NFRA Finds Certain Lapses In Audit Quality Of Network Entities Of Big 4

PwC, Deloitte, EY and KPMG are the four major global entities in the auditing space and they are also known as 'Big 4'

The National Financial Reporting Authority (NFRA) has found certain lapses in the auditing-related activities of the network entities of the Big 4 during detailed audit quality inspections.

The watchdog carried out audit quality inspections of the firms -- Deloitte, Haskins & Sells LLP, BSR & Co LLP, SRBC & Co LLP and Price Waterhouse Chartered Accountants LLP.

BSR & Co LLP and SRBC & Co LLP are the network firms of KPMG and EY, respectively.

PwC, Deloitte, EY and KPMG are the four major global entities in the auditing space and they are also known as 'Big 4'.

The inspections of the audit firms were started in December last year and covered various aspects, including review of firm-wide quality controls evaluate their adherence to Standards on Quality Control (SQC-1) and selected audit documentation of the annual statutory audit of financial statements for the year ended March 31, 2021, according to four separate reports released by NFRA on Friday.

In the case of Deloitte, Haskins & Sells LLP, the regulator has flagged six deficiencies, including that the audit firm did not reassess and recategorise audit risk in one engagement as required and its own policy manual.

NFRA has made six observations with respect to BSR, including that absence of formal documentation, and inadequate explanations regarding the firm's governance and management structure indicate non-compliance with SQC 1's Leadership Responsibilities for Quality.

Among others, it said the audit firm did not provide, during this inspection, details of KPMG network entities, and non-audit services provided by those entities to audit clients of the firm.

"Consequently, the inspection team was unable to evaluate whether the firm is in full compliance with the independence-related requirements of the Code of Ethics and SQC 1. The inspection team observed the need for improvement in the firm's internal review of compliance with independence requirements by its personnel," the report on BSR said.

With respect to SRBC, the watchdog said the audit firm's policies and procedures for ensuring the integrity of audit documentation are not fully in accordance with certain requirements of SQC 1.

One of the observations is that the independent policies of the audit firm do not recognise the direct and indirect relationship between SRBC and its network members of the international network Ernst & Young Global Limited (EY).

"This has resulted in violations of Sections 144 and 141 of the Companies Act, 2013. The India-specific requirements in the Independence Policy of the Audit Firm do not comply with section 144 of the Companies Act, 2013," NFRA said.

In the case of Price Waterhouse Chartered Accountants LLP, the regulator said the audit firm as part of its internal quality monitoring policy and process, performs inspection of a sample of individual audit engagement files and the Inspection teams select certain audit areas for review.

"However, there is no document explaining the rationale or criteria for selection of these specific audit areas for review by the inspection team," NFRA said among its observations.

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