TaxTMI 
TaxTMI 
2023 (7) TMI 889
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....he Institute of Chartered Accountants of lndia ('ICAI' hereafter) and were members of Engagement Team for the statutory audit of Coffee Day Global Limited ('CDGL' or 'the company' hereafter) for the Financial Year ('FY' hereafter) 2018-19. 2 This Order is divided into the following sections: A. Executive Summary B. Introduction & Background C. Major lapses in the Audit D. Other non-compliances with Laws and Standards E. Omission and Commission by the Audit Firm F. Points of Law raised by the Auditors. G. Articles of Charges of Professional Misconduct by the Auditors H. Additional Articles of Charges of Professional Misconduct by the Audit Firm I. Penalty & Sanctions A. EXECUTIVE SUMMARY 3 Pursuant to Securities and Exchange Board of India ('SEBI' hereafter) sharing in April 2022 its investigation regarding diversion of funds worth Rs 3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited ('CDEL' hereafter), a listed company, to Mysore Amalgamated Coffee Estate Limited ('MACEL' hereafter), an entity owned and contro....
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....penalties and sanctions with effect from a period of 3 0 days from issuance of this Order: a) Monetary penalty of Rs One Crore only upon M/s ASRMP & Co. In addition, this Firm is debarred for a period of two 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. b) Monetary penalty of Rs Ten Lakhs only upon CA A. S. Sundaresha. In addition, he is debarred for a period of 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. c) Monetary penalty of Rs Five Lakhs only upon CA Madhusudan U A. In addition, he is debarred for a period of 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. d) Monetary penalty of Rs Five Lakhs only upon CA Pranaav G. Ambekar. In addition, he is debarr....
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....se 91.75% shares were held by Late S.V. Gangaiah Hegde, father of VGS. Coffee Day Global Limited ('CDGL' hereafter) is a subsidiary company of CDEL and the sole buyer of coffee beans produced by MACEL. 10 As per the investigations made by the SEBI, the outstanding balance payable by MACEL to subsidiary companies of CDEL was Rs. 842 crores as on 31 March 2019, which had increased to Rs. 3,535 crores on 31 July 2019, detailed as under in Table-I. Table-I (Rs in crores) Sr No. Names of the Subsidiary Companies of No CDEL from which funds diverted to MACEL Outstanding balance as on March 31, 2019 July 31, 2019 1 Coffee Day Global Ltd (CDGL) 65 1,112 2 Tanglin Retail Reality Developments Pvt Ltd (TRRDPL) 789 1,050 3 Tanglin Developments Ltd (TDL) -12 620 4 Giri Vidhyuth (India) Ltd. (GVIL) - 370 5 Coffee Day Hotels and Resorts Pvt Ltd.(CDH&RPL) - 155 6 Coffee Day Trading Ltd (CDTL) 125 7 Coffee Day Econ Pvt Ltd (CDEPL) - 103 Total 842 3,535 11 As per the Financial Statements ('FS' hereafter) of MACEL, Rs 3,535 crore was further transferred....
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....11.2022 asking them to show cause by 15.12.2022, why the penal provisions of section 13 2( 4 )( c) of the Companies Act 2013 should not be invoked for professional misconduct of: a) Failure to disclose a material fact known to them which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where the Statutory Auditors are concerned with that financial statement in a professional capacity. b) Failure to report a material misstatement known to them to appear in a financial statement with which the Statutory Auditors are concerned in a professional capacity. c) Failure to exercise due diligence and being grossly negligent in the conduct of professional duties. d) Failure 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, and e) Failure to invite attention to any material departure from the generally accepted procedures of audit applicable to the circumstances. 15 The Auditors sought an extension of time of 45 days for submitting response to SCN, which was allowed. The Firm ....
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....ts Independent Auditor's Report dated 24.05.2019 has inter alia asserted that "We conducted our audit in accordance with the Standards on Auditing specified under section 143(10) of the Act". Thus, there is no scope for deviation from the SAs, the fundamental principles of which are contained in their Requirements section and are represented by use of "shall". 19 The Auditors have also mentioned that complete investigation report of SEBI has not been provided to them. In this regard, the relevant extracts of the SEBI report that were relied upon in the SCN, have been provided to the Auditors and thus there is no merit in this objection. C. MAJOR LAPSES IN THE AUDIT C.1 Acceptance of audit engagement disregarding Independence requirements 20 The Auditors were charged with non-compliance with requirements relating to independence of auditor as per SQC 1, SA 200 and SA 220^4 . CA A. S. Sundaresha's (signing partner) proprietorship firm had provided audit and non-audit services to 29 entities belonging to Coffee Day Group including its promoters. The audit firm of the signing partner's daughter (M/s Sundaresha & Associates) has provided audits as well as non-aud....
