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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 ..... 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 . The EP committed professional misconduct as defined by clause 6 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 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gesh Mahipal; II. Debarment of CA Yogesh Mahipal and the audit firm M/s Yogesh Mahipal Associates (FRN: 030845N), for two years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. - DR. PRAVEEN KUMAR TIWARI FULL-TIME MEMBER, DR. AJAY BHUSHAN PRASAD PANDEY CHAIRPERSON AND SMITA JHINGRAN FULL-TIME MEMBER ORDER In the matter of CA Yogesh Mahipal, ICAI Membership No. 530620 under Section 132(4) of the Companies Act 2013 read with Rule 11(6) of National Financial Reporting Authority Rules 2018 1. This Order disposes of the Show Cause Notice ('SCN' hereafter) no. NF-23/41/2022 dated 18.01.2024, issued to CA Yogesh Mahipal, proprietor of M/s Yogesh Mahipal Associates (ICAI Firm registration no. 030845N), Hanumangarh, Rajasthan, who is a member of the Institute of Chartered Accountants of India ('ICAI' hereafter) and was the Engagement Partner ('EP' hereafter) for the statutory audit of Vikas Proppant and Granite Limited, ('Vikas' or 'the company' hereafter) for the Financial Year ('FY' here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed 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 assemble the Audit File. f. The auditors failed to carry out external confirmation for Trade Receivables or any other alternative audit procedure to verify the audit assertions relating to Trade Receivables. g. The auditors failed to demonstrate compliance with the requirement of the Standards on Auditing concerning the Engagement Quality Control Reviewer. 6. Based on our investigation and proceedings under Section 132 (4) of the Companies Act, 2013 and after giving him opportunity to present his case, we find the EP guilty of professional misconduct and impose through this Order a monetary penalty of ₹ 2,00,000/- (Two Lakhs). In addition, the EP CA Yogesh Mahipal and the audit firm M/s Yogesh Mahipal Associates (FRN: 030845N) is debarred, for two years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. This Order will take effect after 30 days from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was observed that the audit had prima facie been conducted by the EP and his team in disregard of most of the SAs and relevant requirements of the Companies Act 2013. Despite this, the EP had issued an unmodified audit opinion in his Independent Auditor's Report. 11. On being satisfied that a sufficient cause existed to act under Section 132(4) of the Companies Act 2013, a SCN was issued to the EP on 18.01.2024, asking him to show cause why action should not be taken for Professional Misconduct in the Statutory Audit of Vikas for the FYs 2018-19 and 2019-20. The EP was charged with professional misconduct of: a) failure to plan the audit and failure to understand the nature of the entity and its environment; b) failure to evaluate the Internal Audit Function; c) failure to determine materiality and performance materiality; d) failure to report the non-provisioning in respect of the Expected Credit Loss; e) non evaluation of the arm's length pricing carried out for Related Party Transactions; f) failure to assemble the Audit File within 60 days of the completion of the audit; g) failure to report non charging of depreciation of lease hold land and plant machinery; h) failu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A 300 and SA 315 stands established. Failure to evaluate the Internal Audit Function 17. The EP was charged with failure to evaluate the Internal Audit Function. It has been stated by the company in the Annual Report of FY 2018-19 (page 22) 2019-20 (page 23) that M/s Sanjay Goyal Associates were the internal auditors to review and strengthen the Internal Financial Control system of the Company. Examination of work papers submitted by EP does not show any analysis of the work of internal auditor or even the fact of the internal audit having been conducted in FY 2018-19 2019-20. 18. As per para 15 of SA 610 Standards on Auditing (SA) 610 (Revised), Using the Work of Internal Auditors , The external auditor shall determine whether the work of the internal audit function can be used for purposes of the audit by evaluating the following: (a) The extent to which the internal audit function's organizational status and relevant policies and procedures support the objectivity of the internal auditors; (b) The level of competence of the internal audit function; and (c) Whether the internal audit function applies a systematic and disciplined approach, including quality control. 19. The EP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile and there was no impairment testing for the long pending trade receivable and provision of Expected Credit Loss (ECL) thereon. 