The National Financial Reporting Authority (NFRA) has penalized CA Santosh Deshmukh, a partner at Khandelwal Kakani & Co., for professional misconduct during the statutory audit of Sanwaria Consumer Limited (SCL) for FY 2017-18. The investigation was initiated following information from SEBI about financial irregularities at SCL. Deshmukh, the engagement partner for the audit, failed to meet several key auditing standards, leading to significant misstatements. Key failures included improper verification of SCL’s inventory, resulting in an overvaluation of ₹18.93 crores in soya seed and ₹13.30 crores in paddy inventories. Deshmukh also failed to audit related party transactions, impairment testing, and non-compliance with consolidation requirements under Indian Accounting Standards. NFRA’s proceedings, under Section 132 of the Companies Act, culminated in a ₹5 lakh fine and a one-year ban from auditing or performing related services for any company. Deshmukh’s request for a second hearing with legal counsel was declined after he withdrew his request. NFRA’s order highlighted significant departures from auditing standards and professional negligence.
Government of India
National Financial Reporting Authority
7th Floor, Hindustan Times House,
Kasturba Gandhi Marg, New Delhi
Order No. 022/2024 | Date: 09.09.2024
In the matter of CA Santosh Deshmukh under Section 132(4) of the Companies Act 2013 read with Rule 11(6) of National Financial Reporting Authority Rules 2018
1. This Order disposes of the Show Cause Notice (`SCN’ hereafter) No. COMV00057/2149 dated 08.04.2024, issued to CA Santosh Deshmukh (ICAI Membership No. 071011), partner of M/s Khandelwal Kakani & Co. (ICAI Firm Registration No. 001311C), who is a member of the Institute of Chartered Accountants of India (`ICAI’ hereafter) and was the Engagement Partner (`EP’ hereafter) for the statutory audit of Sanwaria Consumer Limited (CIN: L15143MP1991PLC006395) (the Company/SCL), for the Financial Year (`FY’ hereafter) 2017-18.
2. This Order is divided into the following sections:
A. Executive Summary
B. Introduction & Background
C. Lapses in the Audit
D. Articles of Charges of Professional Misconduct by the EP
E. 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’ 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 Auditor of Sanwaria Consumer Limited for professional or other misconduct in relation to statutory audit for FY 2017-18, pursuant to information received from Securities and Exchange Board of India (SEBI) pertaining to the financial irregularities in the company and the failure of the auditor to qualify or emphasize in his independent audit report, any matter related to misstatement/ irregularities in the transactions.
5. M/s Khandelwal Kakani & Co. was the statutory auditor of SCL and CA Santosh Deshmukh was the Engagement Partner (EP) for this statutory audit for the FY 2017-18. Accordingly, NFRA initiated proceedings under Section 132 of the Companies Act, 2013 for necessary action against the EP, CA Santosh Deshmukh.
6. On examination of the Audit File and financials of subsidiary and associates of SCL and on being satisfied that sufficient cause existed to take action under sub-section (4) of Section 132 of the Companies Act, 2013, a Show Cause Notice (SCN hereafter) was issued to CA Santosh Deshmukh on 08.04.2024 asking him to show cause why action should not be taken against him for professional misconduct in respect of his performance as EP on behalf of M/s Khandelwal Kakani & Co. , the Statutory Auditor of SCL for the FY 2017-18. The EP, submitted his reply vide email dated 24.05.2024 and refuted all charges, requesting for a personal hearing.
7. The EP was granted a personal hearing on 13.06.2024 & 25.06.2024 where the EP did not appear. NFRA granted a final opportunity to the EP to appear on 05.07.2024, and the EP appeared. During the hearing, the EP requested for one more hearing with his legal counsel. The request was considered, and vide NFRA email dated 15.07.2024, the hearing was posted to 06.08.2024 at 3 PM. However, vide email dated 18.07.2024, the EP informed that there is no requirement of any further hearing.
8. This Order finds that the EP failed to meet the relevant requirements of the Standards on Auditing (`SA’ hereafter) in respect of several significant areas, reflecting a serious lack of professional competence to perform the audit of a Public Interest Entity (PIE). These include:
a. The EP failed to verify the existence and valuation of material inventories of SCL resulting in overvaluation of the soya seed inventories by approx. Rs 18.93 crores and of paddy inventories by Rs 13.30 crores. (C.1)
b. The EP failed to verify the ownership, valuation and evaluate the impairment testing of the investments made by SCL in its loss-making subsidiary and associate companies (C.2).
c. The EP failed in performing evaluation and reporting the non-compliance by SCL related to consolidation of Financial Statements (C.3)
d. The EP failed to obtain sufficient appropriate audit evidence relating to trade receivables (C.5) despite the fact that 100% of the trade receivables were unsecured.
e. The EP also failed to carry out the risk assessment procedures in order to obtain sufficient audit evidence so as to minimise the risk of material misstatement due to fraud or otherwise in the revenue recognition (C.4).
f. The EP was grossly negligent in preparing sufficient audit documentation in accordance with the requirements of SA 230(C.7).
g. The EP failed to communicate deficiencies in internal control to Those Charged with Governance (TCWG) (C.8).
9. Based on the proceedings under Section 132 (4) of the Companies Act and after giving the EP opportunities to present his case, we find the EP guilty of professional misconduct. Accordingly, this Order imposes upon CA Santosh Deshmukh a monetary penalty of 5,00,000/- (Rupees Five Lakhs) and also debars CA Santosh Deshmukh for 1 (One) year 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
10. The National Financial Reporting Authority is a statutory authority set up under section 132 of the Companies Act 2013 to monitor implementation 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.
11. The statutory auditors, both individuals and firms, are appointed by the members of companies under Section 139 of the Companies Act. The statutory auditors, including the Engagement Partners (EP), the Engagement Team and Review Partners that conduct the audit are bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, the Standards on Auditing (SA), 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 Section 132(4) of the Act.
12. Pursuant to information received from Securities and Exchange Board of India (SEBI) pertaining to the financial irregularities in the company, NFRA called for the Audit Files and other information from M/s Khandelwal Kakani & Co, Statutory Auditor for SCL for the Financial Year (FY) 2017-2018 with a purpose to investigate into the possible failure of the statutory auditor to report any matter related to misstatement/ irregularities in the transactions.
13. The Audit Files and other information for FY 2017-18 were called from the Auditor vide letter dated 14.07.2023. Vide letter dated 27.07.2023, the Auditor requested NFRA to grant extension of one month for submitting the Audit File. The Auditor was granted extension of 15 days. The Auditor submitted the Audit Files and other information on 13.08.2023.
14. On examination of the Audit Files and financials of subsidiary and associates of SCL, 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 CA Santosh Deshmukh on 08.04.20204 asking him to show cause why action should not be taken against him for professional misconduct in respect of his performance as EP on behalf of M/s Khandelwal Kakani & Co, the Statutory Auditor of SCL for the FY 201718. The EP was charged with professional misconduct 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 a Chartered Accountant (CA hereafter) is 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 a CA 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 expression of an opinion, or its exceptions are sufficiently material to negate the expression of an opinion.
e. Failure to invite attention to material departure from the generally accepted procedures of audit applicable to the circumstances.
