2024 (1) TMI 589 - NFRA - Companies Law

Professional Misconduct - Failure to evaluate the management's assessment of the entity's ability to continue as a Going Concern - Failure relating to Revenue Recognition - Failures relating to Audit Documentation - Failures relating to Audit Evidence for inventory - Failure to give an appropriate audit opinion - Lapses in fulfilling duties related to Engagement Quality Control (EQC) Reviewer - Failure to determine Materiality - Failure to plan the audit of Financial Statements - Failures relating to communication with Those Charged With Governance - Failures relating to communicating deficiencies in internal control to TCWG and Management - Failures relating to identifying and assessing the risks of material misstatement - Failure to report non-compliances with provisions of the Companies Act 2013 - penalties and sanctions. HELD THAT - The EP issued audit opinion on the Financial Statements without any basis. We also conclude that the EP has committed Professional Misconducts as defined under section 132 (4) of the Companies Act 2013 in terms of Section 22 of the Chartered Accountant Act 1949 (CA Act) as amended from time to time, and as detailed below i. The EP committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 7 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional misconduct when he does not exercise due diligence or is grossly negligent in the conduct of his professional duties . This charge is proved as the EP failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to his failure to report the material misstatements and non-compliances of the Company in its Financial Statements, as explained in the paras 24 to 93 above. ii. The EP committed professional misconduct m terms of Section 132 (4) of the Companies Act, read with Section 22 and clause 8 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional misconduct when he ''fails 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 . This charge is proved as the EP failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to his failure to report the material misstatements and non-compliances of the Company in the Financial Statements, as explained in the paras 24 to 93 above. iii. The EP committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 9 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional misconduct when he ''fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances . This charge is proved since the EP failed to conduct the audit in accordance with the SAs (as explained in paras 24 to 93 above), but falsely reported in his audit report that the audit was conducted as per SAs. Therefore, it is concluded that the charges of professional misconduct enumerated in the SCN dated 16.06.2023 stands proved based on analysis of the evidence in the Audit File, the Audit Report issued by auditor, the submissions made by auditor, and other materials available on record. Penalties and sanctions - HELD THAT - Considering the proved professional misconducts and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, hereby order imposition of monetary penalty of INR 3,00,000/- upon CA Pankaj Kumar. In addition, CA Pankaj Kumar is debarred for 3 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. This debarment shall run concurrently with Penalty Order dated 21.04.2023 in respect of audit of M/s. SRS Ltd. issued against CA Pankaj Kumar.

Summary

Issues Involved:
1. Lapses in the Audit
2. Articles of Charges of Professional Misconduct by the Auditor
3. Penalty & Sanctions

Summary:

1. Lapses in the Audit:
a. Failure to Demonstrate Sufficiency and Appropriateness of Audit Work:
The Engagement Partner (EP) failed to meet the relevant requirements of the Standards on Auditing (SA) in several significant areas, reflecting a serious lack of professional competence. These include audit planning, determining materiality, evaluation of the going concern assumption, assessment of Risk of Material Misstatement, and evaluating the audit results.

b. Failure to Perform Substantive and Analytical Procedures:
The EP failed to verify the revenue of Rs.29.16 crore related to the real estate segment and to evaluate the risk of fraud in revenue recognition in accordance with SA 240.

c. Failure to Analyze the Going Concern Assumption:
Despite significant indicators questioning the going concern assumption, the EP did not evaluate management's assessment of the entity's ability to continue as a going concern as required by SA 570.

d. Failure to Perform Physical Verification or Alternative Audit Procedure for Inventory:
The EP did not perform physical verification or alternative audit procedures for inventory amounting to Rs.102.69 crores, nor did he modify his opinion in the audit report in accordance with SA 501 and SA 705.

e. Failure to Demonstrate Compliance with SA 700 and SA 705:
The EP gave a Qualified Opinion despite being unable to comment on more than 50% of the total assets, which warranted a Disclaimer of Opinion.

f. Failure to Comply with Requirements Concerning the EQC Reviewer:
The EP failed to determine materiality, plan the audit, communicate with Those Charged with Governance (TCWG), and identify and assess risks of material misstatement.

2. Articles of Charges of Professional Misconduct by the Auditor:
a. Failure to Exercise Due Diligence and Gross Negligence:
The EP was found guilty of professional misconduct for failing to exercise due diligence and being grossly negligent in the conduct of professional duties.

b. Failure to Obtain Sufficient Information:
The EP failed to obtain sufficient information necessary for expressing an opinion, which is a significant professional misconduct.

c. Failure to Invite Attention to Material Departure:
The EP failed to highlight material departures from generally accepted audit procedures, which constitutes professional misconduct.

3. Penalty & Sanctions:
a. Monetary Penalty and Debarment:
The National Financial Reporting Authority (NFRA) imposed a monetary penalty of Rs.3,00,000 on CA Pankaj Kumar. Additionally, CA Pankaj Kumar is debarred for 3 years 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. This debarment will run concurrently with a previous Penalty Order dated 21.04.2023.

b. Effective Date of Order:
This Order will become effective after 30 days from the date of issue.