TaxTMI 
TaxTMI 
2023 (12) TMI 487
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....ses in the Audit E. Articles of Charges of Professional Misconduct F. Sanctions and Penalties A. EXECUTIVE SUMMARY 1. In January 2019, some media reports brought to light the alleged siphoning by the directors of DHFL of around 01000 crore of public money. NFRA, pursuant to the duty cast upon it under Section 132 (2) (b) of the Companies Act, 2013 (the Act, hereafter) and Rule 8 of the NFRA Rules, 2018, took up the Audit Quality Review of the Statutory Audit of DHFL for the Financial Year 2017-18 carried out by C&S. Based on the extensive review of audit documentation, NFRA came to the prima facie view that the EP had not discharged his professional duties in accordance with the Act as well as the Standards on Auditing (SA, hereafter). Consequently, an SCN was issued to the EP asking him to show cause why action under Section 132 (4) of the Act should not be initiated against him for professional misconduct. 2. After examining his detailed written submissions, this Order concludes that the EP failed to meet the relevant requirements of the SAS and violated the Act in respect of several significant areas of audit. In the areas of the audit identified in th....
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....ing around 0900 crore through debentures from external sources. Despite DHFL Investments Limited being a 100% subsidiary, DHFL did not consolidate the financial statements of the subsidiary. Had it been consolidated, the liabilities of DHFL would have been higher by <1901 crore with a corresponding reduction in net worth. The EP did not report this material misstatement in the Consolidated Financial Statements. 6. DHFL was regulated by the National Housing Bank (NHB) and hence was bound to follow the relevant NHB Guidelines. The NHB inspection reports for FY 2016-17 flagged certain potential significant violations by DHFL. In this regard, the EP failed to document any evidence in the Audit File to show that there was no material misstatement in the financial statements due to non-compliance with laws and regulations having a direct effect on the disclosures in the financial statements. 7. The EP failed to obtain sufficient appropriate audit evidence regarding the entity's ability to continue as a going concern. The EP ignored clear indications/events that should have raised concerns over the entity's ability to continue as a going concern The EP failed in the discharg....
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....tements as a whole were free from material misstatement due to fraud or error. The EP also failed to ensure that the financial statements were prepared, in all material respects, in accordance with the applicable financial reporting framework. The Audit Opinion issued by the EP is therefore baseless. 13. Based on the investigation and proceedings under Section 132 (4) of the Act and after giving the EP adequate opportunity to present his case, we find the EP guilty of professional misconduct and impose through this Order, the following monetary penalties, and sanctions, which will take effect after 30 days from issuance of this Order. In light of the judgment of the Hon'ble National Company Law Appellate Tribunal (NCLAT) dated 01.12.2023, we have limited the monetary penalty to Lakh only since the violations relate to FY 2017-18. a. Monetary penalty of Rupees Five Lakh. b. In addition, CA Jignesh Mehta is debarred for 10 years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. B. INTRODUCTION AND BACKGRO....
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....h April 2018, certifying that these Financial Statements presented a true and fair view of the affairs of the Company. 18. After an extensive examination of the Audit File, we had reasons to believe prima facie that the violations by the EP may amount to professional misconduct as conceived in Section 132 (4) of the Act, and thus a Show Cause Notice dated 29th September 2021 (the SCN, hereafter) was issued to CA Jignesh Mehta, the EP. The EP was charged with professional misconduct of: a. failure to disclose material facts 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; b. failure to report material misstatements known to him to appear in a financial statement with which the EP 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 the expression of an opinion, or its exceptions are sufficiently material to negate the expre....
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.....2023 of the Hon'ble Bombay High Court, the EP approached the Hon'ble Supreme Court vide SLP No. 13201-13202/2023. The Hon'ble Apex Court, vide its order dated 10.07.2023, upheld the decision of the Hon'ble Bombay High Court and dismissed the Special Leave Petition. 22. In compliance with the above order of the Hon'ble Bombay High Court, an oral hearing before the Executive Body (EB) of NFRA was scheduled on 11.07.2023 to decide the jurisdiction of NFRA. The EP availed of the opportunity along with his legal counsel and also submitted a written summary of submissions vide email dated 17.07.2023. We have examined these submissions in detail and found that NFRA has the required jurisdiction under Section 132(4)(c) of the Companies Act, 2013, as discussed in paragraphs 23 to 32 below. Jurisdiction of NFRA 23. Section 143 (9) of the Companies Act, 2013 mandates an Auditor to comply with the Auditing Standards. The proviso to Section 143 (10) states that until the Auditing Standards are notified by the Central Government, the Auditing Standards specified by the ICAI would be deemed to be the Standards on Auditing. The notification of NFRA with effect from 01-10-....
