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TMI Blog2023 (7) TMI 1246X X X X Extracts X X X X X X X X Extracts X X X X ..... failed to do. Non-provisioning for Trade Receivables- Unsecured, Considered Doubtful - HELD THAT:- SA 200 requires the auditor to comply with all SAs relevant to the audit and mandates an understanding of the entire text of an SA, including its application and other explanatory material, to understand its objectives and to apply its requirements properly. Objective of SA 705 is to express clearly an appropriately modified opinion on the financial statements when the conditions for modifications are met - The opinion expressed in this case is ambiguous as the basis of qualification did not have a proper description and quantification of the financial effects of the misstatement or other explanations as required by Para 17 of SA 705. Hence, the audit opinion is not meeting the objective of SA 705. Such an opinion is misleading to the users of the financial statements as well. The charges regarding non-compliance with SA 705, therefore, stand proven. Wrong Accounting of Deferred Tax Assets - HELD THAT:- It is noted that there is no documentation of evaluation of misstatement identified during the audit as required under SA 450. It is important to note that SA 450 requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he wrong amortization of expenses stands proven. Non-compliance with the format of Financial Statements - HELD THAT:- Section 129(1) of the Act very clearly states that the financial statements shall be in the format as may be provided for different class or classes of companies in Schedule III. Therefore, any deviation from the prescribed format is a non-compliance with the statutory provisions and therefore the auditor's submission in this regard is unacceptable as it is auditors' responsibility to report such non-compliances with the prescribed format. Non-compliance with requirements of SA 230 regarding Audit Documentation - HELD THAT:- As per para A21 of SA 230, Audit Documentation, the Audit File needs to be compiled within a period of 60 days from the date of signing of the Audit Report, not six months as mentioned by EP. This time period of sixty days is given in the Standards on Auditing taking into consideration the constraints faced by the chartered accountants. As the auditor has stated that the documents were scattered in various files and have been compiled only for the submission of Audit File to NFRA, it is evident that the Audit File had not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... professional misconduct is proved. The seriousness with which the Companies Act views cases of professional misconduct is evident from the fact that a minimum punishment is laid down by the law. Considering the proven professional misconduct by CA Sachin Kansal, acceptance of mistakes by him, the nature of violations, size of the audit firm, and applying the principles of proportionality, following sanctions under Section 132( 4 )( c) of the Companies Act, 2013 have been ordered: (i) Imposition of a monetary penalty of Rs 1,00,000 (Rupees One Lakh) upon CA Sachin Kansal. (ii) CA Sachin Kansal is debarred for one year from being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. - Order No: 023/2023 - - - Dated:- 27-7-2023 - Dr. Ajay Bhushan Prasad Pandey Chairperson, Dr. Praveen Kumar Tiwari Full Time Member And Smita Jhingran Full Time Member ORDER In the matter of CA Sachin Kansal, under Section 132(4) of the Companies Act, 2013 1. This Order disposes of the Show Cause Notice ('SCN' hereafter) No. NF-20012/5/202 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Rs.9.07 lakhs have been recognized by the company despite the company being in loss for several years, and lack of certainty that the company would be able to realise the deferred tax assets in future. Anshu was required to prepare its financial statement in the format given in Schedule III to the Companies Act, 2013 but various instances of non-compliance with the format of financial statements have also been noted, which have not been reported by EP in the Auditor's Report. 6. It was also noted that the EP has not assembled the Audit File within 60 days of signing of Auditor's report and has not appointed Engagement Quality Control Reviewer despite Anshu being a listed entity. The EP did not maintain the agreement on terms of Audit engagement in the Audit File, nor did the EP maintain any written communication with TCWG in the Audit File. 7. Based on investigation and proceedings under Section 132 (4) of the Companies Act, 2013 and after giving him opportunity to present his case, NFRA has found the EP guilty of professional misconduct and imposes through this Order the following monetary penalties and sanctions, which will take effect from a period of 30 days ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the FY 2015-16 and CA Sachin Kansal, was the Engagement Partner (EP) on behalf of the Audit Firm. The EP was requested on 08.12.2021, to submit the Audit File 2 and Quality Control Policies of the firm as per SQC 1 3 . In response, the EP furnished Audit File along with SQC Policy followed by the firm in a series of emails (last email dated 08.03.2022). 13. The non-compliances observed by the FRRB of I CAI in the financial statements of the Company were also sent to EP for clarification/ explanation on each of the issues- 30 days were given for the responses which were received on 20.05.2022. 14. After examination of the Audit File and materials available on record, a, prima facie, case of professional misconduct on the part of EP was found and accordingly SCN dated under Section 132(4)(c) of the Act and Rule 11 of the National Financial Reporting Authority Rules, 2018 ('NFRA Rules 2018', hereafter) was issued to the EP, giving him time to respond till 23. L0.2022. 15. The EP was charged in the SCN with professional misconduct on the following grounds: a) failure to disclose material facts known to him, which are not disclosed in a financial statement, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 lakhs, about eight times of what was reported. This resulted in a material misstatement in the financial statements of the Company for FY 2015-16. The SCN stated that the Auditors' opinion in the Independent Auditors' Report that the financial statements give a true and fair view of the state of affairs of the company as on 31.03.2016 was false and misleading since the interest had not been accounted for by the company and the auditor had failed to identify this as a qualification in his auditor's report. 20. In response to the above, the EP submitted that the management was in negotiations with the Bank for a one-time settlement of the loan and hence, in his professional judgment, no additional interest expenses were payable to clear the dues of the Bank. The business, for which the loan was taken, was not profitable and going with management's judgment and acting with objectivity and professionalism to such real-life business situations, the EP had agreed with management's judgment. The EP has referred to a no-dues certificate dated 03.04.2018 from Bank of Baroda, wherein the loan was settled through a one-time settlement; he thus claimed that the judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutory audit. c. The accrual concept in accounting requires a company to record revenue and expenses in the period they are earned or incurred, regardless of when the related cash transactions occur 4 . Liabilities, including contractual obligations, are recognized in the financial statements when they are incurred, even if payment is not due until a later period. This means that contractual obligations that arc incapable of being fulfilled are still recognized as liabilities by a company, even if they are not acknowledged any longer by the management. d. If a contractual obligation no longer meets the definition of liability, it may be excluded from the concept of all known liabilities . For example, if the company has successfully renegotiated the terms of loan agreement and the obligation has been significantly reduced, it may no longer meet the definition of liability and can be excluded from the financial statements. However, there is no such evidence in the Audit File. The Company, instead, had a present obligation, which was legally enforceable 5 . Thus, the interpretation of the EP regarding AS 1 and prudence are flawed and shows a poor understanding of the fundament ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including its application and other explanatory material, to understand its objectives and to apply its requirements properly. Objective of SA 705 is to express clearly an appropriately modified opinion on the financial statements when the conditions for modifications are met. The opinion expressed in this case is ambiguous as the basis of qualification did not have a proper description and quantification of the financial effects of the misstatement or other explanations as required by Para 17 of SA 705. Hence, the audit opinion is not meeting the objective of SA 705. Such an opinion is misleading to the users of the financial statements as well. The charges regarding non-compliance with SA 705, therefore, stand proven. C.3 Wrong Accounting of Deferred Tax Assets 28. The Company had recognized Deferred Tax Assets (DTA) of Rs.9.07 lakhs in FY 2015- 16. As per the Statement for Profit and Loss, the Company had a net loss of Rs.143.96 lakhs and Rs.20.28 lakhs in FY 2014-2015 and FY 2015-2016 respectively (after considering the DTA of Rs.64.38 lakhs in FY 2014-2015 and Rs.9.07 lakhs in FY 2015- 2016). As there was no evidence in the Audit File to indicate the sufficiency o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antly understated by 33% on account of recognition of DTA Regarding the issue of DTA not being material we find that there is no document regarding determination of materiality thresholds in the Audit File as required by SA 320 9 In view of this, his plea cannot be accepted. It reflects the management's intention to depict a better financial position of the company than what existed and the auditor's failure to point this out. 33. As DTA is an accounting estimate, as per para 8 of SA 540 10 , the auditor needs to obtain an understanding of the requirements of the applicable financial reporting framework relevant to accounting estimates, including related disclosures. The EP, in this case, has not obtained a clear understanding of the provisions of AS 22 about the recognition of DT A in the financial statements of the company and failed to report non-compliance with AS 22 by the company. 34. It is noted that there is no documentation of evaluation of misstatement identified during the audit as required under SA 450 11 . It is important to note that SA 450 requires the auditor to accumulate misstatements identified during the audit, determine whether overall audit st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed not to take any adverse view in this regard. 38. The replies of the EP are not acceptable as disclosure of cost formula for inventory is a mandatory requirement under the AS 2 and the financial statements of the company do not indicate the same. Use of specific cost for measurement is also a type of cost formula and should have been included in the Accounting Policies of the company. Use of different formulae permitted under para 14-1 7 of AS 2 can have material impact on the carrying amount of inventories in the Balance Sheet cost of sales in the Profit or Loss. Therefore, disclosure of cost formula in the Financial Statements has relevance significance to the users. As a diligent auditor, it was necessary for him to take up with the TCWG/Management to ensure that there is proper disclosure of accounting policy. In the absence of such action taken by the EP or any work paper in the Audit File pointing to same, the charge regarding not reporting the non-disclosure of cost formula for valuation of inventories in the financial statements stands proven C.5 Wrong amortization of Expenses 39. The EP was charged with non-reporting of violations of AS 26 14 regarding a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Statements 43. The Company was required under Section 129(1) of the Act to prepare financial statements in the format provided in Division I of Schedule III to the Act. Multiple non-compliances with the format were observed in the financial statements of the company and the EP was charged with not reporting the same. Non-compliances observed in the format of financial statements are given below: a. Period from which the company had been continuously defaulting on loans and interest is not indicated 18 . In the annual report, it is only stated that the company has discontinued the payment of interest to the bank, or the payment of secured and unsecured loans. b. Only the names of the partnership firms are given in Note 12 (Non-Current Investments) of the financial statements, other details like names of all their partners, total capital and the shares of each partner are not given. These details are required as per Para 6K of ' General Instructions for preparation of Balance Sheet' under Division I of Schedule III to the Act. c. As per Division I of Schedule III to the Act, securities deposit should be disclosed under long-term loans and advances and Fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y dated 15.11.2023 has agreed to the lapses m Audit documentation. He has admitted that the Audit File was not compiled in accordance with the provisions of SA 230 within the timeframe of six months since the audit, it is submitted that the audit working papers were scattered in different files .... 49. As per para A21 of SA 230, Audit Documentation, the Audit File needs to be compiled within a period of 60 days from the date of signing of the Audit Report, not six months as mentioned by EP. This time period of sixty days is given in the Standards on Auditing taking into consideration the constraints faced by the chartered accountants. As the auditor has stated that the documents were scattered in various files and have been compiled only for the submission of Audit File to NFRA, it is evident that the Audit File had not been compiled by the Auditor even after 5 years of signing of Audit Report. The charges against the EP are, therefore, proved. 50. We observe in this regard that the lack of sufficient documentation in an audit is not a mere technical and procedural formality but is a serious issue which strikes at the very root of the audit and may defeat the very purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars. Vicente Alvarez, CPA was debarred for two years and was required to complete 40 hours of professional education and training relating to PCAOB auditing standards and covering, among other topics, audit documentation and the performance of engagement quality reviews. D.2 Non-compliance Regarding Agreement on Terms of Audit Engagements 52. The EP was charged for not complying with para 9 read with para A20 and para 10 read with para A21-A24 of SA 210 23 , as the Audit File did not contain the agreement on the terms of audit engagements with management or Those Charged with Governance (TCWG). 53. In response, the EP has stated that the Audit Engagement Letter issued to the company was in response to the appointment made in the previous year, and hence it was not amongst the documents in the audit records of FY 2015-16. The EP asked to be pardoned for this omission. 54. The contention of the EP is not acceptable as in case of recurring audits, Para 12 24 of SA 220 requires an assessment from the auditor of whether circumstances require the terms of the audit engagement to be revised and whether there is a need to remind the entity of the existing terms. There is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firms may wish to use other firms to facilitate engagement quality control reviews. ' Hence, being a proprietary firm cannot be accepted as an excuse not to have engagement quality control review when there is a mandatory requirement. (iv) The firm's policies and procedures should require the completion of the engagement quality control review before the report is issued. 30 The Independent Auditors Report of Anshu Clothing Limited was issued on 03.09.2016. It should have been ensured by the Audit Firm that the engagement quality control review had been completed before the report was issued. In this case since the Audit Firm was a proprietary firm and CA Sachin Kansal was the EP and the proprietor of the firm, he should have ensured that the said requirement was met. Hence, the charge that the EP did not comply with the requirements regarding appointment of EQCR stands proven. 58. In a case wherein Engagement Quality Review has not been done by the auditors, PCAOB 31 has observed that For audits of financial statements for fiscal years beginning on or after December 15, 2009, AS 7 requires that an engagement quality review be performed on audits, interim reviews ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly, it is the duty of Auditor to document the same. In the Audit File, there is no documentation of communication with TCWG. The charges regarding non-compliance for communication with TCWG therefore stand proven. 62. The EP has further submitted in his written reply that natural justice demands a lenient view of the Hon Authority in the case of the Respondent because the assessment of audit risk in the audit of Anshu 's by the Respondent was in the context that the total audit fees of the assignment was Rs30,000 Unintended omissions as a result of errors in judgment of audit risk may be pardoned in view of the provisions in Paras A45, A46 and A 52 of SA 200. The respondent being a small proprietorship firm, the hon Authority may prescribe the sanctions based on the principles of proportionally . 63. We note that the fee, which is agreed and accepted by the EP, cannot be an excuse for rationalizing the poor audit quality at a subsequent stage. The EP was at liberty not to accept an engagement if it was financially not viable. In the matter of The Fairdeal Corporation Ltd. Bombay vs. K.Gopalakrishna Rao (quoted in ICAI Code of Ethics, 2009, Page 361 of Vol. III of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclose in his report the material non-compliances the company made regarding non-provision of interest and regarding wrong accounting of deferred tax assets( as per Section 22 and Clause 7 of Part I of the Second Schedule to the CAs Act); b) Failure to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity, as CA Sachin Kansal failed to disclose in his report the material misstatements made by the Company in the area of non-recognition of interest costs pertaining to Borrowings by the lender banks and wrong accounting of deferred tax assets ( as per Section 22 and Clause 7 of Part I of the Second Schedule to the CAs Act); c) Failure to exercise due diligence and being grossly negligent in the conduct of professional duties, because of the lapses and omissions as explained and proved in parts C and D above (as per Section 22 and Clause 7 of Part I of the Second Schedule to the CAs Act); d) Failure to obtain sufficient information which is necessary for the expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion, because of the lapses and omiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enhance his skills as an auditor capable of carrying out the audit of public interest entities. 69. Considering the proven professional misconduct by CA Sachin Kansal, acceptance of mistakes by him, the nature of violations, size of the audit firm, and applying the principles of proportionality, we order the following sanctions under Section 132( 4 )( c) of the Companies Act, 2013: (i) Imposition of a monetary penalty of Rs 1,00,000 (Rupees One Lakh) upon CA Sachin Kansal. (ii) CA Sachin Kansal is debarred for one year from being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. 70. This Order will be effective after 30 days from the date of its issue. Foot Notes 1 AS I, Disclosure of Accounting Policies 2 As defined in para 6(b) of SA 230 of Audit Documentation 3 Standard on Quality Control (SQC) 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements 4 Para 22, Framework for the Preparation and Presentation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch future economic benefits are expected to flow to the enterprise. 16 Para 44 of AS 26 reads as under: 44. An intangible asset arising from development (or from the development phase of an internal project) should be recognised if, and only if, an enterprise can demonstrate all of the following: (a) the technical feasibility of completing the intangible asset so that it will be available for use or sale; (b) its intention to complete the intangible asset and use or sell it; (c) its ability to use or sell the intangible asset; (d) how the intangible asset will generate probable future economic benefits. Among other things, the enterprise should demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; (e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and (f) its ability to measure the expenditure attributable to the intangible asset during its development reliably. 17 Para 30 of AS 22, Accounting for Taxes on Income, reads as 30. Def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Identification of the applicable financial reporting framework for the preparation of the financial statements; and (e) Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content. 24 Para 12 of SA 220 reads as under: 12. The engagement partner shall be satisfied that appropriate procedures regarding the acceptance and continuance of client relationships and audit engagements have been followed, and shall determine that conclusions reached in this regard are appropriate. (Ref Para. A8-A9) 25 SA 220, Quality Control for an Audit of Financial Statements 26 Para 60 of SQC I reads as under: The firm should establish policies and procedures requiring, for appropriate engagements, an engagement quality control review that provides an objective evaluation of the significant judgments made by the engagement team and the conclusions reached in formulating the report. Such policies and procedures should: (a) Require an engagement quality control review for all audits off financial statements of listed entities; (b) . ..... X X X X Extracts X X X X X X X X Extracts X X X X
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