New Delhi, Mar 30 (PTI) The National Financial Reporting Authority (NFRA) has flagged certain lapses in the audit quality of three audit firms.
The observations have been made in NFRA’s three separate inspection reports of SRBC & Co LLP, Deloitte Haskins & Sells LLP and Walker Chandiok & Co LLP.
In its report on SRBC & Co LLP, the regulator conducted audit quality inspections in 2024 and the scope included focus on three audit areas — Internal financial control over financial reporting on revenue, related party transactions and impairment of non-financial assets.
SRBC & Co LLP is member of two networks — Ernst & Young Global network and SR Batliboi & Affiliates.
According to the regulator, SRBC & Co LLP should put in place a robust process to address all threats to independence, which may be created due to the exclusion of certain services from the term non-audit services.
Further, the audit firm should reconsider its policy to exclude NFRA-regulated audit clients’ holding companies, which are in private equity business, for the purpose of providing non-audit services, to ensure full compliance with the laws and standards.
“The EY network has provided ‘Financial Reporting and Accounting Advisory Services’ to its audit clients in 7 cases in 2022-23 and in 4 cases in 2023-24. This prima facie indicates that the firm may be violating laws and standards.
Among others, NFRA said the audit firm should reconsider its policy to avoid indirect business relationship through EY Network entities and put in place a robust process to ensure full compliance with Section 141(3)(e) of the Companies Act.
“The firm should reconsider its policy and include the term ‘Key Managerial Person’ in place of ‘financial reporting oversite role’ to ensure full compliance with section 141(3)(f) of the Act; and apply this section to all partners and their relatives in the EY network,” it said.
In respect of related party transactions, NFRA said in all the three selected engagements, one or more audit procedures performed by the firm were found to be deficient like not verifying the end use of the proceeds of the loans given by the company to its subsidiaries and not evaluating the basis of the management claim of arm’s length pricing of transactions with related parties.
The watchdog initiated the audit quality inspections of Deloitte Haskins & Sells LLP in March 2024. Among other aspects, it focused on three areas — internal financial control over financial reporting on revenue, related party transactions and impairment of non financial assets due to their inherent higher risk of material misstatement.
In the engagement files selected for review in the current inspection cycle, NFRA said it has observed the entity not performing sufficient appropriate audit procedures for the verification of related party transactions being on arm’s length basis as per SA 620.
Also, inadequate evaluation of competence, capability, objectivity and work of the auditor’s expert as per the requirements of SA 620 have been observed, it noted.
Meanwhile, NFRA also said the audit firm has adopted a revised networking agreement wherein the audit executive committee has the ultimate responsibility for quality control and risk management.
“The audit firm has also improvised the procedure to ensure personnel independence. Rather than preparing separate EQCR docket, now the audit firm has also started to include EQCR (Engagement Quality Control Review) work in the audit file itself,” it added.
In the case of Walker Chandiok & Co LLP (WCCL), the regulator conducted an audit quality inspection in August 2024. The scope of the inspection included a review of three selected audit engagements of financial statements for the year ended March 31, 2023 that focused on three areas — related party transactions, impairment of non financial assets and ICFR-revenue due to their inherent higher risk of material misstatement.
According to the regulator, the audit firm has not remediated the issue related to the auditor’s independence, audit documentation, and EQCR, as noted in the previous inspection report.
Also, it said in three engagement files selected for review in the current inspection cycle, deficiencies were noted in the verification of related party transactions, impairment of non-financial assets, and ICFR (Internal Control over Financial Reporting)-revenue.
NFRA also mentioned that as per its inspection report 2022, the entity was part of the international network called Grant Thornton International Ltd (GTIL).
“In its communication to NFRA, however, WCCL has maintained that it is not a member of the GTIL network,” it added.
The three separate reports were made public by the regulator on March 28.
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