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TMI Blog2023 (7) TMI 1245X X X X Extracts X X X X X X X X Extracts X X X X ..... rder is divided into the following sections: A. Executive Summary B. Introduction & Background C. Major Lapses in the Audit D. Other Lapses in the Audit E. Lapses by the Audit Firm F. Findings on Articles of Charges of Professional Misconduct by the Auditors G. Findings on Additional Articles of Charges of Professional Misconduct by the Audit Firm H. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. National Financial Reporting Authority (NFRA) is India's independent regulator in respect of matters relating to accounting and auditing of prescribed class1 of entities which can be broadly described as 'Public Interest Entities' (PIEs). 4. NERA initiated action under Section 132(4) of the Companies Act, 2013 (the Act) for investigating into professional or other misconduct of the Statutory Auditor of MIIL, a company listed on BSE and NSE, following information received from Securities and Exchange Board of India (SEBI) vide letter dated 23.06.2022 regarding financial irregularities committed by MIIT.. 5. MIIL's shareholding pattern in FY 2020-21 reflected substantial public interest with 57- 58% of its shares held by the public, of which 32 -36% were held by individuals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Financial Statements reflect 'true and fair view' except for the effect of non-consolidation of a subsidiary, Merino Shelters Private Limited (MSPL) is erroneous, as the impact of the grounds for qualification was both material and pervasive which, as per Para 8 of SA 705, required the Auditors to give an adverse opinion (para 50). 12. The Auditors did not obtain Sufficient Appropriate Audit Evidence (SAAE) in a number of material account balances and class of transactions such as the following: a) Trade Receivables which constituted 37% of the total assets of MIIL and depicted adverse features indicating a significant risk of material misstatement (ROMM) (para 56). b) In respect of impairment test of investment in, and loan given to a subsidiary, the Auditors did not perform any audit procedures as required by SA 540 to evaluate whether the impairment test and documents given by the Company satisfied the requirements of Ind AS 364 (para 60). c) In respect of the Key Audit Matter (KAM) pertaining to valuation of MIIL's subsidiary, MSPL, the Auditors mentioned that it was done using the Discounted Cash Flow (DCF) method. However, the valuer's report available in the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also debarred for Five 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; ii. Imposition of a monetary penalty of Rs.50,00,000/- (Rupees Fifty Lakhs) upon M/s. MH Dalal & Associates. B. INTRODUCTION and BACKGROUND 17. NFRA is a statutory authority set up under Section 132 of the Act to monitor implementation and enforce compliance of the auditing and accounting standards and to oversee the quality of service of the professions associated with ensuring compliance with such standards. NFRA has the responsibility to protect the public interest and the interests of the investors, creditors and others associated with the companies or bodies corporate that come under its purview. Under Section 132(4) of the Act, NFRA is vested with the powers of a civil court, and power to investigate the prescribed classes9 of companies and impose penalty for professional or other misconduct of the individual members or firms of chartered accountants. 18. The Statutory Auditors, both individual and firm of chartered accountants, are appoin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , issued, on behalf of the Audit Firm, an unmodified opinion in the Independent Auditor's Report for the SFS and a qualified opinion for the CFS, certifying that the Financial Statements (both SFS and CFS) of MIIL reflected true and fair view in conformity with the accounting principles generally accepted in India. 23. On satisfaction that a sufficient cause existed to take action under sub section (4) of Section 132 of the Act, a SCN was issued to the Auditors on 18.10.2022 under Section 132 (4) of the Act read with Rule 11 of the NFRA Rules 2018 asking them to show cause why action should not be taken against the Auditors for professional or other misconduct in respect of their performance of the audit of MITL for FY 2020-21. The Auditors were charged with professional misconduct of: (a) failure 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; 'On half yearly basis, Association of Mutual Funds in India (AMFI) publishes a list of all listed companies in India classified into three categ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvance that resulted in non-compliance with the requirements of Para 15 and 25 of SA 55013. 