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.... standalone Ind AS financial statements under the provisions of the Act and the rules thereunder, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the ICAJ's code of ethics" 24 As per Audit Manual of the Audit Firm, there is a requirement of taking a confirmation of Independence of the Firm's personnel. Similarly, the Engagement Partner was required to evaluate and prepare Client/Engagement Acceptance and Continuance Form. There is no evidence in Audit File that the Audit Firm and Engagement team had complied with these requirements on Independence as per SQC 1, SA 200 and SA 220. Reply of the Auditors 25 While denying the charge, the Auditors stated that independence confirmations were inadvertently not obtained from Madhusudan and Pranaav as they were paid assistants and the client acceptance/continuation form was inadvertently not kept. The Auditors have claimed to have complied with the Independence requirements by reducing self interest threat, familiarity threat and stated that their firm & partners do not have any financial interest in any of the CCD group companies, did not quote lower fees to obtain new eng....
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....ntation on behalf of M/s ASRMP & Co. in the Audit Committee Meeting ('ACM' hereafter) of CDGL held on 07.02.2019 and 24.05.2019. These presentations related to review of quarterly results of CDGL by the Auditor, scope of engagement, audit approach and observations of the Auditor on the Statutory Audit of the annual financial statements for FY 2018-19. Further, the presentation given on 24.05.2019 was prepared by CA Megha Sundaresha Andani, partner of M/s Sundaresha & Associates. (As per properties of PDF document containing presentation). 29 The above fact is corroborated by another fact that CA Pradeepa Chandra C. and CA Chaitanya G. Deshpande (both Partners of M/s Sundaresha & Associates) were involved in 47 out of 67 audit areas identified in the audit plan available in the Audit File. Out of these 4 7 audit areas, 44 were not reviewed by any partner of M/s ASRMP & Co. This shows that the audit of CDGL was performed jointly by partners of M/s ASRMP & Co. and M/s Sundaresha & Associates. But to hide this fact, both partners of M/s Sundaresha & Associates were named as external reviewers in the audit plan. These facts together with the fact that all three firms operate ....
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....thereafter, every year such evaluation is required for continuance of such client/engagement. The Audit Engagement for CDGL for FY 2018-19, was the first appointment of the Auditors and therefore they were required to perform evaluation in terms of provisions of SQC 1 before accepting the engagement. Such an evaluation necessitates a thorough examination of the auditee company's financial parameters, a background check of the promoters, ultimate beneficial owners, key managerial personnel, and ethical requirements, among other things. Evaluation of independence of auditor before acceptance of audit engagement is a mandatory requirement as per Standards on Auditing mentioned above. However, there is no record of this evaluation in the Audit File submitted by the Auditors. The reply of the Auditors reveals their ignorance of the basic requirement of ensuring independence as stated in the Standards on Auditing, which is unacceptable from the Auditors of public limited companies. The Auditors in this case failed to perform due professional care and did not perform sufficient appropriate procedures to evaluate their independence from Coffee Day Group and its promoters before accepta....
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....A asked for the Audit File. Such modifications and additions in the Audit File are not permissible as per SA 230 and amount to tampering. Further, as per SQC-1, SA 200 and SA 220, the Audit Firm and the Engagement Team are required to adhere to ethical principles like integrity & professional behavior. The Audit File is required to be assembled within 60 days of the signing of the audit report. The audit report was signed on 24.05.2019. Accordingly, the Audit File was required to be assembled by 23.07.2019. However, it is quite evident from the above that the same was not done. Further, when NFRA advised the Auditors on 22.06.2022, through email and speed post, to send the Audit File, the letter was returned by postal department with remarks 'no such firm on the address', and the Auditors did not respond to the email. Thereafter their email ID and postal address were obtained from ICAI, which intimated the same email ID and postal address except the change of floor number from 3rd floor to 1st floor. On being reminded vide letter dated 19.07.2022 to submit the Audit File, the Auditors responded on 21.07.2022 that they had shifted office from 3rd floor to pt floor in the sam....
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....anagement & Those Charged With Governance (TCWG) etc. An examination of Audit File shows that the names of the engagement team members & date of performing audit procedures are not mentioned in any of the audit work papers nor are the names of the team members who reviewed the audit work and the extent of review. Reply of the Auditors 37 While denying this charge, the Auditors have replied that maintenance of editable Excel file is not prohibited in SA 230 and modification of audit file is allowed as per para 16 of SA 230; that they have only formatted those files to make it pleasant to view and that the workings maintained in loose sheets were compiled in Excel format after receipt of NFRA notice; that some of the Excel files were merged and new Excel files were created for ease of review by NFRA. During this process the date modified could have been changed to the latest date. They further stated that the contents of Audit File have not been changed and that details of date of conducting the work by article assistants are available in time sheet maintained separately. In respect of creation of two files namely "Planning Compliance & Review Summary" and "Deferred Tax (Workin....
