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TMI Blog2022 (6) TMI 1417X X X X Extracts X X X X X X X X Extracts X X X X ..... meticulous execution of the audit plan etc are fundamental to audit quality. The audit of this listed Company has been done by the CA most casually with no regard to the law, and professional and ethical standards. The CA has failed in his duties as the auditor. Promotion of Public and Investor confidence and Effectiveness in Deterring Auditors and Audit Firms from violating the applicable Accounting and Auditing Standards - HELD THAT:- Audited financial statements are the basic inputs for innumerable transactions in the economy. A breakdown, or severe damage, to the trust and confidence that the public and investors have in financial statements, would have ramifications that go far beyond the limited activities of an auditee company. As professionals, auditors are expected to judge the significance of the operations of the entity they audit for the larger financial and economic sectors and accordingly calibrate their approach and procedures. The auditor's duty of exercising due diligence is owed to the users of the financial statements - Where the auditors have shown to be not diligent in considering these factors, appropriate penalties would follow that should be effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure 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 procedure of audit applicable to the circumstances. 2. PSIL is a company listed on the Bombay Stock Exchange (as on 31st March 2020) and therefore, as per Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015, it is required to comply with the Indian Accounting Standards (Ind AS) prescribed under these rules for the preparation and presentation of its annual financial statements. The CA has issued an unmodified report on the financial statements of the Company for the year 2019-20 stating that In our opinion and to the best of our information and according to the explanations given to us, the aforesaid financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the opening balance and closing balance of shareholder's equity and summarises the related transactions. Movement in retained earnings, reserves and changes in share capital such as the issue of new shares and payment of dividends are disclosed in this report. PSIL being a listed company such information is crucial to the understanding of the whole set of financial statements by the users. The CA has failed to verify and ensure that information pertaining to changes in equity is provided in the Statement of Changes in Equity as part of the Financial Statements. c. As per the Companies Act, PSIL was required to prepare a consolidated financial statement including all its subsidiaries and associates. But PSIL did not prepare a consolidated financial statement despite the existence of a material associate company named Haryana Metals Ltd. This has made the whole set of financial statements unreliable. The CA failed to report this in his audit report pertaining to PSIL. d. Other major findings in the FRQR are further explained in para 1.3 of the Appendix to this order. 5. NFRA on careful examination of all material on record has arrived at the finding in FRQR that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. The facts of the matter and the articles of charge as provided in the SCN are reproduced below in the Appendix to this Order. C. REPLIES OF THE CA TO THE ARTICLES OF CHARGES C.1. Examination of the CA's reply to the SCN C.1.1. Summary of the Reply 12. The CA in his written reply dated 02.05.2022 submits that Extensive efforts have been made so as to ensure that the insufficiencies and observations pointed out in the FRQRR along with deficiencies mentioned in the show cause notice dated 22nd March 2022 with respect to standards on auditing issued by the Institute of Chartered Accountants of India ( ICAI ) along with misstatements in financial statements have been duly rectified in the draft revised auditor's report along with draft restated financial statements of the company keeping in mind the standards on auditing issued by the Institute of Chartered Accountants of India ( ICAI ). 13. The CA in his reply further says that I myself had no intention to deliberately misstate any part of the audit report or not to disclose any misstatements in the financial statements. Professional duties are and always will be held over and above conduct and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RA's jurisdiction is, however, confined to auditors of Companies and Body Corporates specified in Rule 3 of NFRA Rules 2018, made under the Companies Act 2013. These auditors have to now work in terms of the framework provided by the Companies Act, 2013, and the accounting and auditing standards prescribed under the Companies Act. Professional or other misconduct as defined in the Schedules to the CA Act has to be understood in the context of the work that the PIE auditor has to do, and the responsibility cast on him. Essentially, therefore, a failure to comply with the auditing and accounting standards which now have the status and force of law under section 143 of the Companies Act, would amount to professional misconduct. 