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....countants, registered under the Chartered Accountants Act, 1949". So obviously, the Authority has jurisdiction over misconduct committed in the past as well. 28. It is a well-settled law that retrospective applicability can either be expressly provided for or can be inferred by necessary implications from the language employed. The Hon'ble Supreme Court in the case of Zile Singh v. State of Haryana, (2004) 8 SCC 1 at Para 15, held, "It is not necessary that an express provision be made to make a statute retrospective and the presumption against retrospectivity may be rebutted by necessary implication especially in a case where the new law is made to cure an acknowledged evil for the benefit of the community as a whole (ibid., p. 440). This can be achieved by express enactment or by necessary implication from the language employed. If it is a necessary implication from the language employed that the legislature intended a particular section to have a retrospective operation, the courts will give it such an operation. In the absence of a retrospective operation having been expressly given, the courts may be called upon to construe the provisions and answer the question whether....
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....nabling investigation into professional and other misconduct, being in existence in the period before 2018, cannot be said to be retrospective and NFRA jurisdiction is established for implementing the process of investigation into misconduct committed in the past as well. Thus, the challenge to the jurisdiction of NFRA with respect to misconduct committed before 2018 does not stand. 32. Thus, NFRA has the requisite jurisdiction to monitor compliance with Accounting standards, monitor and enforce compliance with the SAS and to investigate matters of professional misconduct of Chartered Accountants in respect of the entities falling under the NFRA domain. D. MAJOR LAPSES IN THE AUDIT 33. Vide letter dated 28.07.2023, the EP was informed about NFRA's decision on the issue of jurisdiction, and he was requested to submit his reply to the SCN. The EP approached Hon'ble NCLAT vide Comp. App. (AT) No. 167 of 2023 wherein the EP raised the issue of non-supply of reasons for arriving at the issue of jurisdiction. The appeal was dismissed as withdrawn vide NCLAT order dated 05.09.2023. 34. The EP was required to submit his reply to the SCN on or before 1st November 2021. A....
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....Annual General Meeting (AGM) for five years from FY 2016-17. The 33rd AGM ratified the said appointment for FY 2017-18. The EP, in his Independent Auditor's Report to the members of DHFL, has, inter alia, stated that: "The reports on the accounts of the branch offices of the Company audited under Section 143 (8) of the Act by branch auditors have been sent to us and have been properly dealt with by us in preparing this report". The audit report also states that the audited financial statements incorporate "the Returns for the year ended on that date audited by the branch auditors of the Company's branches/offices at 250 locations". The records in the Audit File also showed EP's reliance on the Branch Audit Reports issued by the illegally appointed Branch Auditors. In this background, the EP was charged with the following. a. There is no evidence in the Audit File to establish the existence of legal appointment of any branch auditor by the AGM of the Company as required under the Act. There was also no evidence that C&S, the legally appointed auditor for the branches, has carried out the audit of the entire company, including all its 250 branches. The EP failed ....
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....itor of the company under this Act and appointed as such under section 139" (Emphasis added). The requirement of Branch audit is thus mandatory and only one statutory auditor is permitted for the branches, i.e., either the company auditor or the branch auditor, in either case, appointed under section 139. c. After the EP accepted the appointment as per his letter dated 25 July 2017 (Engagement acceptance letter), in August 2017, DHFL appointed a few other branch auditors for a "statutory audit" of its branches vide appointment letters signed by an unidentified authorised signatory of the Company. This appointment of the Branch statutory auditor for FY 2017-18 by the Company was not in accordance with sections 143 (8) and 139 of the Act. Hence, these branch auditors were not the statutory branch auditors appointed under Section 143(8) of the Act, since the appointment was not made by the shareholders in the AGM as required by section 139. Besides, the shareholders of the Company had already appointed C&S as the only Statutory Auditor. All the appointment letters issued to the branch auditors, describing them as "statutory" branch auditors, were issued in consultation with C....