28. In reply, the Auditors simply reproduced Para 15 and 20 of SA 550 and stated that in their understanding of Para 18 of Ind AS 24, only transactions undertaken during the periods covered by the Financial Statements have to be disclosed; and that MIIL had disclosed the transactions in the FY 2020-21 and the outstanding balances with its subsidiaries as on March 31, 2021. The Auditors have not referred to Auditor's obligations under Para 25 of SA 550 and why they have not complied with this para, which is germane to their professional misconduct presently under consideration. Para 25 of SA 550 requires auditors to evaluate whether the identified related party relationships and transactions are appropriately accounted for and disclosed as per the applicable financial reporting framework; and to evaluate whether their effects cause the Financial Statements to be misleading or prevent the Financial Statements from achieving a true and fair presentation. 29. We find that while the Company has disclosed other outstanding amounts of related party transactions which happened in previous years, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unacceptable. Further, the Auditors have failed to comply with the SEBI LODR requirements under Clause 23. 32. The Auditors failure to ensure compliance with disclosure requirements of Ind AS 24, provisions of the Act and SEBI LODR requirements is a serious violation of professional standards especially as the related party transactions have historically been known to be a source of manipulation of financial position, siphoning of funds by the unscrupulous company promoters and management. We therefore conclude that the Auditors have violated Para 15 and 25 of SA 550. We note that the PCAOB, the US Audit Regulator, in its recent order15 in the Matter of Cheryl L. Gore, CPA, imposed sanctions and monetary penalty among other things for failure to act with due professional care and professional skepticism and failure to perform sufficient procedures to determine whether related parties and relationships and transactions with related parties were properly identified, accounted for, and disclosed in the Financial Statements. Failure to report full particulars of loan to a Related Party 33. The Auditors were charged with violating Section 186 (4) of the Companies Act, 2013 by not re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were charged with not reporting the non-disclosure by MIIDL of pledging of equity shares of its subsidiary MSPL amounting to Rs. 102.30 crores for obtaining credit facilities from South Indian Bank and thus violating Para 14 of Ind AS 107,16which requires that the carrying amount of Financial Assets pledged as collateral needs to be disclosed. 39. The Auditors submitted that the pledged collateral was in addition to the primary security (current assets) valuing Rs.1077.32 crores, constituting 66.29% of the total assets of the Company, whereas the value of the undisclosed shares of MSPL pledged as collateral security was only 5.71% of the total value of the assets and was immaterial to the users of the Financial Statements. They also referred to Note 25 to the SFS of MIIL which says that 'Working Capital facilities by banker's are secured by first pari passu charge on entire current assets and second pari passu charges on the immovable properties of the company.' 40. The reply of Auditors that the disclosure was not required as these were only additional security over and above the primary security is not a valid ground for non-compliance with the disclosure requirements of P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o provision was necessary except for a provision for ECL of Rs. 2.14 crores as per Ind AS 109. Nevertheless, our analysis of this information/ explanation presented by the Auditors now shows some significant points of concern regarding the credit risk and impairment loss for trade receivables. 44. Apart from the fact that 16.12% of the total trade receivables stated to be at risk is a significant number, we find that 34.10% of the total unsecured trade receivables were under dispute/litigation; bad debts written off during the year were as high as 6.59% of the total outstanding receivables; the bad debts write off during last three years had increased from Nil in FY 2018-19 to 13.48% in the FY 2019-20 and to a staggering 51.14% of PBT in FY 2020-21. These figures are sufficient to raise red flags to an auditor, who will be expected to apply his professional skepticism to rigorously test any assertion made by the preparers in this regard. However, in the present case, we find that the Auditors have simply accepted what was asserted by the management, displaying lack of professional skepticism. 