The National Financial Reporting Authority (NFRA) conducted an audit quality inspection of M/s Lodha & Co. LLP in March 2024, focusing on their compliance with auditing standards under Section 132 of the Companies Act, 2013. The review covered the firm’s quality controls and documentation for the financial year ending March 31, 2023, particularly in areas with a high risk of material misstatements, including Internal Financial Control Over Financial Reporting (ICFR), Related Party Transactions (RPT), and Impairment of Non-Financial Assets. Key findings include the need for improved consistency in personnel independence declarations across branches, alignment of related party definitions with the Companies Act, and strengthened policies for monitoring independence. Additionally, the audit documentation process requires improvement, especially regarding the addition of documents post audit file assembly and the documentation requirements for Engagement Quality Control Reviews (EQCR). The firm’s reliance on paper-based documentation was identified as a potential risk for integrity issues. NFRA recommended adopting a hybrid or fully electronic system for maintaining audit documentation, while preserving original paper documents for legal or ethical reasons. Further details on the findings for five audit engagements in the identified focus areas are provided in the report.

National Financial Reporting Authority

INSPECTION REPORT 2023
Audit Firm: M/s Lodha & Co. LLP
(Formerly Lodha & Co.)
Firm Registration No. 301051E/E300284
Inspection Report No.132.2-2023-01
December 19, 2024

PART A

Executive Summary

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 inspection of the Chartered Accountant firm M/s Lodha & Co. in March 2024. The scope included a review of firm-wide quality controls to evaluate the Audit Firm’s (also referred to as “the Firm’s”) adherence to SQC-1 and a review of selected Audit Documentation of the annual statutory audit of financial statements for the year ending 31.03.2023. Three significant audit areas were identified regarding each audit engagement viz., Internal Financial Control Over Financial Reporting (ICFR) in Revenue Recognition, Related Party Transactions (RPT) and Impairment of Non-Financial Assets, due to their inherent higher risk of material misstatement. The on-site inspection was carried out during March 2024 and April 2024.

During the inspection, the Inspection Team held discussions with the Audit Firm personnel, reviewed policies and procedures and examined documents to arrive at the prima facie observations. These observations were initially discussed with the Audit Firm and after necessary changes conveyed to the Audit Firm in writing. The replies and documents submitted by the Audit Firm have been examined and the Final Inspection Report has been issued. This report is published after receiving the reply from the Audit Firm. The key observations in this report are summarised as follows.

a. The firm’s forms and checklists for personnel independence declarations need consistent application across all branches, with updated definitions of related parties aligned with the Companies Act and the policies and procedures for monitoring independence compliance require strengthening.

b. The firm’s policy on audit documentation needs improvements regarding the addition of documents post audit file assembly, as a result of internal/external inspections. The Firm’s policy on documentation requirements for EQCR also requires strengthening as detailed in Part V of the report.

c. The Firm’s audit documentation, fully in paper form, is prone to integrity issues due to conversion from electronic form to paper form. The audit firm will be in a better position to demonstrate compliance with SAs and SQC 1 by adopting either a hybrid system or a fully electronic system for maintaining audit documentation. Paper documentation may be limited to documents that are originally obtained or created in paper format and need to be preserved in that format for legal/ethical or other reasons. All other audit evidence obtained, and WPs created or edited using electronic tools or applications should be maintained in their original electronic format. As provided in Paragraph 81 of SQC 1 the original paper documentation may also be electronically scanned for inclusion in the Audit Files.

d. Observations on five audit engagements in areas of Impairment of Non-Financial Assets, ICFR in Revenue and RPT are dealt with in detail in Part C of the report.

Inspection Overview

1. Section 132 of the Act, inter alia, mandates NFRA 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 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 auditor’s quality control system and the manner of documentation of the system by the auditors. Under this mandate, NFRA initiated audit quality inspections in March 2024. The overall objective of audit quality inspections is to evaluate compliance of the Audit Firm/Auditor with auditing standards and other regulatory and professional requirements, and the sufficiency and effectiveness of the quality control system of the Audit Firm/Auditor, including:

(a) adequacy of the governance framework and its functioning.

(b) effectiveness of the firm’s internal control over audit quality; and

(c) system of assessment and identification of audit risks and mitigating measures

2. Inspections involve a review of the quality control policy, a review of certain focus areas, a test check of the quality control processes, and a test check of audit engagements performed by the Audit Firm during the year.

3. Inspections are intended to identify areas and opportunities for improvement in the Audit Firm’s system of quality control. Inspections are, however, not designed to review all aspects and identify all weaknesses in the governance framework or system of internal control or audit risk assessment framework and are also not designed to provide absolute assurance about the Audit Firm’s quality of audit work. In respect of selected audit assignments, inspections are not designed to identify all the weaknesses in the audit work performed by the auditors in the audit of the financial statements of the selected companies. Inspection reports are also not intended to be either a rating model or a marketing tool for Audit Firms.

