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TMI Blog2023 (8) TMI 322X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006 describing the engagement as Branch Statutory Audit shows the absence of professional skepticism and lack of due diligence on his part - The EP s position, (shifting the onus on the Company), cannot be accepted as the EP was required to exercise due diligence under the SA 200 and adhere to the specific provisions of the CAs Act under Section 22 read with Clause 9 of the First Schedule. The non-compliance is thus professional misconduct in terms of section 132(4)(c) of the Companies Act 2013. The said lack of due diligence and gross negligence in accepting an invalid appointment is also professional misconduct as per the Chartered Accountants Act, 1949, the meaning of which is conceived in Section 132(4)(c) of the Companies Act 2013. Non-Compliance with SA 210 Agreeing the Terms of Audit Engagements - HELD THAT:- EP s negligence of the provisions of SA 210 has resulted in accepting an illegal and invalid appointment and issuing a report that is not appropriate to the situation. Thus, apart from the non-compliance with SA 210, this shows absence of professional scepticism and professional judgment in understanding the objective and scope of the audit, thereby violating SA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 500 in not designing and performing audit procedures to obtain sufficient appropriate audit evidence and not evaluate the reliability of information produced by the company - para 5, 6 and 8 of SA 510 relating to the performance of necessary audit procedures and obtaining sufficient and appropriate audit evidence to ascertain the accuracy of Opening Balances and the accounting policies reflected in the Opening Balances - para 6 of SA 520 relating to design and performance of analytical procedures - para 4, 6,7, 8 9 of SA 530 relating to the determination of sample design, sample size and required audit procedures - para 8,9 10 of SA 580 regarding obtaining written representations from the management about their responsibilities. Penalty and sanctions - HELD THAT:- Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The law lays down a minimum punishment for such misconduct. Considering the fact that professional misconducts have been proved and considering the nature of violations and principles of proportionality and keeping in mind the deterrence, proportionality, signalling value of the sanctions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s branch audit without ascertaining the legal validity of his appointment. The investigations revealed that in accepting an invalid appointment CA Akash Goel also violated the provisions of the Chartered Accounts Act 1949, which require ensuring a valid appointment as per the Act. 3. In addition, CA Akash Goel also violated several Standards on Auditing (SA) that are required to be followed during the conduct of an audit of historical financial information and in providing an auditor s certificate. He did not comply with the principles and procedures laid down in the SAs including professional scepticism, audit documentation, sufficiency and appropriateness of audit evidence, audit planning, materiality, engagement risk, nature, timing and extent of evidence gathering procedures and reporting. By committing these violations, CA Akash Goel was found guilty of professional misconduct within the meaning of section 132 (4) (c) of the Act. 4. Based on the nature of professional misconduct and other factors as detailed in this Order we impose a monetary penalty of Rs. 1,00,000/- (One Lakh) on CA Akash Goel and debar him for one year from being appointed as an auditor or internal au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets, operational expenses, fixed deposits and cash balances. Thus, the branch transactions and account balances, audited by the Statutory Branch Auditors , contributed significantly to the company's financial statements. 8. As part of NFRA s investigations, CA Akash Goel was asked to provide the Audit File vide NFRA letter dated 10.08.2022, giving 15 days time. The audit firm submitted the Audit File along with other information in respect of eight branches for FY 2017-18 on 25.08.2022. 9. On examination of the Audit File, NFRA observed prima facie that the branch auditors were appointed by the company without following the due procedure prescribed in the Companies Act, 2013 (the Act) while the audit reports issued by the branch auditor give the false impression that the branch auditors was duly appointed under the Act thereby misleading the users of the financial statements. NFRA also observed that the audit had been conducted in disregard of the SAs and the Act. The EP issued an unsupported Independent Branch Auditors Report on behalf of the Audit Firm that .... The aforesaid Trial Balance, certificate on borrowers, etc. read with the explanatory information is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ignment without complying with the statutory and other requirements and non-compliance with the Standards on Auditing (SAs). I Acceptance of audit appointment without complying with mandatory legal and ethical requirements and issuing audit report without a valid appointment as per the Act 15. It was observed that the appointment of the Audit Firm as Statutory Auditor for the branches of DHFL for FY 2017-18 was.not done by the competent authority i.e., the shareholders. On examination of the Audit File, we observe that the EP did not verify compliance with section 139 of the Act regarding his appointment and accepted the invalid appointment letter that was issued by an Authorised Signatory without the approval of the Board and shareholders. Accordingly, both the appointment as Statutory Auditor for the branches and the Independent Branch Auditors Report issued by the EP were invalid. The Code of Ethics, 2009, applicable to the EP require him to ensure professional competence, due care, integrity and professional behaviour in discharging his duties, which were lacking, as evidenced by his acceptance of an audit engagement that was legally invalid. In doing so, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... try of Corporate Affairs Circular No. 7/2014, dated 01-04-2014, the equivalent sections of the Companies Act 2013 for the above sections of the Companies Act 1956 are sections 139 and 140. As per Section 143 (8) of the Act, the appointment of statutory auditor is required to be made under Section 139 of the Act by the members in the annual general meeting. It is observed that the Resolution for Appointment of Auditor for the financial year 2017-18 passed at the 33rd Annual General Meeting of DHFL held on 21-07-2017, read with the declaration of Voting Results of the resolution to ratify such appointment only refers to the appointment of CAS (Firm Registration No: 101720W), as the Statutory Auditors of the Company to audit the accounts of all the Company s offices including those of its zonal/ regional and branch offices for the financial year 2017-18. No other branch statutory auditors were appointed or ratified by the