NFRA Scrutiny on M/s B D G & CO LLP: Comprehensive Analysis of SQC 1 Compliance and Audit Quality Deficiencies

The landscape of statutory auditing in India is undergoing a massive transformation, driven by the rigorous oversight of regulatory authorities. The National Financial Reporting Authority (NFRA) has been at the forefront of this shift, ensuring that audit firms strictly adhere to prescribed standards. In its recent Inspection Report No. 132.2-2024-08, published on March 27, 2026, the regulatory body outlined significant operational and documentation shortcomings discovered during the review of M/s B D G & CO LLP (Firm Registration No. 119739W/W100900).

Conducted under the statutory mandate provided by Section 132 of the Companies Act 2013, this inspection highlights critical gaps in firm-wide quality controls and engagement-specific procedures. The evaluation focused on the financial year ending 31.03.2024, dissecting the audit methodology applied to three distinct corporate entities: Company A, Company B, and Company C.

This comprehensive analysis breaks down the regulatory findings, exploring the nuances of independence declarations, expected credit loss assessments, and statutory reporting obligations, serving as a vital learning resource for audit professionals and corporate stakeholders.

1. Evaluation of Firm-Wide Quality Control Systems (SQC 1)

A robust System of Quality Control (SQC) is the bedrock of reliable auditing. The inspection revealed several structural deviations within the firm's internal policies, particularly concerning the alignment of documented procedures with the stringent requirements of SQC 1 and the Companies Act 2013.

1.1 Flaws in Independence Declarations

Maintaining absolute independence from the auditee is a non-negotiable prerequisite for statutory auditors. The regulatory review uncovered that the firm’s standard templates for obtaining annual and engagement-specific independence declarations from its team members were legally inadequate.

The declarations failed to encompass the broader corporate network of the assessee. While the templates confirmed independence from the immediate auditee, they glaringly omitted the holding company, subsidiaries, associates, and fellow subsidiaries, which is a direct violation of the independence framework established under Section 141 of the Companies Act 2013. Furthermore, the internal forms utilized the term "immediate family members" instead of the legally defined term "relatives" as mandated by Section 2(77) of the Companies Act 2013. The firm has since committed to overhauling these templates to mirror the exact statutory language.

1.2 Superficial Client Acceptance and Continuance Protocols

Before onboarding a new assessee or continuing an existing engagement, auditors must perform rigorous background checks and risk assessments. The inspection noted that while the firm utilized client acceptance checklists, these documents were often treated as mere administrative formalities. They lacked substantive explanatory notes, supporting evidence, and detailed narratives of the actual procedures executed to evaluate the integrity and risk profile of the client.

1.3 Gaps in Engagement Quality Control Review (EQCR) Policies

The framework governing the Engagement Quality Control Reviewer (EQCR) was found to be misaligned with professional standards. Specifically, the firm's internal policy did not explicitly mandate that an external or internal reviewer must hold active membership with the Institute of Chartered Accountants of India (ICAI), an omission that contradicts clause (d) of paragraph 6 of SQC 1. Additionally, the policy failed to establish clear, objective criteria for determining which non-listed engagements required an mandatory EQCR, falling short of the directives in paragraph 60 of SQC 1.