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....ial Statements (SFS) "AUDITORS REMUNERATION" - "Audit Fees of Branch Auditors" Rs.55 Lakh and Rs.53 Lakhs for FY 2017-18 and FY 2016-17 respectively. The EP's agreement to this disclosure is evidence that apart from the Company, the Audit Firm also considered the branch auditors as statuary auditors. vi. The reporting by the company auditor under clause 143 (3) (c) arises only if the company has a separate Branch auditor appointed under section 143(8) read with 139. The EP reported in the Audit Report of both SFS and CFS that "As required by Section 143(3) of the Act, we report that: ... c) The reports on the accounts of the branch offices of the Company audited under Section 143 (8) of the Act by branch auditors have been sent to us and have been properly dealt with by us in preparing this report." (Emphasis added). The Proviso to section 143 (8) states "Provided that the branch auditor shall prepare a report on the accounts of the branch examined by him and send it to the auditor of the company who shall deal with it in his report in such manner as he considers necessary. (Emphasis added). This makes it clear that the requirement of 'dealing with' branch audi....
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....S was the sole statutory auditors of the Company including all its branches. Therefore, the EP's report under section 143 of the Companies Act 2013 and the report under CARO 2016, both referring to the illegally appointed branch statutory auditors, are false and invalid. Failure to Conduct Branch Audit 40. The audit report conveys in unambiguous terms that there were branches audited by the branch auditors. The EP has taken the returns from branches not visited by him in forming his opinion on the financial statements. Despite this reporting, the EP in his reply to SCN denied any reliance on the works of the branch auditors and maintained that C&S carried out the Audit of the Company, including all its branches. The EP contends that his audit of branches was performed through the ERP system of the company. His stand was that the company had centralised controls, and all branches operated under the same control environment and the transactions in the branches were immaterial. The EP being aware of the provisions of the Act, has thus made false statements in his audit report about the involvement of branch auditors, and all the submissions regarding the pro per conduct of b....
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....contradictory evidence documented by the EP himself, we reject the contentions of the EP that the books and controls are centralized. Despite the above facts, there is no examination of the controls at the branches either by the EP or by the illegally appointed branch statutory auditors. Without properly verifying the control procedures at the branches, the opinion on the Company's accounts, including all its branches, formed by the EP cannot be taken as appropriate. Reliance by the EP on the work of Illegally appointed Branch statutory auditors 41. The EP stated that he did not rely on the work of the branch auditors. This is contradictory to the facts recorded in the Audit File and the Audit Reports issued by the EP, as explained below. a. The Audit Reports on standalone and Consolidated Financial Statements (CFS) and under CARO 2016 unambiguously refer to the branch auditor's reports, as explained in the above paragraphs. The audit report nowhere indicates that the EP did not rely on these branch auditors. b. The WP "Audit Closure", documented in the Audit File, records that "The Company has appointed various Branch Auditors whose scope are pre-de....
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....the branch audit reports would not be used as a basis for his reporting. h. The whole exercise of appointment, determining the scope of the work and receipt of reports of the so-called branch auditors was carried out with the full knowledge and concurrence of C&S. All the communications were either copied to C&S or are addressed directly to C&S. The EP has taken them on the record in his Audit File thus rendering his work as devoid of any legal basis. 42. Thus, there is no merit in the arguments now advanced by the EP that he did not rely on the work of the Branch Auditors. These are afterthoughts not supported by evidence in the Audit File or Audit Report. The documentation in the audit file and the plain meaning of the wordings used in his audit reports clearly show EP's reliance on the work of the branch auditors as a basis for his opinion. Also as explained above, the language used by the EP in his audit report complies with the legal requirements when separate auditors of the Company and branches are legally appointed. However, the EP also admits that there is only one auditor, i.e., C&S, for the company and its branches. Due to these contradictions, the replie....
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....sactions and are the sources of information to the central database, the control procedures followed in the branches need to be tested for arriving at an opinion on the financial statements as a whole. The EP failed to verify this key aspect. e. Without prejudice, we examined the work of the branch auditors, despite them not being appointed legally. In all the concluded cases, we found [Orders against the branch auditors are available on the NFRA website. In a few cases, the order is yet to be passed/given effect due to court orders. Such cases are not included in the cases mentioned here] that none of the branch auditors followed SAS while conducting the audit. We also found that the opinions issued by these purported branch auditors did not conform to SA 700 and were baseless. 44. Thus, the evidence leads us to a situation where neither the illegally appointed branch auditors nor the legal statutory auditor C&S audited the branches as per SAS. This amply proves that the EP who was responsible for the Audit failed to conduct the branch audits as per the Act and SAS and made a false report to the shareholders. In the absence of the branch audit of 250 branches as required ....