Audit Quality Inspection Approach

4. Selection of Audit Firms for the 2023 inspections was based on the extent of public interest involved, as evidenced by the size of the firm, its composition and nature, the number of audit engagements completed in the year under review, complexity and diversity of preparer’s financial statements (henceforth, Companies) audited by the firm and other risk indicators. M/s Lodha & Co LLP (formerly Lodha & Co) was one of the Audit Firms selected as per the above parameters.

5. The selection of individual audit engagements of the Audit Firm was largely risk-based, based on financial and non-financial risk indicators identified by NFRA. Accordingly, the Audit Files in respect of five (5) Audit Engagements relating to the statutory audit of financial statements for the year ending 31.03.2023 were reviewed during the inspection.

6. The scope of the inspection was as follows:

a. Review of firm-wide quality controls to evaluate the Audit Firm’s adherence to SQC 1, Code of Ethics and the applicable laws and rules. Focus areas for the 2024 inspection related to critical elements of the Firm’s quality control system viz. leadership responsibilities within the Firm, auditor independence, acceptance and continuation of audit clients, engagement quality control and the Audit Firm’s internal quality inspection program.

b. Review of individual Audit Engagement Files- A sample of five (5) individual audit engagement files pertaining to the annual statutory audit of financial statements for the year ending 31.03.2023 was selected. Three significant audit areas were identified in respect of each audit engagement viz., Internal Financial Control over Financial Reporting (ICFR) over Revenue Recognition, Related Party Transactions (RPT) and Impairment of Non-Financial Assets, due to their inherent higher risk of material misstatement.

The selected sample of five individual audit engagements is not representative of the Firm’s total population of the audit engagements completed by the Firm for the year under review.

Inspection Methodology

7. An entry meeting was held with M/s Lodha & Co. LLP on 23.02.2024 at NFRA office. The Firm presented an overview of the governance and management structure, its key internal policies and procedures, the Firm-wide system of quality control, its audit approach and methodologies, ethical standards, and its IT system and procedures. The on-site inspection was carried out during March 2024 and April 2024. The inspection methodology comprised meetings, walkthroughs, observation, review, and interviews with members of the leadership team and the engagement teams for the selected audit engagements.

8. The areas of weaknesses or deficiencies on the part of the Audit Firm, included in the inspection reports, should be viewed as areas of potential improvement and not as a negative assessment of the work of the Audit Firm unless specifically indicated otherwise.

Audit Firm’s Profile

9. M/s Lodha & Co LLP (hereinafter referred to as ‘Lodha’ or the Audit Firm or the Firm) was established in 1941 as presented by the Firm in their entry meeting. The Audit Firm was converted to LLP on December 27, 2023. The Firm has six offices in India with 16 partners and about 300+ employees. Lodha & Co LLP is not a part of any networking arrangement.

Acknowledgement

10. NFRA acknowledges the cooperation of the Audit Firm during all stages of the inspection.

PART B

Review of Firm-Wide Audit Quality Control System

11. Deficiencies observed during the review of the Audit Firm’s policies and on the application of the policies based on a review of the selected individual audit engagements are discussed below. Any deviation of the Firm’s policy from the applicable law or any deviation in the application of the Firm’s policy in practice is reported.

A. Independence Requirements

a. Personnel Independence

12. According to Paragraph 18 of SQC 1, an audit firm should establish policies and procedures designed to provide it with reasonable assurance that the firm, its personnel and others subject to independence requirements, maintain independence where required by the Code of Ethics.

13. In compliance with the above, the Firm has a policy of obtaining independence declarations from its personnel in two pre-designed forms: viz. LCO/CHECKLISTS/25-INDEPENDENCE (hereafter Form 1) and LCO/CHECKLISTS/25.1 – INDEPENDENCE AFFIRMATION CHECKLIST (hereafter Form 2). Form 1 is engagement-specific, obtained by the Engagement Partner (EP) from the Engagement Team (ET) members at the assignment’s beginning and end. Form 2 is obtained by the Partner-in-charge of a branch office, annually at the beginning of every financial year for all the clients available at respective branch offices from all personnel engaged in that office/branch and is therefore specific to clients of that branch.

14. The Independence Declaration Form 1 requires compliance with the independence requirements of the IESBA code of ethics applicable to public interest entities but does not consider the Independence requirements of the Companies Act/Code of Ethics. Also, this form requires the declaration of independence of the ET and their “immediate family member” instead of ‘Relative’ which is a requirement of the Companies Act, 2013. It is advised that the independence declarations may be reviewed by the Firm in line with the specific requirements of the Companies Act, 2013.

15. The Independence Declaration Form 2 requires a declaration of each employee’s and their relative’s interest in the Client, its holding company, subsidiary company and fellow subsidiary company but does not specifically include associate of the client company which is a requirement of section 141(2) of Companies Act, 2013.

