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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 ..... dures and response to such risks - Failure to design and implement auditors response to assessed risks - Failure to determine materiality - Failure to perform Analytical Procedures - Failure to prepare documentation regarding Auditor s responsibilities relating to fraud - Failure to Communicate with Those Charged with Governance (TCWG) . Findings on Articles of Charges of Professional Misconduct by the Auditors - HELD THAT:- It is concluded that the Auditors have committed professional misconduct as defined in Section 132 (4) of the Companies Act, read with Section 22 the Chartered Accountants Act 1949 (the CA Act), as amended from time to time, as detailed below: i. The Auditors committed professional misconduct of failure to disclose a material fact known to them which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where they are concerned with that financial statement in a professional capacity . ii. The Auditors committed professional misconduct of failure to report a material misstatement known to them to appear in a financial statement with which they are concerned in a professional capacity. i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring of the work of the EP and the Engagement Team during the audit engagement and has abdicated its responsibility to ensure audit quality as per Professional Standards. Under the circumstances, we proceed to order the following sanctions keeping in mind the deterrence, proportionality, and the signalling value of sanctions. Considering the fact that professional misconducts have been proved and considering the nature of violations and principles of proportionality, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, order: i. Imposition of a monetary penalty of Rs.10,00,000/- (Rupees Ten Lakhs) upon CA Devang Dalal who is 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. M H Dalal Associates. - Order No : 021/2023 - - - Dated:- 28-6-2023 - Dr. Ajay Bhushan Prasad Pandey Chairperson, Dr. Praveen Kumar Tiwari Full Time Member And Smita Jhingran Full Time Member ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udit file and SQC 1 policy of the Firm. NFRA s investigations revealed a number of significant failures on the part of the Auditors. As a result, a Show Cause Notice (SCN) listing their failures and negligences was issued to the Auditors on 18.10.2022 in terms of Section 132 (4) of the Act read with Rule 11 of the NFRA Rules 2018. 8. The Auditors replied to the SCN on 05.12.2022 after availing of extension of time. The Auditors did not avail of the personal hearing offered to them. 9. The lapses in audit established in this Order have been organised into major lapses and other lapses and discussed in section C and D respectively of this Order. 10. The Auditors opinion on Standalone Financial Statements (SFS) that the Financial Statements reflected true and fair view in accordance with accounting principles generally accepted in India and the provisions of the Act was false as the Financial Statements were materially misstated in view of the following: a) Financial Statements did not contain required disclosures mandated by Ind AS 24 2 and the Act, in respect of critical and sensitive information pertaining to Related Party Transactions. These include long outstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors failed to identify the applicable Ind AS viz. Ind AS 115 6 and the presumption of risk of fraud 7 in recognition of revenue (para 68 and 69) . 13. The Auditors made false statement in their report on the Internal Control over Financial Reporting (ICoFR), without testing their adequacy and operating effectiveness as required by the relevant Guidance Note of the ICAI (para 73 and 74) . 14. The Auditors failed to demonstrate sufficiency and appropriateness of audit work in virtually every critical building block of an audit of Financial Statements i.e., Audit Strategy, Planning (para 86 to 88) , Determining Materiality (para 104 to 108) , identification and assessment of ROMM through an understanding of the entity s environment and internal control (para 90 to 94) , designing and performing audit procedures responsive to the ROMM (para 98 to 101) and evaluating the audit results. 15. This Order establishes that in view of the potentially high ROMM in the Financial Statements, and the dismal quality of the audit evidence as reflected in the audit work papers, the Statutory Audit of MIIL, instead of being an exercise in application of professional skill and care h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and the Code of Ethics, the violation of which constitutes professional or other misconduct, and is punishable with penalties prescribed under Section 132(4) (c) of the Act. 19. NFRA took up for investigation, under Section 132(4) of the Act, possible violations of the SAs by the Statutory Auditor of M/s MAN Industries (India) Limited (MIIL), a company located at Mumbai, on receipt of information from Securities and Exchange Board of India (SEBI) vide letter dated 23.06.2022 regarding financial irregularities committed by MIIL. 20. MIIL is a manufacturer and exporter of large diameter Carbon Steel Line Pipes for various high pressure transmission applications for Gas, Crude Oil, Petrochemical Products and Potable Water. MIIL has disclosed, as required under Ind AS 24 10 total of three subsidiaries, the accounts of one of which has not been consolidated. MIIL is a company listed on BSE and NSE and is categorized as a Small Cap company by Association of Mutual Funds in India (AMF 11 ) based on its average market capitalization of Rs. 385.30 crores during six months ended 31.12.2020. Table 1 below depicts certain key features of MIIL, the shareholding pattern of MIIL (showing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of professional duties; (d) failure 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; and (e) failure to invite attention to any material departure from the generally accepted procedures of audit applicable to the circumstances. 