TaxTMI 
TaxTMI 
2024 (4) TMI 728
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....uditors' hereafter). This Order is divided into the following sections: • Executive Summary • Introduction and Background • Major Lapses in the Audit • Findings on the Articles of Charges of Professional Misconduct • Sanctions and Penalties A. EXECUTIVE SUMMARY 1. Reliance Capital Limited (RCL hereafter), a company listed on the Bombay Stock Exchange, engaged in financial services, was jointly audited by M/s Price Waterhouse & Co LLP (PW) and M/s Pathak HD & Associates (PHD) for the Financial Year 2018-19. The Director General of Corporate Affairs (DGCoA), Ministry of Corporate Affairs (MCA), Government of India, vide its letter dated 29.05.2020 informed the National Financial Reporting Authority (NFRA) that PW had resigned from the audit, without issuing an audit report for FY 2018-19 and filed a report to MCA under section 143(12)^1 of the Companies Act, 2013 (the Act) on 11.06.2019. On examination of the matter, it was found that while the ex-auditor PW had filed form ADT-4 with MCA, reporting suspected fraud in RCL, the audit report for the FY 2018-19 issued by PHD on 14.08.2019 stated^2 that there were no m....
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....r joint auditor, brought some significant matters to PHD's notice through various communications starting from the letter dated 24.04.2019. These matters included potentially irrecoverable loans and investments amounting to approximately Rs.12,571 crore to group companies portrayed as recoverable. However, PHD failed to carry out any independent procedures on these matters and discharge the responsibilities of a joint auditor in this regard. (Details in Section C1 of this order). b. PHD indulged in self-review by preparing material information for the financial statements of the Company, which subsequently became the subject matter of their audit opinion, and thus violated the Code of Ethics and SAs. (Details in Section C2 of this order). c. PHD used the Emphasis of Matter (EoM) para in its audit report in which it concluded that there were no matters attracting section 143(12). The EoM para was in non-compliance with the SAs and was misleading for the users of the financial statements. (Details in Section C3 of this order). d. PHD concluded without any regard to the merits of the transactions that there were no matters attracting section 143(12). Despite....
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....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 BACKGROUND 6. NFRA is a statutory authority set up under Section 132 of the Act to monitor the implementation of the auditing and accounting standards and oversee the quality of service of the profession associated with ensuring compliance with such standards. The statutory Auditor, appointed by the members of the company under section 139 of the Act is bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, the SA and the Code of Ethics, the violation of which constitutes professional misconduct. NFRA has the powers of a civil court and is empowered under Section 132(4) of the Act to investigate the prescribed classes of companies and impose penalties for professional or other misconduct of the individual members or firms of chartered accountants. 7. The DGCoA, MCA, Government of India, vide its letter dated 29.05.2020 informed NFRA that the ex-auditor (PW) of RCL had filed a report to MCA under section 143(12) of the Act on 11.06.2019 and resigned from the audit engagement ....
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....lso provided to the Auditors vide NFRA email dated 30.01.2024. The hearing was held on 19.02.2024, and the Auditors requested additional time. Accordingly, the hearing was continued on 21.02.2024 through Video Conferencing. The Auditors i.e. the firm, EP and EQCR submitted a written summary of their submissions made during the personal hearing, along with copies of the documents relied upon, on 01-03-2024. All the written and oral submissions have also been examined in detail before issuing this Order. 11. Given the actions and omissions as auditor, leading to their apparent failure to comply with the Act and the Standards of Auditing, the Audit Firm, EP and EQCR Partner were charged with professional misconduct, as conceived in Section 132(4) of the Act of : a. Failure to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where the statutory auditors are concerned with that financial statement in a professional capacity. b. Failure to report a material misstatement known to him to appear in a financial statement with which EP is concern....
