Facts of the Case

The National Financial Reporting Authority (NFRA) initiated proceedings against CA Santosh Deshmukh, Engagement Partner and Statutory Auditor of Savaria Consumer Limited (SCL) for the Financial Year 2017-18.

The matter originated from information received from the Securities and Exchange Board of India (SEBI) regarding possible irregularities in the company’s financial reporting and the auditor’s failure to identify and report material misstatements and irregularities in the financial statements.

Upon examination of the audit file and financial statements of Savaria Consumer Limited and its subsidiaries/associates, NFRA observed significant deficiencies in the audit process. A Show Cause Notice was issued alleging violations of the Companies Act, 2013 and Standards on Auditing.

The allegations primarily related to:

  • Failure to verify existence and valuation of inventories.
  • Failure to verify ownership, valuation and impairment of investments.
  • Failure to evaluate consolidated financial statements.
  • Failure to obtain sufficient appropriate audit evidence relating to revenue and trade receivables.
  • Failure to prepare adequate audit documentation.
  • Failure to communicate with Those Charged With Governance (TCWG).
  • Failure to comply with multiple Standards on Auditing.

After considering the audit file, written submissions and personal hearing, NFRA concluded that the auditor committed professional misconduct and gross negligence in conducting the audit.

 

Issues Involved

  1. Whether the auditor failed to obtain sufficient appropriate audit evidence regarding inventory valuation and existence.
  2. Whether the auditor failed to verify ownership, valuation and impairment of investments held by the company.
  3. Whether the auditor failed to evaluate and report on consolidated financial statements in accordance with applicable accounting standards.
  4. Whether the auditor failed to perform adequate audit procedures relating to revenue recognition.
  5. Whether the auditor failed to verify trade receivables and assess expected credit losses.
  6. Whether the auditor issued an audit opinion without obtaining sufficient appropriate audit evidence.
  7. Whether the auditor failed to maintain proper audit documentation.
  8. Whether the auditor failed to communicate audit matters and deficiencies to Those Charged With Governance.
  9. Whether such failures constituted professional misconduct under the Companies Act, 2013 and Chartered Accountants Act, 1949.

 

Petitioner’s / NFRA’s Arguments

NFRA contended that:

Inventory Audit Deficiencies

  • The auditor failed to verify the existence and condition of inventories.
  • Inventory valuation included interest costs contrary to accounting requirements.
  • No sufficient evidence existed to support valuation of soya seed and paddy inventories.
  • Audit procedures were inadequate and inconsistent with SA 501 and SA 705.

Investments

  • The auditor failed to verify ownership and valuation of investments.
  • No adequate assessment of impairment indicators was performed.
  • Loss-making investments and recoverability issues were ignored.

Consolidated Financial Statements

  • The auditor did not properly evaluate financial statements of subsidiaries and associates.
  • The audit file lacked evidence of communication and evaluation concerning consolidation requirements.

Revenue Recognition

  • The auditor failed to assess risks of material misstatement relating to revenue.
  • No adequate testing of internal controls or substantive procedures was performed.

Trade Receivables

  • Large receivables remained unverified.
  • No confirmations or alternative audit procedures were performed.
  • Expected credit loss assessment was inadequate.

Audit Documentation

  • Audit working papers were incomplete and insufficient.
  • Documentation lacked evidence of procedures performed, conclusions reached and review mechanisms.

Communication with TCWG

  • No evidence showed communication of significant audit matters or deficiencies to Those Charged With Governance.

NFRA therefore alleged violations of various Standards on Auditing and professional misconduct under applicable laws.

 

Respondent’s Arguments

CA Santosh Deshmukh submitted that:

Regarding Inventory

  • Management had consistently followed a policy of including interest cost in valuation of certain inventories.
  • Physical verification had been witnessed for selected inventory items.
  • Sample-based verification was conducted and management representations were relied upon.

Regarding Investments

  • Relevant documents and management explanations had been obtained.
  • Valuation reports and supporting documents were available.
  • The auditor believed sufficient evidence existed for audit conclusions.

Regarding Consolidation

  • Consolidated financial statements were allegedly unavailable and unsigned.
  • Subsidiary and associate financial statements were not finalized at the relevant time.

