NFRA finds audit firm and CA guilty of professional misconduct under Section 132(4) for violating auditing standards

NFRA found professional misconduct against an audit firm and CA under Section 132(4) of Companies Act 2013. The auditor failed to comply with multiple Standards on Auditing including SA 300, SA 315, and SA 510, failed to verify opening balances, report material misstatements regarding trade receivables and depreciation, conduct proper related party transaction audits, and demonstrate adequate audit procedures. NFRA imposed monetary penalties of Rs.3,00,000 on the audit firm and Rs.2,00,000 on the CA, plus debarred the CA from audit appointments for two years.

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Issues Involved:

1. Failure to plan the audit and understand the nature of the entity and its environment.
2. Failure to verify opening balances.
3. Failure to determine Materiality and Performance Materiality.
4. Failure to report non-provisioning of Expected Credit Loss (ECL).
5. Failure to report on the entity's ability to continue as a Going Concern.
6. Failure to evaluate arm's length pricing for Related Party Transactions.
7. Failure to report non-charging of depreciation on leasehold land and Plant & Machinery.
8. Failure to assemble the Audit File within 60 days of audit completion.
9. Failure to obtain sufficient audit evidence through external confirmations.
10. Failure to determine the appointment of Engagement Quality Control Reviewer (EQCR).
11. Failure to Determine and Communicate with Those Charged With Governance (TCWG).

Detailed Analysis:

1. Failure to Plan the Audit and Understand the Entity and Environment:
The auditors did not document an audit strategy or plan as required by SA 300. They failed to understand the nature of Vikas's business, its environment, and regulatory framework, violating SA 315. The EP admitted the lack of documentation and reliance on verbal discussions, which is insufficient under auditing standards.

2. Failure to Verify Opening Balances:
The auditors did not verify opening balances, a breach of SA 510. Discrepancies were found between closing balances of FY 2019-20 and opening balances of FY 2020-21. The EP's reliance on previous auditors without verification was deemed inadequate.

3. Failure to Determine Materiality and Performance Materiality:
The audit file lacked documentation on determining materiality and performance materiality, violating SA 320. The EP admitted to the absence of such documentation, confirming non-compliance with the standard.

4. Failure to Report Non-Provisioning of Expected Credit Loss:
The auditors did not report the lack of ECL provisioning on trade receivables, despite significant outstanding amounts, violating Ind AS 109. The EP failed to conduct necessary testing or report the non-compliance in the financial statements.

5. Failure to Report on Going Concern:
The company showed signs of financial distress, yet the auditors did not assess or report on its going concern status, violating SA 570. The EP admitted to not documenting the appropriateness of the going concern basis used by management.

6. Failure to Evaluate Related Party Transactions:
Significant related party transactions were not evaluated for arm's length pricing, violating SA 550. The EP failed to document related party relationships and transactions, despite their substantial impact on the financial statements.

7. Failure to Report Non-Charging of Depreciation:
The auditors did not report the non-charging of depreciation on leasehold land and plant & machinery, despite identifying it as a material weakness. This omission violated Ind AS 116 and Ind AS 16, as well as SA 705.

8. Failure to Assemble the Audit File:
The audit file was not assembled within 60 days of audit completion, violating SA 230 and SQC1. The EP admitted to incomplete documentation, citing personal difficulties, but this did not excuse the non-compliance.

9. Failure to Obtain Audit Evidence:
The auditors did not obtain external confirmations for significant balances, violating SA 505. The EP's reliance on management's responsibility for confirmations was insufficient, and no alternative procedures were documented.

10. Failure to Appoint EQCR:
The auditors did not appoint an EQCR for the audit of the listed company, violating SA 220. The EP provided no comment on this omission, which is a significant breach of quality control standards.

11. Failure to Communicate with TCWG:
No documentation was found regarding communication with TCWG, violating SA 260. The EP admitted to the lack of such communication, which is critical for addressing governance issues.

Penalty & Sanctions:

The EP and the audit firm were found guilty of professional misconduct. A monetary penalty of Rs. 2,00,000 was imposed on the EP, and Rs. 3,00,000 on the audit firm. Additionally, the EP is debarred for two years from auditing any company or body corporate. The order becomes effective 30 days after issuance.

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