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....financial position of the company and its subsidiaries and associates. 47. The EP denied the charges and submitted that the accounting treatment adopted by the Company was in line with Paragraph 11 (a) of AS 21. According to the EP, the conversion of CCDs issued by DIL will take place "after 100 months", which is a finite period and hence falls within the meaning of 'near future' as used in AS 21. Also, he submitted that DHFL did not have control over DIL due to a condition in a triparty agreement between DHFL, DIL and DPLI. The condition was that DHFL had to obtain the consent of WGC for the appointment or removal of directors in DIL. Such transfer of control of DIL comes within the meaning of the term 'subsequent disposal in near future'. Also, the accounting treatment reflected the substance of the transaction rather than the legal form. It was also supported by an expert opinion. Hence, according to EP, there was no violation of AS 21. 48. We have examined the replies, the Audit File and the Financial Statements. We observe that the contentions of the EP are not supported by evidence. The EP did not document sufficient appropriate audit evidence and conclu....
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....the disposal of the relevant investment is considered at the time of acquisition of the investment. The EP did not refer to any board resolutions recording the Company's intention at the time of investment in DIL that .it was for disposal in the near future. Even in the disclosure made in the financial statements of 2016-17 and 2017-18, the Company did not explicitly state that the control is temporary, and the intention is to dispose of the subsidiary in the near future. The disclosure note [Note 2.2 of the CFS of 2017-18] only states that "...Company's intention is to liquidate investments in DIL, subject to the favorable market conditions.. .." The tripartite agreement dated 31 March 2017, referred to by the EP also does not evidence any intent on the part of DHFL for disposal of investment in DIL in the near future. d. The term "near future" cannot be interpreted to mean more than 12 months in the normal course, as explained ['Near Future' is considered as not more than twelve months from the acquisition of relevant investments unless a longer period can be justified on the basis of facts and circumstances of the case. (Explanation (b) to Paragraph 11 o....
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....e over form by not consolidating DIL In fact, the true and fair view was not achieved as there were multiple violations of AS 21 and inadequate disclosures and understatement of liabilities in the CFS. Compliance with the requirements of the applicable standards is basic to a fair presentation. iii. The EP placed reliance on an expert opinion obtained by the management. However, as the Audit File did not contain any procedures required as per SA 500 regarding management experts, the expert opinion cannot be accepted as sufficient audit evidence, On merits, we observe that the expert opinion was made on incomplete data [The Expert opinion dated 29-04-2017, issued by Bhavna Doshi Associates LLP talks about "nominal share capital of Rs 1,00,000" in DIL. But as on 31 March 2017, the shareholding of DHFL in DIL was around 2100 crore. The opinion did not consider that the CCDs were pledged by WGC for external borrowings. The Opinion also ignores the fact that DIL was a subsidiary of DHFL as well as WGC.] and echoes the same conclusion as that advanced by the EP in his replies to the SON. We observe that while referring to section 129(5) of the Act, the expert recommends that "ad....
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....the SCN is silent about whether compliance stated in the charges in the SCN is of the nature that would have an effect on the material amounts and disclosures in the financial statement. We see no merit in this argument advanced by the EP, as explained below: a. SA 250 deals with the auditor's responsibility to consider laws and regulations when performing an audit of financial statements[Para 1, SA 250] . The requirements in the SA are designed to assist the auditor in identifying material misstatements of the financial statements due to non-compliance with laws and regulations [Para 4 of SA 250]. The auditor is responsible for obtaining reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, whether caused by fraud or error.[Para 5 of SA 250] The objective of the Auditor as given in para 10 of SA 250 is: i. to obtain sufficient appropriate audit evidence regarding compliance with those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements. ii. to perform specified audit procedures to help identify instan....
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....eduled/restructured Project Loans for Slum Redevelopment and one non-housing loan, the wrong classification of plot loans as housing loans, etc. The EP failed to examine this independently with professional skepticism even though the suspected misstatement was much above the materiality levels. f. In this regard the EP relied on WP 'Audit Closure' wherein he claims that he noted the management's observations in the WP and concluded that their "clarifications seems to be reasonable". We observe that the EP accepted the management's views without challenging them. As noted by the EP, the management stated that "In SRA (Slum Rehabilitation Authority) cases these projects got hit badly due to RERA and Demonetization which are beyond control of the borrowers and therefore, there was need to restructure and provide interest mortarium". Without performing any Audit procedures, the EP agreed and noted his conclusion that "Management clarifications seemed to be reasonable and therefore these loans were treated as standard assets and accordingly provisioning norms on standard assets as per direction [HFC(NHB) Directions 2010] have been applied for". No efforts were m....
