The regulators and the Institute of Chartered Accountants of India (“ICAI”) have been making continuous efforts to implement certain changes related to auditing profession which will help to improve audit quality in general and it is expected that independent auditors too implement those changes in true spirit and change the traditional approach of auditing which is being followed since decades. Also, the Statutory Auditors are expected to stay updated with changes in applicable laws and to adapt usage of technologies in audit functions. The time has come to adapt CHANGE with respect to mindset, the audit approach and to accept the fact that every individual involved in auditing profession will have to adapt usage of technology instead of manual ways of doing audit which should be a distant past very soon.

Let’s elaborate on the steps taken by regulators as well as ICAI along with certain steps which independent auditors are required to initiate at their end for the purpose of improving audit quality.

Peer Review Phase II from 1st July, 2023

The main objective of Peer Review is to ensure that in carrying out the assurance service assignments, the members of the Institute:

• (a) Comply with Technical, Professional and Ethical Standards as applicable including other regulatory requirements thereto; and
• (b) Have in place proper systems including documentation thereof, to amply demonstrate the quality of the assurance services.

Thus, Peer Review is meant for the purpose of enhancing quality of professional work, transparency in technical standards used, world class procedures and techniques resulting into more reliable and useful audit and reports, and it has no relationship whatsoever with any disciplinary or any other regulatory mechanism. The review begins with the assumption that professionals discharge their responsibilities properly and the aim of review is to enhance those attributes of professionalism that serve to keep the profession of chartered accountancy in India in the forefront of the accounting and auditing profession in the world.

At present in Phase I the peer review certificate issued by ICAI is mandatory for those Practice Units who are performing independent audits for listed companies and proposed to be listed companies. So technically the Practice Units which are not doing such types of audits are outside the purview of peer review currently and here the question arises “Who will audit such auditors?”. Unless you have third party review mechanism it is not possible to find out the gaps in audit procedures or to identify the areas for improvements. Therefore, the ICAI is planning to launch phase II of peer review wherein the Peer Review Certificate will be mandatory to the following Practice Units in addition to the Practice Units covered under Phase I:

Further, the ICAI is also planning to cover more Practice Units in Phase III & Phase IV which has been already announced under Peer Review Mandate dated 11th April, 2022.

Centre for Audit Quality Directorate (CAQD) - ICAI

The purpose of an independent audit is to provide confidence to users of audited financial statements in the quality of financial reports, in particular relating to their reliability. Improving audit quality and the consistency of audit execution is essential to maintain confidence in the independent assurance provided by the auditors. It is trust that enables organizations to create long-term value and high-quality audits play a crucial role in building trust and confidence in the users of financial information and thus it is the responsibility of the auditor to ensure that the audit quality is maintained.

Audit and Audit Quality has always been at the forefront at the ICAI. Accordingly, with a purpose to raise the level of awareness and understanding of various aspects of the Audit Quality, the ICAI in the year 2020 established the CAQD. It is pertinent to note that CAQD is conducting various seminars, webinars, certificate courses etc. which should be attended by the team members of Audit firms as the same will surely benefit audit teams to stay updated with the changes coming in for auditing profession and it will also help to improvise the audit quality in the long run.

Audit Quality Maturity Model (AQMM)

The AQMM is a capacity building measure initiated by ICAI and the objective of this Evaluation Matrix is for sole proprietors and Audit firms to be able to self-evaluate their current level of Audit Maturity, identify areas where competencies are good or lacking and then develop a road map for upgrading to a higher level of maturity.

In the Council meeting held on January 9, 2021 it was decided that the both the Peer Review Board and the Centre for Audit Quality (CAQ) would need to develop the ecosystem which is acceptable to both and such collaborative approach would have the advantage of the CAQ developing the quality standards and Peer Review Board testing the said standards.

Initially AQMM was kept recommendatory for one year and from 1st April, 2023 it is mandatory for the firms which are doing audits of listed entities or Banks other than co-op. banks (except multi state co-op. banks) or insurance companies, however the firms doing only branch audits are not covered at present.