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....ions. On examination of the detailed replies, we observe the following in this regard. a. In FY 2018-19^6 RCL had loans from Banks of around Rs.12,700 crore and other external borrowings of around Rs.32,400 crores, consisting of debentures, commercial papers and passthrough certificates. RCL was a Core Investment Company (CIC) investing primarily in its group companies. On 11.06.2019 PW resigned without issuing an audit report and filed form ADT-4 with the MCA as per the provisions of Section 143(12) of the Act, (i.e., reporting of suspected fraud in the Company). Before the resignation, PW issued a letter dated 24.04.2019 to the Company, copied to the Audit Committee and PHD, regarding its observations concerning loans disbursed, investments, and disposal of Compulsory Convertible Debentures (CCDs) of group companies having a cumulative carrying value of approximately Rs.12,571 crore. This letter formed the key basis for PW's reporting of fraud under section 143(12) of the Act. Following this communication, PW and RCL exchanged various communications^7 culminating in the report under 143(12) by PW on 11.06.2019. PHD was copied in these communications. These Group Companie....
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....However, there is no evidence of any revision in the risk assessment or materiality on account of the information received from PW. There is also no evidence of audit procedures performed in response to these communications on or before the 12^th of June 2019, the date on which the Audit Committee asked PHD to examine the matters raised by PW. This conduct of the Auditors is a violation of paragraph 14(c) SA 299 (Revised). 18. The Audit Firm's claim that they revised the audit strategy on 11.06.2019, before the Audit Committee meeting on 12.06.2019, is contrary to the facts recorded in the Audit File. The WP^8 relied upon by EP is dated 12^th June 2019 and it specifically mentions that "After discussion with the Audit Committee in their meeting held on June 12, 2019, we conducted a review of the matters raised by PWC in their letter dated May 14, 2019, issued to the management of the Company as part of our audit procedures." Thus, it is clear from the WP that the Auditors revised the audit strategy and purportedly reviewed the matters raised by PW only at the instance of the Audit Committee. A planning meeting^9 with the audit team was held on 11.06.2019, only after PW res....
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....nsactions referred to by PW and "provide their well-considered view" to the committee. EP notes this decision as the "mandate" given by the Audit Committee. Thereafter the Audit Committee, on 25.06.2019, noted in their minutes that "in respect of section 143 (12) of the Companies Act, 2013, PHD concluded that, in their opinion, the transactions referred to in the PwC letters do not trigger the provisions of section 143(12) of the Companies Act, 2013." (Emphasis supplied by us). This was based on a presentation made by EP to the Audit Committee, affirming that the transactions referred to in the PC letters do not trigger the provisions of section 143(12). Before this date, there was no evidence of any independent view taken by the Audit Committee or the Board regarding these transactions, despite receiving various communications from PW since 24.04.2019. This conclusion of PHD is reported in the Director's report and financial statements, which in turn were audited and reported (including an EoM referring to the same disclosure) by PHD. In light of the above, EP and PHD were charged with preparing material information for the financial statements of the Company, which subseque....
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....actions referred to in the PwC letters do not trigger the provisions of section 143(12) of the Companies Act, 2013.". This was based on a presentation made by EP to the Audit Committee, affirming that the transactions referred to in the PW's letters do not trigger the provisions of section 143(12). Before this date, there is no evidence of any independent views by the Board or Audit Committee, which is mandated under Section 177 of the Act to inter alia perform scrutiny of intercorporate loans and investments, valuation of the assets of the company wherever it is necessary, evaluation internal financial controls and risk management system etc. At this juncture, it is crucial to note the requirements under Rule 13 of the Companies (Audit and Auditors) Amendment Rules, 2015. Neither the Board nor the Audit Committee replied to PW after it sent multiple correspondences specifically referring to Section 143(12). The time limit for a reply expected in this case is 45 days as stipulated in sub-rule (2) of Rule 13. But there were no replies from the Audit Committee or Board. b. The Company then disclosed in the Directors Report that "The company did not agree with the reaso....
