Module: | Statutory Audit, NFRA & ICAI Standards
Q69: Consider the following statements regarding the expanded Audit Quality Inspections conducted by the NFRA for the FY26 cycle:
1. The NFRA significantly expanded its annual review scope to cover the financial statements of 35-40 major companies, an increase from the 25 companies covered in the previous financial year.
2. Critical areas of focus during these inspections include the rigorous evaluation of related party transactions, impairment of non-financial assets, and revenue recognition.
3. Following global regulatory practices, the final inspection reports released by the NFRA will detail the audit deficiencies found but will not publicly name the specific companies whose financials were reviewed.
Which of the above statements is/are correct?
2. Critical areas of focus during these inspections include the rigorous evaluation of related party transactions, impairment of non-financial assets, and revenue recognition.
3. Following global regulatory practices, the final inspection reports released by the NFRA will detail the audit deficiencies found but will not publicly name the specific companies whose financials were reviewed.
Which of the above statements is/are correct?
✅ Correct Answer: D
🎯 Quick Answer:
D. All statements 1, 2, and 3 are correct.Structural Breakdown: Statement 1 is correct; the FY26 cycle saw the highest volume of inspections in the regulator's history, targeting the top 10 firms and 35-40 underlying company financials.
Statement 2 is correct; high-judgment areas like impairment testing and RPTs remain the primary flashpoints for accounting manipulation, thus drawing NFRA focus.
Statement 3 is correct; unlike disciplinary orders against auditors, these quality review reports act as industry reference material and deliberately anonymize the corporate client to align with international PCAOB standards.
Historical/Related Context: After establishing its authority through harsh disciplinary orders between 2019-2023, NFRA pivoted to a more systemic, preventive approach.
Broadening the inspection net ensures that the top tier of Indian auditing operates under constant, predictable regulatory scrutiny.
Causal Reasoning: Anonymizing the corporate client in an Audit Quality Report ensures the focus remains strictly on the methodology and failures of the auditor, preventing unwarranted market panic or stock crashes for a company based solely on an audit procedural critique.