How is an audit conducted under Ind AS standards? A Guide for Indian Businesses

In India’s rapidly globalizing economy, robust and transparent financial reporting is no longer just a good practice—it’s a necessity. For growing businesses, compliance with advanced accounting standards is not merely about ticking a legal box; it is a fundamental hallmark of credibility that builds trust with investors, lenders, and stakeholders worldwide. At the heart of this new framework are the Indian Accounting Standards (Ind AS). Understanding how an audit conducted under Ind AS standards is performed is crucial for any company that falls under its purview, as it represents a significant shift from traditional accounting and auditing practices. This guide will demystify the entire process, breaking down the steps and responsibilities to help you navigate your compliance obligations with confidence.

First, What Exactly Are Ind AS Standards for Audits?

Before diving into the audit process itself, it’s essential to understand the framework that governs it. Ind AS has fundamentally reshaped financial reporting in India, bringing it in line with global best practices. For auditors and businesses alike, this means adapting to a more complex, judgment-based system that demands a higher level of scrutiny and disclosure. This new landscape requires a deeper understanding not just of the rules, but of the principles behind them.

Demystifying Ind AS (Indian Accounting Standards)

Indian Accounting Standards, or Ind AS, are a set of accounting standards that have been converged with the International Financial Reporting Standards (IFRS). Their primary objective is to ensure that the financial statements of Indian companies are consistent, transparent, and easily comparable on a global scale. This harmonization makes it simpler for international investors and stakeholders to understand and evaluate the financial health of Indian businesses, thereby boosting foreign investment and confidence. The introduction of these Ind AS standards for audits has significantly elevated the quality and depth of financial reporting, moving away from a purely rule-based system to one that emphasizes substance over form and relies heavily on professional judgment. This shift requires both management and auditors to think more critically about how economic events are recorded and presented.

Which Companies Are Required to Follow Ind AS in India?

The Ministry of Corporate Affairs (MCA) has implemented Ind AS in a phased manner. It is mandatory for certain classes of companies, while others have the option to adopt them voluntarily. Understanding whether your company falls under this mandate is the first step toward compliance.

The mandatory applicability criteria are as follows:

• Phase I (From April 1, 2016): All companies, whether listed or unlisted, with a net worth of ₹500 crore or more. This also includes their holding, subsidiary, joint venture, and associate companies.
• Phase II (From April 1, 2017): All listed companies not covered in Phase I, and unlisted companies with a net worth between ₹250 crore and ₹500 crore. This again extends to their holding, subsidiary, joint venture, and associate companies.
• Voluntary Adoption: Companies not covered by the mandatory roadmap have the option to voluntarily adopt Ind AS. However, once a company chooses to adopt Ind AS, it cannot revert to the old accounting standards.

Actionable Tip: As a business owner, you should regularly assess your company’s net worth and listing status at the end of each financial year to determine if you meet the criteria for mandatory Ind AS adoption. For the most current and detailed regulations, it’s always best to refer to official notifications. You can find more information on the Ministry of Corporate Affairs (MCA) website.

The Core Process: How an Audit is Conducted Under Ind AS Standards

While the foundational principles of auditing—such as professional skepticism, independence, and evidence-gathering—remain constant, an Ind AS audit involves specific procedures and a far deeper level of scrutiny due to the complexity of the standards. The process is less about checking off items on a list and more about evaluating complex estimates and judgments made by management. This section breaks down the step-by-step process of how an audit conducted under Ind AS standards is executed, from initial planning to the final report.