24. The Auditors vide letter dated 15.11.2022 requested for extension of time for submission of replies, which was granted up to 05.12.2022. The Auditors submitted their reply vide email dated 05.12.2022. 25. The Auditors did not provide satisfactory response to the charges in the SCN and have not accepted their alleged lapses detailed in the SCN. They have claimed that they have a due procedure for carrying out audit assignments which are in compliance with SAs; and that they followed an exhaustive and a thorough process before forming audit opinion. Part C and D of this Order discusses the replies to the charges in detail. 26. The Auditors did not avail the opportunity of personal hearing. Thus, this Order is based on review of the audit file, written responses of the Auditors and other material available on record. Each of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. The Auditors failed to demonstrate professional skepticism to challenge the Company and to get to the bottom of the non-disclosure of a critical and sensitive information from the users perspective. 30. The objective of related party disclosure is to draw attention to the possibility that the financial position and profit or loss of the preparer may have been affected by the existence of related parties and by transactions and outstanding balances with related parties, including commitments with such parties (Refer Para 1 of Ind AS 24). While laying down the purpose of related party disclosure, Para 6 of Ind AS 24 states that a related party relationship could have an effect on the profit or loss and financial position of an entity. Related parties may enter into transactions that unrelated parties would nol. For example, an entity that sells goods to its parent at cost might not sell on those terms to another customer. Also, transactions between related parties may not be made at the same amounts as between unrelated parties . Therefore, disclosure of related party outstanding balances in a partial manner would be incomplete and misleading and if the view of the Audito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that no loan had been given by the Company during the period under audit i.e., FY 2020-21, hence disclosure as required by the Section 186(4) of the Companies Act, 2013 is not applicable. 35. The reply of the Auditors is not acceptable as they were responsible for certifying the information presented in the Financial Statements of FY 2020-21. The reply indicates that their understanding of their obligation under Section 186 (4) of the Act is flawed. We observe that the Auditors have displayed similar lack of understanding in respect of disclosure requirements of Ind AS 24, as elaborated in earlier paragraphs of this Order. Therefore, we conclude that the Auditors failed to comply with their obligation under Section 186 (4) of the Act by failing to report the non-disclosure of full particulars of related party loan of Rs. 8.47 crore to MSPL, its purpose and utilisation. Failure to report non-disclosure of Related Party Loans on gross basis 36. The Company in its Annual Report for 2020-21 has disclosed loan to subsidiary and its repayment on net basis, which was not in accordance with requirements of Para 18 of Ind AS 24 that requires an entity to disclose the amount of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titative benchmarks of materiality of 1% to 2% of total assets. Further, the Auditors reference to disclosure in Note 25 of SFS regarding charge created on the Current Assets and Immovable Property is irrelevant here. Accordingly, we conclude that the Auditors failed to exercise due professional care and to disclose a material fact known to them, which is not disclosed in the Financial Statements, but the disclosure of which is necessary in making such a Financial Statement, where he is concerned with that Financial Statement in a professional capacity. C.3 Issues related to Credit Risk Exposures (Trade Receivables) 41. The Auditors were charged with failure to question the accounting policies relating to trade receivables, improper disclosures, failing to report non-disclosure of credit risk profile of the trade receivables by the Company as required by Para 35M and 35N of the Ind AS 107. Further, the Auditors were charged with non-compliance of SA 505 17 which required them to obtain external confirmations of outstanding trade receivables to ascertain accuracy, genuineness and recoverability of these balances. 