TaxTMI 
TaxTMI 
2022 (9) TMI 1479
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....pplicable provisions of the Companies Act 2013 and Accounting Standards (AS hereafter) notified under the Companies (Accounting Standards) Rules, 2006. 3. M/s. Subramaniam Bengali & Associates was the statutory auditor of TDML for FY 2016-17 and CA Rajiv Bengali was the Engagement Partner (EP hereafter) for this audit. 4. On a preliminary examination of Financial Statements downloaded from BSE website (TDML did not have a working website), it was found that the TDML had not complied with the Accounting Standards and provisions of the Act in the preparation and presentation of its Financial Statements for FY 2016-17, resulting in material misstatements of various figures and disclosures. Vide letter dated 22.03.2022, the Audit File along with other information were called from M/s. Subramaniam Bengali & Associates and the EP, giving 30 days' time for submission of required documents. CA Rajiv Bengali, the EP of the Audit Firm, submitted the Audit File in respect of audit of TDML for FY 2016-17 on 03.05.2022. 5. On examination of the Audit File, it is observed that the audit had been conducted in disregard of most of the Standards on Auditing (SA hereafter) and the Act. ....
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....EP submitted his reply on 16.08.2022. 8. The EP has been evasive in his replies and has not specifically responded to the allegations of non-compliance with statutory requirements. He has mentioned that non communication with the management and breakdown of Computer Systems were the reasons for non-availability of Audit Evidence in Audit File. The EP has accepted his lapses in respect of some of the charges in the SCN, adding that the audit was completed when he was under stress because of his health and was completed in a hurried manner. He also submitted that his Systems were damaged, and he had to change almost the entire Systems; and that all the data could not be recovered, especially the mails which were very much part of the documentation. 9. The SCN gave the EP an opportunity of personal hearing but the EP has chosen not to avail of the same. Thus, this order is based on the written replies of the EP and other materials available on record. 10. We have perused all the materials on record including the written response of the EP. Some of the major violations relate to False reporting in the Independent Auditor's Report about truthfulness & fairness of Cash Flow ....
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....thought and has been prepared or obtained subsequently. This is further corroborated by the fact that the manner of preparation & signing of the CFS submitted by the EP along with reply to SCN is totally different from that of the Balance Sheet and the Statement of Profit and Loss submitted along with the Audit File. The differences are tabulated as under: 11.3 From the above, it can be reasonably inferred that the EP has prepared the Cash Flow Statement after receipt of SCN and attached the same with his reply to SCN with the intention to mislead us. This act of the EP amounts to falsification of the Financial Statements. 12. The EP was charged^2 with false reporting in the Independent Auditor's Report which shows that TDML was registered under section 45IA of the Reserve Bank of India Act 1934 (applicable for Non-Banking Finance Companies-NBFCs) and was holding a registration certificate for the same. In fact, as seen from Annual Report, TDML was in the business of media and content syndication and not an NBFC. TDML was not registered under RBI Act and was not holding such registration certificate. 12.1 Responding to this charge the EP stated that, "Reporting company....
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....s discussed in succeeding paras. 14.1 Responding to these charges the EP stated, "I had carried out the audit in accordance with the SAs but as I have said earlier the query sheet and points raised during the audit were replied by the Company based on which the Financial Statements and Report was made. However due to mainly non communication with the Company I could not complete the Audit File along with necessary documents and secondly my systems were also damaged, and I had to almost change the entire system and all the data could not be recovered especially the mails which were very much part of the documentation ". 14.2 We note that the EP had a statutory duty^6 to retain the audit documentation for seven years from the date of the Auditor's Report. The Audit report in this case was signed on date 30-05-2017. Accordingly, the EP had a statutory duty to preserve the Audit File at least till 29-05-2024. Due diligence would require the EP to proper upkeep of Systems including back up of Audit File to ensure compliance with his statutory obligations. That he failed to do so points to gross negligence and unprofessionalism on his part. In any event, accepting such irrespon....
