NFRA Circular Warns Auditors on Group Audit Obligations

The National Financial Reporting Authority (NFRA) stated on Thursday that existing statutory auditor obligations are being incorrectly interpreted by a section of auditors, emphasizing that principal auditors cannot claim that they did not perform adequate procedures in audits of company group financial statements.

In a circular issued on Thursday, the NFRA stated that it had witnessed gross negligence and audit failure in audits of group financial statements or group audits involving many entities.

The latest circular also comes as the regulator and the apex body of chartered accountants, the ICAI, are at odds over updating the Standard of Auditing (SA) 600, which applies to audits of firms with subsidiaries and associates.

According to the regulator, the audit of standalone financial statements where the company has branches, as well as the audit of consolidated financial statements of companies with subsidiaries, requires special consideration by the principal auditor and other auditors who audit components such as branches and subsidiaries.

SA 600 refers to using the work of another auditor to audit group financial statements. The NFRA stated that it has found unacceptable negligence and audit failure in audits of group financial statements.

“Cases include Reliance Capital Limited, Reliance Home Finance Limited, Reliance Commercial Finance Limited (together accounting for alleged fraud of Rs 29,000 crore), Coffee Day Enterprises Limited (alleged fraud of Rs 3,500 crore), Dewan Housing and Finance Limited (alleged fraud of Rs 34,000 crore), and audit quality review of IL&FS (which collapsed with a debt of Rs 90,000 crore),” according to NFRA.

In these cases, NFRA discovered that funds had been misappropriated through subsidiaries and partners.

“The principal auditors did not raise warning signs at the right time despite indicators of fraud, going concern issues and diversion of funds, as they relied on false interpretations of SA 600 to not go into these issues and instead completely relied upon the clean audit reports of the component auditors,” according to the circular.

While SA 600 does not directly require the principal auditor to evaluate the component auditor’s or other auditor’s audit work documents, the NFRA stated that such a review may be required in certain instances.

“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 GFS (Group Financial Statements) if they believe that a specific SA did not require them to do so,” the circular stated.

The watchdog has discovered that some auditors of Public Interest Entities under its jurisdiction have incorrectly understood their current obligations as statutory auditors.

“This circular is applicable to the auditors of all entities covered under Rule 3 of NFRA rules 2018 with immediate effect to prevent recurrence of audit failures and loss of confidence in an audit of Public Interest Entities (PIEs),” it states.

For Official Circular Download PDF Given Below: