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TMI Blog2023 (8) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... ion does not take into account his judgment on the Going Concern basis arrived at in accordance with SA 570. This is a clear violation of SA 570 - In addition the auditor has also violated Para 8 of SA 230 Audit Documentation, which requires an auditor to prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit to understand the procedures performed - It is evident that the EP's use of the Emphasis of Matter to include the Going Concern basis, without determining if he needed to modify his opinion on this account, was in clear violation of SA 706 - the EP failed to comply with SA 230, SA 570, SA 705 and SA 706 in applying the prescribed audit procedures to evaluate BCL's assumption of the use of going concern basis for the preparation of its Financial Statements. lmproper reporting of Going Concern in Independent Auditor's Report - HELD THAT:- As per Para 22 of SA 570, if adequate disclosure about the material uncertainty is made by the entity in its financial statement, the auditor shall express an unmodified opinion and the auditor's report shall include a separate section under the heading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and taken responsibility for the lapses pointed out in the SCN, in exercise of powers under Section 132( 4)( c) of the Companies Act, 2013, it is hereby ordered the imposition of a monetary penalty of Rs.1 Lakh upon CA Shekhar Sharad. - Order No. 25/2023 - - - Dated:- 1-8-2023 - 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 Shekhar Sharad, ICAI Membership No. 061749 under Section 132(4) of the Companies Act 2013 read with Rule 11(6) of National Financial Reporting Authority 2018 I. This Order disposes of the Show Cause Notice (' SCN' hereafter) of even no. dated 03.11.2022, issued to CA Shekhar Sharad, partner of M/s Shekhar Sharad Co. (ICAI Firm registration no. 011338C), Ramgarh, Jharkhand, who is a member of the Institute of Chartered Accountants of India ('ICAI' hereafter) and was the Engagement Partner ('EP' hereafter) for the statutory audit of Burnpur Cement Limited , West Bengal ('BCL' or 'the company' hereafter) for the Financial Year ('FY' hereafter) 2017-18. 2. This Order is divided into the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Based on investigation and proceedings under section 132 (4) of the Companies Act and after giving opportunity to present the case, NFRA found the EP guilty of professional misconduct and imposes through this Order a monetary penalty of Rs. 1 Lakh. This Order will take effect after 30 days from its issue. B. INTRODUCTION BACKGROUND 8. The National Financial Reporting Authority ('NFRA' hereafter) is a statutory authority set up u/s 132 of the Companies Act 2013 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 is empowered u/s 132 (4) of the Act to investigate prescribed classes of companies and impose penalty for professional or other misconduct of the individual members or firms of chartered accountants. 9. The statutory auditors, both individuals and firms of chartered accountants, are appointed by the members of company u/s 139 of the Act. The statutory auditors, including the Engagement Partners and the Engagement Team that conduct the audit, are bound by the duties and responsibilities prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appear in a financial statement with which the EP is concerned in a professional capacity; c) failure to exercise due diligence, and being grossly negligent in the conduct 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. 13. The EP submitted his reply on 01.12.2022 but did not ask for the personal hearing offered to him in the SCN. In his reply, the EP accepted his lapses in respect of the charges in the SCN stating that he did not differ with the views of NFRA and accepted and acknowledged the issues raised by NFRA; and provided certain clarifications regarding the identified lapses for proper appreciation of facts and circumstances of the case. The EP further added that the lapses did not occur due to gross negligence but due to error in making a professional judgement . We have perused all the material on record including the written responses of the EP. The identified laps ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flow statement stated to have been prepared by the management, on the basis of which the EP concluded that the projected cash flow could be achievable by BCL, was not available in the Audit File. b) In point D1 of the working paper going concern consideration programme , the date of review on the working paper was mentioned as 10.05.2018, while the MRL was dated 28.05.2018. c) The work papers stated that management was in consultation with the Bankers for One Time Settlement (' OTS' hereafter) of outstanding borrowings, however no documentation of such consultation was found in the Audit File. d) The work papers stated that management was planning to increase the capacity utilisation and to curtail the overhead expenses, but no document like Financial Budgets or Quantitative Forecast in this regard were found in the Audit File. e) The work papers stated that the historical results and trends for subsequent period were in line with the management's projected cash flows, but no working was found in its support. 