Structure and challenges of Audit Profession in India

1. Audit Profession in India:
Structure and Challenges

2. THE STRUCTURE
OF
THE PROFESSION

3. 3
• In India, members of ICAI only can be appointed as Statutory Auditors under Companies
Act 2013.
• A person can become member of ICAI by qualifying exams and pursuing practical training
of 3 years under existing Chartered Accountant.
• ICAI is one of largest professional bodies in the world.
Governing Institute
t
• Audit Firms and Chartered
Accountants (CAs) in India are
governed by Institute of Chartered
Accountants of India (ICAI)
• ICAI was established on 1 July 1949
as a statutory body under the
Chartered Accountant Act,1949
enacted by the Parliament to regulate
the profession of Chartered
Accountancy in India

4. Audit Firm’s Registration
• Once qualified, one needs to apply with ICAI for firm registration which can be done in
proprietorship or partnership form. A few years back, keeping in trend with Global
practices, ICAI has allowed LLP (Limited Liability Partnership) structure as well for CA
firm. Since then many firms have converted them into LLP
• The only suffixes to be allowed in the Firm name are either:- “& Co”, “And Co”, “&
Company”, “And Company”, “And Associates”, “& Associates” and now LLP as well
• While there was restriction on number of partners in Firms till 20 earlier, the same is now
extended to 100 since April 2014

5. REGULATION
OF
THE PROFESSION

6. 6
Regulation of the Profession
• In India, Audit profession has been
regulated by ICAI, however in 2018, post
certain scams coming out in open,
Government of India established National
Financial Reporting Authority (NFRA) to
be the Audit regulation body.
• NFRA has been mandated to regulate
audits of all listed entities and unlisted
public companies beyond threshold of
INR 10 Billion, while other audits shall
continue to be regulated by ICAI
• While NFRA was conceived post Satyam
scam in 2009 (one of the (in)famous and
biggest scam at that time), however 2018
PNB scam led the Government to formally
make it operational.

7. RECENT CHANGES
IN AUDITING
PROFESSION IN
INDIA

8. Recent changes having significant
impact on auditing profession
The last decade has seen changes having a significant impact on auditors
with notable changes as follows:
• Mandatory firm rotation
• Internal financial control over financial reporting
• Fraud reporting
• Alignment of Indian Accounting Standards with IFRS
• Stricter norms for independence of auditors
• Limits on number of audits for an auditor

9. 9
Audit Firm Tenure
• Every Company shall at the first
annual general meeting, appoint an
individual or firm as an auditor who
shall hold office:
From the conclusion of that meeting
till the conclusion of its sixth annual
general meeting and thereafter till the
conclusion of every sixth meeting.
However
NOTHING STAYS FOREVER !

10. 10
Mandatory Audit Firm Rotation
Applicable to following entities:
a) All listed companies;
b) All unlisted public companies with paid up share capital of INR 100 million or more
c) All private limited companies with paid up share capital of INR 500 million or more
d) All companies with paid up share capital of below threshold limits mentioned in (b) and
(c) above, but having public borrowings from financial institutions, banks or public
deposits of INR 500 million or more.
Effective date of implementation of mandatory firm rotation:
From 1st April 2017

11. 11
Mandatory Audit Firm Rotation
Maximum tenor under mandatory firm rotation:
(a) An individual shall not be appointed/reappointed as an auditor for more than one term
of five consecutive years and
(b) An audit firm shall not be appointed/reappointed as an auditor for more than two terms of
five consecutive years.
Provided
An individual auditor or an audit firm who/which has completed his/its term as per point (a)
and (b) above respectively shall not be eligible for reappointment as auditor in the same
company for five years from completion of his/its term

12. Recent changes having significant
impact on auditing profession
The last decade has seen changes having a significant impact on auditors
with notable changes as follows:
• Mandatory firm rotation
• Internal financial control over financial reporting
• Fraud reporting
• Alignment of Indian Accounting Standards with IFRS
• Stricter norms for independence of auditors
• Limits on number of audits for an auditor

