Facts of the Case

The National Financial Reporting Authority (NFRA) conducted an investigation into the professional conduct of CA Ramesh Chaturvedi, who acted as the Engagement Partner (EP) and signed the Independent Branch Auditors’ Reports relating to eight branches of Dewan Housing Finance Corporation Limited (DHFL) for the Financial Year 2017-18.

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

The investigation revealed that the appointment of branch auditors 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 legally valid appointment, CA Ramesh Chaturvedi accepted the engagement, acted as Branch Statutory Auditor, and issued Independent Branch Auditors’ Reports.

NFRA further examined the audit work performed and found substantial deficiencies in audit planning, audit documentation, risk assessment, materiality determination, sampling procedures, analytical review procedures, written representations, and overall compliance with the Standards on Auditing.

Consequently, NFRA issued a Show Cause Notice alleging professional misconduct and violation of statutory and professional standards.

 

Issues Involved

  1. Whether CA Ramesh Chaturvedi accepted the audit engagement without ensuring a valid appointment under 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 Branch Auditor complied with the applicable Standards on Auditing while conducting branch audits.
  4. Whether adequate audit documentation and audit evidence existed to support the audit opinion issued.
  5. Whether the auditor exercised due diligence, professional skepticism, and professional judgment as required under auditing standards.
  6. Whether the audit opinion was supported by sufficient and appropriate audit evidence.

 

Petitioner’s Arguments (CA Ramesh Chaturvedi)

The auditor contended that:

1. Limited Scope Assignment

He argued that he was not appointed as an independent statutory auditor and had only a limited role relating to branch records.

2. Reliance on Statutory Auditors

He submitted that he relied upon the reputation and judgment of the statutory auditors and was not involved in the appointment process.

3. Compliance Through Appointment and Consent Letters

The auditor argued that the appointment letter and consent letter substantially fulfilled the requirements of SA 210 relating to engagement terms.

4. Audit Documentation Exists

He claimed that audit plans, audit programmes and audit procedures were maintained in the audit file and were adequate.

5. Materiality and Risk Assessment

He asserted that materiality considerations and audit coverage were incorporated within the audit programme.

6. Restricted Access

He contended that access to information technology systems and management-level representations was limited because he functioned only as a branch auditor.

7. Sampling Procedures Were Applied

He maintained that audit sampling had been performed on a random basis and all loan files had a chance of selection.

8. Misstatements Were Reported

He stated that observations and discrepancies were reported under the “Notes to Accounts and Important Observations” section of branch audit reports.

 

Respondent’s Arguments (NFRA)

NFRA argued that:

1. Appointment Was Legally Invalid

The shareholders had approved only one statutory auditor, namely Chaturvedi & Shah, for the company and all branches. No separate branch auditors were approved by the Annual General Meeting.

2. Auditor Failed to Verify Legal Compliance

The auditor was required to ascertain whether the company had complied with the statutory requirements governing appointment of auditors before accepting the engagement.

3. Professional Misconduct Established

Acceptance of an invalid appointment itself constituted professional misconduct under the Chartered Accountants Act, 1949.

4. Serious Audit Deficiencies Existed

The audit file lacked essential documentation relating to:

  • Understanding of branch operations.
  • Internal control evaluation.
  • Risk assessment procedures.
  • Materiality determination.
  • Audit planning.
  • IT controls review.
  • Loan verification procedures.
  • KYC and anti-money laundering checks.
  • Sampling methodology.
  • Analytical review procedures.
  • Written management representations.

5. Audit Opinion Was Unsupported

NFRA contended that the audit opinion was not backed by sufficient and appropriate audit evidence and therefore violated fundamental auditing standards.

 

Court Order / Findings

NFRA held against CA Ramesh Chaturvedi and concluded that professional misconduct stood proved.

Finding 1: Invalid Appointment Accepted

NFRA found that the auditor accepted an appointment without verifying compliance with Section 139 of the Companies Act, 2013. The appointment was never approved by the shareholders and was therefore invalid from inception.

Finding 2: Lack of Due Diligence

The auditor failed to exercise due diligence before accepting the engagement and demonstrated absence of professional skepticism and professional judgment.

Finding 3: Violation of SA 210

The engagement terms were not properly documented and did not satisfy the requirements prescribed under SA 210 regarding objective, scope, responsibilities and reporting framework.

Finding 4: Violation of SA 230

The audit file lacked sufficient documentation to demonstrate:

  • Nature of audit procedures.
  • Timing of procedures.
  • Extent of testing.
  • Audit evidence obtained.
  • Conclusions reached.

NFRA held that the documentation requirements of SA 230 were seriously violated.

Finding 5: Unsupported Audit Opinion

The auditor failed to establish materiality, risk assessment and audit evidence necessary for expressing an opinion. Therefore, the unmodified opinion issued was unsupported and contrary to SA 700.

Finding 6: Multiple Standards on Auditing Violated

NFRA found non-compliance with numerous Standards on Auditing including:

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

 

Important Clarifications

Appointment Must Be Legally Valid

Auditors must independently verify compliance with statutory requirements before accepting any audit assignment.

Reliance on Management Is Not Sufficient

An auditor cannot merely rely upon management representations regarding validity of appointment.

Audit Documentation Is Fundamental

Audit documentation is not a procedural formality but the primary evidence demonstrating compliance with auditing standards.

Branch Audits Must Follow Full Auditing Standards

Even branch auditors are required to comply with all applicable Standards on Auditing.

Unsupported Opinions Amount to Professional Misconduct

Issuing an audit opinion without adequate audit evidence constitutes serious professional misconduct.

 

Sections 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, Part I, First Schedule
  • Clause 7, Part I, Second Schedule
  • Clause 8, Part I, Second Schedule
  • Clause 9, Part I, Second Schedule

Companies (Audit and Auditors) Rules, 2014

  • Rule 12

NFRA Rules, 2018

  • Rule 11(6)

 

Penalty and Sanctions

NFRA imposed the following sanctions:

Monetary Penalty

₹1,00,000 (One Lakh Rupees)

Debarment

CA Ramesh Chaturvedi was debarred for one year 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.

The order was made effective after thirty days from the date of issuance.

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/09/202309301033323124.pdf

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