42. The Company had disclosed at Note 49 in its Financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PBT being used as benchmark to compare materiality of total bad debts written off. We note that Para A6 of SA 320 18 lays down overarching principle of determining materiality i.e., at five percent of PBT from continuing operations for a profit-oriented entity in a manufacturing industry and one percent of total revenue or total expenses for a not-for-profit entity 19 . Therefore, we consider the Auditors concern regarding the PBT being used as a benchmark is misplaced. Errors in Presentation and Disclosures - Ageing Analysis of Trade Receivables 45. Para 22 of SA 530 requires that the auditor shall perform audit procedures to evaluate whether the overall presentation of the Financial Statements, including the related disclosures, is in accordance with the applicable financial reporting framework. The Audit Work Paper Debtor Ageing as on 31/03/2021 20 gives a summary of party-wise outstanding balances segregated into Current and Non-current. Apart from the fact that the document does not indicate who prepared it, management or the Auditors, the balances included in the current category have outstanding balances in the ageing buckets of 1 to 2 years (Rs 8.63 crores), 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheme of Arrangement approved by Hon ble High Court of Bombay vide its order dated 20.03.2015 23 which was to be made effective from 01.04.2013, the shares held by MIPL in MSPL were to be transferred to MIIL and accordingly MSPL became 100% wholly owned subsidiary of the MIIL from 01.04.2013. MIIL has given effect to this Scheme of Arrangement in its Financial Statements for the FY 2014-15. However, MIIL has not consolidated the Financial Statements of MSPL for FY 2015-16 to 2020-21. 49. The Auditors replied that they had been informed of an ongoing legal dispute between the promoters in relation to the control of MSPL pending in Hon. Bombay High Court, and the consolidation of the financials of MSPL as a subsidiary of MIIL would not only lead to an incorrect disclosure but also result in contempt of the order of the Hon. Bombay High Court dated September 25, 2020. The Auditors submitted that they had relied on a legal opinion given by M/s. Kanga Co to MIIL on 18.12.2015 wherein they had advised MIIL not to treat MSPL as a wholly owned subsidiary of MIIL and not to consolidate the financials of MSPL with MIIL till the time the legal proceedings were disposed of. Further, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below has only the column headings but no work has been shown under the columns: The Audit Work Papers also contain the following documents which are neither signed by any member of the Audit Engagement Team nor by any official of MIIL: a) 1 Page of Debtors Ageing as on 31/03/2021 26 b) 1 Page of Party-wise Ageing as on 31/03/202 27 c) Tax Invoices along with supported documents 28 55. In the reply to the SCN, the Auditors have given incomplete details of the risk profile of the trade receivables, none of which was available in the audit files submitted. The deficiencies in the audit and weaknesses in these submissions have been discussed in Section C 3 above. 56. From Audit Work Papers shown at para 54, it can be noted that the audit work performed, comprises only three cryptic statements of two-three words such as Party wise, Sample Invoice Vouched and Sampling and Materiality Basis, which do not indicate the nature, extent and timing of the work performed to obtain SAAE expected from the auditor such as the following: a) Nature of tests i.e., Test of Controls, Substantive Procedures such as Test of Details, Analytical Reviews. b) Extent of audit w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orting framework to trade receivables, there is no Audit Work Paper except a list of 37 Ind Ass 30 , which is also incomplete as it misses out two critical Ind ASs viz. Ind AS 115 31 and Ind AS 116 32 . It is relevant to note that the trade receivables are Financial Assets within the scope of measurement requirements of Ind AS 109 33 , which prescribes important requirements relating to impairment loss recognition and measurement based on Expected Credit Loss (ECL) approach. A key feature of ECL approach is to measure the ECL allowance after considering the information about past events, current conditions, and forecasts of future economic conditions 34 During the year under audit, the Company had recognized only a small amount of Rs. 2.14 crores as ECL allowance on trade receivables despite the fact that a substantial amount (Rs. 69.79 crores, constituting 51.14% of PBT), was written off as bad debts. As mentioned in para 41 to 43 above, trade receivables depicted high credit risk. Further, Note 42(b) of the SFS states that Rs. 133.24 crores of the outstanding dues are under dispute. Of these, Rs. 96.58 crores, constituting 37.42% of the unsecured trade receivables relate to tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork Papers further state that the management has provided them with valuation report in case of MSPL and discounted cash flow statement in case of Man Overseas Metal, DMCC. 60. We observe from the Audit Work Papers the following major inadequacies and deficiencies in the audit work performed in respect of these material account balances: 60.1 There is no audit work performed to verify the existence of these investments. 60.2 In respect of the audit of impairment test of investments in MSPL, the Auditors have stated in the KAM part of the Auditor s report that the management has assessed the impairment by reviewing the business forecasts using the Discounted Cash Flow (DCF) valuation method whereas the external valuer s report available in the audit file states that this impairment assessment was based on Adjusted Net Assets Value method. This shows negligence and lack of due diligence on a matter that was raised by the Auditors as a KAM. 60.3 The Auditors did not perform any work to check whether the management applied the requirements of applicable financial reporting framework viz. Ind AS 36 and Ind AS 113%. 60.3.1. Ind AS 36 requires the comparison of carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Ind AS 36. 61. In view of the above deficiencies in the audit work performed i.e., simple collection and filing of the documents without any application of an enquiring mind of the auditor, in respect of material account balances, the Auditors have been grossly negligent in performing their professional duties and failed to identify and report material misstatements in the SFS of the Company. Thus, the impairment loss of Rs. 8.56 crores has not been recognized resulting in overstatement of PBT of the Company and the carrying amount of investments. Inventories 62. The closing balance of Inventories is 27.92% of Total Current Assets of MIIL as of 31.03.2021 and therefore is a material significant account balance. The Audit Work Papers and the work performed by the Auditors are as follows: (a) Anjar Plant - Stock summary with supporting 45 (b) Pithampur Plant - Stock Summary with supporting 46 (c) Valuation provided by management Checked 47 (d) Scanned bill of Inventories verified 48 63. According to SA 501 49 , Inventories is one of three items that require special consideration by the auditor and this SA requires certain specific audit procedures hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e similar to those mentioned in respect of Trade Receivables at para 56 of this Order. 68. The Auditors work paper exhibited below regarding compliance with the applicable financial reporting framework has no mention of the standard applicable to Revenue i.e., Ind AS 115. 69. Para 26 of SA 240 53 states that when identifying and assessing the risks of material misstatement due to fraud, the auditor shall presume that there is risk of fraud in revenue recognition. Para 47 of SA 240 further states that when the auditor has concluded that the presumption is not applicable in the circumstances of the engagement, he shall rebut the presumption and shall document the reasons for the conclusion. However, no such documentation exists in Audit Work Papers. Audit of Internal Financial Control Over Financial Reporting(Clause (i) of sub- section 3 of Section 143 of the Companies Act, 2013 (the Act )) 70. The Auditors have expressed unmodified opinion on the adequacy and operating effectiveness of Internal Financial Controls Over Financial Reporting (ICoFR) as at March 31, 2021. The Auditorss opinion further states that they have conducted audit in accordance with the Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of tests performed i.e., test of controls and the timing of those tests etc. Also, there is no documentation of the results of the test of controls performed, based upon which the adequacy and operating effectiveness of the ICoFR has been concluded. 74. In the absence of any evidence of the audit work performed by the Auditors in respect of ICoFR, the unmodified audit opinion issued by them is without any basis. As can be seen from preceding paras, the Auditors are found to have been grossly negligent in their professional duties and have failed to obtain SAAE, thereby violating SA 200 and the Guidance Note. C.6 Audit Documentation 75. The Auditors were charged with non-compliance with Para 8, 9 and 10 of SA 230. 76. The Auditors in their reply referred to certain work papers in the audit file which according to them demonstrate the audit procedure performed, audit evidence obtained, persons who performed and reviewed the same. They further stated that the audit documentation prepared by them is sufficient to enable them to understand the nature, timing and extent of audit procedures performed. 77. We find that the audit file of MIIL for the FY 2020-21 consists ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd information taken from the Company and does not record professional judgements and significant conclusions/decisions made by the Auditors and the basis for that. Non-documentation of the work performed is a clear evidence that the work has not been performed. It is apposite to note the observations of the Australian Audit Regulator ASIC, mentioned below: Firms often assert that our findings relate to documentation deficiencies in their audit file. An audit file should contain sufficient detail for an experienced auditor to understand the work performed and relied on in forming conclusions. Where this detail has not been documented, our presumption is that the work has not been performed. We have used this approach for several years and it is consistent with the approach applied globally by other audit regulators and in most firm internal quality review programs. 