13. 13
Reporting over IFC
• Till financial year ended 31st March 2015, there was no specific responsibility bestowed
on the auditors to report upon overall internal financial controls of the Company.
• Auditor’s reporting on internal controls, till 31st March 2015, was only limited to internal
controls of the Company for the purchase of inventory, fixed assets and for the sale of
goods and services.
Trigger point!
India’s very own Enron Scandal, more specifically known as Satyam Scandal, which broke
out in 2009 highlighted the inability of the audit process to find the financial fraud being
committed by the Management
It made Indian Legislators search for best practices across the world such as:
• Sarbanes Oxlay (SOX) Regulations in United States
• Turnbull Guidance in United Kingdom
• J-SOX in Japan
which eventually lead to birth of Internal financial controls in India

14. 14
Reporting over IFC
Applicable on all entities except for
following private limited companies:
• One person or small company or
• Turnover < INR 500 million as per
latest audited financial statements
and
which has aggregate borrowings <
INR 250 million at any time during
the year

15. Recent changes having significant
impact on auditing profession
The last decade has seen changes having a significant impact on auditors
with notable changes as follows:
• Mandatory firm rotation
• Internal financial control over financial reporting
• Fraud reporting
• Alignment of Indian Accounting Standards with IFRS
• Stricter norms for independence of auditors
• Limits on number of audits for an auditor

16. 16
Fraud Reporting
Effective date:
• MCA came out with notification on 14th
December 2015, pertaining to reporting of
frauds by the statutory auditors/ cost auditor
and secretarial auditor.
Key highlights:
• Auditor to report fraud involving an amount of
INR 10 million or more to the Central
Government
• In case of fraud involving an amount of less
than INR 10 million, auditor shall report the
same to Board/Audit Committee not later than
2 days
• Details of fraud to be reported in Board’s report

17. Fraud Reporting Timeline
Date of
identification of
fraud by the
auditors
Time frame within
which same to be
reported to
Board/Audit
committee
Time frame within
which Board/Audit
Committee needs
to respond to
Auditor
01 02 03 04
DAY 0
Time Frame
within which
Auditor needs to
report to
Secretary, MCA
DAY 2 DAY 45 DAY 60

18. Recent changes having significant
impact on auditing profession
The last decade has seen changes having a significant impact on auditors with
notable changes as follows:
• Mandatory firm rotation
• Internal financial control over financial reporting
• Fraud reporting
• Alignment of Indian Accounting Standards with IFRS
• Stricter norms for independence of auditors
• Limits on number of audits for an auditor

19. 19
Effective date:
New set of Indian Accounting Standards was notified by MCA on 16th February
2015.
Key highlights:
• Harmonisation done with IFRS to make reporting by Indian Companies
more globally accessible.
• Certain carve outs/ carve ins have been made to fill up the gap/differences
in application of Accounting principles practices and economic conditions
prevailing in India.
• The Ind AS are named and numbered in the same way as the
corresponding IFRS.
• Introduced in a phase wise manner (having a total of four phases) with first
phase being mandatorily applicable from 1st April 2016.
• Companies not getting covered under any of the aforesaid four phases will
continue to be governed by existing Indian Accounting Standards
Implementation of new
Indian Accounting Standards

20. PHASES
Roadmap for mandatory
implementation of Ind AS
Companies with
net worth of INR
5,000 million or
more
a) All Listed Companies
or in the process of
listing (not covered in
Phase 1)
b) All unlisted entities
(not covered under
phase 1) and having net
worth of INR 2,500
million or more
a) All scheduled banks
and insurance
companies**
B) NBFC having net
worth of INR 5,000
million or more
01 02 03 04
FY 2016-17
a) NBFC which are
either listed or are
in the process of
listing
b) All unlisted
NBFCs not getting
covered under
phase 3 and having
net worth of INR
2,500 million or
more
Financial year from
which applicable
FY 2017-18 FY 2018-19 FY 2019-20
Entities on whom
applicable
** Ind AS implementation for scheduled banks have been deferred till further notice by RBI
** Ind AS implementation for insurance companies have been deferred by 2 years by IRDAI