Regarding Revenue

  • Internal controls were understood through discussions with management.
  • Revenue testing procedures and analytical reviews were claimed to have been performed.

Regarding Trade Receivables

  • Management representations and available confirmations were considered.
  • Historical recovery patterns were relied upon.

Regarding Audit Documentation

  • Working papers and supporting records were stated to exist and were submitted during proceedings.

The auditor denied allegations of misconduct and asserted that the audit was conducted in accordance with professional standards.

 

Court Order / Findings

NFRA rejected the explanations offered by the auditor and recorded detailed findings.

1. Inventory Audit Failure

NFRA found that:

  • The auditor failed to verify inventory existence and valuation.
  • Inventory valuation wrongly included interest costs.
  • No sufficient audit evidence supported material inventory balances.
  • The auditor failed to exercise professional skepticism.

2. Investments Audit Failure

NFRA held that:

  • Ownership and valuation of investments were not adequately verified.
  • Impairment assessment was not properly conducted.
  • Material losses in investee entities were ignored.

3. Consolidation Failure

NFRA concluded:

  • The auditor failed to evaluate whether consolidation requirements were applicable.
  • No adequate audit evidence supported conclusions regarding subsidiaries and associates.

4. Revenue Audit Failure

NFRA observed:

  • Risk assessment procedures were inadequate.
  • Revenue testing lacked sufficient evidentiary support.
  • Internal controls were not properly evaluated.

5. Trade Receivables Failure

NFRA found:

  • Significant receivables remained unverified.
  • No adequate confirmations or alternative procedures were performed.
  • Expected credit loss considerations were deficient.

6. Audit Opinion Without Sufficient Evidence

NFRA held that the auditor issued an unmodified audit opinion despite lacking sufficient appropriate audit evidence.

7. Audit Documentation Failure

NFRA found substantial deficiencies in working papers and documentation.

8. Communication Failure

NFRA held that the auditor failed to communicate significant audit matters and deficiencies to Those Charged With Governance.

Accordingly, NFRA concluded that the auditor committed professional misconduct and acted with gross negligence in the conduct of the statutory audit.

 

Important Clarifications

Professional Misconduct Established

NFRA held that the auditor committed professional misconduct by:

  • Failing to obtain sufficient and appropriate audit evidence.
  • Failing to exercise due diligence and professional skepticism.
  • Failing to comply with mandatory Standards on Auditing.
  • Issuing an audit report without adequate audit support.
  • Ignoring material risks and misstatements in financial statements.

Seriousness of Auditor’s Role

NFRA emphasized that statutory auditors of listed entities are expected to perform audits with the highest level of diligence, independence and professional competence.

Public Interest Consideration

The order reiterates that audit failures affecting public interest entities undermine confidence in financial reporting and capital markets.

 

Penalty / Final Order

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

Monetary Penalty

  • Fine of ₹5,00,000 (Rupees Five Lakhs).

Debarment

  • Debarment for one year from:
    • Acting as an auditor,
    • Internal auditor,
    • Undertaking any audit work,
    • Performing audit functions in any company or body corporate.

The order becomes effective after 30 days from the date of issuance.

 

Sections / Provisions Involved

Companies Act, 2013

  • Section 132
  • Section 132(4)
  • Section 143(3)
  • Section 143(9)
  • Section 143(10)
  • Section 143(12)

Chartered Accountants Act, 1949

  • Section 22
  • First Schedule, Part I, Clause 5
  • Second Schedule, Part I, Clauses 5, 6, 7 and 8

Standards on Auditing (SAs)

  • SA 200
  • SA 230
  • SA 240
  • SA 260
  • SA 265
  • SA 315
  • SA 500
  • SA 501
  • SA 505
  • SA 520
  • SA 540
  • SA 550
  • SA 560
  • SA 570
  • SA 700
  • SA 705

Accounting Standards

  • Ind AS 2 (Inventories)
  • Ind AS 28 (Investments in Associates and Joint Ventures)
  • Ind AS 36 (Impairment of Assets)
  • Ind AS 110 (Consolidated Financial Statements)

Link to download the order -https://nfra.gov.in/document/order-in-the-matter-of-statutory-audit-of-sanwaria-consumer-limited-for-the-fy-2017-18/

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.