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TMI Blog2025 (1) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... me, and as detailed below: a) The EP and the EQCR committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the CA Act, which states that a chartered accountant in practice 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 and the EQCR failed to conduct the audit in accordance with the SAs and applicable regulations, failed to evaluate valuation reports and failed to perform engagement quality control review. b) The EP committed professional misconduct as defined by clause 8 of Part I of the Second Schedule of the CA Act, which states that a chartered accountant in practice 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 the EP failed to conduct the audit in accordance with the SAs. c) The EP committed professional misconduct as defined by clause 9 of Part I of the Second Schedule of the CA Act, which states that a chartered accounta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndings on the Articles of Charges of Professional Misconduct E. Sanctions and Penalties A. EXECUTIVE SUMMARY 2. Pursuant to Securities and Exchange Board of India (SEBI) sharing in October 2022 information regarding misstatements in the financial statement of DB Realty Ltd, NFRA suo moto initiated examination into the professional conduct of the statutory auditors of DBRL under Section 132(4) of the Companies Act 2013 (Act). DBRL is listed on stock exchanges and hence a public interest entity. A Show Cause Notice was issued to CA Chetan Desai, who was the Engagement Partner (EP) and CA Rakesh Rathi, who was the Engagement Quality Control Reviewer (EQCR) for this audit engagement. 3. NFRA's examination inter alia revealed that in the Audit of DBRL for FY 2015-16, the EP and the EQCR had failed to meet the relevant requirements of the Standards on Auditing (SA) and provisions of the Companies Act 2013 and showed serious lapses and absence of due diligence in the audit of several areas, including: a) The EP failed to exercise professional skepticism and judgement; perform appropriate audit procedures; and obtain sufficient appropriate audit evidence during audit of Rs 3,894.43 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Rs. 5 Lakh only since the violations relate to the year 2015-16. Therefore, we impose through this Order a monetary penalty of Rs five lakhs upon CA Chetan Desai; and Rs three lakhs upon CA Rakesh Rathi. In addition, they are debarred for a period of five years, and three years respectively 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 be effective after a period of 30 days from the issuance of this Order. B. INTRODUCTION AND BACKGROUND 5. National Financial Reporting Authority (NFRA) is a statutory authority set up under section 132 of the Companies Act 2013 to monitor implementation 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 Act to investigate for the prescribed classes of companies, the professional or other misconduct and impose penalty for proven professional or other misconduct of the individual Chartered Accountants or fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary 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 procedures of audit applicable to the circumstances. 10. The EP and the EQCR were initially allowed 30 days' time to submit replies to SCN. The EP sought an extension of six weeks for submission of reply to SCN which was allowed up to 24.05.2024. The SCN sent to EQCR at his postal address (as per record of ICAI) could not be delivered and thereafter he provided his new address where the SCN was duly delivered on 29.04.2024. He sought six weeks' time for submission of reply to SCN which was allowed up to 24.05.2024. The EP and the EQCR sought further extension of time up to 07.06.2024 for submission of replies to SCN which was also allowed. The EP and the EQCR submitted their respective replies to the SCN on 07.06.2024. In the interest of natural justice, an opportunity of personal hearing was provided to them on 16.07.2024, which they attended along with their legal representative through video conferencing and argued their case. During the personal hearing they also so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in such procedural law and change in forum is barred only if express provision is made in new law. From this, we are of prima-facie view that Section 132 (4) of the Companies Act, 2013 can be applied retrospectively. ....7- We also take into consideration the fact that neither any new misconduct has been created in law, which NFRA can investigate and levy penalty, if required nor NFRA can levy penalty greater than the quantum of penalty envisaged under the Chartered Accountants Act, 1949. It is also noted that two appeals filed against the above NCLAT Order have been dismissed by the Hon'ble Supreme Court (Order dated 22.03.2024 in Civil Appeal No. 4518/2024 Order dated 17.05.2024 in Civil Appeal No. 3656/2024). Therefore, according to Doctrine of Merger, NCLAT Order dated 01.12.2023 has become the Order of the Hon'ble Supreme Court. Therefore, there is no merit in the contentions of the EP and the EQCR. 14. They further contended that as per section 24 A (1) (iii) of the Chartered Accountants Act 1949, NFRA cannot regulate in any manner whatsoever the profession of chartered accountants for any alleged professional misconduct committed before establishment of NFRA. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iting standards is only with reference to such standards as were established by law prevailing at the relevant time and were fully binding on statutory auditors. All the Standards on Auditing are a part of the law and are required to be mandatorily complied with from the date of their respective applicability, while conducting statutory audits. Hence, no new obligation is created on the EP and the EQCR by creation of NFRA as these standards were required to be mandatorily followed by them even prior to NFRA's establishment. Section 132(4) of the Act designates NFRA as the forum for determination of professional misconduct. The setting up of a new forum i.e., NFRA does not impose any new duties or obligations on Auditors. NFRA only evaluates their professional work in accordance with the Standards on Auditing and statutory requirements prevailing at the time of the audit. Therefore, there is no bar on NFRA's jurisdiction over the cases of professional or other misconduct committed prior to establishment of NFRA. 19. Section 132(4) of the Companies Act gives exclusive jurisdiction to NFRA in matters of professional or other misconduct. Hence, all cases that fall within the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... former state of the law, and (iv) what it was the legislature contemplated. (p. 388). 21. A plain reading of the relevant provisions would show that Section 132(4)(a) of the Act confers upon the NFRA the power to investigate into the matters of professional or other misconduct committed by any member or firm of Chartered Accountants registered under the Chartered Accountants Act, 1949 in such manner as may be prescribed. The proviso to Section 132(4)(a) of the Act creates a bar on any other institute to initiate or continue any proceedings where the NFRA has initiated an investigation under this Section. This clearly implies that even for matters of professional or other misconduct committed prior to the coming into force of Section 132(4) of the Act, NFRA can initiate an investigation, which would disentitle any other institute such as the ICAI from continuing their proceedings in such matters of misconduct. The expression such matters of misconduct would clearly mean misconduct which has been committed prior to 24.10.2018 i.e. the date of coming into force of Section 132(4) of the Act and qua which proceedings were already underway by the ICAI and with effect from 24.10.2018, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t matter was not done by the EP. A particular loan of Rs 225 crore, to a related party, for which DBRL had given a guarantee had been classified as NPA by the concerned banker in December 2015. But the Auditors had not taken cognizance of this fact. This is discussed in detail in paragraph 25 to 32 of this Order. As pointed out in the SCN, while the EP had given a modified audit report on SFS on the basis of a matter of Rs 1.92 lakhs, he parked more important matters having monetary value of more than Rs 6,972 crores pertaining to investments, loans and advances, and corporate guarantees in Emphasis of Matter (EOM) paragraph of the audit report, again without performing mandatory audit procedures. The SFS show total investments of Rs 2,456 crores and loans and advances of Rs 1,327 crores; which together constituted 90% of balance sheet size of Rs 4,218 crores. On the basis of the valuation reports, these investments, loans and advances were considered as recoverable but the EP did not perform mandatory audit procedures to evaluate the same, as discussed later in this order. The main thrust of the EP's reply has been that his audit firm was the Auditor of the listed company viz. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;Audit Evidence' during audit of contingent liabilities arising out of guarantees given and securities of Rs 3,894.43 crores provided by DBRL to its related parties as per Standalone Financial Statements (SFS) of DBRL for FY 2015-16. The EQCR was charged with failure to exercise due diligence while evaluating the EP's judgement on this matter and violation of SA 220 Para 20 21 of SA 220 (Quality control for an audit of financial statements . 26. The EP and the EQCR denied these charges and stated that - DBRL was the flagship/Holding company of the Group. The real estate projects for which the guarantees and securities were provided were being executed under various special purpose vehicles (SPVs), some of which were also in component entities. It is a normal feature when real estate projects get executed by the developers; Real estate activities are exempted under section 186 of the Act; There is no requirement to make any disclosure with regards to corporate guarantees in the audit report or The Companies (Auditor's Report) Order 2016 (CARO); It was their professional judgement to include Emphasis of Matter (EOM) in auditors report on Consolidated Financial Statements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious entities, were prejudicial to the interest of the company. In the SFS, there were guarantee/securities of Rs 3,894.93 crores, which were shown as contingent liabilities. On consolidation of financial statements, the guarantees/securities of Rs 2,406.79 crores remained as contingent liability and remaining guarantees/securities which pertained to subsidiaries/associates/jointly controlled entities, got eliminated as they showed up as actual liabilities in CFS. Thus, the guarantees/securities of Rs 2,406.79 crores shown in CFS as contingent liability were also included in the SFS as contingent liability. The EP reported in the Audit report on CFS that guarantees/securities given by DBRL were prejudicial to the interest of the company but no such comment was given in the Audit report on SFS, where the same guarantees were reflected. 