भारत सरकार / Government of India

राष्ट्रीय वित्तीय ररपोर्टिं ग प्राधिकरण /National Financial Reporting Authority

*****
7th Floor, Hindustan Times House,
Kasturba Gandhi Marg, New Delhi

NF- 25013/2/2023-O/o Secy-NFRA Dated 3.10.2024

Circular under Section 132(2) (b), (c), and (d) read with Rule 4(1), 4(2)(e) and Rule 9 of NFRA
Rules 2018

To

1. Auditors of the entities under the purview of Rule 3 of NFRA Rules 2018

Subject: 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:

a) Standard on Quality Control (SQC);

b) 35 SAs addressing various aspects during the entire life cycle of an audit; and
c) Code of Ethics including Independence standards.

2. Audit of SFS, where the company has branches, and the audit of CFS of companies with
subsidiaries, associates etc, called as audit of Group Financial Statements (GFS), requires special
considerations by the auditor (called Principal Auditor), who is ultimately responsible for issue of group
audit opinion, and also by the auditors (called Other Auditor) engaged to undertake audit of components
such as branches and subsidiaries etc. ‘SA 600 - Using the Work of Another Auditor’ deals with the
requirements in the audit of GFS.

3. In the contemporary business and economic environment, there are audit areas of material
and/or significant risk in almost all the audits of GFS due to the following features (this list is not
exhaustive).

a. Complex group structures including special purpose vehicles, auto pilot structures, cross
holdings of interests across group entities and shared service centres in different geographies
b. Shell or dummy companies as a conduit to siphon off funds from Public Interest Entities (PIEs)
c. Regular/frequent formation or acquisition of new businesses and/or entities including schemes
of merger and demerger
d. Significant transactions with related parties
e. Significant transactions outside the normal course of business
f. Unusual or abnormal variances in financial data
g. Rapid technological developments

4. However, in the course of performing its functions such as exercising oversight and monitoring
and enforcing compliance, the National Financial Reporting Authority (‘NFRA’) has observed gross
negligence and audit failure in audits of GFS (cases of Group Audits involving various companies).
Instances include Reliance Capital Limited, Reliance Home Finance Limited, Reliance Commercial
Finance Limited (together accounting for alleged fraud of ₹ 29000 Crores), Coffee Day Enterprises
Limited (alleged fraud of ₹ 3500 Crores), Dewan Housing and Finance Limited (alleged fraud of ₹
34000 Crores), and audit quality review of IL&FS (which collapsed with a debt of ₹ 90000 Crores). In
these cases, moneys 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.

5. The combined effect of these have resulted in a loss of tens of thousands of crores in the
financial and capital market, adversely impacting investors, including retail investors, and creditors,
involving huge public interest. Therefore, in exercise of NFRA’s powers under Section 132 (2) (b), (c),
(d) read with Rule 4 (1), 4 (2) (e) and Rules 3, 4 and 9 of NFRA Rules 2018, the auditors’ obligations,
under CA 2013 and existing requirements in SA 600 and related standards, are hereby reiterated in the
following paragraphs, so that interpretations of the provisions of SA 600 by the auditors remain
consistent with their obligations under CA 2013, Standard on Quality Control (SQC) and other
applicable Standards of Auditing.

Observations by NFRA across various enforcement cases (illustrative)

6. Significant gaps have been noted by NFRA in audits, across various enforcement cases,
relevant to audit of GFS. These include:

a. Inadequate coordination/discussion with Component Auditors at most stages of audit