19. In addition to the requirements in the Companies Act, SA 200 - 'Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing' states as follows. a. Paral 8 - The auditor shall comply with all Sas relevant to the audit. b. Para 20 - The auditor shall not represent compliance with Sas in the auditor's report unless the auditor has complied with the requirements of this SA and all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efined by Section 132(4) of the Companies Act, read with section 22 of the Chartered Accountants Act 1949 (No. 38 of 1949) and clause 6 of Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity . This charge is proved as the CA failed to disclose in his report the material misstatements made by the Company in the areas of debtors, loans and advances, property plant and equipment, inventory and other account balances as explained in the paras 16 to 20 above. The CA has also admitted the charge. c. CA Gulshan Jham committed professional misconduct as defined by Section 132(4) of the Companies Act, read with section 22 of the Chartered Accountants Act 1949 (No. 38 of 1949) and clause 7 of Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he does not exercise due diligence or is grossly negligent in the conduct of his professional duties . This charge is proved as the CA failed to conduct the audit in accordance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o five times the fees received, in the case of individuals; and b. Debarring the member 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 for a minimum period of six months or such higher period not exceeding ten years as may be determined by the NFRA. 24. The seriousness with which the Companies Act views proved cases of professional misconduct is evident from the fact that a minimum punishment is laid down by the law. 25. Several factors go into determining what is the appropriate penalty in any case of professional misconduct. These are discussed below with specific reference to the proven facts of this case. a. Compliance with SAs and Maintenance of Audit Quality CA Gulshan Jham is a qualified professional but the serious non-compliances of the Companies Act and Standards on Auditing on his part have been not what was expected from him as the Auditor. The primary function of the Auditor is to achieve the necessary audit quality and compliance with SAs. The charges proved have shown the failure of the CA to discharge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... errent effect on other auditors and, at the same time, sends out a message to the Public and the Investor Community that such misconduct will not be allowed to escape lightly. c. Nature and size of the Audit Firm. The CA in this case is a very small proprietorship firm not having any other listed company audit. Based on the principle of proportionality, the sanctions are being made keeping in mind the nature and size of the audit firm and the fact that he has accepted all the charges. SANCTIONS 26. Considering the fact that professional misconduct has been proved and considering the nature of violations and principles of proportionality, the NFRA, in the exercise of its powers under Section 132(4)(c) of the Companies Act, 2013 orders: (i) Imposition of a monetary penalty of Rs. 100,000 (One Lakh only) upon CA Gulshan Jagdish Jham. (ii) In addition, CA Gulshan Jadish Jham 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. 27. This order will become effective after 30 days from the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required by sub-section 40 of Section 2 of the Companies Act, 2013, Indian Accounting Standard (Ind AS) 1 - Presentation of Financial Statements, and Schedule into the CA, 201 Companies Act, 2013. c) The Company also failed to prepare Consolidated Financial Statements as required by Section 129(3) of the Companies Act, 2013 though it has disclosed certain companies as Associate Companies in the Financial Statements. d) Because of the explicit requirements of Indian Ind AS 109, Financial Instruments, the Company was required to consider all the factors in the recognition and measurement of impairment loss based on expected credit loss approach for Trade Receivables, Loans and Advances and Bank Balances. The full amount of Trade Receivables and Loans and Advances of the Company are unsecured and Bank balances are with non-scheduled lesser-known Banks. Thus, it becomes even more necessary to assess the credit risk holistically as required by the principles of Ind AS 109. However, the Company has not done a proper evaluation of impairment loss allowance for these Financial Assets. e) Disclosures as required by Paragraphs 45, 46 and 48 of Ind AS 7, Statement of Cash Flows, have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith reasons that the financial statements do not give a true and fair view of the state of affairs of the Company. Thus, the independent auditor's report is false, misleading, and made without any basis. 1.8 Consequently, the auditor has also violated the following provisions of the Standards on Auditing- (i) Para 3 of Standard on Auditing (SA) 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing states: The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In the case of most general-purpose frameworks, that opinion is on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit conducted in accordance with SAs and relevant ethical requirements enables the auditor to form that opinion. (ii) Para 6 of Standard on Auditing (SA) 210 - Agreeing the Terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonable; (d) The information presented in the financial statements is relevant, reliable, comparable, and understandable; (e) The financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and (f) The terminology used in the financial statements, including the title of each financial statement, is appropriate. (vii) Para 14 of Standard on Auditing (SA) 700 - When the financial statements are prepared in accordance with a fair presentation framework, the evaluation required by paragraphs 12-13 shall also include whether the financial statements achieve fair presentation. The auditor's evaluation as to whether the financial statements achieve fair presentation shall include consideration of (a) The overall presentation, structure and content of the financial statements; and (b) Whether the financial statements, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation (viii) Para 15 of Standard on Auditing (SA) 700 - The auditor shall evaluate whether the finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required by NFRA (in PDF form) and (iii) Policy document as per SQC 1 (in PDF Form) The audit file is attached with this SCN in Appendix 2. 2.3 NFRA has examined the audit files to verify the audit procedures. These audit files contain documents that purport to be concerning verification of some of the account balances and transactions in the financial statement. NFRA has observed violations of various Standards on Auditing as detailed below. 