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TMI Blog2024 (12) TMI 230X X X X Extracts X X X X X X X X Extracts X X X X ..... the statutory audit of Vikas Proppant and Granite Limited ('Vikas' or 'the company' hereafter) for the Financial Year ('FY' hereafter) 2020-21. 2. This Order is divided into the following sections: A. Executive Summary B. Introduction & Background C. Lapses in the conduct of audit D. Specific Lapses by audit firm E. Article of Charges of Professional Misconduct by the EP F. Penalty & Sanctions A. Executive Summary 3. National Financial Reporting Authority (NFRA) is India's independent regulator, in respect of matters relating to accounting and auditing, of prescribed classes Rule 3 of NFRA Rules, 2018 of entities broadly described as 'Public Interest Entities' (PIES). 4. NFRA initiated action under Section 132(4) of Companies Act 2013 against the Auditor of Vikas for professional or other misconduct in relation to Vikas's statutory audit for FY 2020-21, pursuant to information received from Securities and Exchange Board of India (SEBI hereafter) indicating possible failure of the statutory auditor in reporting accounting misstatements and following the Standards of Auditing. 5. This Order finds that the auditor failed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory authority set up under Section 132 of the Companies Act 2013 to monitor and enforce compliance of the auditing and accounting standards and to oversee the quality of service of the professions associated with ensuring compliance with such standards. NFRA is empowered under Section 132(4) of the Companies Act 2013 to investigate prescribed classes of companies and impose penalty for professional or other misconduct of the individual members or firms of chartered accountants. 8. The statutory auditors, both individuals and firms of Chartered Accountants, are appointed by the members of company under Section 139 of the Companies Act 2013. The statutory auditors, including the Engagement Partners and the Engagement Team that conduct the audit, are bound by the duties and responsibilities prescribed in the Companies Act, 2013 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 under Section 132(4)(c) of the Companies Act 2013. 9. NFRA took up investigation under Section 132(4) of the Companies Act 2013 after rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of leasehold land and Plant and Machinery h) Failure to assemble the Audit File within 60 days of the completion of the audit i) Failure to obtain sufficient and appropriate audit evidence through external confirmations j) Failure to determine appointment of Engagement Quality Control Reviewer (EQCR) (as per SA 220) k) Failure to Determine TCWG and Communicate with them 12. The EP, vide letter dated 21.03.2024, requested a personal hearing which was held on 26.04.2024 through video conferencing wherein CA Priyank Mittal appeared on his own behalf as well as on behalf of the Firm and made submissions. 13. This Order is based on our review of the audit file, written response of the auditor, submissions made during the personal hearing and other material available on record. Each of the charges in the SCN is analysed and discussed herein below. C. Lapses in the conduct of audit Failure to plan the audit and failure to understand the nature of the entity and its environment 14. The auditors were charged with failure to plan the audit and failure to understand the nature of the entity and its environment. For performing audit in an effective manner, auditors were re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audit procedures that are required to be carried out so that the engagement complies with SAs. 18. It is evident from the Annual report of FY 2019-20 (page number 15), that audit firm has given its consent to act as statutory auditors of the Company and has also given a certificate in accordance with Section 139, 141 and other applicable provisions of the Companies Act 2013 to the effect that their appointment, if made, shall be in accordance with the conditions prescribed and that they are eligible to hold office as Statutory Auditors of the Company. The audit firm was appointed as the statutory auditor for the FY 2020-21 onwards and the EP has given his audit report accordingly. In light of this, the defence that the audit was conducted after second Limited Review is irrelevant and is rejected. 19. Further, the EP's reply "Due to the reasons, for some of my query's management was not able to answer properly so I mentioned these points in Management Representation Letter "is not acceptable as it appears from his reply that the Management Representation Letter (MRL) was prepared by EP himself (MRL is a document which is prepared by management). 20. Considering the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 493.99 2.98 Trade receivables 17,022.68 17,015.92 6.76 Other current assets 1,458.09 1,465.68 (7.59) Trade payables 13,078.39 13,077.14 1.25 Other financial liabilities 476.00 475.10 0.90 25. It is noted that the Audit Firm was appointed on 30.09.2020 for statutory audit of Vikas for FY 2020-21 and this was the first year of Audit for auditors. As per para 5 of SA 510, the auditor shall read the most recent financial statements and the predecessor auditor's report thereon for information relevant to opening balance, including disclosures. The EP was the statutory auditor of FY 2020-21, so he should have verified the previous financial statements and auditor's report to verify the opening balances. The contention of the EP that he was appointed on 30.09.2020 i.e. after 1st LR (Limited Review ended on 30.06.2020) is not tenable in view of the position discussed in para 18 above. 