AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (8) TMI 322
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....pses D. Articles of Charges of Professional Misconduct E. Penalty and Sanctions A. EXECUTIVE SUMMARY 1. Dewan Housing Finance Limited Corporation (DHFL), a housing finance company listed on both NSE and BSE), operating through a network of branches, was reportedly involved in financial 'fraud. NFRA took suo motu notice of the matter and carried out an Audit Quality Review (AQR) of the statutory audit of DHFL for FY 2017-18, conducted by Chaturvedi & Shah (CAS), a Mumbai based Chartered Accountant Firm. During the review, it was also noticed that 33 Engagement Partners (EP) or branch auditors had signed the "Independent Brach Auditor's Report" for nearly 250 branches. CA Akash Goel was the Engagement Partner (EP) for the audit of eight branches of DHFL. 2. NFRA's investigations undertaken under section 132 (4) of the Companies Act revealed that CA Akash Goel had undertaken this branch audit without ascertaining the legal validity of his appointment. The investigations revealed that in accepting an invalid appointment CA Akash Goel also violated the provisions of the Chartered Accounts Act 1949, which require ensuring a valid appointment as per the Act. 3. In addition, CA Ak....
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.... BSE, was reportedly in the business of housing finance, It was required to prepare its Financial Statements for the Financial Year (FY) 2017-18 in accordance with Schedule IIT and other applicable provisions of the Companies Act 2013 and Accounting Standards (AS) notified under the Companies (Accounting Standards) Rules, 2006. 7. As per the Annual Report for FY 2017-18, the DHFL branch network had 187 branches, 20 Zonal/ Regional Office/Centralised Processing Units and 135 micro branches (service centres) through which it carried out its core operation of providing long-term Housing and Property Loans. The total amount of loans outstanding as of 31-03-2018 as per the Consolidated Financial Statements of the Company was Rs. 84,982 crore, which is 79% of the total balance sheet size. Apart from the loans, the branches also accounted inter alia for collections, fixed assets, operational expenses, fixed deposits and cash balances. Thus, the branch transactions and account balances, audited by the 'Statutory Branch Auditors', contributed significantly to the company's financial statements. 8. As part of NFRA's investigations, CA Akash Goel was asked to provide the Audit File vide....
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....ed by EP via mail dated 21.12.2022 wherein some additional documents (including the previous year's tax audit report, fixed assets register, working paper for checking the reimbursement voucher, and the trial balance of Allahabad branch) were submitted. 13. The EP availed of the opportunity for a personal hearing and attended the personal hearing on 14.02.2023 before the Executive Body. During the personal hearing, the EP reiterated his written submissions and categorically stated that he worked as Statutory Auditor for the eight branches mentioned above. C. MAJOR LAPSES BY THE EP 14. We have perused all the material on record including the written and oral responses of the EP in response to the charges levelled against him. We discuss in the following paragraphs the charges against the EP under two broad heads viz., acceptance of audit assignment without complying with the statutory and other requirements and non-compliance with the Standards on Auditing (SAs). I Acceptance of audit appointment without complying with mandatory legal and ethical requirements and issuing audit report without a valid appointment as per the Act 15. It was observed that the appointment of the Au....
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.... Clause (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949, the incoming auditor has to ascertain whether the Company has complied with the provisions of the above sections. The word "ascertain means "to find out Jor certain". This would mean that the incoming auditor should find out for certain as to whether the Company has complied with the provisions of Sections 224, 2244 and 225 of the Companies Act. In this respect, it would not be sufficient for the incoming auditor to accept a certificate from the management of the Company that the provisions of the above sections have been complied with. It is necessary for the incoming auditor to verify the relevant records of the Company and ascertain as to whether the Company has, in fact, complied with the provisions of the above sections". 18. As per Ministry of Corporate Affairs Circular No. 7/2014, dated 01-04-2014, the equivalent sections of the Companies Act 2013 for the above sections of the Companies Act 1956 are sections 139 and 140. As per Section 143 (8) of the Act, the appointment of statutory auditor is required to be made under Section 139 of the Act by the members in the annual general meeting. It ....
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....ranch Audit" assigned by the Company and issued the "Independent Branch Auditors' Report" stating in the audit report that it was conducted in accordance with the SAs under the Act. Since these branch audit reports are clearly referred to by Company's Statutory Auditor (CAS) in its report to the members of the Company, we examine here the extent of compliance with the applicable SAs by the Branch Auditor notwithstanding the violation of ethical standards, the Chartered Accountants Act and the invalid appointment of the Branch Auditor. The principles and procedures laid down in the SAs including professional skepticism, audit documentation, sufficiency and appropriateness of audit evidence, audit planning, materiality, engagement risk, nature, timing and extent of evidence gathering procedures and reporting are all applicable in the branch audit as well, being an audit of historical financial information. Accordingly, the EP was charged in the SCN with the following. Non-Compliance with SA 210 "Agreeing the Terms of Audit Engagements" 22. The EP was charged with non-compliance with SA 2102 and the absence of professional scepticism and professional judgment in understanding the o....