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....s of the issues raised by PW or any "in-depth" examination of the alleged fraudulent loan transactions. They were based only on the correspondence between the Company and PW. The legal opinion was sought and obtained after EP's conclusion dated 25.06.2019 that the matter did not merit reporting under Section 143(12). This legal opinion was called for to determine whether the facts, circumstances and observations set out in various letters issued by PW were adequate and appropriate for invocation of the provisions of Section 143(12) of the Act. Thus, the Audit Committee as well as the Board's views on the merits of the transactions were solely based on the conclusions communicated by PHD on 25.06.2019. • As confirmed by EP in his reply, the draft note (finally appearing as Note 41(a) in the Standalone Financial Statements (SFS)) was given by the Company to the Auditors only on 13.08.2019 i.e. after EP gave his conclusion on 25.06.2019 that provisions of Section 143(12) of the Act are not attracted in the matter. As explained in paragraph 23(a) above, there was no independent view by the Board or Audit Committee and no disclosure note was made by the management reg....
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....presentation to the Committee in which EP concluded that the PW observations did not attract the provisions of section 143(12) of the Act. The opinions of the two legal counsels did not examine the merits of the transactions. Nor did the PHD subject the points raised by PW to the rigours of audit examination commensurate with fraud risk to agree or disagree with them and arrive at its own conclusions before the "mandate" (discussed in more detail in Sections C1 and C.4). Ultimately the same conclusion appeared in the Board's Report with acknowledgement of its origin to PHD. It is also disclosed in the Financial Statements in the form of a material assertion. Finally, PHD audited the same disclosure, based on its own opinion, and provided its audit opinion, in the form of an EoM ^16 that there was no matter attracting section 143(12) in the PW observations. The draft note containing the above disclosure was included in the draft financial statements by the management only one day before the signing of the audit report. Thus, it is evident that the disclosure note emanated from information originally prepared by EP. • Reporting under Section 143(12) is a duty cast ....
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....reported by another joint auditor (PW). Also, they did so on being asked by the Audit Committee. It may be noted that the Audit Committee had not even responded to the points raised by PW within the 45 days statutory limit. The management used PHD's said work (done without adequate rigor) as a disclosure in the financial statements. These financial statements were then audited and an EoM was then included in the Auditor's report that relied on the disclosure made by the management (which itself was based on the Auditor's examination). Thus, the actions of PHD amount to self-reviewing the financial statements. Hence the charges in para 21 are established. C.3. Use of Emphasis of Matter (EoM) 26. As explained above, EP used an emphasis of matter paragraph in their audit report to state that the report filed by the resigned joint auditor does not attract section 143 (12). EP also documented in the Audit File that the PW's reporting was unwarranted. Its replies to the SCN also underline the same. In this regard, EP and the Audit Firm were charged with issuing an EoM without basis and in violation of Paragraph 8 of SA 706 (Revised). 27. EP denied the charges. On exami....
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....ied their report. Without prejudice to the above, however, we examine the EoM para for its compliance with para 9 of SA 706 (Revised). This para makes it clear that the EoM paragraph shall refer only to information presented or disclosed in the financial statements and indicate that the auditor's opinion is not modified in respect of the matter emphasized. Thus, before providing an EoM, it must be ensured that the subject matter of the EoM is appropriately presented or disclosed in the financial statements. The subject matter in note 41(a) was a subsequent event after the reporting period and hence covered under Ind AS 10^20. This standard requires disclosure for nonadjusting events or adjusting the amounts recognised in its financial statements to reflect adjusting events after the reporting period. The reporting of fraud is normally an adjusting event. However, the Company disclosed its judgment that the matter was not reportable under section 143(12) and hence treated it as a non-adjusting event. The disclosure notes identify two events, i.e. the reporting of fraud by the previous auditors under section 143(12) and the initiation of regulatory action by the MCA. Ind AS 10 ....
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....e management and also failure to perform audit procedures as required by paragraphs 12 to 14, 23, 24, and 28 to 33 of SA 240. • Failure to examine how the assertions in the financial statements were impacted by such deficiencies. The financial statements were materially misstated, as several irrecoverable loans and investments were portrayed as recoverable, but the same were not reported. Therefore, the Auditor's opinion on the financial statements is without adequate basis. • Failure to assess the end use of loans to understand any issues relating to their recoverability. There is no evidence of independent verification of whether loan funds were used by the borrowers for the same purpose as disclosed by the borrowers at the time of sanction of the loan. Therefore, EP and PHD were charged with failure to comply with Paragraphs 22, 30, and 33 of SA 240. 35. As explained in the previous paragraphs of this Order, Auditors formed a conclusion that the matters reported by PW do not attract Section 143(12) of the Act. Without prejudice to our observations above, we note that the statutory duties of the auditor require them to form an opinion on the fin....
