NATIONAL FINANCIAL REPORTING AUTHORITY
AUDIT QUALITY REVIEW REPORT (AQRR)
AUDITOR: RAJENDRA K. GOEL & CO.
Firm Registration Number (FRN): 001457N
AUDITEE: Jaiprakash Associates Limited (JAL)
Statutory Audit for FY 2017-18
DATE OF REPORT: 27th August 2021
NATIONAL FINANCIAL REPORTING AUTHORITY,
GOVERNMENT OF INDIA
7TH FLOOR, HINDUSTAN TIMES HOUSE, K.G. MARG,
NEW DELHI – 110001
1.1 Section 132(2)(b) of the Companies Act, 2013 requires the National Financial Reporting Authority (NFRA) to, inter alia, monitor and enforce compliance with accounting standards and auditing standards in such manner as may be prescribed.
1.2 Rule 8 of the NFRA Rules, 2018 provides that for the purpose of monitoring and enforcing compliance with auditing standards under the Act, NFRA may–
a) review working papers (including audit plan and other documents) and communications related to the audit;
b) evaluate the sufficiency of the quality control system of the auditor and the manner of documentation of the system by the auditor; and
c) perform such other testing of the audit, supervisory, and quality control procedures of the auditor as may be considered necessary or appropriate.
1.3 The statutory audit of Jaiprakash Associates Limited (JAL) for the financial year 2017-18 (the “Engagement”) was carried out by Rajendra K. Goel & Co. (Firm Registration No. ICAI FRN 001457N) (“Audit Firm/” Auditor”). Pursuant to the Companies Act and the NFRA Rules, NFRA commenced an Audit Quality Review (AQR) of the statutory audit of JAL for the year 2017-18 and arrived at Prima Facie Conclusions (PFC), which were detailed in the PFC Report dated 30th September 2020. The response of the Audit Firm to the PFC Reports was received on 28th November 2020. A Draft Audit Quality Review Report (DAQRR) was issued on 30th March 2021. The Audit Firm submitted its written reply in response to the DAQRR on 14th June 2021. Further, NFRA provided the Audit Firm with a chance for oral hearing on 20th August 2021. However, the Audit Firm did not wish to avail of the opportunity afforded for an oral hearing. In their email of 10 Aug, 2021, in reply to NFRA’s email of 5 Aug, 2021, informing them about the oral hearing, the Audit firm stated that:
“We would like to state that we have submitted all the detailed replies to Questionnaire, PFC and DAQRR of NFRA. We have no further submission in addition to our previous replies submitted to NFRA.
There have been some lapses on our part regarding obtaining documentation but we conducted audit ethically with full honesty, integrity, and with complete independence. Further we would like to bring to your notice that, we have now amended our procedures to ensure that proper documentation is kept at every stage of conducting audit”. Given this reply, the oral hearing was cancelled.
1.4 NFRA has prepared this Audit Quality Review Report (AQRR) on the basis of examination of the Audit File and other information sought from the Audit Firm from time to time, during the course of examination of the working papers, and the responses submitted by the Audit Firm to NFRA’s PFC Report and DAQRR Report.
1.5 The chronology of the events regarding AQR of the statutory audit of JAL for the financial year 2017-18 carried out by Rajendra K. Goel & Co., including details of communications between NFRA and the Audit Firm, is at Annexure 1.
Summary of AQRR
1.6 The following is a summary of the most important observations of the AQRR. Details of the evidence in support of these observations, and the reasoning leading thereto are provided in the later Sections of this AQRR.
a) The Audit Firm’s reporting in the “Basis of opinion” section of Independent Auditors Report is false and misleading. The impact of the transactions violative of accounting and auditing standards, as identified in this AQRR are such that the profit before tax of Rs. 351.71 crores, as reported in the financial statements, would have turned into a loss of at least Rs. 3,215.77 crores. This impact is both material and pervasive. As a result, the Audit Firm was bound, under the SAs, to issue an adverse opinion (Para 8 of SA 705).