b. Discrepancies in the number of components as per CFS and mandatory filings in MCA 21
which were not assessed by the auditors,
c. Non-assessment of inclusion by Management of unaudited financial statements of some
components in the CFS. In respect of the latter, the Principal Auditor stated that “……..
preparation of consolidated financial statements (CFS) is the responsibility of management and
accordingly, use of component’s unaudited financial statements, considering the non-
availability of audited financial statements, was also decision of management. As an auditor,
we had no role to play in this regard. As a holding company auditor, it is not in our realm to
insist on the management that all components financial statements should be audited”. Such
approach by the Principal Auditor went against the very objective of the audit of CFS as per
the SAs i.e., to express an opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework.
d. SA 600 provides that Principal Auditor would normally be entitled to rely upon the work of
Component Auditors unless there are special circumstances to make it essential for him to visit
the component and/or examine the books of accounts and other records of the said component.
While NFRA noted that the company had diverted large amounts to its promoter entity
(upwards of Rs 3500 crores) and the auditor had himself identified the exposure of the group
companies to the promoter company and recoverability of outstanding balances at year end as
an important matter, the auditor stated that he relied upon the work of Component Auditors as
‘no such special circumstances came to his attention to trigger the requirement of SA 600’.
e. On non-reporting of fraud, a Principal Auditor stated that ‘they had no obligation to evaluate
the fraud risk in any of the group companies’ and ‘they had no access to the books of the
subsidiaries audited by the other auditors’.
f. In another case both the Principal and Other Auditors failed to identify the false and erroneous
under-statement of loans to entities controlled by promoters by way of book entries of cheques
received as repayments but not encashed as of balance sheet date.
g. In the case of audit of a non-banking finance company (NBFC) comprising 21 subsidiaries, one
of the joint auditors and the auditor of 2 other subsidiaries had resigned reporting suspected
fraudulent diversion of approximately ₹ 29,000 crores, some through group companies, and
 others through undisclosed related parties and lending to companies which were not credit-
worthy, or had weak financials, or had no business activities; and used these loans for onward
lending whose end use could not be verified. The Principal Auditor in the qualified audit report
on the consolidated financial statements just referred to qualified opinion of the auditor of one
of these 3 subsidiaries and also stated that the audit opinion was solely based on the reports of
the auditors of 6 subsidiaries having 38.64% of the total assets of the group.
h. In the case of another NBFC which operated through a network of around 250 branches across
various states in India, the Principal Auditor did not ensure whether the appointment of the
Branch Auditors appointment was legally valid, while the Principal Auditor’s report stated that
the branch audit reports had been considered and relied upon by the Principal Auditor. At the
same time, the Principal Auditor, in their submissions to NFRA, denied that they relied on the
Branch Auditors’ Report and said that they did branch audits based on ERP System at HO.
Neither the Principal Auditor nor the Branch Auditors verified group-wide internal control
systems, in particular the controls relating to the appraisal and sanction of loans at the head
office level and branch level. The Principal Auditor failed to properly evaluate non-
consolidation of a subsidiary resulting in material understatement of liability in the CFS.
i. In the case of another company 100 % of the revenue of the company was being generated from
its overseas branch (country A) and the auditor of this component was located in another
overseas location (country B). The Principal Auditor was located in India where the entity had
no business activities. The company had disclosed in its annual report that they were engaged
in the Software business, whereas Revenue from operations reported in the financial statements
was from construction business activities in overseas locations. The Principal Auditor did not
evaluate the sufficiency of his participation in this audit which was replete with special
circumstances nor did he evaluate the competence of the overseas auditor to undertake audit as
per Indian statutory requirements.

Incorrect interpretation by some auditors in the application of existing provisions of SA 600

7. The above instances indicate an incorrect understanding by some auditors of their role in the
audit of GFS. Because of the same, some auditors have incorrectly interpreted and selectively applied
provisions of SA 600 in audits of GFS. This incorrect understanding is not in alignment with the
Standards of Auditing and provisions in CA 2013.
8. Such interpretations appear to have partly arisen due to the selective reading of the requirements
in SA 600 and treating them as being independent by themselves, unconnected with the overall
responsibilities of auditors under CA 2013 and other SAs, including SA 200, which is fallacious. Below
are a few examples of interrelated requirements that seem to have been disregarded by auditors in
performing statutory audits of GFS (paragraphs 9-15 below).

9. The authority of all SAs, including SA 600, is set out in SA 200- Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing. It is very
important to note the overall objectives of an auditor in conducting an audit of financial
statements, which are provided in Paragraph 11 of SA 200.

“The overall objectives of the auditor in conducting an audit of financial statements are:

(i) To obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all material respects,
in accordance with an applicable financial reporting framework; and

(ii) To report on the financial statements, and communicate as required by the SAs, in
accordance with the auditor’s findings.
 Note: In all cases when reasonable assurance cannot be obtained and a qualified opinion in the
auditor’s report is insufficient in the circumstances for purposes of reporting to the intended
users of the financial statements, the SAs require that the auditor disclaim an opinion or
withdraw from the engagement, where withdrawal is legally permitted.”

10. The overall objectives of audit of financial statements are the same for a Principal Auditor
or a Component/Other auditor. Thus, Principal Auditors cannot contend that they did not
perform adequate procedures in audits of GFS if in their opinion a particular SA, by itself, did
not require them to do so.