44.1 The Auditors, we also find, have not obtained sufficient appropriate evidence in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 35N of Ind AS 10722. Ind AS Implementation Guidance- Example 12-Provision Matrix of Illustrative Examples of IFRS 9 Financial Instruments (extract given below) provides an illustration of the manner in which the credit risk exposure should be disclosed. We find that no such disclosure has been made by the Company and the Auditors have not reported this matter. Therefore, in light of above, we conclude that the Auditors have failed to report in their audit report the non-disclosure of the credit risk profile of trade receivables as per Para 35 M and 35 N of Ind AS 107 and have therefore not discharged their duties under SA 505. C.4 Failure to report non-consolidation of subsidiary 47. The Auditors were charged with failure to appropriately modify their opinion as per SA 705, even though the accounts of MIIL's subsidiary (MSPL) were not consolidated in the Financial Statements of MIIL. Note 44 of SFS shows MSPL as 100% subsidiary of MIIL. Accordingly, as per Ind AS 110, MIIL was required to consolidate the Financial Statements of MSPL in the CHS of MIIL. 48. The Statutory Auditors have qualified their Audit Report for non-consolidation of MSPL in the Financial Statements of MII ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both material and pervasive to the Financial Statements. In light of above, we conclude that the qualified opinion by the Auditors was without due diligence and sufficient appropriate audit evidence, and the Auditors have failed to comply with Para 8 of SA 705. C.5 Failure to obtain Sufficient Appropriate Audit Evidence (SAAE). 51. The Auditors were charged for failure to comply with SA 20024 as they did not obtain reasonable assurance whether the [financial Statements were free from material misstatements and failed to obtain SAAE. 52. Responding to the charge, the Auditors submitted that they have sufficiently demonstrated that the allegations are unsustainable on account of the submissions made by them. 53. On perusal of the audit file, it is observed that the Auditors have failed to obtain SAAE in respect of a number of material account balances and transactions, some of which are explained below. Trade Receivables 54. Trade receivables are 37%, 28% and 36% of the total assets of MIIL as of 31.03.2021, 31.03.2020 and 31.03.2019 respectively and therefore material and significant account balances that required the Auditors to obtain SAAE. However, the Auditors work docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the applicable financial reporting framework relevant to accounting estimates, including related disclosures. ii) How the management makes accounting estimates, and an understanding of the data on which they are based, including the method or the model, used in making the accounting estimate, relevant controls, the assumptions underlying the accounting estimates. Whether there has been or ought to have been a change from the prior period in the methods for making the accounting estimates, and if so, why etc. b) the auditor shall obtain SAAE whether management's decision to recognise, or to not recognise, the accounting estimates in the Financial Statements is in accordance with the applicable financial reporting framework? (Para 17 of SA 540). c) whether the accounting estimates in the Financial Statements are either reasonable in the context of the applicable financial reporting framework, or are misstated? (Para 18 of SA 540). d) the basis for the auditor's conclusions about the reasonableness of accounting estimates and their disclosure that give rise to significant risks and indicators of possible management bias, if any (Para 23 of SA 540). 58. In respect of understa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments 59. The total Investments of Rs. 132.79 crores constitute 7.41% of the Total Assets of the Company. A significant part (99.52%) of these investments were classified as non-current investments and constitute 22% of the total non-current assets of MIIL as of 31.03.2021. Further, these non-current investments are primarily investments in equity shares of two subsidiaries viz. MSPL and Man Overseas Metal, DMCC. We observe from the audit file that the audit program document depicts the following work performed by the Auditor: a) Valuation Report Checked36 b) Impairment testing done37 The screenshot of the same is reproduced below: In addition, the Audit Work Paper file contains the following documents: (a) Investments in Subsidiary Ledgers38 (b) Category 1 Merchant Banker Valuation Report for MSPL39 (c) Credit Monetary Appraisal of Man Overseas Metal, DMCC40 Audit Work Paper titled 'Final Audit Points'41 describes the discussion between the EP and the EQCR and their decisions to seek information for impairment test under Ind AS 3642 for investments in two subsidiaries due to existence of impairment indicators and to include these as Key Audit Matters (KAM) in thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r not. 60.3.5 The External Valuer has not used 'Comparable Companies Multiple Method' giving reasons as lack of exact comparable companies. However, he has used data of similar firms to determine the cost of equity to estimate the Weighted Average Cost of Capital to arrive at discount rates. This anomaly has not been questioned by the Auditors. 