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TMI Blog2023 (8) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... ry Audit of BCL by virtue of noncompliance with the requirements of SQC 1, SA 220 and SA 230 - Such lapses have been viewed seriously by international regulators as well. Penalty and sanctions - HELD THAT:- It is the duty of an EQCR partner to conduct the review of the work of the ET and ensure that the Independent Auditor's Report issued is appropriate, as it provides useful information to the stakeholders and public, based on which they make decisions on their investments or do transactions with the public interest entity - Without a credible Audit, Investors, Creditors and Other Users of Financial Statements would be handicapped. The entire corporate governance system would fail and result in a breakdown in trust and confidence of investors and the public at large if the auditors do not perform their job with professional scepticism and due diligence and adhere to the standards. 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. Considering the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s domain 2 BCL was required to prepare its Financial Statements ('FS' hereafter) for the FY 2017-18 in accordance with Indian Accounting Standards ('Ind AS' hereafter), as notified by Ministry of Corporate Affairs under Companies (Indian Accounting Standards) Rules, 2015. 5. As per Para 6(c) of Standards on Quality Control ('SQCs' hereafter) SQC 1 and Para 7(b) of SA 220, the engagement quality control review is a process designed to provide an objective evaluation, of the significant judgments the Engagement Team made, and the conclusions reached in formulating the Audit Report. As is set out in this Order, the EQCR partner failed to meet the relevant requirements of the Standards on Auditing ('SA' hereafter) in several significant respects reflecting lack of professional competence to act as an EQCR for the audit of a Public Interest Entity (PIE). In several areas of the audit identified in this Order, the EQCR partner was negligent and failed to apply professional skill and due diligence sufficiently and adequately to critically evaluate the work of the Engagement Partner ('EP' hereafter) and the Engagement Team ('ET' h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wife and shortage of qualified staff. NFRA took up the matter suo moto for investigation and proceedings under Section 132 (4) was initiated. Vide letter dated 21.12.2021. M/s Shekhar Sharad Co., and the EP were asked to submit the Audit File along with other information within 30 days' time. The EP submitted the Audit File for FY 2017-18 on 23.02.2022. The Audit Files showed that CA Riya Agarwal was engaged as the EQCR partner for the audit engagement and her credentials for appointment as EQCR partner were conveyed vide her email dated 07.10.2022. 11 . The examination by NFRA showed that the EP had issued Qualified opinion on the matters mentioned below: a) Inability to comment on the correctness of Trade Receivables and its provisions and write-offs; b) Non-recognition of Interest Cost on the borrowings classified as Non-Performing Assets (NPAs); c) Incorrect valuation of old and obsolete Inventory; and d) Improper recognition of Deferred Tax Assets (DTA) Except for the matters mentioned above, the EP had certified that . . . . financial statements give the information required by the Act in the manner so required and give a true and fair view in con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evaluation of the significant judgments made by the Engagement Team (ET) and ensuring that the conclusions reached by the ET in formulating the Audit Report are appropriate. It is necessary for EQCR to have the requisite technical expertise and experience to enable him/ her to perform the assigned role of evaluating the work of ET so that any possible misstatement / error can be avoided. Without ensuring the appropriate technical expertise and experience, the whole purpose of introducing this second line of quality control viz., EQCR would be defeated. 15. The EQCR partner stated in her reply that ... .. . .. . .... I am associated as a Partner in Shekhar Sharad Co. which is a small sized practising firm and moreover . I did not have any prior experience of Statutory audit of 'listed companies ...... Since, Ramgarh Cantt is a small town with very few practitioners there was no EQCR available who was having prior experience of statutory audit of listed entities. As such I was assigned, and I also accepted role of EQCR for statutory audit of BCL . 16. We observe from the reply of the EQCR partner that she had informed vide her email dated 07.10.2022, that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm 's policies on engagement quality control review have been performed; (b) The engagement quality control review has been completed on or before the date of the auditor's report; and (c) The reviewer is not aware of any unresolved matters that would cause the reviewer to believe that the significant judgments the engagement team made and the conclusions they reached were not appropriate . Para 3 of SA 230 stipulates that: Audit documentation serves a number of additional purposes, including the following ... . . . . . . enabling the conduct of quality control reviews and inspections in accordance with SQC 1 ... ... Para 25 of SA 220 read with Para 3 of SA 230, requires an EQCR to document the procedures conducted to review the work of ET. The work of EQCR involves the application of professional judgment in several significant matters and, therefore the EQCR was required to maintain documentation of evaluation of such judgements, distinct from the documentation of the ET. On perusal of the audit file, only one working paper of EQCR was found, which was a yes / no type checklist. No other working papers are found showing any evaluation done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 20 of SA 220 read with Para 64 of SQC 1, states that an EQCR is required to perform an objective evaluation of the significant judgements made by the ET, and the conclusions reached in formulating the auditor's report. This evaluation involves review of selected audit documentation relating to the significant judgements and conclusions of the ET. The Independent Audit report contained Qualified Opinion in respect of recognition of Deferred Tax Asset (DT A) and an Emphasis of Matter (EOM) in respect of the Going Concern, but audit file shows that the working papers relating to assessment of Going Concern and DT A were not reviewed by the EQCR partner. Other important working papers like audit plan and final analytical review were also not reviewed by the EQCR partner. 20. The EQCR partner was charged 12 with failure to review independence of the audit firm in accordance with Para 21 of SA 220, which states that: For audits of financial statements of listed entities, the engagement quality control reviewer, on performing an engagement quality control review, shall also consider the following: (a) The engagement team's evaluation of the firm's independ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... signed by the EQCR partner during 11 th May to 16 th May 2018 only, i.e., after 40 days of the beginning of the audit. The working papers related with Materiality determination, ROMM were reviewed at the end of the audit due to which the EQCR partner's review was not available for appropriate changes in the planning and conduct of the audit. b) The important work papers relating to Deferred Tax Assets, Going Concern, Independence, and audit plan were not reviewed by the EQCR partner. Yet the EQCR partner reached the same conclusions as the ET, and there was no difference of opinion between the ET and the EQCR. 23. On the basis of the foregoing, it is established that the EQCR partner performed the review by routinely ticking a yes/no checklist and signing on some of the WPs prepared by the ET. The work of EQCR partner is not separately identifiable from that of the ET, which raises serious doubts on the performance of her statutory obligations. Accordingly, it is established that the EQCR Partner failed in her assigned role in the Statutory Audit of BCL by virtue of noncompliance with the requirements of SQC 1, SA 220 and SA 230. Such lapses have been viewed serious ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Act 1949, which states that a CA is guilty of professional misconduct when she ''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 EQCR partner failed to conduct the review of the work of ET in accordance with the SAs as explained in the Paras 14 to 23 above. III. The EQCR partner committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 9 of Part I of the Second Schedule of the Chartered Accountants Act 1949, which states that a CA is guilty of professional misconduct when she ''fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances . This charge is proved as the EQCR partner failed to conduct the review of the work of ET in accordance with the SAs as explained in the Paras 14 to 23 above. Therefore, we conclude that the charges of professional misconduct enumerated in the SCN dated 03.11.2022 stand proved based on the evidence in the Audit File, the Audit Report issued by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2013 provides that the National Financial Reporting Authority shall, where professional or other misconduct is proved, have the power to make order for: (A) imposing 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 less 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 (I) 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; 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. 29. 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 (including Limited Review work). Total professional fees received by Mis Shekhar Sharad Co. for the FY 2017-18 was out of which CA Riya Agarwal had ..share. As per the details of the capita ..... X X X X Extracts X X X X X X X X Extracts X X X X
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