India’s audit regulator has called on statutory auditors to tighten scrutiny of uncorrected misstatements and strengthen communication with audit committees and boards, warning that seemingly insignificant accounting errors can materially distort financial statements when assessed collectively or in the appropriate context.
The National Financial Reporting Authority (NFRA), during a webinar on Standard on Auditing (SA) 450, said auditors should move beyond a mechanical assessment of numerical thresholds and apply professional judgement while evaluating identified misstatements before issuing audit opinions.
” We felt it appropriate to remind auditors of their critical role and responsibility in serving the public interest by lending credibility to companies’ financial reports,” NFRA Chairperson Nitin Gupta said while inaugurating the webinar.
Gupta said SA 450 governs one of the most critical stages of an audit by requiring auditors to evaluate all identified factual, judgemental and projected misstatements, assess their cumulative impact and determine whether the audit opinion requires modification or additional disclosures.
Governance communication under focus
Gupta also reiterated the importance of NFRA’s January 2026 circular on communication between statutory auditors and Those Charged With Governance, saying effective engagement with audit committees and boards is central to a robust financial reporting framework.
The circular requires auditors to communicate audit planning, materiality, significant judgements, fraud risks, internal control deficiencies and uncorrected misstatements on a timely basis. It was issued after NFRA observed recurring deficiencies during regulatory proceedings, including delayed communication and inadequate reporting of governance-related matters.
Auditors urged to assess cumulative impact
During the technical sessions, speakers said auditors should accumulate every identified misstatement except those considered clearly trivial and continuously reassess the audit strategy as new findings emerge instead of evaluating errors in isolation.
The discussions highlighted that misstatements are not limited to numerical inaccuracies but also include errors in classification, presentation and disclosures. Audit teams were advised to maintain a running summary of identified misstatements throughout the engagement and reassess reliance on internal controls where identified errors indicate weaknesses in the control environment.
The experts also emphasised that materiality should not be determined solely on quantitative thresholds. They noted that qualitative factors, including debt covenant breaches, management remuneration, key performance indicators and the potential impact on investor decision-making, could render even relatively small misstatements material.
The session further highlighted that classification errors should not be regarded as harmless merely because they do not affect reported profits. Incorrect classification of liabilities, cash flows or principal-versus-agent transactions constitutes accounting misstatements that require evaluation under SA 450.
Speakers also cautioned auditors against adopting a “same as last year” approach while evaluating accounting estimates in areas such as expected credit loss provisioning and inventory valuation, where changing economic conditions may warrant different assumptions. They further warned against excessive provisioning that could create “cookie jar reserves” capable of distorting future earnings.
Prior-year errors also require evaluation
The webinar also underscored that auditors should evaluate individual misstatements against both quantitative and qualitative materiality before considering their aggregate effect on the financial statements.
It highlighted that uncorrected misstatements from previous years should continue to be assessed where they affect the current year’s financial statements and that planning materiality should be reassessed using the final audited financial results before the audit opinion is issued.
The discussions further noted that where management declines to correct material misstatements, auditors should communicate the matter to Those Charged With Governance and consider whether a modification of the audit opinion under SA 705 (Revised) is warranted, depending on the facts and circumstances.
The webinar forms part of NFRA’s broader effort to strengthen audit quality through technical guidance, auditor advisories and stakeholder engagement. The regulator said it will conduct additional technical webinars during 2026-27 covering complex auditing and financial reporting issues.
