TaxTMI 
TaxTMI 
2024 (5) TMI 140
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....e statutory audit of CMI Limited ('CMIL' or 'the company' hereafter) for the Financial Years ('FY' hereafter) 2019-2020, 2020-21 and 2021-22. 2. This Order is divided into the following sections: A. Executive Summary B. Introduction & Background C. Lapses in the Audit D. Specific Lapses of the Audit Firm E. Articles of Charges of Professional Misconduct by the Auditor 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 broadly described as 'Public Interest Entities' (PIEs). 4. NFRA initiated action under section 132 (4) of Companies Act 2013 ('CA-2013' or 'Act' hereafter) against the Auditors of CMIL for professional or other misconduct in relation to CMIL's statutory audit for FY 2019-2020, 2020-21 and 2021-22, pursuant to information received from Securities and Exchange Board of India (SEBI hereafter) indicating the failure of statutory auditors in the audit of inve....
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....ng to Rs 231.34 crores, Rs 135.29 crores, and􀀦 110.64 crores in FY 2019-2020, 2020-21 and 2021-22 respectively (Para C.9). 6. Based on the investigation and proceedings under Section 132 (4) of the Companies Act and after giving the Auditors adequate opportunity including personal hearing to present their case, we find the Audit Firm and the Engagement Partner 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: i. Monetary penalty of Rs 50,00,000/- (Rupees Fifty Lakhs) upon the Audit firm, M/s Krishna Neeraj & Associates. ii. Monetary penalty of Rs 10,00,000/- (Rupees Ten Lakhs) upon CA Krishna Kr Neeraj. iii. CA Krishna Kr Neeraj is also debarred for 2 (Two) 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 & Background 7. The National Financial Reporting Authority is a statutory authority set up under section 132 of the Companies Act 201....
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....nt material available on record, and on being satisfied that sufficient cause existed to take action under sub-section ( 4) of Section 132 of the Companies Act, a Show Cause Notice (SCN hereafter) was issued to the Audit Firm M/s K Krishna Neeraj & Associates and the Engagement Partner (EP) CA Krishna Kr Neeraj (collectively referred to as Auditors in this Order) on 04.12.2023 asking them to show cause by 04.01.2024 why action should not be taken for professional misconduct in respect of their performance as the Statutory Auditors of CMIL for the FYs 2019-2020, 2020-2021 and 2021-2022. The grounds for the SCN were as follows: a. Failure to disclose a material fact known to them which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where the Chartered Accountant (CA hereafter) is concerned with that financial statement in a professional capacity. b. Failure to report a material misstatement known to them to appear in a financial statement with which the CA is concerned in a professional capacity. c. Failure to exercise due diligence and being grossly negligent in the conduct of professional....
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....NP A, which was not in conformity with Ind AS 109 [IND AS 109: Financial Instruments] and therefore is a "Misstatement" as per SA 200. The SCN charged the auditors merely presented the matter as EoM instead of modifying their opinion in accordance with SA 705. 19. The auditors submitted that they had qualified their opinion by stating that "The company's loans have been declared by the Banks/ Financial Institution as Non-Performing Assets". Further the auditors submitted that "In addition to this qualified opinion, we had mentioned non-recognition of liability on Non-performing Assets under Emphasis of Matter. We have mentioned the matter under qualified opinion as well as mentioned under Emphasis on Matter (EOM} both." 20. We find that for the following reasons, the reply and explanation given by the auditors are misleading and an afterthought: i. In their audit report for the FY 2021-22, the auditors qualified their opinion on the basis of going concern of CMIL and not on the basis of non-recognition of liability on Non-performing Assets, which was only referred to while qualifying the opinion on the basis of going concern. ii. Non-recognition of the l....