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....thorisation letter provided by the management) has not been responded till date. "As per the mails provided to us by the Company, confirmations have been sent to the PW team subsequent to May 14, 2019". 4. Based on the records available on the website of the Ministry of Corporate Affairs for the borrower entity, either no/inadequate charge has been created. "Observation was raised with regard to 7 entities. In case of 6 entities charges were created before 14.05.2019. In case of 1 entity charges has been created on 17.05.2019". 5. Credit Appraisal Memo (CAM) does not adequately cover the credit assessment of the borrower entity and the basis of granting the loan. • CAM does not contain appraisal notes of these loans. The Repayment capacities of the borrowers were not analysed. The loan amount sanctioned is disproportionate to the financial strength of the entity. • All the loans are given for general and corporate purposes. The purpose of the loan is onward lending, however, no assessment of the ultimate borrower is done. • Delays have been observed in servicing interest and principal repayment by the borr....
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....ments for the FY 2018-19 we have observed 86 such transactions related to some of these parties amounting to Rs. 5,900 crores. 38. We observe that the matters noted by EP in the Audit Committee presentation (emphasised in the above table) evidence credit impairment of the borrowing entities. This has a direct impact on the recoverability of the loans. However, EP failed to do any testing to rule out that impairment of such loans was not required. The merits of each of the above are discussed below. • Regarding the classification of CCDs fully as equity (sl. no. 1 in the table above), EP replied that while Ind AS 32^22 necessitates its categorisation as debt due to the absence of a strict fixed-tofixed ratio, this classification pertains only to "surface representation". We observe that as per Ind AS 32, the contractual terms of the CCDs shall be assessed to find out the substance of the transaction, rather than its legal form, to determine whether it is a financial liability or an equity instrument. Thus, the presentation of the financial instruments is also as per the principle of substance over form. Further, if as per the terms of the contract, CCDs are cla....
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....of these entities to understand the repayment capacity. EP has simply copied data from the financial statements (several financial statements are as on 31^st March 2018) and other information provided by the management without any independent examination. None of these data establishes cash inflow streams for any of these entities to ensure repayment capacity and the value of these loans shown as recoverable in RCL's financial statements. • Regarding the non-availability of direct balance confirmations from the borrowers (sl. no. 3 in the table above), we note that except for a few borrowers, there is no evidence to prove that these confirmations were received directly from the borrowers. Thus, the balance confirmations were not in compliance with the requirements of SA 505^26. Notwithstanding the above, it must be noted that receiving balance confirmation does not evidence the recoverability of the loan, which was the core issue pointed out by PW in its letters. Further, the documents given by EP along with his reply do not form part of the audit file and hence cannot be entertained. • Regarding the creation of charges on assets by....
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....ing interest and principal ranging from 60 to 151 days. • Further, EP's reliance solely on management representation is not in compliance with the requirements of para 3 of SA 580, which states that written representations do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. • Our observations on EP's assessment of the risk of material misstatements in the financial statement due to fraud are given in section C.5 of this order. We observe that no adequate consideration of fraud risk factors was given by the Auditors. • Although both PW and PHD, have noted that there were borrowing entities that had no employees, had assets only in the form of loans and advances and investments and had minimal capital, the Auditors have not performed any audit procedure to rule out the possibility that the loans and advances and investments were not being made in companies, that are like shell companies established to route the funds to other entities. Serious issues of credit impairment, and going concern issues relating to the borrowers were completely ignored by the Auditors, despi....
