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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 ..... mary B. Introduction & Background C. Lapses in the audit D. Article of Charges of Professional Misconduct by the EQCR E. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. NFRA initiated action under section 132 (4) of Companies Act 2013 ('CA-2013' or 'Act' hereafter) for professional misconduct against CA Riya Agarwal, the EQCR partner in statutory audit of Burnpur Cement Limited (BCL), West Bengal for FY 2017-18, pursuant to information received from Registrar of Companies ('ROC' hereafter), West Bengal vide letter dated 24.11.2020. Mis Shekhar Sharad & Co., Statutory Auditor of BCL for FY 2017-18 had resigned within one month after issuing Qualified Independent Auditor's Report dated 28.05.2018. 4. BCL1 is a company dealing in the business of Cement Manufacturing and was listed on National Stock Exchange ('NSE' hereafter) and therefore falls under NFRA's domain2 * 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, 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The Statutory Auditors, including the Engagement Partners, EQCR Partners and the Engagement team that conduct the audit are bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, the Standards on Auditing, including the Standards on Quality Control and the Code of Ethics, the violation of which constitutes professional misconduct, and is punishable with penalty prescribed u/s 132 (4) (c) of the Act. 10. NFRA received a letter dated 24.11.2020 from Registrar of Companies (ROC), West Bengal regarding M/s Shekhar Sharad & Co., Statutory Auditor of BCL for FY 2017-18, had, after issuing the 'Qualified' Audit Opinion in its Independent Auditor's Report dated 28.05.2018, resigned within one month on the ground (as stated by him) that it was not possible for him to continue as Statutory Auditor due to reasons like ill health of his 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 subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t her lapses include acceptance of appointment as EQCR without ensuring eligibility criteria and failure to perform the role of EQCR objectively. These are discussed in Part C of this Order. Part C C.1 Acceptance of appointment as EQCR without ensuring eligibility criteria 14. The EQCR partner was charged3 with acceptance of the assignment to act as Engagement Quality Control Reviewer for the audit of BCL for the FY 2017-18, without ensuring eligibility in accordance with Para 69 of SQC 14, which states that : " ............... the engagement quality control reviewer for an audit of the financial statements of a listed entity is an individual with sufficient and appropriate experience and authority to act as an audit engagement partner on audits a/financial statements of listed entities". The work of EQCR involves objective 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding his concurring approval of audit report, Ricks was not a CPA, had issuer-audit experience consisting only of a few weeks' audit staff work for a single issuer client in a different industry and thus violated Auditing Standard No. 7, Engagement Quality Review ("AS 7")". For this misconduct, among others, PCAOB censured the EQR, barring him from being an associated person of a registered public accounting firm for 1 year. C.2 Failure to Perform the role of EQCR Objectively 17. The EQCR partner was charged6 with failure to maintain documentation as per the requirements of Para 25 of SA 2207 and Para 3 SA 2308 Para 25 of SA 220 stipulates that: "The engagement quality control reviewer shall document, for the audit engagement reviewed, that: (a) The procedures required by the firm '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 appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analytical review procedures are important starting points in the planning of the audit, as other audit procedures are designed on the basis of these parameters. Therefore, its review was required to be carried out at an initial stage to incorporate the outcome of such review. As per Para 31 of SA 315, ROMM is a continuous process which further evolves and gets updated as the audit progresses. Therefore, review of ROMM was also required to be carried out on a continuous basis. However, if ROMM is reviewed at the fag end of the audit, then such review becomes ineffective. 19. The EQCR partner was charged11 with failure to review work papers related to significant areas of audit in accordance with Para 20 of SA 220 read with Para 64 of SQC 1. Para 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 De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Para 13 of SCN should have been examined by me on a continuous basis and at the starting point of the audit and I assure to be more diligent and cautious in my future assignments. I once again reiterate that I have done EQCR with integrity and independence and there was no gross negligence in performing my duty. Lapses in properly recording my work has occurred due to lack of expertise and are in the nature of bonafide mistake/errors". 22. While evaluating the replies of the EQCR partner, we observe the following: a) The contention of the EQCR partner that she had regular interactions with the ET and the work was reviewed regularly cannot be established from the audit file as all the working papers were signed by the EQCR partner during 11th May to 16th 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 7 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 "does not exercise due diligence or is grossly negligent in the conduct of his professional duties". This charge is proved as 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. II. The EQCR partner committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 8 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 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 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CR were also not in a timely manner, which resulted in her failure to provide an objective evaluation of the significant judgements made by the ET and the conclusions reached by them in formulating the report. As per the statutes, EQCR is an additional layer available to ensure the quality during the conduct of Audit, and the very objective of such quality review is defeated if the EQCR partner is appointed and performs in a perfunctory manner. The EQCR Partner vide her reply to the SCN has accepted all the charges listed in the SCN and also stated that the lapses occurred due to lack of expertise and are bonafide mistakes / errors. 28. Section 132(4) (c) of the Companies Act 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 unde ..... 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