Facts of the Case

The National Financial Reporting Authority initiated proceedings against CA Yogesh Mahipal, proprietor of M/s Yogesh Mahipal & Associates, who acted as Engagement Partner and statutory auditor of Vikas Proppant & Granite Limited for FYs 2018-19 and 2019-20.

The matter originated from information received from SEBI concerning possible violations in the financial statements and audit process of the listed company. NFRA examined the audit file and found deficiencies relating to non-provisioning of Expected Credit Loss (ECL) on trade receivables, non-reporting of Related Party Transactions (RPTs), depreciation issues relating to leasehold land and plant & machinery and several audit procedure failures.

A Show Cause Notice was issued alleging professional misconduct. After examining the audit records and responses, NFRA proceeded to determine whether the auditor had complied with applicable auditing and accounting standards.

Issues Involved

  1. Whether the auditor failed to properly plan and perform the audit and understand the nature of the entity and its environment.
  2. Whether the auditor failed to evaluate the Internal Audit Function as required under SA 610.
  3. Whether the auditor failed to determine materiality and performance materiality in accordance with SA 320.
  4. Whether the auditor failed to report non-provisioning of Expected Credit Loss on trade receivables as required under Ind AS 109.
  5. Whether the auditor failed to identify and report Related Party Transactions under the Companies Act, 2013 and applicable auditing standards.
  6. Whether the auditor failed to assemble the audit file within the prescribed period under SA 230.
  7. Whether the auditor failed to report non-charging of depreciation on leasehold land and plant & machinery.
  8. Whether sufficient and appropriate audit evidence was obtained through external confirmations.
  9. Whether the auditor failed to appoint and document Engagement Quality Control Review (EQCR) as required by SA 220.
  10. Whether the above failures amounted to professional misconduct under the Chartered Accountants Act, 1949.

 

Petitioner’s / Auditor’s Arguments

The auditor submitted replies to the Show Cause Notice and contended, inter alia, that:

  • Internal auditors had been appointed and their work had been considered.
  • Audit procedures were conducted in relation to the financial statements.
  • The audit opinion was appropriately expressed on the basis of information available.
  • Responses and explanations were furnished regarding the matters raised in the proceedings.

However, NFRA noted that the auditor did not avail the opportunity of personal hearing and several allegations remained unsupported by audit documentation available on record.

Respondent’s / NFRA’s Arguments

NFRA contended that:

  • The auditor failed to document understanding of the entity, its environment and internal controls.
  • No evidence existed showing evaluation of the Internal Audit Function under SA 610.
  • Materiality and performance materiality were not determined or documented.
  • The company failed to provide Expected Credit Loss on significant trade receivables and the auditor did not qualify or modify the audit report.
  • Material Related Party Transactions remained undisclosed and unreported.
  • Audit documentation was not completed within the prescribed statutory period.
  • Leasehold land and plant & machinery were not depreciated in accordance with applicable accounting standards and the auditor failed to report the same.
  • External confirmations for substantial trade receivables were not obtained.
  • Engagement Quality Control Review was neither performed nor documented.
  • Such failures reflected gross negligence and lack of due diligence expected from a statutory auditor of a listed company.

Court Order / Findings

NFRA held that the charges against the auditor stood proved.

The Authority found that:

1. Failure in Audit Planning

The auditor failed to plan the audit and failed to understand the entity and its environment, violating SA 300 and SA 315.

2. Failure to Evaluate Internal Audit Function

No evidence was produced showing evaluation of the Internal Audit Function as mandated by SA 610.

3. Failure to Determine Materiality

The auditor failed to determine and document materiality and performance materiality under SA 320.

4. Failure to Report ECL Provision Deficiency

The company had significant overdue receivables requiring assessment under Ind AS 109. The auditor failed to report non-provisioning of Expected Credit Loss.

5. Failure to Report Related Party Transactions

Substantial transactions and balances with related parties were not properly reported or evaluated.

6. Failure in Audit Documentation

The audit file was not assembled within the statutory period prescribed under SA 230.

7. Failure to Report Depreciation Issues

The auditor failed to report non-charging of depreciation on leasehold land and plant & machinery.

8. Failure to Obtain Sufficient Audit Evidence

External confirmations for material receivables were not obtained and no alternative procedures were documented.

9. Failure to Appoint EQCR

The auditor failed to appoint and document Engagement Quality Control Review despite the company being a listed entity.

NFRA concluded that these lapses constituted professional misconduct under Clauses 5, 6, 7 and 8 of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

Important Clarifications

NFRA on Auditor Responsibility

The statutory auditor of a listed entity is required to conduct the audit with professional scepticism, due diligence and strict compliance with Standards on Auditing.

Documentation is Critical

Absence of audit documentation is treated as absence of performance of audit procedures.

EQCR Requirement

For audits of listed entities, Engagement Quality Control Review is mandatory and must be documented.

ECL Assessment

Auditors are expected to independently evaluate compliance with Ind AS 109 regarding Expected Credit Loss and cannot merely rely upon management assertions.

Related Party Transactions

Auditors must actively identify, evaluate and report undisclosed related party transactions and balances.

Public Interest Entity Audits

Higher standards of care are expected in audits of Public Interest Entities due to the potential impact on investors and stakeholders.

Final Order

NFRA exercised powers under Section 132(4)(c) of the Companies Act, 2013 and ordered:

  1. Monetary Penalty of ₹2,00,000 (Two Lakhs) upon CA Yogesh Mahipal.
  2. Debarment of CA Yogesh Mahipal for a period of two years from being appointed as an auditor or internal auditor and from undertaking any audit in respect of financial statements or internal audit of functions and activities of any company or body corporate.
  3. The order was directed to become effective after 30 days from the date of issue.

Relevant Sections Involved

Companies Act, 2013

  • Section 132(4)
  • Section 132(4)(c)
  • Section 143
  • Section 177
  • Section 188

NFRA Rules, 2018

  • Rule 11
  • Rule 3 (Public Interest Entity)

Chartered Accountants Act, 1949

  • Second Schedule, Part I, Clauses 5, 6, 7 and 8

Standards on Auditing (SA)

  • SA 300 – Planning an Audit of Financial Statements
  • SA 315 – Identifying and Assessing Risks of Material Misstatement
  • SA 320 – Materiality in Planning and Performing an Audit
  • SA 505 – External Confirmations
  • SA 220 – Quality Control for an Audit of Financial Statements
  • SA 230 – Audit Documentation
  • SA 610 – Using the Work of Internal Auditors

Indian Accounting Standards (Ind AS)

  • Ind AS 109 – Financial Instruments
  • Ind AS 116 – Leases

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2024/08/2024081910364639           

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