The National Financial Reporting Authority (NFRA) has flagged concerns with the audit firms for not maintaining and archiving the audit files which is in violation of the auditing norms. In a circular, the audit regulator said that it has observed certain deficiencies in the audit firms’ submission of audit files to NFRA as per the standards of auditing (SAs).
The NFRA said that it has also observed that some auditors of public interest entities (PIEs) seek an unreasonable extension of time for submitting audit files. “While in the interest of natural justice, such extensions have been granted time and again, the elongated timelines sought by audit firms affect the overall timely consideration of the matter at NFRA,” the circular stated.
Documentation Gaps
Further, the regulator said that extensions sought by audit firms are often utilised to convert physical files into electronic formats or vice versa, and even for preparation of fresh or additional audit documentation (after the expiry of prescribed timeline for assembly and archival of audit files) solely for submission to NFRA.
Statutory auditors in India are required to keep audit files for every audit engagement as per SAs, including the Standard on Quality Control (SQC 1), that defines and provides guidance as to what constitutes an audit file and its value during the audit work undertaken by a statutory auditor to support his/her audit report. As per the rules, audit firms are required to design policy, procedures and controls around maintaining the sanctity of audit files, ensuring their completeness and timely archival, including controls around authorised access to archived files.
In cases where any legal or regulatory proceedings have been instituted by any court or authority, the NFRA said that the audit files needs to be retained even beyond the timelines prescribed under SQC-1 or SAs.
“In certain instances, it has been observed that auditors have taken recourse to the suggested 7 years provided in the SQC 1 as the final period up to which they are required to retain the audit file, even when the matter is under regulatory scrutiny or under challenge in courts. Preservation of any document or electronic record which a person may be lawfully compelled to produce as evidence in a court or in any proceeding lawfully held before a public servant is protected in law from obliteration or being rendered illegible…,” the circular said.
Plugging the 7-Year Loophole
In order to plug the gaps, the NFRA has suggested audit firms to establish adequate policy, procedures and controls over audit files keeping in mind all the relevant Indian laws and regulations including, IT rules and regulations. “Audit firms are required to note that audit files requisitioned by NFRA are required to be submitted in complete form and prescribed manner within 7 days of receipt of the communication from NFRA to submit the audit files,” the circular said.