The scores and the level arrived at shall be subject to review by a peer reviewer alongside the peer review cycle which falls anytime on or after 1st of April 2023. However, the firm(s) may choose to get their scores reviewed by an AQMM reviewer before their peer review cycle falls due. In case of firms whose last peer review cycle has been completed and not a year has lapsed from the date of the last review, such firms may choose to get their scores reviewed before their next peer review falls due by an AQMM reviewer. This option would be beneficial for the firms that have undergone their peer review recently and will have to wait for 3 years to have their next cycle for review of their AQMM scores. The level of the firm arrived at, after being reviewed by the peer reviewer shall be hosted on the website of the ICAI alongside the details of the peer review certificate.

AQMM is a cross functional model and covers operations, HR and functional set up of the firm. It also covers engagement teams, firm leadership, IT helpdesk, audit tools, human resources team, admin department, legal cell, networking and management information system desk of the firm. Since it covers many aspects, the audit firms are advisable to refer to implementation guide on AQMM issued by ICAI explaining all aspects at length which would be helpful for accurate evaluation of audit quality maturity levels.

Like peer review phase II, it appears that ICAI might cover more firms under the purview of AQMM in future to improve audit quality especially for small and medium practitioners involved in independent audit practice.

Financial Reporting Review Board (FRRB) – ICAI

FRRB was constituted in July 2002, which is an important wing of ICAI that works to bring improvements in financial reporting practices and thereby promote investors’ confidence in audited financial statements. The Board comprises of members of the Central Council of the ICAI including Government of India nominee with representations from the office of the SEBI, C&AG, IRDA, CBDT from time to time. The Council always endeavor’s to provide independence to the Board and keep it separate from the disciplinary mechanism of the Institute. FRRB neither has co-opted members or ex officio members including the President and Vice-president of the ICAI nor has any member of Disciplinary Committee on the Board. The members with significant expertise in the field work under confidentiality covenants.

FRRB reviews the general purpose financial statements of enterprises and auditor’s report thereon with a view to determine, to the extent possible:

• Compliance with the generally accepted accounting principles in the preparation and presentation of financial statements.
• Compliance with the disclosure requirements prescribed by regulatory bodies, statutes and rules and regulations relevant to the enterprise; and
• Compliance with the reporting obligations of the auditor.

The Board restricts its reviews to the published financial statements only and do not carry out re-audit or review how audit has been conducted by auditors concerned. The Board doesn’t carry out a detailed scrutiny. Further, the review conducted by the Board is neither a judicial proceeding nor a quasi-judicial proceeding.

Criteria for Selection of Enterprises for Review

• Suo motto
• Special cases referred by regulatory bodies.
• Cases where serious accounting irregularities in the financial statements are reported in media

Actions Taken by FRRB Based on Review

FRRB also create awareness amongst ICAI members by releasing “Study on Compliance of Reporting Requirements” from time to time. These publications have been released on both IGAAP and IND AS financials which are available on FRRB page on ICAI website. Also, FRRB articles are published in ICAI journal to apprise the ICAI members and others about the non-compliances observed during the reviews. It is advisable for audit firms to refer to these publications, articles & guide their audit teams and auditees to take preventive measures for avoiding such errors in the financial statements audited by them & audit report thereon.

Major Change in Audit Trail Requirements in Accounting Softwares

The Ministry of Corporate Affairs (MCA) has notified under Rule 11(g) of Companies (Audit and Auditors) Rules, 2014 that from 1st April, 2023, every company using accounting software must use software that records an audit trail of each and every transaction and creates an edit log of each change made in the books of account. The software must also ensure that the audit trail cannot be disabled.

As per the amendment, the backup of the books of accounts maintained in electronic mode shall be kept in servers physically located in India daily. It may be noted that any software used to maintain books of account will be covered within the ambit of this Rule. For e.g., if sales are recorded in a standalone software and only consolidated entries are recorded monthly into the software used to maintain the general ledger, the sales software should also have the audit trail feature since sales invoices would be covered under Books of Account as defined under section 2(13) of the Companies Act, 2013. Auditors would need to evaluate whether management has also considered such software in their compliance with the Account Rules. Accordingly, any software that maintains records or transactions that fall under the definition of Books of Account as per section 2(13) of the Act will be considered as accounting software for this purpose. Therefore, any separate software used for sales, stock, payroll processing etc. shall also have the feature of audit trail (edit log) as mentioned in the Rules.

In view of above, those auditee companies who have not implemented / activated audit trail (edit log) function in their accounting software from 1st April 2023 will be reported by the Statutory Auditors in their statutory audit report for the year 2023-24 because as per the above Rule the feature of recording audit trail (edit log) should be operative throughout the year. The Independent Auditors can refer to the Implementation Guide on Reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 issued by ICAI which gives detailed guidance on audit approach, auditors responsibility, management responsibility, audit documentation, reporting and other related aspects.

