Facts of the Case

The National Financial Reporting Authority (NFRA) initiated an investigation into the professional conduct of CA D. N. Chaturvedi, who acted as the Engagement Partner (EP) for the statutory audit of six branches of Dewan Housing Finance Corporation Limited (DHFL) for the Financial Year 2017-18.

The investigation arose during NFRA's Audit Quality Review (AQR) of DHFL’s statutory audit conducted by Chaturvedi & Shah (CAS). During the review, NFRA observed that several branch auditors had issued Independent Branch Auditors’ Reports for numerous DHFL branches.

CA D. N. Chaturvedi was responsible for auditing six DHFL branches, namely:

  • RPU Lucknow
  • Lucknow Lal Bagh
  • Lucknow
  • Gorakhpur
  • Kanpur
  • Jhansi (Gwalior)

NFRA found that the appointment of branch auditors had not been approved by the shareholders of DHFL through the Annual General Meeting (AGM) as mandated under the Companies Act, 2013. Despite the absence of a valid appointment, CA D. N. Chaturvedi accepted the assignment, represented himself as Branch Statutory Auditor, and issued Independent Branch Auditors’ Reports.

NFRA further examined the audit work performed and identified several serious deficiencies in audit planning, documentation, risk assessment, materiality determination, audit evidence collection, and reporting standards.

Issues Involved

  1. Whether CA D. N. Chaturvedi accepted the audit engagement without a valid statutory appointment under the Companies Act, 2013.
  2. Whether the auditor failed to exercise due diligence before accepting the appointment.
  3. Whether the audit was conducted in compliance with the applicable Standards on Auditing (SAs).
  4. Whether the auditor maintained adequate audit documentation and obtained sufficient audit evidence before issuing an audit opinion.
  5. Whether the conduct amounted to professional misconduct under the Chartered Accountants Act, 1949 and the Companies Act, 2013.

 

Petitioner’s / Noticee’s Arguments

CA D. N. Chaturvedi contended that:

  • He was not appointed as a statutory auditor under Section 139 read with Section 143(8) of the Companies Act, 2013.
  • No AGM resolution had been passed appointing him as branch statutory auditor.
  • The assignment was merely a specific certification engagement and not a statutory audit.
  • Therefore, the statutory requirements applicable to auditors did not govern the assignment.
  • He had performed the work assigned to him diligently and there was no fraud or misappropriation detected in the branches audited by him.
  • Adequate documentation had already been submitted and the work performed was commensurate with the engagement.

 

Respondent’s / NFRA’s Arguments

NFRA argued that:

  • All appointment letters, acceptance letters, audit guidelines, confirmations, and audit reports clearly described the assignment as a statutory branch audit.
  • The auditor himself accepted the appointment as Branch Statutory Auditor and repeatedly represented the engagement as a statutory audit.
  • The auditor failed to verify whether the appointment complied with Sections 139 and 143(8) of the Companies Act, 2013.
  • The audit engagement was accepted without proper authority from shareholders.
  • The audit file lacked critical documentation required under auditing standards.
  • There was no evidence of audit planning, risk assessment, determination of materiality, testing of controls, analytical procedures, audit sampling, or adequate audit evidence.
  • The unmodified audit opinion issued by the auditor was unsupported by sufficient and appropriate audit evidence.

 

Court Order / Findings

NFRA held that:

1. Invalid Acceptance of Audit Engagement

The auditor accepted an appointment that was not approved by shareholders as required under the Companies Act, 2013.

The engagement was therefore legally defective and accepted without due diligence.

2. Professional Misconduct Established

The authority held that the auditor committed professional misconduct by:

  • Failing to verify compliance with statutory appointment requirements.
  • Accepting an invalid audit assignment.
  • Acting with gross negligence.
  • Issuing audit reports without adequate legal authority.

3. Violation of Standards on Auditing

NFRA found non-compliance with multiple auditing standards, including:

  • SA 200 – Overall Objectives of the Independent Auditor
  • SA 210 – Agreeing the Terms of Audit Engagements
  • SA 230 – Audit Documentation
  • SA 300 – Planning an Audit
  • SA 315 – Risk Assessment
  • SA 320 – Materiality in Planning and Performing an Audit
  • SA 330 – Auditor’s Responses to Assessed Risks
  • SA 450 – Evaluation of Misstatements
  • SA 500 – Audit Evidence
  • SA 510 – Initial Audit Engagements – Opening Balances
  • SA 520 – Analytical Procedures
  • SA 530 – Audit Sampling
  • SA 580 – Written Representations
  • SA 700 – Forming an Opinion and Reporting on Financial Statements

4. Audit Documentation Deficiencies

NFRA observed that the audit file lacked:

  • Understanding of branch operations
  • Internal control assessment
  • Audit planning records
  • Materiality determination
  • IT control assessment
  • Verification of trial balances
  • Loan verification procedures
  • KYC and AML verification records
  • Evidence supporting audit conclusions

5. Unsupported Audit Opinion

The auditor issued an unmodified opinion without sufficient audit evidence, risk assessment, materiality evaluation, or documented conclusions.

NFRA held that such opinion was baseless and contrary to auditing standards.

 

Important Clarification

Mere Nomenclature Cannot Alter Legal Character

NFRA clarified that the auditor could not later characterize the assignment as a “specific certification” when all contemporaneous records described it as a statutory branch audit.

Duty to Verify Appointment

An auditor must independently ascertain compliance with statutory appointment requirements and cannot rely solely upon management representations.

Audit Documentation is Fundamental

Proper documentation is not a procedural formality but a core requirement demonstrating compliance with auditing standards and supporting audit conclusions.

Branch Audit Reports Affect Public Interest

Where branch audit reports form part of the statutory auditor’s opinion on company financial statements, branch auditors carry significant public-interest responsibilities.

 

Sections Involved

Companies Act, 2013

  • Section 132
  • Section 132(4)
  • Section 139
  • Section 143
  • Section 143(8)
  • Section 143(10)

Chartered Accountants Act, 1949

  • Section 22
  • Clause 9 of Part I of First Schedule
  • Clause 7 of Part I of Second Schedule
  • Clause 8 of Part I of Second Schedule
  • Clause 9 of Part I of Second Schedule

Companies (Audit and Auditors) Rules, 2014

  • Rule 12

NFRA Rules, 2018

  • Rule 3
  • Rule 11(6)

 

Penalty and Sanctions

NFRA imposed the following sanctions upon CA D. N. Chaturvedi:

Monetary Penalty

₹1,00,000 (One Lakh Rupees)

Debarment

One-year debarment from:

  • Being appointed as an auditor;
  • Being appointed as an internal auditor; or
  • Undertaking any audit relating to financial statements or internal audit of any company or body corporate.


Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/09/202309301929371721.pdf

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