The complexities of navigating multiple regulatory environments can be daunting for multinational corporations (MNCs) with subsidiaries in India. As a Global CFO, it is essential to understand the auditing and assurance standards in India, particularly when operating in a global environment. The Auditing and Assurance Standards Board (AASB) under the Council of the Institute of Chartered Accountants of India (ICAI) has formulated several standards to ensure that financial statements provide high-quality information that is acceptable worldwide. These standards are in line with the International Standards issued by the International Auditing and Assurance Standards Board (IAASB).
They have undergone significant changes in recent years. The introduction of new standards and regulations has transformed the Indian auditing landscape, making it crucial for finance leaders to understand the implications of these changes for their organizations.
In this article, we will provide an in-depth analysis of India’s auditing and assurance standards, their implications for MNCs, and offer practical guidance on navigating these standards.
Overview of Auditing and Assurance Standards in India
The Institute of Chartered Accountants of India (ICAI) plays a vital role in shaping the auditing and assurance landscape in India. As the primary regulatory body, the ICAI is responsible for setting standards that promote transparency, accountability, and trust in financial reporting. To achieve this, the ICAI has adopted the International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB), tailoring them to suit the Indian context.
Standards on Auditing (SAs)
Building on the foundation laid by the ISAs, the ICAI has issued the Standards on Auditing (SAs), which provide detailed guidance for auditors in India. The SAs serve as a comprehensive framework for all audits of financial statements in India, outlining the principles and procedures that auditors must follow to ensure high-quality audits. By adopting the SAs, auditors in India can ensure that their work meets the highest international standards, promoting confidence and trust in the financial reporting process.
Scope and Applicability
The SAs are applicable to all audits of financial statements in India, including audits of listed companies, banks, and other financial institutions. The standards provide guidance on various aspects of auditing, including audit planning, risk assessment, audit procedures, and audit reporting.
Key Components of SAs
The SAs comprise several key components that provide guidance on various aspects of auditing. Some of the key components include:
- Audit Planning: The SAs provide guidance on audit planning, including the identification of audit risks, the development of an audit strategy, and the preparation of an audit plan.
- Risk Assessment: The SAs require auditors to perform a risk assessment to identify potential risks that could impact the financial statements. The standards provide guidance on the factors to be considered during the risk assessment process.
- Audit Procedures: The SAs provide guidance on audit procedures, including tests of controls, substantive procedures, and procedures for identifying and assessing risks.
- Audit Reporting: The SAs provide guidance on audit reporting, including the form and content of the auditor’s report.
Key Changes in Auditing Standards
In recent years, the Institute of Chartered Accountants of India (ICAI) has introduced several significant changes to the auditing standards in India. These changes aim to enhance the quality and transparency of audits, providing stakeholders with more confidence in the accuracy and reliability of financial statements. Some of the key changes include:
- Auditor’s Report: The auditor’s report has undergone a significant revision, now requiring a more detailed description of the auditor’s responsibilities and the scope of the audit. This change aims to provide stakeholders with a clearer understanding of the auditor’s role and the audit process. The revised report also includes a more detailed description of the auditor’s opinion, highlighting any material uncertainties or qualifications.
- Risk Assessment: The auditor is now required to perform a more detailed risk assessment, including an assessment of the risk of material misstatement. This change aims to ensure that auditors identify and address potential risks more effectively, providing stakeholders with greater confidence in the accuracy of financial statements.
- Audit Procedures: The auditor is now required to perform more detailed audit procedures, including procedures to verify the existence and valuation of assets and liabilities. This change aims to ensure that auditors gather sufficient evidence to support their opinion, reducing the risk of material misstatements.
- Internal Controls: The auditor is now required to evaluate the effectiveness of internal controls, including controls over financial reporting. This change aims to ensure that auditors assess the company’s internal control environment, identifying potential weaknesses or deficiencies that could impact the accuracy of financial statements.