16. Further, the above-stated forms, which are part of the Firm’s Policies & Procedures manual, are not followed consistently by all the Branches/Offices. Some branches use different formats for this purpose.

17. We recommend that the Firm should be consistent in its independence-related policies and practices and must comply with Indian Laws, in addition to international requirements.

18. Without admitting to any non-compliance, the Audit Firm has stated that they will modify the forms/checklists as per the Companies Act, 2013. The Audit Firm also stated that a necessary review in this respect will be done and standardization of formats across all branches/ offices to the extent practicable will be implemented. We recommend that this be done on priority in a time-based manner.

b. Independence Policy

19. According to Paragraph 17 of SQC 1, the firm’s policies and procedures should emphasize the fundamental principles which are reinforced by:

(a) the leadership of the firm,

(b) education and training,

(c) monitoring, and

(d) a process for dealing with non-compliance.

20. The Audit Firm has a policy for obtaining independence confirmations from its personnel and providing training pertaining to independence-related provisions. The Audit Firm has stated that the policy for monitoring independence is through Forms 1 & 2 (as mentioned in Paragraph 13 above) and that the policies and procedures in this respect are regularly reviewed and improvements are ensured. Regarding procedures for dealing with non­compliance, the Firm submitted that some procedures are followed as a matter of practice. However, they will review the policy and further elaborate it in their SOP forming part of the firm’s Policies and Procedures (PNP).

21. We are of the view that just obtaining independence declarations from the ET is not an effective way of monitoring independence. It should be further enhanced by periodically reviewing (such as a sample verification of the declarations for their accuracy and completeness, delay in filing, incomplete information etc.) these declarations, including those of partners. The history of violations must be maintained and a policy regarding multiple violations must be in place. The policy should contain provisions for strict independence sanctions, including financial penalties. The Firm should also encourage (through active communications) self-reporting of independence violations, as provided in their independence policy. Annual personal independence refresher training to remind all staff of the Firm’s policies/requirements should be documented where observations from past independence violations have been shared. Going ahead, the Firm may institute robust controls (such as cross-checking the declarations with or obtaining direct data from the depositaries) to ensure completeness and accuracy of the information regarding various investments of its staff and partners.

B. Audit Documentation

Maintenance of Paper Audit Documentation

22. It was also observed that the Audit Firm obtains or creates the majority of the documents, in electronic forms such as MS Excel workings, notes in MS Word format, checklists, scanned PDF documents, emails etc. These electronic documents and tools are extensively used during the audit for various checks, calculations and reviews. However, these documents and workings are not archived. Instead, a printout of these documents and workings is archived, which is prone to intentional or unintentional data losses as compared to the electronic tools used to prepare it originally. We observe that the conversion of the original work done in a spreadsheet or word processor or similar IT tools into paper printouts compromises the integrity of the original work, and causes data loss, hence causing loss of evidentiary value. For instance, a spreadsheet application file, such as an MS Excel file, which comprises a key part of the audit work of the ET, loses its evidentiary value when converted to a paper print due to several key reasons such as loss of metadata, formulae, cell references, calculation logics, loss of interactive elements, lack of complete context etc. Therefore, the audit documentation, insofar as it contains printouts of spreadsheet/word processors or other IT applications, lacks integrity as required by Paragraphs 74, 77, 79, 80 and 81 of SQC 1. The Quality Policy of the Firm is also silent about how the firm ensures the integrity of the electronically process data, information, and documents while converting them to printouts. Such converted documents do not constitute Audit Evidence, Audit Documentation and Audit Files, as defined in SA 500 and SA 230.

23. The audit firm will be in a better position to demonstrate compliance with SAs and SQC 1 by adopting either a hybrid system or a fully electronic system for maintaining audit documentation. The paper documentation may be limited to documents that are originally obtained or created in paper format and need to be preserved in that format for legal/ethical or other reasons. All other audit evidence obtained and WPs created or edited using electronic tools or applications should be maintained in their original electronic format. As provided in Paragraph 81 of SQC 1 the original paper documentation may also be electronically scanned for inclusion in the Audit Files.

24. The Audit Firm has submitted in this regard that the existing policy of maintaining paper documentation is fully in line with SAs and SQC-1. In this regard, we observe that the Firm creates many of the original audit work papers in electronic form, uses Excel-based tools, obtains electronic data and concludes the reporting on the basis of this evidence and workings. The provisions of SQC and SAs regarding paper documentation do not apply in such cases if, on conversion, the reliability and integrity of original data and workings is lost. The paper documentation does not protect the integrity of the information at all stages of the engagement (Paragraph 79 of SQC 1) because it is created at a subsequent stage after the procedures are completed in electronic form. Paragraph 80 of SQC 1 requires procedures to retain all original works, such as cross-references, annotation etc., contained in an original WP in paper form while converting them to electronically scanned copies. The same principles apply to electronic documentation while converting to paper form. However, retaining all the information and data in an electronic application when it is converted to paper form is nearly impossible. Therefore, we reiterate our observations in paragraph 22 that the factors mentioned in the said paragraph are critical because they influence whether a document can be considered reliable audit evidence. An original electronic file retains its evidentiary value due to the presence of metadata, application-specific features, and other original attributes of the electronic application that provide a full picture, whereas the printed version submitted to us lacks these essential details. Such converted documents do not constitute Audit Evidence, Audit Documentation and Audit Files, as defined in SA 500 and SA 230. The Audit Firm is therefore required to implement appropriate measures to rectify the deficiency.