15. Vide his reply dated 23.05.2024 to the SCN, the EP requested for being heard in person. Vide NFRA email dated 04.06.2024, the EP was granted an opportunity of being heard on 13.06.2024. As no confirmation was received from the EP with respect to attending the personal hearing, vide email dated 11.06.2024, the EP was granted another opportunity of being heard on 25.06.2024. The EP vide email dated 21.06.2024 requested for a further extension of 15 days stating that he found the emails from NFRA in the junk folder of his email and therefore could not reply. Considering the request of the EP, as a last opportunity, the EP was granted another extension vide NFRA email dated 24.06.2024 and the personal hearing was rescheduled to 05.07.2024. The EP was asked to confirm his presence in the rescheduled personal hearing to be held on 05.07.2024 at NFRA Office. The EP was also given the option of bringing his legal counsel. The EP was also called upon to submit the SQC Policy of the firm and the form ADT-3. The EP vide his reply dated 28.06.2024 stated that he and CA Vikram Gupte would attend the personal hearing. He also submitted the SQC Policy but failed to submit the ADT-3. Vide email dated 01.07.2024, NFRA reminded the EP that he could only be accompanied by a legal counsel. The EP appeared in the personal hearing on 05.07.2024 and submitted ADT-3 which he had filed with MCA on 03.07.2024, after NFRA had initiated the proceedings, indicating that had not filed this statutory return timely. During the hearing, the EP requested for one more hearing with his legal counsel. The request was considered, and vide NFRA. email dated 15.07.2024, the hearing was posted to 06.08.2024 at 3 PM. However, vide email dated 18.07.2024, the EP informed that as he has covered almost all the facts and there is no requirement of any further hearing scheduled for 06.08.2024.
16. We have perused the Audit File, financials of subsidiary and associates of SCL, the written responses of the EP and the submissions of the EP in the personal hearing held on 05.07.2024. We find that the EP has committed major lapses which include failure relating to audit of Inventory, failure relating to Audit of Investments, lapses relating to consolidated financial statements, failure relating to audit of trade receivable and revenue, insufficient audit documentation, forming opinion on Financial Statements without obtaining Sufficient Appropriate Audit Evidence, and lack of proper communication with TCWG. These have been discussed in Part ‘C’ of this Order.
B. Lapses in the Audit
C.1 Failure relating to Audit of Inventory
17. The EP was charged with non-compliance with the requirements of Section 143(3) (e) of the Companies Act 20132, SA 5013 and SA 7054.
18. As on 31.03.2018, the total inventories of the SCL amounted to 524.90 crores. The breakup of these inventories is as follows:
Table 1
| S. No | Item | Rs. in crore |
| 1 | Raw Material | 328.03 |
| 2 | Work in Progress | 2.73 |
| 3 | Finished Goods | 151.46 |
| 4 | Stores and Spares | 3.87 |
| 5 | Packing Materials | 3.09 |
| 6 | Stock in Trade | 35.70 |
19. Of the total inventories as on 31.03.2018, raw material (62.49%) and finished goods (28.85%) formed the largest part of the total inventories. The raw material mainly consists of Soya Seed (Z 191.06 crores) and Paddy (Z 133.97 crores) and the finished goods mainly consist of Soya DOC (Z 38.22 crores) and Basmati Rice (Z 117.21 crores). The details are as follows:
Table 2
| S. No | Item | Quantity in MT | Rate per MT in Rs. | Rs. in crore |
| 1 | Soya Seed | 44956 | 42500 | 191.06 |
| 2 | Paddy | 33494 | 40000 | 133.97 |
| 3 | Soya DOC | 10921 | 35000 | 38.22 |
| 4 | Basmati Rice | 14652 | 80000 | 117.21 |
20. On examination of the Financial Statements of SCL and the Audit File for the FY 201718, it was observed that an interest cost of 11% was added while arriving at the price considered for the valuation of the closing inventories of soya seed and paddy resulting in overvaluation of the soya seed inventories by approx. Rs 18.93 crores and of paddy inventories by Rs 13.30 crores. The SCN stated that this was in noncompliance with Ind AS-25 and Ind AS-236, that the EP did not report this misstatement in his audit report and did not suitably modify his audit opinion in accordance with SA 705.
21. The SCN also observed that the EP did not obtain sufficient appropriate audit evidence regarding the existence and condition of inventory in accordance with Para 4 to Para 6 of SA 501.
22. In his response to the SCN, in reference to the inclusion of the finance cost in the valuation of the soya seed and paddy, the EP replied that:
“The Company was following a practice of including interest component as part of their closing stock valuation exercise considering inventory to be qualing assets using explanation to definition of qualifying assets available in AS 16 of accounting standards rules 2006. The company also used a logic that raw material (soyabean and paddy) being seeds are seasonal and procurement of crop (i.e. raw material) from farmer can be done once in a year (i.e. harvesting season) and later on the material is available from secondary market at higher prices.
Based on our understanding of client business, Soya Seed and Paddy crop harvesting season starts from October and remains till December. Later on, raw material is only available through secondary market. The Company mills soya seed based on availability or sourcing from primary market (Krushi Upaj Mandi) or secondary market during harvesting season and after March till October it is based on availability in secondary market and usage from own storage. In view of the seasonal nature of raw material, it requires bulk purchases in the season to ensure continuous flow of raw material to the milling plant. Further, the raw material procured and lying in storage also gains value due to loss in moisture content over time. The paddy is generally seasoned for a year or more by industry to acquire the required aroma after procurement. Thus, there is a component of finance involved in procurement of huge stock and keeping raw material available for processing throughout the year…
In case of paddy, paddy qualifies that substantial period of time definition based on the fact that according to the Company, the paddy is seasoned for a year by the company to acquire the required aroma after procurement. The SCL generally sales basmati rice only after seasoning of one year thus making it certain to be qualing assets as it is ready to be used only after one year of procurement……
SCL was following this practice consistently since last many years, the net impact on current year (2017-18) financial after removing impact of overvaluation of opening inventory on account of interest works out to be Rs.4.21 crore. This amount is below the materiality level. Therefore, applying our professional judgement we had not qualified the same.”
Further, in the personal hearing held on 05.07.2024, the EP while reiterating the above statement, also quoted and submitted the accounting policy of another such company to justify the inclusion of borrowing cost in the valuation of rice.
23. In reference to obtaining sufficient appropriate audit evidence regarding the existence and condition of inventory, the EP replied that:
“The Engagement team members visited two plant locations – Mandideep Soya Unit and Itarsi Soya Unit which consist 48.69% (255.57 crore) of total stock as on 31.03.2018 as this was only possible for us to verify on that date. The Physical verification process conducted by the company was witnessed by our team for soya seed and soya DOC. Since we have witnessed the physical verification process for 48.69% of total inventory, which in our considered opinion is a good sample size, to arrive at audit satisfaction ….. During audit quantity certification from the management was also obtained… Since stock was verified on 31.03.2018 and tallying with the book stock therefore, there was no question of reconciling the stock to the closing quantity arrived by the management”.
In the personal hearing held on 05.07.2024, the EP stated that they had only audited the soya division and not the rice division as they had planned to physically verify the rice division in the next year of audit.