21. Recent changes having significant
impact on auditing profession
The last decade has seen changes having a significant impact on auditors with
notable changes as follows:
• Mandatory firm rotation
• Internal financial control over financial reporting
• Fraud reporting
• Alignment of Indian Accounting Standards with IFRS
• Stricter norms for independence of auditors
• Limits on number of audits for an auditor

22. 22
Restricted services for statutory auditors
• Restricted services as Companies Act, 2013 is prescribed below:
➢ Accounting and book keeping services
➢ Internal audit
➢ Design and implementation of any financial information system
➢ Actuarial services
➢ Investment advisory services
➢ Rendering of outsourced financial services
➢ Management services
➢ Services prescribed under the rules
• No such restrictions were prescribed under erstwhile Companies Act, 1956 though
these were covered in Ethical Guidelines of ICAI
• Management services have not been defined under Companies Act, 2013. However,
Management consultancy services have been laid down by council of ICAI mentioning
wide array of services (‘MCS’) under the same. Few of the services being mentioned
under MCS services are as follows:
➢ Working capital management, Personnel recruitment and selection, market
research and demand studies, management and operational audit etc.

23. Recent changes having significant
impact on auditing profession
The last decade has seen changes having a significant impact on auditors with
notable changes as follows:
• Mandatory firm rotation
• Internal financial control over financial reporting
• Fraud reporting
• Alignment of Indian Accounting Standards with IFRS
• Stricter norms for independence of auditors
• Limits on number of audits for an auditor

24. 24
Limits of number of Audits
• A Chartered Accountant in practice cannot perform audit of more than twenty
companies at any single point of time.
• However while computing the number of companies for aforesaid threshold of 20,
following private companies are not considered:
➢ One person Company
➢ Dormant Company
➢ Small Company
➢ Private Companies having paid up share capital of less than INR 1 billion
• Under erstwhile Companies Act, 1956, there was no ceiling on the no. of audits for
private limited companies.

25. QUALITY CONTROL
AND
DISCIPLINARY
GUIDELINES

26. 26
Quality Controls
Following authorities have been constituted
over the course of past 2 decades to
ensure that Audit Firms and Chartered
Accountants comply with the professional
guidelines and adhere to various quality
standards issued:
• Peer Review Board
• Quality Review Board
• National Financial Reporting
Authority

27. 27
Peer Review
• Got established in 2002
• Main objective:
• To ensure members comply with technical,
professional and ethical standards, as applicable
and
• Have in place systems including documentation
to demonstrate the quality of assurance services
• Intended to be educative and is aimed at enhancing
the quality of audit services
• Significant objective is not only to find out deficiencies
but to improve the quality of services rendered by the
members.
• Objective is not to identify isolated cases of
engagement failure, but to identify weaknesses that
are chronic and pervasive in nature

28. 28
Peer Review
• Members firms have been divided into 3 levels for
getting peer reviewed
➢ Level I audit firms - shall be subject to
mandatory review once in a block of three
years
➢ Level II audit firms - shall be subject to
mandatory review once in a block of four years
➢ Level III audit firms - shall be subject to
mandatory review once in a block of five years.
• As per SEBI regulations, an audit firm not holding a
valid peer review certificate can’t issue an audit
opinion on listed entities.

29. 29
Peer Review – Disciplinary proceedings
• Since its main objective is not to find deficiencies but to improve the overall quality of audit
services, accordingly no disciplinary proceedings have been prescribed in the event of
qualified report by peer reviewer.
• However, in the event of qualified report being issued by the peer reviewer, the audit firm will
not be issued peer review certificate that will debar it from undertaking the audits of listed
entities as per SEBI regulations.