55 (Emphasis supplied) 83. Lack of sufficient documentation has been viewed seriously by national and international regulators as well. For example, in the matter of Bharat Parikh Associates Chartered Accountants, the US audit regulator PCAOB took a serious view of the lack of sufficient documentation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 of performance of these activities. 87. Responding to the charge, the Auditors referred to their audit planning documents which included a preliminary requirement list for Statutory Audit for the year ending March 31, 2021, Engagement Letter, Audit Programme, Checklist for CARO and Ind AS Checklist, which they considered as overall audit strategy. We find that the preliminary requirement list for Statutory Audit has three columns, all of which are blank with no remarks and no date. A screenshot of the same is given below: - Therefore, the above clearly indicate lack of due diligence and gross negligence on the part of the Auditors. 88. The Ind AS checklist referred to by the Auditors has only the title of Ind AS. There are no detailed checkpoints of the activities to be performed by the Auditor for each of the applicable Ind AS. Further, the Auditors have mentioned N against Ind AS 21 The Effects of Changes in Foreign Exchange Rates , whereas it has been observed from the Financial Statements of MIIL tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir 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 in identifying the ROMM due to fraud or error and there are no material misstatements in the Financial Statements. 92. Para 32 of SA 315 requires that the auditor shall, inter alia, document the following: 92.1 Sources of information which the understanding of the Entity and its Environment was obtained, risk assessment procedures performed e.g., inquiries of the management and other individuals, analytical procedures, and observation and inspection (Para 32 (b) of SA 315). The risks identified, and the related controls. 92.2 Entity s Internal Control including understanding the various components of Internal Control such as the organisation structure, participation by TCWG, assignment of authority and responsibility, human resource policies/practices, entity s process of determining risks to be managed, the information technology (IT) system relevant to Financial Reporting including those related to business processes and journal entries, control activities whether manual or withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09.2020 respectively. Similarly, Internal Audit Reports reported long pending advances to vendors without receipt of material of Rs. 22.5 crores 65 , Rs. 22.5 crores 66 and Rs. 22.5 crores 67 for the quarter ending 31.03.2021, 31.12.2020 and 30.09.2020, respectively. 94. However, there is no evidence in the audit file that the Auditors identified and assessed the above mentioned adverse features of pending litigation 68 of subtantial amounts as items of ROMM and the risks that required special audit consideration. Therefore, this is a serious non- compliance with the requirements of Para 25 to 29 of SA 315. 95. In light of the above facts and circumstances, we conclude that the Auditors have been grossly negligent in the conduct of their professional duties and made false declaration in the audit report of the true and fair view of the Financial Statements. C.9 Failure to design and implement auditors response to assessed risks 96. The Auditors were charged with failure to comply with Para 1, 5 6 of SA 330 which require the auditor to design and implement overall responses to the ROMM identified and assessed during audit. 97. The Auditors in their response ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 A2 states that a percentage is often applied as a starting point determining materiality for the Financial Statements as a whole and gives factors that affect the appropriate benchmark such as elements of the Financial Statements (e.g., assets, liabilities, equity, revenue, expenses). Para A6 provides more specific guidance when it states that the auditor may consider five percent of PBT from continuing operations to be appropriate for a profit-oriented entity in a manufacturing industry and while the auditor may consider one percent of total revenue or total expenses to be appropriate for a not-for-profit entity. Also, a recent report 70 of the Committee of European Audit Oversight Body (CEAOB) mentions Profit Before Tax (PBT), Adjusted PBT, Average PBT, Total Revenue and Total Equity as the commonly observed benchmarks for determining materiality and reports 3 to 10% and 0.5 to 2% of the PBT, Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 responsibilities as auditors.. D. OTHER LAPSES IN THE AUDIT D.1 Failure to perform Analytical Procedures 110.The Auditors were charged with failure to comply with Para 3(b) and Para 6 of SA 520 which require the auditor to design and perform analytical procedures to assist the auditor in overall conclusion of the audit as to whether the Financial Statements are consistent with the auditor s understanding of the entity. On examination of Financial Statements, it is observed that there was a 90% increase (from Rs. 153.98 crores in FY 2019-2020 to Rs. 292.45 crores in 2020- 2021) under the head selling and distribution expenses, whereas the sales increased only by 18%. Further, the contingent liabilities have reduced by Rs. 543.24 crores in 2020-21. 