Modification of Audit Documentation

25. According to Paragraph 77 of SQC 1, the firm should establish policies and procedures designed to maintain confidentiality, safe custody, integrity, accessibility and retrievability of engagement documentation. Paragraph 79 further mentions that the firm should design and implement appropriate controls for engagement documentation to (a) Enable the determination of when and by whom engagement documentation was created, changed or reviewed; (b) Protect the integrity of the information at all stages of the engagement, (c) Prevent unauthorized changes to the engagement documentation etc.

26. Paragraph 16 of SA 230 mentions that in circumstances other than those envisaged in Paragraph 13, where the auditor finds it necessary to modify existing audit documentation or add new audit documentation after the assembly of the final audit file has been completed, the auditor shall, regardless of the nature of the modifications or additions, document: (a) The specific reasons for making them; and (b) When and by whom they were made and reviewed. Paragraph A24 further elaborates on the matter by providing an example of a circumstance in which the auditor may find it necessary to modify existing audit documentation or add new audit documentation after file assembly has been completed which is the need to clarify existing audit documentation arising from comments received during monitoring inspections performed by internal or external parties.

27. The Audit Firm in its SOP manual has provided that the Firm should maintain a record of changes to engagement documentation post-completion of assembling the engagement files. The SOP on file access and retention states that all requests for the review of work papers (WP) should be addressed to the engagement partner. However, it was noted in a few sample cases that there is no record of approvals taken from the authorized personnel for accessing the area where files are stored or for reviewing and making changes to the Audit File after its archival.

28. The Audit Firm has stated that on completion of the Internal Annual Inspection, modifications to the Audit Files are allowed only after a discussion with the Partner-in-charge. It further stated that the process followed will be reviewed, elaborated, and strengthened.

29. In one out of the five audit files inspected, some deficiencies in documentation were identified during the Firm’s annual quality review. These deficiencies were rectified by adding documents to the audit files without providing the details of when these additional documents were added. These documents could not be separately identifiable from other audit documentation in the Audit File.

30. Without admitting to any procedural deficiencies, the Audit firm has stated that the system followed will be strengthened further and a separate sheet specifying the required details will be maintained.

31. It was also noted that the Firm’s internal annual review observations are part of the same bunch of audit documents despite the annual inspection happening almost a year after the close of the audit. This indicates the absence of controls on document addition after archiving.

32. In this regard, the Audit Firm has stated that the checklist for EQCR and Annual Inspection is common with a separate section in the checklist for Annual Inspection. However, we are of the view that separate checklists and forms should be maintained for EQCR and Annual Inspections since the policies, timing, and scope of these two reviews are different.

33. Other inconsistencies pertaining to audit documentation for which the Audit Firm has submitted that they will further enhance the policy to incorporate necessary changes are summarised as follows:

a. Period of retention of audit file is inconsistent in Firm’s Manual and in their SOP document.

b. In a few cases the work papers in the audit file are not serially numbered and properly indexed. This deficiency has been highlighted in the internal review for both FY 2022 and 2023 as well but no remediation is done.

c. Some WPs in the Audit Files reviewed did not mention the name of the team member who prepared and reviewed the WPs and the date on which it was prepared and reviewed.

d. The register maintained for keeping a record of the files that have been archived does not mention the total number of files per assignment.

C. Consultations

34. According to Paragraph 51 of SQC 1, an audit firm should establish policies and procedures designed to provide it with reasonable assurance that sufficient resources are available to enable appropriate consultation to take place.

35. The Audit Firm has a policy on consultation which mentions subject-wise particulars (i.e., names, etc.) of Internal Experts and Independent Experts who may be referred to for consultation.

36. In one of the Audit Engagements reviewed, it was noted that an internal expert was consulted for a major transaction involving the acquisition of two subsidiaries. However, that Internal Expert was not listed in the SOP document.

37. In this regard, it is advised that the Firm should timely update and communicate changes to the expert’s panel being consulted.

D. Monitoring

38. Paragraph 86 of SQC 1 requires that the firm’s policies and procedures should include an ongoing consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a selection of completed engagements. Paragraph 89 further elaborates on this by providing certain matters that need ongoing consideration and evaluation of the system of quality control, such as:

a. Determination of corrective actions to be taken and improvements to be made in the system, including the provision of feedback into the firm’s policies and procedures relating to education and training.

b. Communication to appropriate firm personnel of weaknesses identified in the system, in the level of understanding of the system, or compliance with it.

