TaxTMI 
TaxTMI 
2024 (12) TMI 230
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....artner ('EP' hereafter) for the statutory audit of Vikas Proppant and Granite Limited ('Vikas' or 'the company' hereafter) for the Financial Year ('FY' hereafter) 2020-21. 2. This Order is divided into the following sections: A. Executive Summary B. Introduction & Background C. Lapses in the conduct of audit D. Specific Lapses by audit firm E. Article of Charges of Professional Misconduct by the EP F. Penalty & Sanctions A. Executive Summary 3. National Financial Reporting Authority (NFRA) is India's independent regulator, in respect of matters relating to accounting and auditing, of prescribed classes Rule 3 of NFRA Rules, 2018 of entities broadly described as 'Public Interest Entities' (PIES). 4. NFRA initiated action under Section 132(4) of Companies Act 2013 against the Auditor of Vikas for professional or other misconduct in relation to Vikas's statutory audit for FY 2020-21, pursuant to information received from Securities and Exchange Board of India (SEBI hereafter) indicating possible failure of the statutory auditor in reporting accounting misstatements and fol....
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.... body corporate. This Order will take effect after 30 days from its issue. B. Introduction & Background 7. NFRA is a statutory authority set up under Section 132 of the Companies Act 2013 to monitor and enforce compliance of the auditing and accounting standards and to oversee the quality of service of the professions associated with ensuring compliance with such standards. NFRA is empowered under Section 132(4) of the Companies Act 2013 to investigate prescribed classes of companies and impose penalty for professional or other misconduct of the individual members or firms of chartered accountants. 8. The statutory auditors, both individuals and firms of Chartered Accountants, are appointed by the members of company under Section 139 of the Companies Act 2013. The statutory auditors, including the Engagement Partners and the Engagement Team that conduct the audit, are bound by the duties and responsibilities prescribed in the Companies Act, 2013 the rules made thereunder, the Standards on Auditing, including the Standards on Quality Control and the Code of Ethics, the violation of which constitutes professional misconduct, and is punishable with penalty prescribed under Se....
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....;s length pricing regarding the compliance of Section 177 & 188 of Companies Act, 2013 for the Related Party Transactions g) Failure to report non-charging of depreciation of leasehold land and Plant and Machinery h) Failure to assemble the Audit File within 60 days of the completion of the audit i) Failure to obtain sufficient and appropriate audit evidence through external confirmations j) Failure to determine appointment of Engagement Quality Control Reviewer (EQCR) (as per SA 220) k) Failure to Determine TCWG and Communicate with them 12. The EP, vide letter dated 21.03.2024, requested a personal hearing which was held on 26.04.2024 through video conferencing wherein CA Priyank Mittal appeared on his own behalf as well as on behalf of the Firm and made submissions. 13. This Order is based on our review of the audit file, written response of the auditor, submissions made during the personal hearing and other material available on record. Each of the charges in the SCN is analysed and discussed herein below. C. Lapses in the conduct of audit Failure to plan the audit and failure to understand the nature of the entity and it....
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....e Entity and Its Environment". (b) The nature, timing and extent of planned further audit procedures at the assertion level, as determined under SA 330 "The Auditor's Responses to Assessed Risks". (c) Other planned audit procedures that are required to be carried out so that the engagement complies with SAs. 18. It is evident from the Annual report of FY 2019-20 (page number 15), that audit firm has given its consent to act as statutory auditors of the Company and has also given a certificate in accordance with Section 139, 141 and other applicable provisions of the Companies Act 2013 to the effect that their appointment, if made, shall be in accordance with the conditions prescribed and that they are eligible to hold office as Statutory Auditors of the Company. The audit firm was appointed as the statutory auditor for the FY 2020-21 onwards and the EP has given his audit report accordingly. In light of this, the defence that the audit was conducted after second Limited Review is irrelevant and is rejected. 19. Further, the EP's reply "Due to the reasons, for some of my query's management was not able to answer properly so I mentioned these point....
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.... had disclosed figures for these balances as under: Table 1 Audited Financial Statements (in Lacs) Particulars Closing balances as per FS of FY 2019-20 (A) Opening balances as per FS of FY 2020-21 (B) Differences (A-B) Other non-current assets 496.97 493.99 2.98 Trade receivables 17,022.68 17,015.92 6.76 Other current assets 1,458.09 1,465.68 (7.59) Trade payables 13,078.39 13,077.14 1.25 Other financial liabilities 476.00 475.10 0.90 25. It is noted that the Audit Firm was appointed on 30.09.2020 for statutory audit of Vikas for FY 2020-21 and this was the first year of Audit for auditors. As per para 5 of SA 510, the auditor shall read the most recent financial statements and the predecessor auditor's report thereon for information relevant to opening balance, including disclosures. The EP was the statutory auditor of FY 2020-21, so he should have verified the previous financial statements and auditor's report to verify the opening balances. The contention of the EP that he was appointed on 30.09.2020 i.e. after 1st LR (Limited Review ended on 30.06.2020) is not tenable in view of th....
