Facts of the Case

The National Financial Reporting Authority (NFRA) examined the statutory audit conducted by M/s Singh Ajay & Co. and its Engagement Partner CA Priyank Mittal in respect of Vikas Proppant & Granite Limited (VPGL) for the Financial Year 2020-21.

During its examination, NFRA observed deficiencies in the audit process and found that the auditors failed to demonstrate sufficient and appropriate audit procedures in several critical areas. The Authority noted shortcomings relating to determination of materiality, evaluation of the company's ability to continue as a going concern, maintenance and assembly of audit documentation, and compliance with auditing standards.

NFRA initiated proceedings under its powers conferred under the Companies Act, 2013 and examined whether the auditors had complied with the applicable Standards on Auditing and professional responsibilities expected from statutory auditors.

 

Issues Involved

  1. Whether the statutory auditors complied with the Standards on Auditing while conducting the audit of VPGL for FY 2020-21.
  2. Whether sufficient and appropriate audit evidence was obtained before expressing the audit opinion.
  3. Whether the auditors adequately evaluated and reported the going concern status of the company.
  4. Whether audit documentation and audit files were properly maintained and assembled.
  5. Whether the conduct of the audit amounted to professional misconduct under the Companies Act, 2013.

 

Petitioner’s Arguments

M/s Singh Ajay & Co. and CA Priyank Mittal

The auditors contended that:

  • The audit was conducted in accordance with the applicable auditing framework.
  • Necessary procedures were performed based on information and records made available by the company.
  • The audit opinion was formed after considering the financial information available during the audit engagement.
  • The conclusions reached during the audit were based upon professional judgment exercised by the engagement team.

 

Respondent’s Arguments

National Financial Reporting Authority (NFRA)

NFRA submitted that:

  • The auditors failed to establish that sufficient and appropriate audit evidence had been obtained.
  • Materiality determination was not properly documented.
  • Audit procedures relating to the company’s going concern assessment were inadequate.
  • Audit documentation was deficient and the audit file was not assembled in accordance with statutory and professional requirements.
  • The auditors failed to demonstrate compliance with the Standards on Auditing and failed to exercise due professional skepticism and professional care expected from statutory auditors.

 

Sections Involved

Companies Act, 2013

  • Section 132(4)
  • Section 132(4)(c)
  • Section 132(4)(d)

Relevant Standards on Auditing (as applicable)

  • SA 200 – Overall Objectives of the Independent Auditor
  • SA 230 – Audit Documentation
  • SA 320 – Materiality in Planning and Performing an Audit
  • SA 570 – Going Concern
  • SA 500 – Audit Evidence
  • Other applicable Standards on Auditing referred to in the proceedings.

 

Court / Authority Findings

NFRA held that the auditors were unable to demonstrate compliance with essential auditing requirements.

The Authority observed deficiencies in:

  • Determination and documentation of materiality.
  • Assessment of the company’s ability to continue as a going concern.
  • Collection and evaluation of sufficient and appropriate audit evidence.
  • Maintenance and assembly of audit documentation and audit files.
  • Compliance with Standards on Auditing and professional obligations.

NFRA concluded that the audit work suffered from serious deficiencies and that the auditors failed to exercise the level of professional diligence expected from statutory auditors.

 

Court Order

NFRA found M/s Singh Ajay & Co. and CA Priyank Mittal guilty of professional misconduct under the Companies Act, 2013.

The Authority imposed monetary penalties and also directed debarment from undertaking audit assignments for the prescribed period as specified in the order.

The order emphasized that statutory auditors occupy a position of public trust and are required to strictly comply with auditing standards and professional obligations while issuing audit opinions.

 

Important Clarification

  1. The order concerns the quality of audit performed for FY 2020-21 and not merely technical deficiencies.
  2. NFRA reiterated that auditors must maintain proper audit documentation capable of demonstrating compliance with auditing standards.
  3. Going concern assessment cannot be treated as a routine exercise and requires adequate audit procedures and evidence.
  4. Failure to maintain audit files and supporting documentation may itself constitute a serious regulatory violation.
  5. The burden lies upon auditors to establish that sufficient and appropriate audit evidence existed at the time the audit opinion was issued.

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

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