Facts of the Case

The National Financial Reporting Authority (NFRA) conducted an investigation into the professional conduct of CA Mohammad Ayub, Partner of M/s ABPS & Associates, who acted as the Engagement Partner (EP) for the statutory audit of three branches of Dewan Housing Finance Corporation Limited (DHFL), namely Ranchi, Durgapur and Patna, for the Financial Year 2017-18.

DHFL, a housing finance company listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), was allegedly involved in large-scale financial irregularities. During NFRA's Audit Quality Review (AQR) of DHFL's statutory audit conducted by Chaturvedi & Shah, NFRA observed that several branch auditors had issued Independent Branch Auditors' Reports for nearly 250 branches.

NFRA examined the audit files of CA Mohammad Ayub and found that his appointment as Branch Statutory Auditor had not been approved by the shareholders of DHFL at the Annual General Meeting as required under the Companies Act, 2013. Despite the absence of a valid statutory appointment, he accepted the engagement, represented himself as Branch Statutory Auditor, and issued Independent Branch Auditors' Reports.

NFRA further examined the branch audit work and found multiple deficiencies and violations of Standards on Auditing (SAs), including lack of audit documentation, absence of risk assessment procedures, failure to determine materiality, inadequate audit planning, and issuance of an audit opinion unsupported by sufficient audit evidence.

 

Issues Involved

  1. Whether CA Mohammad Ayub accepted a branch statutory audit assignment without ensuring compliance with Section 139 of the Companies Act, 2013.
  2. Whether acceptance of an invalid appointment constituted professional misconduct under the Chartered Accountants Act, 1949.
  3. Whether the Engagement Partner complied with the applicable Standards on Auditing while conducting the branch audit of DHFL.
  4. Whether sufficient and appropriate audit evidence existed to support the audit opinion issued by the Engagement Partner.
  5. Whether the Engagement Partner was guilty of professional misconduct under Section 132(4) of the Companies Act, 2013.

 

Petitioner’s / NFRA’s Arguments

NFRA contended that:

  • The appointment of branch auditors was never approved by the shareholders of DHFL at the Annual General Meeting.
  • Section 139 of the Companies Act, 2013 requires statutory auditors to be appointed by members of the company.
  • CA Mohammad Ayub accepted the assignment without verifying whether statutory requirements relating to appointment had been complied with.
  • He violated Section 22 read with Clause (9) of Part I of the First Schedule of the Chartered Accountants Act, 1949 by failing to ascertain the validity of his appointment.
  • He failed to comply with ethical requirements, professional skepticism, professional judgment and due diligence requirements prescribed under SA 200 and the ICAI Code of Ethics.
  • The audit file lacked essential documentation required under SA 230.
  • There was no evidence of:
    • Audit planning,
    • Risk assessment,
    • Materiality determination,
    • Internal control evaluation,
    • Audit sampling procedures,
    • Loan verification procedures,
    • KYC verification,
    • Anti-money laundering checks,
    • Analytical review procedures,
    • Written management representations.
  • The unmodified audit opinion was issued without sufficient and appropriate audit evidence and therefore violated SA 700.

 

Respondent’s Arguments

CA Mohammad Ayub submitted that:

  • Upon receiving the appointment request from DHFL with a copy to the statutory auditor, it was reasonable to believe that the company had complied with the requirements of Section 139.
  • The appointment letter sufficiently described the scope of work and audit guidelines.
  • The audit was recurring in nature and therefore a revised engagement letter was not necessary.
  • Documentation from previous years was available and could be relied upon.
  • An overall audit strategy and audit programme had been prepared.
  • Most major decisions were not taken at branch level, thereby reducing branch-level risks.
  • The audit opinion was issued on the basis of reasonable assurance obtained during the audit.

During the personal hearing, however, the Engagement Partner admitted that non-verification of compliance with the applicable provisions regarding appointment was a "lacuna" on his part.

 

Court Order / Findings

NFRA held that:

1. Invalid Acceptance of Audit Engagement

The Engagement Partner failed to verify whether the appointment as Branch Statutory Auditor complied with Section 139 of the Companies Act, 2013.

The shareholders had approved only Chaturvedi & Shah as the statutory auditor for DHFL and all its branches. No separate branch statutory auditors were appointed or ratified.

Accordingly, acceptance of the engagement and issuance of Independent Branch Auditors' Reports were legally invalid.

 

2. Violation of Ethical Requirements and SA 200

The Engagement Partner failed to:

  • Exercise professional skepticism,
  • Exercise due diligence,
  • Ensure professional competence,
  • Verify legal validity of appointment.

This constituted violation of SA 200 and the ICAI Code of Ethics.

 

3. Non-Compliance with SA 210 (Audit Engagements)

NFRA found that:

  • No valid engagement letter compliant with SA 210 existed.
  • Audit objectives, responsibilities and reporting framework were inadequately documented.
  • The Engagement Partner failed to properly understand and document the scope and nature of the engagement.

 

4. Non-Compliance with SA 230 (Audit Documentation)

NFRA observed significant deficiencies in audit documentation.

The audit file lacked evidence relating to:

  • Understanding branch operations,
  • Internal controls,
  • Audit planning,
  • Materiality determination,
  • IT controls,
  • Previous audit observations,
  • Verification of trial balance items,
  • Loan verification procedures,
  • KYC and anti-money laundering checks.

NFRA held that oral explanations cannot substitute audit documentation.

 

5. Non-Compliance with SA 700

NFRA held that the unmodified audit opinion was unsupported because:

  • Materiality was not determined.
  • Risk assessments were not documented.
  • Sampling methodology was absent.
  • Audit conclusions were not documented.

Therefore, reasonable assurance required under SA 700 was not established.

 

6. Violations of Additional Standards on Auditing

NFRA further found non-compliance with:

  • 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 510 – Initial Audit Engagements – Opening Balances
  • SA 520 – Analytical Procedures
  • SA 530 – Audit Sampling
  • SA 580 – Written Representations

 

Important Clarification

NFRA clarified that:

  • Even though the appointment itself was legally invalid, the audit work was still examined because the branch audit reports had been relied upon by the statutory auditor of DHFL.
  • Acceptance of an audit assignment without verifying legal validity of appointment amounts to professional misconduct.
  • Audit documentation is not a mere procedural formality but a fundamental requirement supporting the audit opinion.
  • Reliance on prior-year files without proper cross-referencing and documentation in the current audit file does not satisfy Standards on Auditing.
  • An audit opinion unsupported by documented audit evidence cannot be considered a valid audit opinion.

 

Sections Involved

Companies Act, 2013

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

Chartered Accountants Act, 1949

  • Section 22

First Schedule – Part I

  • Clause (9)

Second Schedule – Part I

  • Clause (7)
  • Clause (8)
  • Clause (9)

NFRA Rules, 2018

  • Rule 11(6)

Standards on Auditing (SAs)

  • SA 200
  • SA 210
  • SA 230
  • SA 300
  • SA 315
  • SA 320
  • SA 330
  • SA 510
  • SA 520
  • SA 530
  • SA 580
  • SA 700

 

Penalty Imposed

NFRA imposed the following sanctions:

Monetary Penalty

₹1,00,000 (One Lakh Rupees)

Debarment

One-year debarment from:

  • Being appointed as an auditor,
  • Being appointed as an internal auditor,
  • Undertaking any audit of financial statements,
  • Conducting internal audits of any company or body corporate.

Link to download the order -https://www.bseindia.com/bseplus/AnnualReport/511072/5110720318.pdf

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