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....act that CA Pradeepa Chandra C. and CA Chaitanya G. Deshpande (both Partners of M/s Sundaresha & Associates) were involved in 4 7 out of 67 audit areas identified in the audit plan available in the Audit File. Out of these 4 7 audit areas, 44 were not reviewed by any partner of M/s ASRMP & Co. This shows that the audit of CDGL was performed jointly by partners of M/s ASRMP & Co. and M/s Sundaresha & Associates. But to hide this fact, both were named as external reviewers in the audit plan available in the tampered Audit File. 42 On submission of additional working papers by the auditors and their claim that they had inadvertently missed out including them in the audit file, one has to look into SA 230^5 which emphasizes the importance of timely preparation of audit documentation and its archival within a reasonable time after the issuance of the audit report. We highlight below some of the paras of the Standard:- a) Paragraph 7 of SA 230: The auditor shall prepare audit documentation on a timely basis. The explanatory material to the Standard at Para Al, inter alia, states that Documentation prepared after the audit work has been performed is likely to be less accurate ....
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....(UK & Ireland), para 7, 14, A21 & A22 ASA 230 (Australia) and para 15 of AS 1215 (PCAOB, U.S.) 44 Even internationally as seen from the following paragraphs, alteration, backdating of work papers/reviews, substitution or addition of the new work papers, placing blank audit papers____________so as to perform audit procedures ( commonly referred to as Audit File Tampering) subsequent to issuance of audit report or the assembly of final Audit File by the Auditors are not accepted, as they would leave scope for large scale production of additional documents as an afterthought upon commencement of disciplinary proceedings. 45 In the Matter of KPMG Assurance and Consulting Services LLP and Sagar Pravin Lakhani (Engagement Partner) relating to tampering of audit file, PCAOB^7 (Public Company Accounting Oversight Board-Audit Regulator of United States of America), observed that "PCAOB standards require that [a]udit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement . . . [t]o determine who performed the work and the date such work was completed as well as the person who reviewed the work and the date o....
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....did not take sufficient steps through written policies, guidance, training, or otherwise to address that risk. During the 16 month-period following the adoption of the new work paper system, Firm personnel overrode the system and backdated their work paper sign-offs in at least six issuer audits and two quarterly.reviews subject to PCAOB standards. This conduct occurred while teams were assembling a complete and final set of work papers for retention, or earlier, in these engagements. Additionally, some auditors on these engagements deleted and replaced sign-offs in order to ensure that reviewer sign-offs were dated after preparer sign-offs. Collectively, this conduct obscured the dates on which work had actually been completed and reviewed". For this misconduct, PCAOB had imposed a civil money penalty of $350,000 on the firm besides censuring the firm, requiring it to take corrective actions to establish, revise, or supplement, as necessary, its quality control policies and procedures, including monitoring procedures, to provide the Firm with reasonable assurance that personnel comply with PCAOB audit documentation requirements, including those concerning the dating of the complet....
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....e performing audit of fraudulent transactions of Rs 3,769.61 crores with MACEL. They were also charged with their failure to perform risk assessment procedure to provide a basis to identify, assess and respond to the Risk of Material Misstatements ('RoMM' hereafter) at the financial statements and assertion level ^11 The facts are as follows. The Audit committee of CDGL, in its meeting held on 17 .05.2018, had approved purchase of coffee beans up to Rs 500 crores from MACEL, but CDGL had used this approval to give advance of Rs 3,840.51 crores against the reported purchase of Rs 70.90 crores only. MACEL subsequently repaid Rs 3,779.15 crores which indicates that the advance was not intended for purchase of coffee beans, but for diversion of funds. This huge advance was also an unusual transaction, being approx. 54 times of the value of reported purchase of coffee beans (Table 2). 53 Further, even the approval given by the Audit committee for Rs 500 crores advance to MACEL for purchase of coffee beans was unusual because the company's own reported purchase of coffee beans from MACEL was Rs 70.90 crores only. If the company was to purchase coffee of only Rs 70.90 crore....
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....reported the cumulative highest debit and highest credit balance during the year as advance paid to MACEL and repayment of advance from MACEL in the FS, whereas MACEL informed that it had disclosed in FS the gross amount received from CDGL and repaid to CDGL. 56 The above indicates that CDGL diverted at least Rs 3,769.61 crores (Rs 3,840.51 crores advance paid minus Rs 70.90 crores of coffee beans purchased) to MACEL, an entity owned by promoters of CDEL; and that CDGL made significant misstatements in its disclosure relating to RPTs. As per SA 315, the Auditors were required to perform risk assessment procedures and provide a basis for the identification and assessment of Risks of Material Misstatement (Ro MM) at the financial statements and assertion levels'. As per SA 330 the Auditors were required to respond to the identified RoMM. There is no evidence in the Audit File that such procedures were performed to identify & respond to RoMM due to fraudulent diversion of funds to MACEL. 57 SA 240^14 provides that the objectives of auditor are to identify and assess the RoMM in the FS due to fraud, obtain audit evidence and respond to identified or suspected risk. It require....