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....of project loans referred to in the NHB Report was approved by MD and later ratified by the Board. This violation of the NHB directions was not examined by the EP. k. As on the date of the audit report the NHB has given a report containing potential violations of NHB Regulations by DHFL. Such violations fall in the category of suspected non-compliance as per SA 250, The EP contends that the NHB Inspection reports are not final and not concluded by NHB as of the date of the audit report and hence not covered by SA 250. This has no relevance in this case since SA 250 also relates to cases of suspected non-compliance. The EP was bound to follow Para 18 and 21 of SA 250, which was not done in this case. Ironically, the EP himself concluded in the referred WP that the management's contentions are acceptable, and no provisioning is required as suspected by NHB. In the same breath, he states that provision is not made since NHB did not conclude the report. It is not documented on what basis the EP could presume that, NHB would not recommend provisioning in the final report. l. The EP stated that he checked the accounting for the items of the inspection report for whi....
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.... 'Interest income on [CD' contains loans given to several parties. However, no analysis has been made of group exposure limits as per the prescribed legal guidelines of NHB. There is no evidence with respect to any procedure to ensure that lending and investment together did not exceed the threshold limits for a single group of parties (40% of owned funds) as per the directions issued by NHB [Para 32(1)(iii)(b) of HFC(NHB) Directions 2010]. The insufficiency of audit evidence renders the EP's opinion unreliable. b. As per NHB Guidelines [ALM System for HFCs Guidelines (NHB/ND/DRS/Po}-No. 35/2010-11) dated 11 October 2010], a pre-requisite for putting in place the Asset Liability Management (ALM) System is a strong Management Information System (MIS). It is necessary to computerise the MIS and make use of specialised software for managing the assets and liabilities with respect to maturity mismatches and the various risks associated with such mismatches. ALM has to be supported by a management philosophy that clearly specifies the risk policies and tolerance limits. The EP did not examine the Company's IT system for generating automated MIS as part of intern....
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....File that the EP has stated his conclusion regarding the going concern. This conclusion states that going concern basis is appropriate because the company consistently makes profits, declares dividends, and has liquidity and a positive economic environment. However, the basis for the factors mentioned in the conclusion is not documented in the Audit File. 57. The EP also failed to obtain sufficient appropriate audit evidence regarding the appropriateness of management's use of the going concern basis of accounting in the preparation of the financial statements, as explained in the following paragraphs. a. At the outset, we note the contention of the EP that the SAS "only provide guidelines and principles for procedures to be performed' and that all the discussions and inquiries need not be documented. Such comments of the EP arise from a flawed understanding of the law, the Standards and the regulatory regime in place. It is needless to remind the EP that the SAS are mandatorily required to be followed as per Section 143 (9) of the Act. The requirements of the SAS denoted by the word "shall" are unconditionally mandatory and need to be documented invariably as p....
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....uditor's responsibility to rectify the lack of analysis by management... ..when there is a history of profitable operations and a ready access to financial resources, management may make its assessment without detailed analysis." Hcrc, there is no analysis at all by the management.etc. to determine that no events or conditions existed that could cause significant doubt on the entity's ability to continue as a going concern. However, no such considerations are documented in the Audit File. ii. As per the guidelines for Asset Liability Management system in Housing Finance Companies issued by NHB (ALM guidelines) DHFL disclosed in note 38.14, "Maturity pattern of certain items of Assets Liabilities". This disclosure in the SFS shows the liquidity of certain assets and liabilities in different time buckets of contractual maturity. The note shows a liquidity gap in one year. Total outflows are 02,309.68 Crore while inflows are only Crore indicating, a gap of Crore. Regarding the financing of the gap, the ALM guidelines stipulates that the negative gap (i.e. where outflows exceed inflows) up to 30/31 days time buckets should not exceed the prudent....
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....ined above, this was a negative factor that ought to have been tested by the EP, with due professional skepticism, regarding the Company's ability to meet the immediate liabilities. vi. As per ALM guidelines DHFL was required to submit periodical returns comprising three parts, viz, Statement of structural liquidity, Statement of short term dynamic liquidity, and Statement of Interest Rate Sensitivity. However, there is no evidence in the Audit File of any examination of these returns. vii. The ALM guideline also requires the "ALM Support Groups consisting of operating staff' to prepare forecasts (simulations) reflecting the impact of various possible changes in market conditions on the balance sheet and recommend the action needed to adhere to HFC's internal limits. There is no evidence of examination of such a forecast prepared by the ALM Support group. viii. The Company, during 2017-18, indulged in aggressive lending as the housing and other property loans disbursed had doubled compared to previous years. The Company relied heavily on borrowed funds to carry out its lending activities. Coupled with the negative operating cash flows (increas....