60.3.6 The Auditors were aware of the dispute among the promoters of MIIL regarding the value of assets and liabilities of MIPL, MSPL and claims on MIIL. These disputes have been claimed as the reason for not consolidating the Financial Statements of MSPL, which is subject to impairment test, into that of MIIL since 2015. However, the Auditors did not check and evaluate how these valuation disputes among promoters were factored in estimating fair value of MSPL. 60.3.7 In respect of impairment test of overseas subsidiary viz. Man Overseas Metal, DMCC, the Audit Work Papers contain a few pages with initials of an unknown person with the title 'Credit Monetary Appraisal' and give details of valuation based on DCF. There is no evidence of any audit work done to check the accuracy and validity of these amounts keeping in mind the requirements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the Auditors have been grossly negligent in performing their duties in respect of the audit of inventories. Trade Payables 65. Trade Payables constitute 54.12% of Total Liabilities of MIIL as of 31.03.2021 and therefore are a material account balance. The Audit Work Papers consist of | Page of Vendor Ageing50 , a list of outstanding vendors as on 31.03.202151, and 2800 pages of Purchase Invoices52. 66. The deficiencies in the audit work are similar to those mentioned in respect of Trade Receivables (refer para 56). The audit work is merely collection and filing of reams of photocopies of purchase invoices without any analysis and application of mind. The Auditors were so negligent that they have not even bothered to censure that the audit document they obtained and relied upon were authenticated by the Company Management as can be seen from the following reproduced work paper: Revenue 67. Revenue from operations is a material class of account in the audit of any company. The audit work performed by the Auditors, reproduced below, shows hardly any audit work done. Most of the audit deficiencies are similar to those mentioned in respect of Trade Receivables at para 56 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial Statements. 72.3 Planning the audit, role of risk assessment, addressing the risk of fraud, materiality, identifying entity-level controls, identifying significant accounts and disclosures and their relevant assertions., testing controls-testing operating effectiveness, forming an opinion. 72.4 Audit Documentation: It requires that the auditor should comply with the requirements of SA 230, Audit Documentation to the extent applicable. 73. In respect of the audit work relating to ICoFR, there is no evidence at all except for a copy of the unsigned and unauthenticated copy of a document titled "Policies & Procedures on Internal Financial Control54. Further, as elaborated in para 90 to 94, the Auditors have not performed any work relating to SA 315 which is the benchmark to be used by the management and auditors to assess and state adequacy and compliance of the system of internal control. Further, as elaborated in para 77 and 98, the audit programmes used in the audit of Financial Statements are significantly deficient and do not provide any information about nature of tests performed i.e., test of controls and the timing of those tests etc. Also, there is no documentatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vincing because it fails one of the objectives of the audit documentation, that is, to enable other external parties to carry out inspections in accordance with laws and regulations. 80. Further, there was no audit evidence as to who performed the audit work, who reviewed the audit work performed, and the date and extent of such review, reflecting violation of Para 9 of SA 230. 81. The Auditors have also failed to document discussions of significant matters with TCWG, including the nature of significant matters discussed, and when and with whom discussions took place as per Para 10 of SA 230. 82. From the above, it is established that the Auditors have merely collected invoices from the company and placed in the audit file. 'They failed to meet the objectives of SA 230 to prepare documentation that provides sufficient and appropriate record for the basis of auditor's report and evidence that the audit was planned and performed in accordance with SAs. From the above, it is also evident that the audit file primarily contains invoices/bills and information taken from the Company and does not record professional judgements and significant conclusions/decisions made by the Auditors a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auditors failed to adequately document the audit work papers in the audit of Mitie Group plc. for the year ended 31 March 2016, and imposed a financial sanction of two million pounds on Deloitte and 65,000 pounds against Charlton. 