26. As para 6 of SA 510, The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the cur- rent period's financial statements by performing one or more of the following: (i) Where the prior y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en outstanding for a long time, as the Trade Receivables as at 31.03.2021 (Rs. 171.46 crore) were twice the combined sales for the last four years (83.33 crore). Therefore, it is apparent that the outstanding Trade Receivables required provisioning. TABEL 2 (Rs. in Crores) No. Financial Year Sales Trade Receivables 1 2020-21 23.60 171.46 2 2019-20 6.96 170.15 3 2018-19 52.77 175.54 4 2017-18 Nil 167.21 32. The financial statements for FY 2020-21 do not reveal any provisioning for ECL on trade receivables of 171.46 crores as per Ind AS 109. Even though the trade receivables exceeded seven times the sales for FY 2020-21, the auditors failed to examine the matter with professional scepticism. There was no ageing analysis of trade receivables in the audit file and there was no testing for ECL either. The EP also confirmed to NFRA vide letter dated 09.11.2023 (point no. 12 &13) that there was no ECL provisioning policy in Vikas, hence ECL provisioning was not done, and no audit testing was carried out for the same. The EP did not report the non-provisioning by Vikas in the financial statements. In reply dated 21.03.2024 to the SCN as well the EP did not offer any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prepared using the going concern basis of accounting but, in the auditor's judgment, management's use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, the auditor shall express an adverse opinion". 38. On the examination of the audit file, no documentation has been found regarding the appropriateness of the management's use of going concern basis in the preparation of financial statements. The EP also confirmed the same to NFRA vide letter dated 09.11.2023 (point no. 15). In his reply dated 21.03.2024 to the SCN also the EP did not offer any comment on failure to report on the entity's ability to continue as a Going Concern. 39. Considering the above, the charge that the auditors failed to report the non-compliance by the company regarding the appropriateness of the management's use of going concern basis in the preparation of financial statements as per SA 570 stands established. Failure to evaluate the arm's length pricing regarding the compliance of Section 177 & 188 for the Related Party Transactions 40. The auditors were charged with not having evaluated the arm's length pricing in compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e details have been disclosed in the notes to the standalone financial statements, as required by the applicable accounting standards". 44. SA 550 Standards on Auditing (SA) 550, Related Parties lays down requirements regarding audit of related party transactions and provides application guidance. However, in the Audit file submitted by the auditors there were no audit work papers in respect of identification of related party, nature of related party relationships and the details of related party transactions and outstanding balances which is in contravention of the provisions of SA 230 Standards on Auditing (SA) 230, Audit Documentation and SA 550. 45. There are no audit work papers in respect of identification of related party, nature of related party relationships and the details of related party transactions and outstanding balances. In reply dated 21.03.2024 to the SCN the EP did not offer any comment on non-evaluation of the arm's length pricing carried out for Related Party Transactions. This is a serious omission. Non-evaluation of related party transactions has been viewed seriously by International Regulators as well. For example, the PCAOB, the US Regulator Public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid standard. However, no depreciation had been charged on the leased land. 50. It is further noted that the Plant & Machinery valued at Rs.95.46 crore as on 31.03.2020 & 31.03.2021, had not been subjected to depreciation as required in Ind AS 16 Indian Accounting Standards (Ind AS) 16, Property, Plant and Equipment for the FY 2020-21. The EP also confirmed the same to NFRA vide letter dated 09.11.2023 (point no. 8 & 10 and point no 5 of 'Annexure 71') that 'As plant was not in operation during FY 2020-21, hence no depreciation has been charged on assets' and there is no documentation available in this regard. 51. In his reply dated 21.03.2024 to the SCN, EP submitted that with respect to 'false and misleading statement in the financial statement' as mentioned by your good self (in para 26 to 32 of SCN) regarding non-charging of depreciation, my opinion is that it does not form the basis of qualification of audit report. For the purpose of reporting, the fact has been duly mentioned in ICFR and along with the notes of published results. Had my intentions been wrong it should not have disclosed anywhere". 52. As per para 7 of SA 705 Standards on Auditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at "an appropriate time limit within which to complete the assembly of the final audit file is ordinarily not more than 60 days after the date of the auditor's report". The date of Independent Auditor's Report is 23.06.2021 for FY 2020-21. The EP has failed to comply with the provisions of SA 230 and SQC1 as explained in the subsequent paras. 