Step 1: Planning and Risk Assessment

This initial phase is arguably the most critical, as it sets the foundation for the entire audit engagement. A well-structured plan ensures that audit efforts are concentrated on the areas with the highest risk of material misstatement. The auditor begins by gaining a comprehensive understanding of the client’s business, its industry, the economic environment it operates in, and, most importantly, the specific Ind AS that apply to its transactions and balances. A significant part of this stage involves identifying high-risk areas unique to the Ind AS framework. These often include fair value measurements (Ind AS 113), which require significant estimation; revenue recognition from contracts with customers (Ind AS 115), which has complex five-step model requirements; and the impairment of assets (Ind AS 36), which involves forecasting future cash flows. Based on this thorough risk assessment, the auditor develops a detailed audit strategy and plan, outlining the nature, timing, and extent of the audit procedures. A key part of understanding audits under Ind AS guidelines is recognizing this initial risk-based approach, which ensures efficiency and effectiveness.

Step 2: Fieldwork and Substantive Testing

This is the execution phase where the audit plan is put into action and auditors gather the necessary evidence to support their opinion. The team performs a combination of tests of controls and substantive procedures. Under Ind AS, this involves a meticulous examination of complex and judgment-heavy areas. For instance, when testing Financial Instruments (Ind AS 109), auditors must verify not only the existence of the instruments but also their correct classification (e.g., Amortised Cost, FVTPL, FVTOCI) and the appropriateness of the valuation models used for their measurement. Similarly, for Leases (Ind AS 116), auditors must check that management has correctly identified all lease contracts and has accurately calculated the corresponding right-of-use assets and lease liabilities to be recognized on the balance sheet—a significant departure from previous standards. For companies with subsidiaries, verifying the proper application of Consolidation principles (Ind AS 110) is paramount. This practical phase of how audit is done under Ind AS in India requires auditors with specialized knowledge to challenge management’s assumptions and ensure the evidence obtained is both sufficient and appropriate.

Step 3: Finalisation, Review, and Reporting

In the final stage, the audit team aggregates and evaluates all the evidence gathered during fieldwork. The lead auditor assesses any identified misstatements, both individually and in aggregate, to determine their impact on the financial statements as a whole. This phase involves extensive communication with the company’s management and those charged with governance (like the Audit Committee) to discuss significant findings, internal control deficiencies, and any uncorrected misstatements. Understanding the Primary Purpose of Internal Audit in the Modern Organization can provide context on how these deficiencies are identified. Based on the evaluation, the auditor forms an opinion on whether the financial statements present a “true and fair view” and are prepared, in all material respects, in accordance with the applicable Ind AS framework. This opinion is then articulated in the final audit report, which is prepared as per the stringent Standards on Auditing (SAs) issued by the ICAI. The report itself contains enhanced disclosures and a more detailed explanation of the auditor’s responsibilities, making this final step critical when conducting audits as per Ind AS regulations. For more details on these auditing standards, you can visit the Institute of Chartered Accountants of India (ICAI) website.

Key Differences: Ind AS Audit vs. Traditional Audit

The transition from the previous Indian Generally Accepted Accounting Principles (IGAAP) to Ind AS has introduced significant changes, making the audit process more challenging and comprehensive. It’s not just a change in accounting rules but a fundamental shift in philosophy that directly impacts how an audit is approached and executed.

Emphasis on Fair Value Over Historical Cost

One of the most profound changes introduced by Ind AS is the extensive use of fair value accounting. While traditional audits primarily focused on verifying transactions based on their historical cost, Ind AS requires many assets and liabilities (like financial instruments, investment properties, and assets acquired in a business combination) to be measured at their current market or fair value. This introduces a high degree of subjectivity and estimation. The auditor’s role evolves from simply vouching for an invoice to critically evaluating and challenging the valuation models, key assumptions (like discount rates and growth forecasts), and data sources used by management to arrive at these fair values. This requires specialized skills and a deep understanding of valuation techniques.

Principle-Based vs. Rule-Based Approach

Traditional Indian GAAP was largely rule-based, providing specific guidance for most transactions. Auditors could often rely on a checklist approach to ensure compliance. In contrast, Ind AS is principle-based, much like IFRS. It provides a broad framework and requires management to use professional judgment to apply the underlying principles to specific transactions and economic realities. For an auditor, this means they can no longer just confirm if a rule was followed. Instead, they must assess whether the accounting treatment adopted by the company truly reflects the economic substance of the transaction, which is a far more complex and demanding task.