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.... c. A continuous declining trend in Net Worth of CMIL from t 305.97 crores in FY 2018-19 to Rs 306.62 crores in 2019-20 and Rs 117.12 crores in 2020-21. d. A continuous declining trend in the book value per share of CMIL from Rs 208.52 in FY 2018-19 to Rs 208.95 in 2019-20 and Rs 77.71 in 2020-21. e. Negative working capital i.e.(-) Rs 22.42 crores in FY 2020-21. 24. Despite the presence of the above mentioned indicators, raising questions about the going concern assumption in preparation of Financial Statements for the FY 2020-21, no evidence was found in the Audit File of the management's assessment of the entity's ability to continue as a going concern; nor was any evaluation conducted by the auditor of such assumption as required by Para 7 and Para 12 read with Para A 7 and A9 of SA 570. 25. In response to the SCN, the auditors submitted that they had noticed the decline in turnover of CMIL with negative PAT and asked management's perspective for preparation of financial statements for the FY 2020-21 under going concern approach. CMIL replied along with supporting documents, which were considered by the auditors to understand the rea....
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....ng of appropriateness of the Going Concern basis by the auditors. We, therefore, find that the auditors were grossly negligent in performing their duty in accordance with SA 570. 28. Such lapses have been viewed seriously by international regulators as well. For example, the Public Company Accounting Oversight Board [PCAOB release No. 105,2015-028 dated 23.07.2015] ('PCAOB' hereafter), the US Regulator, charged Bravos & Associates CPA's ("Firm") and Thomas W. Bravos, CPA ("Bravos") in connection with audit of UAHC for FYE June 30, 2013, where Bravos authorized issuance of the Finn's unqualified audit report, which included going concern explanatory language regarding those Financial Statements. However, Respondents did not have a reasonable basis for making these statements and issuing their audit report". For misconduct including this and others, PCAOB censured the firm by revoking its registration and imposed a civil monetary penalty of $ 10000 on the firm. Bravos was barred from being an associated person of a registered public accounting firm. C.3 Failure relating to Revenue Recognition 29. The auditors were charged for failure to plan and perform audit....
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....Framework and if so, then they were also required to perform such audit procedures to ensure that revenue was being recognised in accordance with the policy of the Company. However, there is no evidence in the Audit File to show that the auditors verified the recognition of Revenue vis-a-vis the Company's policy of Revenue recognition. In fact, the Revenue recognition policy was nowhere found in the Audit File. iii. There is no documentation in the Audit File to show that the auditors verified the fundamental assertions of occurrence, completeness and accuracy of the recognized revenue. Nor there is evidence to show that the auditors performed audit procedures like understanding the business entity and relevant industry, and the internal controls governing the generation of revenue. iv. Further, no GST returns (GSTR 1, GSTR 2B, GSTR 3B), OST analysis and sample invoices are evidenced in the Audit File and the same are submitted as part of the reply to the SCN, which is rejected. 33. In light of the foregoing, we find that the auditors displayed gross negligence and lack of due diligence in discharging their duties relating to the audit of the revenue recognized in t....
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....documents, evaluation of Going Concern assumption etc. Further, in the personal hearing held on 09.04.2024, CA Krishna Kr Neeraj submitted that they could not submit the complete audit working papers due to shifting of their office and also stated that due to peer review of the firm, the working papers were taken out of the Audit File. 37. We find that for the following reasons, the reply and explanation given by the auditors are misleading and are an afterthought: i. The Audit File lacked many significant and critical working papers such as: a. Verification of the Inventory as on 31.03.2020, 31.03.2021, 31.03.2022. b. Loan agreements between CMIL and the lenders. c. External verification of Trade Receivables as on 31.03.2020, 31.03.2021, 31.03.2022. d. Working papers for setting materiality and performance materiality. e. Auditor's evaluation of the appropriateness of Management's use of the Going Concern assumption. f. Details of the EQC Reviewer and the review work performed by the EQC Reviewer. g. Minutes of the meetings amongst the members of ET, with Management and TCWG. ii. None of th....
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....ormed. 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) 42. In another case, in the matter of Bharat Parikh & Associates Chartered Accountants, the US audit regulator PCAOB took a serious view of the lack of sufficient documentation and imposed penalties and sanctions for violations including insufficient documentation. The PCAOB order dated 19.03.2019 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 insufficient to demonstrate the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached....