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....uing professional education and a civil money penalty of $40,000. C.5. Other Omissions/Commissions in Obtaining Sufficient Appropriate Audit Evidence in Key Areas of Audit C.5.1. Verification of Lending Policy 42. EP and PHD were charged with the failure to obtain sufficient appropriate audit evidence as required by SA 500^33 regarding compliance with the Lending Policy despite observing marked deviations from the auditee's lending Policy documented in the Audit File. 43. EP submitted that the decision-making process lies in the hands of its management and the auditor has no role in these decisions. PHD submits that it understood that the policy and the weaknesses in internal control had been reported in the qualified opinion on its report on Internal Controls over Financial Reporting (ICFR). 44. In this regard we observe as follows: a. In the WP "Audit Planning Memorandum" EP identified Loans as a Significant Risk/Fraud Risk. A review of the Lending Policy was one of the audit procedures planned to address the risk. Accordingly, EP documented the Lending Policy. The testing of compliance with the policy by EP was limited to loan approval by the author....
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....y have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members. Thus, though the Company has the discretion to determine the terms and conditions of sanctioning the loans, the auditor must inquire whether or not those loans are prejudicial to the interest of the Company. RCL is a Core Investment Company. Its business involves transacting in loans to group concerns, its major income is from interest and the strength of the Company is derived from its loans and investments. Thus, if the Company is investing in entities which are credit impaired/ financially weak, in violation of its own lending policy, then it is prejudicial to the interest of the stakeholders. The recoverability of the loans was also required to be assessed properly and adequate provisions needed to be made in the accounts where necessary. Not evaluating this work of the auditee shows gross negligence and a lack of professional skepticism on the part of the Auditors. 45. In light of the above, all the charges in paragraph 42 of failure to obtain sufficient appropriate audit evidence regarding compliance with lending policy....
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.... appropriate audit evidence as required by SA 500 to support the audit opinion. 49. Thus, the charge of non-compliance with requirements of para 26 of SA 330 of analysing contradictory audit evidence stands proved. C.5.3. Assessment of Risk of Material Misstatement (ROMM) due to Fraud 50. EP and PHD were charged with the failure to issue an audit opinion that was appropriate to the circumstances. EP failed to identify revenue recognition and management override of controls as fraud risk as per the requirements of Paragraphs 26 and 31 of SA 240. Though the EP identified loans as a significant risk in the WPs and also noted the procedures to be performed to address the same, they ignored the contradictory evidence while concluding that the financial statements are free from material misstatements, thus failed to comply with Paragraphs 26 and 27 of SA 330. 51. In response to the above EP submitted that he had applied all the required procedures during the audit to ascertain whether there was a management override of controls. EP submits that the WPs^37 clearly state that revenue has been considered as a significant risk/fraud risk. Further, he states that irres....
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....without disclosing why a prima facie unusual transaction (sale at 1.62 times the fair value and transfer in multiple tranches on the same day) was not considered so, indicates that the transaction was recorded in the books to window-dress the accounts of Reliance Land Limited by showing a higher value of its CCDs ahead of the listing of its shares. In this scheme of transactions, RCL booked a profit of Rs.827 crore and gave more loans to already credit-impaired entities (Reliance Digitech Ltd and Reliance Venture Asset), who repaid their outstanding loans using this amount. Despite the underlying design of all these unusual transactions, defying accounting and financial rationale, the Auditors accepted the rationalisation given by RCL without necessary examination and verification. 53. As per para 32(c) of SA 240, the auditor is required to evaluate whether the business rationale (or the lack thereof) of unusually significant transactions suggests that they may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets. The sale of CCD at a value more than its fair value (1.62 times), and then the transfer of funds bet....
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.... the US audit regulator PCAOB imposed sanctions on an auditor for failure to appropriately evaluate whether the revenue is reported in conformity with the applicable financial reporting framework. The sanctions included censuring the Firm, requiring the Firm to engage an independent consultant to review and make recommendations concerning its system of quality control and a civil money penalty of $400,000. C.5.4. Verification of Expected Credit Loss (ECL) on Financial Assets in Compliance with Ind AS 109 57. EP and PHD were charged with failure to obtain sufficient appropriate audit evidence regarding the reasonability of the estimate of ECL and related disclosures in the financial statements. This has led to a failure to report material misstatements of under-provisioning and consequent overstatement of profits in the financial statements. 58. In response to this charge, EP submitted that the audit procedures performed were adequate as per SAs. He stated that the values of loans appearing in the financial statements at the year-end were compared with the valuation report provided by the independent valuer which is more than the values reported in the financial statements.....
