9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2023 (8) TMI 358 - 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 - 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 - Non-Compliance with other SAs - Penalties 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, 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, we find that the charges in paras 13 and 14 above stand proven. 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 skepticism 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 - On examining the additional documents added by the EP in the interest of fairness, and have taken the evidence into consideration wherever it is supporting or corroborating the original audit documentation submitted to NFRA. However, the conclusion is inescapable that additional documentation submitted to NFRA was deficient in terms of the nature, timing and extent of the audit procedures performed, who prepared and reviewed the audit working papers (WPs) and the timing of the audit procedures. For example, the majority of the additional documents submitted (purportedly from the EP's previous year's audit file), only have the sign and stamp of the Audit Firm. It carries no indication of any audit procedure being performed in respect of the financial year in question i.e. 2017-18 - 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. Determination of materiality is therefore important in an audit. Despite noting the evidence for control deficiency such as the observations noted by EP in his working paper titled Audit observation for the Koehl branch, the EP did not document how this deficiency was immaterial and how it did not affect the financial information - There is also no determination of materiality thresholds in the audit file. In the absence of documented conclusions, insufficient audit documentation, determination of materiality and assessment of the risk of misstatements and the test of controls we observe that the audit 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 - the audit plan is not required since the scope of work is well defined'' have no basis in the SAs and show the EP's absolute disregard to the quality of audit. Moreover, the audit plan now submitted by the EP was not forming part of the Audit File for 2017-18. Such contentions of the EP are against the fundamentals of SA 230 that require the maintenance of an Audit File that can enable an experienced auditor having no connection with the audit to understand the nature, timing and extent of the audit procedures performed to comply with the SAs. To evidence compliance with the requirements of the SAs, it is the fundamental stipulation of SA 230 that the auditor shall assemble the audit documentation in one audit file (and not multiple audit files of different years). Non-compliance with para 5, 6 11 of SA 315 and para 1, 5 6 of SA 330 - HELD THAT - A s 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. - In the absence of any documentation in the audit file, the contention is only an afterthought and hence not admitted. Non-compliance with para 10, 11 14 of SA 320 - HELD THAT - Mandatory documentation requirements of SA 320 include the factors considered in the determination of materiality and materiality for the financial statements as a whole, the materiality level or levels for particular classes of transactions, account balances or disclosures, performance materiality and any revision of the materiality amounts as the audit progress. The audit documentation in the present case did not contain any of these details and hence the replies of the EP are not acceptable. Non-compliance with para 5, 6, 8, 14 15 of SA 450 in the absence of the evaluation of identified misstatements and uncorrected misstatements - HELD THAT - The EP submits that there were no instances of identified misstatements and material misstatements and hence SA 450 is not applicable. The reply of the EP is not acceptable in the absence of any documentation or conclusions in the audit file in this regard. 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 - HELD THAT - The replies are not accepted since there is no evidence in the Audit File of designing and performing audit procedures, such as an audit plan, the substantive procedures performed and the conclusions drawn. Non-compliance with para 6 of SA 520 relating to the design and performance of analytical procedures - HELD THAT - The EP submits that SA 520 is not applicable since it is not a financial statement audit. The reply is not accepted since, as explained earlier in this order, the SAs are applicable for the branch statutory audit also. 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 - HELD THAT - The conditions in the appointment letter do not evidence basis for EP's work and conclusions. The SAs casts a responsibility 22 on the auditor to design and perform audit procedures to obtain sufficient appropriate audit evidence on which to base the audit opinion. The terms dictated by the company cannot substitute this responsibility. There is no evidence that any of the sampling and the related procedures as detailed in SA 530 have been complied with by the EP, while the audit opinion is based on sample testing. In the absence of any evidence to show compliance with the determination of sample design, sample size and audit procedures performed on it, the contentions of the EP are not accepted. Penalties 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 Sam Varghese, which establishes the professional misconduct. Despite being a qualified professional, it is found that the EP, CA Sam Varghese has not adhered to the Standards of Audit. 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, 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 (One Lakh) upon CA Sam Varghese; ii. CA Sam Varghese 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. Non-compliance with Standards on Auditing (SAs). 3. Professional misconduct charges. 4. Penalty and sanctions. Summary: I. Acceptance of Audit Engagement without Valid Authorization: The National Financial Reporting Authority (NFRA) found that CA Sam Varghese accepted the audit engagement for DHFL branches without valid authorization as required under Section 139 of the Companies Act, 2013. The appointment was not approved at the Annual General Meeting (AGM) of DHFL, violating both the Companies Act, 2013 and the Chartered Accountants Act, 1949. Despite the lack of valid approval, CA Sam Varghese issued an "Independent Branch Auditors' Report," portraying himself as a "Branch Statutory Auditor." II. Non-Compliance with Standards on Auditing (SAs): NFRA identified several violations of the Standards on Auditing (SAs) by CA Sam Varghese. These include: - SA 210: Failure to agree on the terms of the audit engagement with management or Those Charged With Governance (TCWG). - SA 230: Inadequate audit documentation, lacking evidence of the nature, timing, and extent of audit procedures performed. - SA 700: Failure to form an opinion and report on financial statements, including evaluating the effect of misstatements. - Other SAs: Non-compliance with SA 300 (audit planning), SA 315 (risk assessment), SA 320 (materiality), SA 450 (evaluation of misstatements), SA 500 (audit evidence), SA 520 (analytical procedures), and SA 530 (audit sampling). III. Professional Misconduct Charges: NFRA charged CA Sam Varghese with professional misconduct under the Chartered Accountants Act, 1949, for: - Failing to ascertain whether the requirements of Sections 139 of the Companies Act, 2013, were complied with. - Failing to exercise due diligence and being grossly negligent in professional duties. - Failing to obtain sufficient information necessary for the expression of an opinion. - Failing to invite attention to material departures from generally accepted audit procedures. IV. Penalty and Sanctions: NFRA imposed the following penalties and sanctions on CA Sam Varghese: - A monetary penalty of Rs. 100,000 (One Lakh). - Debarment 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. The order will become effective after 30 days from the date of issue.
|
