Facts of the Case

The National Financial Reporting Authority (NFRA) initiated an investigation into the professional conduct of CA Dhiraj Parasmal Jain, who acted as the Engagement Partner (EP) and branch auditor for four branches of Dewan Housing Finance Corporation Limited (DHFL) for the Financial Year 2017-18.

DHFL, a listed housing finance company, was under scrutiny following allegations of large-scale financial irregularities and fraud. During NFRA’s Audit Quality Review of the statutory audit conducted by Chaturvedi & Shah, NFRA observed that several branch auditors had issued Independent Branch Auditors’ Reports for DHFL branches.

The investigation revealed that the appointment of branch auditors, including CA Dhiraj Parasmal Jain, had not been approved by the shareholders of DHFL as required under the Companies Act, 2013. Despite the absence of a valid appointment, the auditor accepted the engagement, conducted branch audits, and issued Independent Branch Auditors’ Reports.

NFRA further examined the audit work performed and found significant deficiencies in compliance with the Standards on Auditing (SAs), audit documentation requirements, audit planning procedures, risk assessment procedures, sampling methodologies, materiality assessment, audit evidence collection, and reporting standards.

 

Issues Involved

  1. Whether acceptance of a branch audit engagement without a valid appointment approved under Section 139 of the Companies Act, 2013 constituted professional misconduct.
  2. Whether the auditor failed to exercise due diligence before accepting the audit assignment.
  3. Whether the auditor violated the Standards on Auditing while conducting the branch audit.
  4. Whether the audit documentation maintained by the auditor satisfied the requirements prescribed under SA 230.
  5. Whether the auditor obtained sufficient and appropriate audit evidence before issuing an unmodified audit opinion.
  6. Whether issuance of the Independent Branch Auditors’ Report without compliance with statutory and auditing requirements amounted to professional misconduct under Section 132(4) of the Companies Act, 2013.

 

Petitioner’s Arguments (NFRA)

NFRA contended that:

  • The appointment of the branch auditor was invalid because it had not been approved by the shareholders as required under Section 139 of the Companies Act, 2013.
  • The auditor failed to verify whether statutory requirements relating to appointment had been complied with before accepting the engagement.
  • The auditor accepted an appointment letter issued merely by an authorised signatory without ensuring legal validity.
  • The auditor failed to issue a proper engagement letter as mandated by SA 210.
  • Audit files lacked adequate documentation demonstrating planning, execution, supervision, review, and conclusions of audit procedures.
  • No evidence existed regarding risk assessment, determination of materiality, audit sampling methodology, internal control evaluation, or sufficient audit evidence.
  • The auditor issued an unmodified audit opinion despite not possessing sufficient and appropriate audit evidence.
  • Such conduct demonstrated gross negligence, lack of professional skepticism, absence of due diligence, and non-compliance with multiple Standards on Auditing.

 

Respondent’s Arguments (CA Dhiraj Parasmal Jain)

The auditor submitted that:

  • The absence of shareholder approval for appointment remained unnoticed because DHFL was a large listed company and it was assumed that all statutory compliances had been completed.
  • The omission was inadvertent and not deliberate.
  • The appointment communication and audit instructions issued by DHFL substantially covered the scope and responsibilities of the audit engagement.
  • Additional documents and working papers not originally submitted were later produced during the proceedings.
  • Audit procedures relating to loan verification, KYC verification, security verification, and review of documents were stated to have been performed.
  • Materiality was applied through professional judgment during the audit process.
  • Analytical procedures and audit sampling were allegedly carried out despite limited documentation.
  • Since no material irregularities were identified, management representation letters were not considered necessary.

 

Court Findings / NFRA Findings

NFRA rejected the explanations provided by the auditor and held that:

1. Invalid Acceptance of Audit Engagement

The auditor accepted a statutory branch audit assignment without verifying whether the appointment complied with Section 139 of the Companies Act, 2013.

The shareholders had appointed only Chaturvedi & Shah as statutory auditors for DHFL and its branches. No separate appointment or ratification existed for the respondent as branch statutory auditor.