24. We have considered the reply of the EP and find that the EP has failed to perform the audit procedures to ascertain and verify the existence, condition and the valuations of the inventories reflecting in the books of SCL as on 31.03.2018 for the following reasons:
a) Valuation of inventories:
i. Para 9 to 11 and Para 17 of Ind AS-2 “Inventories” states that borrowing costs are included in the cost of inventories only in case of limited circumstances as identified by Ind AS-23 “Borrowing Costs”. Para 7 of Ind AS-23 states that, depending upon the circumstances, inventories may be qualifying asset for capitalization of the interest, but inventories that are manufactured, or otherwise produced, over a short period of time, are not qualifying assets. Para 5 of Ind AS-23 states that a qualifying asset is an asset that “necessarily” takes a “substantial period of time” to get ready for its intended use Or sale.
ii. In the extant case, SCL treated closing inventories of soya seed and paddy as qualifying assets due to the reason that it makes bulk purchases in the season to ensure continuous flow of raw material to the milling plant and therefore capitalized the interest cost of 11% while arriving at the price considered for the valuation. As per the Ind ASs quoted above, in order to become a qualifying asset, an asset should “necessarily” take “substantial period of time” to get ready for its intended use or sale. This is not stated or clarified in the SCL’s accounting policy. The inventory policy of SCL states that “Raw material, stores and spares are valued at lower of cost (on FIFO basis) or net realisable value, whichever is lower”. There is no mention about the inclusion of borrowing cost for valuation of inventories in the said policy. There is no evidence in the Audit File to show if the EP had verified/concluded that the Paddy and Soya seeds are qualifying assets based on established criteria. There is nothing in the Audit File to support the claim made by the EP about his understanding of the client business, its production process and ageing of its inventory, the process of procurement of raw materials etc. or any efforts on the part of EP to obtain any report of technical expert that substantiates the claim of the EP. In fact, the MRL given by management of SCL states that “Rice” (not the paddy) is time aged to get better price in the market and therefore, the contention of the EP that paddy is seasoned by SCL is not acceptable.
iii. The submission of the accounting policy of another company by the EP in the personal hearing held on 05.07.2024 to support his stand regarding inclusion of interest costs in valuation of Paddy and Soya is rejected as the policy of that company explicitly states that “cost include interest cost on raw material where such raw material are stored for substantial period of time”. However, there is no such mention in the policy of the SCL, indicating that the EP failed to analyse the matter applying the established standards and is now rationalizing his position by giving unacceptable arguments.
iv. Therefore, the inclusion of the interest cost of 11% in arriving at the price considered for the valuation of the closing inventories of soya seed and paddy without supporting evidence resulted in overvaluation of the soya seed inventories by approx. 18.93 crores and of paddy inventories by 13.30 crores. This is not in compliance with Ind AS-2 and Ind AS-23 and therefore, we conclude that the EP failed to evaluate and report this non-compliance and misstatement.
b) Verification of existence and condition of inventories:
i. SCL largely had three processing plants/ factories situated at Mandideep, Itarsi and Kiratpur. These processing plants/ factories had 4 categories of inventories in form of raw material, work in progress, finished goods and trading stock as depicted in Table 3 below. The ET only verified the stock lying at Mandideep and Itarsi unit and only two categories of inventory viz. raw material (soya seed) and finished good (soya doc) were verified. There is no sufficient evidence in the Audit File to show the performance of physical verification or any alternative audit procedures with respect to the other material inventories.
Table-3
| S. No | Location | Inventory | Category | Value in Crores |
| 1 | Mandideep | Soya Seed | Raw Material | 100.99 |
| 2 | Mandideep | Soya Doc | Finished Good | 15.45 |
| 3 | Mandideep | Paddy | Raw Material | 110.10 |
| 4 | Mandideep | Rice | Finished Good | 33.56 |
| 5 | Itarsi | Soya Seed | Raw Material | 90.07 |
| 6 | Itarsi | Soya Doc | Finished Good | 7.01 |
| 7 | Itarsi | Rapeseed Meal | Trading stock | 4.79 |
| 8 | Itarsi | Rice | Trading stock | 9.37 |
| 9 | Kiratpur | Paddy | Raw Material | 23.86 |
| 10 | Kiratpur | Rice | Finished Good | 83.60 |
ii. The contention of the EP that the ET had witnessed the physical verification process for 48.69% of total inventory is a good sample size to arrive at audit satisfaction is flawed and shows his poor understanding of the SAs. Para 7 of SA 5307 states that the auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low level. Para 8 of SA 530 states that the auditor shall select items for the sample in such a way that each sampling unit in the population has a chance of selection. In the extant case, there is no sufficient evidence in the Audit File about the basis of selection of the sample of inventories. Further, the auditor’s selection of sample is biased as it completely neglected all the inventories other than Soya Seed and Soya Doc. The EP failed to exercise professional skepticism in planning and performance of the audit of inventories and sidelined the possibility that the figures related to inventories may be materially misstated. In fact, the EP did not check and verify the stock statements and their reconciliation submitted to the bank by SCL as an alternative audit procedure.
25. In the light of above, we, fmd the reply and explanation of the EP clearly as an attempt to justify non-performance of his professional duties and an afterthought to mislead NFRA. The evidence claimed by the EP are neither sufficient nor appropriate to draw conclusions about the existence and valuation of the inventory. We, therefore, fmd the EP to have been grossly negligent in performing his duty in accordance with of Section 143(3) (e) of the Companies Act 2013, SA 5018 and SA 7059.
26. Lapses in the audit of inventory have been viewed seriously by International Regulators as well.
(a) The US audit regulator PCAOB took a serious view of the non-performance by AMC Auditing, LLC of audit procedures pertaining to inventory and obtaining sufficient audit evidence. The PCAOB order° stating that “because inventory observation procedures were not performed for most of the reported inventory, nor was sufficient evidence obtained or conclusions reached to evaluate Issuer B’s representations about quantities and physical condition of inventory, Liu failed to obtain sufficient evidence for reported inventory during Issuer B’s 2016 audit”, suspended Mimi Liu, CPA for a period of one year.
(b) The PCAOB 11, in the matter of W.T. Uniack CPA, P.C. (firm) and William T. Uniack, CPA (respondent), revoked the firm’s registration and barred the respondent from being an associated person of a registered public accounting firm for their failure inter alia to obtain sufficient appropriate audit evidence and exercise due professional care and professional skepticism in the audit of inventory. The PCAOB noted that “An auditor who issues an audit opinion without employing procedures to observe inventories has the burden offustijdng the opinion expressed. Moreover, in such circumstances, tests of the accounting records alone will not be sufficient for [the auditor] to become satisfied as to quantities; it will always be necessary for the auditor to make, or observe, some physical counts of the inventory and apply appropriate tests of intervening transactions.”
C.2 Failure relating to Audit of Investments
27. The EP was charged with failure to verify the ownership and valuation and evaluate the impairment testing of the investments made by SCL in its loss-making subsidiary and associate companies resulting in failure to comply with Section 143(3)(e) of the Companies Act 2013, SA 700 and SA 705.
28. As on 31.03.2018, SCL had investments of 36.29 crores. These investments include investment in the unquoted shares of its subsidiary, Sanwaria Energy Limited (SEL) (Z 31.17 crores) and its associate Shreenathji Solvex Limited (SSL) (Z 4.76 crores). The company valued these investments in unquoted shares at cost and had been holding these investments in the last three financial years at the same value.
29. Sanwaria Energy Limited incurred a loss of 58 lakhs in the FY 2017-18. Shreenathji Solvex Limited incurred a loss of 83 lakhs in the FY 2017-18, had accumulated loss of 32.97 crores and had negative net worth (Z -15.97 crores) as on 31.03.018. As a result, the recoverable value of investment in the associate was reduced to 0.
30. Para 8 of Ind AS-36 “Impairment of Assets” provides that an asset is impaired when its carrying amount exceeds its recoverable amount. Paragraphs 12 to 14 of Ind AS-36 detail indications of an impairment loss. If any of those indications are present, an entity is required to make a formal estimate of the amount recoverable. Para 12 (h) (i) of Ind AS-36 states that a higher carrying amount of the investment in the separate Financial Statements as compared to the carrying amounts in the Consolidated Financial Statements of the investee’s net assets is an indicator that the asset may be impaired. Para 59 of Ind AS-36 provides that, if the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount.