30. We find that the Guarantees/securities of Rs 3,894 crores given by DBRL constitute 92% of SFS balance sheet. Out of these, the EP found guarantees/securities of Rs 2,407 crores (57% of SFS balance sheet) prejudicial to the interest of DBRL while reporting on CFS, but surprisingly, the EP did not find the same guarantees/securities prejudicial whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions relating to related party transactions) applies. It is not understood how maintenance of registers by the Auditee company, would suffice for absence of the Auditor's audit work or an evaluation on his part of the guarantees/securities given by DBRL. The EP, being statutory auditor of DBRL, had access to all information relating to guarantees and securities provided by DBRL. The fact remains that he did not adequately evaluate the guarantees given and securities provided by DBRL to its related parties. After being charged for this lapse the EP in his additional reply dated 07.08.2024 stated that the reason for the guarantees being prejudicial to the interest of the company, was that no fees/commission were charged by DBRL for these guarantees. This reply is considered as an afterthought as the Audit File has no evidence of this being the basis of the EP's opinion that guarantees were prejudicial to the interest of DBRL. 30.3 We also find that the Audit Report u/s 143(3) of the Act states that three matters of EOM paragraph may have an adverse effect on the functioning of the company viz., guarantees given and securities provided by the company of Rs 3,894 crores; t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L's business, the reply of the Auditors is not accepted. 31. DBRL had disclosed the above guarantees/securities as contingent liabilities. As per AS 29 Accounting Standards 29 - Provisions, Contingent Liabilities and Contingent Assets , DBRL was required to estimate the outflow of resources, if any, to settle the obligation arising out of guarantees given and securities provided; and make provision in the books of accounts if a reliable estimate could be made of the amount of the obligation. DBRL did not make any provision on this account on the ground that guarantees and securities given by it were not expected to result in any financial liability for the company. 31.1 The EP was required to evaluate the decision of DBRL, that guarantees and securities given by DBRL were not expected to result in any financial liability on the company Para 17, 18 21 of SA 540 . However, perusal of the Audit File indicates that the EP did not perform the appropriate audit procedures before relying on the management assertion. The basic audit procedure to be performed under these circumstances was to check whether such related parties were regular in repayment of principal and interest to the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision was warranted under AS 29. 31.3 PBPL was a wholly owned subsidiary of Marine Drive Hospitality and Realty Private Limited (MDHRPL). DBRL held 15.53% shares of MDHRPL. In addition, directors, KMPS, relatives of directors/KMPs and enterprises controlled by them held 62.51% of share capital in MDHRPL. DBRL had disclosed PBPL as a related party where the KMPs and their relatives have significant influence. Thus, it is clear that PBPL was not a component of DBRL for CFS, therefore the EP's reliance on the auditor of PBPL for this purpose, was inappropriate. Similarly, the guarantee and securities of total amount of Rs 2,406.79 crores were given for borrowings by entities which were not components of DBRL i.e., not part of CFS, therefore, the question of reliance on the component auditor is misplaced. 31.4 In respect of reliance on component auditors of other entities which were part of CFS, we note that paragraph 2 of SA 600 states that the purpose of this SA is to establish standards to be applied in situations where an auditor, reporting on the financial information of an entity, uses the work of another auditor with respect to the financial information of one or more c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusion, a mere statement that it was his professional judgement does not absolve the Auditor of professional skepticism expected in such a case. 31.7 In respect of invocation of guarantee given by DBRL for a loan of Rs 225 crores given by Bank of India (BOI) to PBPL, the EP replied that the loan was secured by other securities such as (i) charge on fixed assets both present and future projects other than project land, (ii) charge on all current assets including receipts of all the receivables related to the respective projects, (iii) charge on all bank accounts, insurance contracts of respective company along with the common securities (iv) a pari passu charge on its property of Hotel Hilton Mumbai; and that the fact of bank classifying this loan as NPA on 31.12.2015 was not known to him. Therefore, according to the EP, there was no need for him to obtain direct confirmation from the bank and it was not mandatory under SA 505 (External Confirmations). 