85. In the present case, we note that instead of being an exercise in application of professional skill and care to ensure quality of the audit evidence, the Auditors work had degenerated into simply collecting and filing reams of photocopies of documents of routine nature (e.g., 2900 pages of Purchase/Sales Invoices) in the Audit Work Paper file. We therefore conclude that the Auditors have failed to comply with provisions of SA 230 in respect of audit documentation thereby showing lack of due diligence and gross negligence. C.7 Failure to plan the audit of Financial Statements 86. The Auditors were charged with non-compliance with Para 6, 8 and 11 of SA 300 which requires the auditor to establish an overall audit strategy that guides the development of the audit plan and documenting of the audit strategy and any changes made thereto during the engagement with reasons for the same. On examination of the audit file, we find that there is no evidence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perform sufficient audit procedures that addressed the risks of material misstatement. "PCAOB censured the Firm, revoked its registration permanently, and imposed a civil money penalty of $12,500 upon the firm. C.8 Failure to perform risk assesment procedures and response to such risks 90. 'The Auditors were charged with failure to comply with Para 5, 6 and 11 of SA 31557 which requires that the auditor shall perform risk assessment procedures to provide a basis for the identification and assessment of risks of material misstatement (ROMM) at the Financial Statement and Assertion levels. It also requires the auditor to obtain an understanding of the entity and its environment. Further, the Auditors were charged with failure to comply with Para 1, 5 and 6 of SA 33058. 91. Responding to the charge, the Auditors have simply mentioned the objectives of SA 315 and SA 330 without evidence of any work having being performed. They have also stated that these charges do not hold good, since in their opinion the charges of professional misconduct relating to certain specific errors/omissions do not survive. Further, they state that they have performed necessary risk assessment procedures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed documents lack even the basic information, the name and other details of the IT system used by the Company. 93.2 The Executive Summary of Internal Audit Reports for the three quarters during the audit period FY 2020-21 do not even have basic details like date of the internal audit report, who had performed these internal audits, signature of the internal auditors etc. This notwithstanding, the internal audit reports contain certain matters of serious concern on the recoverability of the trade receivables and capital advances indicating significant risk of material misstatements of revenue, ECL (or Impairment Loss), trade receivables and other advances in the Financial Statements under audit i.e., FY 2020-21. The Internal Audit Reports reported amounts withheld by the customers for delay in supply of pipes as per contract committed of Rs. 85.19 crores62 , Rs. 126.87 crores63 and Rs. 120.47 crores64 for the quarter ending 31.03.2021, 31.12.2020 and 30.09.2020 respectively. Similarly, Internal Audit Reports reported long pending advances to vendors without receipt of material of Rs. 22.5 crores65 , Rs. 22.5 crores66 and Rs. 22.5 crores67' for the quarter ending 31.03.2021, 31.12.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been detailed. 101.In the light of above glaring deficiencies, we conclude that the Auditors were found wanting in compliance with Para 1,5 & 6 of SA 330. C.10 Failure to determine materiality 102.The Auditors were charged for failure to comply with Para 10 and 14 of SA 320, which require an auditor to determine materiality for the Financial Statements as a whole while establishing the overall audit strategy and the auditor to document the amounts and the factors considered in his determination of materiality for the Financial Statements as a whole and for performance materiality. 103.The Auditors denied the charges stating that there is no proof of alleged misstatements having significantly impacted the usability of the Financial Statements. 104. According to Para 10 of SA 320, when establishing the overall audit strategy, auditor shall determine the 'Materiality' for the Financial Statements as a whole. In addition, Para 11 of SA 320 states that the auditor shall determine 'Performance Materiality' for the purposes of assessing the ROMM and determining the nature, timing and extent of further audit procedures. 