25. The EP failed to report the non-provisioning of ECL on trade receivable by Vikas in the financial statements. There is no audit documentation/evaluation regarding non- provisioning of doubtful debts. The EP also confirmed in his letter dated 10.11.2023 to NFRA that no documentation was available for determination of ECL provisioning by the company'. In his reply dated 22.03.2024 to the SCN also, the EP did not offer any comment on lack of documentation/evaluation regarding reporting the non-provisioning in respect of the Expected Credit Loss. 26. Considering the above, the charge that the EP failed to report the non-compliance by the company regarding ECL provision as per Ind AS 109 stands established. No Evaluation of the arm's length pricing carried out for Related Party Transactions 27. The EP was charged with not evaluating the arm's length pricing for Related Party Transactions. As part of the audit procedures, the EP was required to confirm whether the approval for related party transactions had been accorded by the Audit Committee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g (SA) 550, Related Parties stands established. Non-evaluation of related party transactions has been viewed seriously by International Regulators as well. For example, the PCAOB, the US Regulator Public Company Accounting Oversight Board (PCAOB) Release No. 105-2017-038 , censured and imposed monetary penalty of $ 30,000 collectively on the firm and respondents in the matter of Seale and Beers CPAs, LLC, and Charlie B. Roy, CPA, for their failure inter alia to obtain, or ensure that the engagement team obtained, sufficient appropriate audit evidence for significant items reported in the financial statements, including related party transactions and expenses. Failure to assemble the Audit File within 60 days of the completion of the audit 32. The EP was charged with failure to assemble the Audit File within 60 days of the completion of the audit. Para 75 of SQC1 read with para A21 of SA 230 Standards on Auditing (SA) 230, Audit Documentation 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 . The date of Independent Auditor's Report is 22.05.2019 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 97), the company stated that it was into business of mining of Granite Blocks and manufacturing of Proppants. It is apparent from the report that this land meant for mining and quarrying should have been depreciated as per Ind AS 116. However, no depreciation was provided in the books of accounts. 38. It is further noted that the Plant Machinery had been valued at *78.02 crore as on 31.03.2019 31.03.2020. This plant machinery had not been subjected to depreciation during FY 2018-19 2019-20 as required by Ind AS 16 Indian Accounting Standards (Ind AS) 16, Property, Plant and Equipment . The EP also confirmed the same to NFRA vide letter dated 10.11.2023 (point no. 16) and stated that the plant and machinery was not operational during those years, so depreciation was not charged. In reply dated 22.03.2024 to the SCN the EP did not offer any comment on not reporting the non-charging of depreciation of lease hold land and Plant Machinery. 39. As per para 55 of Ind AS16 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y evidence of external confirmation from third party and any alternative procedure adopted by the EP, the charge that the EP failed to comply with the provisions of SA 505 stands established. Failure to determine appointment of Engagement Quality Control Reviewer (EQCR) 44. The EP was charged with failing 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 2018-19. 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. 45. In reply dated 22.03.2024 to the SCN the EP did not offer any comment on appointment of EQCR. 46. SA 220 and SQCl 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, the 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 . 47. Para 64 of SQC1 casts a du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Vikas Proppant Granite Limited for the FY 2018-19 and 2019-20. 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 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 failed to disclose in his report the material non-compliances by the company as explained in Para 24-31 above. (b) The EP committed professional misconduct as defined by clause 6 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... public interest entity Public interest entity as defined in Rule 3 of NFRA Rules 2018 . 52. 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. 53. 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 of a listed company. As we have explained in this Order, deficiency in the conduct of Audit, abdication of responsibility and inappropriate conclusions on the part of CA Yogesh Mahipal establish his professional misconduct. 54. 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. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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