NFRA Inspection Reports: Key Audit Quality Deficiencies Observed Across Major Audit Firms

Introduction

The National Financial Reporting Authority (NFRA), established under Section 132 of the Companies Act, 2013, conducts periodic inspections of audit firms to assess compliance with auditing standards, quality control requirements, independence provisions, and other regulatory obligations. The inspection reports issued by NFRA provide valuable insights into recurring deficiencies observed across audit engagements and firm-level quality control systems.

The observations discussed below are derived from NFRA inspection reports issued in respect of various audit firms and highlight important areas requiring attention by audit practitioners, engagement partners, quality reviewers, and firm leadership.

 

Deloitte Haskins & Sells LLP (2023)

Failure to Meet Independence Requirements

NFRA observed deficiencies relating to auditor independence, including:

  • Engagement-level independence confirmations were not obtained or retained in the Engagement Management System (EMS-Audit File) as required under Paragraph 18 of SQC 1.
  • The audit firm provided certain non-audit services that resulted in a self-review threat, thereby violating Sections 141 and 144 of the Companies Act, 2013.

Leadership Responsibilities for Quality under SQC 1

NFRA noted that there was no Board established to oversee the Network, its activities, and its officers as envisaged under Clauses 10 and 11 of the Networking Agreement executed among DHS LLP and other member firms.

Fraud Risk Assessment

In one engagement, the audit firm failed to reassess and recategorize audit risk despite circumstances warranting such reassessment, contrary to Paragraph 31 of SA 315 and the firm's own policy requirements.

Audit Documentation Deficiencies

The inspection identified documentation shortcomings, including:

  • An Engagement Quality Control Review (EQCR) Docket generated through the EQCR Portal was not incorporated into the Engagement Management System as evidence of the performance of the EQCR process.
  • Considering the nature and magnitude of an investment, sufficient documentation supporting existence at year-end was not maintained, resulting in non-compliance with Paragraph 7 of SA 230.

Consultation Process

NFRA further observed that during the consultation process, the basis and rationale for decisions reached were not adequately documented as required under Paragraph 56 of SQC 1.

 

SRBC & Co. LLP (2022)

Failure to Meet Independence Requirements

The inspection report highlighted that:

  • The India-specific requirements contained in the firm's Independence Policy did not fully comply with Section 144 of the Companies Act, 2013.
  • Audit services were provided to an auditee while another network entity simultaneously rendered non-audit services to the same auditee group, resulting in non-compliance with Sections 141 and 144 of the Companies Act, 2013.

Leadership Responsibilities for Quality under SQC 1

NFRA observed that the audit firm did not adequately document its leadership structure and responsibilities in accordance with Paragraphs 11, 12, and 13 of SQC 1.

Fraud Risk Documentation

The firm was found to have inadequately documented the rebuttal of presumptive fraud risk as required under SA 240.

Audit Documentation Deficiencies

The inspection identified several documentation-related concerns:

  • Audit file integrity issues amounting to non-compliance with Paragraphs 77, 79, and 80 of SQC 1.
  • Failure to record the completion dates of audit procedures as required under Paragraph 9 of SA 230.
  • Documentation relating to Engagement Quality Control Review was found insufficient to meet the requirements of SA 220 and SA 230.

 

PwCA LLP (2023)

Non-Compliance with SA 260 (Revised)

NFRA observed deficiencies relating to communication with Those Charged With Governance (TCWG).

The firm identified the Audit Committee of audited entities as TCWG without appropriately evaluating whether the Audit Committee represented the complete governance structure required under SA 260 (Revised).

Failure to Meet Independence Requirements

The firm's policies permitted the provision of non-audit services to foreign holding companies, which NFRA considered inconsistent with the requirements of Section 144 of the Companies Act, 2013.

Leadership Responsibilities for Quality

NFRA observed that no documented rationale or criteria existed for the selection of engagements for internal review.

Audit Documentation Deficiencies

The audit files were found to contain inadequate documentation, resulting in non-compliance with Paragraphs 77–81 of SQC 1 and the requirements of SA 230.

Related Party Transactions

The inspection report noted instances of non-compliance involving transactions covered under Section 186 of the Companies Act, 2013.

 

BSR & Co. LLP (2023)

Failure to Meet Independence Requirements

NFRA observed that the firm's policy permitted the provision of non-audit services to foreign holding companies, which was considered inconsistent with Section 144 of the Companies Act, 2013.

Audit Documentation Deficiencies

The inspection identified inadequate audit documentation resulting in non-compliance with Paragraphs 77–81 of SQC 1 and SA 230.

CARO Reporting Deficiencies

NFRA noted deficiencies in reporting under CARO 2016 relating to disclosure requirements prescribed under Section 186(4) of the Companies Act, 2013.

Impairment of Assets (Ind AS 36)

The firm's audit procedures concerning impairment testing of investments were found to be deficient.

 

Walker Chandiok & Co. LLP (2023)

Audit Documentation Deficiencies

NFRA observed inadequate audit documentation resulting in non-compliance with Paragraphs 77–81 of SQC 1 and SA 230.

Failure to Meet Independence Requirements

The firm's policies permitted the provision of non-audit services to foreign holding companies, which was considered inconsistent with Section 144 of the Companies Act, 2013.

Client Acceptance and Continuance Procedures

The inspection revealed that the firm did not fully adhere to prescribed client acceptance and continuance requirements. Deficiencies included inadequate verification of client integrity and insufficient documentation relating to the resolution of identified concerns.

Engagement Quality Control Review (EQCR)

NFRA reported deficiencies in the firm's Engagement Quality Control Review process in relation to the requirements prescribed under SQC 1 and SA 220.

Non-Compliance with SA 620

The firm was found to have relied extensively on management experts and auditor's experts without adequately evaluating the appropriateness of the assumptions used by those experts, as required under SA 620.

Related Party Transactions

The inspection report noted non-compliance relating to transactions governed by Section 186 of the Companies Act, 2013.

Impairment of Assets (Ind AS 36)

NFRA observed deficiencies in obtaining sufficient appropriate audit evidence supporting the non-recognition of impairment losses on investments in subsidiaries facing significant going concern concerns. The engagement team relied upon outdated and unsigned documents purporting to provide financial support from an overseas parent entity.

 

Lodha & Co. LLP (2024)

Failure to Meet Independence Requirements

The inspection identified deficiencies in personnel independence declarations maintained by the firm.

Audit Documentation Deficiencies

NFRA observed:

  • Inadequate documentation relating to the Engagement Team and the Engagement Quality Control Reviewer.
  • Audit file integrity risks arising from conversion of audit documentation from electronic form to paper form.

 

Conclusion

The NFRA inspection reports reveal recurring themes across multiple audit firms, particularly in the areas of auditor independence, audit documentation, fraud risk assessment, engagement quality control review, impairment testing, related party transactions, client acceptance procedures, and governance over quality control systems.

These observations underscore the importance of robust compliance with SQC 1, Standards on Auditing, the Companies Act, 2013, and applicable financial reporting requirements. Strengthening documentation practices, independence safeguards, quality control systems, professional skepticism, and governance mechanisms remains essential for enhancing audit quality and maintaining public confidence in the financial reporting ecosystem.

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