31.8 This reply is not accepted as (i) availability of other securities does not imply that DBRL would not be held liable as a guarantor and this logic has been proved correct by the fact that there was NCLT order for initiation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, due to a dispute between partners, only DBRL's representatives had signed the financial statements of the LLP. The share of profit of DBRL in this LLP was Rs 1.92 Lakhs which was recognised by the DBRL; (b) the decision to qualify the Audit Report for an item of Rs 1.92 lakhs was made after careful evaluation of its nature and the specific circumstances surrounding it; (c) SA 320 SA 320 - (Materiality in planning and performing an audit). mandates that materiality be assessed in the context of the financial statements as a whole, considering both quantitative and qualitative factors; (d) qualification was deemed necessary to uphold the principles of fair presentation and transparency; and (e) The audit qualification was not just for an immaterial amount but to bring out the fact that the financial statements of partnership firm were not signed by both the partners as required under the partnership deed. The charges and replies are evaluated hereunder. 35. First of all, it is important to understand when an auditor is required to modify an audit report. This is provided in paragraph 6 of SA 705 which states: 6. The auditor shall modify the opinion in the auditor's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Rs 1.92 lakhs is not quantitatively material to SFS of DBRL. It is also noted from the Audit file AWP-Form SA56G that the Auditor did not identify any misstatement in the SFS. 35.4 Coming to the qualitative aspect as claimed by the EP, it is noted from paragraph 6 of SA 320 that the auditor is required to consider not only the size but also the nature of uncorrected misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements. We note from the Audit file AWP - page 13 of Form SA56H that the management had explained to the Audit team that a few partners were not available and management did not expect any change in the financials on signing of other partners. Thus, the EP's reply about dispute among partners does not hold. Further, it is also noted that the EP did not identify any misstatement in SFS. Further, he did not evaluate effect of this matter on SFS as noted from the relevant audit work paper depicted hereafter. 13. Discussion on Share of profit from an investment in a LLP, included in other income is based on the unaudited financial results of such LLP's (in both Standalone and consolidated) View ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C-III and C-IV of this Order that audit procedures performed and audit evidence obtained in the matters of Loans and advances, Investments and Corporate guarantees were deficient and not conforming to the relevant Standards on Auditing. Further, in respect of corporate guarantees, the Audit Report on CFS states that guarantees and securities given by DBRL were prejudicial to the interest of DBRL; and the Audit Reports on SFS as well as CFS state that guarantees given by DBRL may adversely affect the functioning of the company. Despite this finding, the EP and the EQCR did not evaluate whether this matter may affect the true and fair view of the SFS. Thus, the charge in the SCN, mentioned at paragraph 33 of this Order, is proved. III. Lapses in audit of Loans and Advances given by DBRL 37. The EP was charged with failure to exercise professional skepticism and judgement and evaluate the business rationale of making loans and advances Para 15 16 of SA 200 - Overall Objectives of the Independent Auditor and the conduct of an audit in accordance with Standards on Auditing ; to perform risk assessment procedures to provide a basis for the identification and assessment of Risks of Materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n valuation reports were verified. The Firm was not the Auditor for most of the subsidiaries, joint venture and associate entities; and that the component auditors gave clean audit reports on 'going concern'. The charges and replies of the EP are evaluated hereunder. 39. The majority of the loans and advances made by DBRL were long outstanding. Some companies to whom the loans were given, were having negative net worth. It was recorded in the Audit File Audit Work Paper (AWP) - SA42 - Loans (Assets) that (a) these entities were at an early stage of real estate development; (b) the company had provided valuation report for the projects undertaken by these companies; and (c) based on valuation report and assessment of management, there was no impairment in the value of these loans and advances and security deposits. It is also recorded in the Audit File that certain security deposits (included in loans and advances), given to various parties for acquisition of development rights, were long outstanding and the company was in process of obtaining necessary approvals with regard to these properties and that their current market values were significantly in excess of their carryi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of SA 500 that the competence, capabilities and objectivity of a management's expert, and any controls within the entity over that expert's work, are important factors in relation to the reliability of any information produced by a management's expert. Similarly, paragraph A48 of SA 500 provides guidance that considerations when evaluating the appropriateness of the management's expert's work as audit evidence for the relevant assertion may include: (a) the relevance and reasonableness of that expert's findings or conclusions, their consistency with other audit evidence, and whether they have been appropriately reflected in the financial statements; (b) if that expert's work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods; and (c) if that expert's work involves significant use of source data, the relevance, completeness, and accuracy of that source data. The Audit file does not have record of such evaluation, indicating the EP has completely disregarded such important guidance available in the SA 500. 