16. The EP stated that the analysis of Going Concern basis was based on discussion with the management and projected cash flow presented during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdance with the above provisions of SA 570 and therefore the Auditor's opinion does not take into account his judgment on the Going Concern basis arrived at in accordance with SA 570. This is a clear violation of SA 570. b) In addition, we find that the auditor has also violated Para 8 of SA 230 Audit Documentation, which requires an auditor to prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit to understand the procedures performed. Accordingly, the contention of the EP that he checked the Cash flow statement, Quantitative forecast for increasing capacity utilisation and comparison of historical results with the projection of next 12 months, but did not keep the copy of the same, cannot be accepted. The EP submitted that the correspondence regarding OTS with bank was not kept in the audit file due to its voluminous nature. This is not acceptable as the EP is required to document sufficient appropriate audit evidence in support of his work. c) MRL is an important document, and where the EP needed to perform his analysis on the basis of an unsigned copy of MRL, he needed to document appropriately in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch has eroded net worth and its current liabilities are greater than the current assets, but the management is already in discussion with some lenders and investors regarding expansion of the existing Plant and other new Plant and is confident about the viability of the expansion. The management after considering all the facts, foreseeable future, trading estimates and cash flow forecasts is confident about the going concern and so the use of going concern basis remains appropriate. The SCN observed that there was no attempt by the EP to evaluate the above-mentioned disclosure made by the company and the disclosure made by BCL in note no. 35 above cannot be stated as adequate disclosure since it fails to disclose: a) Quantification of principal financial parameters viz., the negative net worth, overall losses, negative current assets, huge financial liabilities and failure to pay creditors. b) Principal events affecting going concern viz. closure of its Asansol Plant and non-operational status of its clinker division. c) Excessive reliance on One time settlement of huge financial liabilities. Accordingly, the SCN stated that as per the requirement of Para 19 of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by revoking its registration and impose a civil monetary penalty of$ 10000 on firm. The Bravos (Engagement Partner) was barred from being an associated person of a registered public accounting f rm. C.3 Inconsistency in audit documentation 23. The EP was charged 10 with inconsistency in audit documentation as the working paper recording the overall opinion and conclusions were reviewed and signed on 16 May 2018, while the Management Representation Letter (MRL), which was one of the supporting documents was signed on 28 May 2018. The SCN stated that this prima facie establishes that MRL was obtained only to complete the documentary evidence and to fulfil the requirements of the SA 580 Written Representations. The EP and the engagement team had evidently already framed the audit conclusions and obtained the representation only to support their such framed conclusions. 24. The EP replied that the unsigned MRL was provided by the company from time to time and its contents were noted in audit working papers including in Partner's Review Notes . The EP was reportedly assured by BCL that a signed copy of the unsigned MRL will be submitted. There was delay by BCL in furn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial statements by the company, in Para 14 to 22 above. (d) The EP committed professional misconduct as defined by clause 8 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of professional misconduct when he fails to obtain sufficient information which is necessary for expression of an opinion, or its exceptions are sufficiently material to negate the expression of an opinion . This charge is proved as the EP failed to conduct the audit in accordance with the SAs and applicable regulations and failed to analyse and report the appropriateness of use of going concern in the preparation of financial statements by the company, in Para 14 to 22 above. (e) The EP committed professional misconduct as defined by clause 9 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of professional misconduct when he fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances . This charge is proved since the EP failed to conduct the audit in accordance with the SAs as explained in Para 14 to 22 above. Therefore, we conclude that the charges of prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penalty of- (I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and (II) not Jess than ten lakh rupees, but which may extend to ten times of the fees received, in case of firms. (B) debarring the member or the firm from-(1) being appointed as an auditor or internal auditor er undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or (II) performing any valuation as provided under section 247, for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority. 31. As per the information furnished by CA Shekhar Sharad vide email dated 20.04.2023, the audit fees of BCL for the FY 2017-18 was Rs . (including Limited Review work). Total professional fees received by M/s Shekhar Sharad Co. for the FY 2017-18 was ..out of which CA Shekhar Sharad had .share. As per the details of the capital account of CA Shekhar Sharad, he received net profit and other remuneration amount in for the year ended 31.03.2018 from Mis Shekhar Sharad Co. 32. Considering ..... X X X X Extracts X X X X X X X X Extracts X X X X
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