39. It is observed that there is either no formal documentation or there is only incomplete documentation of evidence of periodical updating of the policies.

40. The feedback, if any, received from the participants on training courses, seminars and the Firm’s policies and procedures is also not seen as formally documented. There is no mention of any disciplinary action in the policy as required by Paragraph 95 of SQC 1 and thereby certain repetitive observations in the internal inspection report for financial years 2022 and 2023 remain without remediation.

41. Paragraph 100 of SQC 1 requires that the documentation of monitoring should record whether the quality control system has been appropriately designed and effectively implemented and whether the firm’s Quality Control policies have been appropriately applied. The Firm’s annual inspection documentation was deficient regarding this requirement. Also, there is no uniformity in the annual inspection checklist used by different branches/ offices of the Firm.

42. Without admitting to any non-compliance, the Audit Firm has stated that necessary review of the policies, practices and procedures including standardization of the checklists as pointed out will be implemented by the Firm to the extent possible.

43. It is advised that the Firm should establish procedures to provide it with reasonable assurance that the policies and procedures relevant to quality control pertaining to monitoring are relevant, operating effectively and complied with by all branches/ offices consistently.

E. Engagement Quality Control Review (EQCR)

44. Paragraph 63 of SQC 1 requires a firm to establish policies and procedures setting out the documentation requirements for an Engagement Quality Control Review (EQCR). In this regard, the Firm’s policy does not mention the documentation requirements for EQCR.

45. The Firm stated that the EQCR partner discusses significant accounting, auditing, and financial reporting issues with the engagement partner, including matters for which there has been consultation and confirms with the engagement partner that there are no significant unresolved issues. However, it is observed that the only evidence of EQCR in the files is certain checklists with ‘yes’, ‘no’ and ‘NA’, without providing the nature, timing and extent of the involvement of the EQCR partner.

46. In four out of five audit files reviewed, it was noted that the documentation of EQCR partner’s work was inadequate. In all the cases, even the checklist also does not evidence who performed the review and when. Certain columns in the checklist are filled in incorrectly in two cases. In one of the cases, an in-house consultation was obtained but there was no evidence to substantiate that the EQCR partner had reviewed the appropriateness of the same.

47. While admitting the deficiencies, the Audit Firm has stated that written notes are prepared for the meetings, but it does not include every point discussed.

48. In this regard, we are of the view that documentation of the work of the EQCR partner needs to be strengthened to capture the discussions of significant matters and the nature and extent of the review. It is also advised that documentation of EQCR should be filled in more carefully, including the checklists where inadvertent errors were made. All the meetings of the EQCR partner with the engagement team should be documented in the form of minutes, noting down all the key discussions (which is a mandatory requirement of SA 220) on significant matters, any specific suggestions made by the EQCR partner, etc.

F. Other Policy Matters

49. The Audit Firm handles audits of more than 60 public interest entities. It operates from six locations across India and has a staff strength of 300 plus. Its growing professional services include assurance, taxation and advisory. Given the profile of the Firm, clientele and complexities, we are of the view that the Firm may harness technology to further improve audit quality and efficiency in the following key areas:

a) Independence monitoring

b) Bandwidth management and time logs

c) Engagement Team allocation

d) Client acceptance and continuance

e) Communication of quality policies and feedback.

f) Audit Documentation.

g) Audit Procedures such as Journal Entry testing, related party verification, impairment, sampling, etc.

50. It is also advised that the Firm’s policy on confidentiality of electronic data should be reviewed and strengthened to ensure the confidentiality of the information obtained in electronic form and stored in electronic devices, cloud storage and email folders of ET members. It should also lay down a clear policy on structured training provided to staff and partners with respect to risks posed by IT systems, IT tools and technology used by the PIE audit clients, regulatory actions and developments around audit quality.

51. While elaborating on their existing policies, the Audit Firm has stated that they are in the process of exploring better ways of harnessing technology to improve audit quality and bring in efficiency. The Firm has detailed its policy on IT infrastructure stating that it is already in place. We recommend the above improvements to the policy, depending on the Firm’s plans for growth and expansion.

PART C

Review of Individual Audit Engagement Files Focusing on Selected Areas of Audit

52. This section discusses deficiencies observed in the selected audit engagements. The inspection covered five individual audit engagements, and focused on three audit areas viz., related party transactions, ICFR in revenue, and impairment of non-financial assets, for detailed review. Certain critical audit procedures performed by the Firm’s engagement team in respect of these audit areas were reviewed viz., identification and assessment of risk of material misstatement, internal controls, design and execution of audit procedures in response to assessed risk (test of controls, test of details, sample sizes, and analytical reviews etc.), accounting estimates, accounting policies/disclosures and evaluation of identified misstatements.

