NFRA’s Interpretation on SA 230 Audit Documentation

It has been observed that National Financial Reporting Authority (NFRA) has always stressed the importance of audit files and audit documentation and compliance with Standard on Auditing SA 230 ‘Audit Documentation’ as under:

In terms of Clause 7 of Part I of the Second Schedule to the Chartered Accountants Act, 1949,a CA in practice shall be deemed to be guilty of professional misconduct if he “ does not exercise due diligence, or is grossly negligent in the conduct of his professional duties”.

In Clause 7, the portion “does not exercise due diligence” has been added. It is not only gross negligence that will now constitute professional misconduct. Even the non-exercise of due diligence will constitute actionable professional misconduct.

What constitutes due diligence, in any case, is decided primarily by the requirements section of the applicable SAs. The requirements of the SAs impose unconditional responsibility on the auditor. A strict liability approach has been now brought in by these changes. This is also in line with several decided cases in advanced countries such as the USA and the UK.

Failure to comply with the SAs, and especially the unconditionally mandatory requirements portion thereof, would amount to not only failure to exercise due diligence, but could also be gross negligence depending upon the facts of the case. The touchstone, however, always remains compliance with the SAs.

As far as the evidence on which to base a decision about the compliance with due diligence, or the gross negligence of the auditor is concerned, the SAs have an in-built mechanism in the form of a specific SA 230 on Audit Documentation.

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