These MCA notifications are aimed at ensuring transparency and accountability in the financial sector. The use of accounting software with audit trail features will help prevent financial fraud and ensure that companies are maintaining accurate records and eventually it will give more comfort to the Statutory Auditors for performing company audits.

Use of Technology

According to the report by Centre for Economic Policy Research (CEPR) in March 2020, a rapid increase in the volume of data requires auditors to be equipped with the latest available technological tools to analyze a much higher volume of data in their audits than previously required.

CEPR said that the business in present times is becoming larger and more complex. Also, it is becoming difficult for the auditor to really access the complete data and study the systems to achieve the in-depth examination and subsequent analysis. The limited tools to access and analyze the data and study the systems to bring out effective reports is becoming a big challenge and these limitations are across both the large and small enterprise.

In today’s fast changing world, the businesses are also adapting to new technologies in business operations & other supporting functions, so it is essential for auditors to move from manual ways of doing audits towards use of technology in the form of audit automation tools for documentation, sampling techniques, data analysis, obtaining direct confirmations from third parties etc. This will surely help Independent Auditors to improve audit quality and to have better data retention systems in place as compared to having voluminous hard copies of documents that used to be kept in files.

Audit Teams on Field Presence

As all of us know, during the first and second lockdown during Covid-19 pandemic across the country, the statutory auditors were supposed to finalize the audits virtually or with very a smaller number of on filed visits & limited access to auditees premises. During the pandemic it was need for an hour to perform most of the audit procedures virtually and all of us did it by compulsion. However, post covid also it has become general practice by auditees and auditors to have virtual meetings, to share data online through various modes, to share audit queries virtually & have discussions through audio / video means of communication.

There is no harm in doing audits through hybrid mode to save travelling time of audit teams, but it is very important to understand that auditors may not be able to gather sufficient and appropriate audit evidence without having field presence. The examples are difficulties to check authenticity of original documents, missing out important updates with respect to auditee business, more time involvement in virtual communication etc. Therefore, it is essential for the audit team to visit auditee’s office / premises during the audit & decide based on their expertise the extent to which physical presence is required. Audit team’s physical presence on field can surely improve audit quality & save considerable amount of man hours which would have been required in virtual mode of performing audit.

Trainings for Audit Teams

As all of us know that auditing is bread and butter for CA profession and many practitioners are engaged in this profession since very long time. Although experienced CAs are having good knowledge of auditing aspects, it is essential for signing partner / proprietor & his audit teams to keep them updated with changes happening around auditing profession due to ever demanding expectations from various stakeholders and regulators. This is possible only through internal training programmes within Audit Firms on regular basis and by attending seminars / webinars conducted by ICAI and more particularly by CAQD on the topics like Standards on Auditing, Peer Review, AQMM, Ind AS, Accounting Standards etc. These training courses can be beneficial to audit practitioners and their audit teams, which would eventually improve audit quality in the long run.

Conclusion

As soon as a corporate fraud is unearthed, the auditor is the first one to face the heat and finds himself as scapegoat. Expectations from auditors are unreasonably high. With the rise in the number of cases of corporate frauds, several initiatives have been taken by ICAI, MCA, SEBI, and other regulators. Increased regulatory watch and more awareness among auditors on the recent changes in applicable laws are playing an important role in building up the quality of audit.

An Auditor is required to ensure compliance with all relevant statutes applicable to entities audited by them and identify all the risk areas. Ensuring all of this while completing an audit in a short span of time is a challenging task, however it can be ensured by taking steps in the right direction as discussed in the earlier paragraphs of this article. If an auditor is conducting an audit without affecting his independence, with compliance of applicable laws & code of ethics, with proper documentation as per Standards on Auditing & Standard on Quality Control etc., there are less chances that questions would be raised on his audit quality. In nutshell, if both the auditees and auditors are performing their responsibilities by remaining within boundaries of applicable laws and regulations with clear intentions, it is possible to overcome facing challenges from regulators. Therefore, the Independent Auditors should continue performing audits with a positive mindset & they should be always ready to adapt every single CHANGE that is coming their way in future.

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Author may be reached at: eboard@icai.in