TaxTMI 
TaxTMI 
2023 (11) TMI 1173
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.... in the Audit D. Other Lapses in The Audit E. Articles of Charges of Professional Misconduct by the EP 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 classes[Rule 3 of NFRA Rules, 2018] of entities which can be broadly described as 'Public Interest Entities' (PIEs). 4. NFRA initiated action under Section 132(4) of the Companies Act, 2013 (the Act) for investigating into professional or other misconduct of the statutory auditor of MIIL, a listed company, following information received from Securities and Exchange Board of India (SEBI) vide letter dated 23.06.2022 regarding financial irregularities committed by MIIL. 5. MIIL is a manufacturer and exporter of large diameter Carbon Steel Line Pipes for various high pressure transmission applications for Gas, Crude Oil, Petrochemical Products and Potable Water. By virtue of being listed, MIIL falls under the jurisdiction of NFRA under Rule 3 of NFRA Rules, 2018. 6. M/s Rohira Mehta & Associates, Chartered Accountants (presently RMA & Co.), Firm ....
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....ppropriate Audit Evidence (SAAE) in a number of critical areas of audit viz., non-consolidation of a material subsidiary (para 18-21), credit risk evaluation of Trade Receivables (para 43-44) and failure to perform risk assessment procedures and response to such risks (para 64-72). e) The EP failed to demonstrate sufficiency and appropriateness of audit work in virtually every critical building block of an audit of Financial Statements i.e., Audit Strategy, Planning (para 45 to 48), Analytical Procedures (para 50-54), Determining Materiality (para 55 to 61), identification and assessment of ROMM through an understanding of the entity's environment and internal control (para 62 to 66), resulting in non-compliance with Standards on Auditing, notified under Section of 143 (10) and made mandatory under section 143 (9) of the Act. 9. Considering the professional misconduct of the EP, this Order imposes upon CA Nilesh Chheda a monetary penalty of Rs.5,00,000 (Rupees Five Lakhs Only). CA Nilesh Chheda is also debarred for 5 (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 t....
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....of its annual Financial Statements from the FY 2016-17. Table 1 below depicts certain key financial features of MIIL and the shareholding pattern of MIIL for the FY 2016-17, FY 2015-16, and FY 2014-15, which indicate substantial public interest. Table 1: Some key financial features of MIIL (Numbers except percentages are in Rs Crores) Particulars 31.03.2017 31.03.2016 31.03.2015 Shareholding Pattern Public 54.94% 54.94% 54.21% Individual 38.92% 38.92% 40.6% Revenue from Operations 1060.49 1391.68 1364.02 PBT 43.39 92.86 64.14 Equity Borrowing from Banks 221.65 276.50 264.68 14. M/s Rohira Mehta & Associates, Chartered Accountants (presently RMA & Co.), Firm Registration No 118777W, was the statutory auditor of MIIL and CA Nilesh Chheda was the Engagement Partner (EP) for this statutory audit for the FY 2016-17. The EP & the Firm (statutory auditors) were instructed on 03.08.2022 to submit the Audit File and other relevant information, which they did on 18.08.2022. 15. The examination of the Audit File revealed that the audit had been ....
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.... hearing and other material available on record. Each of the charges in the SCN is analysed and discussed in Part C and D of this Order. C. MAJOR LAPSES IN THE AUDIT C1. Failure to report non-consolidation of subsidiary 18. The EP was charged with failure to appropriately modify his audit opinion as per SA 705, even though the accounts of MIIL's wholly owned subsidiary viz., Merino Shelters Pvt. Ltd (MSPL), were not consolidated in the Financial Statements of MIIL, as per Ind AS 110 [Indian Accounting Standard (Ind AS) 110, Consolidated Financial Statements] The EP had qualified his Audit Report for non-consolidation of MSPL in the Financial Statements of MIIL. MSPL was the wholly owned subsidiary of MAN Infra Projects Private Limited (MIPL), which in turn was the wholly owned subsidiary of MIIL. Pursuant to the Scheme of Arrangement approved by Hon. High Court of Bombay vide order dated 20.03.2015, which was to be made effective from 01.04.2013, the shares held by MIPL in MSPL were transferred to MIIL and accordingly MSPL became wholly owned subsidiary of the MIIL from 01.04.2013. MIIL gave effect to this Scheme of Arrangement in its Financial Statements for the FY 2014-1....
