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TMI BlogResponsibilities of Principal Auditor and Other Auditors in Group AuditsX X X X Extracts X X X X X X X X Extracts X X X X ..... 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 demerg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8-23 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 evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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 case [ Juthika Bhattacharya v. State of M.P., (1976) 4 SCC 96: 1976 SCC (L S) 561 ] 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 decision [ State of Haryana v. Raghubir Dayal (1995) 1 SCC 133 = 1994 (11) TMI 370 - SUPREME COURT ], 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 = 1965 (4) TMI 91 - SUPREME COURT ; (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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurities and Exchange Board of India (Listing Obligations and Disclosure requirements) Regulations 2015 , issued 11 July 2023 by SEBI. The circular provides [ Chapter III Financial Disclosures, Section III A, part (C), paragraph 12 ] 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation 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 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 explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 prot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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