TaxTMI 
TaxTMI 
Effective Communication Between Statutory Auditors and Those Charged with Governance, Including Audit Committees
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....rd of Directors (BOD or the 'Board'), Independent Directors (IDs), Audit Committees and Statutory Auditors of Companies in respect of Accounts and Audit of Companies. 2.1 Board of Directors: Section 134 of CA 2013 and related Rules require that the financial statements, including the consolidated financial statements, if any, be approved by the Board of Directors. A report by the Board shall be attached to the financial statements, which shall include, inter alia, an important statement called Directors' Responsibility Statement. According to sub-section 5 of Section 134, this statement shall disclose the Board's assertions regarding certain critical aspects, such as adherence to applicable accounting standards; selection and application of accounting policies and making of judgements/estimates on reasonable and prudent basis; maintenance of adequate records for safeguarding the assets of the company and preventing and detecting fraud and other irregularities; preparation of accounts on a going concern basis; implementation of adequate internal financial controls and ensuring their operating effectiveness; and implementation of proper systems to ensure complia....
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....inancial statements give a true and fair view. Further, sub-section 9 of section 143 of CA 2013 casts a statutory obligation on the Auditor to comply with the auditing standards. 3. Provisions of the SAs prescribed under CA 2013: There are two SAs, viz. SA 260 (Revised) [Standard on Auditing (SA), 260 (Revised), Communication with Those Charged with Governance (SA 260 (Revised)] and SA 265 [Standard on Auditing (SA), 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management (SA 265)] that deal with the communication between the Auditors and Those Charged with Governance (TCWG), Audit Committee and Management. Also, there are many other SAs, including SQC 1, that have specific communication requirements between the Auditor and TCWG (Refer Annexure I). Certain important requirements of these SAs are summarised below: 3.1 TCWG: Paragraph 10 (a) of SA 260 (Revised) defines TCWG as those with responsibility for overseeing the strategic direction of the company and obligations relating to the accountability of the company. Paragraph 11 lays down a mandatory requirement for an Auditor to determine appropriate persons as TCWG within the go....
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....ting. These communication requirements are designed, inter alia, to strengthen governance over the financial reporting process by ensuring that TCWG has a timely and clear visibility into the audit process. Timely information on how the audit is planned, what are the areas of key risks, and whether the Auditors are truly independent, enables TCWG to ensure uncompromising objectivity of the Auditors. These measures are instrumental in enhancing audit quality and, in turn, protecting public interest. Hence, every non-compliance with these important provisions of the Standards and CA 2013 is not just a procedural violation but would impact the governance framework of public interest entities that may ultimately erode investors' confidence. 4. Common non-compliances with SA 260 (Revised) and SA 265 observed during NFRA's investigations into professional misconduct by some Auditors. 4.1 The common non-compliances by some Auditors as noticed by NFRA are listed below: a) Auditors were found to have not adequately evaluated the entity's governance structure, and contrary to the requirements of SA 260 (Revised), they incorrectly identified only the Audit Committee....
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....the Auditors failed to communicate identified weaknesses or the absence of internal controls to TCWG, including serious deficiencies in credit policies and the failure of the Risk Management Committee to meet over multiple years. 5. In view of the above, and other information from various monitoring activities, and in light of the instances of ineffective communication between the Auditors and TCWG, the following provisions of the SAs prescribed under the CA 2013, other requirements of the CA 2013 and relevant Rules thereof are reiterated for the attention of Statutory Auditors and Management/TCWG/ACs of the Companies that fall within the purview of NFRA. 5.1 Role and Responsibility to establish an Effective Two-way Communication: As noted above, the requirements explicitly mandate compliance with the SAs and require robust two-way communication between the Auditors and TCWG. It is a joint or collective mandatory obligation of the Company's Governing Body, i.e. Board of Directors, its Audit Committee, its Management, and its Auditors to establish a robust, effective two-way communication. Appropriate policies and processes are needed to implement these requirements in ....
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....nts in the financial reporting framework, corporate governance practices and other regulatory matters. This expectation is without prejudice to the professional scepticism required of the Auditor as per the standards on Auditing. d) Summary of the prescriptions of key SAs that require communication of specific matters with TCWG by the Auditors. e) Policy and Process of updating or escalating the matters to TCWG, about the discussion and communication between Nodal officers of TCWG and Auditors and also the Auditors' interaction with subgroups of TCWG. f) Policy and process of documenting and communicating the views/ instructions/ actions of TCWG on the significant matters communicated by the Auditors, such as planned scope and timing of audit, Auditor's assessment of Risk of Material Misstatement due to fraud or error, Auditor's evaluation of the Internal Control System in the Company. g) Frequency of meetings between TCWG, and the Auditors and the expected Agenda matters for the meetings. h) All significant communications shall be in writing and formally acknowledged by both the Auditor and TCWG, either in the form of minute....
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....e internal controls or differences of views/opinions with those of the Management in respect of significant accounting estimates, etc. In such situations, Auditors shall request a meeting with TCWG in writing, and TCWG shall either accede to the request or, in writing, communicate the reasons for declining it. 5.6 Agenda and matters to be communicated with TCWG: While the SAs, and provisions of CA 2013 and Rules thereof have a comprehensive and detailed list of matters to be discussed with and communicated between the Auditors and TCWG, the following matters shall invariably form part of the agenda matters for interactions between Auditors and TCWG. a) Audit Strategy and Audit Planning including quantification of Materiality and its effect on nature and extent of audit work; Auditors assessment of risk of material misstatement (ROMM), Internal Control Environment in particular to prevent frauds and non-compliance with critical laws and regulations; areas of significant accounting policy judgment and management estimations; areas requiring involvement of experts, either by the Management or the Auditors; accounting or other areas of concerns requiring special attentio....