A. Related Party Transactions (RPT)

53. In one of the engagement files, no evidence was available to evidence that the management had established internal controls on the identification of all the related parties and the related party relationships as defined in Ind AS 24 (Refer to paragraph 14 of SA 550). ET also did not document the rationale for adopting the random sampling technique for testing of related party transactions.

54. In another engagement file inadequate evidence was documented regarding inquiries made by the ET for identifying the sources/methods to maintain and update the list of related parties in accordance with paragraph 14 of SA 550, This is because there was inadequate evidence of performing procedures to identify whether any new employees or vendors/customers/contracting parties are related parties. The ‘KYC documentation’ verified by the ET in this regard does not evidence checking of compliance with all the related party relationships defined in Ind AS 24. There is no evidence available to substantiate procedures performed to identify whether any existing employee or vendor/customer has come under the ambit of related parties during the year.

55. This audit file also does not evidence the performance of the analytical procedure to ensure completeness of RPTs specifically focusing on unusual transactions/trends/patterns in transactions other than disclosed RPTs, that may indicate an undisclosed related party.

B. Internal Financial Control over Financial Reporting (ICFR) – Revenue

56. Regarding one of the engagement files it is noted that the company had identified whether a particular control is a ‘key control’ and whether there is ‘fraud risk’. The ET stated that they manually check whether such identification done by the Company is correct. We observe no documentation of the basis or audit procedures performed to understand this classification by the Company. We are of the view that the Firm should further strengthen the documentation in the audit file.

57. In another engagement file, one WP titled “Risk Assessment Summary” identified revenue as a significant risk and noted a risk factor “risk of revenue being recorded before control is transferred”. Audit procedures planned were “to evaluate the design and implementation of Company’s controls in respect of revenue recognition” and to “test the effectiveness of such controls over revenue cutoff at year-end”. In this regard, it was observed that the ET did not check whether the ‘Control Owners’ had reviewed the controls. Also, there was no evidence available to substantiate the sufficiency of the design of internal controls on cut­off, balance confirmation, and debtor collection.

58. The Audit Firm submitted the WPs on their testing of the review controls by the Control Owners of the Company. For controls pertaining to cut-off, balance confirmation and debtor’s collection, the Audit Firm in its response has listed certain procedures carried out by them and has also stated that the controls for cut-off procedures, balance confirmation, debtor collection, etc. are inbuilt into the Risk Control Matrix maintained by the Company. However, after going through the WPs submitted by the Audit Firm, we observe that the WPs submitted show the number of samples selected for testing and the samples attached therein. The Audit procedures claimed to be performed regarding the sufficiency of the design of controls are not documented in the Audit File.

59. In this regard, the Audit Firm is advised to strengthen its documentation fully in line with SA 230, read with SA 500.

C. Impairment of non-financial assets

60. In one of the engagement files, the ET noted that all the CGUs were profitable in FY23. Therefore, there were no impairment indicators. This was based on the future projections made by the management. In this regard, it was observed that the ET did not challenge the assumptions used by the management while calculating the budgeted EBITDA, PAT, cash flows etc. of the CGUs. Only the information provided by the entity (such as the Annual Business Plan for FY24) was available in the audit file.

61. The Audit Firm has submitted that the future projection was taken as additional comfort and required testing was carried out for broad consistency taking into account ‘as is’ business scenario of the company. It is further stated that “considering that no impairment testing was needed in this respect compliances with respect to SAs become irrelevant to the context”. We observe in this regard that impairment testing is not required when impairment indicators are absent. Profitable operations and future projections confirming the continuation of present operations alone do not evidence the absence of impairment indicators. There is inadequate documentation in the audit file to ensure the absence of impairment indicators, including evidence of the minimum indicators mandatorily to be considered by the Company as per Ind AS 36.

62. In the second engagement file, where the Company estimated an impairment loss, it was observed regarding impairment assessment by the Company that the ET did not obtain an understanding of the entity’s internal control, including an understanding of how management makes the accounting estimate on impairment, and an understanding of the data on which they are based, including the method, and where applicable, the model used in making the impairment estimate, relevant controls, the assumptions underlying the impairment estimates, etc. as required by para 8(c) and 9 of SA 540. Also, the ET did not challenge the assumptions used by management experts in arriving at Depreciated Replacement Cost (DRC).

63. The Audit Firm in its response submitted the audit procedure carried out by the ET and attached the WPs in this regard. However, the WPs attached do not provide evidence of the audit procedures claimed to have been carried out by the ET.

64. In the third engagement file, the ET noted that based on future cashflow projection (as provided by the client), the total value of the subsidiary was more than the total exposure of the Company and therefore, no impairment was required for Goodwill (on acquisition of the subsidiary). In this regard, we observe that the document relied upon by the ET was information provided by the entity (on the letterhead of the client’s subsidiary) and was based on assumptions like projected P&L items, WACC etc. An independent examination of this IPE was not included in the audit file.

