The CA Institute on Friday called upon the National Financial Reporting Authority (NFRA) to “pause” the revision process of a key auditing standard (SA600 -Using the Work of Another Auditor) that governed conduct of Group audits in the country.

This pause to revision process (being undertaken by NFRA) is necessary to allow for a comprehensive review and discussion with all relevant stakeholders to ensure that any changes are in the best interest of the profession and public, the Institute of Chartered Accountants of India (ICAI) said in a statement here.

ICAI has also expressed “surprise” over the NFRA move to issue a consultation paper on revision of SA600 the same day (September 17) when the Central Council of the CA Institute met to start the review of SA600.

‘Room for further review’

ICAI also noted that the Central Council had in its meeting on September 17, 2024, expressed that while the current SA 600 has been effective and has stood the test of time, there is room for further review and strengthening to better serve public interest. 

The Council has tasked the Auditing and Assurance Standards Board (AASB) with this review and started the process of reviewing the standard for exposure, as has been the practice in ICAI, according to the statement.

“Unfortunately, while this issue was still being discussed in the September 17 meeting of the Council, NFRA has come out with an Exposure Draft of SA 600 for revision inviting public comments on the same day, which has come as a surprise to the Institute”, said the ICAI statement.

Due process

As per the established practice, for revision of any standard, the Council of the Institute sets up a Group, which, after thoroughly examining all issues involved, releases an Exposure Draft of the standard for public comments. 

After considering the public comments and making necessary changes, the AASB submits its report to the Council. Following due deliberations, the Council forwards its recommendations on the standards to NFRA. “This process could not be complied with in the existing case, as NFRA has already issued the Exposure Draft for public comments even when the Council was discussing this matter for review,” ICAI statement said.

The bone of contention between ICAI and NFRA is about the alignment of SA 600 with ISA 600 (International Standard of Auditing). While NFRA is for complete convergence, ICAI feels the Indian situation requires carve-outs on the requirements of the auditing standard around group audits of enterprises. ICAI is opposed to allowing the group auditor access or look into the working papers of component auditors. This practice is, however, allowed in the international standard.

Component auditor competencies

International ISA 600 requires the group auditor to assess the professional competence of component auditors for companies within the same group. In foreign jurisdictions, the auditors come with different qualifications and audit is not mandatory for all companies under the law. Thus, they have the concept of Group and component auditor, according to ICAI.

In India, all companies have to be mandatorily audited by chartered accountants under the Companies Act, 2013. Since all chartered accountants are members of the ICAI, this ensures uniform standard of qualification and professional competence. “Given this uniformity, ICAI believes it is neither possible nor desirable for the group auditor to assess or exercise control over the decisions of a component auditor who is equally qualified,” ICAI statement said.

Under the existing SA-600, the group auditor already has the power to specify to what extent he relied on component auditor reporting and can seek further clarification or justification from the component auditor, if required, it added.

Relevance to Indian context 

International ISA 600 defines a component auditor to be an auditor who performs audit work related to a component for purposes of the group audit. A component auditor is part of the engagement team for group audit. This definition is not relevant to the Indian context. The unique regulatory architecture and professional environment in India necessitates a careful consideration of domestic needs and circumstances before transplanting overseas standards.Further, there are apprehensions in the minds of small and medium CA firms who are generally entrusted with audit work of the subsidiary companies that the Group auditor in the guise of overseeing of quality of their work and under the pretext of ensuring uniform quality may persuade the managements to replace the small audit firms of subsidiary companies with that of his own firms leading to concentration of the audit work in the hands of few firms. “This would make the survival of the small firms difficult. In India, there arelarge number of small CA firms compared to foreign jurisdictions”, ICAI statement noted.

Consolidated financial statement 

The existing legal framework in India mandates the preparation of consolidated financial statements for holding and subsidiary companies. The responsibility for these consolidated financial statements does not lie with the key management personnel and Boards of Directors of the holding company but with the Boards and key management personnel of the respective subsidiary companies. If that be the case, it would be unfair and unjust to fasten the liability on the group auditor alone ignoring the managements of the holding company. As per the existing SA-700 (Revised), the respective Boards of Directors of the companies included in the Group are responsible for maintenance of adequate accounting records as per law. “The proposed revision in SA 600 do not adequately address the issues arising out of the Group and component auditors and their inter-se relationship and responsibilities”, ICAI statement said.

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