30. 30
Quality Review
• Quality Review is governed by Section 28A of
Chartered Accountants Act, 1949
• Central Government constituted a Quality
Review Board (‘QRB’)
• It comprises of a Chairperson and 10 other
members.
• Central Government nominates Chairperson and
5 members
• Remaining 5 members are nominated by council
of ICAI
• QRB initiated quality review with effect from
Financial Year 2012-13

31. 31
Quality Review - Scope
• Compliance with the applicable technical standards in India and other applicable
professional and ethical standards and other relevant guidance.
• Compliance with the relevant laws and regulations as required under applicable
auditing standard.
• Whether the Audit firm under review has implemented a system of quality control
with reference to the applicable quality control standards.
• Whether there is any material misstatement of assets and liabilities as at the
reporting date in respect of the selected entity.

32. 32
Quality Review
• Criteria for selection of audit firms for
quality review:
Criteria based on audit firms depending
upon the volume of work handled, nature of
clients, sectors that may be identified as
facing high risk.
• Criteria based on entities audited:
Audited entities being part of sector
otherwise identified as being susceptible to
risk on the basis of market intelligence
reports,
serious accounting irregularities in the
financial statements highlighted by the
media and other reports w.r.t audited
entities,
major non-compliance under relevant
statutes highlighted in past reviews w,r.t.
audited entities.

33. 33
Quality Review
Quality review cycle
• Once in three years for audit firms having 20 or
more partners
• Once in four years for audit firms having 10 or
more but less than 20 partners
• Once in five years for audit firms having less
than 10 partners
Sample of coverage of audit engagements
• Up to 3 audit engagements of audit firm under
review
• However in the absence of any adverse finding
in past review, not more than 1 audit
engagement of same partner/proprietor of
audit firm under review

34. 34
Quality Review – Disciplinary proceedings
Material non-compliance being identified on part
of the audit firm
• Matter may be recommended to council of
ICAI for referring to Disciplinary Directorate of
Institute for consideration and appropriate
action
Non-compliances which are not material
• An advisory/guidance to audit firm under
review may be issued by the QRB
Observations of trivial nature
• Audit firm under review agrees to take
corrective steps in future or has already
undertaken corrective steps, the report may
be taken on record and matter may be closed

35. 35
National Financial Reporting Authority (NFRA)
• Governed by Section 132 of Companies Act, 2013
• NFRA got constituted on 1st October 2018
• MCA notified NFRA Rules, 2018 on 13th November 2018
• Similar authority was there in erstwhile Companies Act, 1956 by name of NACAS
(National advisory committee on Accounting Standards)
• However NFRA has been bestowed with wider powers as compared to NACAS

36. 36
Jurisdiction of NFRA Rules, 2018

37. 37
NFRA – Disciplinary proceedings
• If an audit firm is found guilty of not
adhering to accounting and auditing
standards, following disciplinary
proceedings will get initiated:
• Penalty of:
• Not less than 0.10 Million Rupees,
but which may extend to 5 times of
the fees received, in the case of
individuals
• Not less than 1 Million Rupees, but
which may extend to 10 times of the
fees received, in case of firms
• Debarring the member or the firm for a
minimum period of 6 months or for such
higher periods not exceeding 10 years,
as may be decided by NFRA

38. CHALLENGES
FACED BY
PROFESSION

39. 39
Challenges
• Play Video
• https://www.youtube.com/watch?v=njgbmeiGi
4E
• That was a small glimpse of challenge faced
by auditors today.

40. 40
Challenges faced by profession
• Audit profession in India has been going through challenging times.
• There is growing expectation gap between the profession and the society.
• An auditor is now expected to detect all existing and potential frauds.
• However people need to understand that auditors are not insurers but assurers.
• With excessive scrutiny by various stakeholders, auditors have been under pressure
to either take strong stand or move out of audits.

41. 41
Challenges faced by profession
• The problem got aggravated with auditors’ rotation provisions coming into force where
many of the firms, specially, big fours have to look for new clients while leaving old
clients. This led to acceptance of certain client without adequate quality checks
• This has led to number of auditors resigning from audits. The data of resignations from
listed companies which is in public domain reflect auditors’ discomfort with many of
clients’ accounts.
• Wings of ICAI has also been clipped to large extent by introduction of NFRA where
Central Government has a much bigger role to play without any interference from ICAI.

