AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (2) TMI 465
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....d various capital facilities from time to time to PCL in respect of its business of marketing computers and software. That as per terms of the sanction of the capital it was incumbent upon PCL to ensure that drawings on the account were covered by the advance value of the stock hypothecated to the complainant bank. Various banks and financial institutions had also extended financial assistance to M/s.Altos India Ltd. (hereinafter referred to as AIL), a sister concern of PCL. In a special audit carried out of the stock etc. of AIL, glaring acts of commission and omission committed by AIL surface. That IDBI, a creditor of PCL circulated a background note to the effect that with effect from 1988-89 the increase in stock of PCL was much higher than the profits generated and similar was the position with AIL with effect from the year 1992-93. That the two companies had adopted a modus operandi, being, booking as sales of software reported developed by PCL was shown to third parties who would in turn show delivery to AIL as a purchaser and from AIL sales were shown to PCL. This loop was repeated many times. IDBI estimated the value of current assets generated through the said process to ....
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....fficial liquidator. The committee also noted that as per the terms and conditions on which the working capital facility was sanctioned by the complainant to PCL, the condition of PCL submitting stock statement at the close of each fortnight, were not examined by the officers of the complainant. Respondent's stand that he was not to look into the statements and his role was to certify the balance sheet only was noted by the Committee. 5. The Committee noted the following findings given by the special auditor in regard to the stock:- "2. Stocks 2.1 Analysis/review of the sales to certain parties accounts (whose accounts are clubbed under the supplier's sub ledger) revealed that SWT sales have been, inter alia, made to the certain selected parties during the year 01.01.1996 to 31.12.1996. 2.2a) Certain amounts have been shown as paid on behalf of AIL to certain selected SWT debtors through State Bank of Bikaner and Jaipur which may be taken by the Banks for the verification with the bank statements. 2.2b) Details of amounts debited to AIL's accounts with corresponding credit entries appearing in the selected SWT debtors accounts. 2.2c) Amounts debited to AIL's account as purchas....
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....the report as contemplated by law. Further, there were suspicious adjustment entries between AIL and PCL which ought to have raised a doubt about the genuineness of the transactions and ought to have been detected and reported by the respondent. Regarding liability of the auditor, in paras 26 to 35 of the report the committee, with reference to the evidence before it the stand taken by the parties, the Committee opined as under:- "26. The Committee perused the financial statements of the years under question, the working results of the Company and the background note circulated by IDBI and observed that a major portion of the Company's profit flowed from increase in stock. Further, in the later years, namely, from 1988-89 onwards that the increase in stock was always higher than the net profit. 27. The modus operandi which was adopted by PCL and AIL was booking as sales of a software reportedly developed by PCL to an outsider party which in turn would be passed on to AIL as purchaser which again would be supplied to PCL as sales. In this process, this loop getting repeated many times but there was no cash flow while the sales and stock/receivables kept on increasing. However, the....
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....ors are identified that cause the auditor to believe that additional audit procedures are necessary, the auditor should document the presence of such risk factors and the auditor's response to them. 50. The auditor must document matters which are important in providing evidence to support the audit opinion, and the working papers must include the auditor's reasoning on all significant matters which require the auditor's judgment, together with the auditor's conclusion thereon. Because of the importance of fraud risk factors in the assessment of the inherent or control risk of material misstatement, the auditor documents fraud risk factors identified and the response considered appropriate by the auditor." 31. Further, as per AAS-3, Documentation: "1. Auditing and Assurance Standard (AAS)1, "Basic Principles Governing an Audit" (Paragraph 11), states, "The auditor should document matters which are important in providing evidence that the audit was carried out in accordance with the basic principles." The purpose of this Standard is to amplify the basic principles outlined above. 2. Documentation, for purposes of this Standard, refers to the working papers prepared or obtained by....
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.... auditor needs to plan and perform this audit with an attitude and professional skepticism so as to identify and properly evaluate the matters that increase the risk of material misstatement in the financial statements, the circumstances that make the auditor suspect that the financial statements are materially misstated. The Committee noted that from the circumstances which were in existence at the time of audit and the manner in which the loop of transactions had been carried out by the Company along with the other companies revealed that the Respondent ought to have applied his professional skepticism and should not have accepted these transactions as genuine. Moreover, in view of the Committee, the manner in which the transactions were booked in the books of accounts of the Company ought to have raised an alarm that the financial statements were suspected to have material misstatements which as a prudent auditor, the respondent did not try to assess and accordingly failed in his duties to carry out the audit in a diligent manner and in other words helped the management to defraud the bank and public at large of the funds which they had invested in the Company." 8. Suffice it t....