Companies Act 2013 mandates auditors to follow auditing standards. The Institute of Chartered Accountants of India (ICAI) has been issuing auditing standards from time to time covering an eclectic variety of areas such as quality control, documentation and using the work of another auditor. In recent times, the standard on using the work of another auditor — SA 600 — has become a topic of discussion among the auditing fraternity.

The National Financial Reporting Authority (NFRA) has issued a draft of a revised standard along with a consultation paper seeking public comments.

The ICAI has raised concerns over hasty implementation of the standard, without considering the collateral impact it would have on the auditing fraternity.

The existing SA 600, on ‘Using the Work of Another Auditor’, deals with guidance on group audits. Its objective is to provide guidance in situations where the principal auditor uses the work of another auditor — usually called component auditor — with respect to the financial information of one or more components included in the financial statements of the entity.

SA 600 confirms that the principal auditor would not be responsible for the work entrusted to the other auditors, except in circumstances which should have aroused his suspicion about the reliability of the work performed by them. The draft of the Revised SA 600 issued by the NFRA states that the group engagement partner is both responsible and accountable for the component audits.

SA 600 provides for shared responsibility between a principal auditor and component auditors, whereas the draft of the revised SA 600 puts the ball in the court of the principal auditor. This is going to put additional pressure on the principal auditor to ensure that the component auditors’ work meets the standards.

NFRA and ICAI

The diverse views of the NFRA and the ICAI arise from the context in which they have issued the standards. NFRA issued the draft of the Revised SA 600 in response to the auditors of companies they inspected, who stated that they were not responsible for the audit of components per SA 600.

ICAI has issued and once amended the standard considering it to be sufficient for a diverse country with multiple regulators. They feel that the responsibility and the resultant power cannot be only on the principal auditor. The combination of responsibility and power could encourage them to choose a component auditor they are comfortable with. This could impact a lot of small and medium audit firms who are dependent on the audit fees from these companies. NFRA is of the opinion that not many audit firms would be impacted by the Revised Standard.

The Consultation Paper proposes that the Revised SA 600 would apply only to listed companies that meet certain threshold limits. There can be no two opinions that audit quality needs to be a top priority for audit firms in the present environment considering the number of accounting accidents we have witnessed, are continuing to witness and will probably witness in the future also (hopefully, they would only be exceptions).

Also, most of these accounting accidents have occurred in transactions between subsidiary companies and related parties. The crux of the issue is: Who should be held responsible if there are major red flags in the financial statements of components that are not reported by the auditors in their report? Per the existing standard, it would probably be the component auditor.

But according to the proposed revised standard, it would probably be the principal auditor. The ideal solution should probably be that both should be held responsible — one for not reporting it and the other for not forcing the other to report it. It is hoped that when the final standard is issued, it would provide the ideal solution.

The writer is a chartered accountant