31. Given the above-mentioned requirements of the standards, the EP was required to verify the ownership and valuation of these investments in SEL and SSL. Further, in view of the loss-making nature of SEL and SSL, the EP was required to check/evaluate the impairment testing of the investments. However, no sufficient evidence of such working is found in the Audit File.
32. In his written reply, the EP stated that “after the question raised by you (NFRA) in show cause notice we realised that the documentation of work performed for audit of investments was not part of the audit file. By virtue ofprocedure/right given to us in para 16 (which is appended below) of SA 230 along with application guidance available in para A24(which is appended below this) we do hereby present our views and additional documents considered by us at the time of audit but not documented in audit file earlier”.
33. The EP further submitted that Shreenathji Solvex Limited owned a land whose market value was 55.65 crore and therefore no devaluation/ impairment in value of investment was sought by us. The EP also presented calculations for the same in his reply to the SCN and also in the personal hearing held on 05.07.2024.
34. We fmd that for the following reasons, the reply and explanation given by the EP are misleading and an afterthought:
i. There is no evidence in the Audit File to show that the EP had performed any audit procedure with respect to the audit of investments.
ii. We find that the EP failed to enquire with the management of the company about the losses being incurred by SEL and SSL and the impact of the losses on the valuation of the investments shown in the books of SCL. There is also no evidence in the Audit File to show that the EP evaluated the impairment testing of the investments as per Ind AS-36 and reported this noncompliance.
iii. Further, we fmd no evidence in the Audit File to show that the EP examined this noncompliance with Ind AS-36 from the point of view of reporting a “Misstatement” as per Para 13(i) of SA 200 and took this into account for expressing the audit opinion in accordance with SA 705.
iv. In the personal hearing held on 05.07.2024, the EP submitted a copy of the sale deed dated 12.09.2008 in respect of the land owned by SSL and also purported working of the valuation of the land. Apart from not being a part of the Audit File, the copy of the sale deed dated 12.09.2008 in itself is a not a sufficient and appropriate evidence to establish the ownership of the land as it is not backed by some other evidence like a copy of land record with ownership details as on 31.03.2018 in the name of SSL. Therefore, we find the EP lacking in due diligence on this count.
v. The EP’s argument that Para 16 of SA 230 gives him the right to submit additional documents not documented in the audit file submitted to NFRA is flawed and not acceptable as the said Para 16 read with Para A24 of SA 230 states that modification to the Audit File can be done as a result of an internal monitoring or any external inspections only. Whereas in the extant case, NFRA, instituted disciplinary proceedings under section 132(4) of the Act by issue of the SCN to the EP and therefore the contention of EP on this ground is rejected. The addition of an audit working paper to the Audit File after the issue of an SCN by the regulatory authority is an act of rectification which may amount to tampering of the Audit File which is viewed seriously.
35. In the light of above, we, find the reply and explanation of the EP clearly as an attempt to justify non-performance of his professional duties and an afterthought to mislead NFRA. The EP clearly failed to fulfil his duty related to the audit of investments. We, therefore, find the EP to have been grossly negligent in performing his duty in accordance with of Section 143(3)(e) of the Companies Act 2013, SA 700 and SA 705.
36. Negligence in performing audit procedures related to the audit of investments has been viewed seriously by international regulators too. For example, PCAOB in its order dated 23.01.202412, in the matter of Tyson Holman, CPA, and Anna Hrabova, CPA, censured Tyson Holman, CPA, barred Holman from being an associated person of a registered public accounting firm; imposed a $65,000 civil money penalty on Holman; censured Anna Hrabova, CPA; limiting Hrabova’s activities in connection with any audit for a period of one year and imposed a $30,000 civil money penalty on Hrabova for inter alia failure to obtain sufficient appropriate audit evidence with respect to Issuer’s investments.
C.3 Lapses relating to Consolidated Financial Statements
37. The EP was charged with the failure to comply with the requirements of Section 143(3) (e) of the Companies Act 2013, SA 700 and SA 705 as the EP did not evaluate and report the non-compliance of Ind AS-11013 and Ind AS-28′4 by SCL.
38. SCL had investments in its subsidiaries namely SEL and Sanwaria Singapore Pte Limited (SSPL) and in its Associate Company namely SSL. Para 19 of Ind AS-110 states that a parent shall prepare Consolidated Financial Statements using uniform accounting policies for like transactions and other events in similar circumstances. Section 129 (3) of the Companies Act 2013 states that where a company has one or more subsidiaries, it shall, in addition to Financial Statements, prepare a Consolidated Financial Statement of the company. Para 16 of Ind AS-28 states that an entity with joint control of, or significant influence over, an investee shall account for its investment in an associate or a joint venture using the equity method.
39. However, SCL neither prepared the Consolidated Financial Statements in accordance with the requirement of Ind AS-110 nor accounted for the investment in associate company as per the requirements of Ind AS-28.
40. In his written reply, the EP submitted that “We were verbally promised by the management on the date of signing of standalone financials that the company will get consolidated financials signed by us once financial of the subsidiary and associates are ready to sign. The financials of the subsidiary company were signed by M/s Dubey Gupta and associates on 05/09/2018 Which was a date quite later than the date of signing of standalone financials of SCL. At the time of signing standalone financial statement, consolidated financial statements were neither ready and nor presented to us. ” ….”Thus, situation was not envisaged and documented in the audit file of standalone financials. The consolidated financials were neither prepared nor signed by any person. This situation has led to resignation of our firm from the assignment. We had decided to resign from assignment since SCL did not get it ‘s further results reviewed and also consolidated financial statement were not prepared by them. Moreover, the non-consolidation does not affect true and fair view of the standalone financial statement on which we have given report.
In the personal hearing held on 05.07.2024, the EP submitted the resignation letter dated 26.10.2018 and the ADT- 3 filed by EP on 03.07.2024.
41. We find that for the following reasons, the reply and explanation given by the EP are misleading and an afterthought:
i. There is no evidence in the Audit File to show that the EP had made any communication with the TCWG/ Management of the company with respect to the Consolidated Financial Statements. Further, there is no evidence in the Audit File of any submissions made by the management related to Consolidated Financial Statements including in the Management Representation Letter given to the auditor.
ii. The firm resigned from the statutory audit of SCL on 26.10.2018. There is no mention in the Audit File of the verbal assurance received by the EP that the Consolidated Financial Statements would be submitted later. The contention of the EP that the non-preparation and non-submission of the Consolidated Financial Statements led to the resignation of the firm from the assignment is not substantiated by the resignation letter of the firm in which it was stated that the firm was resigning from the assignment owing to “pre-occupations”. We find this as an act of misleading the regulator to justify nonperformance of his statutory duties.
iii. Para 19 of SA 60015 states that there should be sufficient liaison between the principal auditor and the other auditor. For this purpose, the principal auditor may find it necessary to issue written communication(s) to the other auditor. However, there is no evidence in the Audit File to show that the EP communicated with the auditor of the subsidiary and the associate companies to understand the status of their annual financial statement.
42. In light of above, we, conclude that the EP was grossly negligent in performing evaluation and reporting the non-compliance of Ind AS-110 and Ind AS-28 by SCL and also failed to comply with the requirements of Section 143(3) (e) of the Companies Act 2013, SA 700 and SA 705.