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....l opinion provided by the Company taken in 2015. In light of the details in paragraph 20 above, it is seen that the Hon. Bombay High Court had not stayed consolidation of the said account. Thus, the plea taken by the EP does not hold. The impact of non-consolidation of Financial Statements of MSPL into that of MIIL was material and pervasive, as the assets and liabilities of MSPL constituted about 19.20% and 28.96 % respectively of the assets and liabilities of MIIL (Table 2) and resulted in exclusion of additional information, required under Schedule III to the Companies Act, 2013, of enterprises consolidated as subsidiary/ associates /joint ventures. Table 2 (In Rs. Crore) Particulars MIIL (Published Consolidated Financials) As on 31.03.2017 MSPL as on 31.03.2017 MSPL as % of MIIL Total Assets 1356.39 260.43 19.20 % Total Liabilities 758.11 219.57 28.96 % Net Worth 598.28 40.85 6.83 % In light of above, we conclude that the qualified opinion by the EP, when there was sufficient basis for an adverse opinion, was without due diligence and without obtaining sufficient appropriate audit evidence, and thus the EP failed to comply w....
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....balance of GST credit lying in the electronic credit ledger & cash ledger with the balances in the books of accounts." ii) Clause (A) 26 of the letter contains request for 'Ageing of debtors and creditors o/s as 31.03.2021' whereas the audit relates to FY ending 31.03.2017. iii) Clause B (3) of the above referred work paper requests for details regarding payment made towards GST, which had not even been introduced in the period under audit. iv) Clause (B) 10 requests for details of lease rental paid as per Ind AS 116, Leases, which came into force for accounting period starting 01.04.2019 and therefore was not relevant for FY ending 31.03.2017. In view of the above, it is clear that this important work paper has been inserted in the Audit File after the SCN was issued by NFRA and the Audit File has been tampered with while submitting to NFRA pursuant to issuance of SCN by NFRA. 25. When confronted with these facts during the personal hearing, the EP attributed it to a typographical error. Mr. Nirav Mehta, the EQCR Partner, stated that all such information requests to the Company were sent by email, which they shall provide along with Section 65B Certif....
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....ding valuation report for impairment testing from the external professionals Valuation report is placed in the Audit File but there is no evaluation by the EP of the valuation report. III Working paper at Page 1488 to 1531 & 2848 to 2891 of Audit Paper Book Working Paper regarding actuarial valuation report from the external professionals Valuation report is placed in the Audit File but there is no evaluation by the EP of the valuation done. Actuarial Valuation report was dated 04.08.2017, after the audit report was signed on 30.05.2017. This working paper is incorporated after 60 days of Audit casting serious doubt on the integrity of Audit File. IV Working Paper at Page 299 to 614 of Audit Paper Book Working Paper regarding confirmation for bank balance, outstanding bank loan, bank guarantee and letter of credit directly from the bankers As per Para 16 of SA 505, the Auditor shall evaluate whether the results of the external confirmation procedures provide relevant and reliable audit evidence, or whether performing further audit procedures is necessary. No such evaluation is made by the EP and no conclusion is drawn by EP and reviewed by EQCR. 28. Ba....