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....gly'. The amount of coffee purchased from MACEL was only Rs 1.13 crores, which was not disclosed at all. Pooling of transactions with more than 40 Related Parties into transaction with one Related Party is not permitted as per Ind AS 24, Related Party Disclosures. Further, approval of Board of Directors (BOD) & Audit Committee was not taken in respect of transactions with 40 related parties, which is a violation of section 177 & 188 of the Act. 60 Further, CDGL has claimed in related party disclosures given in the FS that all transactions and balances were priced on an "Arm's length basis". In this connection, Para 23 of Ind AS 24, Related Party Disclosures states "Disclosures that related party transactions were made on terms equivalent to those that prevail in arm 's length transactions are made only if such terms can be substantiated". There is no work paper in the Audit File that the Auditors performed any audit procedure to examine whether related party transactions and balances were at arm's length. Further, as per Ind AS 24, CDGL was required to disclose the terms & conditions of related party transactions, however CDGL did not give such disclosure in the ....
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....s running current account, the maximum balance at any point of time during the year was reported as gross transactions with MACEL; that Ind AS 24 does not specifically provide that gross amount have to be reported in related party disclosures and the company adopted the most appropriate disclosure that they relied on the balance confirmations obtained from the company; that interest is charged on the advance paid to planters including MACEL; and that the amount advanced to MACEL is not regarded as fraud and there is no misstatement in disclosure of related party transactions. Accordingly, the question of reporting fraud under section 143(12) of the Act & CARO does not arise. 64 The Auditors have justified the pooling stating that MCAEL acts as coffee pooler to CDGL as a general trade practice adopted by CDGL over several years as a matter of convenience. The Auditors have attributed non-disclosure of purchase from MACEL worth Rs 1.13 crores to a clerical mistake. They have stated that the company had complied with Ind AS 24. They have further submitted that approval of audit committee was obtained for purchase from MACEL as ordinary course of business and therefore, no further a....
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.... used for proposed instant coffee plant that was later on dropped by the company. Nor is there any evidence of any agreement with MACEL, or whether MACEL had the capacity to supply coffee beans worth Rs 500 crores. Further, the reported purchase of coffee beans from MACEL in the previous year was only Rs 39.23 crores, which is glaring evidence of the unusual nature of these advances. The Auditor's plea that section 188 of the Act is not applicable for transactions undertaken in the ordinary course of business, does not hold as such an exemption to the provisions of section 188 of the Act, is available only if the transaction is on "Arm's length basis". The nature and facts of this advance and the absence of rationale & documentation clearly indicate that these transactions cannot be treated as arm's length. We therefore find that the Auditors failed to determine whether these significant Related Party Transactions of unusually high amount were authorized and approved by the Board of Directors in terms of section 188 of the Act. 68 From the above analysis, it is established that the Auditors failed to question and report the diversion of funds by CDGL by way of huge a....
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....e users of the Financial Statements. The reasons for the management to do this are not far to seek, as this provided a reason for the management to fraudulently advance unusually large amount of advance of Rs 3840.51 crores to MACEL portraying it as a large supplier of coffee beans. The Auditors failed to exercise due diligence and professional skepticism in auditing these RPTs which led to misstatements and violation of Ind AS 24. 70 Rule 6A of the Companies (Meeting of Board and its Powers) Rules 2014 deals with procedure for approval of related party transactions by the Audit Committee. Sub rule 4 of the said Rule inter alia provides that approval shall contain 'name of the related parties'. In this case, no approval was granted by the Audit Committee or the BOD of CDGL for entering into transactions with 40 other related parties. In respect of section 188 of the Act, though these transactions were in the ordinary course of business, it is observed from the Audit File that the Auditors did not perform any audit procedure to evaluate whether such transactions were entered into on "Arm's Length Basis" as required under section 188 of the Act. These prove blatant vio....
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....uired for purchase of coffee beans. Since a major portion of the supplier advance was not for supply of coffee beans, it should have been classified and presented as 'Financial Assets' in terms of definition of financial assets given at para 11 and provisions of presentation given at para 15 of lnd AS 32. It is evident that CDGL misrepresented the true nature of the transactions with the mala-fide intension of concealing fraudulent diversion of funds. The Auditors failed to perform appropriate audit procedures to identify this misclassification and question the management. 75 As discussed in charge C-4, CDGL was involved in evergreening of loans and round tripping of funds with the ulterior motive of understating the loan to MACEL by Rs 222.50 crores. These loans were never repaid by the group companies, but financial statements were manipulated to conceal the real picture. The financial positions of MACEL showed that it had negligible business operations, had negative net worth, and was used as conduit by promoters to siphon off money from CDGL. These were sufficient evidence that MACEL lacked the financial strength to repay loans and accordingly recognition of impairme....
