TaxTMI 
TaxTMI 
2022 (6) TMI 1417
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....tement in a professional capacity; b. failure to report material misstatements known to him to appear in a financial statement with which the CA is 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 procedure of audit applicable to the circumstances. 2. PSIL is a company listed on the Bombay Stock Exchange (as on 31st March 2020) and therefore, as per Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015, it is required to comply with the Indian Accounting Standards (Ind AS) prescribed under these rules for the preparation and presentation of its annual financial statements. The CA has issued an unmodified report on the financial statements of the Company for the year 2019-20 stating that "In our opinion and to the best of our information and according to the explanations given to....
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.... b. The Companies Act requires a Statement of Changes in Equity as part of the financial statements, without which the financial statements will not be complete as per the Companies Act. This statement gives the reconciliation between the opening balance and closing balance of shareholder's equity and summarises the related transactions. Movement in retained earnings, reserves and changes in share capital such as the issue of new shares and payment of dividends are disclosed in this report. PSIL being a listed company such information is crucial to the understanding of the whole set of financial statements by the users. The CA has failed to verify and ensure that information pertaining to changes in equity is provided in the Statement of Changes in Equity as part of the Financial Statements. c. As per the Companies Act, PSIL was required to prepare a consolidated financial statement including all its subsidiaries and associates. But PSIL did not prepare a consolidated financial statement despite the existence of a material associate company named Haryana Metals Ltd. This has made the whole set of financial statements unreliable. The CA failed to report this in hi....
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....g owing to personal reasons. The hearing was accordingly held on 31st May 2022, through video conferencing and was attended by the CA. The oral hearing proceedings through the VC have been recorded. B. FACTS OF THE CASE AND ARTICLE OF CHARGES 11. The facts of the matter and the articles of charge as provided in the SCN are reproduced below in the Appendix to this Order. C. REPLIES OF THE CA TO THE ARTICLES OF CHARGES C.1. Examination of the CA's reply to the SCN C.1.1. Summary of the Reply 12. The CA in his written reply dated 02.05.2022 submits that "Extensive efforts have been made so as to ensure that the insufficiencies and observations pointed out in the FRQRR along with deficiencies mentioned in the show cause notice dated 22nd March 2022 with respect to standards on auditing issued by the Institute of Chartered Accountants of India ("ICAI") along with misstatements in financial statements have been duly rectified in the draft revised auditor's report along with draft restated financial statements of the company keeping in mind the standards on auditing issued by the Institute of Chartered Accountants of India ("ICAI")." 13. The CA in his reply fu....
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....he specific jurisdiction that has been granted to the NFRA. The First and Second Schedules to the Cas Act define what constitutes "professional or other misconduct". These Schedules apply to all Cas, whether in practice or employment. NFRA's jurisdiction is, however, confined to auditors of Companies and Body Corporates specified in Rule 3 of NFRA Rules 2018, made under the Companies Act 2013. These auditors have to now work in terms of the framework provided by the Companies Act, 2013, and the accounting and auditing standards prescribed under the Companies Act. "Professional or other misconduct" as defined in the Schedules to the CA Act has to be understood in the context of the work that the PIE auditor has to do, and the responsibility cast on him. Essentially, therefore, a failure to comply with the auditing and accounting standards which now have the status and force of law under section 143 of the Companies Act, would amount to professional misconduct. 19. In addition to the requirements in the Companies Act, SA 200 - 'Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing' states as follows. ....
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....capacity". This charge is proved as the CA failed to disclose in his report the material non-compliances the Company made, as explained in paras 16 to 20 above. The CA has also admitted the charge. b. CA Gulshan Jham committed professional misconduct as defined by Section 132(4) of the Companies Act, read with section 22 of the Chartered Accountants Act 1949 (No. 38 of 1949) and clause 6 of Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he "fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity". This charge is proved as the CA failed to disclose in his report the material misstatements made by the Company in the areas of debtors, loans and advances, property plant and equipment, inventory and other account balances as explained in the paras 16 to 20 above. The CA has also admitted the charge. c. CA Gulshan Jham committed professional misconduct as defined by Section 132(4) of the Companies Act, read with section 22 of the Chartered Accountants Act 1949 (No. 38 of 1949) and clause 7 of Part 1 of t....
