Professional scepticism in audit work is essential where suspicious transactions and stock irregularities point to financial manipulation.

A statutory auditor may be found guilty of professional misconduct where book-entry transactions, inflated stock, receivables and other irregularities indicate that the accounts do not reflect the true financial position, yet the auditor fails to exercise professional scepticism or inquire into suspicious entries. The text notes that the relevant auditing standards required fraud-risk assessment, documentation of significant matters and proper working papers, but the respondent did not produce audit records or satisfactorily explain the scrutiny of stock and debtor statements supporting working-capital facilities. On that basis, misconduct under the Chartered Accountants Act, 1949 was upheld and removal from the register for five years was sustained.

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Issues: Whether the respondent, acting as statutory auditor, was guilty of professional misconduct for failing to detect and report suspicious book-entry transactions, stock overstatement and other irregularities, and whether removal from the register for five years was warranted.

Analysis: The respondent had audited the company over several years, but the record showed a pattern of circular transactions, inflated stock and receivables, and other manipulation that should have alerted an auditor exercising due care. The auditing standards relied upon required consideration of fraud risk, maintenance of working papers, documentation of significant matters, and application of professional scepticism. The respondent did not produce working papers, did not demonstrate that he had examined the stock and debtor statements supporting the working capital facilities, and did not satisfactorily answer the disciplinary findings. The conduct was assessed against the statutory duty to inquire into book-entry transactions and the professional obligations of a chartered accountant.

Conclusion: The respondent was held guilty of professional misconduct under the relevant schedule to the Chartered Accountants Act, 1949, and the penalty of removal of his name from the register of members of the Institute for five years was upheld.

Ratio Decidendi: A statutory auditor who fails to exercise professional scepticism, to inquire into suspicious book-entry transactions, and to preserve or produce audit documentation may be found guilty of professional misconduct where the surrounding circumstances indicate that the accounts do not reflect the true financial position.

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