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....oMM) 60. SA 3 1 5 requires audit procedures for the identification, assessment and conclusion relating to RoMM. Para 32 of SA 315 and SA 230 require the corresponding documentation. In the absence of such documented procedures, the EP was charged with failure to appropriately identify, classify and assess the RoMM and failure to contain the RoMM to an acceptably low level as required by SA 315 and SA 240. 61. The EP responded that there is no requirement to document procedures performed to arrive at an understanding of the entity and the risks identified. He further stated that the checklists used by the ET sufficiently document the requirements of para 32 of SA315 and hence all the charges were denied. 62. The EP's reply demonstrates either his lack of understanding of the SAS and the present regulatory regime or is a rationalization in response to the show cause notice, which is indefensible. 63. On a harmonious reading of Paras 4 and 6 of SA 500, Audit Evidence, and Paras 5 and 8 of SA 230 it is clear that the Auditor is required to document all the audit procedures he designed and performed, all the audit evidence obtained and the results of all such audit proce....
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.... 315 states that the auditor shall perform risk assessment procedures to provide a basis for the identification and assessment of risks of material misstatement at the financial statement and assertion levels. The procedures shall include inquiries, analytical procedures, observation and inspection. None of these mandatory procedures for risk assessment are documented in the Audit File. c. Para 10 of SA 315 requires that the EP and other key ET members shall discuss the susceptibility of the entity's financial statements to material misstatement, and the application of the applicable financial reporting framework to the entity's facts and circumstances. No such discussions are documented in the Audit File. d. Para 1 1 of SA 315 mandates that the auditor shall obtain an understanding of various factors regarding the entity and its environment to understand the classes of transactions, account balances, and disclosures to be expected in the financial statements. This includes the entity's objectives and strategies, and those related business risks that may result in ROMM. However, the relevant WPs [Mainly, WP Audit Planning Memorandum.pdf, WP 'Understand....
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....ted assertions) is a mandatory requirement and is the foundation for subsequent audit procedures. There is no such identification as claimed by the EP and there is no mapping of risk to any account captions, disclosures or assertions. It is not understood as to how, without even determining the materiality, the EP could make a statement that there are "significant areas" and all risks are significant. Does it mean that there were no low or moderaterisk areas in DHFL? If so, then what was the response to the significant risks planned by the EP? How are fraud risk and control testing results factored into the ROMM assessment? The EP's rudimentary work is in total disregard of the SAS. Importantly, the EP in the WP titled 'Overall audit strategy' in point no 1 1, against the checklist item "Ensure special attention required for any significant risks is given duly while framing the overall audit strategy" recorded that " There is no significant risk"! This recording in the audit file is in total contrast to the plea taken by the EP in response to this charge. g. The EP claims that WT 'SA 315. pdf "lists the assessed and identified ROMM at account and assertion ....
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.... SA 240 requires the auditor to make a presumption that there is a risk of fraud in revenue recognition and thereafter an evaluation as to which types of revenue, revenue transactions or assertions give rise to such risks. There is neither any assessment nor the rebuttal of any presumption (Para 47, SA 240) documented in the WPs. There is also no documentation of ROMM due to fraud at the financial statement level and the assertion level as required by Para 44 of SA 240. j. The EP has made a few fraud-related inquiries [WP Fraud risk.pdf] such as entity-level controls, internal control, accounting processes etc. only with the CFO of the Company. As required by para 17 to 21 of SA 240 the auditor is required to make inquiries with management and others within the entity including the internal auditor, where an internal audit function is present, and also with those charged with governance for identifying risk of material misstatements due to fraud. Para A6 of SA 315 also deals with the requirement to inquire with management and others within the entity including other employees with different levels of authority to identify the ROMM. For instance, there were various deficien....
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....e PCAOB revoked the registration of the firm and barred Chadwick for 3 years from being an associated person of a registered public accounting firm. 69. Lack of sufficient documentation has also 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, PCAOB took a serious view of the lack of sufficient documentation and imposed penalties and sanctions for violations including insufficient documentation. The PCAOB order states that " ....Audit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement to: (a) understand the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached, and (b) determine who performed the work and the date such work was completed as well as the person who reviewed the work and the date of such review.....the documentation for each of those audits was in sufficient to demonstrate the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached, including in those areas of ....