PART D

Chronology of events

Sr. No.	Date	Event/Correspondence
1.	14.12.2023	Intimation of On-site Inspection from NFRA to the Audit Firm.
2.	23.02.2024	Pre-Inspection Meeting with Audit Firm held at NFRA office.
3.	19.03.2024 to 05.04.2024	On-Site Inspection
4.	25.04.2024	Questionnaire issued by NFRA to Audit Firm
5.	08.05.2024	Extension sought by Firm for submission of replies
6.	04.06.2024	Communication of Inspection Team’s Observation (1st Set) to Firm
7.	11.06.2024	Response to Questionnaire received from Audit Firm
8.	24.06.2024	Communication of Inspection Team’s Observations (2nd Set) to Firm
9.	02.07.2024	Response received from the Audit Firm on first set of observations
10.	16.07.2024	Response received from the Audit Firm on the second set of observations
11.	29.10.2024	Communication of Inspection Report from NFRA to the Audit Firm.
12.	01.12.2024	Detailed replies to Inspection Report by the Audit Firm
14.	11.12.2024	Reply to the Final Inspection report by Audit Firm
15.	19.12.2024	Publication of Inspection Report on the website of NFRA as per Rule 8 of NFRA Rules 2018.

Appendix A The Firm’s response to this inspection report

Pursuant to Section 132(2) of the Companies Act, 2013 and Rule 8 of NFRA Rules, 2018, the Authority is publishing its findings relating to non-compliance with SAs and the sufficiency of the Audit Firm’s quality control system. As part of this process, the Audit Firm provided a written response to the Final Inspection Report, which is attached hereto. NFRA, based on the request of the Audit Firm has excluded the information from this report which was considered proprietary.

LODHA
&CO LLP
Chartered Accountants

14 Government Place East, Kolkata 700 069, India
Telephone : 033-2248-11 II/1507/40400000
Telefax : 033-2248-6960
Email : calgrlodhaco.com

 

December 11, 2024

The Secretary,
National Financial Reporting Authority,
Hindusthan Times (7th floor),
18-20 Kasturba Marg,
New Delhi 110 001.

Respected Madam,

Sub: Response to the inspection Report  2024 of Lodha & Co LLP, Chartered Accountant

Lodha & Co LLP [the “Firm”] acknowledges the receipt of Inspection Report 2024 of the Firm [‘the Inspection Report’].

We have evaluated the Observations stated in Part B and C of the Inspection Report and summary of.these Observations as summarized and incorporated under Executive Summary and our print ready replies are enclosed herewith in Appendix-A.

We acknowledge that our response given in the said Appendix along with this letter will be published along with the Inspection Report.

The Firm recognizes the responsibilities and duties entrusted upon National Financial Reporting Authority (‘NFRA’) u/s 132(2) of the Companies Act, 2013 and underlying objectives of ensuring and uplifting the quality standards of audit in general as well as of the Firm involved in carrying out the audit and processes and controls being applied by them in this respect.

We appreciate NFRA’s inspection process and objective behind the same and their suggestions and recommendations provided in the inspection report more particularly the need of documentation, formalization, recording and presentability at every stage of assurance work. NFRA’s inspection has provided us the glimpse of insight of the regulatory expectations and opportunity to identify further qualitative improvements that can be made with respect to our system and procedures.

We, as a Firm are committed to take necessary actions wherever required to ensure that our procedures and policies as followed by us are suitably augmented for further visibility apart from continuing to remain compliant to the applicable standards and requirements.

It has been our endeavor to execute the audits following best practices and standards and look forward to continuing to improve upon our systems, procedures and fostering to develop our people in terms of their knowledge and skill so that the responsibilities entrusted and trust bestowed upon us by the clients, stakeholders, regulatory authorities and public at large are given due prominence and recognition in our approach and practice.

We in terms of our professional obligation towards discharging our responsibilities following highest quality standards considering overall growth of the economy, will constructively engage with NFRA for their valuable guidance and support for further augmenting our approach towards audit especially when we are in the process of transforming towards digitizing our auditing practices and strengthening our system and procedures akin to technological advancement being currently underway and to be followed in the time ahead.

Thanking you,
Yours faithfully,

For LODHA & CO LLP
Chartered Accountants
Firm’s ICAI Registration No. 301051E/E300284

APPENDIX-A

INDEPENDENCE

Independence as a matter of Firm’s philosophy has been given topmost prominence and priority in our entire process and approach of auditing. As observed during the course of inspection also, we do not provide any prohibited non-audit services to any of our Assurance clients in adherence to the Ethical Rules and Regulations and Provisions of Section 144 of the Companies Act 2013.

While we ensure compliance of independence norms, we have noted the suggestions of NFRA regarding certain remedial actions required to be taken on our part as follows:

• Standardization across all offices with respect to check lists and formats used for Independence Declarations and monitoring thereof will be ensured and term `Relative’ as defined under Section 2(77) of the Companies Act, 2013 will be used in all such documents and will be so defined for clarity and uniformity across all offices.
• Actions against the violation of Independence requirements including those in the form of sanctions and penalties for deliberate violations by the Engagement Team and requirement for maintaining history of such violations will be incorporated as part of SOP forming part of the Firm’s Policies and Procedures (`PNP’).