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.... reported in CARO that no material fraud by or on the company had been noticed or reported during the course of audit. Accordingly, the Auditors were charged with violation of section 143 (12) of the Act and also the Companies (The Auditors Report) Order 2016. As per section 143(1) of the Act, the Auditors were also required to inquire whether transactions are represented merely by book entries and are prejudicial to the interest of the company. The accounting entries for Rs 222.50 crores were merely book entries. The Auditors did not report these fictitious accounting entries and thus were charged to have violated section 143(1) of the Act. 79 The cheques of Rs 222.50 crores received up to 31.03.2019 but not credited in bank accounts, constituted 27.75% of total borrowings of Rs 801.90 crores of CDGL. This was an indication of Risk of Material Misstatement (Ro MM) due to fraud. Auditors are required to perform appropriate audit procedures to investigate the RoMM as per SA 240, SA 315 and SA 330. In the instance case, there is no evidence in the Audit File that the Auditors performed such audit procedures to identify and respond to RoMM due to fraudulent reduction of Related Par....
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....ansactions on the same day, which was evident from payment column of the same bank statement for the same day. This clearly indicates lack of professional skepticism (SA 200) and due diligence while verifying bank statements. Therefore, we are of the view that the Auditors' inert passivity in the face of known evergreening of loans and understatement of related party borrowings establish their gross negligence in performance of Audit. 83 Similar evergreening through circulation of funds could be observed from bank statement of CDGL with Induslnd Bank as well and the Auditors have claimed that they have verified realization of cheques in the bank statement of CDGL. CDGL received five cheques of total amount of Rs 25 crores on 30.03.2019 from MACEL, which were cleared on 02.04.2019 in circular manner. For example, MACEL paid Rs 6.70 crores to CDGL, which then paid Rs 6 crores to MACEL, which then paid Rs 5 crores to CDGL and so on ...... There was no economic substance in these transactions. 84 Similar evergreening through circulation of funds could be observed from bank statement of CDGL with Karnataka Bank as well and the Auditors have claimed that they have verified real....
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.... firm in which CDGL has 99% share. If sufficient and appropriate audit procedure had been performed, it would have come to the notice of the auditors that it was not actually a loan but a case of circular transaction, diversion, siphoning of the money. CCCW is a small entity, having a balance sheet size of Rs 1.92 crores, net worth of Rs 1.81 crores only and no revenue from operations during FY 2017- 18. The loan of Rs 130.55 crores given by CDGL to CCCW was further passed on to Kumar Hegde H C as a 'Capital Advance' by CCCW. Further, in following financial year 2019-20, as per CDGL bank statement with the Corporation Bank, on 09.05.2019, CDGL again paid Rs. 135.50 crore in seven installments to MACEL, which in tum passed on the amount to Kumar Hegde, enabling him to repay the capital advance. Out of this, Kumar Hegde repaid Rs 55.50 crores directly to CDGL in three installments and CCCW repaid Rs 80 crores to CDGL in four installments. All these transactions were done on the same day. Thus, the CCCW repaid the advance received from the CDGL with the additional funds received from CDGL through a series of circular transactions but the end use of the money originally given a....
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....g to a misstatement of Rs 132.3 7 crores in the Balance Sheet and misstatement of Rs (-11.82) lakhs in the Statement of Profit and Loss in the Consolidated Financial Statements. 90 No document or evidence is available in the Audit File about any risk assessment procedure performed by the Auditors to examine the purpose of this loan, verifying approval of Audit Committee/Board of Directors for giving this loan and communication with TCWG on this matter. Accordingly, the Auditors were charged with violation of provisions of SA 200, SA 240, SA 315, SA 330 and Section 143(1), 143 (12) and 177 of the Act. 91.Further, the Auditors were also charged with their failure to perform appropriate audit procedures to verify whether CDGL has complied with Ind AS 109 in relation to loans given to CCCW. CDGL did not recognize impairment loss allowance & did not write off non-recoverable portion of loans given to CCCW (Rs 130.55 crores) as per Para 5.5.1 and para 5.4.4 of lnd AS 109, although CCCW did not have the financial strength to repay the loans. This resulted in CDGL violating Ind AS 109. The Auditors were required under section 143(3)(e) of the Act, to report whether, in their opinion,....