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....here are many instances of non-compliance with the project loan policy which remain unchecked, as mentioned below: i. Requirement of the project loan policy to keep Asset Coverage Ratio @125% based on project valuation. ii. Testing of legal search and technical scrutiny reports based on which project loan was sanctioned. iii. Verification of charge created on assets. 73. The WP is a testimony that the EP had simply relied on all the information provided by the management without any professional skepticism. 74. Regarding the evaluation of internal controls relating to the appraisal of loans at branch level, the EP submitted that all the required controls were tested based on the 5 sample RPUs selected and based on the controls at the head office level. However, we observe that there are no branch-related controls documented by the EP. Even with the limited sample testing in most of the cases credit reports and valuation reports were not available. Though the ET has noted this, no further follow-up was done in this regard. Such instances indicate the absence of controls at branches, but the EP did not address these deficiencies appropriately. 75. ....
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....s charged with failure to obtain sufficient information which is necessary for the expression of an opinion on Internal Financial Controls over Financial Reporting (ICFR) and for issuing a baseless audit report under Section 143(3)(i) [Report on whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls] of the Act. The EP did not maintain professional skepticism, professional competence and due care during the audit. 81. The EP in his reply denied all the charges, stating that the opinion on ICFR was based on audit procedures as per the Guidance Note of ICAI on ICFR. We observe that the contention of the EP is not supported by evidence as explained below. a. The EP stated in his report on ICFR of the SFS that "We conducted our audit in accordance with the Guidance Note on Audit of Internal Financial Controls over Financial Reporting (the "Guidance Note ") and the Standards on Auditing, issued by ICAR'. Based on the requirements of the Guidance Note and SAS, the EP was expected to: i. Obtain an understanding of the overall risks to internal financial controls ....
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....ng paper "\\24 Internal Financial Control\ DHFL RCMs.xls"] referred by the EP, it is recorded that "JVs in Fixed deposit Module are automatically passed in OMNI system however certain JVs which are related to adjustments are manually approved'. There is no further examination by the EP in the angle of management override of controls, even after noting the manual override of automated controls in journal entries. d. In the WP, the ET has recorded some controls with respect to the following: Entity Level Controls, Book Closure, IT General Controls, Payroll, Revenue, Borrowings, Investments, Interest and Finance costs, Key Operating Expenses, Fixed Assets, and Loans & Advances. There is no documentation to show the audit procedures followed by the ET based on which significant account balances/disclosure items and relevant assertions that may carry the potential of a misstatement have been identified. e. In the referred WP, the controls listed, the risks identified, and the control processes therein are exactly as provided by the Company as per their Risk Control Matrix (RCM). SA 315 (Para 16) in this regard requires that if the entity has established a risk asse....
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....A 315. We observe that in several cases [Example: In sheet 'Revenue' for 4 controls, the test of design is shown as pending, where the ET has noted control deficiencies, In sheet "Book Closure" [1 controls where the test of effectiveness is pending, One in sheet "Borrowing", One in interest, and 4 in Fixed assets], even after noting control deficiencies, the ET noted that testing regarding design and operating effectiveness is pending. The EP failed to perform any audit procedures to determine whether these control deficiencies constituted a material weakness in the internal financial controls. We also observe that the EP did not perform the test of the operating effectiveness of the majority of the controls. For instance, regarding loans, which is the most significant item in the financial statement, for 29 out of 53 controls listed, the EP' s testing is limited to the purported 'walkthrough [See para 78 i (ii) below regarding our observations on the 'walkthrough' performed by the EP] '. A walkthrough of one transaction does not confirm that a control stated to be in place by the Company has been operating as designed for the period under reporting. Testing the operati....
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....anges of authorized signatories and limits at their end within one month time. We reviewed Board Resolution evidencing authorized signatories we did a walkthrough of requests sent by Manager Accounts to 5 Banks about addition and deletion of authorized signatories iii. To test the above control, the EP has documented the Board Resolution dated 27th January 2016 and communication to 4 banks dated 20^th December 2017. The Board resolution carries the names of authorised signatories stated in the letters as removed from the signatory list due to resignation or transfer, not the people included in the signatories as per the letters. Then the EP claims that he did a "walkthrough" of 5 banks. A walkthrough is tracing a transaction from start to end. However, the EP did not verify the relevant board resolution, the approval of the authorised signatory, or the time limits prescribed in the control. Also, the walkthrough should end with ensuring that the Board-approved authorisation is followed by the Company in practice. Mere documentation of the Company documents does not amount to a walkthrough. Giving this as an example in the reply shows that the EP is unaware of how an ....
