Background:
The roles and responsibilities of an independent auditor / audit firm are evolving continuouslytomaintain stakeholder confidence and protect investors wealth. There is increased thrust on improving and sustaining the audit quality in the current times.
Till now, only peer review was done by the Institute of Chartered Accountants of India (ICAI) of certain specified audit firms and ICAI is expanding its horizon to cover more audit firms under the peer review in a phased manner over next 3 years. NFRA has introduced Annual Transparency Report (ATR) which is still in the draft stage and comments are invited till 16th February 2023. On the other hand, ICAI will be evaluating Audit Firms through its Audit Quality Maturity Model (AQMM).
In this article, I have given a comparison between ATR (draft) and AQMM for a better understanding. Although ATR is a draft, one will have to start preparing soon and hence considered for this article.
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Particulars |
ATR |
AQMM |
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1. Introduction |
ATR is a reportissued by an auditor on critical data points about the auditor’s operational activities, management, governance, ownership structures, policies, and procedures necessary to deliver high quality audits. |
AQMM is an evaluation matrix for sole proprietors and audit firms which enables self-evaluation of level of audit maturity and identification of areas where competencies are good or lacking for upgrading the maturity level. |
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2. Regulator/Monitoring Institution |
NFRA Rule 8(2) of NFRA Rule, 2018 empowers NFRA to require an auditor to report on its governance practices and internal processes designed to promote audit quality, protect its reputation and reduce risk including risk of failure of auditor. |
Peer Review Board of ICAI The scores and level arrived at by the auditor / audit firms on self- evaluation would be reviewed by AQMM Peer Reviewer alongside or before the peer review cycle. |
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3. Which CA firms are covered as of 31st March, 2023 |
CA firms who are statutory auditors of Top 1000 Listed Companies (by market capitalisation) for six months period of June – December 2022 published by AMFI. Time of applicability as per the draft is 31st March 2023 |
CA Firms performing statutory auditsof following entities are mandatorily required to assess the level of audit quality maturity w.e.f. 1st April 2023 • Listed entity • Banks other than co-operative banks (*) • Insurance Companies (*) Firms doing only bank branch audits are not covered. |
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4. Is Report required to be submitted? If yes, to whom? |
Yes, it should be submitted to NFRA and the published on the website of the auditor. |
No. The detailed reporton self-evaluation containing score of each area of the defined matrix should be available with the firm at any point in time. However, the same should not be publicised or mentioned in public domain. Once the said score is reviewed by AQMM Peer Reviewer, it would be hosted on website of ICAI. |
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5. What is the timeline for submission of above report? |
The report should be submitted within 3 months from the end of each financial year. Thus, it should be submitted before 30th June of every year. The ATR should be approved by the statutory auditor approving the financial statements of the said auditor. |
There is no defined timeline for auditor / audit firms to complete self-evaluation. To my mind, the same should be a continuous exercise and the score should be updated on completion of relevant audits. Adequate documentation should be maintained by the firms to justify the self-evaluated score at any point in time. |
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6. Is the format of report specified? |
Yes |
Yes, the detailed matrix is specified in the revised model (V 1.0) along with implementation guide of ICAI with scores for each point. |
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7. What are the contents of the report? |
A) GENERAL – Legal Structure – Ownership – Management Structure – Governance Structure |
B) NETWORK
– Legal, operating structure and domicile of network
– Oversight body of network
– Activities and services rendered by network
– Details of all the members in India & Overseas of said network
– Total Income and Sources of Income of network
C) THIRD PARTY AGREEMENTS
– Name and domicile of entities with whom the auditor has alliances / collaborations / licensing arrangements / knowledge sharing arrangements etc.
– Nature and details of above arrangements
D) INTERNAL POLICIES & PROCEDURES
– Internal Quality Control System
– Monitoring compliance with Independence
– Acceptance and Continuation of audits
– Audit quality control mechanisms – D & OE
– Audit Methodology
– CPE of all professional staff
– Remuneration of partners and senior staff
– Pricing of services with network members
– Date of recent internal review of quality control mechanisms
– Date of recent review by NFRA
– Name and CIN of all the Companies which are within
The report of self-evaluation is aggregating to 600 points segregated into following 3 main areas:
• Practice Management (Operations) – 280 points (47%)
• HR Management – 240 points (40%)
• Practice Management (Strategic/Functional) – 80 points (13%)
The above areas are further broken down into following
A) Practice Management (Operations)
• Quality Control – 80
• Technology adoption – 64
• Service delivery/effort monitoring – 36
• Quality review manuals/tools – 24
• Benchmarking – 16
• Client sensitisation – 16
• Revenue/Budget/Pricing – 16
• Work-flow practice manuals – 16
• Practice Areas – 12
B) HR Management
• Resources turnover and compensation management – 104
• Training & Development – 44
• KPI based performance evaluation – 32
• Qualification skill sets of staff and use of experts – 32
• Resource planning & monitoring as per firm policy –28
C) Practice Management (Strategic/Functional)
• Infrastructure (Physical/Others) – 48
• Practice Management – 20
• Practice Credentials – 12
The above sub-areas are further broken one level down to evaluate on specific
8. Global Scenario
EU, Australia and Korea have a practice of publishing ATR for 5+ years now. Certain firms publish such reports in other countries where it is not mandatory.
To my mind, India and ICAI are first to introduce a score based, specific audit quality maturity model for evaluating and improving the audit quality of auditor / audit firms. PCAOB has issued list of Audit Quality Indicators which can be used by audit committees and regulators to evaluate the audit quality of firms.
Conclusion:
From the above comparison, one can conclude that ATR is aerial view of the auditor / audit firm and AQMM is ground view of the auditor / audit firm. The two reports are not overlapping except forfirm’s internal policies and procedures of auditing but the two reports read together would give greater sense of comfort to all stakeholders (regulators, investors etc.) in terms of assessing the firms audit quality and capabilities. I feel that professional services firms should start to prepare these irrespective of their applicability. Just going through the process will benefit them immensely.
