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2023 (8) TMI 261 - NFRA - Companies LawProfessional Misconduct - Acceptance of audit engagement without valid authorization and without complying with ethical requirements; and issuing an audit report in violation of the Act - Failure to comply with Standards on Auditing (SAs) - Non-Compliance with SA 210 Agreeing the Terms of Audit Engagements - Non-Compliance with SA 230 Audit Documentation - Non-Compliance with SA 700, Forming an Opinion and Reporting on Financial Statements - Non-Compliance with other SAs - Penalty and sanctions. Acceptance of audit engagement without valid authorization and without complying with ethical requirements; and issuing an audit report in violation of the Act - HELD THAT - The absence of due diligence and display of gross negligence by the EP run afoul of the provisions of the Chartered Accountants Act, 1949 and resulted in professional misconduct as conceived under Section 22, Clause 9 of Schedule I of the Chartered Accountants Act, 1949. The acceptance of an invalid appointment letter for the Statutory Audit of the Branch, the conduct of the audit based on an invalid appointment, presenting convoluted logic and baseless reading of the law to justify the actions show the absence of professional skepticism and gross negligence on the EP's part. Therefore, the charges stand proven. Failure to comply with Standards on Auditing (SAs) - HELD THAT - The Branch Auditors accepted the Statutory Branch Audit assigned by the Company and issued the Independent Branch Auditors' Report stating therein that it was conducted in accordance with the SAs specified under the Act. Since these branch audit reports are clearly referred to by Company's Statutory Auditor (CAS) in its report to the members of the Company, here is examined the extent of compliance with the applicable SAs by the Branch Auditor notwithstanding the violation of ethical standards, the Chartered Accountants Act, 1949 and of the Companies Act 2013 in accepting an invalid appointment as the Branch Auditor. The principles and procedures laid down in the SAs including professional skepticism, audit documentation, sufficiency and appropriateness of audit evidence, audit planning, materiality, engagement risk, nature, timing and extent of evidence-gathering procedures and reporting are all applicable in the branch audit as well, being an audit of historical financial information. Non-Compliance with SA 210 Agreeing the Terms of Audit Engagements - HELD THAT - The EP accepted the appointment letter issued by DHFL and issued the audit report without complying with the requirements of SA 210. Between 2015-16 and 2016-17, there was a significant change in the circumstances relating to the branch audit. In 2015-16 the AGM decided to have a separate branch auditor and company's auditor, while in subsequent years there was only one auditor (CAS) to audit the Company and all its branches. This calls for the application of para 13 of SA 210 as well. EP's negligence of the provisions of SA 210 resulted not only in accepting an illegal appointment and non-compliance with SA 210 but also in the absence of professional scepticism and professional judgment in understanding the objective and scope of the audit, thereby violating SA 200 also. Therefore, the charges stand proven. Non-Compliance with SA 230 Audit Documentation - HELD THAT - The EP did not follow the requirements of SA 230 and that the audit documentation does not give evidence of the nature, timing and extent of audit procedures performed, results of those audit procedures and conclusions reached during the. Hence the charges regarding non-compliance with SA 230 stand proven. Non-Compliance with SA 700, Forming an Opinion and Reporting on Financial Statements - HELD THAT - SA 700 is applicable in this audit and as per the SA 700, the EP is required to evaluate the effect of the misstatements and decide to appropriately modify the opinion. However, despite noting the absence of required information the EP did not document how this deficiency was immaterial and had not resulted in a misstatement - Nowhere in the audit file has it been documented how these deficiencies were resolved while reaching the conclusion that all documents were properly obtained by the EP and how its impact was considered by the EP in the audit opinion. There is also no determination of materiality thresholds in the audit file. In the absence of documented conclusions, determination of materiality and assessment of the risk of misstatements and the test of controls and based on the above contradictory evidence available, we observe that the unmodified opinion issued by the EP does not comply with SA 700. Hence, the charges stand proven. Non-Compliance with other SAs - HELD THAT - Non-compliance with para 6, 7, 8, 9 10 of SA 300 as the EP failed in establishing an overall audit strategy and development of audit plan etc. in accordance with SA 300 - Non-compliance with para 5, 6 11 of SA 315 and para 1, 5 6 of SA 330 as the audit file