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....aken from the Company and does not record professional judgements and significant conclusions/decisions made by the EP and the basis for that. Non-documentation of the work performed is clear evidence that the work has not been performed. It is apposite to note the following observations of the Australian Audit Regulator ASIC: "Firms often assert that our findings relate to documentation deficiencies in their audit file. An audit file should contain sufficient detail for an experienced auditor to understand the work performed and relied on in forming conclusions. Where this detail has not been documented, our presumption is that the work has not been performed. We have used this approach for several years and it is consistent with the approach applied globally by other audit regulators and in most firm internal quality review programs."[Refer Page 7 of ASIC Audit Inspection Report - Report 743 October 2022] (Emphasis supplied) 33. Lack of sufficient documentation has been viewed seriously by national and international regulators as well. For example, in the matter of Bharat Parikh & Associates Chartered Accountants, dated 19.03.2019, the US audit regulator PCAO....
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....nt loss allowance of this category of financial assets. The company failed to disclose the ageing bucket of trade receivables, and the EP failed to report this non-disclosure in his audit report, which is a material non-compliance with the requirements of the applicable financial reporting framework. 36. The Ind AS Implementation Guidance-Guidance on implementing IFRS 7 Financial Instruments: Disclosure, IG20D, reproduced below at Table 4, illustrates the disclosures required by Paragraph 35M and 35N. Table-4 37. Further, the Company should have shown disclosures as per Ind AS Implementation Guidance-Example 12-Provision Matrix of Illustrative Examples of IFRS 9 [https://indasaccess.icai.org/download/2019/asb052019/147/147BB2019_B_IFRS9%20Financial%20Instruments.pdf] Financial Instruments (shown in Table 5 & 6 below), which illustrates the disclosures required for impairment loss allowance of Trade Receivables. Table 5 Table 6 38. As can be seen from Table 4, 5 and 6, the EP failed to report in his audit report the nondisclosure by the Company of material information regarding credit risk profile of Trade Receivables as per Para 35M and 35N of Ind AS 107. 39. T....
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....res as on 31.03.2017, consisted of Secured Trade Receivables of Rs.172 Crores (50.4%), and Unsecured Trade Receivables of Rs.169 Crores (49.6%), out of which Rs.121 Crores (72%) were from one major customer, Tecnimont, from which there was regular inflow and at the time of closure of the Audit File, only Rs. 42 Crores was outstanding against Tecnimont. Of the remaining amount of Rs. 48 Crores of Unsecured Trade Receivables, disputed Trade Receivables amounted to Rs.17 Crores (5% of the total Trade Receivables as on 31.03.2017), which was not material. The EP also stated that he had obtained Management Representation Letter dated 30.05.2017, which stated that there was strong chance of recoverability of the total Trade Receivables including the disputed ones. 43. The EP reiterated the position during the personal hearing adding that the unsecured Trade Receivables accounting for over 49% of the total outstandings balances were within the ageing bucket of 6-8 months; that there was no previous outstanding and that the recovery was regular and some of it was recovered during the audit. Based on this, the EP stated that he had identified the credit risk as low; and that most of the ....
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....nding the doubt regarding genuineness of this work paper, nowhere in the Audit File the status of information sought and obtained is recorded. The working paper was signed by the EP and EQCR partner, however, no date is mentioned on such work paper casting doubt on its integrity. II. Working Paper at Page 4 to 10 of Audit Paper Book Working Paper regarding Engagement Letter The EP has mentioned that his responsibility is to report if the Financial Statements do not comply in any material respect with the Indian Accounting Standards prescribed in the new Companies Act, 2013 and Companies (Accounting Standards) Rules, 2006. It is to be noted that the Companies (Accounting Standards) Rules, 2006 was no longer applicable to MIIL but the Companies (Indian Accounting Standards) Rules, 2015(Ind AS Rules) was applicable to MIIL. This shows EP's ignorance of the applicable standards and the related statutory requirements. Further, the working paper was signed by the EP and EQCR partner, however, no date is mentioned on such work paper casting doubt on its integrity. III. Working Paper at Page 28 to 41 of Audit Paper Book Working Paper regarding CARO and Ind AS checklist....
