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of <h1>NFRA penalizes audit firm Rs 10 lakh and CA Rs 5 lakh with 3-year debarment for professional misconduct</h1> <h3>In the matter of Lexus Granito India Limited against CA Firm M/s Ashok Holani & Co. and CA Rahul Jangir</h3> In the matter of Lexus Granito India Limited against CA Firm M/s Ashok Holani & Co. and CA Rahul Jangir - TMI Issues Involved:1. Lapses in the audit.2. Lapses by the Audit Firm.3. Articles of Charges of Professional Misconduct by the Auditors.4. Additional Articles of Charges of Professional Misconduct specific to the Audit Firm.5. Penalty & Sanctions.Summary:1. Lapses in the Audit:The National Financial Reporting Authority (NFRA) found significant lapses in the audit conducted by M/S Ashok Holani & Co. and CA Rahul Jangir for Lexus Granito India Limited (LGIL) for FYs 2017-18 to 2019-20. The auditors failed to meet the Standards on Auditing (SA) requirements, showing gross negligence and lack of professional skepticism. Key issues included:- Unilateral Write-Back of Liabilities: LGIL wrote back substantial liabilities as 'Other Income,' inflating profits and understating losses. The auditors did not apply appropriate audit procedures to test these transactions.- Inventory Valuation: LGIL adopted a flawed accounting policy for inventory valuation, not complying with AS 2. The auditors failed to attend physical inventory counts and did not modify their opinion despite material misstatements.- Related Party Transactions: The auditors did not obtain sufficient appropriate audit evidence for related party transactions, including significant payments from IPO proceeds to a related party.- Inappropriate Reporting through KAM: The auditors reported matters through Key Audit Matters (KAM) without sufficient audit evidence or prior communication with Those Charged with Governance (TCWG).- Forming Inappropriate Audit Opinion: Despite material misstatements, the auditors issued unmodified opinions for the FYs 2017-18 to 2019-20.2. Lapses by the Audit Firm:The audit firm, M/S Ashok Holani & Co., failed to establish and maintain a system of quality control, ensuring compliance with professional standards and regulatory requirements. The firm did not document compliance with independence requirements or appoint an Engagement Quality Control Reviewer (EQCR) for the statutory audit of a listed company.3. Articles of Charges of Professional Misconduct by the Auditors:The NFRA concluded that the auditors committed professional misconduct under Section 22 of the Chartered Accountants Act 1949 and Section 132 (4) of the Companies Act 2013. The charges included:- Failure to disclose material facts and report material misstatements.- Gross negligence and lack of due diligence in conducting the audit.- Failure to obtain sufficient information necessary for expressing an opinion.- Failure to invite attention to material departures from generally accepted auditing procedures.4. Additional Articles of Charges of Professional Misconduct specific to the Audit Firm:The audit firm was additionally charged with professional misconduct for failing to exercise due diligence and being grossly negligent in the conduct of professional duties, violating the Standards on Auditing and SQC 1.5. Penalty & Sanctions:Based on the findings, NFRA imposed the following penalties and sanctions:- A monetary penalty of Rupees Ten Lakhs on M/S Ashok Holani & Co.- A monetary penalty of Rupees Five Lakhs on CA Rahul Jangir, along with a three-year debarment from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of any company or body corporate.The order will become effective 30 days from its issue.
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