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....was accounted as capital advance to DFFCPL instead of advance to CCCW and same was rectified later on. 95 The Auditors have further replied that CCCW is a partnership firm which is not required to be mandatorily audited under any regulation. However, CDGL was following the practice of getting the same audited and signed by a Chartered Accountant. They further submitted that membership and registration number were mentioned from the date, when UDIN^16 was made mandatory i.e., July'2019. Accordingly, the said FS of CCCW was considered by them for consolidation purpose and there is no lapse in audit of CFS. 96 In respect of compliance with Ind AS 109, the Auditors stated that the source of payment by Kumar Hegde to CCCW cannot be determined by them as statutory auditor of CDGL and that Kumar Hegde had already repaid it in the subsequent year before signing of audit report. Accordingly, at the time of finalization of audit, there was no indicator of impairment, and therefore question of impairment loss or write off does not arise. 97 The Auditors have denied the charge relating to Internal Financial Control. Citing para 5 Analysis of reply 98 We find that the special....
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....ent u/s 143(12) of the Act and in the Independent Auditor's Report. 101 The Auditors attempted to justify the difference in loan amounts due to the manipulation of balances with CCCW and DFFCPL by claiming that the loan was given to DFFCPL on behalf of CCCW. This is contradictory to the agreement between CCCW & Kumar Hegde in which it is recorded that CCCW paid Rs 130.55 crores advance to Kumar Hegde. Further, such a huge amount of loan cannot be paid to anyone other than the loanee without proper documentation. As a result, we conclude that the Auditors' reasoning for the presence of two sets of FS of CCCW is baseless and an afterthought to cover up the deficiencies in their Audit. 102 The Auditors have not explained why the FSs of CCCW were not signed by any CCCW officer or even an officer of CDGL, which was the major partner of CCCW. Regarding the absence of the signing partner's ICAI membership number and the auditor firm's ICAI firm registration number on the FS and audit report of CCCW, the Auditors have contended that mentioning these details was not mandatory prior to July 2019. We note that such information was required to be mentioned in the Audit Re....
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....ional skepticism while performing audit of internal financial control. They failed to identify complete absence of IFC, which was evident from evergreening of loans through structure circulation of funds and round tripping of funds, that too all with related parties. These lapses are tantamount to turning a blind eye to the ruse that lay before them. The Auditors should know that transactions with related parties have high risk of fraud. The Auditors could not give any reply as to how they used the Internal Audit Reports while performing audit of CDGL. 106 Internal financial control over financial reporting is designed and implemented to prevent, and detect fraudulent transactions. However, based on the above analysis, we find that controls were totally absent in CDGL in release of supplier advances & loans, and banking transactions and there was total management override of controls in these areas. Any significant deficiencies or material weaknesses in internal controls must be revealed by the Auditors, but we find that instead of reporting their absence, the Auditors falsely reported that CDGL had adequate Internal Financial Controls with reference to financial statements and ....
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....n in the Financial Statements. The Audit File shows that Rs 50.55 crores was converted from 'capital advance to DFFCPL' into 'loan to CCCW'. The Auditors were charged with not questioning or seeking justification for this conversion and not exercising due diligence while conducting audit of this capital advance, and thus violated SA 200, SA 240, SA 315, and SA 330. Reply of the Auditors 111 The Auditors have denied the charge stating that CDGL was into coffee business, mainly through cafes and used to purchase furniture from DFFCPL in ordinary course of business. Accordingly, the Auditors have claimed that section 188 of the Act was not applicable on these transactions; that even though the transaction is beyond the limit approved by the Audit Committee, the same was carried out in the ordinary course of business and purchases were within the approved limit; and that since the advance to DFFCPL was covered by the general limit of Rs 4,000 crore approved by the company by special resolution, there is no non-compliance of section 177 of the Act. 112 The Auditors have further submitted that the amount of Rs.50.55 crores was paid to DFFCPL on behalf of CCCW. Th....
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....SA 240, SA 315 and SA 330 and not reported the noncompliance of section 188 and 177 of the Act. D. OTHER NON-COMPLIANCES WITH LAWS AND STANDARDS In addition to the major lapses covered under section C of the order, the Auditors were also charged with following lapses in the audit: a) Failure to report non compliances with section 134(1) of the Act. b) Failure to comply with SA 700, Forming an Opinion and Reporting on Financial Statements. c) Failure to comply with SA 250, Consideration of Laws and Regulations in an Audit of Financial Statements. d) Failure to comply with SA 260, Communication with Those Charged With Governance (TCWG) & SA 265, Communicating deficiencies in Internal Control to Those Charged With Governance and Management. e) Failure to comply with SA 300, Planning an audit of Financial Statements. Reply of the Auditors 116 The Auditors have denied their wrongdoings and professional misconduct in all the charges mentioned in the previous paragraph. 117 With respect to compliance with section 134( 1) of the Act, the Auditors stated that they had obtained constructive evidence, in the form of receipt of signed....
