Facts of the Case

The matter arose from NFRA's investigation into the professional conduct of CA P Rabi Kumar Patra, Engagement Partner of M/s ABPS & Associates, who conducted statutory branch audits of three branches of Dewan Housing Finance Corporation Limited (DHFL) for FY 2017-18.

Following reports concerning alleged large-scale financial irregularities and fraud involving DHFL, NFRA initiated an Audit Quality Review of the statutory audit conducted by Chaturvedi & Shah. During the review, NFRA observed that several branch auditors, including CA P Rabi Kumar Patra, had issued Independent Branch Auditors’ Reports for DHFL branches.

NFRA found that the appointment of branch auditors had not been approved by the shareholders of DHFL as required under the Companies Act, 2013. Despite the absence of a valid statutory appointment, CA P Rabi Kumar Patra accepted the engagement as Branch Statutory Auditor and issued Independent Branch Auditors’ Reports for three DHFL branches located at Jamshedpur, Sambalpur and Bhubaneswar.

NFRA further examined the audit work performed and observed significant deficiencies in compliance with the Standards on Auditing and maintenance of audit documentation.

 

Issues Involved

  1. Whether the auditor accepted a branch audit engagement without a valid appointment under Section 139 of the Companies Act, 2013.
  2. Whether the auditor exercised due diligence before accepting the audit assignment.
  3. Whether the auditor complied with applicable Standards on Auditing while conducting the audit.
  4. Whether adequate audit documentation and audit evidence were maintained.
  5. Whether issuance of an unmodified audit opinion without sufficient audit evidence amounted to professional misconduct.

 

Petitioner’s / NFRA’s Arguments

NFRA contended that:

  • The appointment of the branch auditor was not approved by shareholders as required under Section 139 of the Companies Act, 2013.
  • The auditor failed to verify whether statutory requirements for appointment had been complied with.
  • The auditor accepted an invalid appointment letter issued by an authorised signatory without proper corporate approval.
  • The auditor failed to comply with ethical requirements and obligations under the Chartered Accountants Act, 1949.
  • The audit file lacked sufficient audit documentation.
  • There was no evidence regarding audit planning, risk assessment, determination of materiality, sampling procedures, internal control evaluation, verification procedures and audit conclusions.
  • The auditor issued an audit opinion without sufficient appropriate audit evidence.
  • Multiple Standards on Auditing were violated, including SA 200, SA 210, SA 230, SA 300, SA 315, SA 320, SA 330, SA 510, SA 520, SA 530, SA 580 and SA 700.

 

Respondent’s Arguments

CA P Rabi Kumar Patra submitted that:

  • Upon receiving the appointment communication from DHFL with a copy to the statutory auditor, it was reasonable to believe that the company had complied with Section 139 requirements.
  • The appointment letter and audit guidelines sufficiently explained the scope of work.
  • The audit engagement was recurring in nature and therefore a fresh engagement letter was not considered necessary.
  • Documentation from previous years was available and referred to during the audit process.
  • Audit planning and audit strategy had been formulated.
  • Materiality considerations did not substantially arise within the scope of branch audit work.
  • Analytical procedures and sampling procedures had been followed.
  • Most significant risks were managed at the corporate level rather than branch level.

 

Court Order / Findings

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

1. Invalid Acceptance of Audit Engagement

The auditor failed to ascertain whether statutory requirements regarding appointment had been complied with before accepting the engagement.

NFRA held that a Chartered Accountant is under a professional obligation to verify compliance with statutory appointment provisions and cannot merely rely upon management representations.

The acceptance of the audit engagement and issuance of the audit report without a valid appointment amounted to professional misconduct.

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

NFRA found that:

  • No proper engagement letter was executed.
  • Audit objectives and responsibilities were not properly documented.
  • Scope and terms of engagement were inadequately defined.

Accordingly, SA 210 was violated.

3. Violation of SA 230 – Audit Documentation

NFRA observed substantial deficiencies in audit documentation.

The audit file lacked evidence relating to:

  • Understanding of branch operations.
  • Internal control evaluation.
  • Audit planning.
  • Materiality assessment.
  • IT control review.
  • Verification of loans and assets.
  • KYC and anti-money laundering checks.
  • Audit conclusions and professional judgments.

NFRA held that oral explanations could not substitute documentary evidence.

4. Violation of SA 700 – Forming an Opinion and Reporting on Financial Statements

NFRA concluded that:

  • No sufficient appropriate audit evidence supported the audit opinion.
  • Materiality was not determined.
  • Risk assessment procedures were absent.
  • Sampling methodology was undocumented.

Therefore, issuance of an unmodified audit opinion was without adequate basis.

5. Violations of Additional Standards on Auditing

NFRA also found violations of:

  • SA 300 – Audit Planning
  • SA 315 – Risk Assessment
  • SA 320 – Materiality
  • SA 330 – Responses to Assessed Risks
  • SA 510 – Opening Balances
  • SA 520 – Analytical Procedures
  • SA 530 – Audit Sampling
  • SA 580 – Written Representations

The audit file did not contain evidence demonstrating compliance with these standards.

 

Important Clarification

NFRA clarified that:

  • A branch statutory auditor must independently verify the legality of the appointment before accepting the engagement.
  • Reliance on assumptions or management communications cannot replace statutory verification.
  • Audit documentation is fundamental to audit quality and cannot be substituted by oral explanations.
  • Branch audits are subject to the same auditing standards and professional responsibilities applicable to statutory audits.
  • Even where the appointment itself is invalid, audit work performed may still be scrutinized for compliance with auditing standards.

 

Sections / Provisions Involved

Companies Act, 2013

  • Section 132
  • Section 132(4)
  • Section 139
  • Section 140
  • 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

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 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
  • SA 700 – Forming an Opinion and Reporting on Financial Statements

 

Penalty and Sanctions

NFRA imposed the following sanctions:

  1. Monetary penalty of ₹1,00,000 (One Lakh Rupees) upon CA P Rabi Kumar Patra.
  2. Debarment for one year from:
    • Being appointed as an auditor,
    • Being appointed as an internal auditor,
    • Undertaking any audit relating to financial statements or internal audit of any company or body corporate.

The order was directed to become effective after 30 days from the date of issuance.

 

Related Case Laws

NFRA vs Chaturvedi & Shah (DHFL Audit Matter)

NFRA examined the statutory audit of DHFL and scrutinized the role of statutory auditors and branch auditors in connection with the alleged financial irregularities.

NFRA Orders Against Various DHFL Branch Auditors

Multiple branch auditors associated with DHFL branch audits for FY 2017-18 were subjected to disciplinary proceedings concerning invalid appointments, audit quality deficiencies and non-compliance with auditing standards.

Bharat Parikh & Associates Chartered Accountants (PCAOB Order)

Referenced by NFRA while emphasizing the importance of maintaining sufficient audit documentation and evidence supporting audit conclusions.

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

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