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....d Credit Loss 31. The auditors were charged with failure to report non-provisioning in respect of Expected Credit Loss (ECL). The financial statements do not reveal any provision made on account of ECL on trade receivables as per Ind AS 109 Indian Accounting Standard (Ind AS) 109, Financial Instruments. Table 2 shows that the Trade Receivables had been outstanding for a long time, as the Trade Receivables as at 31.03.2021 (Rs. 171.46 crore) were twice the combined sales for the last four years (83.33 crore). Therefore, it is apparent that the outstanding Trade Receivables required provisioning. TABEL 2 (Rs. in Crores) No. Financial Year Sales Trade Receivables 1 2020-21 23.60 171.46 2 2019-20 6.96 170.15 3 2018-19 52.77 175.54 4 2017-18 Nil 167.21 32. The financial statements for FY 2020-21 do not reveal any provisioning for ECL on trade receivables of 171.46 crores as per Ind AS 109. Even though the trade receivables exceeded seven times the sales for FY 2020-21, the auditors failed to examine the matter with professional scepticism. There was no ageing analysis of trade receivables in the audit file and....
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....concern basis of accounting in the preparation of the financial statements; b) To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern; and c) To report in accordance with this SA". 37. Further as per para 21 of SA 570, "If the financial statements have been prepared using the going concern basis of accounting but, in the auditor's judgment, management's use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, the auditor shall express an adverse opinion". 38. On the examination of the audit file, no documentation has been found regarding the appropriateness of the management's use of going concern basis in the preparation of financial statements. The EP also confirmed the same to NFRA vide letter dated 09.11.2023 (point no. 15). In his reply dated 21.03.2024 to the SCN also the EP did not offer any comment on failure to report on the entity's ability to continue as a Going Concern. 39. Considering the above, the charge that the audit....
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....arm's length testing carried out for the Related Party Transactions. 42. Further, the entire sales of Rs. 23.60 crore during FY 2020-21 were made to the related parties but were not disclosed under Related Party Transactions. The EP vide letter dated 09.11.2023 (point no. 18 & 19) has admitted this. 43. The EP in the Independent Auditor's Report under point (xiii) of Annexure A (page 91 of annual report) of FY 2020-21 had stated that, transactions with the related parties are in compliance with section 177 and 188 of Act, where applicable and the details have been disclosed in the notes to the standalone financial statements, as required by the applicable accounting standards". 44. SA 550 Standards on Auditing (SA) 550, Related Parties lays down requirements regarding audit of related party transactions and provides application guidance. However, in the Audit file submitted by the auditors there were no audit work papers in respect of identification of related party, nature of related party relationships and the details of related party transactions and outstanding balances which is in contravention of the provisions of SA 230 Standards on Auditing (SA) 230, Audit ....
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.... 31.03.2021, has not been subjected to depreciation as required in Ind AS 116 Indian Accounting Standards (Ind AS) 116, Leases for the FY 2020-21. Para 31 of Ind AS 116 states that "lessee shall apply depreciation to the property in depreciating the right-of-use asset". As per the annual report for FY 2020-21 (page No. 97), the company had stated that "The Company is into business into the mining of Granite Blocks and manufacturing of Proppants". It is evident from the valuation report that this land was meant for mining quarrying which are subject to depreciation as per the aforesaid standard. However, no depreciation had been charged on the leased land. 50. It is further noted that the Plant & Machinery valued at Rs.95.46 crore as on 31.03.2020 & 31.03.2021, had not been subjected to depreciation as required in Ind AS 16 Indian Accounting Standards (Ind AS) 16, Property, Plant and Equipment for the FY 2020-21. The EP also confirmed the same to NFRA vide letter dated 09.11.2023 (point no. 8 & 10 and point no 5 of 'Annexure 71') that 'As plant was not in operation during FY 2020-21, hence no depreciation has been charged on assets' and there is no documentation a....