39.4 The EP vide email dated 07.08.2024 referred to an AWPS AWP no - page no. 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by DBRL 42. The EP was charged with failure to perform appropriate audit procedure and to obtain sufficient appropriate audit evidence during the audit of investment of Rs 2,456 crores (non-current investment of Rs 2,370.2 crores and current investment of Rs 85.8 crores) made by DBRL in its Subsidiaries, Associates, Joint Venture and Others as shown in SFS. The EQCR was charged with failure to exercise due diligence while evaluating this matter. 43. The EP denied this charge and stated that - The investment made by DBRL was for the development of projects and not for any treasury operations or for business of investing in shares etc., to earn dividends on it. Consequently, normally, the question of such investments becoming bad also does not arise. Investment was valued as per AS 13 and the accounting policy of DBRL. Financial statements and audit reports were verified; negative net worth was noticed; and valuation reports were reviewed. The required audit procedures were performed for evaluation of competence, capability and objectivity of the valuation experts and experts were approved/registered valuers. Audit procedures were performed for confirmations of balances verificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worth was noticed; and valuation reports were reviewed. On perusal of first AWP Page 37 38 of AWP SA 41 cited by the EP, it is found that such audit procedure was performed for investment of Rs 1.89 crores only (out of total investment of Rs 2,456 crores), which shows that inadequate audit procedure was performed by the EP. On perusal of second AWP Page 21 40 of SA 41 cited by the EP, it is observed that only name of valuers, date of reports and fair values are recorded in AWP, however, there is no evidence of evaluation of the basis of valuation, how the fair value was determined, reliability of data used for valuation and appropriateness of the assumptions used in the valuation reports. The importance of such evaluation by the auditor has already been discussed in paragraph 39.3 of this Order, hence is not being repeated for brevity. 44.3 Regarding evaluation of competence, capability and objectivity of the valuation experts, the EP replied that required audit procedures were performed and experts were approved/registered valuers. However, on perusal of AWP Page 21 of SA 41 cited by him, no audit evidence is found in the Audit File regarding registration numbers of valuers; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as withdrawn from the 'members current account' with TEJV. In such situation. to rule out the possibility of misuse of funds through a related party, a prudent auditor should verify relevant bank statements, which was not done in this case. Therefore, this reply is not accepted. 44.6 The EP and the EQCR were required to perform appropriate audit procedure to verify the existence of investments on the balance sheet date. Though they had verified share certificates of Rs 3.50 crores in respect of the investment made during the year, however, in respect of remaining investment carried forward from previous year, it is recorded in the Audit File that the audit team had verified share certificates but there is no evidence in the Audit File to substantiate this claim of verification. 44.7 Regarding existence of investment, the EP replied that the Engagement Team had physically verified the closing investment with the share certificates/demat statements other than those which were pledged with the banks/financial institutions, which were verified from the previous years signed financials. On perusal of relevant AWP Page 18 19 of AWP SA 41 , it is observed that though it is recorde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or inter alia the direction, supervision, and performance of the audit engagement in compliance with professional standards and regulatory and legal requirements Para 15 of SA 220 . 47.2 However, there is no evidence in the Audit File of the EP's direction and supervision of the performance of audit of DBRL. The EP was only involved during planning stage of audit; and thereafter in finalisation of the audit report Audit Work Papers SA16, SA21, SA29, SA29A, SA30, SA55A, SA56H and SA57D , as detailed below. There is no evidence of the EP's direction and supervision of the audit of DBRL between 14.03.2016 to 20.05.2016 when major part of the audit procedures was performed. The EP did not even plan AWP SA 28 - Audit Team and review responsibilities to review a major part of the audit performance; and planned to review only six areas viz. (a) Audit Program and budget; (b) IFCs, Process Notes Walkthroughs; (c) Revenue and Receivables; (d) Taxation; (e) CARO Compliance; and (f) Preparation and review of the Audit Report and related working. Further, the