Facts of the Case

The National Financial Reporting Authority (NFRA) initiated proceedings against CA Pankaj Kumar, Engagement Partner (EP), who conducted the statutory audit of SRS Real Infrastructure Limited (SRSRIL) for the Financial Year 2017-18.

The proceedings originated from information received from the Serious Fraud Investigation Office (SFIO), which had investigated SRS Real Infrastructure Limited and its group companies. The SFIO investigation revealed alleged diversion of funds, inflated purchases and sales, and siphoning of funds through various entities within the group.

NFRA examined the audit file and related records to determine whether the Engagement Partner had complied with the applicable Standards on Auditing (SAs) and professional requirements while conducting the audit.

After review of the audit documentation, audit procedures performed, and responses submitted by the auditor, NFRA concluded that significant lapses existed in the conduct of the audit.

 

Issues Involved

The principal issues before NFRA were:

  1. Whether the Engagement Partner failed to evaluate the management’s assessment of the entity’s ability to continue as a going concern.
  2. Whether the auditor failed to obtain sufficient and appropriate audit evidence regarding revenue recognition.
  3. Whether adequate audit documentation was maintained in compliance with Standards on Auditing.
  4. Whether sufficient audit procedures were performed regarding inventory verification.
  5. Whether the auditor issued an inappropriate audit opinion despite significant audit deficiencies.
  6. Whether the Engagement Partner failed in duties relating to Engagement Quality Control Review (EQCR).
  7. Whether materiality was appropriately determined.
  8. Whether proper audit planning was undertaken.
  9. Whether communication with Those Charged With Governance (TCWG) was adequate.
  10. Whether deficiencies in internal control were properly communicated.
  11. Whether risks of material misstatement were appropriately identified and assessed.
  12. Whether there was non-compliance with the provisions of the Companies Act, 2013 and applicable Standards on Auditing.

 

Petitioner’s Arguments (NFRA)

NFRA contended that the Engagement Partner committed professional misconduct and gross negligence while conducting the audit.

NFRA alleged that:

  • Significant indicators raising doubts about the company’s going concern status were ignored.
  • Revenue from the real estate segment was accepted without sufficient verification and supporting audit evidence.
  • Audit documentation was grossly inadequate and failed to demonstrate compliance with auditing standards.
  • Inventory constituting a substantial portion of total assets was not subjected to adequate audit procedures.
  • Materiality was not determined as required under SA 320.
  • Audit planning was deficient and lacked entity-specific risk assessment.
  • Risks of material misstatement were not properly identified and assessed.
  • Required communication with TCWG and reporting of internal control deficiencies were not adequately performed.
  • An unmodified audit opinion was issued despite the existence of significant audit concerns.
  • The audit file lacked evidence supporting critical audit conclusions.

NFRA therefore asserted that the auditor failed to exercise due diligence and professional skepticism expected of a statutory auditor of a Public Interest Entity.

 

Respondent’s Arguments (CA Pankaj Kumar)

The Engagement Partner denied the allegations and submitted explanations in response to the Show Cause Notice.

The principal submissions included:

  • Going concern assessment was allegedly not required for FY 2017-18 because the audit report was signed subsequently.
  • Certain government actions and developments occurring after the balance sheet date were cited to justify conclusions regarding going concern.
  • Revenue recognition procedures were stated to have been performed, and limitations arose due to circumstances affecting access to records.
  • The auditor contended that audit documentation deficiencies should not automatically imply that audit work was not performed.
  • Inventory verification limitations were disclosed through qualifications in the audit report.
  • The auditor argued that some observations represented technical breaches rather than professional misconduct.
  • It was submitted that the audit opinion was based on available information and professional judgment exercised during the audit.

 

Court Order / Findings

NFRA rejected the explanations offered by the Engagement Partner and held that the audit suffered from serious deficiencies.

NFRA found that:

1. Failure relating to Going Concern Assessment

The auditor failed to properly evaluate management’s assessment regarding the company’s ability to continue as a going concern despite the presence of significant warning indicators such as losses, negative cash flows, defaults and stalled projects.

2. Failure relating to Revenue Recognition

The auditor failed to obtain sufficient and appropriate audit evidence regarding revenue recognition and did not adequately address fraud risks associated with revenue.

3. Failure relating to Audit Documentation

The audit file lacked essential working papers, audit procedures, conclusions, review documentation and evidence supporting key audit judgments.

4. Failure relating to Inventory Verification

Adequate procedures regarding existence and condition of inventory were not performed despite inventory representing a material component of assets.

5. Inappropriate Audit Opinion

The Engagement Partner issued an audit opinion without obtaining sufficient audit evidence as required under the auditing standards.

6. Failure in EQCR Responsibilities

The Engagement Partner failed to establish proper involvement and documentation of the Engagement Quality Control Reviewer.

7. Failure to Determine Materiality

No evidence existed to demonstrate determination of materiality in accordance with SA 320.

8. Failure in Audit Planning

The audit plan lacked entity-specific considerations and failed to demonstrate proper risk-based planning.

9. Failure in Communication with TCWG

The auditor did not adequately communicate significant audit matters and risks to Those Charged With Governance.

10. Failure to Communicate Internal Control Deficiencies

Material deficiencies in internal controls were not properly communicated to management and TCWG.

11. Failure in Risk Assessment

The auditor failed to identify and assess risks of material misstatement at both financial statement and assertion levels.

12. Professional Misconduct Established

NFRA concluded that the Engagement Partner committed professional misconduct under Section 132(4) of the Companies Act, 2013 read with relevant provisions of the Chartered Accountants Act, 1949.

 

Important Clarification

NFRA emphasized that:

  • Audit documentation is the primary evidence demonstrating that an audit was conducted in accordance with professional standards.
  • Mere assertions that audit procedures were performed cannot substitute documentary evidence.
  • Professional skepticism and independent verification are fundamental responsibilities of statutory auditors.
  • Public Interest Entity audits require strict adherence to auditing standards.
  • Failure to obtain sufficient appropriate audit evidence before issuing an audit opinion constitutes serious professional misconduct.
  • Technical violations affecting audit quality may amount to professional misconduct where they compromise the reliability of the audit process.

 

Sections Involved

Companies Act, 2013

  • Section 132(4)
  • Section 143(9)
  • Section 143(10)
  • Section 447

Chartered Accountants Act, 1949

  • Section 22
  • First Schedule, Part I, Clause 7
  • First Schedule, Part I, Clause 8
  • First Schedule, Part I, Clause 9

Standards on Auditing (SAs)

  • SA 230 – Audit Documentation
  • SA 240 – Auditor’s Responsibilities Relating to Fraud
  • SA 260 – Communication with Those Charged With Governance
  • SA 265 – Communicating Deficiencies in Internal Control
  • 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 500 – Audit Evidence
  • SA 501 – Audit Evidence – Specific Considerations for Selected Items
  • 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
  • SQC 1 – Quality Control for Firms Performing Audits and Reviews

 

Penalty / Sanctions

NFRA imposed the following sanctions on CA Pankaj Kumar:

Monetary Penalty

  • ₹3,00,000 (Rupees Three Lakhs)

Debarment

  • Debarred for a period of three years from:
    • Being appointed as an auditor.
    • Undertaking audits in respect of financial statements.
    • Performing audit functions and activities relating to any company or body corporate.

The debarment was directed to run concurrently with an earlier penalty order passed against the auditor.

Link to download the order -  https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2024/01/202401092094974712.pdf  

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