National Financial Reporting Authority
NEW DELHI: The absence of audit documentation and failure to submit audit files to the regulator is evidence that the audit is unreliable and invalid, National Financial Reporting Authority (NFRA) has said in a regulatory order.
NFRA said not maintaining audit files is viewed seriously by global regulators including the Public Company Accounting Oversight Board of the US.
National Financial Reporting Authority
NFRA’s ruling taking the alleged non-submission of audit files as professional misconduct came in the case of a statutory audit of a company Bartronics India Ltd for the 18 months up to 31 March 2015 by a Hyderabad based auditor.
“Absence of audit documentation or failure to submit the audit file to NFRA, is a clear evidence that the auditor failed to obtain reasonable assurance about whether the financial statements as a whole were free from material misstatement and that the auditor’s opinion…was without any basis and unreliable and hence, invalid,” the audit watchdog said in the order. The auditor’s opinion about financial statement is part of independent auditor’s report.
Emails sent to the company and to the auditor on Friday seeking comments for the story remained unanswered at the time of publishing.
Although NFRA’s disciplinary orders and audit quality review reports are specific to individual companies and their statutory auditors, these carry a larger message to the corporate sector and to the audit fraternity about the regulator’s expectations from company executives who prepare financial statements and the statutory auditors who sign off on them.
NFRA’s orders seek to ensure that auditors follow not only Companies Act provisions, but also the audit standards, code of ethics and other norms set out by the profession’s self-regulator and standard setter Institute of Chartered Accountants of India. The idea is to make sure auditors exercise professional skepticism and not just go by the claims of the management.
NFRA has issued around 25 disciplinary orders since March this year aimed at improving the quality of financial statements and their audit, the reliability of which is critical for the investment climate in the country.
NFRA chairperson Ajay Bhushan Pandey at a conference last month listed lack of audit documentation as a critical finding from its disciplinary orders. “ Audit work documentation, if performed in true spirit, leads to ‘thinking audit’ rather than ‘ticking audit’. Of course, such an exercise will naturally bring to the fore the much-needed professional scepticism and analytical mind of the auditors into active play,” Pandey said at the event.
NFRA also wants auditors to understand the business purpose, business rationale of transactions and the group structure of the companies as it would help in detecting financial irregularities and fraud. NFRA believes auditors cannot brush aside their responsibility to report frauds. The watchdog last month clarified that resignation does not absolve an auditor of his responsibility to report suspected fraud. (ends)
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