NFRA begins audit quality inspections of five audit firms

The National Financial Reporting Authority (NFRA) has started the audit quality inspections of five audit firms including the Big 4 network entities.

NFRA Chairman Ajay Bhushan Pandey said the inspections will complete in three weeks and a draft report is expected before financial year end.

“Audit quality checks will be helpful to both audit companies and the NFRA.” “It will enable an independent regulator like NFRA collect comments and also help in overall improvement of the audit profession,” said Ajay Bhushan Prasad Pandey, Chairperson of the agency.

NFRA stated in its guidelines in November that inspections are designed to highlight issues and possibilities for improvement in the audit firm’s quality control system. Inspections will include a firm-wide audit quality review (SQC 1) and individual file assessments on a test-check basis to assess compliance with applicable auditing standards as well as quality control policy and methods.

Pandey said while delivering the keynote address today at the Conference on “Financial Reporting & Governance Framework – Building Trust” organised by the Confederation of Indian Industry that there is a need to revisit the existing short-term and vague ‘Going Concern’ accounting concept and replace it with long-term viability or Resilience Statements by the Management and Board.

Corporate Fraud Prevention

According to Pandey, the need of the hour for the finance community and directors is to take measures to prevent frauds and failures of internal financial controls because not all corporate frauds are committed by sophisticated designs but by age-old methods such as fictitious sales and loans and advances, over invoicing of purchases, related party transactions, and failure of basic internal controls.

Pandey proposed crowdsourcing of risk-related and areas of emphasis for auditor consideration in order to create trust and meet stakeholders’ expectations. He also proposed taking into account the UK Brydon report’s proposal of publishing the Directors Risk Report before the audit scope is chosen by The Audit Committee, so that stakeholders’ comments on that Risk Report can be evaluated.