11. Paragraphs 18-23 of SA 200 state that the auditor shall comply with all SAs relevant to the
audit. SA 200 further states that the auditor shall not represent compliance with SAs in the auditor’s
report unless the auditor has complied with the requirements of this SA and all other SAs relevant to
the audit. An SA is relevant to the audit when the SA is in effect, and the circumstances addressed by
the SA exist. The auditor shall have an understanding of the entire text of an SA, including its
application and other explanatory material, to understand its objectives and to apply its
requirements properly.

12. SA 200 further states that “The SAs contain objectives, requirements and application and other
explanatory material that are designed to support the auditor in obtaining reasonable assurance. The
SAs require that the auditor exercise professional judgment and maintain professional skepticism
throughout the planning and performance of the audit and, among other things:
• Identify and assess risks of material misstatement, whether due to fraud or error, based on an
understanding of the entity and its environment, including the entity’s internal control.
• Obtain sufficient appropriate audit evidence about whether material misstatements exist,
through designing and implementing appropriate responses to the assessed risks.
• Form an opinion on the financial statements based on conclusions drawn from the audit
evidence obtained.

These requirements are universal to audit of financial statements, whether standalone or

consolidated.

13. Paragraph 21 of SA 200 states that to achieve the overall objectives of the auditor, the auditor
shall use the objectives stated in relevant SAs in planning and performing the audit, having regard to
the interrelationships among the SAs, to:
(a) Determine whether any audit procedures in addition to those required by the SAs are necessary in
pursuance of the objectives stated in the SAs.
(b) Evaluate whether sufficient appropriate audit evidence has been obtained.
As seen above, the requirement of performing audit procedures is not limited to those just mentioned
in an SA. SA 200 states that because the circumstances of audit engagements vary widely and all such
circumstances cannot be anticipated in the SAs, the auditor is responsible for determining the audit
procedures necessary to fulfil the requirements of the SAs and to achieve the objectives. In the
circumstances of an engagement, there may be particular matters that require the auditor to perform
audit procedures in addition to those required by the SAs to meet the objectives specified in the SAs
(Para A70 of SA 200).

An opposite situation may also arise where an auditor is not able to perform additional procedures to
meet the overall objectives of the SAs and the overall objectives of the auditor. The Note below
paragraph 11 of SA 200 (quoted in paragraph 9 above) states that in all cases when reasonable assurance
cannot be obtained and a qualified opinion in the auditor’s report is insufficient in the circumstances
for purposes of reporting to the intended users of the financial statements, the SAs require that the
auditor disclaim an opinion or withdraw from the engagement, where withdrawal is legally permitted.
A similar requirement is there in paragraph 22 of SA 600 which requires that when the principal auditor
concludes, based on his procedures, that the work of the Other Auditor cannot be used and he has not
been able to perform sufficient additional procedures regarding the financial information of the
component audited by the Other Auditor, he should express a qualified opinion or a disclaimer.
14. Under SA 600 the principal auditor continues to remain responsible for forming and expressing
his opinion on the group financial statements. A combined reading of the provisions of SA 600 such as
paragraph 5, which states that ‘When the principal auditor uses the work of another auditor, the principal
auditor should determine how the work of the other auditor will affect the audit’, and paragraph 12,
which states that “The principal auditor should perform procedures to obtain sufficient appropriate audit
evidence, that the work of the other auditor is adequate for the principal auditor's purposes, in the context
of the specific assignment’, show that under SA 600 as well, the auditor is required to obtain sufficient
appropriate audit evidence to provide a basis for his overall opinion. In doing so, the auditor must
comply with the requirement under paragraph 17 of SA 200, namely, ‘to obtain reasonable assurance,
the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low
level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor’s
opinion.’

15. As per paragraph 9 of SA 600 in considering whether the auditor's own participation is
sufficient to be able to act as the Principal Auditor, the Principal Auditor has to consider the risk of
material misstatements in the financial information of the components audited by the Other Auditor. In
doing so, the auditor is expected to apply the requirements in SA 315-Identifying and assessing risks of
material misstatement through understanding the entity and its environment (e.g. paragraph 11 read
with application paragraph A29) and not rely blindly on the work done by the Component Auditor.
Paragraph 10 of SA 600 does not envisage a mechanical adoption/ reliance on the work of the
Component Auditor, but a professional assessment of the decision regarding such reliance which needs
to be documented by the auditor.