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....e auditor to design and perform analytical procedures to assist the auditor in overall conclusion of the audit as to whether the financial statements are consistent with the auditor's understanding of the entity. The SCN noted that there was substantial decrease in key financial parameters vis-a-vis the previous financial year; revenue from operations decreased by 23.80 % (from Rs. 1391.68 Crore in FY 2015-2016 to Rs. 1060.49 Crore in 2016-2017) and profit before tax decreased by 53.27 % (from Rs. 92.86 Crore in FY 2015- 2016 to Rs. 43.39 Crore in 2016-2017). Further, the Company had written off substantial Rs. 28.12 Crore of Trade Receivables as bad debts in the previous FY 2015- 2016, compared to no write off for the year 2016-2017, which appears unusual in view of the fact that substantial amount (Rs 17.00 crore) of Trade Receivables were under litigation and a significant part (49%) of outstanding balances was unsecured. 51. In response, the EP submitted that he relied on management representation stating strong recoverability of the Trade Receivables in the year under consideration [Para 8 @ Page 86 of the Audit Paper Book] and has referred to the final audit discussion let....
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.... NON-CURRENT LIABILITIES Borrowings 190.49 131.33 -31.06 CURRENT LIABILITIES Borrowings 76.66 225.41 194.04 Other financial liabilities 95.96 120.54 25.61 Other current liabilities 41.96 19.23 -54.17 54. In view of above, it is evident that the Audit File does not evidence any analytical procedures performed, which proves that the EP failed to design and perform analytical procedures and enquire with the management regarding fluctuations in the figures from previous FY. We, therefore, conclude the EP has violated Para 3(b) and Para 6 of SA 520. C6. Failure to determine Materiality 55. The EP was charged for failure to comply with Para 10 and 14 of SA 320, which requires an auditor to determine materiality for the Financial Statements as a whole while establishing the overall audit strategy and document the amounts and the factors considered in his determination of materiality for the Financial Statement as a whole and for performance materiality. 56. Responding to the charge, the EP responded that ".....
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....ards Board of the ICAI (2019)] are relevant: "III. Members may also note that recently, the Council of the Institute of Chartered Accountants of India has approved the Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related Services. The said Preface introduces a totally new format of writing Standards, in line with that adopted by the International Auditing and Assurance Standards Board pursuant to its Clarity Project. According to the new format the Standards on Auditing (SAs) would now contain two distinct sections, one, the Requirements section and, two, the Application Guidance section. IV. The fundamental principles of the Standard are contained in the Requirements section and represented by use of "shall". Hitherto, the word, "should" was used in the Standards, for this purpose. ..." 60. The EP's assertion that nothing has been set out to indicate or prove that alleged misstatements have significantly impacted the usability of Financial Statements is false and misleading. Examination of the Audit File revealed that EP did not even determine materiality or performance materiality in the audit of Financial Statements of M....
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....d necessary risk assessment procedures in identifying the RoMM due to fraud or error and there are no material misstatements in the Financial Statements. The EP submitted that he has given qualified opinion to make the users of the Financial Statements aware of non-consolidation, that he has performed necessary risk assessment procedures and that there are no material misstatements in the Financial Statements. The EP has also stated that he has maintained adequate audit documentation to show that he has performed risk assessment procedure for material misstatement. 64. We observe that there is no evidence in the Audit File to show that any risk assessment procedures have been performed by the EP. Also, the EP's reply does not refer to any work paper where he has performed risk assessment procedures for material misstatements at the Financial Statement and Assertion levels and his audit responses to such risks etc. 65. As per Para 5 of SA 315, the auditor is required to perform risk assessment procedures at the Financial Statement and Assertion levels. Assertions generally used by the auditor to consider the different types of potential misstatements that may occur are shown in t....