Assurance Standards
In addition to auditing standards, the Institute of Chartered Accountants of India (ICAI) has also issued assurance standards, which provide guidance on various types of assurance engagements. These standards are designed to promote transparency, accountability, and trust in financial reporting, and to provide stakeholders with confidence in the accuracy and reliability of financial information.
These standards provide a comprehensive framework for assurance engagements, outlining the principles and procedures that practitioners must follow to ensure high-quality assurance engagements.
Standards on Assurance Engagements (SAEs)
One of the key components of the ICAI’s assurance standards is the Standards on Assurance Engagements (SAEs). These standards apply to assurance engagements other than audits and reviews of financial information. They provide guidance on the procedures to be performed during an assurance engagement, including:
- Identifying the subject matter of the assurance engagement
- Evaluating the suitability of the criteria used to evaluate the subject matter
- Gathering evidence to support the assurance conclusion
- Forming an opinion on the subject matter
- Reporting on the assurance engagement
The SAEs are designed to provide practitioners with a framework for conducting assurance engagements that are tailored to the specific needs of the engagement.
Standards of Quality Control (SQCs)
The Institute of Chartered Accountants of India (ICAI) has issued the Standards of Quality Control (SQCs) to ensure that all services under engagement standards, including audits, reviews, and assurance engagements, are performed with the highest level of quality. These standards provide guidance on quality control procedures, including risk assessment, staff training, and monitoring, to help firms maintain the highest standards of quality.
Scope and Applicability
The SQCs apply to all firms that provide services under engagement standards, including audits, reviews, and assurance engagements. This includes firms that provide services to a wide range of clients, from small and medium-sized enterprises (SMEs) to large corporations and government entities.
Key Components of SQCs
The SQCs comprise several key components that provide guidance on quality control procedures. These components include:
- Risk Assessment: Firms must perform a risk assessment to identify potential risks that could impact the quality of their services. This includes assessing the risk of providing services to clients in high-risk industries or with complex financial transactions.
- Staff Training and Development: Firms must provide ongoing training and development opportunities to their staff to ensure that they have the necessary skills and knowledge to perform high-quality services.
- Monitoring: Firms must establish a monitoring process to ensure that their quality control procedures are operating effectively. This includes monitoring the performance of staff, the quality of services provided, and the effectiveness of quality control procedures.
Standards on Review Engagements (SREs)
The Institute of Chartered Accountants of India (ICAI) has issued the Standards on Review Engagements (SREs) to provide guidance on the procedures to be performed during a review engagement of historical financial information. These standards apply to reviews of financial statements, which are less extensive than audits but provide a level of assurance that the financial statements are free from material misstatements.
Scope and Applicability
The SREs apply to reviews of historical financial information, including financial statements and other financial information. These standards are relevant to a wide range of entities, including companies, partnerships, trusts, and non-profit organizations.
Key Components of SREs
The SREs comprise several key components that provide guidance on the procedures to be performed during a review engagement. These components include:
- Planning the Review Engagement: The reviewer must plan the review engagement to ensure that it is conducted in accordance with the SREs. This includes determining the scope of the review, identifying the accounting policies and procedures used by the entity, and assessing the risk of material misstatement.
- Performing the Review Procedures: The reviewer must perform review procedures to obtain evidence about the financial statements. These procedures may include inquiries of management and other employees, analytical procedures, and other procedures to gather evidence.
- Evaluating the Evidence: The reviewer must evaluate the evidence obtained during the review to determine whether the financial statements are free from material misstatements.
- Reporting on the Review: The reviewer must report on the results of the review, including any material misstatements or uncertainties.
India’s Convergence with International Standards
India has made significant strides in converging its auditing and assurance standards with international standards, marking a major milestone in its journey towards global harmonization. The Institute of Chartered Accountants of India (ICAI) has played a pivotal role in this convergence process, adopting the International Standards on Auditing (ISAs) and converging its standards with the International Financial Reporting Standards (IFRS).
