9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2024 (12) TMI 166 - NFRA - Companies LawProfessional misconduct - financial irregularities in the company and the failure of the auditor to qualify or emphasize in his independent audit report, any matter related to misstatement/ irregularities in the transactions - Section 132(4) of the Companies Act 2013 read with Rule 11(6) of National Financial Reporting Authority Rules 2018 - Penalty and sanctions. HELD THAT - The EP committed professional misconduct in terms of by Section 132 (4) of the Companies Act, read with Section 22 and clause 5 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 disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity - This charge is proved as the EP failed to obtain sufficient and appropriate audit evidence to draw conclusions about the existence and valuation of the inventory, failed to perform his duty of evaluation and reporting the non-compliance of Ind AS-110 and Ind AS-28 related to consolidation of financial statements of SCL, failed to fulfil his duty related to the audit of investments. The EP committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 6 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 report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity - This charge is proved as the EP failed to obtain sufficient and appropriate audit evidence to draw conclusions about the existence and valuation of the inventory, failed to perform his duty of evaluation and reporting the non-compliance of Ind AS-110 and Ind AS-28 related to consolidation of financial statements of SCL, failed to fulfil his duty related to the audit of investments. 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 and 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 rules as well as due to his failure to report the material misstatements and non-compliances of the Company in its financial statements. The EP committed professional misconduct in terms of by 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 rules as well as due to his failure to report the material misstatements and non-compliances of the Company in the financial statements. 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 but reported in his audit report that the audit was conducted as per SAs. Penalty and sanctions - HELD THAT - Independent Auditors of Publicly Listed Companies are expected to demonstrate sufficiency and appropriateness of audit work in every aspect of the critical building blocks of an audit of Financial Statements of a PIE. Failure of the auditor to meet the requirements envisaged under the Law and Professional Standards on Auditing are conspicuous in this audit engagement performed by the EP - the manner in which the audit was conducted, failed to meet the requirements of the SAs, the Act and the Code of Ethics in a number of significant aspects which demonstrated gross negligence on the part of the EP. This can be gauged from the failure of the EP to critically assess the existence and valuation of inventories, failure to comment in the audit report about the non-consolidation of financial statements, failure to verify the impairment testing of the investments of SCL and failing to apply the mandatory SAs in the audit - it is concluded that the EP's failure to comply with the provisions of SAs, exhibit professional skepticism, and fulfill the necessary audit procedures led to significant deficiencies in the audit. This non-compliance, combined with the consequent reporting failures, constitutes a breach of professional responsibilities and statutory requirements. The EP's actions (or inactions) constitute a serious violation of audit standards, leading to significant repercussions for the integrity and reliability of the financial statements. The professional misconduct of CA Santosh Deshmukh has been detailed in the foregoing paragraphs of this Order. 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 5,00,000/- (Rupees Five Lakhs) and also debars CA Santosh Deshmukh for 1 (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. Lapses in the Audit 2. Failure relating to Audit of Investments 3. Lapses relating to Consolidated Financial Statements 4. Lapses relating to Audit of Revenue 5. Failure related to Audit of Trade Receivables 6. Failure related to forming an opinion on Financial Statements without obtaining Sufficient Appropriate Audit Evidence 7. Failure related to Audit Documentation 8. Failures relating to determination and communication with Those Charged With Governance (TCWG) 9. Failure to report non-compliances with provisions of the Companies Act 2013 10. Lapses relating to Related Party Transactions, Advances, and Materiality Detailed Analysis: 1. Lapses in the Audit: The Engagement Partner (EP) failed to adhere to the Standards on Auditing (SA) in several critical areas. Notably, the EP did not verify the existence and valuation of material inventories, leading to overvaluation. The EP also failed to verify ownership, valuation, and impairment testing of investments, and did not evaluate the non-compliance related to the consolidation of financial statements. Additionally, the EP neglected to obtain sufficient audit evidence for trade receivables and did not perform adequate risk assessment procedures. This lack of professional competence was evident in the failure to communicate deficiencies in internal control to Those Charged with Governance (TCWG). 2. Failure relating to Audit of Investments: The EP did not verify the ownership and valuation of investments in loss-making subsidiaries and associates, nor did he evaluate impairment testing as required by Ind AS-36. The EP's explanation was found to be misleading, lacking evidence of performed audit procedures. The EP's reliance on outdated documentation and failure to comply with SA 700 and SA 705 further highlighted negligence. 3. Lapses relating to Consolidated Financial Statements: The EP failed to ensure compliance with Ind AS-110 and Ind AS-28, as SCL did not prepare consolidated financial statements or account for investments in associates as required. The EP's claim of verbal assurances from management was unsupported by audit documentation, and the resignation letter did not substantiate the EP's claims. 4. Lapses relating to Audit of Revenue: The EP did not perform adequate audit procedures to address risks of misstatement in revenue recognition, failing to comply with SA 200, SA 240, and SA 315. The EP's claim of understanding the business and performing control testing was unsupported by evidence. The audit file lacked documentation of analytical procedures and verification of inter-unit sales. 5. Failure related to Audit of Trade Receivables: The EP did not obtain sufficient audit evidence or assess risks of material misstatement for trade receivables, which formed a significant part of the balance sheet. The EP's reliance on management representation without performing critical audit procedures demonstrated a lack of professional skepticism and failure to comply with SA 200 and SA 315. 6. Failure related to forming an opinion on Financial Statements without obtaining Sufficient Appropriate Audit Evidence: The EP formed an opinion on financial statements without obtaining reasonable assurance of their accuracy, violating SA 700. The EP failed to address material misstatements and non-compliance with internal financial controls, resulting in a perfunctory audit. 7. Failure related to Audit Documentation: The EP did not prepare sufficient audit documentation as required by SA 230. The audit file lacked critical working papers, and most documents did not meet the basic requirements of SA 230. This failure undermined the integrity of the audit and demonstrated gross negligence. 8. Failures relating to determination and communication with Those Charged With Governance (TCWG): The EP failed to determine TCWG or communicate audit responsibilities, scope, and deficiencies in internal control, violating SA 260 and SA 265. The EP's reliance on management representation letters as evidence of communication was inadequate. 9. Failure to report non-compliances with provisions of the Companies Act 2013: The EP failed to comply with Section 143(9) of the Companies Act, 2013, by not adhering to several SAs, demonstrating gross negligence in the conduct of professional duties. 10. Lapses relating to Related Party Transactions, Advances, and Materiality: These charges were not pursued further based on the EP's responses and submissions during the hearing. Penalty and Sanctions: The EP was found guilty of professional misconduct under Section 132(4) of the Companies Act, 2013, and was penalized with a monetary fine of Rs. 5,00,000 and debarred for one year from being appointed as an auditor or internal auditor. The judgment emphasized the importance of adhering to audit standards and the serious repercussions of failing to meet professional responsibilities.
|
