India's audit standard loophole that has professionals in a fix

livemint.com:

New Delhi: An innocuous piece of India's audit rules has come under scrutiny, after several alleged audit lapses that paved the road to spectacular business bust-ups were traced back to it. However, fixing it could be tricky, audit industry executives said. When a company raises money from the public and transfers it to a subsidiary, and further to the company's promoters, the diversion may go unnoticed in audits.

This is because a specific standard in India's accounting rules allows the parent company's auditor to rely on subsidiary’s auditor’s work without being held responsible for it, said an expert in auditing, calling it a departure from international norms. At the heart of the matter is ICAI’s Standard on Audit--SA 600, which is similar to International Accounting Standard Board’s (IASB) ISA 600, dealing with the framework for auditors to use the work of other auditors. This applies to auditing the books of parents and subsidiaries or branches.

This was central theme in some of the alleged audit lapses investigated by the regulator National Financial Reporting Authority (NFRA). This, and the way an audit standard is worded, calls for a review as these are crucial in checking instances of fund diversion, the person cited above said on the condition of anonymity. Audit regulator NFRA and accounting and auditing rule maker, The Institute of Chartered Accountants of India (ICAI) are looking into this matter, two other persons with knowledge of the development said, adding consultations also involve other financial sector regulators.