TaxTMI 
TaxTMI 
2023 (7) TMI 1246
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....mmary B. Introduction & Background C. Failure to Report Non- compliance with Accounting Standards D. Non-compliances with Standards of Auditing E. Articles of Charges of Professional Misconduct F. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. Pursuant to the information received from the Ministry of Corporate Affairs (MCA, hereafter), regarding irregularities observed in the financial statements of the Company by the Financial Reporting Review Board (FRRB, hereafter) of the ICAI for FY 2015- 16, NFRA initiated investigation into the role of the Statutory Auditors during the audit of Anshu for FY 2015-16. During FY 2015-16, the equity shares of the company were listed on Bombay Stock Exchange and Metropolitan Stock Exchange. Mis S. Kansal and Associates were the statutory auditors of Anshu and CA Sachin Kansal was the EP for the audit during FY 2015-16. 4. Based on the investigation and proceedings under Section 132(4) of the Companies Act, 2013 ('the Act' hereafter) into the issues raised in the FRRB report and the preliminary examination of the financial statements of Anshu and the Audit File submitted by the EP, NFRA found the EP, prima facie, guilty of profes....
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....ng compliance with such standards. NFRA has certain powers of a civil court and is empowered under Section 132 (4) of the Act to investigate the prescribed classes of companies and impose penalty for professional or other misconduct of the individual members or firms of chartered accountants. 9. The statutory auditors, both individual and firm of chartered accountants, are appointed by the members of a company, under Section 139 of the Act. The statutory auditors, including the Engagement Partners and the Engagement Team are bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, the Standards on Auditing (SAs, hereafter) including the Standards on Quality Control and the Code of Ethics, the violation of which constitutes professional misconduct, and is punishable with penalty prescribed under Section 132 (4) (c) of the Act. 10. On receipt of information vide letter dated 05.11.2019 from MCA describing irregularities observed by FRRB of ICAI in the Financial Statements of Anshu for FY 2015-16, the matter was thereafter taken up for investigation into the role of statutory auditor under Section 13 2(4) of the Act. 11. Anshu was engaged in the re....
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....ted procedure of audit applicable to the circumstances. 16. On 25.10.2022, the EP sought an extension of time for replying to the SCN and was permitted to submit the reply to SCN by 15.11.2022. On 15.11.2022, the EP filed written submissions in response to the SCN along with a request for personal hearing in accordance with Rule 11(5) of NFRA Rules 2018. Accordingly, the EP was given personal hearing on 01.02.2023 through video conferencing, as requested by him vide email dated 27.01.2023. 17. During the personal hearing through video conferencing, the EP conveyed that his written reply dated 15.11.2022 was the final reply. He also submitted that as he was a newly qualified Chartered Accountant at the time of signing of financial statements of the company and it was his first audit of a listed company, the charges in the SCN may be viewed leniently. 18. This Order takes cognizance of all materials on record. The major lapses found on the part of the EP in the audit of the financial statements of Anshu for FY 2015-16 are failure to report non-compliance with AS. These are discussed in Part 'C' of this Order. Non-compliances with SAs are discussed in Part 'D' of th....
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....hat have become "due" are unlikely to be "paid", then they would not become expenses "incurred" up on becoming "due" automatically until and unless the uncertainty over its payment is removed These are finer principles of accounting practised to achieve the objective of true and fair state affairs in the financial statement." The EP has further argued that it was a case of error of judgment, which cannot become the basis to hold him guilty of professional misconduct. 22. We observe that while the EP justifies his action, he also admits that there was an error of judgment. The justifications of the EP are not acceptable for the following reasons: a. None of the claims of the EP are supported by the evidence in the Audit File. There are no documents in the Audit File which indicate any ongoing negotiations regarding the settlement of the loans. On the contrary, the Audit File contains a demand letter dated 02.01.2014 from Bank of Baroda for both the principal and the interest amount due and a response letter dated 03.01.2014 from the company stating that the company was working hard to arrange the funds. There is another letter dated 20.05.2014 from Bank of Baroda taking possessio....
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....es- Unsecured, Considered Doubtful 24. The SCN charged the EP for non-compliance of SA 705. During FY 2015-16, the company had not made provision for 'Trade Receivables- Unsecured, Considered Doubtful' of􀁖 709 lakhs, which constituted 22% of the total assets of the company. The SCN noted that the EP had also stated in his Auditor's Report in the section for "Basis of Qualified Opinion" as under: "In respect of balances of receivables and payables confirmation and reconciliation is unsecured and doubtful. Impact is uncertain and cannot be commented by us. For receivables considered doubtful and no provision has been created in the books of accounts. ". 25. However, in the paragraph titled "Qualified Opinion" EP opined that the Financial Statements give a true and fair view without any qualification or reference to the "Basis of Qualified Opinion" section as required under Para 237 of SA 705. 26. In response to the above charge, EP replied that "the Respondent wanted to qualify the non-provisioning of doubtful trade receivables" and that "it was an unintended mistake. Although the mistake is on the face of the audit report, a combined reading of the report ....