b) The Audit Firm did not obtain sufficient appropriate audit evidence to understand the impact that the insolvency petition against JIL had on the Company (JAL). Further, the Audit Firm did not perform any audit procedures to understand as to why the Company (JAL) was made a party to this insolvency petition. This indicates gross negligence and total lack of due diligence on the part of the Audit Firm. Even assuming, but not admitting, that the Audit Firm was not able, after exercising due diligence, to ascertain the impact of the pendency/ongoing CIRP/legal proceedings of JIL with the NCLT Allahabad and the Hon’ble Supreme Court of India, the Audit Firm should have issued a disclaimer of opinion.
c) The Audit Firm compromised with the effectiveness of the auditor’s report by widespread use of Emphasis of Matter (EOM) Paragraphs. The Audit Firm has provided eight EOMs in the financial statements of FY 2017-18. Para A3 of SA 706 states that widespread use of Emphasis of Matter Paragraphs diminishes the effectiveness of the auditor’s communication of such matters. Further, the Audit Firm failed to obtain sufficient appropriate audit evidence for providing these EOMs that was required as per SA 706.
d) The Audit Firm has failed to appropriately and sufficiently evaluate the use of going concern basis of accounting by the Management and thus failed to note the implications thereon in the Auditor’s Report.
e) In assessing ROMM, the Audit Firm did not satisfactory rebut the presumption of ROMM due to fraud in respect of revenue recognition and management override of controls. This ultimately resulted in several violations of applicable provisions of Ind AS and SAs.
f) The Audit Firm had not identified and assessed ROMM through understanding the entity and its environment, including the entity’s internal control. There were no ROMM procedures performed by the Audit at the assertion level. The Audit Firm has failed to perform the audit with professional skepticism and has failed to obtain sufficient appropriate audit evidence to reduce ROMM to an acceptably low level.
g) JAL’s financial exposure in its subsidiaries, associates and joint ventures amounting to Rs. 6,894.02 crore was not properly valued as per the applicable Accounting Standards. The Audit Firm failed to obtain sufficient appropriate evidence on correct valuation of JAL’s investment in these entities.
h) The Company’s accounting treatment for Non-Current Assets held for sale was not in accordance with the accounting standards, which led to a huge misstatement in the financial statements. The Audit firm also failed to obtain sufficient appropriate audit evidence in this regard.
i) The Audit Firm has made a complete travesty of the EQCR process by appointing the EP himself as its EQCR Partner, thereby negating the very fundamental objectives of the SAs.
j) The Audit Firm has failed to maintain audit documents as per the requirements of SA 230.The integrity and reliability of the Audit File is questionable due to inconsistencies arising out of such lack of documentation.
1.7 While reference has been made in most cases to SAs which have a direct bearing on the issues under consideration, it needs to be borne in mind that certain generally applicable requirements of the SAs, such as the need to exercise professional skepticism, the need to obtain sufficient appropriate audit evidence, performance of procedures to address the assessed risks, etc., are integral in all individual cases discussed in the AQRR even if they are not specifically included in individual paragraphs of the Report.
1.8 Based on the conclusions in the AQRR, it appears that the Audit Firm has failed to meet the requirements of the SAs while forming their opinion on the Company’s Financial Statements for FY 2017-18. The instances discussed in this Report are of such significance that, in the NFRA’s view, the Audit Firm did not have sufficient justification for issuing the Audit Report asserting that the audit was conducted in accordance with the SAs. NFRA draws attention to Response 12 in the ICAI’s Implementation Guide on Reporting Standards ( November 2010 edition) that says that “a key assertion that is made in this paragraph is that the audit was conducted in accordance with the SAs”; and that “If during a subsequent review of the audit process, it is found that some of the audit procedures detailed in the SAs were not in fact complied with, it may tantamount to the auditor making a deliberately false declaration in his report and the consequences for the auditor could be very serious indeed” (emphasis added). Failure to comply with any of the requirements of applicable SAs indicates that the Audit Firm has failed to achieve the central purpose of audit, and that there was not an adequate basis to issue the report it did.
1.9 This AQR is designed to identify and highlight non-compliance with the requirements of the SAs, and to bring out insufficiencies in the Quality Control System of the Audit Firm and the shortcomings in the documentation of the audit process. The AQR also evaluates the quality and adequacy of the supervisory procedures of the Audit Firm. The AQRR is, therefore, not to be treated as an overall rating tool.