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....l controls cannot be considered effective if one or more material weakness exists, to form a basis for expressing an opinion, the auditor must plan and perform the audit to obtain sufficient appropriate evidence to obtain reasonable assurance about whether material weakness exists as of the date specified in management's assessment] and states that in a combined audit of ICFR and financial statements, the auditor expresses an opinion on the (a) "Opinion on internal control over financial reporting, which requires: - Evaluating and opining on management 's assessment of the effectiveness of internal financial controls" and (b) Evaluating and opining on the effectiveness of internal controls over financial reporting. vii. A mere presentation before the audit Committee and Risk Control Matrix prepared by the management, cannot lead an EP to conclude that the management had carried out a "thorough assessment and evaluation" of ICFR at specific dates. The EP must obtain persuasive evidence in this regard which has not been done in the instant case. 82. We have already discussed the absence of testing in the case of internal control relating to the appraisal of loans ....
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.... We observe that the EP, under Clause 3(xiii) of the Companies (Auditor's Report) Order, (CARO) 2016 on the Company's standalone financial statements for FY 2017-18, reported that "In our opinion and according to the information and explanations given to us, Company is in compliance with Sections 177 and 188 of the Act, wherever applicable, for all the transactions with related parties and their details have been disclosed in the standalone financial statements etc., as required by the applicable accounting standards. ". As this reporting is irrespective of the materiality of RPTs we examine EPs compliance with the applicable SAS and the Act and observe as follows. a. There is no evidence that the EP has verified the complements of RPTs and hence the claim that RPTs are not material is not admissible. At the planning stage, [WP Audit Planning memorandum] the EP identified the following risks and their response related to RPTs. Audit Risk: Risks with regard to related -party transactions are:- Overly complex transactions: Related parties may operate through an extensive and complex range of relationships and structures. Relationships and t....
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....d the ledger accounts of the related parties and verified the reported transactions. The WP cited shows a copy of the ledger accounts of some of the related parties. Such an examination does not identify the actual purpose of the transactions as required by para 13 (c) of SA 550. ii. To prove compliance with para 14 of SA 550 the EP submits that he verified the minutes of the meeting of the Audit Committee which approves related party transactions. However, reading the minutes does not enable the auditor to obtain an understanding of the controls regarding identification, accounting, and disclosure of related party relationships and transactions in accordance with the applicable financial reporting framework. Thus, the EP violated para 14 (a) of SA 550. iii. Regarding approval of RPT as per Section 177, the EP claims that the Audit Committee had approved all the transactions. However, the WPs in this regard only have partial [As per 'WP\26 Secreterial\DHFL Gist of Secretarial Records 20 17-18.doc' the board of directors had taken up the item "to consider and approve investment for an amount not exceeding Rs 50 crore in Avanse Financial Services Limited". H....
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....has resulted in issuing a baseless report under CARO 2016 on compliance with Sections 177 and 188 of the Act. 86. Based on the above facts we observe that the EP failed to verify the related party transactions as required by the SAS. The EP failed to understand the nature of related party relationships and transactions, failed to test the completeness of related parties and transactions, failed to evaluate controls, failed to verify the arm's length basis of related party transactions and failed to duly report under CARO 2016. Such failures have resulted in violations of SA 500 and 550 as explained in the paras above. Consequently, the EP has failed to demonstrate the achievement of the objectives of the respective SAS. Hence the charges in para 84 above stand proved. 87. As a consequence of all the above failures, the EP failed to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement due to fraud or error. The EP also failed to ensure that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. The Audit Opinion issued by the EP is therefo....
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.... This charge is proved as the EP failed to disclose in his report the material non-compliances of the Company regarding branch audits, consolidated financial statements and ICFR as explained in sections D. 1, D.2 and D.7 above. b. CA Jignesh Mehta committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 6 of Part I of the Second Schedule of the Chartered Accountants Act) 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant 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 EP failed to disclose in his report the material noncompliances of the Company regarding branch audits and consolidated financial statements as explained in sections D. 1 and D.2 above. c. CA Jignesh Mehta committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 7 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949....
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....n the Audit File, the audit reports on the standalone financial statements and consolidated financial statements for the FY 2017-18 dated 30th April 2018, the submissions made by the EP, the audited financial statements of DHFL and other material on record. F. SANCTIONS AND PENALTIES 92. Section 132 (4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed is evident from the fact that a minimum punishment is laid down by the law. 93. Independent Auditors of publicly listed companies serve a critical public function of enabling the users of audited Financial Statements to make informed decisions. It is the duty of an auditor to conduct the audit with professional skepticism and due diligence and report his opinion in an unbiased manner. Statutory audits provide useful information to the stakeholders and public, based on which they make their decisions on their investments or do transactions with the public interest entity. 94. Absent a robust system of auditing, investors, creditors and other users of Financial Statements would be handicapped and ....