This convergence is designed to promote transparency, accountability, and consistency in financial reporting, and to facilitate the comparison of financial statements across countries and jurisdictions.
Auditing & Assurance Standards: Adoption of ISAs & ISAEs
One of the key areas of convergence is auditing standards. The Institute of Chartered Accountants of India (ICAI) has adopted the International Standards on Auditing (ISAs) and International Standards on Assurance Engagements (ISAEs), which provide a framework for auditing financial statements and for assurance engagements respectively. Both the ISAs & ISAEs are widely recognized and respected globally, and their adoption in India is a significant step towards harmonizing auditing standards with international best practices.
Financial Reporting Standards: Convergence with IFRS
Another critical area of convergence is financial reporting standards. The ICAI has converged its standards with the International Financial Reporting Standards (IFRS), which provide a framework for financial reporting and accounting. The IFRS are widely used globally, and their adoption in India is expected to enhance the transparency and comparability of financial statements.
Implications for MNCs
The auditing and assurance standards in India have significant implications for MNCs with subsidiaries in India. Some of the key implications include:
- Compliance with Indian Auditing Standards: MNCs must ensure that their Indian subsidiaries comply with the auditing standards in India, including the SAs and assurance standards.
- Convergence with International Standards: MNCs must also ensure that their Indian subsidiaries converge their auditing and assurance standards with international standards, including the ISAs, ISAEs, and IFRS.
- Risk Assessment and Internal Controls: MNCs must ensure that their Indian subsidiaries perform a detailed risk assessment and evaluate the effectiveness of internal controls, including controls over financial reporting.
Guidance for Global CFOs
As a Global CFO, it is essential to understand the auditing and assurance standards in India and their implications for your organization. Here are some guidance points to consider:
- Stay Up-to-Date with Changes in Auditing Standards: Stay informed about changes in auditing standards in India and ensure that your organization is compliant with the latest standards.
- Ensure Convergence with International Standards: Ensure that your organization’s auditing and assurance standards converge with international standards, including the ISAs and IFRS.
- Focus on Risk Assessment and Internal Controls: Focus on performing a detailed risk assessment and evaluating the effectiveness of internal controls, including controls over financial reporting.
- Collaborate with Auditors and Assurance Providers: Collaborate with auditors and assurance providers to ensure that your organization is compliant with the latest auditing and assurance standards in India.
How Outsourcing to Experts like Finsmart Accounting Can Support You
Managing auditing and assurance standards for a subsidiary in India can be a complex and time-consuming task, especially when navigating the intricacies of India’s regulatory environment. At Finsmart Accounting, our team of experts provides comprehensive guidance on compliance with Indian auditing and assurance standards, including accounting and financial reporting requirements. By partnering with us, you can ensure that your subsidiary is fully compliant with the latest auditing and assurance standards in India, optimize your corporate governance structure, and minimize the risk of non-compliance.
Finsmart Accounting is a leading provider of corporate governance and compliance services to foreign companies setting up subsidiaries in India.
By outsourcing to Finsmart Accounting, you can:
- Gain a deeper understanding of the regulatory requirements for foreign companies in India
- Ensure compliance with Indian regulations, including the Companies Act, 2013
- Optimize your corporate governance structure to meet Indian regulatory requirements
- Minimize the risk of non-compliance and associated penalties
- Mitigate the risk of reputational damage due to non-compliance
To learn more about how Finsmart Accounting can support you in setting up a subsidiary in India, schedule a consultation with our team of experts today.
Book a consultation today: https://calendly.com/finsmart_accounting/30min
India Business Head
Mrs. Dipali Phadke is a qualified Chartered Accountant with more than 20+ years of experience in the field of Accounting, Taxation and Payroll. She is the backbone of Company’s Operations and heads India Business at Finsmart Accounting