16. Therefore, the responsibility of the auditor under SA 600 is required to be read with the
auditor’s concomitant responsibilities in CA 2013, and in related SAs such as SA 200, SA 220
(Revised), SA 230, SA 240, SA 300, SA 315 (Revised 2019), SA 320, SA 330, SA 450 and SA 701
towards obtaining sufficient and appropriate evidence in support of the auditor’s opinion on the
group financial statements.

17. Additionally, the interpretation apparently being applied by some auditors in respect of
obligations or requirements which use words other than ‘shall’ in the text of SA 600, is also not correct.
The word ‘should’, it appears, is being interpreted by some auditors to claim that the provisions are
directory and not mandatory. A few such provisions in SA 600 which use the word ‘should’ are
illustrated below. For instance,
a. Paragraph 5 of SA 600 states that ‘When the principal auditor uses the work of another
auditor, the Principal Auditor should determine how the work of the other auditor will
affect the audit.’
b. Paragraph 9 of SA 600 states that the auditor should consider whether the auditor’s
own participation is sufficient to be able to act as a Principal Auditor.
c. Paragraph 12 of SA 600 states that “The Principal Auditor should perform procedures
to obtain sufficient appropriate audit evidence, that the work of the other auditor is
adequate for the principal auditor's purposes, in the context of the specific assignment.”
 d. Paragraph 15 of SA 600 states that “The Principal Auditor should consider the
significant findings of the other auditor”.

18. The word ‘should’ has been used on over twenty occasions in the substantive text of the SA
600 and the word ‘shall’ has not been used even once. Considering these provisions as directory and
not performing the required procedures frustrates the basic purpose of the audit and the objectives of
this Standard and results in non-compliance of the Section 143(2), Section 143(3), Section 143(9) of
CA 2013 and the Standards of Auditing.

19. The Hon’ble Supreme Court of India in a case1 has held:

“…The mere use of the word “should” does not mean necessarily that the compliance
with the rule is discretionary. It is well-settled that whether a provision is directory or
mandatory depends on its object and purpose, not merely on the use of any particular word or
phrase. ….”

20. In another decision2, the Hon’ble Supreme Court held

“Equally, it is settled in law that when a statute is passed for the purpose of enabling the doing
of something and prescribes the formalities which are to be attended for the purpose, those
prescribed formalities which are essential to the validity of such thing, would be mandatory”

21. In a recent decision,3 the High Court of Bombay laid down a clear test to determine whether a
provision is mandatory or directory in nature:

“36. Some of the well-known tests to determine whether a provision

is mandatory or directory are as follows:

(i) The use of expressions like “shall” or “may” are not conclusive and regard must he had to
the true intent of the legislation. However, use of expressions like “shall” or “should” or “must’
by the legislature at least prima facie, indicates mandatory nature. Similarly, the use of
expressions like “may” or “as nearly as may be” by the legislature, at least prima
facie indicates directory nature. State of U.P. v. B.R. Upadhya, AIR 1961 SC 751;

(ii) The circumstance that the statute itself provides consequences of breach or noncompliance,
normally suggests a mandatory nature; Maqbool Ahmad v. Onkar Pratap Narain Singh, AIR
1935 PC 85, p. 88, Manilal Shah v. Sardar Mahmad, AIR 1954 SC 349;

(iii) A provision couched in negative form, generally suggests mandatory nature; Affirmative
words, simplicitor, generally suggest directory nature; M. Pentiah v. Muddla, AIR 1961 SC
1107; Dharamdeo Raiv. Ramnagina Rai, (1972) 1 SCC 460;

(iv) A procedural rule, should ordinarily, not be construed as mandatory. If a provision relates
to performance of any public duty and the invalidation of any act done in disregard of that
provision causes serious prejudice to those for whose benefit it is enacted and at the same time,
who have no control over the performance of the duty, such provision should be treated
as directory; Dattatraya Moreshwar (supra);

1
Juthika Bhattacharya v. State of M.P., (1976) 4 SCC 96: 1976 SCC (L&S) 561
2 State of Haryana v. Raghubir Dayal (1995) 1 SCC 133
3 WP No 10478 of 2014 Anant H. Ulahalkar and Ors Vs Chief Election Commissioner and Ors decided on 09.12.2016
 (v) If a statute confers a concession or privilege and prescribes a mode of acquiring it, the mode
so prescribed must be adopted as even affirmative words in such cases are construed
imperative; Edward Ramia Ltd. v. African Woods Ltd., 1960 (1) ALL ER 627;

