National Financial Reporting Authority (NFRA) on Friday published guidelines on audit quality inspection, in a bid to further improve the standards of auditors.
The inspection guidelines are based on recommendations of the International Forum for Independent Audit Regulators (IFIAR), which comprise audit regulators of 54 countries.
NFRA will pick the audit firms for such inspections based on its own risk identification parameters along with other factors such as the size of the firm and nature of audits that they conduct.
In some cases, audit firms may also be selected based on specific concerns highlighted by the government or any other regulatory agency.
“NFRA’s inspections are intended to identify areas and opportunities for improvement in the audit firm’s system of quality control,” the authority said in a statement on Friday. “Inspections will consist of firm-wide review of audit quality (SQC1) and individual file reviews on test-check basis to evaluate the level of compliance with applicable auditing standards and quality control policy and processes.”
To be sure, these inspections are different from investigations. However, if during the inspections any shortcomings are found, it could be the basis for launching enforcement action against the entities.
The NFRA guidelines focus on three aspects: adequacy of governance framework, ascertaining the effectiveness of an audit firm’s internal controls and evaluating the audit risks along with mitigating measures.