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....ML had not given such a disclosure in the Statement of Profit and Loss and wrongly aggregated these extraordinary items under the head 'Other Expenses'. 15.1 The EP was also charged^10 with non-compliance to SA 450 relating to 'Evaluation of misstatements identified during the audit' as he failed to document evidence of corrections of misstatement regarding bad debts from Rs. 23.11 crores to Rs. 14.87 crores. The EP was required to document the corrections of misstatements in the Financial Statements11. We observe that the EP had enquired with the management regarding details of Bad Debts amounting to Rs. 23.11 crores shown in the Trial Balance. The Audit File do not reflect any work paper showing how the EP's query was resolved. In the audited Financial Statements, however, Sundry Balance Written off (net) of Rs. 14.87 crores was disclosed. No audit procedures were performed to verify the correctness of Sundry Balance Written off (net) for Rs. 14.87 crores and genuineness of this transaction. 15.2 Responding to the charge relating to non-compliance to SA 240 the EP stated that - "There was no such circumstances and situation which would draw the attention....
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....39;s use of the 'Going Concern' assumption in preparation of Financial Statements despite several adverse indicators in the Financial Statements that could raise significant doubt about the 'Going Concern' assumption and management's intentions to continue operations. Such indicators included: (i) Reduction in 'Revenue from Operations' from Rs. 51 crores in FY 2015-16 to Rs. 17.06 crores in FY 2016-17, (ii) Reduction in Inventory from Rs. 12.71 crores in FY 2015-16 to NIL in FY 2016-17, (iii) Sundry Balances worth Rs. 14.87 crores had been written off during the year, (iv) Recognition of abnormal Miscellaneous Expenses of Rs. 24.06 crores during the year and (v) The company had incurred loss of Rs. 54.37 crore, which resulted in substantial reduction in Net Worth from Rs. 58.89 crores as on 31.03.2016 to Rs. 4.52 crores as on 31.03.2017. 16.1 Responding to the charge as to why the appropriate audit evidence about 'Going Concern' assumption was not obtained by the auditor, the EP stated that - "Revenue from operations had decreased due to some of the clients cancelled their orders and other business ....
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....earlier due to breakdown of systems, I am unable to recover the data and give any proof on the issue. The same could not be recovered from the Company because we have no communication since last more than five years. Further you must have also observed that the Note No. 27 to the Financial Statement seems not complete. This is the reason the names of other related party which were there. Generally, the Full table is made but unfortunately not able to recover that data. As far as the change of Directors are concerned, I have no idea on that issue at present." 17.2 As discussed earlier, the reply of the EP that he is not able to retrieve e-mails is unacceptable. The EP having failed to evaluate RPT and make appropriate disclosures regarding the same has thus not complied with SA 550. 18. The EP was charged^18 with non-compliance with SA 230 relating to 'Audit Documentation' in that he had failed to document the nature, timing and extent of audit procedure performed and results thereof; failed to document audit evidence obtained, conclusions reached, communication with management & Those Charged With Governance (TCWG) etc.; he did not assemble the Audit File within 60 da....
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....t of the Act. The Financial Statements were required to be approved by the Board of Directors before these were signed by the EP on 30.05.2017 as per the provisions of the Act. However, there was no evidence in the Audit File that Financial Statements were approved by Board of Directors of TDML. Further, the Financial Statements were not signed by the Chief Finance Officer and Company Secretary, in violation of the provisions of the Act. The names of other signatories were not mentioned in the Financial Statements. 20.1 Responding to the charges the EP stated that "The Financial Statements were signed by the directors. The Audit report was signed and was given in good faith after getting the signature on the Balance Sheet but it was a mistake on my part to trust them for the same ". 20.2 Thus, the EP has accepted his lapse in not ascertaining that the persons as prescribed in the Act had signed the Financial Statements, and absent these, placing disclaimers about the same in his audit report. This is extreme lack of diligence on the part of a qualified professional to not insist to write the names of persons who signed on the Financial Statements as Directors of the TDML. The....
