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2023 (7) TMI 1028
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....her lapses in the Audit E. Findings on the Articles of Charges of Professional Misconduct by Auditor F. Penalty & Sanctions A. Executive Summary 3. National Financial Reporting Authority (NFRA) is India's independent regulator in respect of matters relating to accounting and auditing of prescribed class of entities which can be broadly described as 'Public Interest Entities' or PIEs. 4. NFRA initiated action under Section 132(4) of the Companies Act, 2013 (the Act hereafter) for investigating into professional misconduct by the Engagement Partner (EP) CA Narayan Prasad Swami, partner of M/s Agarwal Jain & Gupta, consequent on information received from the Office of Registrar of Companies, Mumbai (ROC), regarding investigation carried out by the office of Regional Director, Mumbai into the affairs of WNLL, listed on SME segment of Bombay Stock Exchange (BSE), with 70.78 % of shares held by public as per the last quarter of FY 2017-18. WNLL is engaged in manufacturing and trading lingerie, intimate wear and select exclusive wear. 5. NFRA's investigation into the alleged failures of the EP, carried out under section 132(4) of the Act, revealed a number of significant failures on ....
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....ibed in the Act, the rules made thereunder, the Standards on Auditing (SA hereafter), including Standards on Quality Control and Code of Ethics, the violation of which constitutes professional misconduct, and is punishable with penalty under section 132(4) of the Act. 9. NERA received from the Office of Registrar of Companies (ROC), Mumbai, a letter dated 25.11.2020 forwarding findings of an investigation carried out by the office of Regional Director, Mumbai into the affairs of WNLL under section 210(1 (a) & and; 210(1) (c) of the Act. 10. The investigation by the ROC revealed that the company's books of accounts had been falsified and revenues inflated; that the auditors had not performed their duties as "independent watchdog"; had not verified the assets and inventories; and had not qualified their report. 11. As per its Annual Report for FY 2017-18, WNLL is engaged in the business of manufacturing and trading of lingerie, intimate wear and select exclusive wear. WNLL was listed on the SME segment of BSE during FY 2017-18. Table 1 depicts certain key features of WNLL, its shareholding pattern, Revenue, Inventory, Trade Receivables & Trade Payables and PBT for the FY 2017-18. ....
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....ing in attendance at physical inventory counting as required under para 4 of the SA 5011. The inventory of WNLL was = 24.11 crore as at 31.03.2018 and constituted a material item as it amounted to more than 36 % of the balance sheet size of % 66.24 crore. 19. The EP in his reply to the SCN stated that "With regards to the verification of inventory, due to high volume of inventories we had applied principles of auditing on test check basis for the said inventory and we formed our opinion on the basis of the verification done by us. In addition to conducting our tests we had also obtained management representation on the said matter. Further we have not noticed any negative remark in stock audit and stock statement provided in Bank...". 20. We find that the Audit File has no evidence of verification of the inventory on test check basis, as claimed. The Audit File has only two sheets of paper out of which one gives the stock statement of inventory hypothecated to Bank of Baroda, and the other is a copy of the Certificate of Registration tor Modification of Charge issued by the RoC, Mumbai. In his statement before Assistant Director/Inspector, office of Regional Director, Western Reg....
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....P was charged with failure to evaluate the basis of arm's length pricing for the transactions entered with Related Parties as no documentation in this regard was found in the audit file. It was noticed that approximately 54% of the total sales for FY 2017-18 had been made to M/s Shiv Apparel which is identified in the audit file as a partnership firm in which one of the partners, Premila Bhanushali, was the wife of Bhavesh T Bhanushali, Managing Director of WNLL. Though identified as a related party in the list of related parties in the audit file and the Annual Report for FY 2017-18, the auditor failed to perform the risk assessment procedure relating to the related party transactions with M/s Shiv Apparel, as mandated in para 18 of SA 550. 23. The EP, in his reply to the SCN, did not respond to the specific non-compliances with which he was charged, but stated "... that sales and purchases are as per the returns filed with VAT and GST Authority. In addition to the above all the related party transactions of the Company pursuant to the principles of AS-184 have been disclosed in the notes to accounts of the said financials and no details of information have been withheld to the s....
