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NEW DELHI : The National Financial Reporting Authority on Tuesday said companies will be chosen for audit quality and financial reporting quality review based on the impact the entity has on the economy.

After an extensive public consultation, NFRA said of the two criteria, ‘external impact risk’ will get higher weightage, as it identifies and measures the financial impact a firm could have on the Indian economy and the environment. The other key criterion is the risk of material misstatement, which may escape the attention of auditors, or could be overlooked by auditors.

External impact risk indicates how systemically important a business is and what is the impact it may have on the economy in case it fails. The risk of material misstatement reflects the level of governance standards, as well as the reputation and track record of the company’s auditors. Well-governed firms are unlikely to figure in this review considering that the “regulator’s time and resources are finite".

“While the predominant portion of the sample will be selected on objective criteria, based on a predefined selection algorithm, there will be flexibility adequate to take care of emerging events and circumstances, and also to build in an element of surprise," NFRA said.

The algorithm will also be designed to avoid possibilities of repeated selection of only a certain class of companies, while repeatedly missing out other classes of companies and auditors,it added.

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