Extensive Disclosure Requirements

Ind AS mandates a significantly higher level of disclosure in the notes to the financial statements compared to the old standards. These disclosures are meant to provide users with a deeper understanding of the company’s financial position, performance, and the judgments and estimates made by management. The auditor’s responsibility extends to meticulously verifying that these disclosures are not only accurate but also complete and compliant with the requirements of each specific Ind AS, as outlined in the rules for a company’s Section 129 – Financial Statement. This includes disclosures about financial instrument risks, lease arrangements, revenue recognition policies, and fair value hierarchies, adding another layer of complexity and time to the audit process.

Conclusion

Navigating the landscape of Indian Accounting Standards is a complex but essential task for modern Indian businesses. An Ind AS audit is a rigorous, multi-faceted process that goes far beyond simple number-checking. It involves three core phases: meticulous Planning and Risk Assessment focused on high-judgment areas; detailed Fieldwork and Testing of complex standards like fair value and revenue recognition; and careful Finalisation and Reporting to provide a true and fair view. The entire process is judgment-intensive, with a strong emphasis on substance over form and extensive disclosures.

Ultimately, a properly conducted audit under Ind AS standards is more than a compliance burden; it is a powerful tool for enhancing transparency, building investor confidence, and ensuring your business is ready for the global stage. It validates the integrity of your financial information and demonstrates a commitment to the highest standards of corporate governance.

Feeling overwhelmed by Ind AS compliance? The complexities of an Ind AS audit require expert handling.

Contact TaxRobo’s team of seasoned auditors today for a consultation. We ensure your financial reporting is compliant, accurate, and robust. Let us handle the complexities so you can focus on your business.

Your Questions on Ind AS Audits, Answered

1. Does my small private limited company need an Ind AS audit?

Not necessarily. Ind AS is mandatory only if your company meets the prescribed net worth or listing criteria. The vast majority of small and medium-sized private companies in India are not required to adopt Ind AS and continue to follow the Accounting Standards (AS) notified under the Companies (Accounting Standards) Rules, 2006. However, any company can choose to adopt Ind AS voluntarily if they wish to align with global standards, but remember, this decision is irreversible.

2. What is the biggest challenge when conducting audits as per Ind AS regulations?

The biggest challenge is often the high degree of management judgment and estimation involved in applying the standards. Areas such as the fair valuation of financial instruments, impairment testing of goodwill and other assets, and accounting for complex business combinations are not based on simple, verifiable figures. They rely on forecasts and assumptions about the future. Auditors must spend a significant amount of time and resources to rigorously evaluate the reasonableness of these estimates, which can be a source of intense discussion and debate with management.

3. How can I prepare my business for a smooth Ind AS audit?

Proactive preparation can make the audit process significantly smoother. Key steps include:

• Maintain meticulous documentation for all significant transactions, especially those involving complex judgments or estimates. Proper Maintenance of Books of Accounts: Section 128 Explained is the first step.
• Engage professional valuers for assets that require fair value measurement well in advance of the audit.
• Invest in training your accounting team on the nuances of the Ind AS applicable to your business.
• Perform an Ind AS impact assessment beforehand to identify key areas of change.
• Consult with an expert firm like TaxRobo early in the process to get guidance and resolve complex accounting issues before they become audit findings.

4. Is an Ind AS audit more expensive than a regular audit?

Generally, yes. The increased complexity, expanded scope, and the need for auditors with specialized skills in areas like valuation and financial instruments all contribute to a more intensive audit effort. The higher risk associated with how audit is done under Ind AS in India means auditors must perform more extensive procedures. This typically results in more time being spent on the engagement, which in turn leads to higher audit fees compared to an audit conducted under the previous Indian GAAP.