(vi) Where a provision prescribes that a certain act has to be done in a particular manner by a
person in order to acquire a right and it is coupled with another provision which confers an
immunity on another when such act is not done in that manner, the former has to be regarded
as mandatory one;

(vii) Provisions which impose private duties or obligations upon private parties are ordinarily
to be regarded as mandatory; Kedamath Jute Mfg, Co. Ltd. v. Commercial Tax Officer, AIR
1966 SC 12;

(viii) If exceptions, exemptions or concessions are granted by a statute subject to fulfilment of

certain conditions, then such conditions must be mandatorily fulfilled. Subject to fulfilment of
conditions, the provision may be liberally construed;

(ix) The nature, design and consequences which would follow from construing the provision as
“mandatory” or “directory”. Where construction of a provision as directory will render the
provision or significant parts otiose, redundant or a surplusage. The principle is that the
legislature does not use words in vain; and

(x) Where the construction of a provision as mandatory would result in absurdity, which could
never have been intended by the legislature, the provision can be construed as directory.”

Preliminarily, it may be noted that on a prima facie basis, unlike the word ‘may’, the use of the word
‘should’ indicates that the provision is mandatory and not directory. Further, the interpretation of
‘should’ depends on several factors like legislative intent, the purpose of the law, and the consequences
of non-compliance (especially for public interest).

22. Accordingly, auditors shall note that the use of the word ‘should’ at various occasions in SA
600 does not confer an arbitrary choice to the auditors to selectively apply the determinations or
procedures required in the SA. The auditors are required to comply with SA 600 and related provisions
on audit of GFS across SAs, unless the auditor records reasons for not doing so and provides reasons in
his or her audit file and documentation that he or she undertook alternative actions that were sufficient
to achieve the objective of the specific audit engagement.

23. It is useful to note that similar considerations of the use of specific terms to denote auditor
obligations under Standards of Auditing apply globally. The Public Company Accounting Oversight
Board (PCAOB), USA, has issued Rule 3101, Certain Terms Used in Auditing and Related Professional
Practice Standards, in which it is stated that while the word ‘shall’ implies ‘unconditional
responsibility’, the word "should" indicates responsibilities that are ‘presumptively mandatory’.

Rule 3101 states that ‘the auditor must comply with requirements of this type specified in the Board's
standards unless the auditor demonstrates that alternative actions he or she followed in the
circumstances were sufficient to achieve the objectives of the standard. Failure to discharge a
presumptively mandatory responsibility is a violation of the relevant standard and Rule 3100 unless the
auditor demonstrates that, in the circumstances, compliance with the specified responsibility was not
necessary to achieve the objectives of the standard”.

In the note issued under the rule, the PCOAB stated that “in the rare circumstances in which the auditor
believes the objectives of the standard can be met by alternative means, the auditor, as part of
documenting the planning and performance of the work, must document the information that
demonstrates that the objectives were achieved.”
24. Importance of the Principal Auditor’s obligations towards Group financial statements is further
underscored in the Master circular for compliance with the provisions of the Securities and Exchange
Board of India (Listing Obligations and Disclosure requirements) Regulations 2015, issued 11 July
2023 by SEBI. The circular provides4 that the statutory auditor of a listed entity shall undertake a
limited review of the audit of all the entities/companies whose accounts are to be consolidated with
the listed entity as per the relevant accounting standard (AS 21/Ind-AS 110) in accordance with
guidelines issued by the Board on this matter. The audit procedures, which extensively reference SA
600 in addition to other obligations of auditors in respect of audit/review of CFS, are provided in
Annexure 10 of SEBI’s above-mentioned circular.

Sufficiency of audit procedure towards evaluation of the work of the Other Auditor by the
Principal Auditor

25. In the course of NFRA’s functions relating to oversight over the quality of service of the
profession and monitoring and enforcing compliance with auditing and accounting standards, some
auditors have contended to NFRA that in their understanding there is a bar on review of work papers of
the Component Auditor, and this perceived bar has been stated by some Principal Auditors to be a
reason to place sole reliance on the work of the Component Auditors. In their understanding the bar
arises due to Clause (1) of the Second schedule of the Chartered Accountants Act, 1949, PART I,
Professional misconduct in relation to Chartered Accountants in Practice which states that a Chartered
Accountant in Practice shall be deemed to be guilty of professional misconduct, “if he discloses
confidential information acquired in the course of his professional engagement to any person other
than his client so engaging him, without the consent of his client or otherwise than as required by any
law for the time being in force”.