C.4 Lapses relating to audit of Revenue
43. The EP was charged with failure to perform adequate audit procedures to address the risk of misstatement due to fraud or otherwise in the revenue recognition in accordance with the requirements of SA 200, SA 240 and SA 315 and in obtaining sufficient appropriate audit evidence for verification of Revenue.
44. As per Para 15 of SA 20016, the auditors are required to plan and perform an audit with professional skepticism and Para 11 & 12 of SA 31517 require the auditor to understand the entity, its environment and internal controls. Further, Para 25 of both the SA 24018 & SA 315 requires the auditor to identify and assess the Risk of Material Misstatement (`ROMM’ hereafter), due to fraud or otherwise, at the Financial Statement level as well as at assertion level for classes of transactions, account balances and disclosures.
45. In the FY 2017-2018, SCL reported a total revenue of 5066.57 crores, consisting of Revenue from operations (Z 5054.73 crores) and Other Income (Z 11.84 crores).
46. In accordance with the requirements of SA 200, SA 240 and SA 315, while auditing the revenue of SCL which is a trading and manufacturing company, the EP was required to work and document in respect of the following areas:
- Understanding of business entity & relevant industry.
- Understanding of business environment of the company.
- Internal controls governing the generation of revenue.
- Verification of whether the company had instituted adequate cutoff procedures in relation to sales and sales returns so as to ensure that the transactions pertaining to a period are recorded in that period and not in a preceding or subsequent period by examining the despatch documents pertaining to a few days immediately before the year-end and verifying that the related sales invoices have been recorded as sales of the current year.
- Verification of the trade receivables to check that they are realized by the company through ledger scrutiny and its corroboration with the bank statements.
- Verification of the inter unit/plant sales and its treatment in the Financial Statements in accordance with applicable financial reporting framework
- Assessment of Management’s performance vis-à-vis the company’s expectations, as may be available in the Budgets.
- Verification of the other income of SCL (Income from trading in futures) by verification of the statement of D’Mat account, contract notes, margin statements etc.
47. However, on examination of the Audit File, no sufficient evidence is found that the EP had planned and performed audit with professional skepticism, had performed work to understand the entity, its environment and internal controls, and identified and assessed the ROMM due to fraud or otherwise.
48. In his written reply, the EP submitted that they had obtained the knowledge of entity along with its operating environment through entity’s previous financial statements and other available information and gave reference to some audit working papers. He further submitted that they have also performed control testing on various aspects of internal control system and gave reference to some audit working papers. Also, the audit team, he stated, had performed audit procedure like performance of verification of Sales Invoice along with supporting document and reconciliation of revenue with the GST and VAT Returns.
49. We find that for the following reasons, the reply and explanation given by the EP are an afterthought and therefore not acceptable:
i. There is nothing in the Audit File to support the claim made by the EP about his under-standing of the business of SCL, its production process, process of procurement of raw materials etc, even though it was the first year of his audit assignment.
ii. The control testing document, as referred by the EP, is merely a checklist of internal controls related to the revenue, without any details of the audit procedure performed.
iii. There is no sufficient evidence of any analytical procedure performed by the EP for plausible relationships among financial and non-financial data through trend analysis, ratio analysis etc.
iv. There is no sufficient evidence in the Audit File to show that the EP had checked and verified the inter-unit plant sales.
v. The EP referred to certain sample sale invoices to substantiate the testing of internal controls on revenue. These sample sales invoices are related to sales of items like bar-dana, iron scrap, oil etc. whose contribution in the total revenue is negligible. Out of the total revenue from operations (Z 5054.73 crores) of SCL for the FY 2017-18, bas-mati rice contributed approx. 50% (22548.20 crores) and Soya Doc contributed approx. 13% (2652.01 crores) but the sample invoices relating to control testing of revenue in respect of basmati rice and Soya Doc are not evidenced in the Audit File. The sample invoices19 referred to by the EP in personal hearing held on 05.07.2024 do not pertain to testing of internal controls on revenue and are a general dump of invoices. Further, in order to check the controls related to revenue, the EP was required to do a complete back testing of sales invoice starting from purchase contracts/agreements, purchase orders, sales invoices, dispatch order and delivery notes. The samples2° referred to by the EP merely refer to invoice number and no reference of other credentials viz. details of purchase contracts/agreements, purchase orders, sales invoices, dispatch order are seen in such sample invoices in the Audit File. Further, there is nothing in the Audit File to show that the auditor verified the controls related to rebate/discount viz-a- viz the re-bate/discount policy of the company. The control testing as claimed by EP is found to be thoroughly inadequate.
vi. SCL disclosed Other Income of Z 11.84 crores in the FY 2017-18 of which, future trading profit of Z 9.70 cores formed the largest part. The profit from future trading formed approx. 14 % of the total profit for the FY 2017-18 and therefore required a separate disclosure in the notes to accounts. However, SCL disclosed the future trading profit as “others” by clubbing with some other incomes. Further, there is no sufficient evidence in the Audit File to show that that the auditor verified the Statement of D’Mat account, contract notes with the bank statement of SCL.
50. In the light of above, we, conclude that the EP was grossly negligent in performing audit procedures to verify the Revenue of SCL. As revenue forms a critical component of the financial statements of any entity, the failure of the EP to adequately test the controls and perform due audit procedures in respect of revenue has rendered the audit perfunctory. Accordingly, we find the EP having failed to comply with SA 200, SA 240 and SA 315 and in obtaining sufficient appropriate audit evidence for verification of Revenue.
51. Negligence in performing audit procedures to verify the critical item like Revenue has been viewed seriously by international regulators too. For example, PCAOB in its order dated 08.02.201221, in the matter in the Matter of Ernst & Young LLP, Jeffrey S. Anderson, CPA, Ronald Butler, Jr., CPA, Thomas A. Christie, CPA, and Robert H. Thibault, CPA„ censured Ernst & Young LLP, barred Jeffrey S. Anderson, CPA and Robert H. Thibault from being associated with a registered public accounting firm; censured Ronald Butler, Jr., CPA and Thomas A. Christie, CPA and imposed civil money penalties in the amounts of $2,000,000 on E&Y, $50,000 on Anderson, $25,000 on Thibault, and $25,000 on Butler for failures to properly evaluate a material component i.e., revenue of Issuer’s financial statements.
C.5 Failure related to audit of Trade Receivables
52. The EP was charged with failure to obtain sufficient appropriate audit evidence and identify and assess the risks of material misstatement in accordance with the requirement of SA 200 and 315.
53. Para 15 of SA 200 states that the auditor shall plan and perform an audit with professional skepticism recognising that circumstances may exist that cause the financial statements to be materially misstated. Further, Para 17 of SA 200 states that the auditor shall plan and perform an audit with professional skepticism recognising that circumstances may exist that cause the financial statements to be materially misstated.
54. Para 5 of SA 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. Para 6 of SA 315 states that the risk assessment procedures shall include (a) Inquiries of management and of others within the entity who in the auditor’s judgment may have information that is likely to assist in identifying risks of material misstatement due to fraud or error; (b) Analytical procedures; and (c) Observation and inspection.
55. The SCN stated that the trade receivables of SCL (? 916.03 crores) formed a material part of the Balance Sheet (52.89%) and 18.12% of the revenue from operations (Z 5054.73 crores). The trade receivables turnover ratio was approximately 6.15 times or approximately 60 days. Also, 100% of the trade receivables were unsecured but no provisioning for doubtful debts was done in respect the trade receivables. Such alarming facts and figures required a greater degree of professional skepticism in performing the audit of the trade receivables. However, there was no sufficient evidence in the Audit Files to show that the EP had displayed professional skepticism and performed procedures like ageing/movement analysis of the trade receivables, analysis of the expected credit loss and verification of the statement of trade receivables submitted to banks to rule out the chances of any material misstatement in the financial statements due to fraud or error. Further, no working paper is found in the Audit File indicating that the EP had obtained and verified any justifiable explanation for slow realization of the trade receivables, nor were there any documents relating to pursuance of realization of trade receivables as per the credit policy of the company.