105. Para A2~-A6 of SA 320 provides application material. Para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Auditors have not determined any 'Materiality' or 'Performance Materiality' in the audit of Financial Statements of MIIL, which is a mandatory requirement. All that can be found in the Audit Work Papers is vague and general expression like 'Materiality Basis', 'High Value' and Random' in the column titled 'Sampling Method' of just two pages of the undated audit programme74 . 108. In view of the above, we conclude that the Auditors have failed to adhere to the mandatory requirements of the fundamental audit procedure of determining Materiality in accordance with SA 320 and falsely stated in their report that they had conducted their audit in accordance with the SAs specified under Section 143(10) of the Act. 109. We also conclude that the quality and credibility of the audit work performed by the Auditors is significantly deficient vis-a-vis the requirements of the relevant SAs. Rather, it docs not inspire any confidence in the audit work of the Auditors of a public interest entity, the fundamental purpose of which is to enhance the degree of confidence of intended users in the Financial Statements. Therefore, we hold that the Auditors have failed to discharge their responsib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epare documentation regarding Auditor's responsibilities relating to fraud 116.The Auditors were charged with failure to comply with the requirements of Para 16 and 24 of SA 240. 117. Responding to the charge, the Auditors submitted that necessary inquires with the management were made and as per the information and explanation given by the management, no fraud on or by the Company was noticed during the period of audit. The Auditors referred to clause 3(x) of CARO 2020 and reported that: "Based upon the audit procedure performed for the purpose of reporting the true and fair view of the Financial Statements and as per the information and explanation given by the management, we report that no fraud by the company or on the company by the Company or on the company by its officers or employees has been noticed or reported during the period covered by our audit." 118. We observe that it is nowhere documented in the audit file whether Auditors had identified and assessed ROMM to comply with the requirements of Para 16 of SA 240 wherein Auditor is required to perform the procedures as mentioned in Paragraphs 17 to 24 of SA 240, to obtain information for use in identifying the ROM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tates that the Auditor shall communicate in writing with TCWG regarding significant findings from the audit if, in the auditor's professional judgement, oral communication would not be adequate. Further, Para 23 of SA 260 states that, "Where matters required by this SA to be communicated are communicated orally, the auditor shall include them in the audit documentation, and when and to whom they were communicated. Where matters have been communicated in writing, the auditor shall retain a copy of the communication as part of the audit documentation", which the Auditors failed to do. 122. In light of above, we conclude that the Auditors failed to exercise due diligence and were grossly negligent in not identifying and communicating with TCWG and therefore, violated the requirements of SA 26078 and SA 26579. 123.Failure to appropriately communicate with Audit Committee has been viewed seriously by our international counterparts too. For example, PCAOB, the US Regulator, charged the public accounting firm L.L. Bradford & Company, LLC (Audit Firm) for its failure to communicate with the audit committee during the audit of WebXU Inc.'s ("WebXU") and noted that the "Firm also viola ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted every year. (vii) If the Company has been audited before, the changes in its financial situation from the last audit is taken into consideration. Also review of note of previous year audit notes and observations are also done which assist the team to plan the audit in an effective manner. (viii) On the above basis, timeline is decided, and responsibilities are assigned. Also, due date of completion is mentioned. (ix) Evidence is gathered on the basis of which the audit opinion is arrived at. (x) Audit work is reviewed by the Engagement Partner and finally by Engagement Quality Control Review Partner (EQCRP). (xi) Once preliminary opinion is arrived at, discussion placed with TCWG. (xii) If required, audit file review by EQCP and discussion between the EP and EQCR regarding audit observations. (xiii) Thereafter, a conclusive audit opinion is formed based on the audit evidence gathered. This opinion is formed post discussion with TCWG and EQCP. Additionally, take Management representation. (xiv) Thereafter, Audit File is closed within 60 days of completion of the Audit. (xv) Audit