2024 (12) TMI 229 - NFRA - Companies Law

Professional misconduct - Failure to plan the audit and understand the entity and its environment - Failure to evaluate the Internal Audit Function - Failure to determine Materiality and Performance Materiality - Failure to report non-provisioning in respect of the Expected Credit Loss - No evaluation of the arm's length pricing for Related Party Transactions - Failure to assemble the Audit File within 60 days of audit completion - Failure to report non-charging of depreciation of leasehold land and plant machinery - Failure to obtain sufficient and appropriate audit evidence through external confirmations - Failure to determine the appointment of Engagement Quality Control Reviewer (EQCR) - Penalty and Sanctions. HELD THAT - The EP committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 which states that a Chartered Accountant 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 . The EP committed professional misconduct as defined by clause 6 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 which states that a Chartered Accountant 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 disclose in his report the material non-compliances by the company. The EP committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 which states that a Chartered Accountant 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 exercise due diligence in the audit of the company in accordance with the SAs and applicable regulations. The EP committed professional misconduct as defined by clause 8 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 which states that a Chartered Accountant 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 and failed to analyse and report the appropriateness of accounting policy. The EP committed professional misconduct as defined by clause 9 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 which states that a Chartered Accountant 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. The charges of professional misconduct against the EP, as enumerated in the SCN dated 18.01.2024, stand proved based on the evidence in the Audit File, the Audit Report issued by EP, the submissions made by EP, the annual report of Vikas for the FY 2018-19 2019-20 and other materials available on record. 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 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 of a listed company. As explained in this Order, deficiency in the conduct of Audit, abdication of responsibility and inappropriate conclusions on the part of CA Yogesh Mahipal establish his professional misconduct. Considering the proven professional misconduct, the nature of violations, principles of proportionality and deterrence against future professional misconduct, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, it is hereby ordered I. Imposition of a monetary penalty of 2,00,000/- upon CA Yogesh Mahipal; II. Debarment of CA Yogesh Mahipal and the audit firm M/s Yogesh Mahipal Associates (FRN 030845N), for two 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.

Summary

Issues Involved:

1. Failure to plan the audit and understand the entity and its environment.
2. Failure to evaluate the Internal Audit Function.
3. Failure to determine Materiality and Performance Materiality.
4. Failure to report non-provisioning in respect of the Expected Credit Loss.
5. No evaluation of the arm's length pricing for Related Party Transactions.
6. Failure to assemble the Audit File within 60 days of audit completion.
7. Failure to report non-charging of depreciation of leasehold land and plant & machinery.
8. Failure to obtain sufficient and appropriate audit evidence through external confirmations.
9. Failure to determine the appointment of Engagement Quality Control Reviewer (EQCR).
10. Articles of Charges of Professional Misconduct by the Engagement Partner (EP).
11. Penalty and Sanctions.

Detailed Analysis:

1. Failure to Plan the Audit and Understand the Entity and Its Environment:
The auditor failed to comply with SA 300 and SA 315 by not planning the audit or understanding the nature of the entity and its environment. There was no documentation of an audit strategy or plan, and the auditor admitted to this lack of documentation, confirming the charge.

2. Failure to Evaluate the Internal Audit Function:
The auditor did not evaluate the internal audit function as required by SA 610. Despite the company having internal auditors, the EP incorrectly stated that there was no internal auditor for the relevant financial years, confirming the charge.

3. Failure to Determine Materiality and Performance Materiality:
The auditor did not determine materiality and performance materiality as required by SA 320. The absence of documentation regarding materiality was admitted by the EP, establishing the charge.

4. Failure to Report Non-Provisioning in Respect of the Expected Credit Loss:
The auditor failed to report the non-provisioning of Expected Credit Loss (ECL) on trade receivables, which was a significant oversight given the large discrepancies between trade receivables and sales. The EP admitted to the lack of documentation on ECL provisioning, confirming the charge.

5. No Evaluation of the Arm's Length Pricing for Related Party Transactions:
The auditor did not evaluate whether related party transactions were conducted at arm's length, as required by the Companies Act, 2013. The EP failed to document or report these transactions, confirming the charge.

6. Failure to Assemble the Audit File Within 60 Days of Audit Completion:
The auditor did not compile the audit file within the required 60 days post-audit completion, as mandated by SA 230 and SQC1. The delay and lack of completeness of the audit file were evident, confirming the charge.

7. Failure to Report Non-Charging of Depreciation of Leasehold Land and Plant & Machinery:
The auditor did not report the non-charging of depreciation on leasehold land and plant & machinery, contrary to Ind AS 116 and Ind AS 16. The EP's failure to report this in the audit report confirms the charge.

8. Failure to Obtain Sufficient and Appropriate Audit Evidence Through External Confirmations:
The auditor failed to obtain external confirmations for significant balances, relying solely on management representations, which is against SA 505. The absence of alternative procedures or documentation confirms the charge.

9. Failure to Determine the Appointment of Engagement Quality Control Reviewer (EQCR):
The auditor did not appoint an EQCR for the audit of the listed company, violating SA 220. The lack of appointment and documentation confirms the charge.

10. Articles of Charges of Professional Misconduct by the Engagement Partner (EP):
The EP was found guilty of multiple counts of professional misconduct under the Chartered Accountant Act, 1949, including failure to disclose material facts, report material misstatements, exercise due diligence, and obtain sufficient information.

11. Penalty and Sanctions:
The EP was imposed a monetary penalty of Rs. 2,00,000 and debarred for two years from being appointed as an auditor or internal auditor. The order will take effect 30 days from issuance, reflecting the seriousness of the professional misconduct.