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A Circular No.NF- 25013/2/2023 -O/o Secy-NFRA dated October 3, 2024 has been issued by the National Financial Reporting Authority under Section 132(2) (b), (c), and (d) of Companies Act, 2013 read with Rule 4(1), 4(2)(e) and Rule 9 of NFRA Rules 2018 with respect to responsibilities of Principal Auditor and Other Auditors in Group Audits.

The Statutory Audit of financial statements, both standalone financial statements (SFS) and consolidated financial statements (CFS) under Companies Act, 2013 (CA 2013 or Act), require the auditors to mandatorily comply with the Standards on Auditing (SAs), and related Standards and Codes, prescribed under section 143 of CA 2013. As of now, the auditors are required to ensure adherence to the following sets of Standards and Codes to remain compliant with the extant laws in India: 

1. Standard on Quality Control (SQC); 
2. 35 SAs addressing various aspects during the entire life cycle of an audit; and 
3. Code of Ethics including Independence standards.  

For audits involving branches or group entities (Group Financial Statements, GFS), special considerations are necessary, particularly regarding the responsibilities of the Principal Auditor and Other Auditors. “SA 600” addresses the collaboration between these auditors.  

In today’s complex business environment, GFS audits face significant risks due to intricate group structures, related party transactions, rapid technological changes, and potential fraud through shell companies. The National Financial Reporting Authority (NFRA) has highlighted instances of audit failures, such as in the cases of Reliance and Dewan Housing, where significant frauds went undetected due to negligence and misinterpretation of SA 600.  In these cases, monies were diverted through subsidiaries and associates. The Principal Auditors did not raise red flags at the right time despite indicators of fraud, going concern issues and diversion of funds, as they relied on fallacious interpretations of SA 600 to not go into these issues and instead completely relied upon the clean audit reports of the Component Auditors.

These failures have led to substantial financial losses affecting investors and creditors, prompting the NFRA to reaffirm auditors’ responsibilities under CA 2013 and related standards to ensure compliance and protect public interest.  

The Circular therefore contains a detailed insight/information into the following:

1. Observations by NFRA across various enforcement cases (illustrative)
2. Incorrect interpretation by some auditors in the application of existing provisions of SA 600
3. Sufficiency of audit procedure towards evaluation of the work of the Other Auditor by the Principal Auditor
4. Professional competence
5. Responsibility for Consolidated Financial Statements lies with the Management and Board of Directors of the Holding Company and the Principal Auditors