The audit regulations for small and medium enterprises, especially the firms that have very little or no exposure to the public investors, have less complex structures and where the ownership is less dispersed, may ease substantially. The move is aimed at promoting ease of doing business, and facilitating speedy growth of these units without being disrupted by redundant audit interventions.
According to official sources, the Institute of Chartered Accountants of India (ICAI) has finalised a new set of auditing standards for these classes of companies, describing them as “less complex entities” under certain defined criteria. These standards will significantly reduce the disclosure requirements and simplify the processes for auditors, they said, but added that the audit quality won’t nevertheless be compromised.
The ICAI has already sent the draft standards to the National Financial Reporting Authority (NFRA) for approval. Once cleared by the regulator, the CA body will likely proceed with notifying them, sources close to the development told FE.
Simplifying Audit
The move is also in conformity with the ICAI’s alignment of the standards with the “IFRS for SMEs” framework, which is a standalone accounting system for SMEs, private entities and non-publicly accountable entities. “Since over 90% of the audited companies in India are small or medium in size, a less complex framework will enable ease of audits without dilution of audit quality and reporting responsibilities,” said an official.
In India, MSMEs follow standards on auditing (SAs) which were issued by ICAI for statutory audits. These standards are different from the Indian Accounting Standards (Ind AS) which are being followed by public interest entities (PIEs). Limited liability partnerships (LLPs) have a different set of audit standards.
“The current standards for MSMEs, which focuses on the traditional Indian Generally Accepted Accounting Principles (GAAP), already allows for simpler reporting procedures. However, the proposed standards will further ease the norms, by removing complexities, requiring fewer disclosures, reduced documentation and fewer testing requirements while retaining the core principles of presenting a true and fair view,” the official said.
Under the new standards, for example, the ICAI has diluted the norms pertaining to the working papers which are documents prepared by the auditors during the course of an audit engagement. The working papers contain evidence of the procedures followed, work performed, and conclusions of the auditors involved.
Need for Clarity
Experts, however, said that more clarity is required from the ICAI as to how these standards will be different from the current auditing framework followed by the MSMEs. “The less complex entities for which these standards are designed are usually companies with limited public borrowings, and where the promoters are the largest shareholders. How these new standards will be different from the current system which offer certain exemptions and reduced requirements for SMEs needs to be known. Also, clarity is needed on the company thresholds where these standards would apply,” said the founding partner at a large audit firm.
In the FY26 Union budget, the finance minister revised the investment and turnover limits for the classification of MSMEs. Entities with an annual turnover of up to Rs 500 crore, and investments of Rs 125 crore fall under the MSME bracket.
Ashok Haldia, former secretary, ICAI said that the need for financial discipline and transparency in the auditing of MSMEs is as important as for any other entity as they avail various fiscal benefits and debt and equity support from public institutions. “It might not be prudent to relax auditing standards at the moment except for entities who have not availed fiscal support or funding from public agencies,” he cautioned.
The characteristics of less complex entities include concentration of ownership and management in a small number of individuals, straightforward or uncomplicated transactions, centralised accounting, few internal controls, simpler systems, fewer levels of management, fewer personnel, and extensive involvement by owners and senior management.