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....tion II of the Guidance Note states that a benchmark system of internal control, based on suitable criteria, is essential to enable the management and auditors to assess and state adequacy and compliance of the system of internal control. Para 17 of the Guidance Note mentions that the requirements in Appendix 1 of SA 315 provide necessary criteria for IFCoFR. 69. Section IV of the Guidance Note prescribes technical guidance on audit of IFCoFR. Some of the critical prescriptions are: 69.1 While the auditor should combine the audit of IFCoFR and the audit of Financial Statements, the objectives of the audits are not identical. However, the auditor must plan and perform the work to achieve the objectives of both audits. 69.2 The auditor should design his or her testing of controls to accomplish the objectives of both audits simultaneously: 69.2.1 To obtain sufficient evidence to support the auditor's opinion on IFCoFR as of year-end, and 69.2.2 To obtain SAAE to support the auditor's control risk assessments for the purposes of the audit of Financial Statements. 69.3 Planning the audit, role of risk assessment, addressing the ris....
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....o obtain Sufficient Appropriate Audit Evidence (SAAE) 73. The EP was charged with failure to comply with SA 200 [SA 200 Overall objectives of the Independence Auditor and the Conduct of an Audit in accordance with Standards on Auditing] as he did not obtain reasonable assurance whether the Financial Statements were free from material misstatements and failed to obtain sufficient appropriate audit evidence. 74. Responding to the charge, the EP submitted that the charge does not survive on account of the submissions made by him hence, the allegation of failure to obtain reasonable assurance that the financial statements were free from material misstatement is incorrect. 75. The response of the EP which is casual is not acceptable. As we discussed in this Order, the EP failed to obtain SAAE to support his assurance that the Financial Statements were free from material misstatements in the following critical areas of audit: (i) Non-consolidation of a material subsidiary (Para 18-21), (ii) Credit risk evaluation of Trade Receivables (Para 40-44) and (iii) Failure to perform risk assessment procedures and response to such risks (Para 62- 72) The EP ....
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.... in Paragraphs 17 to 24 of SA 240, to obtain information for use in identifying the risks of material misstatement due to fraud. Further, the EP failed to evaluate whether the information obtained from other risk assessment procedures and related activities performed indicates that one or more fraud risk factors are present and therefore did not comply with Para 24 of SA 240. We also observe that it is nowhere documented in the Audit File whether EP had inquired from the company's staff in respect of internal control processes or observed the staff performing the controls. The reply is an afterthought to mislead NFRA and hide his deficiencies in conduct of audit. In the light of above, we conclude that the EP failed to comply with the requirements of Para 16 and 24 of SA 240. C10. Failure to communicate with Those Charged with Governance (TCWG) 79. The EP was charged with failure to determine TCWG and communicate with TCWG about the responsibilities as an auditor, overview of planned scope, timing of the audit and deficiencies in Internal Control etc. The EP was also required to maintain audit documentations of such communication with TCWG. The SCN noted that the examination ....
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....iciencies in internal control identified during the audit to those charged with governance on a timely basis for which there is no evidence in the Audit File. 82. In the light of above, we conclude that the EP has failed to exercise due diligence and was grossly negligent in not identifying and communicating with TCWG and consequently, failed to comply with the requirements of SA 260 and SA 265. 83. Failure to appropriately communicate with Audit Committee (which is a part of the TCWG) has been viewed seriously by international regulators too. For example, PCAOB, the US Regulator, charged the public accounting firm L.L. Bradford & Company, LLC (Audit Firm) for its failure to communicate with the audit committee during the audit of WebXU lnc.'s ("WebXU") and noted that the "Firm also violated a PCAOB rule that requires a registered public accounting firm to communicate, in writing, to the audit committee ............. " The PCAOB, for this misconduct among others, censured the Firm, revoked its registration, and imposed a civil money penalty of $12500. D. Other Lapses in Audit D1. Failure to report non-disclosure of Related Party Loans on gross basis 84. The Compa....