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....dence of the nature, timing and extent of audit procedures performed, results of those audit procedures and conclusions reached during the audit as required by SA 230. In terms of SA 230, the objective of the auditor is to prepare documentation that provides a sufficient and appropriate record of the basis for the auditor's report; and evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements. In the absence of the required documentation, the audit report EP issued to CAS was without adequate basis and was in violation of SAs. 27. Responding to the charges, the EP denied all the charges and submits that all the required procedures were duly done. He states that "...... We had pre-defined scope of audit & we had performed the audit as per the scope....... "and that "it is not practically possible for auditor to make copies of all files and keep in record for proving its innocence. So, had gone through all the data physically & on the basis of that we had drafted our opinion & given the report and we take full responsibility of that report that we had not done anything in good faith & had done [sic] the audit with profe....
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....clusions reached thereon, and significant professional judgments made in reaching those conclusions. 32. SA 230 further requires that in documenting the nature, timing and extent of audit procedures performed, the auditor shall record (a) The identifying characteristics of the specific items or matters tested; (b) Who performed the audit work and the date such work was completed; and (c) Who reviewed the audit work performed and the date and extent of such review. Thus, the burden of proof requiring compliance with a mandatory requirement of an SA lies with the auditor. The Audit File does not contain the basic documentation such as: a. Understanding the branch operations, internal controls and responsibilities at various levels in the branch (refer to SA 3157) b. Audit plan made after understanding the branch operations in accordance with SA 300 c. Determination of materiality levels (refer to SA 3208) d. Understanding of the IT system controls (refer to SA 315) e. Summary of the accounting policies, observations from previous audits, inspection reports, and internal audit reports (refer to SA 315) f. List of documents verified and minutes of meeting with the manageme....
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....lts of those audit procedures and conclusions reached during the audit. Hence the charges in para 26 regarding non-compliance with SA 230 stand established. Non-Compliance with SA 700, "Forming an Opinion and Reporting on Financial Statements" 36. The EP was charged with non-compliance with SA 700. As per SA 7009 in order to form an opinion, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Such a conclusion shall take into account, inter alia, whether sufficient appropriate audit evidence has been obtained and whether uncorrected misstatements are material, individually or in aggregate. In the Annexures to the audit report, the EP has, at several places, noted that for a large number of loan files reviewed, either required documents were not obtained or loans disbursed were not as per the loan policy of Company/ National Housing Bank or EP did not have access to the required information. Since the unmodified opinion expressed by the EP is not supported by evidence, the EP was charged that he did not comply with SA 70010. 37.....
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.... regarding the performance of risk assessment procedures for material misstatements at the financial statement level and assertion level and response to such risks etc. c. para 10, 11 & 14 of SA 320 for determining materiality, performance materiality and documentation thereof. d. para 5, 6, 8, 14 & 15 of SA 45013 absent the evaluation of identified misstatements and uncorrected misstatements. e. para 6 & 9 of SA 50014 in not designing and performing audit procedures to obtain sufficient appropriate audit evidence and not evaluate the reliability of information produced by the company. f. para 5, 6 and 8 of SA 51015 relating to the performance of necessary audit procedures and obtaining sufficient and appropriate audit evidence to ascertain the accuracy of Opening Balances and the accounting policies reflected in the Opening Balances. g. para 6 of SA 52016 relating to design and performance of analytical procedures. h. para 4, 6,7, 8 & 9 of SA 53017 relating to the determination of sample design, sample size and required audit procedures. i. para 8,9 & 10 of SA 58018 regarding obtaining written representations from the management about their responsibilities. 41. The....
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.... C-II above. (As per Section 22 and Clause 9 of Part I of the Second Schedule to the CAs Act). Thus, EP Akash Goel committed professional misconduct, as defined in the respective clauses of the CAs Act, the meaning of which is conceived under Section 132 (4) of the Companies Act as amounting to professional misconduct. E. PENALTY AND SANCTIONS 44. Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The law lays down a minimum punishment for such misconduct. 45. The information contained in the Financial Statement, in this case, includes material information from the Branches of the Company, where a substantive part of the lending activities was carried out. 46. A Branch Auditor is duty-bound to examine and ascertain the integrity of the underlying information forming Financial Statements of such entities19 in the larger public interest. 47. The EP in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to the reports he issued to facilitate the Company's Auditor to issue their report on the Financial Statements. As detailed in the foregoing para....