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2023 (7) TMI 1245 - NFRA - Companies LawProfessional Misconduct - Lapses pertaining to Related Party Transactions - Conversion of Loan into Capital Advance to Merino Shelters Pvt. Ltd. (MSPL) - Failure to report full particulars of loan to a Related Party - Failure to report non-disclosure of Related Party Loans on gross basis - Failure to report non-disclosure of material transactions - Issues related to Credit Risk Exposures (Trade Receivables) - errors in Presentation and Disclosures - Ageing Analysis of Trade Receivables - Inadequacy of disclosures regarding credit risk exposure of trade receivables required under Para 35M and 35N of Ind AS 107 - Failure to report non-consolidation of subsidiary - Failure to obtain Sufficient Appropriate Audit Evidence (SAAE) - Recognition and measurement of Expected Credit Loss Allowance - Audit of Internal Financial Control Over Financial Reporting(Clause (i) of sub- section 3 of Section 143 of the Companies Act, 2013 - Failure to plan the audit of Financial Statements - Failure to perform risk assesment procedures and response to such risks - Failure to design and implement auditors response to assessed risks - Failure to determine materiality - Failure to perform Analytical Procedures - Failure to prepare documentation regarding Auditor s responsibilities relating to fraud - Failure to Communicate with Those Charged with Governance (TCWG) . Findings on Articles of Charges of Professional Misconduct by the Auditors - HELD THAT - It is concluded that the Auditors have committed professional misconduct as defined in Section 132 (4) of the Companies Act, read with Section 22 the Chartered Accountants Act 1949 (the CA Act), as amended from time to time, as detailed below i. The Auditors committed professional misconduct of failure to disclose a material fact known to them which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where they are concerned with that financial statement in a professional capacity . ii. The Auditors committed professional misconduct of failure to report a material misstatement known to them to appear in a financial statement with which they are concerned in a professional capacity. iii. The Auditors committed professional misconduct by not exercising due diligence and being grossly negligent in the conduct of their professional duties. iv. The Auditors committed professional misconduct by failing to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion. v. The Auditors committed professional misconduct by failing to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances. Findings on Additional Articles of Charges of Professional Misconduct by the Audit Firm - HELD THAT - The Audit Firm has committed Professional Misconduct as defined in Section 132(4) of the Companies Act, read with Section 22 the Chartered Accountants Act 1949, as amended from time to time, as failure to exercise due diligence and being grossly negligent and by failing to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances, in the conduct of professional duties in respect of matters as explained in Section E above and thus violated SQC I. Penalty and Sanctions - HELD THAT - Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed, is evident from the fact that a minimum punishment is laid down by the law - Independent Auditors of Public Listed Companies serve a critical public function of enabling the users of Audited Financial Statements to take informed decisions. The Auditors in the present case were required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to Financial Statements to facilitate its users. As detailed in this Order, substantial deficiencies in the audit, abdication of responsibility and inappropriate conclusions on the part of CA Devang Dalal establish his professional misconduct. Despite being a qualified professional, CA Devang Dalal has not adhered to the Standards and has thus not discharged the duty cast upon him. On the contrary, he has tried to cover up by giving unsubstantiated and unconvincing replies to the SCN - The Firm, M/s. M H Dalal Associates has also failed to exercise appropriate control and monitoring of the work of the EP and the Engagement Team during the audit engagement and has abdicated its responsibility to ensure audit quality as per Professional Standards. Under the circumstances, we proceed to order the following sanctions keeping in mind the deterrence, proportionality, and the signalling value of sanctions. Considering the fact that professional misconducts have been proved and considering the nature of violations and principles of proportionality, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, order i. Imposition of a monetary penalty of Rs.10,00,000/- (Rupees Ten Lakhs) upon CA Devang Dalal who is also debarred for Five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of Financial Statements or internal audit of the functions and activities of any company or body corporate. ii. Imposition of a monetary penalty of Rs.50,00,000/- (Rupees Fifty Lakhs) upon M/s. M H Dalal Associates.
