Table of Contents
NFRA Orders, Audit Documentation & Audit Quality normal finding:
The inspections indicate recurring weaknesses in four critical areas like independence and ethics, audit documentation, audit evidence, professional skepticism, and quality control systems (SQC-1/SQM). The National Financial Reporting Authority's clear message is "If it is not documented, it is not done. Audit firms must maintain robust documentation, exercise professional skepticism, ensure independence, and issue appropriate audit opinions based on the nature and pervasiveness of misstatements. Based on the different NFRA inspection reports and audit quality observations, the major findings are mentioned here under:
1. Independence Violations
- Shareholding in Audit Client Group: Partners of an audit firm's network held securities in the holding company of an audit client. Securities continued to be acquired even after the audit engagement commenced. Independence monitoring systems failed to identify the breach promptly. And remedial action was taken only after significant delay.
- Incorrect Eligibility Checks: Audit firms used the term “Immediate Family Member" instead of “Relative" as defined under the Companies Act. This could miss disqualifying interests of siblings, in-laws, step-relatives, and other relatives. Eligibility letters issued under this system were potentially non-compliant.
2. Human Resource & Competency Issues
- National Financial Reporting Authority noted that Fake CA Qualification: An employee was hired as a Chartered Accountant in January 2021; qualification verification was conducted only after 2.5 years; ICAI confirmed the CA certificate was fake; the individual worked 3,937 audit hours before detection.
3. Engagement Partner and Reporting Issues
- The National Financial Reporting Authority noted that audit reports were Signed by non-engagement partners: In 40 audit engagements, partners other than the engagement partner signed audit reports. Also NFRA observed this practice was not compliant with SQC 1 and SA 700 requirements.
4. Improper Audit Opinions
- Revenue Recognition Case: The National Financial Reporting Authority noted that A disputed receivable was not provided for in the financial statements. The auditor relied on management's legal opinion. An Emphasis of Matter (EOM) paragraph was used instead of modifying the audit opinion. No SA 450 misstatement evaluation was performed. No communication to Those Charged with Governance (TCWG) regarding possible misstatement.
- Wrong Type of Modified Opinion: The National Financial Reporting Authority found cases where auditors issued like a qualified opinion instead of an adverse opinion or a qualified opinion instead of a disclaimer of opinion. The pervasive nature of misstatements was not properly evaluated.
5. Serious Documentation Deficiencies
- Missing Audit Evidence : National Financial Reporting Authority noted that material PPE additions in Q4 were not supported by audit working papers. No evidence of invoice testing, capitalization verification, vendor agreement review, or physical verification procedures. The auditor claimed work was performed but not assembled in the audit file.
- Integrity of Audit Documentation: National Financial Reporting Authority identified that working papers were signed before events actually occurred. Representation letters dated after preparer and reviewer sign-off dates, working papers modified after audit report issuance, and the possibility of inserting blank audit working papers later without affecting sign-off dates.
6. SQC-1 / Quality Control Deficiencies:
- National Financial Reporting Authority found the Common observations across inspected firms included Absence of formal SQC-1 documentation, Weak internal quality monitoring systems and inadequate engagement quality control reviews (EQCR). Improper network entity disclosures and lack of documented rationale for audit judgments. With deficiencies in client acceptance and continuance procedures.
7. Non-Audit Services Violations
- The National Financial Reporting Authority noted that several cases where audit firms rendered prohibited non-audit services, possible violations of Section 144 of the Companies Act, 2013, were observed.
8. Risk Assessment and Audit Execution Failures
- Key issues noted by the National Financial Reporting Authority, like engagement team independence confirmations not obtained. During impaction, the National Financial Reporting Authority found that audit risk reassessment was not performed as required by SA 315, impairment testing procedures were deficient, and presumed fraud risks were inadequately documented. And excessive reliance on management experts without evaluating assumptions used.
9. Going Concern Deficiencies
- National Financial Reporting Authority observed Reliance on outdated and unsigned support letters, Inadequate evaluation of going concern assumptions, Failure to correctly report material uncertainties: During impaction, the National Financial Reporting Authority found that auditors were not adequately assessing evidence related to financial support and liquidity.