111. In response, the Auditors submitted that they had questioned the management regarding items that reported a significant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overed 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 ROMM due to fraud. Further, as mentioned in preceding paras, the Auditors have failed to perform any audit procedure in respect of identification and assessment of ROMM under SA 315. We also observe that it is nowhere documented in the audit file whether the Auditors made enquiries from the company s staff related to internal control processes or observed the staff performing the controls. The reply is an afterthought to hide their deficiencies in the conduct of audit. In the light of above, we conclude that the Auditors have failed to comply with the requirements of Para 16 and 24 of SA 240. D.3 Failure to Communicate with Those Charged with Governance (TCWG) 119.The Auditors were charged with failure to determine TCWG and communicate with TCWG about the responsibilities as an auditor, overview of planned scope, timing of the audit an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailure 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 violated a PCAOB rule that requires a registered public accounting firm to communicate, in writing, to the audit committee ............. PCAOB for this misconduct among others, censured the Firm, revoked its registration, and imposed a civil money penalty of $12500. E. LAPSES OF THE AUDIT FIRM 124.The Audit Firm was charged with failure to comply with Para 2 of SA 220 and Para 3 of SQC 1 which stipulates that the Firm has an obligation to establish and maintain a system of quality control. The Firm was also charged with failure to establish policies and procedures designed to provide it with reasonable assurance that the Firm and its personnel comply with relevant ethical requirements in accordance with Para 14 of SQC 1. 125. As part of the audit file, the Firm submitted a two-page document titled Polic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween 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 forming an audit opinion. 126.The fundamental deficiencies noted are as follows: 126.1 Quality Control Policy (QCP) does not even mention how the firm complies with prohibition on non-audit services under Section 144 of the Act, Partner Rotation requirements and what its policies and procedures are to mitigate the various threats to compliance with the fundamental principles of the Code of Ethics issued by the ICAI. 126.2 QCP is silent in respect of certain critical aspects such as Consultation, Engagement Quality Control Review, ongoing consideration and evaluation of the Firms QCP and periodic inspection of selection of completed assignments. 126.3 QCP is not supported by any Procedure Manual. 126.4 The Firm s response to SCN states that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndated 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 Accountants Act 1949 (the CA Act), as amended from time to time, as detailed below: i. The Auditors committed professional misconduct of failure to disclose a material fact known to them which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where they are concerned with that financial statement in a professional capacity (Refer Clause 5 of Part I of the Second Schedule of the CA Act). This charge is proved as explained in Section C and D above. ii. The Auditors committed professional misconduct of failure to report a material misstatement known to them to appear in a financial statement with which they are concerned in a professional capacity. (Refer Claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 entities 81 in larger public interest. 137.The Auditors in the present case were required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to Financial Statements to facilitate its users. As detailed in this Order, substantial deficiencies in the audit, abdication of responsibility and inappropriate conclusions on the part of CA Devang Dalal establish his professional misconduct. Despite being a qualified professional, CA Devang Dalal has not adhered to the Standards and has thus not discharged the duty cast upon him. On the contrary, he has tried to cover up by giving unsubstantiated and unconvincing replies to the SCN. The Firm, M/s. M H Dalal Associates has also failed to exercise appropriate control and monitoring of the work of the EP and the Engagement Team during the audit engagement an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 audit file 2 21 Indian Accounting Standard 1, Presentation of Financial Statements (Ind AS 1) 22 Indian Accounting Standard 107, Financial Instruments: Disclosures (Ind AS 107) 23 Company Scheme Petition No. 658 and 659 24 Standard on Auditing 200, Overall objectives of the Independence Auditor and the Conduct of an Audit in accordance with Standards on Auditing (SA 200). 25 Page 21 of Audit File | 26 WP Reference-Page 175 of Audit File 2 27 WP Reference- Page 176 of Audit File 2 28 WP Reference-Page 177-213 of Audit File 2 29 (Para A6 of SA 540) Standard on Auditing ..... 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