9911796707
TMI Blog2024 (12) TMI 230X X X X Extracts X X X X X X X X Extracts X X X X ..... mine TCWG and communicate with them and failure to assemble the Audit File - Failure to carry out proper audit of Related Party Transactions ('RPTs' hereafter) of Vikas (trade payables to related parties were high as 93.09% of total trade payables and trade receivables from related parties were 68.38% of total trade receivable) - Failure to carry out external confirmation for Trade Receivables or any other alternative audit procedure to verify the audit assertions relating to Trade Receivables - Failure of the audit firm to demonstrate compliance with the requirement of the Standards on Auditing concerning the Engagement Quality Control Reviewer - penalty and sanctions. HELD THAT:- The EP committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 which states that a Chartered Accountant is guilty of professional misconduct when he fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity . This charge is proved as the EP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the FY 2020-21 and other materials available on record. 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 seriousness with which proven cases of professional misconduct are to be viewed, is evident from the fact that a minimum punishment is laid down by the law - The EP in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to Financial Statements. As explained in this Order, deficiency in the conduct of Audit, abdication of responsibility and inappropriate conclusions on the part of CA Priyank Mittal establish his professional misconduct. Considering the proven professional misconduct, the nature of violations, principles of proportionality and deterrence against future professional misconduct, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, it is hereby ordered: I. Imposition of a monetary penalty of ₹3,00,000/- (Three Lakhs) upon the Audit Firm M/s Singh Ajay Co. II. Imposition of a monetary penalty of 2,00,000/- (Two Lakhs) upon CA Priyank Mittal. III. In addition, CA Priya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reflecting gross negligence and lack of due diligence to perform audit of a Public Interest Entity (PIE). These include: a. Failure to plan the audit and understand the nature of the audited entity and its environment as per SA 300 and SA 315. b. Failure to verify opening balances required as per SA 510. c. Failure to report material misstatement due to non-provisioning of the ECL on trade receivables (Vikas had trade receivables of 171.46 crores in FY 2020-21 which was more than seven times the sales of 23.60 crores) and not charging depreciation on lease hold land and plant machinery. d. Failure to demonstrate sufficiency and appropriateness of audit work in several critical aspects of the audit of the Financial Statements i.e., determining materiality, failure to report on the entity's ability to continue as a going concern, failure to determine TCWG and communicate with them and failure to assemble the Audit File. e. Failure to carry out proper audit of Related Party Transactions ('RPTs' hereafter) of Vikas (trade payables to related parties were high as 93.09% of total trade payables and trade receivables from related parties were 68.38% of total trade receivable) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L) and non- charging of depreciation on lease hold land and plant machinery during the statutory audit of Vikas during FYs 2018-19, 2019-20 2020-21. 10. As M/s Singh, Ajay Co were the auditors of Vikas during FY 2020-21, NFRA vide letter dated 17.01.2023, sought the Audit File and other documents for the FY 2020-21 from the EP, who submitted the same on 02.03.2023. The company disclosed under Significant Accounting Policies in its Annual Report for the FY 2020-21, that it had prepared the Financial Statements (FS hereafter) in accordance with the Indian Accounting Standards (hereafter referred to as the 'Ind AS') Applicable financial reporting framework was the 'Indian Accounting Standards (Ind AS)' prescribed by Ministry of Corporate Affairs under Section 133 of Companies Act, 2013 (the Act ) read with Companies (Indian Accounting Standards (Ind AS)) Rules, 2015 and other relevant provisions of the Act as notified by Ministry of Corporate Affairs. On examination of the Audit Files and other documents, it was observed that the audit had prima facie been conducted in disregard of several SAs and relevant requirements of the Companies Act 2013. Despite this, the EP ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udit Plan must be documented in accordance with Para 11 of SA 300, but no such documentation is found in the Audit File submitted by EP vide letter dated 02.03.2023. 15. The auditors were also required to understand the nature of the business of Vikas by gaining an understanding of relevant industry, applicable regulatory structure etc. at macro level and gaining understanding of nature of the entity, its operations, its ownership, its governance capital structure, and applicable financial reporting framework etc. at the entity level as required by para 11 of SA 315 Standards on Auditing (SA) 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment . However, no audit documentation reflecting auditors understanding of the nature of the business of the entity was found in the audit file as required by para 11 of SA 300. The EP confirmed to NFRA vide letter dated 09.11.2023 (point no. 4) that there was no documentation available regarding his understanding of the audited entity its environment and that most of the discussion were verbal and oral. 16. In his reply dated 21.03.2024 to the SCN, the EP submitted that the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alances. As per para 3 of SA 510 Standards on Auditing (SA) 510, Initial Audit Engagement - Opening Balances , the objective of the auditor with respect to opening balances is to obtain sufficient appropriate audit evidence about whether: (a) Opening balances contain misstatements that materially affect the current period's financial statements; and (b) Appropriate accounting policies reflected in the opening balances have been consistently applied in the current period's financial statements, or changes thereto are properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework. 