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.... FY 2020, and the FRQRR published by NFRA. D. PENALTY 23. According to Sec. 132(4)(c) of the Companies Act, 2013, in a case where professional or other misconduct is proved, the NFRA shall have the power to make an order for- a. Imposing a penalty of not less than one lakh rupees, but which may extend to five times the fees received, in the case of individuals; and b. Debarring the member from 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 for a minimum period of six months or such higher period not exceeding ten years as may be determined by the NFRA. 24. The seriousness with which the Companies Act views proved cases of professional misconduct is evident from the fact that a minimum punishment is laid down by the law. 25. Several factors go into determining what is the appropriate penalty in any case of professional misconduct. These are discussed below with specific reference to the proven facts of this case. a. Compliance with SAs and Maintenance of Audit Quality CA Gulshan Jham is a qua....
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....sers in making economic decisions ". "Due diligence" is required to meet the information needs of these users. Where the auditors have shown to be not diligent in considering these factors, appropriate penalties would follow that should be effective, proportionate and dissuasive. It is also essential that the penalty imposed has a suitable deterrent effect on other auditors and, at the same time, sends out a message to the Public and the Investor Community that such misconduct will not be allowed to escape lightly. c. Nature and size of the Audit Firm. The CA in this case is a very small proprietorship firm not having any other listed company audit. Based on the principle of proportionality, the sanctions are being made keeping in mind the nature and size of the audit firm and the fact that he has accepted all the charges. SANCTIONS 26. Considering the fact that professional misconduct has been proved and considering the nature of violations and principles of proportionality, the NFRA, in the exercise of its powers under Section 132(4)(c) of the Companies Act, 2013 orders: (i) Imposition of a monetary penalty of Rs. 100,000 (One Lakh only) upon CA G....
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....ompliance with the Indian Accounting Standards notified under Section 133 of the Companies Act, 2013. The disclosures at several places are made in accordance with the Companies (Accounting Standards) Rules 2006, which Framework is no longer applicable to the Company. b) The Company failed to present a Statement of Changes in Equity in the Financial Statements as required by sub-section 40 of Section 2 of the Companies Act, 2013, Indian Accounting Standard (Ind AS) 1 - Presentation of Financial Statements, and Schedule into the CA, 201 Companies Act, 2013. c) The Company also failed to prepare Consolidated Financial Statements as required by Section 129(3) of the Companies Act, 2013 though it has disclosed certain companies as Associate Companies in the Financial Statements. d) Because of the explicit requirements of Indian Ind AS 109, Financial Instruments, the Company was required to consider all the factors in the recognition and measurement of impairment loss based on expected credit loss approach for Trade Receivables, Loans and Advances and Bank Balances. The full amount of Trade Receivables and Loans and Advances of the Company are unsecured and Ba....
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....nd give a true and fair view in conformity with the accounting principles generally accepted in India. He also falsely certified that the financial statements comply with the Accounting Standards specified under Section 133 of the Companies Act, read with Rule 7 of the Companies (Accounts) Rules, 2014. 1.7 There is no evidence in the Audit File to support the above statements in the Audit Report. The FRQRR explains with reasons that the financial statements do not give a true and fair view of the state of affairs of the Company. Thus, the independent auditor's report is false, misleading, and made without any basis. 1.8 Consequently, the auditor has also violated the following provisions of the Standards on Auditing- (i) Para 3 of Standard on Auditing (SA) 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing states: The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an appl....
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....ment's judgments (vi) Para 13 of Standard on Auditing (SA) 700 - In particular, the auditor shall evaluate whether, in view of the requirements of the applicable financial reporting framework : (a) The financial statements adequately disclose the significant accounting policies selected and applied; (b) The accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate; (c) The accounting estimates made by management are reasonable; (d) The information presented in the financial statements is relevant, reliable, comparable, and understandable; (e) The financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and (f) The terminology used in the financial statements, including the title of each financial statement, is appropriate. (vii) Para 14 of Standard on Auditing (SA) 700 - When the financial statements are prepared in accordance with a fair presentation framework, the evaluation required by paragraphs 12-....
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....pression of an opinion. e) invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances. 2.0 Actions/Omissions leading to professional misconduct in relation to other non-compliances of Auditing Standards 2.1 NFRA had sought the Audit Files from CA Gulshan Jham via e-mail on 22nd June 2021. In response to the mail, CA Gulshan Jham had provided the audit file via e-mail on 05th August 2021. 2.2 The e-mail from CA Gulshan Jham Contains- (i) 42 audit files work papers numbered 1 to 20 (in PDF Form) (ii) Annexures 2 & 3 as required by NFRA (in PDF form) and (iii) Policy document as per SQC 1 (in PDF Form) The audit file is attached with this SCN in Appendix 2. 2.3 NFRA has examined the audit files to verify the audit procedures. These audit files contain documents that purport to be concerning verification of some of the account balances and transactions in the financial statement. NFRA has observed violations of various Standards on Auditing as detailed below. 2.4 Requirement of Standard on Auditing (SA) 230 Audit Documentation- (i) Para 8 of SA 230 states- ....
