The National Financial Reporting Authority (NFRA), the country’s sole independent audit regulator, has published audit quality inspection guidelines.

This would pave the way for NFRA to undertake audit quality inspections of audit firms. The inspections are intended to bring about systemic improvements in overall financial reporting framework in the country.  

NFRA has stated in its guidelines that inspections are intended to identify areas and opportunities for improvement in the audit firm’s system of quality control. Inspections will consist of firm-wide review of audit quality (SQC 1) 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 has also clarified that inspections by nature are distinct from investigations undertaken under section 132 (4) of the Companies Act 2013. However, in certain cases, test-check by the inspection teams may provide basis for or require reference of such cases/matters for enforcement or investigation under applicable provisions of the Act and Rules.

Audit quality inspections are expected to 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.

It may be recalled that as part of the feedback obtained by NFRA on its consultation paper (2021) on ‘Enhancing Engagement with Stakeholders’, many stakeholders had also suggested inclusion of onsite inspection of audit firms by NFRA. 

This was suggested to help inspection teams familiarise themselves with the systems and processes followed by audit firms and to enable the audit firms to comply with and conform to applicable auditing standards, guidance, etc. in the execution of its audits.

Globally, audit quality inspections are integral to the functioning of independent audit regulators.  

For instance, the core principles of independent audit regulators by the International Forum for Independent Audit regulators (IFIAR), which comprises independent audit regulators from 54 countries/jurisdictions, requires that audit regulators, should as a minimum, conduct recurring inspections of audit firms undertaking audits of public interest entities in order to assess compliance with applicable professional standards, independence requirements and other rules, laws and regulations.

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