Page 48 - Banking Finance November 2020

ARTICLE

A weak system of audit control provides an opportunity to
a company to indulge in dilution of financial reporting quality
or/and earnings quality.

There can be a number of reasons for the decline in
standards of audit control by the auditors of the company
while auditing the financial performance of a unit. Some of
the reasons that can lead to dilution of audit quality are as
detailed below:
a) The auditor relies on fee from the client and this
sometimes adversely affects the independence of the
auditor.
b) Due to the competition among auditors/auditing firms, firm. Such auditors are more prone to be influenced by
they may have a tendency to quote very low prices for the management.
their services which in turn leads to fall in quality of
There are several regulatory provisions put in place by the
audit reports.
Ministry of Corporate Affairs (MCA) to regulate the auditing
c) The appointment of auditors in the current scenario is profession. Some of these provisions are:
being done by the management of the auditee unit and
1) Section 139 to 148 (Chapter X) of the Companies Act,
naturally, they may have a tendency to hire auditor who
2013 deals with the Audit and Auditors.
suits their interests and listens to them.
2) Section 139 relates to appointment of auditors.
d) The auditors provide non-audit related services also to
3) Section 140 deals with removal and resignation of
their clients and there is a possibility that they may
dilute the quality of audit so that business from these auditor, giving of special notice.
ancillary services keeps flowing to them. 4) Section 141 provides for eligibility, qualifications and
disqualifications of auditors.
e) In some cases, the auditors prepare the auditee unit's
financial statements and then audit those very 5) Section 142 deals with Remuneration of auditors.
statements which have been prepared by themselves. 6) Section 143 provides for Powers and duties of auditors
This is a kind of 'Self-review' on the part of the auditor and auditing standards
and beats the very concept of an independent audit.
7) Section 144 prohibits the auditors to render certain
f) Sometimes, an auditor is associated with a client for a services other than audit.
fairly long time and as a result, develops a sort of
personal relationship with the client which involves an In order to ensure effective compliance of the above
emotional quotient as well. In such cases, there are regulations, the Central Government has notified the
definite chances of the auditor not adopting a neutral Companies (Audit & Auditors) Rules, 2014 and made
stance while auditing the client books and he may be amendments in the same from time to time.
inclined in favor of the client.
Standards of Auditing (SAs) issued by the ICAI are mandatory
g) The auditors may also face pressure from the
to be followed by the auditors in view of Section 143(9) of
management of the auditee unit to scale down the
the Companies Act, 2013. The auditors are expected to
extent of audit to reduce audit fee.This type of situation
ensure compliance with SAs in their audit engagements to
will definitely affect the objectivity of the auditor.
ensure quality audits.
h) Many a times, it is seen that auditors with very less
experience are hired by the firms to audit their books A consultation paper was also floated by MCA in February
of accounts. Such auditors sometimes lack the capability 2020 inviting suggestions for improvement in audit
to audit the firm's accounts considering the size of the independence and accountability. After receipt of

48 | 2020 | NOVEMBER | BANKING FINANCE