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....but have been shown in Note No-19 to FS, (iv) Wrong figure of Earning per Share has been reported, (v) Disclosure about Loans as in Note no-6 to FS is incomplete, as the bifurcation of loan amounts was not mentioned. (vi) Classification of Short-Term Borrowings at Note 8 to FS has not been given. (vii) Classification of Short Terms Loans & Advances at Note 15 to FS, has not been given. 22.1 Responding to the charges the EP stated that "(i) Short Term Borrowing of Rs. 1.40 crores was from Aparna Shah as explained to us and what I recollect which was given to Company for payment of Taxes, (ii) Deferred Tax Asset shown under Current Asset. It is a mistake and should have been stated under Non Current Assets, (iii) The nature of business of the Company is of Media content and not manufacturing or Trading in Goods - and hence instead of Material Consumed it has been shown as Operating Cost. However, the details has been given, in the Schedule, (iv) Diluted Earnings per share shown at Rs. 0.53 for 31st March 2016 on the face of Profit & Loss account, However, in the Schedule Note No. 25 it has been correctly shown at Rs. 0.45, (v) Terms of Repayment....
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....reciation for Motor Car provided at 6 years of useful life instead of 8. Which is an error of judgment." 23.4 The EP has admitted that the company did not disclose the method of depreciation in the SAP and that while accounting for depreciation of the car the useful life taken as 6 years instead of 8 years was an error. As an Auditor the EP should have pointed out these discrepancies, but failed to do so. His explanation that the working in the FA schedule implied that WDV method was used and therefore the company had not disclosed the depreciation method in the SAP is not acceptable. The method of depreciation is required to be specifically disclosed. Further, TDML's SAP for valuation of inventories gives the impression that inventory is valued at cost of production plus relevant overhead cost whereas, as per AS 2, Inventories are required to be valued at lower of cost and net realisable value. Therefore, it is clear that the EP failed to report non-compliance with SAP of the company and Schedule II of Companies Act, 2013. 24. The EP was charged^27 with incorrect reporting as the audit work papers show payment of salary of Rs. 25.76 lakhs to Aparna Shah, Director of TDML....
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.... 25.1 Responding to the charges the EP stated that, "(a) As far as the AS 15 regarding the retirement benefits, the Company had not given any details and hence it has been qualified to that extent. It was explained to us that since none of employees had completed more than 5 year the retirement benefits were not applicable to them. Since it was oral discussion the same has not been put in the audit report." 25.2 The reply of the EP does not justify non-disclosure of the reason for non-compliance with AS 15 and its financial effect. Besides, verbal explanations or oral discussions cannot be the reason for non disclosure in the Independent Auditor's Report. 26. As discussed, the EP has made a series of serious departures from the Standards and the Law, in conduct of the audit of TDML for FY 2016-17. Based on above discussion, it is proved that EP had issued unmodified opinion on the Financial Statements without any basis. The poor quality of Audit followed by the cover up in terms of Cash Flow Statement that did not exist at the time of Audit, incomplete documentation and attempt to mislead through evasive replies further compounds the professional misconduct on the part ....
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.... 22) above. iv. CA Rajiv Bengali committed professional misconduct as defined by Section 132(4) of the Companies Act, read with section 22 and clause 8 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (No. 38 of 1949) as amended from time to time, which states that an EP 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 and applicable regulations as well as due to his total failure to report the material misstatements and non-compliances made by the Company in the financial statements, as explained in the para No. 11, 13 to 17, 19, 20, 21, 24 and 25 above. v. CA Rajiv Bengali committed professional misconduct as defined by Section 132(4) of the Companies Act, read with section 22 and clause 9 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (No. 38 of 1949) as amended from time to time, which states that an EP is guilty of professional misconduct when he "fails ....
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....NS 32. Considering the fact that professional misconducts have been proved and considering the nature of violations and principles of proportionality, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, order: (i) Imposition of a monetary penalty of Rs. Five Lakhs upon CA Rajiv Bengali. (ii) In addition, CA Rajiv Bengali is debarred for Five years 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. 33. This order will become effective after 30 days from the date of issue of this order. Foot Note 1'At para No. 3.1 of SCN' 2At para No. 3.2 of SCN 3At para No. 3.3 of SCN 4Consequent upon demonetization, GSR-308-E dated 30.03.2017, inserted a new clause for disclosure of Specified Bank Notes in division I of schedule III of the Act. 5At para No. 3.4 of SCN 6As per para 82 of Standard on Quality Control-1 and para A23 of SA 230-Audit Documentation. 7SA 700 - Forming An Opinion And Reporting On Financial Statements 8At para 4.2 of SCN 9Para 4.2, 8 and ....