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....or Management" is misplaced as this Doctrine is applicable to third parties, not having access to the internal records of a company. The Auditors should have obtained a certified copy of the Board resolution approving the Financial Statements and authorizing the Directors to sign the Financial Statements and should have kept the same in the Audit File before its assembly. The Auditors did not do the same. Thus, this charge is proved that the Auditors did not ensure compliance with section 134(1) of the Act by CDGL. 123 SA 700 - Based on our earlier findings on each charge in the preceding paragraphs it is clear that the replies of the Auditors are not satisfactory. By not taking into account the large-scale fraudulent transactions of huge amounts while making audit conclusions, the Auditors violated SA 700 and failed to draw attention to the presence of material misstatements of Rs 7514.10 crores in the Financial Statements of CDGL. Thus, the charge that the Auditors violated SA 700 is proved. 124 Regarding SA 250, it was seen that CDGL had given loans of Rs 35840.51 crores to a promoter owned entity viz MACEL, in the garb of Supplier Advance for coffee beans, despite the fac....
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....re, timing and extent of planned risk assessment procedures. The Audit plan available in the Audit File does not contain any details of planning relating to risk assessment procedures. The quality of performance of an audit largely depends upon the quality of audit strategy and audit plan. We find that the Auditors were deficient in developing an effective audit plan. Therefore, this charge is proved that the Auditors have violated SA 300. Failure to comply with SA 210, Agreeing the terms of audit engagements, SA 510, Initial Audit Engagements - Opening Balances and Failure to comply with SA 720, The Auditor's Responsibilities relating to Other Information. 127 The Auditors were charged with non-compliance with SA 210, SA 510 and SA 720. Having considered the replies, we drop these charges. E. OMISSION AND COMMISSION BY THE AUDIT FIRM In addition to being jointly responsible for the lapses in audit performed by the EP and other members of the engagement team, the Audit Firm was charged with omissions and commissions solely attributed to it. These are discussed below. Lapses in constitution of Engagement Team (ET) and assigning responsibility among ET members (Add....
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....gement among three partners ( one signing partner and two engagement partners), which is against the principle of SQC-1 resulting in noncompliance with SQC 1. Further, there is no term like 'signing partner' in any of the SAs. The responsibilities of each partner have not been clearly defined in the audit plan. Designations were recorded for the areas to be covered like Article Assistant, Engagement Partner, External Reviewer, Junior Partner, Senior Partner, Audit Assistant and Partner. Name of the persons are not recorded, making it impossible to know who performed which audit activity. Further, there were no members in the engagement team with some designations used in audit plan like Junior Partner, Senior Partner and Audit Assistant. In light of the foregoing details, the SCN charged the Audit Firm with assigning responsibility of audit engagement in a very casual manner without clearly defining the responsibilities among engagement team members thereby laying a weak foundation of audit engagement. Reply of the Auditors 133 While denying the charge, the Audit Firm has submitted that the word signing partner is used in their office to identify the person going to s....
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....iolation of SQC 1. 136 The Audit Firm did not furnish any reply relating to "External Reviewers" mentioned in the audit plan. There is no concept of external reviewer in the Standards. 'External' person can be associated with the engagement team in three ways; (a) An Auditor can use the work of an auditor's expert if expertise in a field other than accounting or auditing is necessary to obtain sufficient appropriate audit evidence. Both the so-called external reviewers (CA Pradeepa Chandra C. and CA Chaitanya G. Deshpande) are not covered in this definition as there is no record in the Audit File that they had performed any expert job in field other than accounting and auditing (SA 620) (b) An Auditor can engage external person as EQCR for evaluation of the significant judgements and conclusions in formulating the audit report, as specified in para 6(c) & (d) of SQC 1 and para 7(b) & (c) of SA 220. It is neither the claim of the Auditors that CA Pradeepa Chandra C. and CA Chaitanya G. Deshpande had been engaged as EQCRs, nor is it evident from the Audit File that they performed the tasks of EQCRs. ( c) An Auditor may consult external persons on difficult or contentio....
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....orts issued by the firm or engagement partners are appropriate in the circumstances 140 Responding to the charge, the Audit Firm stated that: a) They have issued audit report after taking into account the provisions of the Act, Ind AS prescribed u/s 133 and Standards on Auditing u/s 143(10) of the Act. They have taken management representation letter for various aspects relating to this engagement and reported u/s 143(2) of the Act. b) They rely on the replies in forgoing para in respect of NFRA's observation on alleged non-compliance with accounting and auditing standards. c) They confirmed the "Report on other legal and regulatory requirements" of audit report in compliance to section 143(3) of the Act. d) Section 143(4) is not applicable as there were no negative answer or answer with a qualification. e) They have complied with the Auditing Standards {section 143(9) of the Act}. f) In compliance with section 143(12) of the Act, the Audit Firm replied that there is no fraud identified by them, hence there is no reporting requirement to the Central Government. g) The Firm has a Quality Control Manual in place an....
