Inspection Report: M/s SRBC & Co. LLP (2023) · 132.2-2023-05

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राष्ट्रीय वित्तीय रिपोर्टिंग प्राधिकरण

National Financial Reporting Authority

INSPECTION REPORT 2023

Audit Firm: M/s SRBC & Co. LLP
Firm Registration No. 324982E/E300003
Inspection Report No.132.2-2023-05
March 27, 2025

NFRA, 7th Floor,
HT House, 18-20, K. G. Marg, New Delhi 110001

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Contents

Executive Summary ..............................................................................................................................3
Inspection Overview .............................................................................................................................5
Audit Quality Inspection Approach ....................................................................................................6
Inspection Methodology .......................................................................................................................7
Audit Firm’s Profile ..............................................................................................................................8
Acknowledgment ...................................................................................................................................8
Review of Firm-Wide Audit Quality Control System - Compliance with Previous Year’s Inspection Observations .......................................................................................................................8
A. Independence of auditor .................................................................................................................8
B. Leadership Structure and Responsibilities ...................................................................................18
C. Audit documentation ....................................................................................................................19
D. Engagement Quality Control Review ..........................................................................................20
Review of Individual Audit Engagement Files ............................................................................. 20
Deficiencies in the audit of Related Party Transactions and ICFR-Revenue ............................. 20
Chronology of Events .........................................................................................................................23
Appendix A - The Firm’s response to this inspection report ..........................................................24

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PART A

Executive Summary

1. Section 132 of the Companies Act 2013 (the Act) mandates the National Financial Reporting Authority (NFRA), inter alia, to monitor compliance with Auditing Standards, to oversee the quality of service of the professions associated with ensuring compliance with such standards, and to suggest measures required for improvement in quality of their services. Under this mandate, NFRA conducted audit quality inspections of the Chartered Accountant Firm M/s SRBC & Co LLP in 2024 (the Audit Firm/the Firm/SRBC). The scope included a review of the remedial actions taken by the Firm for the deficiencies reported in the previous inspection report, and a review of three selected individual audit engagements of financial statements for the years ending 31.03.2023, focusing on three significant audit areas, viz., Internal Financial Control over Financial Reporting on Revenue, Related Party Transactions and Impairment of Non-Financial Assets. The Inspection included an on-site visit in August 2024, discussions with the Audit Firm personnel including the engagement teams of select audit engagements, review of policies and procedures and examination of documents. The observations were conveyed to the Audit Firm. An inspection report was issued to the Firm, for which a written response was received. The observations in this report are based on the Firm’s remedial responses on the previous inspection report dated 22.12.2023, further information/documents provided by the Firm and results of selected sample audit engagement files. The key observations in this report are summarized as follows.

2. M/s SRBC & Co. LLP is member of two networks viz., Ernst & Young Global network (EYG/EY network) and SR Batliboi & Affiliates (Indian network/SRB network). In the previous inspection report dated 22.12.2023, we observed that the Audit Firm’s independence policies do not recognize relationship between EY network and SRB network resulting in non-compliance with section 141 & 144 of the Companies Act 2013. We had recommended that the Audit firm should make necessary changes to its Independence policy and also review all its ongoing engagements considering EY network entities as directly and indirectly related to SRB & Affiliates.

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3. On a review of the Audit Firm’s response to the previous inspection report, we observed that the Audit Firm had not fully remediated the observations of the previous inspection report. The Audit Firm did not provide information relating to non-audit services provided by EY network entities to the Firm’s audit clients. Thus, it could not be verified if the Firm is in full compliance with independence requirements given in section 141 & 144 of the Companies Act 2013, SQC 1¹, Standards on Auditing 220², and the Code of Ethics³. Accordingly, the Draft Inspection Report was sent to the Firm seeking its response.

4. In response to the Draft Inspection Report, the Firm informed of its proposal to amend its independence policy and also provided information relating to non-audit services provided by EY Network entities to the Firm’s audit clients. On account of substantial delay by the Firm to provide complete information to the inspection team, it could not be verified if the Firm is in full compliance with independence requirements given in section 141 & 144 of the Companies Act 2013, SQC 1, Standards on Auditing 220, and the Code of Ethics. However, our prima facie observations are as under–

• a) The Firm should put in place a robust process to address all threats to independence, which may be created due to the exclusion of certain services from the term non-audit services.
• b) The Firm should reconsider its policy to exclude NFRA regulated audit clients’ holding companies, which are in private equity business, for the purpose of providing non-audit services, to ensure full compliance with the laws and standards.
• c) The EY network has provided ‘Financial Reporting and Accounting Advisory Services’ to its audit clients in 7 cases in 2022-23 and in 4 cases in 2023-24. This prima facie indicates that the Firm may be violating laws and standards.
• d) In one sample case, the amount of non-audit fee exceeded audit fees. This might have created self-review threat and self-interest threat.
• e) The restriction of section 141 applies to all partners of EY Network and their relatives. Further, the Act uses the term ‘relatives’ which has a wider meaning than the term ‘immediate family member’ used by the Firm. Therefore, the Firm should reconsider this policy to ensure compliance with section 141(3)(d) of the Act.

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• f) The Firm should (a) reconsider its policy to avoid indirect business relationship through EY Network entities and (b) put in place a robust process to ensure full compliance with section 141(3)(e) of with the Act.
• g) The Firm should reconsider its policy and include the term ‘Key Managerial Person’ in place of ‘financial reporting oversite role’ to ensure full compliance with section 141(3)(f) of the Act; and apply this section to all partners and their relatives in the EY network. (Part B of this Report).

5. The Audit Firm revised its policies and procedures to remediate the documentation issues raised in the previous inspection report regarding its leadership structure, Engagement Quality Control Review and sign-off policy on audit work papers. Compliance with such revised policies and procedures will be further reviewed during next inspection cycle. (Part B of this Report).

6. In respect of Related Party Transactions (RPT), in all the three selected engagements, one or more audit procedures performed by the Firm were found to be deficient like not verifying the end use of the proceeds of the loans given by the company to its subsidiaries, not evaluating the basis of the management claim of arm’s length pricing of transactions with related parties, not evaluating management expert’s work, and incomplete RPT disclosures. (Part C of this report).

7. In respect of ICFR-Revenue, in case of two selected engagements, the audit files did not contain appropriate evidence of performance of test of controls on one or more counts (Part C of this report).

Inspection Overview

8. Section 132 of the Act, inter alia, mandates the NFRA, to monitor compliance with Auditing and Accounting Standards, to oversee the quality of service of the professions associated with ensuring compliance with such standards, and to suggest measures required for improvement in the quality of their services. The relevant provisions of NFRA Rules prescribe the procedures in this regard, which include evaluation of the sufficiency of the quality control system of Auditors and the manner of documentation of their work. Under this mandate, NFRA initiated audit quality inspections in March 2024 (Inspection Cycle

Footnotes

1. SQC 1 - Standard on Quality Control (SQC) 1 - Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements. ↩

2. Standards on Auditing (SA) 220 - Quality Control for an Audit of Financial Statements. ↩

3. The Code of Ethics issued by the Institute of Chartered Accountants of India. ↩