The National Financial Reporting Authority (NFRA) has issued guidelines to inspect select audit firms to identify areas and opportunities for improvement in the audit firm’s system of quality control, a statement said.
“Inspections will consist 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,” NFRA said.
The selection of the audit firm or the auditor for such inspection by NFRA would be based on assessment of risks in the audit environment.
Other parameters, such as the size, composition, and nature of the firm, number of audit engagements completed in the year under review, complexity and diversity of preparer financial statements audited would also be taken into account. NFRA can add other “risk indicators” to this list from time to time.
The inspection cycle will start with a presentation by the audit firm, which would be address-specific areas as communicated by NFRA.
On-site inspection after meeting the senior management would also be conducted.
“The inspected audit firm/auditor will be required to provide written responses to the queries and observations, and written confirmations as required by the inspection team.”
NFRA would issue a draft inspection report for obtaining responses of the audit firm before finalisation and issue of final inspection report.
The inspection report could 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 or auditors,” NFRA guidelines said.
The authority said audit quality inspections, world-wide, are integral to the functioning of independent audit regulators.
“Audit quality inspections will provide an opportunity for feedback and course correction to the audit firms and at the same time foster a greater mutual understanding of the policies and procedures that underlie audit quality management,” the financial reporting authority added.