42. 42
Numbers don’t lie
A brief summary of auditors resignation data reflects:

43. 43
Auditors are resigning like never before

44. 44
Challenges faced by smaller firms
• In India, majority of the firms are still proprietors-ship or small partnership firm.
• Frankly speaking, most of the small audit firms still focus to earn fee through taxation
advisory instead of audit practice.
• Audit fee has not kept pace with increasing volumes and costs. This to an extant also
because of cut-throat competition in Audit firms.

45. 45
Challenges faced by smaller firms
• Current audit structure is highly skewed in India
• Around 63% of BSE 500 Companies are being
audited by Big 4 auditing firms in India
• After Big 4, there are only handful of global and
Indian auditing firms having size, scale and
wherewithal to compete at national scale
• After top 15-20 firms, the market peters out -
small firms are localized, face funding issues for
expansion
• According to report by Prime Research, 72% of
auditing firms in India are small or sole players
(less than five partners) and just 152 firms have
more than 10 partners.

46. 46
Challenges faced by smaller firms
• Expansion is one of the biggest
challenges that small firms faces due
to funding constraints.
• Few Indian firms explored the
alternative of association with the
multinational firms to expand, to take
advantage of synergies and to
survive in this cut-throat competition
in long run
• However issuance of notices by ICAI
to Indian arms of multinational
auditing firms including BIG 4,
Kreston, Mazars, Nexia, Baker Tily
and RMS, alleging flouting foreign
direct investment norms and other
guidelines has been a big setback to
said associations.

47. WITH
CHALLENGES
COMES
OPPORTUNITIES
AS WELL

48. Opportunities – Few firms have exploited that
• With such challenges comes opportunities as well that can be exploited.
• Grant Thornton and BDO International have expanded significantly in India over the
course of last few years due to Big Four losing some ground.
What exactly made these firms expand so significantly?
• Huge pool of resources at disposal being led by huge pool of partners.
• Offices across different cities.
• Association with an international firm has helped in following ways:
➢ Alignment of auditors on group wide basis
➢ Sharing of audit tools and resources
➢ Sharing of knowledge
➢ Inward referrals
• Further, there is an unwritten rule here in India being adopted by big MNCs as per
which Big 4 and other firms having an association with an international auditing firm is
considered a guarantee of highest quality.

49. WHERE DOES
KRESTON INDIA
FIT IN

50. 50
Working together
• Resources are there to compete with the
best players in auditing profession in India
• In India, Kreston International has Eight
members firms present across major cities
• The total team size of all firms put together is
more than 1,000 staff members
• Firms handle some of the best clients in
India including industry leaders.
• However there is still a big gap when
compared to big audit players in the India
• If exploited properly, Kreston India can
expand significantly

51. Proven
credibility
among clients
A technically
qualified & well
experienced team
All service
professional firms
meeting client’s
requirements
01 02 03 04
CREDIBILITY EXPERIENCED
TEAM
05
Maintain high
standards of
commitment,
competence &
confidentiality
Bring value to
clients while
maintaining quality
and efficiency in
services rendered
ONE STOP
POINT
THE 3
‘C’s
VALUE TO
CLIENTS
Why Kreston India?

52. Delhi
Bangalore/Kochi
Mumbai
Kreston SNR Advisors LLP
V K Verma & Co.
Kreston SGCO Consulting
India LLP
Rahul Gautam Divan &
Associates
M K Dandeker & Co.
Kreston SGCO Consulting India LLP
Chennai
Kreston SNR Advisors LLP
Pune
P Murali & Co.
Hyderabad
Kreston OPR Advisors LLP
Ahmedabad & Baroda
Kreston RKS Advisory Pvt. Ltd.
Raipur
52Audit Profession in India Private & Confidential
Locations

53. THANKS
By: Manoj Sharma
Ritesh Kumar
Partners, SNR & Company