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.... counting due to unforeseen circumstances, the auditor shall make or observe some physical counts on an alternative date and perform audit procedures on intervening transactions. 47. In their written reply, the auditors stated that during the FY 2019-20, due to outbreak of Covid-19, they conducted the physical verification on 5th and 6th May 2020. Further for the physical verification of stock, the stock taking was done on a sample basis on 3rd and 5th April 2021 for the FY 2020-21 and 4th and 6th April 2022 for 2021-22. The auditors also submitted a copy of stock taking and management letter in this regard. 48. We find that for the following reasons, the reply and explanations given by the auditors are misleading and an afterthought: i. There is no evidence in the Audit File to show that the auditors performed physical verification of the inventories as on 31.03.2020, 31.03.2021 and 31.03.2022. The Audit File merely contains the stock statements as prepared by CMIL. ii. The copy of the stock taking submitted by the auditors as part of reply to the SCN, though liable to be ejected, appears to be a bunch of papers from which no conclusion can be drawn. 49.....
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....aterial misstatements, the auditor needs to obtain sufficient appropriate audit evidence. 52. In their written reply, the auditors responded that they had obtained audit evidence before forming the opinion and complied with the requirements of SAs. The auditors referred to the documents submitted as part of the reply to the SCN. 53. We find the reply and explanation given by the auditors as erroneous and an afterthought. As explained in Sections C1 to C5 above, there were several instances of material misstatements for which the auditors failed to obtain Sufficient Appropriate Audit Evidence; on the contrary, they certified that the Financial Statements of CMIL for the FYs 2019-2020, 2020-21 and 2021-22 (except for going concern} were reflecting True and Fair view. The reply of the auditors clearly shows their lack of understanding and putting into practice the provisions of the SAs thereby displaying a very casual approach in the audit of a PIE. 54. The Auditor's Opinion in the audit report holds a very high value as it is an assurance given by the auditor to the users and stakeholders about the True and Fair status of the Financial Statements. The auditor's failu....
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....Finn improperly issued the audit report without obtaining an engagement quality review and concurring approval of issuance and thus violated Auditing Standard No. 7, Engagement Quality Review ("AS 7")". For this misconduct, PCAOB censured the Firm and imposed a civil money penalty of $5000. Similarly in another matter of Halperin Ilanit CPA ("Firm") and Ilanit Halperin, PCAOB [PCAOB Release No. 105-2024-012 dated 19^th March 2024] among other things stated that "The Firm failed to obtain engagement quality reviews for any of the Issuer Audits, and improperly permitted Cuentas, Enigma, and SuperCom to use its audit reports for the Issuer Audits without having obtained concurring approval of issuance from an engagement quality reviewer" and imposed a civil money penalty in the amount of $200,000 jointly and severally, on the Firm and Halperin; revoking the Firm's registration and requiring Halperin to complete 40 hours of continuing professional education. C.8 Failure to determine Materiality 62. The auditors were charged with failure to determine materiality for the Financial Statements as a whole while establishing the audit strategy, as required by Para 10 of SA 320 [SA ....
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....rd are contained in the Requirements section and represented by use of "shall". Hitherto, the word, "should" was used in the Standards, for this purpose .... 67. As there is no working paper in the Audit File evidencing determination of materiality and performance materiality by the auditors, we conclude that the auditors have failed to adhere to the mandatory requirements of determining Materiality in accordance with SA 320 and falsely stated in their report that they had conducted the audit in accordance with the SAs specified under Section 143(10) of the Act. C.9 Failures related to audit of Trade Receivables 68. The auditors were charged with failure in audit of Trade Receivables in accordance with the requirements of SA200, SA 500 and SA 505. 69. Para 17 of SA 200 states that the auditor shall obtain Sufficient Appropriate Audit Evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor's opinion. Further Para 6 of SA 500 states that the auditor shall design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining Sufficient Approp....