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.... confirmations were pending on the date of completion of the audit on 30.05.2018. However, there is no evidence in the Audit File of balance confirmations having been sought from debtors or creditors. 28. In light of the materiality of these transactions, the absence of documentation regarding balance confirmations from the debtors & creditors and lack of any evidence of alternate procedures performed, it is obvious that the auditor has failed to comply with SA 505, and the charge regarding EP's failure to obtain sufficient appropriate audit evidence regarding the trade receivables & trade payables, stands proven 29. The importance of external confirmation can be best evidenced by referring to the Satyam case7 in which the Auditing Firm Price Waterhouse's failure during audit to obtain external confirmation of bank balances was highlighted by PCAOR, the US regulator. It was stated in the PCAOB order passed in the case that "auditing standards include specific requirements relating to an auditor's use of "confirmation," which is "the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item af....
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....n for these doubtful debts. The EP also failed to report this omission in the Independent Auditor's Report dated 30.05.2018 signed by him even though it was a significant amount. Had this provision been made by WNLL the profit of 2 2.56 crore would have turned into loss of 7 6.61 crore. Hence, the effect of this omission on the true and fair position of the financial statements was material. 33. Accordingly, we hold that the charge regarding the failure to report on the non- provisioning in respect of doubtful debts stands proven. 34. In a similar case '° PCAOB, the US Regulator, revoked the registration of the EP, Martin Lundie, and imposed a monetary penalty of $ 65000. Martin Lundie served as the engagement partner for EY Canada's integrated audit of Just Energy's financial statements as of and for the fiscal year ended March 31, 2019. The PCAOB stated in the order that "... Lundie knew during the 2019 Audit that Just Energy identified its allowance for doubtful accounts or receivables allowance as a significant accounting estimate. Moreover, he and the engagement team identified the receivables allowance as a significant accounting and auditing issue. Yet Lundie faile....
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....d in the Audit File. Also, as part of entity's risk assessment process the auditor is required as per para 15 of SA 315 to understand whether the entity has a process for identifying business risks relevant to financial reporting objectives, estimating significance of the risks, assessing likelihood of occurrence and deciding how to address those risk. There are no such papers in the audit file. 38. In the absence of appropriate evidence in the Audit File, we are constrained to conclude that the auditor has failed to plan the audit and has also failed to understand the entity and its environment as mandated by the SAs. 39. In this regard, we note that in the audit of Capstone's13 by Seale and Beers, LLC, PCAOB revoked the registration of Seale and Beers CPAs, LLC and imposed monetary penalty of $20,000 for several failures including the failure to plan the audit. The PCAOB stated that the auditor had failed to properly plan the audit, including failing to assess the risks of material misstatement and to identify any significant risk at the financial statement and assertion level. D.2 Failure to identify and communicate with Those Charged With Governance (TCWG) 40. The EP w....
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....rges. 47, In the absence of any evidence in the audit file, and lack of any satisfactory reply from the EP, we hold that the charge regarding the EP's failure to document the sampling methodology adopted for the substantive testing stands proven. D.5 Failure to determine that Engagement Quality Control Reviewer (EQCR) had been appointed 48. The EP was charged with failure to determine that the EQCR had been appointed for the audit of WNLL for FY 2017-18, which was in violation of SA 22017 The WNLL being a listed company, the auditor was required to determine that EQCR had been appointed in terms of Para 19(a) of SA 220. 49. The EP in his reply to SCN has stated that Senior Partner (EQCR) reviews the financials of the company and that the EQCR policy had been shared for our reference. 50. The reply of the EP is not acceptable since there is no documentation in the audit file regarding the engagement of EQCR and the details of reviews carried out by the EQCR. Hence, we conclude that the charge regarding the failure to determine that EQCR had been appointed, stands proven. 51. We note that in the case of Donahue Associates LLC, an audit firm, the registration was revoked and mo....
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....anies serve a critical public function of enabling the users of Audited Financial Statements to take informed decisions. Absent a robust system of auditing, investors, creditors, and other users of financial statements would not be able to get the true and fair picture of the state of affairs of the company. The best of systems fail, if the professionals implementing the system do not perform their job. This could lead to a serious failure of the financial system which could ultimately result in a breakdown in trust and confidence of investors and the public at large. Thus, the auditor is duty bound to examine and ascertain the integrity of Financial Statements of such entities19" in larger public interest. 55. As detailed in the foregoing paragraphs of this Order, substantial deficiencies in audit, including in audit of inventories, related party transactions, external confirmations of receivable and payables and provisioning for doubtful debts and failure to properly plan the audit establish the professional misconduct of the EP, CA Narayan Prasad Swami. Under the circumstances, we proceed to impose sanctions keeping in mind the deterrence, proportionality, and the signalling va....