26. It is clear that the above-mentioned clause does not constitute a bar on sharing of work papers
between the Principal Auditor and the Component/Other auditor, nor is there such a bar in any other
law in the country. Sharing of work papers by a Component Auditor with the Principal Auditor will be
permissible because it is required by the Principal Auditor for discharging his duties under Section 143
of CA 2013 and, therefore, it meets the requirement of ‘as required by any law for the time being in
force’ mentioned in Clause (1) of the Second schedule of the Chartered Accountants Act, 1949, PART
I. This is further explained in the following paragraphs.

27. Sharing of work papers by auditors, or review of work papers of the Component Auditor by the
Principal Auditor, which is required in course of his professional duties, is inherent to the obligations
of the Principal Auditor in s.143 of CA 2013 and SAs (SAs have a statutory status in CA 2013). Section
143 of CA 2013 (s.227 and s.228 of CA 1956 also) requires that the company auditor or the Principal
Auditor has to consider the report of the branch auditor and report how (CA 1956)/in what manner (CA
2013) he considered it in respect of his overall reporting obligations. Relevant provisions in CA 2013
are discussed below in paragraphs 28-30.

28. Further, S. 143 of CA 2013 grants auditors a right of access to all books and vouchers of the
company including right of access to the records of all the subsidiaries of the companies in so far as it
relates to the consolidation of its financial statements with that of its subsidiaries. Auditors are entitled,
under the provisions of this section, ‘to require from the officers of the company such information and
explanation as he may consider necessary for the performance of his duties as auditor…’.

29. The obligation of the auditor under the Companies Act lies towards ‘every financial statement’
which includes the CFS. Section 143 (2) of CA 2013 states that ‘The auditor shall make a report to the
members of the company on the accounts examined by him and on every financial statements which
are required by or under this Act to be laid before the company in general meeting and the report shall

4
Chapter III Financial Disclosures, Section III A, part (C), paragraph 12
after taking into account the provisions of this Act, the accounting and auditing standards and matters
which are required to be included in the audit report under the provisions of this Act or any rules made
thereunder or under any order made under sub-section (11) and to the best of his information and
knowledge, the said accounts, financial statements give a true and fair view of the state of the
company‘s affairs as at the end of its financial year and profit or loss and cash flow for the year and
such other matters as may be prescribed.

30. Section 143 (3) of CA 2013 states that the auditor‘s report shall also state—
(a) whether he has sought and obtained all the information and explanations which to the best
of his knowledge and belief were necessary for the purpose of his audit and if not, the details
thereof and the effect of such information on the financial statements;
(b) whether, in his opinion, proper books of account as required by law have been kept by the
company so far as appears from his examination of those books and proper returns adequate for
the purposes of his audit have been received from branches not visited by him;
(c) whether the report on the accounts of any branch office of the company audited under
subsection (8) by a person other than the company‘s auditor has been sent to him under the
proviso to that sub-section and the manner in which he has dealt with it in preparing his report;
(d) whether the company‘s balance sheet and profit and loss account dealt with in the report are
in agreement with the books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting standards;
(f) the observations or comments of the auditors on financial transactions or matters which have
any adverse effect on the functioning of the company;
(g) whether any director is disqualified from being appointed as a director under sub-section
(2) of section 164;
(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and
other matters connected therewith;
(i) whether the company has adequate internal financial controls system in place and the
operating effectiveness of such controls;
(j) such other matters as may be prescribed.

Section 143 (4) states that ‘Where any of the matters required to be included in the audit report
under this section is answered in the negative or with a qualification, the report shall state the
reasons therefor’.

31. Therefore, the law specifies unequivocal right of access of the Principal Auditor to records of
holding company, subsidiaries, associates, JVs, branches, and to information and explanation from
company officers (including subsidiaries, associates, JVs, branches), his obligations to report on all
information and explanations which to the best of his knowledge and belief were necessary for purpose
of audit, his obligations to report if any of the matters that are required to be reported in the audit report
could not reported or are answered in negative or a qualification.