Audit File has no evidence of the EP's review of even planned areas of (b), (c), (d), and (e) mentioned in this paragraph. Pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch to the audit engagement; (c) identifying matters for consultation by more experienced engagement team members during the audit engagement; (d) timely review by the EP of critical areas of judgement at appropriate stages of audit; and (e) whether audit work is performed in accordance with professional standards and regulatory and legal requirements Para A15 to A18 of SA 220 . The AWPs cited in his reply do not demonstrate his involvement during audit period from 14.03.2016 to 20.05.2016 as detailed in below Table 2: Table 2. AWP no. Title of AWP Date of audit work done Nature of audit work done SA16 Planning Meeting With Client 07.03.2016 Understanding the entity, enquiries, scope of audit and audit timetable. SA21 Audit timetable 10.03.2016 List of activities from 25.02.2016 to 27.05.2016. SA29 Engagement Team discussion 15.03.2016 Discussion of general matters, Discussion of potential for fraud and identification of fraud risk factors, tax matters/IS audit matters and how they affect the audit, Group Audit matters, Risks identified, Internal Financial Controls (IFC) Evaluation Planning, Audit strategy, and roles and responsibilities etc. SA29A Audit strategy 14.03.2016 Audit st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and stated that the roles of the EP and the EQCR are distinct and essential in the context of an audit. He stated that the EP is the primary individual responsible for the audit engagement and its overall outcome; and the EQCR focuses on evaluating the major decisions and judgements of the audit team. He stated that he was not an integral member of the engagement team; his involvement was confined to review of the Audit File as mandated by SA 220 and SQC 1; and he was not required to maintain separate working papers. He referred to 23 AWPS in support of work done by him AWPS - SA 02, SA 04, SA 11, SA 12, SA 14, SA 18, SA 19, SA 25, SA 29, SA 54G, SA 54H, SA 56C, SA 56E, SA 56G, SA 56H, SA 57B, SA 57C, SA 57D, SA 58A, SA 58B, SA 58E, SA 581, and Form Q12 (total 23 AWPS) . According to him, EQCR's objective view can be achieved through checklist as opposed to reaching a level of subjective satisfaction; and that the provision is silent on HOW the EQCR should express his agreement or disagreement with the engagement team's judgement. He finally stated that he had in-depth verified the planning documents, substantive procedures performed, and audit evidence obtained in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the work of the company's specialist, the auditor should evaluate whether the significant assumptions used by the specialist are reasonable .... Chow did not perform any procedures to evaluate the reasonableness of any other assumptions developed by Sugarmade and used by Sugarmade's valuation specialist, including, for example, estimated operating expenses and the discount rate . (emphasis supplied). In this case, PCAOB barred the EP from being an associated person of a registered public accounting firm , required him to undergo training in subjects that are directly related to the audits of issuer financial statements and imposed monetary penalty of $50,000; PCAOB also barred EQCR from serving as EQCR for one year, required him to undergo training in subjects that are directly related to the audits of issuer financial statements and imposed monetary penalty of $25,000. The regulator also imposed monetary penalty of $ 75,000 upon the Audit Firm. 56. PCAOB (PCAOB) Release No. 105-2022-009 May 24, 2022 in the matter of Bo-Shiang Lien, CPA relating to his failure inter alia to perform any procedures to understand the work performed or assumptions used by the third-party speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time to time, and as detailed below: a) The EP and the EQCR committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the CA Act, which states that a chartered accountant in practice 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 and the EQCR failed to conduct the audit in accordance with the SAs and applicable regulations, failed to evaluate valuation reports and failed to perform engagement quality control review, as explained in Section - C above. b) The EP committed professional misconduct as defined by clause 8 of Part I of the Second Schedule of the CA Act, which states that a chartered accountant in practice 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 the EP failed to conduct the audit in accordance with the SAs as explained in Section - C - I to V above. c) The EP committed professional misconduct as defined by claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sconduct 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 (1) 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, 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. 64. The audit fee for this engagement was Rs Total revenue of the Firm was Rs and fee for limited review was Rs during 2015-16 and Rs during 2016-17. The EP and EQCR received total remuneration of Rs FY 2015-16. and Rs respectively in 65. In light of the judgment of the Hon'ble National Company Law Appellate Tribunal dated 01.12.2023, we are limiting the monetary penalty to ₹5 Lakh only since the violations relate to the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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