NFRA Sets Ambitious Inspection Target for FY26, Embraces AI for Audit Oversight
The National Financial Reporting Authority (NFRA) has announced plans to complete inspections of ten audit firms during the current financial year 2025-26, marking the highest number in its seven-year history. In his first media interview since assuming office last July, chairperson Nitin Gupta revealed that the regulator is simultaneously exploring the integration of artificial intelligence (AI) to strengthen its oversight capabilities over statutory audits.
AI Integration and Inspection Goals
Gupta described NFRA's approach to AI as taking "baby steps" in testing, with potential for larger-scale deployment in the future. "The idea is to expedite the overall workflow and make it more efficient," he explained. This technological advancement would enable the regulator to analyze a greater volume of financial statements more effectively, focusing on critical accounting policies, questionable transactions, and auditors' professionalism within India's rapidly evolving economy.
The planned inspection of ten audit firms represents a significant increase from the six firms inspected in FY25. Gupta, who previously served as chairperson of the Central Board of Direct Taxes (CBDT), emphasized that all efforts are directed toward improving the quality of statutory audits in the country.
Previous Inspections and Regulatory Focus
Earlier inspection cycles covered twelve prominent audit firms, including:
- Deloitte Haskins & Sells LLP
- Price Waterhouse Chartered Accountants LLP
- Lodha & Co.
- BSR & Co.
- SRBC & Co.
- Walker Chandiok & Co. LLP
Inspection reports for these firms were published between December 2023 and March 2025. It is important to note that these reports are not disciplinary orders and do not entail penalties. Instead, they serve as tools for monitoring compliance with auditing standards, evaluating audit quality, and providing suggestions for improvement.
NFRA's inspections concentrate on areas with inherent risks of material misstatement, such as:
- Related party transactions
- Impairment of non-financial assets
- Internal controls over revenue recognition
The regulator also assesses whether audit firms maintain appropriate structure and processes that ensure independence and compliance with the Companies Act and audit quality rules, while verifying proper maintenance of required audit documentation.
Expert Perspectives on AI-Driven Audit Oversight
Industry experts have welcomed NFRA's exploration of AI tools. Keshav Sehgal, partner at Ashok Maheshwary & Associates LLP, Chartered Accountants, highlighted several benefits of AI-driven oversight:
- Rapid extraction of financial data from diverse formats
- Deeper analysis of complex disclosures
- Automated validation of accounting standards and regulatory requirements
- Consistent identification of non-compliance and irregular patterns
- Better assessment of audit quality
- Proactive fraud detection capabilities
"Overall, AI-driven oversight supports stronger regulatory supervision, improved transparency, and greater confidence in India's audit framework," Sehgal stated. He specifically praised NFRA's recent collaboration with IndiaAI, an initiative of the Ministry of Electronics and Information Technology, to develop AI capabilities with private sector participation, calling it a "smart, proactive step toward modernizing audit oversight in India."
Capacity Building and New Standards Development
Gupta outlined that a significant portion of NFRA's regulatory work will focus on capacity building and advocacy. This approach aims to enhance the quality of auditors' professional services, potentially reducing the need for stringent enforcement actions, particularly concerning smaller audit practices.
The regulator plans to conduct a workshop in Kolkata during February to sensitize the professional auditing community about expected compliance levels. This follows three successful workshops held last year in Hyderabad, Indore, and Bangalore, which Gupta described as "widely received."
"All our efforts are conceived from the perspective of improving the quality of statutory audit," Gupta explained, emphasizing that capacity building forms an essential component of this mission.
Additionally, NFRA will develop more guidance tools for auditors and audit committees, particularly those led by independent directors, to facilitate effective communication on crucial audit aspects.
New Financial Reporting Format
In a significant development, NFRA approved a new reporting format under accounting standard Ind AS 118 during a meeting on December 22. This standard, which corresponds to International Financial Reporting Standard (IFRS) 18, deals with 'presentation and disclosure in financial statements' and introduces a revised format for financial statement presentation.
The new template requires businesses to categorize all income and expenses into three defined groups:
- Operating: Core business activities
- Investing: Returns or losses from investments
- Financing: Items such as interest paid or received
This standardized format aims to provide investors with clearer insights into profit drivers and expenditure patterns. The standard will now be forwarded to the Ministry of Corporate Affairs for formal notification, completing a process that began when the Institute of Chartered Accountants of India (ICAI) cleared it in August 2025 before submission to NFRA.
Queries sent to audit firms regarding these developments remained unanswered at the time of reporting, highlighting the ongoing dialogue between regulators and the auditing profession as India strengthens its financial reporting framework through technological innovation and enhanced oversight mechanisms.