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....e view in the SCN, to be further probed and established with an open mind after offering an opportunity in the interest of natural justice to the Auditors to rebut the charges and provide their reply to the SCN. No conclusions were reached before analysis of the reply of the Auditors. 144 There is also no truth in the Auditors contention that no investigation was conducted by NFRA. The SCN was issued after duly examining the material contained in the Audit File and other materials on record in accordance with Rule 11 of the NFRA rules 2018 and the conclusion reached in this Order are based on due consideration of the Auditors' replies on each point of charge in the SCN. G. ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT BY THE AUDITORS 145 As discussed in the foregoing paragraphs, the Auditors have made a series of serious departures from the Standards and the Law, in their conduct of the audit of CDGL for FY 2018-19. Based on above discussion, it is proved that the Auditors had issued unmodified opinion on the Financial Statements without any basis. The poor quality of Audit, tampering of Audit File, the cover up in terms of submission of additional documents that did ....
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....8 of Part I of the Second Schedule of the CA Act, 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 Auditors 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 Section C-3 to C-6 and Section - D above. v. The Auditors committed professional misconduct as defined by clause 9 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of professional misconduct when he ''fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances". This charge is proved since the Auditors failed to conduct the audit in accordance with the SAs as explained in the Section C and D above. H. ADDITIONAL ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT BY THE AUDIT FIRM ....
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....Marcum LLP ("Marcum"); imposed a civil money penalty of $250,000 on Marcum; prohibiting Marcum from audit works for a period of three years. PCAOB also imposed a penalty of $25,000 on the Engagement partner John E. Klenner besides barring him from being an associated person of a registered public accounting firm. 150 Similarly, failures to perform audit procedures and exercise professional skepticism in related party transactions and internal control over financial reporting have invited serious action by audit regulators in other jurisdictions too. For example, in case of Cheryl L. Gore, CPA and Stanley R. Langston, CPA, PCAOB^19 had observed that "Gore failed to obtain sufficient appropriate audit evidence and to perform sufficient procedures concerning whether Issuer A 's financial statements accurately disclosed its related party transactions"..... "Gore failed to exercise due professional care, including professional skepticism, and failed to obtain sufficient appropriate audit evidence in connection with Issuer A 's identification, accounting, and disclosure of related party relationships and transactions ... .... Specifically, as part of her risk assessment proced....
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....training with respect to auditor independence. 153 Similarly, in AWC (CPA) Limited, WONG Chi Wai, CPA, and WONG Fei Cheung, CPA, PCAOB observed "As the engagement partner, Albert Wong was responsible for AWC's compliance with independence requirements. Although Albert Wong knew at the time of the Kandi 2012 Audit that Mui had accepted a Power-of-Attorney from Kandi in order to handle the New York State agency matter, he failed to evaluate whether Mui's activities on Kandi's behalf constituted prohibited non-audit services that would impair Mui's independence, as well as AWC's and its associated persons. Albert Wong took, or omitted to take, actions during the Kandi 2012 Audit, that he knew, or was reckless in not knowing, would directly and substantially contribute to the Firm's violation of independence requirements, in contravention of PCAOB Rule 350". For misconducts including independence violations, PCAOB censured audit firm & partner, revoked the audit firm's registration & barred partner from being an associated person of a registered public accounting firm, and imposed a civil money penalty on the audit firm and the partner. I. PENALTY & SA....
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....fessionals, the Auditors have not adhered to the Standards and have thus not discharged the duty cast upon them 160 Section 132(4)(c) of the Companies Act 2013 provides that National Financial Reporting Authority shall, where professional or other misconduct is proved, have the power to make order for (A) imposing penalty of (I) not less than one la.kh rupees, but which may extend to five times of the fees received, in case of individuals; and (II) not less than ten lakh rupees, but which may extend to ten times of the fees received, in case of firms; (B) debarring the member or the firm from (I) being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or (II) performing any valuation as provided under section 247, for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority. 161 As per information furnished by Mis Sundaresha & Associates vide letter dated 10 .09.2022 and Mis ASRMP & Co. vide letter dated 29.09.2022, the statutory audit fees of CDGL for 20....
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....ule 3 of the NFRA Rules 2018 ^2 Section 143(9) of the Act provides that every auditor shall comply with the auditing standard. Further proviso to section 143(10) of the Act provides that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards. ^3 SA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing ^4 SA 220, Quality Control for an Audit of Financial Statements specific engagements, designed to provide it with reasonable assurance that it will undertake or continue relationships and engagements only where it: (i) ------, (ii) ------ and (iii) Can comply with the ethical requirements". ^5 Standard on Auditing 230, Audit Documentation. ^6 Refer para 74 & 75 of Standard on Quality Control 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements ^7 PCAOB Release No. 105-2022-033 dated 06.12.2022. ^8 PCAOB Release No. 105-2021-014 dated 29.09.2021 ^9 Audit file is defined i....