Principal Auditor mandatorily required to perform procedures specified in SA 600 in case of group audits to obtain sufficient appropriate audit evidence for the work of other auditor
NFRA Circular on responsibilities of principal auditor and other auditors in group audits. Every Principal Auditor mandatorily required to perform procedures specified in SA 600 in case of group audits
National Financial Reporting Authority (NFRA) has issued a Circular under Section 132(2) (b), (c), and (d) read with Rule 4(1), 4(2)(e) and Rule 9 of NFRA Rules 2018. The circular is addressed to auditors of the entities under the purview of Rule 3 of NFRA Rules 2018 and explains the responsibilities of Principal Auditor and Other Auditors in Group Audits.
Recently, the NFRA had proposed to revise the Standard on Auditing (SA) 600 issued by ICAI titled as using the work of another auditor by introducing SA 600 (Revised), Special Considerations-Audits of Group Financial Statements (including the work of component auditors).
According to the Circular, audit of standalone financial statements (SFS), where the company has branches, and the audit of consolidated financial statements (CFS) of companies with subsidiaries, associates etc, called as audit of Group Financial Statements (GFS), requires special considerations by the auditor who is ultimately responsible for issue of group audit opinion, and also by the other auditor engaged to undertake audit of components such as branches and subsidiaries etc. ‘SA 600 – Using the Work of Another Auditor’ deals with the requirements in the audit of GFS.
The circular states that NFRA being the authority for exercising oversight and monitoring and enforcing compliance, has observed gross negligence and audit failure in audits of GFS.
Therefore, the NFRA exercising its powers has clarified the auditors’ obligations, under Companies Act 2013 and existing requirements in SA 600 and related standards so that interpretations of the provisions of SA 600 by the auditors remain consistent with their obligations under CA 2013, Standard on Quality Control (SQC) and other applicable Standards of Auditing.
According to the Circular, the responsibility of the auditor under SA 600 is required to be read with the auditor’s concomitant responsibilities in CA 2013, and in related SAs such as SA 200, SA 220 (Revised), SA 230, SA 240, SA 300, SA 315 (Revised 2019), SA 320, SA 330, SA 450 and SA 701 towards obtaining sufficient and appropriate evidence in support of the auditor’s opinion on the group financial statements.
The circular says that Paragraph 11 of SA 600 provides that when planning to use the work of another auditor, the Principal Auditor should consider the professional competence of the other auditor in the context of the specific assignment if the Other Auditor is not a member of the ICAI. This provision does not say that the Principal Auditor should not or cannot consider the professional competence of the Other Auditor in the context of the specific assignment even if the Other Auditor is a member of the ICAI.
The Circular says that under existing SA 600 the principal auditor continues to remain responsible for forming and expressing his opinion on the group financial statements. A combined reading of the provisions of SA 600 such as paragraph 5, which states that ‘When the principal auditor uses the work of another auditor, the principal auditor should determine how the work of the other auditor will affect the audit’, and paragraph 12, which states that “The principal auditor should perform procedures to obtain sufficient appropriate audit evidence, that the work of the other auditor is adequate for the principal auditor’s purposes, in the context of the specific assignment’, show that under SA 600 as well, the auditor is required to obtain sufficient appropriate audit evidence to provide a basis for his overall opinion. In doing so, the auditor must comply with the requirement under paragraph 17 of SA 200, namely, ‘to obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor’s opinion.
According to the Circular, the interpretation apparently being applied by some auditors in respect of obligations or requirements which use words other than ‘shall’ in the text of SA 600, is not correct. The word ‘should’, which appears in paragraph 5, 9, 12 and 15 is being interpreted by some auditors to claim that the provisions are directory and not mandatory. However, considering these provisions as directory and not performing the required procedures frustrates the basic purpose of the audit and the objectives of this Standard and results in non-compliance of the Section 143(2), Section 143(3), Section 143(9) of CA 2013 and the Standards of Auditing.
The circular lays down that auditors shall note that the use of the word ‘should’ at various occasions in SA 600 does not confer an arbitrary choice to the auditors to selectively apply the determinations or procedures required in the SA. The auditors are required to comply with SA 600 and related provisions on audit of GFS across SAs, unless the auditor records reasons for not doing so and provides reasons in his or her audit file and documentation that he or she undertook alternative actions that were sufficient to achieve the objective of the specific audit engagement.
The Circular also says that the Clause (1) of the Second schedule of the Chartered Accountants Act, 1949, PART I which makes the disclosure of confidential information of clients to any person as professional misconduct does not constitute a bar on sharing of work papers between the Principal Auditor and the Component/Other auditor, nor is there such a bar in any other law in the country. Sharing of work papers by a Component Auditor with the Principal Auditor will be permissible because it is required by the Principal Auditor for discharging his duties under Section 143 of CA 2013 and, therefore, it meets the requirement of ‘as required by any law for the time being in force’ mentioned in CA Act, 1949.
The circular further states that even under the section 143(3) of the CA 2013, the law specifies unequivocal right of access of the Principal Auditor to records of holding company, subsidiaries, associates, JVs, branches, and to information and explanation from company officers (including subsidiaries, associates, JVs, branches), his obligations to report on all information and explanations which to the best of his knowledge and belief were necessary for purpose
of audit, his obligations to report if any of the matters that are required to be reported in the audit report could not reported or are answered in negative or a qualification.
The circular says that while SA 600 does not mention specifically a review of audit work papers of the Component Auditor or Other Auditor by the Principal Auditor, such a review may need to be applied by an auditor in appropriate cases, in exercise of his professional duties, professional skepticism and professional judgement, for evaluating whether the work of the Component Auditor is adequate for his purposes the Component Auditor towards gathering sufficient and appropriate evidence that his overall opinion on the group financial statements is appropriate in the circumstances as per his obligations in CA 2013 and the SAs). Such a review of audit work papers of the Component Auditor or Other Auditor by the Principal Auditor would also be consistent with the obligations of the Principal Auditor in SEBI’s LODR, as mentioned above. Sharing of work papers by the Component Auditors with the Principal Auditor will be permissible in such cases and the above provision of the Chartered Accountants Act, 1949 will not come in the way because such sharing is required for the lawful discharge of duties of the Principal Auditor.
The Circular states that use of the word ‘should’ in the various paras of SA 600 shall not be treated as directory, giving an arbitrary choice to the Principal Auditor to perform or not to perform the procedures as specified in the SA 600. The word “should” in SA 600 casts responsibilities that are presumptively mandatory. Every Principal Auditor is, therefore, mandatorily required to perform all the procedures specified in SA 600 (regardless of the word ‘should’ in SA 600) and related SAs in fulfilment of his obligations under CA 2013 read with the overall objectives provided under SA 200, unless he has valid reasons to say that he has carried out alternate procedures to achieve these objectives and the absence of performance of such procedure would not materially impact his opinion of the accounts being true and fair. In circumstances in which the Principal Auditor believes the objectives of the SAs relevant to audit of GFS can be met by alternative means, the Principal Auditor, as part of documenting the planning and performance of the work, shall document the information that demonstrates how the objectives were achieved through the alternate means
The Circular mandates that it is applicable to the auditors of all entities covered under Rule 3 of NFRA rules 2018 with immediate effect. Such auditors are required to scrupulously adhere to the circular in carrying out their audits of the Public Interest Entities (PIE).
Download NFRA Circular Click Here >>
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