AUDIT DOCUMENTATION

• Our assurance engagement team is committed to compliance with respect to the requirements of Standards of Auditing including SA 230 on audit documentation and our PNP have accordingly been formulated. This includes identification of Preparer and Reviewer of working papers and relevant dates of working papers and completion thereof being signed by respective Partner-in-Charge. We are committed to take remedial actions as stated hereunder so that the deficiencies, changes, modification as stated in the Inspection Report are addressed to strengthen the overall documentation to remain in compliant with respect to the requirements of SA 230 and SQC-1.
• System of indexing, linking of documents and cross-referencing thereof, even though followed will be further strengthened so that these are comprehensive and complete in terms of the requirements of the standard.
• Documents once archived are stored in a secured location and are accessed by authorized personnel based on the approval of the Partner-in-Charge. Alterations, additions to the archived documents primarily as a result of Internal/ External Inspection will invariably be cross-referenced with authentication on all the relevant documents. Preferably, a separate sheet with necessary cross-referencing with related WP in the Audit File will be maintained.
• Distinctive identification of documents for engagement quality concurrent review (EQCR) and annual inspection will be ensured and two separate check lists instead of one combined checklist as followed currently, will be introduced as part of Firm’s PNP.
• We have noted observations made with respect to the documentation of firm being maintained in physicalform. Data, details obtained during the course of engagement performance and the extract of the relevant documents used for the procedure being applied in soft copies are printed and kept with necessary cross-referencing in hard copy for further reference. These along with other records and evidences in physical form are indexed, cross referred and kept as part of overall documentation to be considered as audit evidence or file in terms of SA 230 and SA 500.

The documentation maintained in physical form even though in compliance with SA 230, SA 500 and SQC 1, in order to be so has resulted in voluminous record keeping in physical form considering the requirement for cross referencing and documenting the processes and procedures being followed for carrying out the audit. Accordingly, as suggested by the Inspection Team, in order to be in a better position, the Firm is committed for further digitisation of audit records and move towards hybrid system of record keeping instead of in physical or manual form of record keeping being maintained currently. This will bring in more efficiency in the entire system given the volume of operations and paper work currently being maintained by the Firm.

We reiterate our commitment for maintaining robust and distinctive documentation.

CONSULTATION

• The Firm has a procedure of consultation as outlined in SA230 and the Firm’s PNP formulated for the purpose. With regard to the Observations for updating the list of internal experts on continuing basis we will like to mention that this is a dynamic process necessitating changes depending on the skills, knowledge and experience and the requirements for the related consultation. The list of such persons provided in SOP for reference, is not an exhaustive list on the matter. This however, as suggested will be updated periodically.

MONITORING & QUALITY CONTROL REVIEW

• The procedure as mentioned under EQCR requirements are forming part of PNP and in certain cases are followed as a matter of practice which will be fully documented or formulated as suggested by the Inspection Team.
• The Firm uses check list to document the review process which includes evaluation, judgment, review of documentation and discussions with the engagement Partners and sign off by the Partner responsible for the same. The person responsible for EQCR is not a member of the Engagement Team and this is followed strictly across all offices.
• We understand the requirement for robust documentation to exhibit vis-à-vis EQCR involvement in the audit engagement including discussion and conclusion in compliance with SA 220. EQCR procedure so far as it relates to formalizing communication, feedback mechanism, documentation of EQCR, standardised check lists to be followed across all offices will be strengthened to ensure continued compliance and enhance audit quality visibility. System of elaborate recording by way of minutes of discussions, maintaining supporting evidences with necessary cross-referencing for review being carried out and required sign off on all the relevant pages, instead of being at the end of the check list will be strengthened.
• Disciplinary actions in the form of sanctions, punishment including penalties for non-compliances will be specified in the SOP forming part of Firm’s PNP.
• Formal communication, feedback format, systems of procedure in respect of training imparted by the Firm will be incorporated as a part of SOP.

Individual Audit Engagement Files:

• With respect to observations concerning individual audit engagements dealing with adequacy of management’s control for identifying related parties, ICFR in Revenue and Impairment of Non-Financial Assets necessary evidences in support of the audit procedures being followed by us have been documented. However, as suggested linking the evidences will further be ensured to further strengthen the overall documentation and easy availability of evidences to the effect.
• While we acknowledge the observations made on specific audit engagements and recognize the potential for improving our documentation, we can assure you that the underlying audits were conducted in accordance with relevant auditing standards.

We have obtained necessary evidences supporting our audit procedures. Considering the valuable suggestions received, the firm is committed to enhancing its audit quality by further identifying the linkages with respect to the audit evidences and procedures being carried out to strengthen overall documentation.