India’s National Financial Reporting Authority (NFRA) issued guidelines for audit quality inspections, as it seeks to identify areas and opportunities for improvement in the audit firm’s system of quality control.

The inspection guidelines are on the lines of the best practices followed by international audit regulators, the government said in a statement. Inspections will consist of firm-wide review of audit quality and individual file reviews on test-check basis to evaluate the level of compliance with applicable auditing standards and quality control policy and processes, it added.

The statement also said the NFRA, a part of the Ministry of Corporate Affairs, has clarified that inspections by nature are distinct from investigations. However, in certain cases, test-check by the inspection teams may provide basis for enforcement or investigation under applicable provisions of the act and rules, it noted.

The government said in response to the audit regulator’s consultation paper “Enhancing Engagement with Stakeholders’ in 2021, several stakeholders had suggested onsite inspection of audit firms by NFRA. The notion behind the suggestion was to help inspection teams familiarize themselves with the systems and processes followed by audit firms and also to enable them to comply with auditing standards in its audits, it added.

Audit quality inspections will provide an opportunity for feedback and course correction to the audit firms, as well as foster a greater mutual understanding of the policies and procedures that underlie audit quality management, according to the statement.

The government said the inspections are intended to bring about systemic improvements in the overall financial reporting framework in the country.

The key criteria for the audit quality inspection are:

• Provisions in the act, rules and amendments thereof

• Standard on Quality Control (SQC) 1, including Code of Ethics

• Standards of Auditing

• Policies, guidelines and manuals of the firm

• Indian Accounting Standard (IndAS) as may be applicable to selected individual audit engagements

• Relevant circulars/directions of other regulators, as applicable

• Directions issued by internal quality boards/committees and Quality Review Board (QRB), Institute of Chartered Accountants of India (ICAI)

The key inspection guidelines are:

• Inspections will involve a review of the quality control policy, review of certain focus areas, test check of the quality control processes, and test check of audit engagements performed by the audit firm/auditor during the year.

• The inspected auditor/audit firm would have no role, whatsoever, in any selection by NFRA of the audit firm/auditor or test-check of individual audit engagements undertaken by the audit firm/auditor. The selection will only be made by the inspection team.

• The audit engagements selected may be reviewed for application of all or select auditing standards, as may be decided by the inspection team.

• The scope of inspection will be informed by NFRA to the audit firm/auditor at the commencement of inspection.

• Inspections may, in certain cases, also lead to financial reporting quality reviews of financial statements of the companies, whose audits are selected for inspection. They may also result in issue of advisories or directions to the audit firms/auditors.

The audit regulator said the inspection report would comprise its inspection approach, findings or non-compliances, audit firm/auditor responses, NFRA’s conclusions and recommendations.

NFRA would publish the results of the findings in accordance with its rules, and the inspected audit firm/auditor will be required to provide their response to the draft inspection report within 30 days of its issue, it added.

The inspected audit firm/auditor will be required to submit compliance to inspection findings contained in the final inspection report issued by NFRA within the stipulated timelines.