Issues Involved:
1. Major lapses in the audit. 2. Other lapses in the audit. 3. Lapses by the audit firm. 4. Findings on articles of charges of professional misconduct by the auditors. 5. Findings on additional articles of charges of professional misconduct by the audit firm. 6. Penalty and sanctions. Summary: Major Lapses in the Audit: 1. Related Party Transactions: The auditors failed to identify and report non-disclosure of outstanding capital advances to a related party, violating Ind AS 24 and SA 550. They also failed to report the non-disclosure of full particulars of loans to a related party, violating Section 186(4) of the Companies Act, 2013. 2. Credit Risk Exposures: The auditors did not question the accounting policies related to trade receivables and failed to report non-disclosure of the credit risk profile as required by Ind AS 107. They also did not obtain external confirmations of outstanding trade receivables as per SA 505. 3. Non-consolidation of Subsidiary: The auditors issued a qualified opinion on the financial statements without due diligence, failing to comply with Para 8 of SA 705. 4. Sufficient Appropriate Audit Evidence (SAAE): The auditors did not obtain SAAE for material account balances and transactions, violating SA 200. 5. Impairment Testing: The auditors failed to perform adequate audit procedures for impairment testing of investments, violating SA 540. 6. Inventory Audit: The auditors did not attend the physical count of inventory, violating SA 501. 7. Trade Payables and Revenue: The auditors failed to perform adequate audit procedures for trade payables and revenue, violating SA 330 and Ind AS 115. 8. Internal Control Over Financial Reporting (ICoFR): The auditors issued an unmodified opinion on ICoFR without performing the required audit procedures, violating SA 200 and the Guidance Note on Audit of ICoFR. 9. Audit Documentation: The auditors failed to prepare adequate audit documentation, violating SA 230. 10. Audit Planning: The auditors did not establish an overall audit strategy or document the audit plan, violating SA 300. 11. Risk Assessment: The auditors did not perform risk assessment procedures or document the identification and assessment of risks, violating SA 315 and SA 330. 12. Materiality: The auditors did not determine materiality for the financial statements, violating SA 320. Other Lapses in the Audit: 1. Analytical Procedures: The auditors failed to perform analytical procedures to assist in the overall conclusion of the audit, violating SA 520. 2. Fraud Responsibilities: The auditors did not document procedures to identify and assess the risk of material misstatement due to fraud, violating SA 240. 3. Communication with Those Charged with Governance (TCWG): The auditors failed to communicate with TCWG about audit responsibilities, scope, and deficiencies in internal control, violating SA 260 and SA 265. Lapses by the Audit Firm: 1. Quality Control: The audit firm failed to establish and maintain a system of quality control, violating SA 220 and SQC 1. The firm's quality control policy was inadequate and not supported by a procedure manual. Findings on Articles of Charges of Professional Misconduct by the Auditors: 1. Failure to Disclose Material Fact: The auditors failed to disclose a material fact known to them, violating Clause 5 of Part I of the Second Schedule of the CA Act. 2. Failure to Report Material Misstatement: The auditors failed to report a material misstatement known to them, violating Clause 6 of Part I of the Second Schedule of the CA Act. 3. Gross Negligence: The auditors were grossly negligent in their professional duties, violating Clause 7 of Part I of the Second Schedule of the CA Act. 4. Insufficient Information for Opinion: The auditors failed to obtain sufficient information necessary for expressing an opinion, violating Clause 8 of Part I of the Second Schedule of the CA Act. 5. Departure from Generally Accepted Audit Procedures: The auditors failed to invite attention to any material departure from generally accepted audit procedures, violating Clause 9 of Part I of the Second Schedule of the CA Act. Findings on Additional Articles of Charges of Professional Misconduct by the Audit Firm: 1. Professional Misconduct: The audit firm committed professional misconduct by failing to exercise due diligence, being grossly negligent, and failing to invite attention to material departures from generally accepted audit procedures, violating SQC 1. Penalty and Sanctions: 1. CA Devang Dalal: Imposition of a monetary penalty of Rs.10,00,000/- and debarment for five years from being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of any company or body corporate. 2. M/s. M H Dalal & Associates: Imposition of a monetary penalty of Rs.50,00,000/-. This order will become effective after 30 days from the date of its issue.
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