The statements of National Financial Reporting Authority (NFRA) chairman at a seminar recently have brought to centre-stage the continuing discussion around the quality of audit and the assurance that it should provide to stakeholders at large. That “audit should not be ticking audit but thinking audit” is worthy of serious discussion.

The context is also appropriate considering the recent resignations by auditors on account of lack of information flow from the management. The time has come to fix this issue and bridge the so-called expectation gap between the auditors and the users of financial statements.

In the good old days when accounts were prepared manually, companies were burning the midnight oil to keep information on accounts ready so that the audit process is seamless and continuous. In other words, the auditee was wearing the thinking cap, and could well anticipate the questions that would be asked. The stickiness factor associated with the auditor and the management actually helped since the expectation gap at that level was non-existent. It was a myth even to think that “independence” was comprised. The importance given by the promoter-chairman to the entire audit process by itself enhanced the quality of audit and record keeping.

Ticking the boxes

Today, systems and processes have taken over the entire audit flow and the process. Much of what is sought to be achieved is the ticking of all the boxes, driven largely by constraints of time and the dwindling importance to the human element in discharging the functions of audit. Committees and boards are now dictated by the demands of adherence to every word of the regulation and the focus of questions naturally has shifted to the compliance part of the audit flow. As pointed out by the NFRA chief, auditors have no choice but to follow the stipulations specified in the various standards of auditing. This is not only a necessity and a given but more importantly will be the basis to ascertain whether the audit methodology has been properly carried out and the documentation supports the same when the matter comes up for scrutiny. Form is crucial for defence and substance will enhance the overall quality of audit.

The need of the hour is offer the right mix of thinking and ticking. Both are necessary and it is nobody’s case that it should be either/or. The question is how do we achieve it? The short answer is that the statutory auditor has to spend sufficient time interacting with key management personnel/senior management personnel and get a pulse of what is happening. Clearly, the demands of time and sheer volume of transactions have shifted the needle more towards processes than people.

Whatever one may say about audit being a watchdog and not a bloodhound, the fact is that regulators and users of financial statements do expect to know from the audit fraternity where things can go wrong. Conveying a potential bad news will not be well received but if it is required in the interest of the organisation, so be it. This is exactly where the thinking part will come into operation. Maybe in times to come audit reports will have two parts — ticking and thinking. If this can be achieved then clearly 2+2 = 5 and a win-win for all concerned. NFRA and the audit fraternity should work together to get to this goal.

The writer is a chartered accountant

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