lacks any documentation regarding the performance of risk assessment procedures for material misstatements at the financial statement level and assertion level and response to such risks etc. - Non-compliance with para 10, 11 14 of SA 320 for determining materiality, performance materiality and documentation thereof - Non-compliance with para 5, 6, 8, 14 15 of SA 450 in the absence of the evaluation of identified misstatements and uncorrected misstatements - Non-compliance with para 6 9 of SA 500 in not designing and performing audit procedures to obtain sufficient appropriate audit evidence and not evaluating the reliability of information produced by the company - Non-compliance with para 6 of SA 520 relating to the design and performance of analytical procedures - Non-compliance with para 4, 6, 7, 8 9 of SA 530 relating to the determination of sample design, sample size and required audit procedures. 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 law lays down a minimum punishment for such misconduct - The EP in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to the reports issued to facilitate the Company's Auditor to form their opinion on the Financial Statements. As detailed in this order starting from the acceptance of the Audit to the conduct and conclusion of the audit, there were substantial deficiencies in the Audit and abdication of responsibility on the part of EP, CA Mathew Samuel, which establishes the professional misconduct. Despite being a qualified professional, it is found that the EP, CA Mathew Samuel has not adhered to the Standards of Audit. On the contrary, the EP has tried to cover up the deficiencies by resorting to arguments not supported by law or evidence. Considering the fact that professional misconducts have been proved and considering the nature of violations and principles of proportionality and keeping in mind the deterrence, proportionality, signalling value of the sanctions and time required for improvement in knowledge gaps we, in the exercise of powers under Section 132(4)( c) of the Companies Act, 2013, proceed to order the following sanctions i. Imposition of a monetary penalty of Rs.100,000/- upon CA Mathew Samuel; ii. CA Mathew Samuel is debarred for one year 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.
Issues Involved:
1. Acceptance of audit engagement without valid authorization. 2. Failure to comply with Standards on Auditing (SAs). 3. Professional misconduct and negligence in performing professional duties. 4. Penalty and sanctions. Summary: 1. Acceptance of Audit Engagement Without Valid Authorization: The National Financial Reporting Authority (NFRA) found that CA Mathew Samuel accepted the audit engagement for a branch of Dewan Housing Finance Corporation Limited (DHFL) without valid authorization, violating the Companies Act, 2013 and the Chartered Accountants Act, 1949. The appointment of the 33 branch auditors, including CA Mathew Samuel, was not approved at the Annual General Meeting (AGM) of DHFL. Despite this, CA Mathew Samuel accepted the appointment and issued an "Independent Branch Auditors' Report," thereby violating ethical requirements and professional standards. 2. Failure to Comply with Standards on Auditing (SAs): NFRA's investigation revealed multiple violations of Standards on Auditing (SAs) by CA Mathew Samuel. These included non-compliance with SA 210 (Agreeing the Terms of Audit Engagements), SA 230 (Audit Documentation), SA 700 (Forming an Opinion and Reporting on Financial Statements), and other relevant SAs. The audit documentation was found to be deficient, lacking evidence of the nature, timing, and extent of audit procedures performed. The EP's flawed understanding and interpretations of the SAs were highlighted, showing an absence of professional skepticism and judgment. 3. Professional Misconduct and Negligence in Performing Professional Duties: CA Mathew Samuel was found guilty of professional misconduct under Section 132 (4) of the Companies Act, 2013. The charges included failure to ascertain compliance with Section 139 of the Act, gross negligence in professional duties, failure to obtain sufficient information for expressing an opinion, and failure to highlight material departures from generally accepted audit procedures. The EP's actions displayed gross negligence and an absence of due diligence, leading to the issuance of an audit report without a sound basis. 4. Penalty and Sanctions: Considering the nature of the professional misconduct, NFRA imposed a monetary penalty of Rs. 100,000 (One Lakh) on CA Mathew Samuel and debarred him for one year from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of any company or body corporate. The order emphasized the need for deterrence, proportionality, and signaling value of the sanctions, recommending further training for CA Mathew Samuel to enhance his understanding of SAs and improve his proficiency as an auditor. The order will become effective 30 days from the date of issue.
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