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2022 (6) TMI 1417 - NFRA - Companies LawProfessional Misconduct - Compliance with SAs and Maintenance of Audit Quality - Promotion of Public and Investor confidence and Effectiveness in Deterring Auditors and Audit Firms from violating the applicable Accounting and Auditing Standards - sanctions and penalties. Compliance with SAs and Maintenance of Audit Quality - HELD THAT - CA Gulshan Jham is a qualified professional but the serious non-compliances of the Companies Act and Standards on Auditing on his part have been not what was expected from him as the Auditor. The primary function of the Auditor is to achieve the necessary audit quality and compliance with SAs. The charges proved have shown the failure of the CA to discharge this duty. A critical, questioning attitude, an unwillingness to be satisfied by merely superficial explanations, not concluding on material matters without rigorous verification from more than one angle, diligent and methodical cross verification, proper planning and the meticulous execution of the audit plan etc are fundamental to audit quality. The audit of this listed Company has been done by the CA most casually with no regard to the law, and professional and ethical standards. The CA has failed in his duties as the auditor. Promotion of Public and Investor confidence and Effectiveness in Deterring Auditors and Audit Firms from violating the applicable Accounting and Auditing Standards - HELD THAT - Audited financial statements are the basic inputs for innumerable transactions in the economy. A breakdown, or severe damage, to the trust and confidence that the public and investors have in financial statements, would have ramifications that go far beyond the limited activities of an auditee company. As professionals, auditors are expected to judge the significance of the operations of the entity they audit for the larger financial and economic sectors and accordingly calibrate their approach and procedures. The auditor's duty of exercising due diligence is owed to the users of the financial statements - Where the auditors have shown to be not diligent in considering these factors, appropriate penalties would follow that should be effective, proportionate and dissuasive. It is also essential that the penalty imposed has a suitable deterrent effect on other auditors and, at the same time, sends out a message to the Public and the Investor Community that such misconduct will not be allowed to escape lightly. Nature and size of the Audit Firm - HELD THAT - The CA in this case is a very small proprietorship firm not having any other listed company audit. Based on the principle of proportionality, the sanctions are being made keeping in mind the nature and size of the audit firm and the fact that he has accepted all the charges. Penalties and Sanctions - HELD THAT - Considering the fact that professional misconduct has been proved and considering the nature of violations and principles of proportionality, the NFRA, in the exercise of its powers under Section 132(4)(c) of the Companies Act, 2013 orders (i) Imposition of a monetary penalty of Rs. 100,000 (One Lakh only) upon CA Gulshan Jagdish Jham. (ii) In addition, CA Gulshan Jadish Jham is debarred for one year from being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.
Issues Involved:
1. Failure to disclose material facts in financial statements. 2. Failure to report material misstatements. 3. Lack of due diligence and gross negligence. 4. Insufficient information for expression of an opinion. 5. Failure to highlight departures from generally accepted audit procedures. 6. Non-compliance with Standards on Auditing (SA). Issue-wise Detailed Analysis: 1. Failure to Disclose Material Facts: The CA was charged with not disclosing material facts necessary for the financial statements of Prabhu Steel Industries Limited (PSIL) for the financial year 2019-20. The NFRA found that the CA failed to report significant non-compliances by PSIL, including the lack of impairment loss provision on debtors, loans, and advances, which constituted 53.5% of total assets. This omission led to inflated profits, misleading investors and the public. The CA admitted to these charges and did not deny the allegations. 2. Failure to Report Material Misstatements: The CA did not report material misstatements in the financial statements, such as the absence of a Statement of Changes in Equity and the failure to prepare consolidated financial statements despite having an associate company. These omissions rendered the financial statements unreliable. The CA's audit report falsely claimed compliance with the Companies Act and Indian Accounting Standards (Ind AS), which was disproved by the NFRA's findings. 3. Lack of Due Diligence and Gross Negligence: The CA was found grossly negligent and lacking due diligence in his professional duties. The NFRA's review revealed that the audit was conducted without adherence to the Standards on Auditing (SA). The CA failed to verify critical aspects such as impairment losses, changes in equity, and compliance with Ind AS. His audit report falsely stated that the financial statements were prepared in accordance with the applicable framework, which was not the case. 4. Insufficient Information for Expression of an Opinion: The CA did not obtain sufficient information necessary for expressing a valid opinion on the financial statements. The audit documentation lacked details on significant matters, discussions with management, and compliance with auditing standards. The CA's failure to gather adequate audit evidence and his subsequent issuance of an unmodified opinion constituted professional misconduct. 5. Failure to Highlight Departures from Generally Accepted Audit Procedures: The CA did not invite attention to material departures from generally accepted audit procedures. He falsely reported that the audit was conducted in accordance with the Standards on Auditing, despite significant non-compliances. The NFRA found that the CA's audit file did not contain evidence supporting the audit report's claims, indicating gross negligence and false reporting. 6. Non-compliance with Standards on Auditing (SA): The NFRA identified multiple violations of the Standards on Auditing (SA) by the CA, including: - SA 230 (Audit Documentation): The audit documentation was insufficient and did not provide a clear understanding of the audit procedures performed. - SA 220 (Quality Control for an Audit): No engagement quality control review (EQCR) was conducted, as required for audits of listed entities. - SA 260 (Communication with Those Charged with Governance): There was no evidence of communication with those charged with governance (TCWG). - SA 300 (Planning an Audit): The audit file lacked an overall audit strategy and plan. - SA 315 (Risk Assessment): No risk assessment procedures were documented. - SA 320 (Materiality): The audit file did not determine materiality levels. - SA 330 (Responses to Assessed Risks): No responses to assessed risks were documented. - SA 450 (Evaluation of Misstatements): No documentation of identified misstatements. - SA 500 (Audit Evidence): Inadequate audit procedures to obtain sufficient appropriate audit evidence. - SA 505 (External Confirmations): Lack of control over external confirmation requests. - SA 520 (Analytical Procedures): No evidence of analytical procedures performed. - SA 530 (Audit Sampling): No basis for sample selection documented. - SA 550 (Related Parties): No audit procedures for related parties. - SA 580 (Written Representations): No written representations from management. - SA 705 (Modifications to the Opinion): The CA issued an unmodified opinion despite material misstatements. Penalty: The NFRA imposed a monetary penalty of Rs. 100,000 on the CA and debarred him for one year from being appointed as an auditor or internal auditor for any company or body corporate. The order will become effective 30 days from the date of issuance. Conclusion: The NFRA concluded that the CA's actions amounted to professional misconduct, supported by evidence from the audit file, audit report, and the NFRA's Financial Reporting Quality Review Report (FRQRR). The CA's failure to comply with auditing standards and his false reporting led to significant penalties to maintain public and investor confidence and deter future violations.
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