Acceptance of such an invalid appointment constituted professional misconduct.

2. Violation of SA 210 – Agreeing the Terms of Audit Engagements

NFRA found that no valid engagement letter satisfying the requirements of SA 210 had been issued.

The auditor failed to properly document:

  • Scope of audit.
  • Responsibilities of auditor.
  • Responsibilities of management.
  • Applicable financial reporting framework.
  • Nature and content of reporting obligations.

Accordingly, SA 210 was violated.

3. Violation of SA 230 – Audit Documentation

The audit file lacked documentation concerning:

  • Audit planning.
  • Risk assessment.
  • Internal control understanding.
  • Audit procedures performed.
  • Evidence obtained.
  • Professional judgments exercised.
  • Conclusions reached.

NFRA emphasized that oral explanations cannot substitute mandatory audit documentation.

The auditor failed to maintain audit records sufficient for an experienced auditor to understand the work performed.

4. Violation of SA 700 – Forming an Opinion

NFRA observed that:

  • Several loan files were unavailable during verification.
  • The auditor did not evaluate the implications of unavailable records.
  • No evidence existed showing assessment of materiality or audit risk.
  • The unmodified audit opinion lacked adequate evidentiary support.

Consequently, the audit opinion was held to be baseless and unsupported.

5. Violations of Other Standards on Auditing

NFRA additionally found violations of:

  • SA 300 – Audit Planning.
  • SA 315 – Risk Assessment.
  • SA 320 – Materiality.
  • SA 330 – Responses to Assessed Risks.
  • SA 450 – Evaluation of Misstatements.
  • SA 500 – Audit Evidence.
  • SA 520 – Analytical Procedures.
  • SA 530 – Audit Sampling.
  • SA 580 – Written Representations.

The auditor failed to demonstrate compliance with these mandatory standards through proper audit documentation.

 

Important Clarification

NFRA clarified that:

  • Even where an appointment is made by a listed company, auditors are under a statutory obligation to independently verify whether the appointment complies with the Companies Act.
  • Reliance on management representations or assumptions regarding compliance is insufficient.
  • Audit documentation must be contemporaneous, complete, and capable of demonstrating the nature, timing, extent, and results of audit procedures.
  • An unmodified audit opinion cannot be issued unless supported by sufficient and appropriate audit evidence.
  • Acceptance of an audit assignment in violation of statutory requirements and subsequent failure to comply with Standards on Auditing constitutes serious professional misconduct.

 

Sections and Standards Involved

Companies Act, 2013

  • Section 132(4)
  • Section 139
  • Section 140
  • Section 143(8)
  • Section 143(10)

Chartered Accountants Act, 1949

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

Standards on Auditing (SAs)

  • 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 – Identifying and Assessing Risks
  • SA 320 – Materiality
  • SA 330 – Auditor’s Responses to Risks
  • SA 450 – Evaluation of Misstatements
  • SA 500 – Audit Evidence
  • SA 520 – Analytical Procedures
  • SA 530 – Audit Sampling
  • SA 580 – Written Representations
  • SA 700 – Forming an Opinion and Reporting on Financial Statements

 

 

Court Order / Final Decision

NFRA held CA Dhiraj Parasmal Jain guilty of professional misconduct under Section 132(4) of the Companies Act, 2013 for:

  • Accepting an invalid statutory audit appointment.
  • Failure to exercise due diligence.
  • Gross negligence in professional duties.
  • Failure to obtain sufficient audit evidence.
  • Failure to comply with multiple Standards on Auditing.
  • Issuance of an unsupported audit opinion.

Penalties Imposed

  1. Monetary Penalty: ₹1,00,000 (One Lakh Rupees).
  2. Debarment:
    • Six months debarment from being appointed as an auditor or internal auditor.
    • Prohibited from undertaking audits relating to financial statements or internal audits of any company or body corporate during the debarment period.

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/09/20230930885090631.pdf

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