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.... The firm should establish policies and procedures requiring, for appropriate engagements, an engagement quality control review that provides an objective evaluation of the significant judgments made by the engagement team and the conclusions reached in formulating the report. Such policies and procedures should: (a) Require an engagement quality control review for all audits of financial statements of listed entities; (b) Set out criteria against which all other audits and reviews of historical financial information, and other assurance and related services engagements should be evaluated to determine whether an engagement quality control review should be performed; and (c) Require an engagement quality control review for all engagements meeting the criteria established in compliance with subparagraph (b). (iii) Para 92 of (SQC) 1, states - small firms and sole practitioners may wish to use a suitably qualified external person or another firm to carry out engagement inspections and other monitoring procedures. Alternatively, they may wish to establish arrangements to share resources with other appropriate organizations to facilitate monitorin....
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.... and content of the auditor's report, if any; and (e) Any other significant matters arising from the audit that, in the auditor's professional judgment, are relevant to the oversight of the financial reporting process. (v) Para 17 of SA 260 states that - In the case of listed entities, the auditor shall communicate with those charged with governance (a) A statement that the engagement team and others in the firm as appropriate, the firm and, when applicable, network firms have complied with relevant ethical requirements regarding independence; and (b) (i) All relationships and other matters between the firm, network firms, and the entity that, in the auditor's professional judgment, may reasonably be thought to bear on independence. This shall include total fees charged during the period covered by the financial statements for audit and non-audit services provided by the firm and network firms to the entity and components controlled by the entity. These fees shall be allocated to categories that are appropriate to assist those charged with governance in assessing the effect of services on the independence of the auditor; and ....
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....ation and assessment of risks of material misstatement at the financial statement and assertion levels. Risk assessment procedures by themselves, however, do not provide sufficient appropriate audit evidence on which to base the audit opinion (ii) Para 6 of SA 315 states - The risk assessment procedures shall include the following: (a) Inquiries of management, of appropriate individuals within the internal audit function (if the function exists), and of others within the entity who in the auditor's judgment may have information that is likely to assist in identifying risks of material misstatement due to fraud or error. (b) Analytical procedures. (c) Observation and inspection. (iii) There is no audit evidence of carrying out any risk assessment procedure that was required to be done as per SA 315. Therefore, the CA did not comply with SA 315. 2.9 Requirement of Standard on Auditing (SA) 320 Materiality in planning and performing an Audit- (i) Para 10 of SA 320 states - When establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole. If, in the specific circums....
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....ii) There is no evidence available in the Audit File to show that the Auditor has complied with the requirements of Para 6 of SA 500. 2.13 Requirement of Standard on Auditing (SA) 505 External Confirmations- (i) Para 7 of SA 505 states - When using external confirmation procedures, the auditor shall maintain control over external confirmation requests, including: (a) Determining the information to be confirmed or requested; (b) Selecting the appropriate confirming party; (c) Designing the confirmation requests, including determining that requests are properly addressed and contain return information for responses to be sent directly to the auditor; and (d) Sending the requests, including follow-up requests when applicable, to the confirming party. (ii) In the audit file, Working Papers No. 2A to 2D and No. 10 relates to confirmations from external parties. (iii) The audit evidence in Working Papers 2A to 2D and 10 are not sufficient and appropriate as there is no basis on which the information is confirmed and there is no proof that the confirmations have been received by the auditor directly from an external source.....
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.... the population from which the sample is selected. There is no basis for the selection of the sample as required by the SAs. (iv) Thus the auditor has failed to perform the audit procedure as specified in SA 530. 2.16 Requirement of Standard on Auditing (SA) 550 Related Parties (i) Para 3 of SA 550 states - Because related parties are not independent of each other, many financial reporting frameworks establish specific accounting and disclosure requirements for related party relationships, transactions and balances to enable users of the financial statements to understand their nature and actual or potential effects on the financial statements. Where the applicable financial reporting framework establishes such requirements, the auditor has a responsibility to perform audit procedures to identify, assess and respond to the risks of material misstatement arising from the entity's failure to appropriately account for or disclose related party relationships, transactions or balances in accordance with the requirements of the framework. (ii) Para 4 of SA 550 states - Even if the applicable financial reporting framework establishes minimal or no related....