56. Responding to the charges in the SCN, the EP in his written reply stated that “the audit team has exercised professional skepticism while petforming the audit. This can be viewed from working papers such as `fraud risk document”, confirmations that were sought from trade receivables and around 40% of receivables were confirmed by the Audit. Ledger scrutiny was also performed for major trade receivables” … “We have reviewed the audited financial statement of last 4 years and noted that there are no bad debts and have not made any provision bad debts. The same also confirmed by the management and stated in the point 48 of MRL appended below. Therefore, there is not credit loss in trade receivable….”
57. With respect to the question of slow realization of debtors, the EP submitted the data of the receivable cycle for previous 5 years of SCL and stated that as the receivable cycle was improving since last three years, there was no reason to question about slow realisation.
58. In response to the question of verification of the statement of trade receivables submitted to banks, the EP submitted that the requirement of reconciliation of trade receivables with statements submitted to bank have started after onset of CARO 2020 which has become effective from audit of year 2022-23 and therefore the EP has not performed these procedures.
59. We find that the breakup of the total trade receivable (Z 916.03 crores) as on 31.03.2024 is as follows:
Table-4
| S. No | Debtor | Amount outstanding in crores | Percentage of total trade receivables |
| 1 | UWI Infra Pvt. Ltd. | 145.98 | 15.94% |
| 2 | UAC Commodities Pvt. Ltd. | 153.14 | 16.72% |
| 3 | U.R. ARC Pvt. Ltd | 27.28 | 2.98% |
| 4 | Other parties (approx. >950) | 589.62 | 64.36% |
| Total | 916.03 | 100% | |
The Audit File contain the balance confirmation received only from UWI Infra Pvt. Ltd, UAC Commodities Pvt. Ltd. and U.R. ARC Pvt. Ltd. There is no audit evidence that letters were written for balance confirmation to more than 950 debtors who accounted for over 64% of the trade receivables. Even in the case of the three debtors for which confirmation were available, there is no evidence that letters seeking confirmations were sent by the EP to these three debtors. There is no document in the Audit File to show how the samples were selected for external confirmations and the rationale of selection of these samples etc. A reasonable sample selection provides a basis for the auditor to draw conclusions about the population from which the sample is drawn. A skewed sample selection, as in the present case, compromises the integrity and objective of the audit.
60. There is no sufficient evidence in the Audit File to prove the claim of the EP that he reviewed the financial statements of last four years to verify bad debts and provision for bad debts. There is no sufficient evidence in the Audit File to show that the EP performed any analysis of the SCL’s receivable cycle. The contention of the EP that they have relied upon the MRL which says that trade receivable is valid and expected to be realised in normal course of business, shows absence of professional skepticism and blind acceptance of what was stated by the management. While such a representation letter serves as a formal acknowledgment of the management’s responsibilities with regard to debtors, it does not relieve the EP of his responsibility for performing audit procedures to obtain sufficient appropriate audit evidence which forms the basis for the expression of audit opinion on the financial information.
61. In view of the fact that 100% of the trade receivables of SCL were unsecured and no provisioning for doubtful debts was done with respect to them, ageing analysis of the trade receivable, analysis of the credit terms of the company, significantly overdue debts, debts whose collection is barred by statute of limitation etc. was critical in the audit of trade receivables. However, no sufficient evidence of such working is found in the Audit File. In the absence of performance of such critical audit procedure, there is no audit assurance about the possibility of diversion of funds and the trade receivables being inflated.
62. The contention of the EP that he did not verify the statement of trade receivables submitted to banks as the requirement of reconciliation of trade receivables with statements submitted to bank has started after onset of CARO 2020 is not tenable and is an afterthought as considering the materiality of trade receivables of SCL (Z 916.03 crores), the EP ought to have carried out, under the requirement of the SAs, this basic and critical audit procedure of verifying the trade receivables with the statement submitted to banks. The reference to requirement of CARO 2020 is not relevant here.
63. Professional skepticism i.e., a questioning mind and a critical assessment of audit evidence is crucial in performing audit including identifying and assessing the risks of material misstatement, performing tests of controls and substantive procedures. Sufficient appropriate audit evidence is the bedrock for an auditor to support the conclusion(s) expressed in the audit report. In the extant case, the EP did not show professional skepticism in carrying out the required risk assessments procedures and in test of controls. Accordingly, we find that the EP failed to comply with SA 200 and SA 315 in performance of the audit of trade receivables.
64. Negligence in performing audit procedures related to the audit of trade receivables has been viewed seriously by international regulators too. For example, PCAOB in its order dated 20.03.202422, in the matter of CHOI Chung Chuen, MA Hong Chao, and DONG Chang Ling, censured CHOI Chung Chuen, MA Hong Chao, and DONG Chang Ling, barred Choi and Ma each from being an associated person of a registered public accounting firm, limited Dong’s activities in connection with any audit for a period of one year and imposed civil money penalties in the amounts of $75,000 on Choi, $50,000 on Ma, and $25,000 on Dong for failure to exercise due care and professional skepticism and obtain sufficient appropriate audit evidence to support Issuer’s net accounts receivables and doubtful accounts.
C.6 Failure related to forming an opinion on Financial Statements without obtaining Sufficient Appropriate Audit Evidence
65. The EP was charged with failing to form audit opinion on Financial Statements without obtaining reasonable assurance whether the financial statements as a whole are free from material misstatement, whether due to fraud or error in accordance with the requirements of the provisions of SA 700.
66. Para 10 to 14 of SA 700 requires that the auditor shall form an opinion on whether the Financial Statements are prepared in accordance with the requirements of the applicable financial reporting framework. While forming an opinion on the financial statements, the auditor shall obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement by obtaining sufficient appropriate audit evidence.
67. In the extant case, as explained in the foregoing paragraphs, instances of material misstatements have been enumerated for which the EP failed to obtain sufficient appropriate audit evidence, but he certified that the Financial Statements of SCL for the FY 2017-18 (except for liability towards employees gratuity on estimated basis) were reflecting True and Fair view. Further, as enumerated, SCL lacked adequate internal financial controls over financial reporting, for example non consolidation of the Financial Statements in FY 2017-18 and non-evaluation of the impairment requirement with respect to the investments. Despite this, the EP in his Report on the Internal Financial Controls, opined that the company has, in all material respects, an adequate internal financial controls system over financial reporting.
68. The EP in his written reply denied these charges and stated that the conclusions drawn on financial statements were ensuring true and fair view of financial statements except as mentioned in the report.
69. The reply of the EP makes light of the compliance requirements of the SAs in light of the errors and omissions mentioned in the foregoing paragraphs of this Order. The EP has clearly failed in obtaining sufficient appropriate audit evidence by failing to perform test of controls, risk assessment procedures and analytical procedures and therefore failing to obtain reasonable assurance about whether the fmancial statements as a whole are free from material misstatement.
70. In light of above, we, conclude that the EP was grossly negligent in forming an opinion on Financial Statements without obtaining reasonable assurance about whether the financial statements as a whole were free from material misstatement. Accordingly, the EP failed to comply with the requirements of SA 700.