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....trol testing, which is absent in this case. • There is no evaluation as to whether the management's decisions on the range of scenarios and the weightage given to these scenarios capture the appropriate extent of ECL required by Ind AS 109. • There is no examination of the completeness, accuracy and relevance of the inputs and no assessment of the reasonableness of the assumptions used by the management in the ECL calculations and model. • The Table below shows the amount of ECL provision made by the Company on certain loans outstanding as on 31.03.2019 and the classification of such loans. (All Rs. in crore) Sl. No. Name of Borrower Amount of Loan Outstanding Loan Classification (Stage) Amount of ECL 1. Crest Logistics & Engineers Pvt Ltd 3,026 2A & 1 766 2. Reliance Venture Asset Management Pvt Ltd 2,480 2A 1,047 3. Reliance Digitech Ltd 1,589 1 54 4. Reliance Alpha Services Pvt Ltd 1,107 2 43 5. Reliance Integrated Services Pvt Ltd 581 3 581 6. Reliance Unicorn Enterprises Pvt Ltd 69 2A 31 7 Reliance Medi....
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....Rs.1,500 crore, and that the Company has got the assets of Crest valued by a registered valuer, which shows a value of assets of more than Rs.15,000 crore. Thus, management is confident of recovering the entire exposure". In this regard, Paragraph 9 of SA 500 requires an auditor to sufficiently evaluate the reliability of any information provided by the auditee company before the use of such information for purposes of audit. However, EP did not perform sufficient audit procedures to test the adequacy of the information provided by the Company. The MoU entered between RCL and Crest Logistics, relied upon by EP, does not document as to which assets, out of the total of assets valuing Rs.15000 crore, would be purchased by RCL and the time of such purchase. It only stated that assets for a consideration of Rs.1,500 will be purchased. Thus, there was no examination, on the part of EP, of the assets in question or their valuation to ascertain the genuineness of the claims of the management. Thus, the classification of ICD of Crest as stage 1 was not supported by evaluation and hence not justified. • Past trends as well as forward-looking information are to be used by ....
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....erstatement of profits in the financial statements. Accordingly, the charges in paragraph 57 above are proved. 62. Such lapses in challenging the management and absence of professional skepticism are viewed seriously by audit regulators across the world. In the matter of K.R. Margetson Ltd. and Keith R. Margetson^49, the US audit regulator PCAOB imposed sanctions on an auditor for failure to appropriately evaluate the reasonableness of a discount rate used in developing the valuation estimate. The sanctions included revocation of registration of the firm, restrictions in acting as EP and a civil money penalty of $30,000. In the matter of Martin Lundie, CPA^50 (Partner, EY Canada), PCAOB imposed sanctions for failing to sufficiently test the assumptions underlying the estimate and by failing to sufficiently test the accuracy and completeness of data on which that estimate was based. Sanctions included debarring from being an associated person of a registered public accounting firm and a civil money penalty of $65,000. C.6. Omissions and Commissions in Engagement Quality Control Review (EQCR) 63. The EQCR partner was charged with the failure to exercise due dilig....
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....Partner. He needs to apply his objective wisdom to ensure that the ET has complied with all the requirements applicable to the subject matter under review. Thus, the evaluation should be whether the audit procedures performed are appropriate, whether ET had obtained sufficient appropriate audit evidence and whether appropriate conclusions were reached and documented for those audit areas. While doing so, the matters discussed by the EQCR Team with EP, the additional evidence or procedures required by the EQCR Partner etc. shall form part of the documentation so that the work of the EQCR is evidenced and identifiable. Even when the EQCR Partner agrees with all significant matters documented by the ET, there is still a need to document the discussions and procedures of the EQCR and the basis on which the EQCR Partner agreed with the ET. The documentation in such cases should be based only on the principles laid down in SA 230. We observe that the Documentation by the EQCR partly covers the above requirements, insofar as it incorporates certain significant decisions made by the ET, queries raised by the EQCR Partner and the replies provided by EP. However, the subject matter of ....
