NFRA circular NF-25013/3/2025--NFRA · 07 Jan 2026
Official title
NFRA Circular on Effective Communication Between Statutory Auditors and Those Charged with Governance, Including Audit Committees
Summary
Check the official recordThe National Financial Reporting Authority mandates that statutory auditors, boards of directors, and audit committees establish robust, two-way communication throughout the audit process. This circular reiterates existing obligations under the Companies Act 2013 and Standards on Auditing to ensure effective governance and audit quality. Auditors must formally determine those charged with governance at the start of the audit and document all communications. All significant interactions must occur in writing, be unambiguous, and include specific agenda items such as audit strategy, internal control deficiencies, and independence assessments. Companies must implement a formal communication framework to facilitate these exchanges. Failure to comply with these standards undermines the governance framework and erodes investor confidence.
What you must do
Key dates
Who is affected
If you do not comply
NF-25013/3/2025--NFRA
राष्ट्रीय वित्तीय रिपोर्टिंग प्राधिकरण
National Financial Reporting Authority
7th Floor, Hindustan Times House,
Kasturba Gandhi Marg, New Delhi
Dated: 07.01.2026
CIRCULAR
To
Subject: Effective Communication Between Statutory Auditors and Those Charged with Governance, Including Audit Committees
In the course of discharging of NFRA's statutory functions, it has been noticed that there is a need to strengthen the communications between Statutory Auditors (Auditors), Those Charged with Governance (TCWG), including Audit Committees (ACs), in line with the requirements of the Companies Act, 2013 (CA 2013), the Standards on Auditing (SAs) prescribed under CA 2013, and other relevant Rules and Regulations.
2. Provisions of CA 2013 and other Relevant Rules: The CA 2013 has placed certain important obligations on the Board of Directors (BOD or the 'Board'), Independent Directors (IDs), Audit Committees and Statutory Auditors of Companies in respect of Accounts and Audit of Companies.
2.1 Board of Directors:
Section 134 of CA 2013 and related Rules require that the financial statements, including the consolidated financial statements, if any, be approved by the Board of Directors. A report by the Board shall be attached to the financial statements, which shall include, inter alia, an important statement called Directors' Responsibility Statement. According to sub-section 5 of Section 134, this statement shall disclose the Board's assertions regarding certain critical aspects, such as adherence to applicable accounting standards; selection and application of accounting policies and making of judgements/estimates on reasonable and prudent basis; maintenance of adequate records for safeguarding the assets of the company and preventing and detecting fraud and other irregularities; preparation of accounts on a going concern basis; implementation of adequate internal financial controls and ensuring their operating effectiveness; and implementation of proper systems to ensure compliance with all applicable laws.
2.2 Independent Directors:
Schedule IV to the CA 2013 lays down a Code for Independent Directors. Sub-clause 4 of Clause II casts an obligation on them to satisfy themselves of the integrity of financial information and that financial controls and the systems of risk management are robust and defensible. Further, Clause III casts several duties on the independent directors, such as appropriate induction and regular updation of their skills, knowledge and familiarity with the company; clarification or amplification of information; remaining well informed about the company and the external environment it operates; paying sufficient attention and ensuring that adequate deliberations are held before approving related party transactions. Reporting concerns about unethical behaviour, actual or suspected fraud or violation of the company's Code of Conduct or Ethics Policy; and where there are concerns about the running of the company or proposed action, the independent directors are to ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting.
2.3 Audit Committees:
Section 177 of CA 2013, the related Rules stipulate several important roles and responsibilities of the Audit Committee. One of the critical responsibilities is to review and monitor the Auditor's independence and performance, and the effectiveness of the audit process. Other areas of critical significance relate to related party transactions, inter-corporate loans and investments, the valuation of assets of the company, the evaluation of internal financial controls and risk management systems, the review of major accounting entries involving estimates based on the exercise of judgment by management and discussions with Auditors before the audit commences, about the nature and scope of audit as well as post-audit discussions to ascertain any area of concern and so on.
2.4 Auditors:
Section 143 of CA 2013 is titled 'Powers and duties of auditors and auditing standards'. Sub-section 2 of section 143 requires the Auditor to make a report to members of the company on the accounts examined and the financial statements, inter alia, after taking into account the provisions of CA 2013, the accounting and auditing standards, and whether the financial statements give a true and fair view. Further, subsection 9 of section 143 of CA 2013 casts a statutory obligation on the Auditor to comply with the auditing standards.
3. Provisions of the SAs prescribed under CA 2013: There are two SAs, viz. SA 260 (Revised)[^1] and SA 265[^2] that deal with the communication between the Auditors and Those Charged with Governance (TCWG), Audit Committee and Management. Also, there are many other SAs, including SQC 1, that have specific communication requirements between the Auditor and TCWG (Refer Annexure I). Certain important requirements of these SAs are summarised below:
3.1 TCWG:
Paragraph 10 (a) of SA 260 (Revised) defines TCWG as those with responsibility for overseeing the strategic direction of the company and obligations relating to the accountability of the company. Paragraph 11 lays down a mandatory requirement for an Auditor to determine appropriate persons as TCWG within the governance structure. As per the CA 2013, since the Board of Directors is overall responsible for the governance of the company, it will qualify for being considered as TCWG. TCWG could also be a sub-group of the Board, which could be the Audit Committee plus some of the Board members. In such a case (where a sub-group has been determined to be TCWG) the Standard requires that the Auditor determines if there is a further need for communicating with the full Board. In any case, it is necessary for the Auditor to determine TCWG at the start of the Audit. Once TCWG is determined, the Standards require regular, two-way communication with TCWG throughout the Audit.
3.2 The Communication Process:
The SA 260 (Revised) mandates a two-way communication process that has to be documented alongside any matters communicated orally. There is sufficient guidance within the Standard (refer to para A37-A53 of SA 260 (Revised) and Appendix 2 to the SA) that details the form and process of this communication. For example, the Auditor is to communicate his approach to internal control and the nature and extent of the specialised skills and expertise needed for the audit, e.g., Fair Value Measurements, Expected Credit Loss Allowance computations, and seek TCWG's suggestions on any particular area requiring the Auditor's additional consideration during audit.
3.3 Specific matters to be communicated under SA 265:
This SA deals with the Auditor's communication about the deficiencies in internal controls identified during the audit, with both TCWG and Management. These need to be communicated in writing and in a timely manner. The Auditor has to determine whether the control deficiencies identified are significant, individually or in combination, and the communication of such deficiencies must explain their potential effects. Moreover, significant deficiencies in internal control need to be communicated in writing and in a timely manner.
3.4 TCWG and Management Responsibilities:
The fact that the financial statements are audited does not relieve TCWG of its responsibilities. The objectives of communications with TCWG include obtaining from TCWG the information relevant to the audit and providing them with timely observations arising from the audit that are significant and relevant for them to fulfil their responsibility of oversight of the financial reporting. These communication requirements are designed, inter alia, to strengthen governance over the financial reporting process by ensuring that TCWG has a timely and clear visibility into the audit process. Timely information on how the audit is planned, what are the areas of key risks, and whether the Auditors are truly independent, enables TCWG to ensure uncompromising objectivity of the Auditors. These measures are instrumental in enhancing audit quality and, in turn, protecting public interest. Hence, every non-compliance with these important provisions of the Standards and CA 2013 is not just a procedural violation but would impact the governance framework of public interest entities that may ultimately erode investors' confidence.
