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TMI Blog2024 (12) TMI 229X X X X Extracts X X X X X X X X Extracts X X X X ..... 8-19 and 2019-20. 2. This Order is divided into the following sections: A. Executive Summary B. Introduction & Background C. Lapses in the conduct of audit D. Article of Charges of Professional Misconduct by the EP E. 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 2018-19 and 2019-20, pursuant to information received from Securities and Exchange Board of India (SEBI hereafter) indicating the failure of statutory auditor regarding provisioning in respect of the Related Party Transactions (RPT), Expected Credit Loss (ECL) and depreciation of lease hold land and plant & machinery. 5. This Order finds that the auditors failed to meet the relevant requirements of the Standards on Auditing ('SA' hereafter) in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Order will take effect after 30 days from its issue. B. Introduction & Background 7. The NFRA is a statutory 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charging of depreciation of lease hold land and plant & machinery; h) failure to obtain sufficient and appropriate audit evidence through external confirmations; and i) failure to determine appointment of Engagement Quality Control Reviewer (EQCR). 12. The reply to the SCN was submitted by the EP on 22.03.2024. The EP did not avail the opportunity of personal hearing offered in the SCN. This Order is based on a review of the audit file, written response of the auditor 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 13. The EP was charged with failure to plan the audit and failure to understand the nature of the entity and its environment. For performing the audit in an effective manner, EP was required to plan the audit of financial statements of Vikas in accordance with Para 3 and 8 of SA 300 Standards on Auditing (SA) 300, Planning and Audit of Financial Statements. The Audit Strategy and Audit Plan must be documented in accordance with Para 11 of SA 300, but no such documenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he internal audit function applies a systematic and disciplined approach, including quality control. 19. The EP in his email to NFRA dated 10.11.2023 and letter dated 10.11.2023 attached with it, has stated that there was no internal auditor for the FY 2018-19 & 2019-20. In reply dated 22.03.2024 to the SCN as well the EP did not offer any comment regarding evaluation of internal audit function. 20. Accordingly, we conclude that the EP failed to comply with the provisions of SA 610 as it relates to evaluation of the work of internal auditor. Failure to determine Materiality and Performance Materiality 21. The EP was 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. 22. However, there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to confirm whether the approval for related party transactions had been accorded by the Audit Committee / Board of Directors / Shareholders as per Sections 177,185 and 188 of the Companies Act, 2013 and whether these transactions were in the ordinary course of business and on arm's length basis, which the EP failed to do. 28. The Trade Payables on 31.03.2019 to the related parties (Rs.130.53 crore) were almost 100% of the Total Trade Payables of Rs.130.57 crores. The Trade Receivables on 31.03.2019 from the related parties were Rs.112.08 crore which is 63.84% of Total Trade Receivables of Rs. 175.54 crores on that date. Loan payable to directors were Rs.64.04 crore and Rs. 57.11 crore respectively in FY 2018-19 and 2019-20. However, there were no audit work papers in relation to the evaluation of arm's length testing, as required under Section 177, 185 and 188 of the Companies Act, 2013. 29. Further, on examination of the Valuation Certificate issued by CA Somprakash Agarwal, it is noted that the Leasehold lands of 25 crore acquired from the Managing Director of Vikas during the FY 2018-19 were not disclosed under the Related Party Transactions and the EP failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of the auditor's report". The date of Independent Auditor's Report is 22.05.2019 and 27.06.2020 for FY 2018-19 & 2019-20 respectively. The EP has failed to comply with the provisions of SA 230 and SQC1 Standard on Quality Control (SQC) 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements as explained in the subsequent paras. 33. NFRA vide its letter dated 17.01.2023 had requested the EP to submit the audit file by 02.02.2023. In response, the EP vide letter dated 03.02.2023 had requested one month's extension and was given time till 24.02.2023. The EP subsequently submitted the audit file on 07.03.2023 but affidavit regarding completeness of audit file was not submitted along with audit file as required by NFRA vide letter dated 17.01.2023. 34. NFRA vide its mail dated 17.04.2023 requested the EP to submit the affidavit regarding completeness of audit file within 10 days. In turn, EP had requested NFRA vide email dated 26.04.2023 to allow some more time to submit extra documents and did not mention regarding submission of affidavit. However, no subsequent communicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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". 40. In the Independent Auditor's Report of FY 2018-19 and 2019-20, the EP stated that ",the standalone financial statements give the information required by the Companies Act, 2013 ("the Act") in the manner so required and give a true and fair view in conformity with the Indian Accounting Standards prescribed under section 133 of the Act read with the Companies (Indian Accounting Standards) Rules, 2015, as amended, ("Ind AS") and other accounting principles generally accepted in India, of the state of affairs of the Company, and its profit, total comprehensive income, its cash flows and the changes in equity for the year ended on that date." 41. Considering the above, the charge is proved that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgments the engagement team made and the conclusions they reached in formulating the report". 47. Para 64 of SQC1 casts a duty upon the EQCR partner to review important working papers relating to the significant judgments that the engagement team made and the conclusions they reached. Para 66 of SQCI requires that the engagement quality control reviewer conducts the review in a timely manner at appropriate stages during the engagement so that significant matters may be promptly resolved to the reviewer's satisfaction before the report is issued. Paras 68-72 of SQC1 prescribe the criteria for the eligibility of engagement quality 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. 48. Considering the above, the charge that the EP failed to comply with the provisions of SA 220 regarding appointment of EQCR stands established. 49. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement 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 24-31 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 13-49 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 negate the expression of an opinion". This charge is proved as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the 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 Reporting Authority. 55. As per the information furnished by CA Yogesh Mahipal vide email dated 07.03.2023, the audit fees of Vikas for the FY 2018-19 & 2019-20 was ........ in each FY. However, as per EP's submission the mentioned fee was not received. 56. Considering the proven professional misconduct, the nature of violations, principles of proportionality and deterrence against future professional misconduct, we in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, hereby order: I. Imposition of a monetary penalty of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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