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The National Financial Reporting Authority (NFRA) will invite public comments on the revised International Standard on Auditing 600 (ISA 600) proposed to be adopted by publicly listed companies and non-public-sector banks, sources close to the development told Business Standard.
The decision to take this “graded approach” for the adoption of the ISA, which is meant to rein in auditors often found hiding behind the audit reports signed off by subsidiary companies, was taken at a meeting of various financial sector regulators at NFRA’s board meeting on Monday (August 26).
The idea behind upgrading the Standards of Audit 600 currently followed by Indian auditors to ISA 600 is to plug current gaps, which have led to major audit lapses in the recent past.
Auditors of public-sector banks and their branches, along with auditors of public-sector undertakings, would not be covered by ISA 600, it was decided in the meeting, the source said.
“Seeing the urgency of the matter with scams after scams being discovered, it was felt that the public interest needs to be protected.
"Instead of making the standards applicable for all 1.3 million companies, we want to start with just the listed entities,” the person close to the development said.
The meeting was attended by regulators, including the Reserve Bank of India, Securities and Exchange Board of India (Sebi), Institute of Chartered Accountants of India (ICAI), along with representatives from the Ministry of Corporate Affairs.
For auditors of small companies, the ICAI would give its recommendation on the adoption of ISA 600 after looking into the matter.
This issue was discussed at an NFRA board meeting in 2021 as well, but no decision was taken.
On the adoption of a standard for quality management for auditors, which would allow the regulators to impose restrictions and bans on the firm as a whole, the NFRA has asked the ICAI to share the draft note it had prepared earlier.
On August 19, the NFRA slapped a penalty of Rs 10 crore on audit firm BSR & Associates LLP and Rs 75 lakh on two chartered accountants for lapses in the audit of Coffee Day Enterprises Limited (CDEL), which runs the Café Coffee Day chain.
The NFRA said in an order that the auditors did not report fraudulent diversion of funds despite having enough evidence that public money was moved to the promoter’s entity, which had no business connection with the listed company.
The revised ISA 600 highlights the importance of the group auditor’s review of component auditor audit documentation.
“The review of component auditor audit documentation is directly related to, and influenced by, the group auditor’s direction and supervision of the component auditors and the review of their work throughout the group audit,” the revised ISA 600 said.
The revised ISA 600 strengthens and clarifies various aspects of the group auditor’s interaction with component auditors, including communicating relevant ethical requirements, determining the competence and capabilities of the component auditor, and determining the appropriate nature, timing, and extent of involvement by the group auditor in the work of the component auditor.
While the new standards have to be notified by the government, it must be preceded by a recommendation from the financial regulators such as ICAI, NFRA, and Sebi.
