NFRA
NFRA Circular Warns Auditors on Group Audit Obligations

NFRA Circular Warns Auditors on Group Audit Obligations

The National Financial Reporting Authority (NFRA) issued a warning on Thursday regarding the misinterpretation of statutory auditor obligations by some auditors. The authority emphasized that principal auditors cannot claim insufficient procedures were performed in the audits of group financial statements.

In the circular released on Thursday, the NFRA noted instances of gross negligence and audit failures linked to group audits involving multiple entities. This circular is particularly pertinent as the NFRA and the apex body of chartered accountants, the ICAI, are in disagreement over the recent updates to the Standard of Auditing (SA) 600, which governs audits involving firms with subsidiaries and associates.

The NFRA stated that audits of standalone financial statements, where the company has branches, as well as audits of consolidated financial statements of companies with subsidiaries, necessitate special consideration by both the principal and component auditors.

SA 600 pertains to utilizing the work of another auditor when auditing group financial statements. The NFRA claims it has uncovered significant negligence and failures in auditing group financial statements. Noteworthy cases cited include:

In these cited instances, the NFRA discovered that funds were misappropriated through subsidiaries and partners. The circular reports that principal auditors failed to raise alarms timely, despite evident indicators of fraud, going concern issues, and fund diversions. Instead, they relied on misleading interpretations of SA 600 and the clean audit reports from component auditors.

While SA 600 does not explicitly require principal auditors to review the audit work documents of component or other auditors, the NFRA indicated that such evaluations may be necessary in certain cases. The regulator stated, “A principal auditor and a component/other auditor have the same overall objectives while auditing financial statements. Thus, major auditors cannot claim that they did not execute adequate procedures in audits of Group Financial Statements (GFS) if they believe a specific SA did not require them to do so.”

The NFRA has identified that some auditors of Public Interest Entities (PIEs) under its jurisdiction have misunderstood their obligations as statutory auditors. This circular will be applicable to all auditors of entities covered under Rule 3 of NFRA rules 2018 with immediate effect, aiming to prevent future audit failures and restore confidence in the audit of Public Interest Entities (PIEs).

For the official circular, download the PDF here.

Radhika Goyal is Author of Taxconcept Gurugram head office, for deeply reported tax, gst and income tax articles on issues that matter. He splits her time between New Delhi and Bengaluru, and has worked...