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2023 (7) TMI 1246 - NFRA - Companies LawProfessional Misconduct - failure to report non-compliance with accounting standards - Non-provision of Interest Costs on Borrowings from Bank and NBFCs - Non-provisioning for Trade Receivables- Unsecured, Considered Doubtful - Wrong Accounting of Deferred Tax Assets - Non-disclosure of Cost Formula for the Measurement of Inventories - Wrong amortization of Expenses - Non-compliance with the format of Financial Statements - Non-compliance with requirements of SA 230 regarding Audit Documentation - Non-compliance Regarding Agreement on Terms of Audit Engagements - Non-compliance Regarding Appointment of Engagement Quality Control Reviewer - Non-compliance Regarding Communication with TCWG. Non-provision of Interest Costs on Borrowings from Bank and NBFCs - HELD THAT - The charges relating to failure to report non-provision of Interest Costs pertaining to Borrowings from bank and NBFCs stand proven. The omission being material in nature, the EP should have taken them into consideration before issuing his opinion in accordance with SA 705 , which he failed to do. Non-provisioning for Trade Receivables- Unsecured, Considered Doubtful - HELD THAT - SA 200 requires the auditor to comply with all SAs relevant to the audit and mandates an understanding of the entire text of an SA, including its application and other explanatory material, to understand its objectives and to apply its requirements properly. Objective of SA 705 is to express clearly an appropriately modified opinion on the financial statements when the conditions for modifications are met - The opinion expressed in this case is ambiguous as the basis of qualification did not have a proper description and quantification of the financial effects of the misstatement or other explanations as required by Para 17 of SA 705. Hence, the audit opinion is not meeting the objective of SA 705. Such an opinion is misleading to the users of the financial statements as well. The charges regarding non-compliance with SA 705, therefore, stand proven. Wrong Accounting of Deferred Tax Assets - HELD THAT - It is noted that there is no documentation of evaluation of misstatement identified during the audit as required under SA 450. It is important to note that SA 450 requires the auditor to accumulate misstatements identified during the audit, determine whether overall audit strategy and audit plan needs revision, communicate all misstatements accumulated to the appropriate level of management, evaluate the effect of uncorrected misstatements after reassessing materiality in the context of entity's actual financial result and determine whether uncorrected misstatements are material individually or in the aggregate taking into account the financial statements as a whole and also communicate the same to TCWG. However, none of these steps were performed by the EP - In the absence of such an evaluation in the Audit File, there is no evidence of how the EP assured himself of reasonable assurance . Hence the arguments regarding DT A not being material and being 2% of total balance sheet are afterthoughts and the charges regarding non-reporting the wrong accounting of DTA stand proven. Non-disclosure of Cost Formula for the Measurement of Inventories - HELD THAT - The replies of the EP are not acceptable as disclosure of cost formula for inventory is a mandatory requirement under the AS 2 and the financial statements of the company do not indicate the same. Use of specific cost for measurement is also a type of cost formula and should have been included in the Accounting Policies of the company. Use of different formulae permitted under para 14-1 7 of AS 2 can have material impact on the carrying amount of inventories in the Balance Sheet cost of sales in the Profit or Loss. Therefore, disclosure of cost formula in the Financial Statements has relevance significance to the users - As a diligent auditor, it was necessary for him to take up with the TCWG/Management to ensure that there is proper disclosure of accounting policy. In the absence of such action taken by the EP or any work paper in the Audit File pointing to same, the charge regarding not reporting the non-disclosure of cost formula for valuation of inventories in the financial statements stands proven. Wrong amortization of Expenses - HELD THAT - EP has admitted his mistake and was of the view that these were presentation errors and not material and sought pardon for the same - In light of the auditor's acceptance of his errors, it is clear that the provisions of AS 26 and AS 22 have not been adhered to and the charge regarding non-reporting of the wrong amortization of expenses stands proven. Non-compliance with the format of Financial Statements - HELD THAT - Section 129(1) of the Act very clearly states that the financial statements shall be in the format as may be provided for different class or classes of companies in Schedule III. Therefore, any deviation from the prescribed format is a non-compliance with the statutory provisions and therefore the auditor's submission in this regard is unacceptable as it is auditors' responsibility to report such non-compliances with the prescribed format. Non-compliance with requirements of SA 230 regarding Audit Documentation - HELD THAT - As per para A21 of SA 230, Audit Documentation, the Audit File needs to be compiled within a period of 60 days from the date of signing of the Audit Report, not six months as mentioned by EP. This time period of sixty days is given in the Standards on Auditing taking into consideration the constraints faced by the chartered accountants. As the auditor has stated that the documents were scattered in various files and have been compiled only for the submission of Audit File to NFRA, it is evident that the Audit File had not been compiled by the Auditor even after 5 years of signing of Audit Report. The charges against the EP are, therefore, proved. Non-compliance Regarding Agreement on Terms of Audit