32. SA 600 also requires, in paragraph 12, that “The Principal Auditor should perform procedures
to obtain sufficient appropriate audit evidence, that the work of the Other Auditor is adequate for the
Principal Auditor's purposes, in the context of the specific assignment.” SA 600 further requires under
paragraph 5 that ‘When the Principal Auditor uses the work of another auditor, the Principal Auditor
should determine how the work of the other auditor will affect the audit.’

33. Above provisions in law and SA read together and read with auditor’s overall objectives
in the SAs demonstrate that while SA 600 does not mention specifically a review of audit work
papers of the Component Auditor or Other Auditor by the Principal Auditor, such a review may
need to be applied by an auditor in appropriate cases, in exercise of his professional duties,
professional skepticism and professional judgement, for evaluating whether the work of the
Component Auditor is adequate for his purposes (the purpose being evaluating the work done by
the Component Auditor towards gathering sufficient and appropriate evidence that his overall
opinion on the group financial statements is appropriate in the circumstances as per his
obligations in CA 2013 and the SAs). Such a review of audit work papers of the Component
Auditor or Other Auditor by the Principal Auditor would also be consistent with the obligations
of the Principal Auditor in SEBI’s LODR, as mentioned above. Sharing of work papers by the
Component Auditors with the Principal Auditor will be permissible in such cases and the above
provision of the Chartered Accountants Act, 1949 will not come in the way because such sharing
is required for the lawful discharge of duties of the Principal Auditor.

Professional competence

34. Paragraph 11 of SA 600 provides that when planning to use the work of another auditor, the
Principal Auditor should consider the professional competence of the Other auditor in the context of
the specific assignment if the Other Auditor is not a member of the ICAI. This provision does not say
that the Principal Auditor should not or cannot consider the professional competence of the Other
Auditor in the context of the specific assignment even if the Other Auditor is a member of the ICAI.

Paragraph 13 of SA 600 requires that the nature, timing, and extent of procedures (performed by
the Principal Auditor) will depend on the circumstances of the engagement and the Principal
Auditor’s knowledge of the professional competence of the Other Auditor. The paragraph further
states that this knowledge may have been enhanced from the review of the previous audit work of the
Other Auditor.

35. Form the above, it is abundantly clear that the reference to ‘knowledge of professional
competence’ in this provision cannot by any interpretation be understood to mean the process of merely
confirming whether the Other Auditor is a CA or not. There is no parallel of any such provisions in any
other profession where acquiring a professional degree is taken to be synonymous with professional
competence. Professional competence goes beyond acquiring a professional degree/certification and
takes into account the experience of the auditor, in terms of years of experience, relevant skills, sectors
audited, complexity of audit assignments handled, and availability of adequate resources to undertake
the specific engagement etc., to name a few. As provided in the SA, this assessment of professional
competence of the Component or the Other Auditor is meant to help the Principal Auditor in his
evaluation of the work of the Other Auditor and to determine to what extent he has sufficient appropriate
audit evidence that provides a sufficient basis for his opinion on the GFS.

36. To conclude, as explained above, a selective reading and interpretation of existing provisions
in SA 600 by some auditors without keeping in view the overall purpose and objectives of the audit and
the provisions of the Act is not in alignment with the Standards of Audit and provisions of the
Companies Act, 2013 and also not in public interest.

Responsibility for Consolidated Financial Statements lies with the Management and Board of
Directors of the Holding Company and the Principal Auditors

37. Attention of the auditors is also invited to the provisions related to Consolidated Financial
Statements in CA 2013 as some members of the auditing profession have shown a wrong understanding
that the responsibility for Consolidated Financial Statements does not lie with the Management
and Board of Directors (BOD) of the Holding Company and concomitantly the group auditor
should also not have responsibility for the same.
The provisions of CA 2013 are very clear as far as the responsibility for financial reporting of both
Separate Financial Statements and CFS of the parent company are concerned.
 (a) Section 134 (1) of CA 2013 dealing with approval of Financial Statements and Board’s
Report says that ‘the financial statements, including consolidated financial
statements, if any, shall be approved by the BOD before they are signed on behalf of
the Board by the Chairperson of the company where he is authorized by the Board and
by the two directors and CEO and CFO and Company Secretary’. Read with Section
129 (3) and 129 (7) of CA 2013, the provisions provide for the responsibility of the
CFS to be that of the holding or parent company.
(b) Further, as mentioned above also, under Section 129 (4) of CA 2013 states that ‘the
provisions of this Act applicable to the preparation, adoption and audit of the financial
statements of a holding company shall, mutatis mutandis, apply to the consolidated
financial statements.’ Hence the responsibilities of the management and the auditors of
the holding entity are unambiguous in law.

