Everything about NFRA circular

National finance reporting authority (NFRA) recently released a circular on responsibilities of statutory auditors in relation to fraud of a company. But before that in this blog we will also talk about what exactly statutory audit is, we will go into its details, its types and procedures and also talk about the latest circular to keep you updated.

What is Statutory Audit?

Statutory audit is a type of audit mandated by a stature (or law) in which external audit of a company is done to ensure that it is operating within the legal guidelines  . It is just one of the many types of audits conducted, including internal audits, tax audits and GST audits. The Statutory Audit to which the NAFRA circular applies is conducted under the companies act 2013 by a Chartered Accountant.

One of the purpose of a Statutory Audit is to prevent any fraud or misuse of funds. A statutory auditor, who is often a Chartered  accountant is appointed by the companies board of directors through a due legal process.. The external auditor has the right to request access and know about the company’s financial books, records such as :  invoices, ledgers, bank accounts, financial transactions, accounting records, challans, balance sheets, bookkeeping records, purchase order and etc for the purpose of audit and preparation of  the audit report.

It is important to note that being subject to a statutory audit does not necessarily imply any wrongdoing on the part of the company and its a mandatory audit for private limited company, public company, listed  company, limited liability partnership and even municipalities to go through statutory audit procedure by an external auditor.

What does the latest NFRA Circular states for statutory auditor & in relation to fraud?

NFRA released a circular on 26 June 2023 and it had 3 big highlights which are as follow-

• If auditors have suspicions of fraud involving a specified amount by company officers or employees, they are obligated to inform the Central Government. To fulfil this requirement, they must take certain steps, including reporting to the Board/Audit Committee and submitting Form ADT-4 to the Central Government.

• Even if auditors resign from an audit engagement, they are still expected to fulfil their reporting obligations and may face consequences under the Companies Act 2013 for failing to report fraud. The Supreme Court of India has also clarified in past, that auditors who resign without reporting fraud can still be held accountable according to section 140(5) of the Companies Act 2013.

• Auditors should maintain professional skepticism and not allow themselves to be influenced by legal opinions from the company or its management. They should be mindful of the potential risk of fraud and communicate any suspicions to relevant parties. By fulfilling their reporting obligations, auditors play a crucial role in preventing fraud and safeguarding the interests of stakeholders.

Understanding the Process of a Statutory Audit

The procedure of Statutory auditing involves ensuring compliance with laws and regulations, maintaining independence and objectivity, and planning, executing, and reporting on the audit. Key responsibilities include reviewing financial statements, auditing financial records, and ensuring appropriate disclosures . Challenges such as dealing with potential risks and staying updated on developments in the field must also be navigated. By following these steps effectively, a statutory auditor may assess the effectiveness of Internal control and contribute to financial transparency and accountability. Remember, effective internal controls go a long way in preventing fraud.

Step 1: Gaining an Understanding of the Entity and Its Environment

To effectively conduct a statutory audit, the first step is gaining an understanding of the entity and its environment. This involves comprehending the entity’s business operations, internal controls, and risk management processes. It is crucial for the auditor to obtain relevant information about the industry, regulatory environment, and economic conditions in which the entity operates. Additionally, assessing the governance structure and evaluating the competence and integrity of management are essential tasks. By obtaining a thorough understanding, auditors can plan and execute the audit effectively, identify areas of risk, and tailor procedures accordingly.

Step 2: Assessing the Internal Control Systems

Assessing the internal control systems is a crucial step in the statutory audit process. Here, the auditor evaluates the effectiveness and efficiency of the policies and procedures implemented by the management to ensure reliable financial reporting and compliance with regulations. This assessment includes understanding the control environment, risk assessment processes, information systems, and monitoring activities of the audited entity. By identifying weaknesses or deficiencies in the internal control systems, the auditor can make recommendations to improve the reliability of financial statements.

Step 3: Testing the Effectiveness of Controls and Reviewing Account Balances

Testing the effectiveness of controls and reviewing account balances is an essential step for a statutory auditor. It involves evaluating the design and operation of controls to prevent errors or fraud. Additionally, the auditor reviews account balances, ensuring accuracy and supporting documentation. Sampling is often used to test controls and account balances. This step ensures that financial statements are free from material misstatement, providing a fair representation of the organization’s financial position and performance.

Conclusion

In conclusion, the NFRA stated in its circular that a statutory auditor has to report any fraud or suspicion to the central government, they have too fulfil their obligation of reporting fraud even if they resign and they shouldn’t allow themselves to be influenced by the management of the company being audited in any way .

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