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....hat had very minimal impact on the financial statement did not make a case of professional misconduct although it was an error of judgment in the application of Accounting Standard 22, ... ". 30. The EP has stated that his responsibility as per Section 143(2) of the Act was to ensure that the accounts are true and fair to the best of his information and knowledge and are as per the provisions of the Act and the Accounting and Auditing Standards. He has further stated that as per SA 700, he has to give a "reasonable assurance" and not "absolute assurance". 31. Although the EP accepts that non-verification of compliance with AS 22 was an oversight, he seeks to rely on SA 700 which refers to 'reasonable assurance' and he further points to the deferred tax assets not being material. The reference by the auditor to reasonable assurance as given in SA 700 has no relevance in this matter. It is apparent that the DT As have been recognised in contravention of the relevant Accounting Standards and the same has not been denied. Recognition of DTA in a company, which is continuously incurring losses and not having reasonable certainty of sufficient future taxable income, was erroneo....
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....e is no evidence of how the EP assured himself of "reasonable assurance". Hence the arguments regarding DT A not being material and being 2% of total balance sheet are afterthoughts and the charges regarding non-reporting the wrong accounting of DTA stand proven. C.4 Non-disclosure of Cost Formula for the Measurement of Inventories 35. The EP was charged for not reporting that the cost formula for the measurement of inventory was not disclosed by the company in its Financial Statements. 36. The disclosure in the Accounting Policy for cost of inventories stated that "The Finished goods are valued at lower of cost or net realizable value. Consumable Stores & Spares and packing material are written off at the time of purchase itself." The cost formula for calculation of the cost of the inventory (say, First In First Out, weighted average cost, specific cost etc.) is not given in the financial statements. The Audit File also does not contain any work paper regarding the cost formula used by the company. This is in contravention of Para 26(a) of AS 213 which mandates the disclosure of accounting policies regarding inventories including the cost formula. 37. In response to the above....
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....c benefits are expected to flow to the company through these expenses. b. Audit File does not clearly indicate whether 'Deferred Revenue Brand Development Expenditure' satisfies the conditions of para 4416 of AS 26 which provides the conditions for recognition of intangible assets arising from development (or from development phase of an internal project). Only when these conditions are satisfied this expenditure can be recognized as an intangible asset and amortized over a period. The Audit File did not have any work paper in this regard. c. Recognition of MAT Credit Entitlement presented as Unamortized Expenses is not in compliance with AS 2217 41. In response to the above charges, EP has admitted his mistake and was of the view that these were presentation errors and not material and sought pardon for the same. 42. In light of the auditor's acceptance of his errors, it is clear that the provisions of AS 26 and AS 22 have not been adhered to and the charge regarding non-reporting of the wrong amortization of expenses stands proven. C.6 Non-compliance with the format of Financial Statements 43. The Company was required under Section 129(1) of the Act to prepar....
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....d format. D. NON-COMPLIANCES WITH STANDARDS OF AUDITING D.1 Non-compliance with requirements of SA 230 regarding Audit Documentation 46. The EP was charged with false reporting that the Audit was conducted in accordance with SAs despite non-compliance with a large number of SAs. Para 8 and 9 of SA 23019 requires an Auditor to "prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand'. The EP had failed to comply with para 8 and 9 of SA 23020 , as the nature, timing and extent of audit procedure performed, results thereof, audit evidence obtained, and conclusions reached are not documented in the Audit File. 47. Para 14 and A21 of SA 23021 mandates the assembly of the final Audit File within 60 days after the date of the auditor's report. The EP was charged for not assembling the Audit File within 60 days of signing of audit report as he did not send the Audit File to NFRA by 07.01.2022 as advised by NFRA vide letter dated 08.12.2021. 48. The auditor in his reply dated 15.11.2023 has agreed to the lapses m Audit documentation. He has admitted that "the Audit File was not compiled in ac....
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....ssuer B audits, the audit documentation was insufficient to demonstrate which aspects of the audit and which audit documentation Bharat Parikh reviewed'. 51. In another case of delayed Audit Documentation viz., Alwarez and Associates Inc, an audit firm registered with PCAOB, where Vincente Alvares was a partner, PCAOB22 noted "...... also violated AS 1215, Audit Documentation ("AS 1215 ") by repeatedly failing to timely assemble a complete and final set of audit documentation assembled for retention ("archived") by the documentation completion date (i.e., within 45 days after the report release date) for 43 broker-dealer Audits for FY 2018 and FY 2019. The Firm and Alvarez further violated AS 1215 by repeatedly failing to document the information required by AS 1215 when audit documentation was changed after the documentation completion date for 25 broker-dealer Audits for FY 2018 and FY 2019." In this matter, Alvarez & Associates, Inc., and Vicente Alvarez, were censored and registration of Alvarez & Associates, Inc. was suspended for two years. Vicente Alvarez, CPA was debarred for two years and was required to complete 40 hours of professional education and training relati....