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....39;s Report that Vikas was in conformity with the Indian Accounting Standards (Ind AS), despite the violation of Ind AS 116, Ind AS 16, stands established. Failure to assemble the Audit File within 60 days of the completion of the audit 56. The auditors were charged with failure to assemble the Audit File within 60 days of the completion of the audit. Para 75 of SQC1 Standard on Quality Control (SQC) 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements read with para A21 of SA 230 states that "an appropriate time limit within which to complete the assembly of the final audit file is ordinarily not more than 60 days after the date of the auditor's report". The date of Independent Auditor's Report is 23.06.2021 for FY 2020-21. The EP has failed to comply with the provisions of SA 230 and SQC1 as explained in the subsequent paras. 57. As per the submission made by the EP vide email dated 25.04.2023 addressed to NFRA it is stated that "due to the long hospitalization and death of my father in law during the period of May and June-21 (finalization of audit period) documents....
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....of bank balances and third-party balance confirmation for trade payables, trade receivables and advance to suppliers was obtained by the EP. The EP also confirmed the same to NFRA vide letter dated 09.11.2023 (point no. 11) and stated that 'Third party balances are subject to confirmation and responsibility of the management'. In the absence of external confirmation, the auditor is required to perform alternative audit procedures to obtain relevant and reliable audit evidence. 64. In absence of external confirmation from third party and any alternative procedure adopted by the auditors, the charge that the auditors failed to comply with the provisions of SA 505 Standards on Auditing (SA) 505: External Confirmations stands established. Failure to determine appointment of Engagement Quality Control Reviewer (EQCR) 65. The auditors failed to determine the appointment of EQCR for the engagement of the audit of the Company which was required since Vikas was a listed Company during FY 2020-21. Para 19(a) of SA 220 Standards on Auditing (SA) 220: Quality Control for an Audit of Financial Statements requires determination of appointment of an EQCR for audit of listed entit....
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....ty 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. 70. Considering the above, the charge that the auditors failed to comply with the provisions of SA 220 regarding appointment of EQCR stands established. Failure to Determine TCWG and Communicate with them 71. The auditors were charged with failure to Determine TCWG and Communicate with them. No minutes of meeting or record of discussions with Those Charged With Governance (TCWG) were found in the audit file, as is required under SA 260 Standards on Auditing (SA) 260, Communication with Those Charged with Governance, Communication with Those Charged with Governance. No documentation was available regarding the communication made with TCWG required by SA 260. The EP also confirmed vide letter dated 09.11.2023 (point no.7) that there is no documentation available regarding 'Communication with Those Charged with Governance' and there was no documentation of communication made with the TCWG regarding the weakness identified in the in....
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....de it with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements, and that reports is- sued by the firm or engagement partner(s) are appropriate in the circumstances. Para 7 of SQC-1 states that the firm's system of quality control should include policies and procedures addressing (a) Leadership responsibilities for quality within the firm. (b) Ethical requirements (c) Acceptance and continuance of client relationships and specific engagements (d) Human resources (e) Engagement performance (f) Monitoring. 77. The lapses enumerated in SCN, and discussed in the foregoing paragraphs indicate that the Audit Firm failed to achieve the central purpose of the audit, and that there was no adequate basis to issue the audit report asserting that the audit was conducted in accordance with the SAs and ethical requirements and therefore we conclude that the Audit Firm failed to fulfil its duties prescribed under Section 143 of the Act. In addition, the audit firm remains responsible for all the lapses of EP, as detailed in the foregoing paragraphs as the EP conducted the audit on behalf of the audit firm, which was t....
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....that a Chartered Accountant is guilty of professional misconduct when he "fails 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 he is concerned with that financial statement in a professional capacity". This charge is proved as the EP failed to disclose in his report the material non-compliances by the company as explained in Para 31-55 above. (b) The EP committed professional misconduct as defined by clause 6 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 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 non-compliances by the company as explained in Para 31-55 above. (c) The EP committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 which states that a Chartered Accountant is guilty of profession....
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....the audit with professional scepticism 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 Public interest entity as defined in Rule 3 of NFRA Rules 2018. 85. Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proven cases of professional misconduct are to be viewed, is evident from the fact that a minimum punishment is laid down by the law. 86. The EP in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to Financial Statements. As we have explained in this Order, deficiency in the conduct of Audit, abdication of responsibility and inappropriate conclusions on the part of CA Priyank Mittal establish his professional misconduct. 87. Section 132(4)(c) of the Companies Act 2013 provides that National Financial Reporting Authority shall, where professional or other misconduct is proved, have the power to make order for- ....