Firm stated that they have an exhaustive and thorough process before form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in SFS and a qualified opinion on the CFS without any basis. The poor quality of audit, incomplete documentation and attempt to mislead through evasive replies further compounds the professional misconduct on the part of the Audit Firm. Based on the foregoing discussion and analysis, we conclude that the Audit Firm has committed professional or other misconduct, as defined in the Act. In an audit engagement assigned to an Audit Firm, the responsibility of the Audit Firm is to ensure its systems and processes are conducive to a high-quality audit in compliance with the Law and Professional Standards. We find that the Firm has failed in this regard. 130.It is pertinent to note that PCAOB in its recent order80 in the case of Marcum LLP mandated functional changes to the quality control supervisory structure in the firm and imposed monetary penalty of 3 Million USD for quality control violations. F. Findings on Articles of Charges of Professional Misconduct by the Auditors 131.Based on the foregoing discussion and analysis, we conclude that the Auditors have committed professional misconduct as defined in Section 132 (4) of the Companies Act, read with Section 22 the Chartered Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplained in Section E above and thus violated SQC I. H. PENALTY and SANCTIONS 133.Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed, is evident from the fact that a minimum punishment is laid down by the law. 134.Independent Auditors of Public Listed Companies serve a critical public function of enabling the users of Audited Financial Statements to take informed decisions. 135.Absent a robust system of auditing, investors, creditors and other users of Financial Statements would be handicapped and their interest compromised. The best of systems fails if the professionals implementing the system do not perform their job. This could lead to a serious failure of the financial system which could ultimately result in a breakdown in trust and confidence of investors and the public at large. 136.Thus, the Auditors are duty bound to examine and ascertain the integrity of Financial Statements of such entities81 in larger public interest. 137.The Auditors in the present case were required to ensure compliance with SAs to achieve the necessary a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Items (SA 501) 6 Indian Accounting Standard 115, Revenue from Contract with Customers (Ind AS 115) 7 Standard on Auditing 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements (SA 240) 8 Para 3 of Standard on Quality Control for Firms that Perform Audits and Reviews of Historical 9.Financial Information, and Other Assurance and Related Services Engagements (SQC 1). 10 Rule 3 of NFRA, 2018 11 Indian Accounting Standard 24, Related Party Disclosures 12 Indian Accounting Standard 24, Related Party Disclosures (ind AS 24) 13 Standard on Auditing 550, Related Parties (SA 550) 14 Section 177 of the Companies Act,2013 read with Rule 7 of Companies (Meetings of Board and its Powers) Rules,2014 15 Release No. 05-2021-020 dated December 14, 2021 16 Indian Accounting Standard 107, Financial Instruments: Disclosures (Ind AS 107) 17 Standard on Auditing 505, External Confirmations (SA 505) 18 Standard on Auditing 320, Materiality in Planning and Performing 19 Refer report of the Committee of European Audit Oversight Body (CEAOB) on benchmarks for determining materiality threshold in the audit of public interest audits. 20 Page 176 of aud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to Assessed Risk (SA 330) 59 WP Reference- Page 17-19 of Audit File 1 60 WP Reference- Page 42-48 of Audit File 1 61 WP Reference- Page 38-49 of Audit File 4 62 WP Reference - Page 39 of Audit File 4 63 WP Reference - Page 41 of Audit File 4 64.WP Reference Page 45 of Audit File 4 65 WP Reference Page 4S of Audit File 4 66 WP Reference - Page 41 of Audit File 4 67 WP Reference - Page 45 of Audit File 4 68 See Annexure 2 to SA 31S 69 WP Reference Page 20-21 of Audit File 1 70.Report on the CEAOB Survey, Materiality in the Context of Audit July 2022 71 Audit Quality Thematic Review Materiality December 2013, FRC UK 72 Section L of the Handbook of the Auditing Pronouncements issued by Audit and Assurance Standards Board of the ICAI (2019). 73 Page 5 of Handbook of the Auditing Pronouncements issued Audit and Assurance Standards Board of the ICAI (2019). 74 WP Reference 20/21 of Audit File 1 75 SA 260: Communication with Those Charged with Governance (Para 15,11,14,16 & 23) 76 SA 265: Communicating Deficiencies in Internal Control to Those Charged with Governance and Management 77.Page 11 to 16 of Audit File-1 78.SA 260: Communication with Those Charged with Gove ..... 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