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.... CMIL never received confirmation from the debtors and therefore the auditors considered debtors balance as per books of CMIL to be correct is again astonishing. In such a situation, the auditors were required to design and perform audit procedures like ledger scrutiny, checking of invoices, verification of bank statements and bank reconciliation to logically check and verify the assertion related to Trade Receivables, which the auditors failed to perform. e. Negative confirmations are a way to get confirmation of accounts, but such a procedure is logical only when it involves a small percentage of the whole samples. A cent percent application of negative confirmation reflects the auditor's lack of knowledge to perform audit and underlines the importance of external confirmations. 72. We, therefore, conclude that the auditors were grossly negligent in performing their duty in violation of SA 200, SA 500 and SA 505. C.10 Failures relating to communication with Those Charged With Governance 73. The auditors were charged with failure to determine TCWG, communicate with TCWG about the responsibilities of the auditor, overview of planned scope, timing of the audit ....
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.... of the auditors is erroneous as it makes light of the compliance requirements of the Act and the SAs in light of the errors and omissions mentioned in the foregoing paragraphs of this Order. 81. We, therefore, conclude that the auditors have been grossly negligent in the conduct of their professional duties in violation of Section 143 (9) of the Companies Act, 2013. D. Specific Lapses of the Audit Firm 82. In addition to the lapses mentioned in the foregoing paragraphs of this Order, the Audit Firm was charged in the SCN specifically for the failure to fulfill its duties prescribed under Section 143 of Companies Act, 2013 along with failure to adhere to the requirements of SQC 1. 83. The powers and duties of the statutory auditors have been prescribed under Section 143 of the Act. The duties include making their report to the members of the Company after taking into account the provisions of the Act, the Accounting and Auditing Standards (subsection 2); stating in their report and expressing opinion on matters listed in subsection 3; stating the reasons, if any of the matters required to be included in the audit report under this section is answered in the negative or ....
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....d wherever required reported the non-compliances." The auditors as part of the reply to the SCN submitted some general policies. 87. The reply of the auditors is misleading and not acceptable. There is no evidence in the Audit File regarding SQC 1, quality control systems, policies and procedures. The only document in the Audit File is a checklist which cannot be called as a document of quality control systems, policies and procedures. The document purported to be SQC policy of the firm is in fact some general policies relating to human resource, audit risk etc. 88. Therefore, as discussed above, the Audit Firm has made departure from the Standards and the Companies Act, 2013 in the conduct of the audit of CMIL for FY 2019-2020, 2020- 21 and 2021-22. The poor quality of audit, incomplete documentation and misleading responses further compound the professional misconduct on the part of the Audit Firm. Based on the foregoing discussion and analysis, we conclude that the Audit Firm has committed professional or other misconduct, as defined in the Act. In an audit engagement assigned to an Audit Firm, the responsibility of the Audit Firm is to ensure that its systems and processe....
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....e made a series of serious departures from the Standards and the Law, in their conduct of the audit of CMIL for FY 2019-2020, 2020-21 and 2021-22. Based on the above discussion, it is proved that the auditors failed to report in their audit report, the misstatement in the financial statements of CMIL. The poor quality of audit as reflected in failures related to fundamental aspects of audit like setting materiality, evaluation of going concern, carrying out external confirmation together with the incomplete documentation, further compound the professional misconduct of the auditors. Based on the foregoing discussions and analysis, we conclude that the Auditors have committed Professional Misconduct as defined under Section 132 (4) of the Companies Act, 2013 in terms of Section 22 of the Chartered Accountant Act 1949 (CA Act) as amended from time to time, and as detailed below: i. The auditors committed professional misconduct in terms of by Section 132 (4) of the Companies Act, read with Section 22 and clause 5 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional miscon....
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....xpression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion". This charge is proved as the auditors failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to their failure to report the material misstatements and non-compliances of the Company in the financial statements, as explained in the paras 17 to 91 above. v. The auditors committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 9 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional misconduct when he ''fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances". This charge is proved since the auditors failed to conduct the audit in accordance with the SAs but falsely reported in their audit report that the audit was conducted as per SAs as explained in paras 17 to 91 above. 93. In addition to above, the Audit Firm has committed Professional Misconduct as defined in Section 1....