Engagements - HELD THAT - The contention of the EP is not acceptable as in case of recurring audits, Para 12 of SA 220 requires an assessment from the auditor of whether circumstances require the terms of the audit engagement to be revised and whether there is a need to remind the entity of the existing terms. There is no document evidencing such an assessment and there is no such procedure documented in the Audit File. Moreover, there was no audit engagement letter (as prescribed by SA 210) in the Audit File. Hence the charges against EP stand proven. Non-compliance Regarding Appointment of Engagement Quality Control Reviewer - HELD THAT - The EP was charged for not complying with para 19(a) of SA 220 and para 60 of SQC-1 as there was no evidence that he had determined that Engagement Quality Control Reviewer (EQCR, hereafter) had been appointed, which is required for audits of listed entities - there are no other persons accountable for this assignment. Therefore, there was no requirement for the appointment of any other person on quality control. Non-compliance Regarding Communication with TCWG - HELD THAT - The EP was charged for not complying with para 7, 10, 11, 12, 13 19 of SA 260 SA 265 as he did not determine TCWG and did not communicate with TCWG about the responsibilities of auditor, overview of planned scope and timing of the audit etc. and did not make required documentations. The Audit File did not have any documentation regarding communication with TCWG - The mistakes made in the audit were unintended and happened due to lack of knowledge of accounting standards and standards on auditing. He further added that he was a budding Chartered Accountant and had only four years of experience at the time of this audit. It was his first audit of a listed company and that he is not doing audits of any listed companies anymore. In addition, the EP showed his inclination for further studying the Accounting Standards and Standards on Auditing and the Act and submitted that the sanctions be imposed lightly lest they adversely impact his career. 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 the Companies Act views cases of professional misconduct is evident from the fact that a minimum punishment is laid down by the law. Considering the proven professional misconduct by CA Sachin Kansal, acceptance of mistakes by him, the nature of violations, size of the audit firm, and applying the principles of proportionality, following sanctions under Section 132( 4 )( c) of the Companies Act, 2013 have been ordered (i) Imposition of a monetary penalty of Rs 1,00,000 (Rupees One Lakh) upon CA Sachin Kansal. (ii) CA Sachin Kansal 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 Report Non-compliance with Accounting Standards 2. Non-compliances with Standards of Auditing 3. Articles of Charges of Professional Misconduct 4. Penalty & Sanctions Summary: 1. Failure to Report Non-compliance with Accounting Standards: - Non-provision of Interest Costs on Borrowings from Bank and NBFCs: The EP failed to report that the company did not recognize accrued interest of Rs.143.98 lakhs on loans, violating Section 128 and Section 129 of the Act and AS 1. This resulted in a material misstatement in the financial statements. The EP's justification, based on management's judgment and subsequent settlement with the bank, was not supported by evidence in the Audit File. - Non-provisioning for Trade Receivables: The company did not make provision for 'Trade Receivables- Unsecured, Considered Doubtful' of Rs.709 lakhs, constituting 22% of total assets. The EP admitted to an unintended mistake in the audit report, which did not meet the objective of SA 705. - Wrong Accounting of Deferred Tax Assets: The company recognized Deferred Tax Assets of Rs.9.07 lakhs despite continuous losses, violating AS 22. The EP admitted oversight but argued the impact was minimal. However, the recognition was erroneous and misleading. - Non-disclosure of Cost Formula for the Measurement of Inventories: The EP failed to report the non-disclosure of the cost formula for inventory measurement, violating Para 26(a) of AS 2. The EP's justification was not acceptable as disclosure is mandatory. - Wrong Amortization of Expenses: The EP admitted to non-reporting violations of AS 26 regarding amortization of expenses, including Preliminary and Listing Expenses, which do not meet the definition of non-current assets. 2. Non-compliances with Standards of Auditing: - Non-compliance with SA 230 regarding Audit Documentation: The EP did not prepare sufficient audit documentation, violating Para 8 and 9 of SA 230. The Audit File was not assembled within 60 days, as required by SA 230. - Non-compliance Regarding Agreement on Terms of Audit Engagements: The EP did not comply with SA 210 as the Audit File lacked the agreement on terms of audit engagements. - Non-compliance Regarding Appointment of Engagement Quality Control Reviewer: The EP did not appoint an Engagement Quality Control Reviewer for the audit of the listed entity, violating SA 220 and SQC-1. - Non-compliance Regarding Communication with TCWG: The EP did not document communication with Those Charged with Governance (TCWG), violating SA 260 and SA 265. 3. Articles of Charges of Professional Misconduct: The EP was found guilty of professional misconduct under Section 132(4) of the Companies Act, 2013, and the Chartered Accountants Act, 1949, for: - Failing to disclose material facts and report material misstatements. - Failing to exercise due diligence and being grossly negligent. - Failing to obtain sufficient information for expressing an opinion. - Failing to invite attention to material departures from generally accepted audit procedures. 4. Penalty & Sanctions: - A monetary penalty of Rs 1,00,000 was imposed on CA Sachin Kansal. - CA Sachin Kansal was 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 any company or body corporate. This Order will take effect 30 days from the date of issuance.
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