ISA 600 dispute: NFRA, ICAI can find common ground, says official

The senior official said that ICAI is not opposed to implementing the revised ISA 600 but is trying to figure out the path to do so. ICAI would be taking up this issue in its next council meeting

The differences between the Institute of Chartered Accountants of India (ICAI) and the National Financial Reporting Authority (NFRA) over the adoption of the latest revised International Standard on Auditing (ISA) 600 are due to a communication gap and will be resolved through dialogue between the two organisations, a senior government official said.

The official said that ICAI is not opposed to implementing the revised ISA 600 but is working on determining the appropriate path for its implementation. ICAI will address this issue at its next council meeting.

The purpose of updating the Standard on Auditing 600, currently followed by Indian auditors, to the revised ISA 600 is to address gaps that have led to major audit lapses in the recent past.

The revised ISA 600 strengthens and clarifies various aspects of the group auditor’s interaction with component auditors. This includes communicating relevant ethical requirements, assessing 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.

According to sources, NFRA is expected to invite public comments on the adoption of the revised ISA 600 by public listed companies and non-public sector banks. Auditors of public sector banks and their branches, along with auditors of public sector undertakings, will be excluded from the new standards.

The matter was discussed at the last board meeting of NFRA, which was attended by regulators including the Reserve Bank of India, Securities and Exchange Board of India (Sebi), ICAI, and representatives from the Ministry of Corporate Affairs.

According to sources, ICAI is reportedly concerned that the adoption of ISA 600 may result in an unintended concentration of audit work among a few large firms, adversely affecting small and medium practices in India. This could be detrimental to growing economies like India.

Sources indicate that ICAI believes that, since all auditors in India are subject to the same education, training, and licensing requirements, there should be no need for the group auditor to assess the professional competence of the component auditor.

While the new standards must be notified by the government, this process requires a recommendation from financial regulators such as ICAI, NFRA, and Sebi.

The revised ISA 600 highlights the importance of the group auditor’s review of component auditor documentation.

“The review of component auditor 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,” ISA 600 reads.

NFRA supports the adoption of the revised ISA 600 to rein in auditors who may be concealing problems behind audit reports signed off by subsidiary companies.

According to sources, NFRA is concerned that this practice allows monies from listed companies to be siphoned off, as audit reports from subsidiary companies are relied upon by the principal auditor.

This issue has been raised in several of NFRA’s orders. Most recently, on August 19, NFRA imposed a penalty of Rs 10 crore on the audit firm BSR & Associates LLP and Rs 75 lakh on two chartered accountants for lapses in the audit of Coffee Day Enterprises, which operates the Café Coffee Day chain.

NFRA’s order indicated that the auditors failed to report fraudulent diversion of funds despite having sufficient evidence that public money was transferred to a promoter’s entity with no business connection to the listed company.

Status update
 

> NFRA is expected to invite public comments on the revised ISA 600 adoption by public listed companies and non-public sector banks

> ICAI is concerned that adoption of the ISA 600 will result in an unwarranted situation of the concentration of audit work with 

few large firms

> Revised ISA 600 strengthens and clarifies various aspects of the group auditor’s interaction with component auditors