Facts of the Case

The National Financial Reporting Authority (NFRA) initiated proceedings against M/s Singh Ajay & Co., the statutory audit firm, and CA Priyank Mittal, Engagement Partner (EP), concerning the statutory audit of Vikas Proppant & Granite Limited for FY 2020-21.

The proceedings originated from information received from SEBI indicating possible deficiencies in the statutory audit. Upon examination of the Annual Report, audit file, financial statements, and other supporting records, NFRA observed several audit lapses and non-compliance with the Companies Act, 2013 and applicable Standards on Auditing.

NFRA issued a Show Cause Notice alleging professional misconduct and audit failures relating to planning, execution, documentation, related party transactions, expected credit loss assessment, going concern evaluation, depreciation accounting, external confirmations, quality review mechanisms, and communication with those charged with governance.

After considering submissions and hearing the parties, NFRA passed its final order.

 

Issues Involved

  1. Whether the auditors failed to adequately plan the audit and understand the audited entity and its environment.
  2. Whether the auditors failed to verify opening balances as required under SA 510.
  3. Whether the auditors failed to determine materiality and performance materiality as required under SA 320.
  4. Whether the auditors failed to report material misstatements arising from non-provisioning of Expected Credit Loss (ECL) on trade receivables.
  5. Whether the auditors failed to evaluate and report uncertainties regarding the company's ability to continue as a going concern.
  6. Whether the auditors failed to evaluate arm’s length pricing and statutory compliance relating to Related Party Transactions under Sections 177 and 188 of the Companies Act, 2013.
  7. Whether the auditors failed to report non-charging of depreciation on leasehold land and plant & machinery.
  8. Whether the auditors failed to assemble the audit file within the prescribed period.
  9. Whether sufficient and appropriate audit evidence including external confirmations was obtained.
  10. Whether the audit firm failed to establish compliance with quality control requirements including appointment of Engagement Quality Control Reviewer (EQCR).
  11. Whether the auditors failed to communicate significant matters with Those Charged With Governance (TCWG).

 

Petitioner’s Arguments

The audit firm and Engagement Partner submitted that:

  • Audit procedures were conducted despite operational difficulties arising from the COVID-19 pandemic.
  • Management Representation Letters and other management inputs were relied upon during the audit process.
  • Differences in opening balances did not materially affect the financial statements.
  • Trade receivables were considered recoverable and therefore no ECL provision was considered necessary.
  • The company continued operations and therefore the going concern assumption remained valid.
  • Related party transactions had been disclosed in the financial statements.
  • Depreciation-related observations were claimed to be matters of accounting judgment.
  • Delays in documentation and compilation of audit records were attributed to practical difficulties during the pandemic period.
  • Certain omissions were stated to be inadvertent and not intentional.

 

Respondent’s Arguments

NFRA contended that:

  • The audit file lacked evidence of adequate planning and understanding of the audited entity.
  • Opening balances were not verified despite the audit being the first-year audit engagement.
  • No documentation existed regarding determination of materiality and performance materiality.
  • Significant trade receivables required ECL assessment and provisioning which was not reported.
  • The company incurred losses and displayed indicators requiring a detailed going concern assessment.
  • Related party transactions constituted a substantial portion of business activity and lacked sufficient audit evaluation regarding arm’s length pricing and statutory compliance.
  • Material misstatements relating to depreciation on leasehold land and plant & machinery were ignored.
  • Audit documentation was incomplete and not assembled within prescribed timelines.
  • No external balance confirmations were obtained from debtors or creditors.
  • No EQCR appointment or review evidence existed.
  • Required communication with TCWG was not documented.

According to NFRA, these failures represented serious departures from auditing standards and professional responsibilities.

 

Court Order / Findings

NFRA held that the Engagement Partner and audit firm committed professional misconduct and failed to comply with multiple Standards on Auditing and statutory requirements.

NFRA found:

  • Failure to plan the audit and understand the audited entity and its environment.
  • Failure to verify opening balances under SA 510.
  • Failure to determine materiality and performance materiality.
  • Failure to report non-provisioning of Expected Credit Loss.
  • Failure to evaluate and report going concern uncertainties.
  • Failure to evaluate arm’s length pricing and compliance concerning Related Party Transactions.
  • Failure to report depreciation-related misstatements.
  • Failure to assemble audit documentation within statutory timelines.
  • Failure to obtain sufficient and appropriate audit evidence through external confirmations.
  • Failure to appoint Engagement Quality Control Reviewer.
  • Failure to communicate with Those Charged With Governance.

NFRA concluded that the conduct amounted to professional misconduct under the Chartered Accountants Act, 1949 and attracted action under Section 132(4) of the Companies Act, 2013.

 

Penalty and Sanctions

NFRA imposed the following penalties:

On M/s Singh Ajay & Co.

  • Monetary Penalty: ₹3,00,000

On CA Priyank Mittal

  • Monetary Penalty: ₹2,00,000
  • Debarment: Two years from being appointed as auditor or internal auditor and from undertaking any audit-related functions in respect of financial statements or internal audits of any company or body corporate.

The order was directed to become effective after thirty days from the date of issuance.

 

Important Clarification

This order reiterates that statutory auditors are required to maintain comprehensive audit documentation, obtain sufficient audit evidence, independently assess material risks, verify opening balances, evaluate related party transactions, assess going concern assumptions, and comply with quality control requirements prescribed under the Standards on Auditing.

The decision also emphasizes that disclosure of transactions by management does not relieve auditors from their obligation to independently verify, evaluate, and report material misstatements and statutory non-compliances.

The order reinforces NFRA's commitment to maintaining audit quality and professional accountability under the Companies Act, 2013.

Sections Involved

  • Section 132(4) of the Companies Act, 2013
  • Section 143 of the Companies Act, 2013
  • Section 177 of the Companies Act, 2013
  • Section 188 of the Companies Act, 2013
  • Section 129 of the Companies Act, 2013
  • Chartered Accountants Act, 1949
  • NFRA Rules, 2018
  • Standards on Auditing (SA) 200
  • SA 220 – Quality Control for Audit of Financial Statements
  • SA 230 – Audit Documentation
  • 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 330 – Auditor’s Responses to Assessed Risks
  • SA 500 – Audit Evidence
  • SA 505 – External Confirmations
  • SA 510 – Initial Audit Engagements – Opening Balances
  • SA 550 – Related Parties
  • SA 570 – Going Concern
  • SA 700 – Forming an Opinion and Reporting on Financial Statements
  • SA 705 – Modifications to the Opinion in the Independent Auditor’s Report
  • SA 260 – Communication with Those Charged with Governance
  • SQC 1 – Standard on Quality Control

Link to download the order - https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2024/07/20240705380026246.pdf  

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