71. Failure in forming an opinion on Financial Statements without obtaining Sufficient Appropriate Audit Evidence has been viewed seriously by international regulators too. For example, in the Matter of Haynie & Company, PCAOB in its order dated 23.01.202423, censured the firm, Haynie & Company and imposed $400,000 civil money penalty for inter alia failing to obtain sufficient appropriate audit evidence to provide a reasonable basis for the Firm’s audit opinions, and to conduct the 2019 Audits with due care and professional skepticism.
C.7 Failure related to Audit Documentation
72. The EP was charged with failure to prepare sufficient audit documentation in accordance with the requirements of SA 23024.
Para 8 of SA 230 requires an auditor to prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand:
(a) The nature, timing, and extent of the audit procedures performed to comply with the SAs and applicable legal and regulatory requirements;
(b) The results of the audit procedures performed, and the audit evidence obtained; and
(c) Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions.
73. Para 9 of SA 230 states that in documenting the nature, timing and extent of audit procedures performed, the auditor shall record (a) The identifying characteristics of the specific items or matters tested; (b) Who performed the audit work and the date such work was completed; and (c) Who reviewed the audit work performed and the date and extent of such review.
74. In his written reply, the EP denied the charges and submitted that the audit working papers were duly documented and referred to various paras of his reply to the SCN.
75. Our analysis of the EP’s reply and other related material shows that:
i. The Audit File lacked many significant and critical working papers such as:
a. Documents related to audit of inventory viz., consolidated working of the inventory category wise and plant wise etc.
b. Documents related to determination and communication with TCWG, Minutes of the meetings amongst the members of Engagement Team (ET) with management and TCWG.
c. Working papers related to verification of the related party transactions like the approval of the board and audit committee of SCL, the documents related to verification of arm’s length price etc.
d. Working papers related to valuation of investments of SCL.
e. Working papers related to audit of trade receivable viz the working related to analysis of SCL’s receivable cycle, analysis of expected credit loss etc.
f. Resignation letter and the ADT-3 submitted by the EP to RoC after resigning as auditor of SCL.
ii. The Audit Work Papers did not have the caption of work paper, date, signature of preparer, and reviewer.
iii. Most of the Audit Work Papers submitted to us do not meet any of the basic requirements of Para 8 and 9 of SA 230.
76. The above position clearly demonstrates the EP’s gross negligence in the preparation of audit documents and conduct of audit of a PIE in a casual manner. ADT-3 was not part of the Audit File and was submitted in July 2024 after repeated reminders from NFRA. The EP failed to meet the objectives of SA 230 to prepare documentation that provides sufficient and appropriate record for the basis of auditor’s report and evidence that the audit was planned and performed in accordance with SAs.
77. Audit documentation is a crucial aspect of the audit process as it provides a detailed record of the audit procedures performed, the evidence obtained, and the conclusions reached. It ensures that an experienced auditor, with no prior connection to the audit, can understand the nature, timing, and extent of the audit work. The EP’s failure to prepare adequate audit documentation, as required by SA 230, highlights a significant lapse in meeting professional standards. This failure undermines the integrity of the audit and demonstrates gross negligence, leading to professional misconduct. Proper documentation is essential for maintaining transparency, accountability, and the overall quality of the audit.
78. Non-documentation of the work performed is clear evidence that the work has not been performed. It is apposite to note the following observations of the Australian Audit Regulator ASIC:
“Firms often assert that our findings relate to documentation deficiencies in their Audit File. An Audit File should contain sufficient detail for an experienced auditor to understand the work performed and relied on in forming conclusions. Where this detail has not been documented, our presumption is that the work has not been performed. We have used this approach for several years and it is consistent with the approach applied globally by other audit regulators and in most firm internal quality review programs. “25 (Emphasis supplied)
79. In the matter of Bharat Parikh & Associates Chartered Accountants, dated 19.03.2019, 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 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, including in those areas of the audits involving significant risks. For the FY 2016 and 2017 Issuer A audits, the documentation also failed to demonstrate who performed the work and the date such work was completed Additionally, in each of the Issuer A and Issuer B audits, the audit documentation was insufficient to demonstrate which aspects of the audit and which audit documentation Bharat Parikh reviewed.”
80. The Executive Counsel to the Financial Reporting Council (FRC), the UK Audit Regulator, in the matter pertaining to Deloitte LLP and John Charlton in the audit of Mitie Group plc. for the year ended 31 March 2016, imposed a financial sanction of Two Million Pounds, a published statement in the form of severe reprimand against Deloitte and a financial sanction of 65,000 Pounds and a published statement in the form of a severe reprimand against Charlton besides other things, for breach of ISA 230 as they failed to adequately document the audit work papers.
81. In light of the foregoing, we find the explanation of the EP unacceptable and conclude that the EP was grossly negligent in performing his duty in accordance with SA 230.
C.8 Failures relating to determination and communication with Those Charged With Governance (TCWG)
82. The EP was charged with failure to determine TCWG, communicate with TCWG about the responsibilities of the auditor, overview of planned scope, timing of the audit and deficiencies in Internal Control and to maintain audit documentations of such activities in accordance with the requirements of SA 26026 and 26527.
83. Responding to the charge, the EP replied that the minutes of meeting were not documented, however, the meetings have happened and can be verified from the language of management representation letter available in Audit File where management is referring to the queries raised by the EP during audit and discussion.
84. There is no sufficient evidence in the Audit File to show that the EP had determined the TCWG or communicated with the TCWG or performed any duty as required by SA 260 and SA 265. There is no sufficient evidence in form of minutes of the meeting held between the EP and the TCWG. The MRL issued by the management cannot be said as an evidence of the meetings and of the determination, communication with TCWG. Further, there is no sufficient evidence that the EP raised significant audit issues like the impairment requirement of the investments of SCL, the issue of non-consolidation of the financial statements to the TCWG.
85. In the light of above, we conclude that the EP has failed to exercise due diligence and was grossly negligent in not identifying and communicating with TCWG, overview of planned scope, timing of the audit and deficiencies in Internal Control etc. Consequently, the EP failed to comply with the requirements of SA 260 and SA 265.
86. Failure to appropriately communicate with Audit Committee (which is a part of the TCWG) has been viewed seriously by international regulators too. For example, PCAOB, the US audit regulator, charged the public accounting firm L.L. Bradford & Company, LLC (Audit Firm) for its failure to communicate with the audit committee during the audit of WebXU Inc.’s (“WebXU”). It stated that the “Firm also violated a PCAOB rule that requires a registered public accounting firm to communicate, in writing, to the audit committee …………….. ” The PCAOB, for this misconduct among others, censured the Firm, revoked its registration, and imposed a civil money penalty of $12500.
C.9 Failure to report non-compliances with provisions of the Companies Act 2013
87. The EP was charged with failure to comply with Section 143 (9)25 of the Companies Act, 2013 which requires that every auditor shall comply with the SAs.
88. Responding to the charge, the EP reiterated his earlier statements and stated that he deemed himself compliant with the provisions of the Companies Act, 2013 including accounting standards and auditing standards applicable in India.
89. As explained in the above paragraphs, it is clearly evident that the EP failed to comply with a number of SAs namely SA 200, SA 315, SA 230, SA 260, SA 265, SA 700, SA 705 etc.
90. We, therefore, conclude that the EP was grossly negligent in the conduct of his professional duties in violation of Section 143 (9) of the Companies Act, 2013.