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....review are available, where applicable.28 (ii) As Anshu is a listed entity, it was mandatory for the auditor to determine that an EQCR had been appointed for review of the audit work.29 Accordingly, while accepting the said engagement, the Audit Firm should have assessed whether the individuals meeting the criteria and eligibility requirements to perform EQC Review were available. (iii) As per para 6 of SQC1, EQCR may be 'a partner, other person in the firm, suitably qualified external person. or a team made up of such individuals, with sufficient and appropriate experience and authority to objectively evaluate, before the report is issued, the significant judgments the engagement team made and the conclusions they reached in formulating the report'. Further, as per para 72 of SQC1, 'suitably qualified external persons may be contracted where sole practitioners or small firms identify engagements requiring engagement quality control reviews. Alternatively, some sole practitioners or small firms may wish to use other firms to facilitate engagement quality control reviews. ' Hence, being a proprietary firm cannot be accepted as an excuse not to have engagement qua....
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....9 of SA 26032 & SA 26533 as he did not determine TCWG and did not communicate with TCWG about the responsibilities of auditor, overview of planned scope and timing of the audit etc. and did not make required documentations. The Audit File did not have any documentation regarding communication with TCWG. 60. In reply to the charge, the EP has explained that communications with management were face to face during audit and by sharing draft audit report physically and hence no written communications existed. This explanation by EP cannot be accepted. 61. In the above context, it is important to reiterate Para 19 of SA 260 as under: "Where matters required by this SA to be communicated are communicated orally, the auditor shall document them, and when and to whom they were communicated. Where matters have been communicated in writing, the auditor shall retain a copy of the communication as part of the audit documentation. " It is clear that in case the communication is done orally, it is the duty of Auditor to document the same. In the Audit File, there is no documentation of communication with TCWG. The charges regarding non-compliance for communication with TCWG therefore stand....
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....IONAL MISCONDUCT 65. Given the above-mentioned actions and omissions, it is established that CA Sachin Kansal did not comply with the stipulations in the Act and the Chartered Accountants Act; 1949 (CAs Act, hereafter) and showed gross negligence and lack of due diligence in the audit of the said engagement. CA Sachin Kansal has not ensured audit quality and was grossly negligent in professional duties by not adhering to the requirements laid down by the relevant SAs. This has led to the issuance of an audit report not backed by audit evidence. Specifically, the following failures on the part of CA Sachin Kansal as contained in the Articles of Charges in the SCN stand established: a) Failure to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity, as CA Sachin Kansal failed to disclose in his report the material non-compliances the company made regarding non-provision of interest and regarding wrong accounting of deferred tax assets( as per Section 22 and Clause 7 of Part I of the Second Schedule....
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....methodical cross verification, proper planning, and meticulous execution of the audit plan etc. are fundamental to audit quality. As detailed in this Order, it is evident that the EP during the Audit of Anshu has failed to report non-compliance with Accounting Standards and the prescribed format of Financial Statement as per the Companies Act, 2013, and has not complied with several requirements of Standards on Auditing. 68. We note that both in his written reply to the SCN and during personal hearing, the EP has not only agreed with the violations identified in the SCN, but has expressed regret citing lack of experience and knowledge of the accounting and auditing standards and has expressed inclination to further study Accounting Standards and Standards on Auditing to improve his knowledge. Since there are gaps in the EP's understanding of SAs that need to be addressed, CA Sachin Kansal would benefit from further training in the area of SAs to enhance his skills as an auditor capable of carrying out the audit of public interest entities. 69. Considering the proven professional misconduct by CA Sachin Kansal, acceptance of mistakes by him, the nature of violations, size of t....
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....ed tax assets can be realised'. 9 SA320, Materiality in Planning and Performing an Audit 10 SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures 11 SA 450, Evaluation of Misstatements identified during the Audit. 12 Reasonable assurance means high, but not absolute, level of assurance as per Glossary of Term issued by ICAI 13 Para 26 of AS 2, Valuation of lnventories, states as under: "26. The financial statements should disclose: (a) the accounting policies adopted in measuring inventories, including the cost formula used; and (b) the total carrying amount of inventories and its classification appropriate to the enterprise." 14 AS 26, Intangible Assets 15 Para 6.2 of AS 26 reads as under: "6.2 An asset is a resource: ( a) controlled by an enterprise as a result of past events; and (b) from which future economic benefits are expected to flow to the enterprise. " 16 Para 44 of AS 26 reads as under: "44. An intangible asset arising from development (or from the development phase of an internal project) should be recognised if, and only if, an enterprise can demonstrate all of the following: (a) the technical fea....