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....ng as required under the Micro, Small and Medium Enterprises Development Act, 2006 during the year as per Schedule III of the Companies Act, 2013. As per the Annual Report of the Company for 2016-2017, there is no disclosure of information required to be disclosed under the Micro, Small and Medium Enterprises Development Act, 2006 to the extent such parties have been identified and amount of principal and interest outstanding during the year as per Schedule III of the Companies Act, 2013. 88. Responding to the charge, the EP submitted that queries were raised to TCWG regarding the same and the management vide their representation letter intimated that such nondisclosure was on account of non-identification of suppliers [Ref: Para 24 @ Page 92 of Audit Paper Book]. The EP referred to the notes to account no. 48(i) contained in the SFS, wherein it has been expressly disclosed that the Company had not initiated the process of identifying 'suppliers' covered under the MSME Act and hence such disclosure had not been made. In view of the above, the EP sated that no further reporting was required to be made. 89. The disclosure of information related to MSMEs is an important ....
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....0, 2017 had given a confirmation that they have not contravened any provisions of the Companies Act, 2013 [Ref: para l4(d) @page 87 and para 27 @ Page 93 of Audit Paper Book]. 93. The company is absolved from disclosure requirements of Section 186(4) provided it is a company exempted under Section 186(11) i.e., a company established under the object of and engaged in the business of providing infrastructural facilities. We have reviewed the provisions of Section 186(11) and related Schedule VI vis-a-vis the actual activities of MIIL and its main object clause in its Memorandum of Association and are of the opinion that it is not explicitly clear whether MIIL is eligible for exemption under Section 186 (11) of the Act. Notwithstanding the above, there is no evidence of any comment/conclusion/judgement recorded in the Audit File that MIIL enjoys exemption as envisaged under Section 186(11) of the Act being a company involved in infrastructural facilities. Further, there is also no evidence to show that the EP discussed this issue with the management and TCWG. As Related Party Transactions are often prone to misuse, including diversion of funds and therefore a material area of audi....
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....o lien on the fixed deposit. 96. We have considered the reply of the EP. In view of the explanation and workpapers submitted by the EP, the charge is dropped. E. Articles of Charges of Professional Misconduct by the EP 97. As discussed in the paragraphs above, the EP has made significant departures from the standards and the Companies Act, 2013 in the conduct of the audit of MIIL for 2016-2017. Based on above discussion, we note that the EP has given an unmodified opinion in SFS and a qualified opinion on the CFS without obtaining SAAE. The poor quality of audit, incomplete documentation, attempt to mislead through tampering of the Audit File, and evasive replies establish that CA Nilesh Chheda committed professional misconduct, as defined defined in Section 132 (4) of the Companies Act, read with Section 22 the Chartered Accountants Act 1949 (the CA Act), as amended from time to time, and as detailed below: (i) CA Nilesh Chheda committed professional misconduct as defined in clause 5 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 disclose a material fact known to them which is not disc....
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....reakdown in trust and confidence of investors and the public at large. 101. Thus, the Auditor is duty bound to examine and ascertain the integrity of Financial Statements of such entities [41 As defined in Rule 3 of NFRA Rules 2018] in larger public interest. The Auditor's duty of exercising due diligence is owed to the users of the Financial Statements. 102. The Auditor in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to Financial Statements to facilitate its users. As detailed in this order, substantial deficiencies in audit, abdication of responsibility, failure to act with due diligence and inappropriate conclusions on the part of CA Nilesh Chheda establish his professional misconduct. Despite being a qualified professional, CA Nilesh Chheda has not adhered to the Standards and has thus not discharged the duty cast upon him. Under the circumstances, we proceed to order the following sanctions keeping in mind deterrence, proportionality, and the signalling value of sanctions. 103. As per information, the statutory audit fee of MIIL for FY 2016-17 was Rs. ...... and fees towards other services (Cer....