C.10 Lapses relating to Related Party Transactions, Advances and Materiality
91. The EP was charged with failures related to related party transactions, advances and materiality. In view of the written responses of the EP and submissions made during the personal hearing held on 05.07.2024, these charges are not pursued further.
D. Articles of charges of Professional Misconduct by the Auditor
92. As discussed in the foregoing paragraphs, the EP has made a series of serious departures from the Standards and the Law, in his conduct of the audit of SCL for FY 2017-2018. We, therefore, conclude that the EP has committed Professional Misconduct as defined under Section 132 (4) of the Companies Act, 2013 in terms of Section 22 of the Chartered Accountants Act 1949 (CA Act) as amended from time to time, and as detailed below:
i. The EP 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 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 ‘flaking such financial statement where he is concerned with that financial statement in a professional capacity”.
This charge is proved as the EP failed to obtain sufficient and appropriate audit evidence to draw conclusions about the existence and valuation of the inventory, failed to perform his duty of evaluation and reporting the non-compliance of Ind AS-110 and Ind AS-28 related to consolidation of financial statements of SCL, failed to fulfil his duty related to the audit of investments as explained in paras 17 to 42 above.
ii. The EP committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 6 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 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 obtain sufficient and appropriate audit evidence to draw conclusions about the existence and valuation of the inventory, failed to perform his duty of evaluation and reporting the non-compliance of Ind AS-110 and Ind AS-28 related to consolidation of financial statements of SCL, failed to fulfil his duty related to the audit of investments as explained in paras 17 to 42 above.
iii. The EP committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 7 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 “does not exercise due diligence and is grossly negligent in the conduct of his professional duties”.
This charge is proved as the EP failed to conduct the audit in accordance with the SAs and applicable rules as well as due to his failure to report the material misstatements and non-compliances of the Company in its financial statements, as explained in the paras 17 to 90 above.
iv. The EP committed professional misconduct in terms of by Section 132 (4) of the Companies Act, read with Section 22 and clause 8 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 obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion”.
This charge is proved as the EP failed to conduct the audit in accordance with the SAs and applicable rules as well as due to his failure to report the material misstatements and non-compliances of the Company in the financial statements, as explained in the paras 17 to 90 above.
v. The EP 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 EP failed to conduct the audit in accordance with the SAs but reported in his audit report that the audit was conducted as per SAs as explained in paras 17 to 90 above.
E. Penalty and Sanctions
93. Independent Auditors of Publicly Listed Companies are expected to demonstrate sufficiency and appropriateness of audit work in every aspect of the critical building blocks of an audit of Financial Statements of a PIE. Failure of the auditor to meet the requirements envisaged under the Law and Professional Standards on Auditing are conspicuous in this audit engagement performed by the EP.
94. As is set out in this Order, the manner in which the audit was conducted, failed to meet the requirements of the SAs, the Act and the Code of Ethics in a number of significant aspects which demonstrated gross negligence on the part of the EP. This can be gauged from the failure of the EP to critically assess the existence and valuation of inventories, failure to comment in the audit report about the non-consolidation of financial statements, failure to verify the impairment testing of the investments of SCL and failing to apply the mandatory SAs in the audit. We therefore conclude that the EP’s failure to comply with the provisions of SAs, exhibit professional skepticism, and fulfill the necessary audit procedures led to significant deficiencies in the audit. This non-compliance, combined with the consequent reporting failures, constitutes a breach of professional responsibilities and statutory requirements. The EP’s actions (or inactions) constitute a serious violation of audit standards, leading to significant repercussions for the integrity and reliability Of the financial statements.
95. 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.
96. 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:
A) imposing penalty of (I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and (II) not less than five lakh rupees, but which may extend to ten times of the fees received, in case of firms;
(B) debarring the member or the firm from (I) being appointed as an auditor or internal auditor or undertaking any audit in respect of Financial Statements or internal audit of the functions and activities of any company or body corporate; or (II) performing any valuation as provided under Section 247, for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority.
97. As per the information furnished by CA Santosh Deshmukh vide his email dated 05.2024, the statutory audit fees of SCL for the FY 2017-18 was
98. The professional misconduct of CA Santosh Deshmukh has been detailed in the foregoing paragraphs of this Order. Considering the proved professional misconducts and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, hereby order imposition of monetary penalty of 5,00,000/- (Rupees Five Lakhs) and also debars CA Santosh Deshmukh for 1 (One) year 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. In light of the judgement of the Hon’ble National Company Law Appellate Tribunal (NCLAT) dated 01.12.202329, we have limited the monetary penalty to 5 Lakh only since the violations relate to FY 2017-18.
99. This Order will become effective after 30 days from the date of its issue.
Sd/-
(Dr. Ajay Bhushan Prasad Pandey)
Chairperson
Sd/-
(Dr. Praveen Kumar Tiwari)
Full-Time Member
Sd/-
(Smita Jhingran)
Full-Time Member
Authorised for issue by the National Financial Reporting Authority,
Date: 09.09.2024
Place: New Delhi
(Vidhu Sood)
Secretary
Order in the matter of Comp. App. (AT) No. 68,87,90 & 91 of 2023, Judgement dated 01.12.2023, page 92, that states regarding retrospective jurisdiction of NFRA that ” We also take into consideration the fact that neither any new misconduct has been created in law, which NFRA can investigate and levy penalty, if required nor NFRA can levy penalty greater than the quantum of penalty envisaged under the Chartered Accountants Act, 1949.”
Copy To: –
i. Secretary, Ministry of Corporate Affairs, Government of India, New Delhi.
ii. Securities and Exchange Board of India, Mumbai.
iii. Registrar of Companies, Gwalior.
iv. Secretary, Institute of Chartered Accountants of India, New Delhi.
v. IT-Team, NFRA for uploading the order on the website of NFRA.
Notes:
1 Rule 3 of NFRA Rules, 2018
2 The auditor’s report shall also state whether, in his opinion, the financial statements comply with the accounting standards
3 SA 501: Audit Evidence—Specific Considerations for Selected Items
4 SA 705: Modifications to the Opinion in the Independent. Auditor’s Report
5 Ind AS-2 “Inventories”
6 Ind AS-23 “Borrowing Costs”
7 Audit Sampling
8 SA 501: Audit Evidence—Specific Considerations for Selected Items
9 SA 705: Modifications to the Opinion in the independent. Auditor’s Report
10 PCAOB Release No. 105-2020-021 dated December 3, 2020.
11 PCAOB Release No. 105-2017-028
12. PCAOB Release No. 105-2024-002
13 Ind AS-110 “Consolidated Financial Statements”
14 Ind AS-28 “Investments in Associates and Joint Ventures”
15 SA 600: Using The Work of Another Auditor
16 SA 200. Overall Objectives of the Independent Auditor and the Conduct of en Audit in Accordance with Standards on Auditing
17 SA 315: Identifying and Af.sr,sing the Risk of Material Misstatement through understanding the entity and its environment
18 SA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
19 Audit files \11. Performing Audit\16.Revenue From Operation Sale Invoices
20 Audit files\4. Performing Auditl16.Revenue From Operation1Sample Sale Invoice
21 PCAOB Release No. 105-2012-001
22 PCAOB Relcan No. 105-2024-013
23. PCAOB Release No. 105-2024-001
24 SA 230: Audit Documental
25 Refer Page 7 of ASIC Audit Inspection Report — Report 743 October 2022
26 SA 2607 Communication with The .e. Charged with Governance
27 SA 265: Communicating Deficiencies in Internal Control to Those Charged with Governance and Management
28 Section 143 (9): Powers and duties of auditors and auditing standards.