22. On the examination of the audit file, it has been noted that there were no work papers in relation to the verification of the Opening Balances even though FY 2020-21 was the first year of audit of Vikas by Singh Ajai Co. The EP acknowledged vide letter dated 09.11.2023 (point no. 14) that opening balances were not verified. 23. In his reply dated 21.03.2024 to the SCN, EP submitted that as per Para A2 of page no 5 of SA 510, the current auditor can place reliance on the closing balances contained in the financial statements for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce relevant to the opening balances; or (iii) Performing specific audit procedures to obtain evidence regarding the opening balances. 27. As there is no evidence in the audit file whether auditors have performed the procedure to verify the opening balances despite difference as shown in Table 1, the charge that auditors failed to obtain sufficient appropriate audit evidence about opening balances and violation of SA 510 stands established. Failure to determine Materiality and Performance Materiality 28. The auditors were charged with failure to determine Materiality and Performance Materiality. As per Para 10 of the SA 320 Standards on Auditing (SA) 320, Materiality in Planning and Performing Audit , while establishing the overall audit strategy, the auditor shall determine Materiality for the financial statements as a whole. Further, as per Para 11 of the SA 320, the auditor should also determine Performance Materiality for purposes of assessing the risks of material misstatement and determining the nature, timing, and extent of further audit procedures. 29. However, there was no documentation in the audit file pertaining to the determination of Materiality and Performance Materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble were outstanding for a long time the company should have made ECL provisions and since the company did not do so, it was the auditor's duty to report the failure of the company in making ECL provisioning as per Ind AS 109. 34. Considering the above, the charge that the auditors failed to report the non-compliance by the company regarding ECL provision as per Ind AS 109 stands established. Failure to report on the entity's ability to continue as a Going Concern 35. The auditors were charged with failure to report on the entity's ability to continue as a Going Concern. The Company had incurred a loss of *11.38 crore during FY 2020-21 and had a bank balance of only 3.12 lakhs as on 31.03.2021 which was the same as on 31.03.2020. The EP admitted in his statement dated 19.09.2022 recorded before SEBI that there was no movement of funds with respect to sales and purchases and the salaries of the employees were paid by the sister concerns Vikas WSP Ltd and Vikas Chemigum Ltd. The trade receivables of *171.46 crores was 91.4% of the net worth of Vikas as on 31.03.2021(187.64 crore), but the sales were only *23.60 crores. Net current liability position was adverse (current a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2021 Salary Mr. Praveen Bishnoi (Company Secretary) Advance to suppliers-- Vikas Chemi Gums (India) Ltd Allotment of ESOP's-- Vikas Gran Employees Welfare Trust Trade receivables - Vikas Chemi Gums India Ltd. - Vikas Dall General Mill Trade payable - Vikas WSP Limited - Vegan Colloids Ltd. Unsecured Loan Payable - Mrs. Bimla Devi Jindal - Mr. Lokesh Garg Other payables Praveen Bishnoi Mansarovar Industrial Development Corp Vikas WSP Unsecured loan receivable - Vikas Gran Employees Welfare Trust 8.00 980.00 85.00 11,557.41 166.52 10168.12 2362.39 4783.42 49.50 9.15 15.44 394.26 52.50 Total 30631.71 41. It can be seen from Table 3 that: - (a) Related party transactions disclosed in the financial statement for the FY 2020-21 under different heads loans advances, Allotment of ESOP's, Trade receivable, Trade payable, Unsecured loan payable, Other payable, Unsecured loan etc. as disclosed in note no. 26 of financial statement were ₹ 306.32 crores which were significant keeping in view the balance sheet size of ₹ 388.89 crores. (b) The total trade and other payables as on 31.03.2021 were ₹134.61 crores, out of which 130.73 crore (97.12%) were with related parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng related party transactions and expenses. 46. Considering the above, the charge that the auditors failed to evaluate the arm's length pricing and non-disclosure of all Related Party Transactions as per Section 177 188 of the Companies Act, 2013 and SA 550 stands established. Failure to report non charging of depreciation of leasehold land and Plant machinery 47. The auditors were charged with failure to report non charging of depreciation on lease hold land and plant machinery. The EP had identified and reported the following material weakness in the Internal Financial Controls for issuing the Report on the Internal Financial Controls under Clause (i) of Section 143(3) of the Companies Act, 2013: - The Company has not provided the Depreciation on its fixed assets, due to non- operation in the company. 48. However, the EP had failed to qualify the Independent Auditor's Report on the 'Audit of Financial Statements' even though he had identified material weakness in the internal controls of the company. The EP failed to consider the impact on the account of the non- charging of depreciation on the fixed assets. As the company had already reported a loss of 11.38 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cific amounts in the financial statements, the auditor shall include in the basis for opinion section a description and quantification of the financial effects of the misstatement, unless impracticable. If, it is not practicable to quantify the financial effects, the auditor shall so state in this section. 53. As per para 55 of Ind AS 16 Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with Ind AS 105 and the date that the asset is derecognised. Therefore, depreciation does not cease when the asset be- comes idle or is retired from active use unless the asset is fully depreciated . 