38. In view of the above background including the judgements of the Hon’ble Supreme Court and
High Court, as cited above, and the critical public interest function performed by the auditors of public
interest entities, NFRA reiterates that auditors shall understand their responsibility under CA 2013 and
SA 600 with their concomitant responsibilities in related SAs such as SA 200, SA 220 (Revised), SA
230, SA 240, SA 300, SA 315 (Revised 2019), SA 320, SA 330, SA 450 and SA 701 towards obtaining
sufficient and appropriate evidence in support of the auditor’s opinion on the group financial
statements and carry out audit procedures accordingly.

39. While doing so, use of the word ‘should’ in the various paras of SA 600 shall not be treated as
directory, giving an arbitrary choice to the Principal Auditor to perform or not to perform the procedures
as specified in the SA 600. The word "should" in SA 600 casts responsibilities that are presumptively
mandatory. Every Principal Auditor is, therefore, mandatorily required to perform all the procedures
specified in SA 600 (regardless of the word ‘should’ in SA 600) and related SAs in fulfilment of his
obligations under CA 2013 read with the overall objectives provided under SA 200, unless he has valid
reasons to say that he has carried out alternate procedures to achieve these objectives and the absence
of performance of such procedure would not materially impact his opinion of the accounts being true
and fair. In circumstances in which the Principal Auditor believes the objectives of the SAs relevant
to audit of GFS can be met by alternative means, the Principal Auditor, as part of documenting the
planning and performance of the work, shall document the information that demonstrates how the
objectives were achieved through the alternate means.

40. Section 132 (2) (b) & (c) of CA 2013 and the rules made thereunder enjoin upon NFRA to
ensure compliance with accounting and auditing standards as prescribed. Rule 4 (1) of NFRA Rules
2018 requires the Authority to protect the public interest and the interest of investors, creditors and
others associated with the companies governed under Rule 3 by establishing high quality standards of
accounting and auditing and exercising effective oversight of auditing functions performed by the
auditors. Clauses (c), (d) and (e) of Rule 4 (2) inter alia require monitoring and enforcing compliance
with Auditing Standards, suggesting measures for improvement in the quality of service and promoting
awareness in relation to the compliance of auditing standards. The present circular is issued to
implement the aforesaid objectives for the protection of public interest. It seeks to promote awareness
for ensuring effective compliance with the existing auditing standards.

41. It may be noted that this circular reiterates, in public interest, the existing obligations on
statutory auditors which, as NFRA has observed, are not being interpreted correctly by a section of
auditors of the Public Interest Entities under NFRA’s purview. This circular is applicable to the auditors
of all entities covered under Rule 3 of NFRA rules 2018 with immediate effect to prevent recurrence of
audit failures and loss of confidence in audit of Public Interest Entities (PIEs). The auditors of the
entities under Rule 3 of NFRA Rules 2018 are hereby required to scrupulously adhere to this circular
in carrying out their audits of the PIEs.

Authorised for issue by the Executive Body, NFRA.

(Vidhu Sood)
Secretary, NFRA
.
Copy to:
1. Secretary, Ministry of Corporate Affairs, Government of India
2. Governor, Reserve Bank of India
3. Chairperson, Securities and Exchange Board of India
4. Chairperson, Insurance Regulatory and Development Authority of India
5. Chairperson, Pension Fund Regulatory Development Authority
6. Director General of Corporate Affairs, Ministry of Corporate Affairs, Government of India
7. Director General (Commercial-II), O/o CAG of India
8. Chairman, BSE
9. MD&CEO, National Stock Exchange
10. President, The Institute of Chartered Accountants of India
11. President, The Institute of Company Secretaries of India
12. Director General, Confederation of Indian Industry (CII)
13. Director General, Federation of Indian Chamber of Commerce and Industry (FICCI)
14. Secretary General, The Associated Chambers of Commerce and Industry of India (ASSOCHAM)
15. Secretary General, PHD Chamber of Commerce and Industry (PHDCCI)
16. Director, The CFO Board