Audit Quality Inspection Guidelines · 30 Apr 2026

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National Financial Reporting Authority

AUDIT QUALITY INSPECTION GUIDELINES

(updated up to 30.04.2026)

7^th-8^th Floor, Hindustan Times House
18-20, Kasturba Gandhi Marg, New Delhi 110001
https://nfra.gov.in

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(Updated up to 30.04.2026)

NATIONAL FINANCIAL REPORTING AUTHORITY

Audit Quality Inspection Guidelines

Audit quality inspections, worldwide^1, are integral to the functioning of independent audit regulators. An inspection generally consists of firm-wide quality reviews and/or test-check of individual audit assignments to evaluate the level of compliance with applicable auditing standards and quality control policies and processes.

Mandate and Overall Objective

1. In keeping with the functions entrusted to NFRA under section 132 of the Companies Act 2013, audit quality inspections are a key tool with the Regulator to fulfil its statutory obligations. The mandate for inspections is derived from section 132 (2) of the Companies Act 2013 (Act, hereinafter) and the relevant provisions of the NFRA Rules 2018 (Rules, hereinafter).

2. The overall objective of inspections is to evaluate compliance of the audit firm/auditor (the 'auditor', hereinafter) with auditing standards and other regulatory and professional requirements, and the sufficiency and effectiveness of the quality control system of the auditor, including

• (a) adequacy of the governance framework and its functioning,
• (b) effectiveness of the auditor's internal control over audit quality, and
• (c) system of assessment and identification of audit risks and mitigation measures.

Criteria

3. Criteria are benchmarks used to check compliance, evaluate or measure subject matter consistently and reasonably. Criteria are identified based on the Laws, rules, regulations, policies, standards, etc., governing the subject matter.

4. Accordingly, the criteria for inspections would be:

• • Provisions of the Act, Rules and amendments thereof,
• • Standards of Auditing, including Standard on Quality Control (SQC 1) and Code of Ethics,
• • Policies, guidelines, methodologies and manuals, etc. of the firm
• • Accounting Standards, as may be applicable to selected individual audit engagements,
• • Relevant circulars/directions of other regulators, as applicable.

Scope and Scale of Inspections

5. A proportionate regulatory approach is followed in inspections which is commensurate to the size of the firm, the significance of its audit portfolio to investors, creditors and public interest, past inspection compliance (where inspections are recurring), and risks pertaining to selected focus areas, amongst other relevant factors.

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^1 Reference: Core principles of independent audit regulators by the International Forum for Independent Audit Regulators (IFIAR) require that audit regulators should, as a minimum, conduct recurring inspections of audit firms undertaking audits of public interest entities in order to assess compliance with applicable professional standards, independence requirements and other rules, laws and regulations. IFIAR comprises independent audit regulators from 56 jurisdictions.

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(Updated up to 30.04.2026)

6. Inspections will involve a review of the quality control policy, including tone at the top, firm culture and governance, review of certain focus areas, test check of the quality control processes, controls around the use of technology in audit, and/or test check of audit engagements performed by the auditor during the year.

7. The scope of inspection will be informed by NFRA to the auditor at the commencement of inspection. The scope of an inspection will generally not vary during its execution unless specific circumstances or findings warrant an expansion of scope or coverage. Any change in scope or coverage would be intimated to the auditor, with due authorisation.

8. The audit engagements selected may be reviewed for application of all or select auditing standards, as may be decided by the inspection team.

9. Inspections are intended to identify areas and opportunities for improvement in the auditor's system of quality control. Inspections, by nature, are distinct from investigations undertaken under section 132 (4) of the Act. However, in certain cases, test check by the inspection teams may provide a basis for or require reference of such cases/matters for enforcement or investigation under applicable provisions of the Act and Rules.

10. Inspections may not lead to a detection or identification of all the weaknesses in the governance framework or system of internal control or audit risk assessment framework and are not designed to provide absolute assurance about the auditor's quality of audit work. In respect of selected audit assignments, inspections may not identify all the weaknesses in the audit work performed by the auditors in respect of the audits of the financial statements of the companies. Inspections are also not intended or designed to replace the role and responsibilities of the companies' independent statutory auditors.

11. Inspections may, in certain cases, also lead to financial reporting quality reviews of financial statements of the companies whose audits are selected for inspection. They may also result in issue of advisories or directions to the auditors.

Selection of auditors and audit engagements

12. Selection of auditors - Selection of auditors and determination of periodicity of their inspections by NFRA will be based on assessment of risks in the audit environment and parameters such as the size of the firm, composition and nature of the firm, number of audit engagements completed in the year under review, complexity and diversity of preparer financial statements audited and other such risk indicators as NFRA may determine from time to time. In addition, any specific concerns highlighted by the Government, other regulators, or issues in the public domain may also influence the selection of auditors for inspection.

13. Selection of individual audit assignments - Selection of audit engagements will be both risk-based and random, and based on financial and non-financial indicators^2 identified by NFRA. Details of audit engagements conducted by the auditor will be required to be provided by the auditors to the inspection team, in advance, for selection purposes.

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^2 May include audit areas that are complex, areas where new accounting standards have been introduced, audit areas significant to prevailing economic trends or conditions etc

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(Updated up to 30.04.2026)

14. The inspected auditor would have no role whatsoever in any selection by NFRA of the auditor or identification of any area of quality control or quality management policy or practices of the auditor, or selection and test-check of individual audit engagements undertaken by the auditor.

Methodology

15. The inspection process will usually commence with a presentation by the auditor. The presentation would comprise the specific areas communicated by NFRA and any areas the auditor may like to present. NFRA would also outline its inspection approach and plan to the auditor.

16. Inspections may involve questionnaires, conversations with the audit firm's leadership, requests for written confirmations, entry and exit meetings, discussions, site visits, interviews, observations, walkthroughs, review of documents, review of the audit documentation system, including ERPs and other IT applications in place. The inspection team may issue questionnaire/s requesting the auditor to keep records ready for onsite inspection. At the start of on-site inspection, entry meetings with senior management of audit firm or heads of various verticals may be held to better appreciate the structure and working of the audit firm/auditor. Enquiry meeting/s with audit engagement teams of selected audit engagements may also be held at the start of the inspections.

17. The inspection execution cycle will comprise site-visits, interviews, reviews of controls, substantive testing, issue of queries and observations, and follow-up of previously issued observations (to be relevant in case of recurring inspections). The inspected auditor will be required to provide written responses to the queries and observations, and written confirmations as required by the inspection team, within the timelines communicated by the inspection team. The inspected auditor may be required to transfer the selected audit engagement files and other records to the inspection team in the manner requested.

18. Inspections would close with a meeting with the senior management of the auditor. NFRA would subsequently issue a draft inspection report for obtaining responses from the auditor before finalisation and issuance of the final inspection report.