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....tory procedures are prescribed in all the SAs. SA 220 is no exception as far as EQCR is concerned. 66. Thus, we conclude that the EQCR Partner failed to objectively evaluate and question EP when EP failed to meet the relevant requirements of the SAs and violated the Act, and the Code of Ethics in respect of several significant areas. Hence the charges in Paragraph 63 above stand proved. 67. We also observe that such lapses have been viewed seriously by international regulators as well. For example, PCAOB^51, the US Regulator, charged Grant L. Hardy (CPA) for his failure in connection with his role as Engagement Quality Reviewer ('EQR' hereafter) in the audit of financial statements of some of the issuer clients and noted that "Hardy violated PCAOB Auditing Standard No. 7, Engagement Quality Review ("AS 7″) by providing his concurring approval of issuance without performing with due professional care the EQRs required by this standard for the Firm's audits of COPsync and Forever Green's December 31, 2010, financial statements and AEG's June 30, 2011, financial statements." For this misconduct, PCAOB censured the EQR, barring him from being an associated person of a regis....
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.... firm to carry out this audit, the firm (as the appointed statutory auditor has the primary responsibility) is also answerable for its report issued under the Act, as further explained in the following paragraphs. 71. The requirements of Sub-Sections 9 and 10 of Section 143, SQC-1^54 and SAs, which are subordinate legislations, lay down the following in clear terms: • Responsibility for the overall quality of all the audit engagements, by ensuring that the firm's personnel comply with applicable laws, SAs and ethical requirements and issues reports appropriate to the situation, rests with the firm^55. • Within the above framework, the individual engagement partners are personally responsible^56 for the quality of specific engagements to which they are assigned by the firm as per its policies. 72. When a firm is appointed as an auditor under Section 139, all the responsibilities cast under the Act are primarily on the firm. As mandated by Section 132, the responsibility of overseeing the quality of service of the professions associated with ensuring compliance with auditing standards rests with NFRA. Monitoring and enforcing compliance with ....
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....a and $75,000 on its partner Lakhani for lapses in audit documentation by the partner, who was an ET member. PCAOB also suspended Lakhani from being an associated person of a registered public accounting firm for a period of one year. 76. The "Firm and Engagement Performance Metrics" published by PCAOB on October 12, 2022^59, provides a detailed study of engagement level and firm-level quality matrices. Engagement-level metrics provide information about a particular engagement of the firm, and Firm-level metrics address an audit firm's overall strategy in complementing the engagement-level matrices. The study covers all major jurisdictions, including India, in the world and top tier Audit Firms. The study reveals that many metrics can be applied at both the engagement and firm level and some metrics may only be reported at either the engagement level or the firm level. (Refer to Page 5 of the report). The report lists key Audit Quality Indicators reported by 9 leading audit firms^60 (refer to page 14 of the report). This Audit Quality Indicators make it clear that in, actual practice across the world, the Audit Firm has an equally important role as that of EP to ensure ove....
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.... • c. EP, EQCR Partner and PHD 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) as amended from time to time, which states that a CA is guilty of professional misconduct when he "does not exercise due diligence or is grossly negligent in the conduct of his professional duties". This charge is proved as EP, EQCR Partner and PHD conducted the Audit of a Public Interest Entity in total disregard of their statutory duties, evidenced by multiple critical omissions and violations of the standards. The instances of failure to conduct the audit in accordance with the SAs and applicable regulations, and failure to report the material misstatements in the financial statements and non-compliances made by the Company are as explained in Paras C1 to C7 above. • • EP, EQCR Partner and PHD committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 8 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (N....
