The National Financial Reporting Authority, shortly after releasing the guidelines for inspection of audit firms to improve quality control, has begun the inspections of five large audit firms.
NFRA’s inspections are intended to identify areas and opportunities for improvement in the audit firm’s system of quality control. Inspections will consist of a firm-wide review of audit quality (SQC 1) and individual file reviews on a test-check basis to evaluate the level of compliance with applicable auditing standards and quality control policy and processes.
NFRA has clarified that inspections by nature are distinct from investigations. However, in certain cases, test-check by the inspection teams may provide the basis for enforcement or investigation under applicable provisions of the Act and Rules.
In keeping with the functions entrusted to NFRA under Section 132 of the Companies Act, 2013, audit quality inspections are a key tool for the Regulator to fulfill its statutory obligations. The mandate for inspections is derived under section 132 (2) of the Companies Act 2013 (Act, hereinafter) and relevant provisions in NFRA Rules 2018.
The Chairman of NFRA, Ajay Bhushan Pandey said that the inspections can take up to three weeks and a complete draft report will be made available by the end of the financial year.
As per the guidelines issued earlier, inspections will involve a review of the quality control policy, a review of certain focus areas, a test check of the quality control processes, and a test check of audit engagements performed by the audit firm/auditor during the year, as may be identified by the inspection teams.
The inspected auditor/audit firm would have no role, whatsoever, in any selection by NFRA of the audit firm/auditor or test-check of individual audit engagements undertaken by the audit firm/auditor, the selection of which will only be made by the inspection team.
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