57. As per the submission made by the EP vide email dated 25.04.2023 addressed to NFRA it is stated that "due to the long hospitalization and death of my father in law during the period of May and June-21 (finalization of audit period) documents remain scattered at different locations and in spite of my best efforts I am not able to make up some of them". The EP in most of submissions made vide letter dated 09.11.2023 had admitted that no documentation was made while performing the statutory audit of Vikas. 58. Para 75 of SQC1 read with para A21 of SA 230 states that "an appropriate time limit within which to complete the assembly of the final audit file is ordinarily not more than 60 days after the date of the auditor's report". Therefore, the auditors failed to comply with the provisions of SA 230 and SQC1, and were charged acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the auditors failed to comply with the provisions of SA 505 Standards on Auditing (SA) 505: External Confirmations stands established. Failure to determine appointment of Engagement Quality Control Reviewer (EQCR) 65. The auditors failed to determine the appointment of EQCR for the engagement of the audit of the Company which was required since Vikas was a listed Company during FY 2020-21. Para 19(a) of SA 220 Standards on Auditing (SA) 220: Quality Control for an Audit of Financial Statements requires determination of appointment of an EQCR for audit of listed entities. 66. In reply dated 21.03.2024 to the SCN the EP did not offer any comment on appointment of EQCR. 67. SA 220 and SQC 1 lay significant emphasis on the appointment of EQCR, the work to be done by EQCR and documentation to be carried out by the EQCR. Vide para 7(b) of SA 220, engagement quality control review is defined as "process designed to provide an objective evaluation, before the report is issued, of the significant judgments the engagement team made and the conclusions they reached in formulating the report". 68. Para 64 of SQC 1 casts a duty upon the EQCR partner to review important working papers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were found in the audit file, as is required under SA 260 Standards on Auditing (SA) 260, Communication with Those Charged with Governance, Communication with Those Charged with Governance. No documentation was available regarding the communication made with TCWG required by SA 260. The EP also confirmed vide letter dated 09.11.2023 (point no.7) that there is no documentation available regarding 'Communication with Those Charged with Governance' and there was no documentation of communication made with the TCWG regarding the weakness identified in the internal controls (point no. 9). In reply dated 21.03.2024 to the SCN the EP did not offer any comment on failure to Determine TCWG and Communicate with them. 72. Considering the above, the charge that the auditors failed to comply with the provisions of SA 260 regarding appointment of EQCR stands established. 73. Failure to appropriately communicate with Audit Committee (which is a part of the TCWG) has been viewed seriously by international regulators too. For example, PCAOB, the US Regulator, charged the public accounting firm L.L. Bradford & Company, LLC (Audit Firm) for its failure to communicate with the audit committe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foregoing paragraphs indicate that the Audit Firm failed to achieve the central purpose of the audit, and that there was no adequate basis to issue the audit report asserting that the audit was conducted in accordance with the SAs and ethical requirements and therefore we conclude that the Audit Firm failed to fulfil its duties prescribed under Section 143 of the Act. In addition, the audit firm remains responsible for all the lapses of EP, as detailed in the foregoing paragraphs as the EP conducted the audit on behalf of the audit firm, which was the statutory auditor of the company appointed under Section 143 of the Act. 78. In his reply dated 21.03.2024 to the SCN the EP submitted that "Total fees received by the firm from audit of Vikas Proppant and Granite Limited ....... was| and I received a total remuneration of ....... from the firm during the FY 2020-21. How- ever, there was no specific remuneration for execution of audit of Vikas proppant and Granite Limited which I have received from the firm. My humble submission is that as I was the Engagement Partner and I solely executed the audit along with my staff. Further, I am solely responsible for the inadvertent mistakes in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 EP failed to disclose in his report the material non-compliances by the company as explained in Para 31-55 above. (c) The EP committed professional misconduct as defined by clause 7 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 "does not exercise due diligence or is grossly negligent in the conduct of his professional duties". This charge is proved as the EP failed to exercise due diligence in the audit of the company in accordance with the SAs and applicable regulations, as explained in Para 31-73 above. (d) The EP committed professional misconduct as defined by clause 8 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 obtain sufficient information which is necessary for expression of an opinion, or its exceptions are sufficiently material to n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SAs to achieve the necessary audit quality and lend credibility to Financial Statements. As we have 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. 87. Section 132(4)(c) of the Companies Act 2013 provides that 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 five 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 of Companies Act, 2013, for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial ..... X X X X Extracts X X X X X X X X Extracts X X X X
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