2.4 Requirement of Standard on Auditing (SA) 230 Audit Documentation- (i) Para 8 of SA 230 states- The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand: (a) The nature, timing, and extent of the audit procedures performed to comply with the SAs and applicable legal and regulatory requirements; (b) The results of the audit procedures performed, and the audit evidence obtained; and (c) Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions. Para 10 of SA 230 states - The auditor shall document discussions of signif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quality control review for all engagements meeting the criteria established in compliance with subparagraph (b). (iii) Para 92 of (SQC) 1, states - small firms and sole practitioners may wish to use a suitably qualified external person or another firm to carry out engagement inspections and other monitoring procedures. Alternatively, they may wish to establish arrangements to share resources with other appropriate organizations to facilitate monitoring activities (iv) According to the above requirements of the SAs, the audit of PSIL requires engagement quality control review (EQCR) as PSIL is a listed entity. (v) NFRA has observed that no such EQCR was conducted during the audit of PSIL which is a violation of SA 220 and SQC 1. 2.6 Requirement of Standard on Auditing (SA) 260 - Communication with those charged with Governance (TCWG)- (i) Para 11 of SA 260 states that - The auditor shall determine the appropriate person(s) within the entity's governance structure with whom to communicate (ii) Para 14 of SA 260 states that - The auditor shall communicate with those charged with governance the responsibilities of the auditor in relation to the financial statemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vered by the financial statements for audit and non-audit services provided by the firm and network firms to the entity and components controlled by the entity. These fees shall be allocated to categories that are appropriate to assist those charged with governance in assessing the effect of services on the independence of the auditor; and (ii) The related safeguards that have been applied to eliminate identified threats to independence or reduce them to an acceptable level. (vi) Para 23 of SA 260 states that - Where matters required by this SA to be communicated are communicated orally, the auditor shall document them, and when and to whom they were communicated. Where matters have been communicated in writing, the auditor shall retain a copy of the communication as part of the audit documentation (vii) NFRA has examined the audit file of the CA wherein no documentary evidence in respect of any communication between the auditor and TCWG as per the above requirements of the SAs has been found. (viii) The auditor has, therefore, failed to comply with the requirements of SA 260 about communication with TCWG. (ix) Because of the absence of identification of, and communi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 320 Materiality in planning and performing an Audit- (i) Para 10 of SA 320 states - When establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than the materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements, the auditor shall also determine the materiality level or levels to be applied to those particular classes of transactions, account balances or disclosures. (ii) Para 11 of SA 320 states - The auditor shall determine performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures (iii) The audit file did not contain any audit document determining materiality levels as specified in Para 10 and 11 of SA 320. Therefore, there is noncompliance with SA 320 by the Auditor. 2.10 Requirement of Standard on Auditing (SA) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the information is confirmed and there is no proof that the confirmations have been received by the auditor directly from an external source. (iv) Therefore, the Auditor has failed to comply with SA 505. 2.14 Requirement of Standard on Auditing (SA) 520 Analytical Procedures- (i) Para 6 of SA 530 states - The auditor shall design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor's understanding of the entity. (ii) Appendix to SA 520 gives a list of Analytical Procedures to be carried out. It includes trend analysis, test of reasonableness, ratio analysis and confirmation of sources of information. (iii) There is no evidence in the Audit Foel to show that analytical procedures have been carried out by the auditor while forming an overall conclusion on the financial statements. (iv) Therefore, the Auditor has failed to comply with SA 520. 2.15 Requirement of Standard on Auditing (SA) 530 Audit Sampling- (i) Para 4 of SA 530 states - The objective of the auditor when using audit sampling is to provide a reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial reporting framework establishes minimal or no related party requirements, the auditor nevertheless needs to obtain an understanding of the entity's related party relationships and transactions sufficient to be able to conclude whether the financial statements, insofar as they are affected by those relationships and transactions: (a) Achieve a true and fair presentation (for fair presentation frameworks); or (b) Are not misleading (for compliance frameworks) (iii) PSIL has stated in its annual report that Haryana Metals Ltd. as an associate company (Matters and facts are discussed in Para 2.4 of FRQRR) (iv) No audit procedure concerning related parties as specified in SA 550 has been done by the auditor. Thus the CA did not comply with SA 550. 2.17 Requirement of Standard on Auditing (SA) 580 Written Representation (i) Para 8 of SA 580 states - The auditor shall request written representations from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned. (ii) Para 9 of SA 580 states - The auditor shall request management to provide a written representation that it has fulfilled its responsibi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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