54. The EP has identified the issue of non-charging of depreciation for the leased land and the plant and machinery as he reported the same in ICFR but failed to report in his Independent Auditor's Report as required by SA 705 and certified that the financial statements give a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.01.2023. 60. NFRA vide its mail dated 17.04.2023 requested the EP to submit the affidavit regarding completeness of audit file within 10 days. In response, EP vide email dated 25.04.2023 to NFRA had accepted that the submitted audit file was not complete. 61. It is evident that the audit file was not compiled within 60 days of completion of audit as required by SA 230 and SQC1. The audit documentation acts as a basis of the auditor's report and as evidence that the audit was planned and performed in accordance with SAS and applicable legal and regulatory requirements. In the absence of proper audit documentation, there is no way for us to ascertain whether the required audit procedures were performed at all. 62. Considering the above, the charge that the auditors failed to assemble the Audit File within 60 days of the completion of the audit stands established. Failure to obtain sufficient and appropriate audit evidence through external confirmations 63. The auditors were charged with failure to obtain sufficient and appropriate audit evidence through external confirmations. As on 31.03.2021 the company had a bank balance of ₹ 3.12 Lakhs, trade payable of₹ 134.61 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity control reviewers and lay down the guidelines for ensuring his independence and objectivity for the assigned work of quality control in the engagement. For the listed entities, the SA 220 [Para 19(a)] makes it mandatory to ensure appoint an EQCR. 69. Non-appointment of EQC Reviewer has been viewed seriously by international regulators as well. For example, the PCAOB (PCAOB) release No. 105-2015-040 dated 03.12.2015 , the US Regulator, charged public accounting firm Stein Company, LLP (Audit Firm) for its failure in audit of Health Talk Live, Inc. ( Health Talk ) noting that The Firm improperly issued the audit report without obtaining an engagement quality review and concurring approval of issuance and thus violated Auditing Standard No. 7, Engagement Quality Review ( AS 7 ) . For this misconduct, PCAOB censured the Firm and imposed a civil money penalty of $5000. Similarly in another matter of Halperin Ilanit CPA ( Firm ) and Ilanit Halperin, PCAOB (PCAOB) Release No. 105-2024-012 dated 19.03.2024 among other things stated that The Firm failed to obtain engagement quality reviews for any of the Issuer Audits, and improperly permitted Cuentas, Enigma, and Super Com to use its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e statutory auditors have been prescribed under Section 143 of the Companies Act, 2013. The duties include making his report to the members of the company after taking into account the provisions of the Companies Act, 2013 the accounting and auditing standards (subsection 2); stating in his report and expressing opinion on matters listed in subsection 3; stating the reasons, if any of the matters required to be included in the audit report under this section is answered in the negative or with a qualification (subsection 4); complying with the auditing standards (subsection 9); and reporting to the Central Government matters which he believes involve the offence of fraud (subsection 12). 75. Paragraph 2 of SA 220 stipulates that Quality Control Systems, policies and procedures are the responsibility of the audit firm. Para 6 of SA 220 states that the objective of the auditor is to implement quality control procedures at the engagement level that provide the auditor with reasonable assurance that (a) The audit complies with professional standards and regulatory and legal requirements and (b) The auditor's report is- sued is appropriate in the circumstances. 76. Para 3 of SQC 1 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udit Firm has made departure from the Standards and the Companies Act, 2013 in the conduct of the audit of Vikas for FY 2020-21. The poor quality of audit, incomplete documentation and misleading responses further compound the professional misconduct on the part of the Audit Firm. Based on the foregoing discussion and analysis, we conclude that the Audit Firm has committed professional mis- conduct, as defined in the Chartered Accountant Act, 1949. In an audit engagement as- signed to an Audit Firm, the responsibility of the Audit Firm is to ensure that its systems and processes are conducive to a high-quality audit in compliance with the Law and Professional Standards. We find that the Firm has failed in this regard. E. Articles of Charges of Professional Misconduct by the Auditors 81. As discussed in the foregoing paragraphs, the EP has made departures from the Standards and in his conduct of the audit of Vikas Proppant Granite Limited for the FY 2020-21. Considering the foregoing discussion, our findings on each article of charge listed out in the SCN, are stated below: (a) The EP committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arture 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 31-46 56-70 above. 82. In addition to above, the Audit Firm has committed Professional Misconduct as defined in Section 132(4) of the Companies Act, 2013 read with Section 22 of the Chartered Accountant Act, 1949 as amended from time to time, by failing to exercise due diligence and being grossly negligent in the conduct of the statutory audit of the company, significantly in respect of matters explained at Section C and Section D above and thus, violated the SAS and SQC 1. 83. Therefore, we conclude that the charges of professional misconduct against the EP (CA Priyank Mittal) and the audit firm (M/s Singh Ajay Co.) enumerated in the SCN dated 18.01.2024 stand proved based on our analysis of the evidence in the Audit File, the Audit Report issued by auditors, the submissions made by auditors, the annual report of Vikas for the FY 2020-21 and other materials available on record. F. Penalty Sanctions 84. It is the duty of an auditor to conduct the audit with professional scepticism and d ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
