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2023 (8) TMI 129 - NFRA - Companies LawProfessional Misconduct - Improper Assessment of Going Concern Basis - lmproper reporting of Going Concern in Independent Auditor's Report - Inconsistency in audit documentation - Penalty and Sanctions. Improper Assessment of Going Concern Basis - HELD THAT - Under the going concern basis of accounting, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future. According to para 21 of SA 570, if in the auditor's judgment the management's use of the going concern basis is inappropriate, then the auditor shall express an adverse opinion. The auditor has admitted that he performed limited quantitative analysis and also did not maintain sufficient documentation. The auditor failed to comply with SA 570 in failing to determine if the management's use of the going concern basis was inappropriate and express an opinion accordingly - the auditor has not performed analysis in accordance with the provisions of SA 570 and therefore the Auditor's opinion does not take into account his judgment on the Going Concern basis arrived at in accordance with SA 570. This is a clear violation of SA 570 - In addition the auditor has also violated Para 8 of SA 230 Audit Documentation, which requires an auditor to prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit to understand the procedures performed - It is evident that the EP's use of the Emphasis of Matter to include the Going Concern basis, without determining if he needed to modify his opinion on this account, was in clear violation of SA 706 - the EP failed to comply with SA 230, SA 570, SA 705 and SA 706 in applying the prescribed audit procedures to evaluate BCL's assumption of the use of going concern basis for the preparation of its Financial Statements. lmproper reporting of Going Concern in Independent Auditor's Report - HELD THAT - As per Para 22 of SA 570, if adequate disclosure about the material uncertainty is made by the entity in its financial statement, the auditor shall express an unmodified opinion and the auditor's report shall include a separate section under the heading Material Uncertainty Related to Going Concern . However, in terms of para 23 of SA 570, if adequate disclosure is not made and the auditor opines that the use of going concern is doubtful, the auditor is required to express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705 - the charge against the EP that he violated SA 570 and SA 705 is established - Such lapses have been viewed seriously by international regulators as well. Inconsistency in audit documentation - HELD THAT - As per para 13 of SA 580, the date of written representation shall be as near as practicable to, but not after, the date of the auditor's report on the financial statements. In light of this, the charge is not further proceeded with. Penalty and sanctions - HELD THAT - It is the duty of an auditor to conduct the audit with professional scepticism and due diligence and report his opinion in an unbiased manner. Statutory audits provide useful information to the stakeholders and public, based on which they make their decisions on their investments or do transactions with the public interest entity - Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proven cases of professional misconduct are to be viewed, is evident from the fact that a minimum punishment is laid down by the law. The EP in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to Financial Statements - Despite the presence of a plethora of negative indicators indicating serious threat to the financial health of BCL, CA Shekhar Sharad failed to obtain sufficient appropriate audit evidence in support of assumption of Going Concern basis and failed to report the conclusions in accordance with the applicable provisions of SA 570 read with SA 705. The EP vide his reply to the SCN has accepted all the charges listed in the SCN and also stated that BCL was his first audit of a listed company, and the lapses have not occurred due to gross negligence, but due to error in making professional judgement. Considering the proved professional misconduct, the nature of violations, principles of proportionality and deterrence against future professional misconduct, and also keeping in mind that the EP has accepted all the charges and taken responsibility for the lapses pointed out in the SCN, in exercise of powers under Section 132( 4)( c) of the Companies Act, 2013, it is hereby ordered the imposition of a monetary penalty of Rs.1 Lakh upon CA Shekhar Sharad.
Issues Involved:
1. Lapses in the conduct of audit. 2. Articles of Charges of Professional Misconduct by the Engagement Partner (EP). 3. Penalty & Sanctions. Summary: I. Lapses in the Conduct of Audit: Improper Assessment of Going Concern Basis: The EP was charged with improper assessment of the appropriateness of the use of the Going Concern basis by BCL. Despite significant financial distress indicators (e.g., reported loss of Rs 44.49 crores, negative working capital of Rs 238.85 crores, and high debt levels), the EP failed to conduct a detailed analysis or maintain sufficient documentation to support the management's use of the Going Concern assumption. The EP's audit documentation was found deficient, lacking evaluation of projected cash flows, and necessary supporting documents. The EP admitted to limited quantitative analysis and insufficient documentation, violating SA 570, SA 230, SA 705, and SA 706. Improper Reporting of Going Concern in Independent Auditor's Report: The EP improperly reported on the Going Concern basis by incorporating an Emphasis of Matter (EOM) paragraph instead of issuing a qualified or adverse opinion as required by SA 570 and SA 705. The EP acknowledged that proper interpretation of SA 570 could have led to a different opinion. The NFRA found that the EP failed to perform the necessary analysis and did not comply with the standards. Inconsistency in Audit Documentation: The EP was charged with inconsistency in audit documentation, as the working paper recording overall opinion and conclusions was reviewed and signed before obtaining the signed Management Representation Letter (MRL). The EP claimed that the unsigned MRL was provided and noted in audit working papers, with the signed copy received later. The NFRA did not proceed further with this charge, considering the timing of the MRL and auditor's report. II. Articles of Charges of Professional Misconduct by the EP: The EP was found guilty of professional misconduct under various clauses of the CA Act, including failure to disclose material facts, report material misstatements, exercise due diligence, obtain sufficient information, and invite attention to material departures from audit procedures. The charges were proved based on evidence in the Audit File, Audit Report, submissions, and admissions made by the auditor. III. Penalty & Sanctions: The NFRA emphasized the duty of auditors to conduct audits with professional skepticism and diligence. Given the seriousness of the proven professional misconduct, the NFRA imposed a monetary penalty of Rs. 1 Lakh on CA Shekhar Sharad. The order will become effective 30 days from its issue date.
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