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....he audit with the highest level of professional skepticism and due diligence and report their opinion in an unbiased manner. Despite the resignation of the joint auditor and a reporting of suspected fraud, PHD, EP and EQCR Partner failed to conduct the audit as per standards on auditing. The material misstatements in the financial statements due to inadequate provision, unjustified valuation of loans and irrational business practices were concurred by the Auditors in disregard of their responsibilities under the Act and SAs. The Auditors also demonstrated recklessness and unprofessionalism by rationalising the actions of the Company, inappropriately evaluation of the work of the resigned auditor, and ignoring the fundamentals of accounting and auditing. Such actions of the Auditors necessitate stricter sanctions and penalties taking into account the letter and spirit of the law. 81. Because professional misconduct has been proved and considering the nature of violations and principles of proportionality, we, in the exercise of powers under Section 132 (4) (c) of the Companies Act, 2013, order: a. Imposition of a monetary penalty of Rs.3 crore (Rupees Three Crore) ....
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.... conduct of an audit in accordance with standards on auditing. 12 Refer para 20 and 21 of SA 240- The auditor's responsibilities relating to fraud in an audit of financial statements. 13 Refer para 100.9 to 100.11 and 290.163 of Code of Ethics 2009. 14 Note 41 (a) Standalone Financial Statements (SFS) - "The Company's previous auditor, after resigning from the office in June 2019 submitted a report under Section 143(12) of the Companies Act, 2013 with the Ministry of Corporate Affairs. The Company has examined the matter and also appointed legal experts, who independently carried out an in-depth examination of the matter and the issues raised therein and have concluded that there was no matter attracting provisions of Section 143(12) of the Companies Act, 2013. The matter is under consideration with the Ministry of Corporate Affairs." A similar note was available in the Consolidated Financial Statements (CFS) as well. 15 Refer separate charges in the Order regarding violation of SA 706 (Revised) in issuing an EoM. 16 Refer separate charges in the SCN regarding violation of SA 706 (Revised) in issuing an EoM. 17 Refer to Sections....
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....fer WP - Expected Credit Loss, Audit Closure Document 46 Paragraphs 5.4.1 and B5.5.45 of Ind AS 109. 47 As all the 10 financial assets listed in the table above showed objective indicators for credit impairment, these loans may be classified under stage 3 with 100% provision (This excludes the amount of interest income overstated, which is not ascertainable from the audit file). 48 Total interest charges on credit-impaired assets (Rs.1089 crore) minus interest on stage 3 assets (Rs.131 crore). Refer to WP Expected Credit Loss. 49 PCAOB Release No. 105-2023-023 September 12, 2023. 50 PCAOB Release No. 105-2022-040 December 22, 2022 51 PCAOB release no 105 2015 001 dated 12.01.2015 52 PCAOB Release No. 105-2021-020 December 14, 2021 53 PCAOB release no. I 05-2021-012 dated 29.09 200 I 54 220 - Quality Control for an Audit of Financial Statements, deals with the overall quality of an audit engagement. SA 220 provides that: "2. Quality control systems, policies and procedures are the responsibility of the audit firm. Under SQC 1, the firm has an obligation to establish and maintain a system of qua....
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....carrying value aggregating to approximately Rs. 12,571 Crores as at March 31, 2019. On a sample testing of such loans/ CCDs we have noted certain observations on the status / financial strength of the borrower/ issuer of the CCDs. Such Borrowers/ issuers included in Exhibit 1 have one or more of the undermentioned characteristics; 1. Networth of borrowers/ parties is negative/ Latest available audit reports on the financial statements of the Borrower/party carry an "Emphasis of Matter paragraph" on going concern status of borrower companies. 2. There is limited no revenue and/ or profit as per the last available audited financial statements 3. Equity capital is low in comparison to debt raised by the borrower/ parties In light of the above, we would like the Management of the Company to respond to our queries, which may also incorporate audit committee's point of view. These evaluations will help us to determine next steps as may be warranted under Companies Act 2013, professional standards including standards on auditing and consequential impact on our reporting responsibility on financial statements, Internal Financial Reporting over F....