Company in the said meeting. Therefore, in the absence of a valid appointment order, EP s acceptance vide letter dated 09.09.2017 of the appointment as statutory auditor of the branches and issuance of the Independent Branch Auditor s Report for the eight Branche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable in the branch audit as well, being an audit of historical financial information. Accordingly, the EP was charged in the SCN with the following. Non-Compliance with SA 210 Agreeing the Terms of Audit Engagements 22. The EP was charged with non-compliance with SA 210 2 and the absence of professional scepticism and professional judgment in understanding the objective and scope of the audit, thereby violating SA 200 3 . SA 210 4 stipulates that the auditor shall agree to the terms of the audit engagement with management or Those Charged With Governance (TCWG) and that subject to paragraph 11 of the SA, the agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable forms of a written agreement and shall include (a) the objective and scope of the audit of the financial statements; (b) the responsibilities of the auditor; (c) the responsibilities of management; (d) 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the audit as per the scope....... and that it is not practically possible for auditor to make copies of all files and keep in record for proving its innocence. So, had gone through all the data physically on the basis of that we had drafted our opinion given the report and we take full responsibility of that report that we had not done anything in good faith had done [sic] the audit with professional knowledge judgement and also reported where we had not received the documents for checking so there is no violation of S4 230 Also. 28. The reply of the EP is not acceptable since there is no evidence in the Audit File to indicate that the EP had performed audit procedures and documented the conclusion, nature, timing and extent of the procedures performed, as detailed below. 29. As explained by SA 230, the nature and purposes of audit documentation are to provide evidence of the auditor s basis for a conclusion about the achievement of the overall objectives of the auditor; and evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements. SA 230 lists enabling the conduct of quality control reviews and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Audit plan made after understanding the branch operations in accordance with SA 300 c. Determination of materiality levels (refer to SA 320 8 ) d. Understanding of the IT system controls (refer to SA 315) e. Summary of the accounting policies, observations from previous audits, inspection reports, and internal audit reports (refer to SA 315) f. List of documents verified and minutes of meeting with the management (substantive audit procedures). g. Proof of verification of trial balance items, including assets (substantive audit procedures) h. Procedures adopted to verify the loans sanctioned during the year and classification of loans as per regulatory norms (substantive audit procedures) i. KYC verification, anti-money laundering verification, security verification (substantive audit procedures). 34. 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 purpose of the audit itself. Lack of sufficient documentation has been viewed seriously by national and international regulators as well. For example, in the matter of Bhar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Annexures to the audit report, the EP has, at several places, noted that for a large number of loan files reviewed, either required documents were not obtained or loans disbursed were not as per the loan policy of Company/ National Housing Bank or EP did not have access to the required information. Since the unmodified opinion expressed by the EP is not supported by evidence, the EP was charged that he did not comply with SA 700 10 . 37. The EP denied the charges and stated that EP had not received the files even after prior intimation; that EP s responsibility was to express an opinion and EP could not do more if the management decided not to give the files. In response to further questions during the oral hearing of the EP, the EP stated that he had considered the impact of missing information, which was material, while forming his audit opinion and had reported it in the annexure to the audit report. 38. The contention of the EP that he has complied with SA 700 is not acceptable since the audit opinion issued by the EP ambiguously states that the Trail Balance and other details of the branch ... exhibit a true and fair view . This is despite the fact that, by his own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riate audit evidence to ascertain the accuracy of Opening Balances and the accounting policies reflected in the Opening Balances. g. para 6 of SA 520 16 relating to design and performance of analytical procedures. h. para 4, 6,7, 8 9 of SA 530 17 relating to the determination of sample design, sample size and required audit procedures. i. para 8,9 10 of SA 580 18 regarding obtaining written representations from the management about their responsibilities. 41. The EP denied these charges stating that the reply of these are also covered in the above reply of the various SA s. 42. For the reasons stated in Para 28 to 34 above, the reply of the EP is not acceptable and the charges in para 38 stand proven. D. ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT BY THE EP 43. Given the above-mentioned actions and omissions, it is established that CA Akash Goel did not comply with the stipulations in the Chartered Accountants Act, 1949 regarding the acceptance of the statutory audit engagement and showed gross negligence and lack of due diligence while accepting an invalid appointment as auditor. Notwithstanding this illegality, the consequential lack of due d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the lending activities was carried out. 46. A Branch Auditor is duty-bound to examine and ascertain the integrity of the underlying information forming Financial Statements of such entities 19 in the larger public interest. 47. The EP in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to the reports he issued to facilitate the Company s Auditor to issue their report on the Financial Statements. As detailed in the foregoing paragraphs, there were deficiencies in the Audit and abdication of responsibility on the part of CA Akash Goel right from the acceptance of the Audit without due diligence in ascertaining the validity of the offer, to the actual conduct of the audit, which establishes his gross negligence resulting in professional misconduct. We also conclude that despite being a qualified professional, CA Akash Goel has not adhered to the Standards on Auditing. On the contrary, he has tried to cover up the shortcomings by resorting to arguments not supported by evidence. 48. As demonstrated by the discussions above, there are gaps in his understanding of SAs that need to be addressed. To enhan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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