Facts of the Case

  1. DHFL was a housing finance company listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
  2. NFRA initiated an Audit Quality Review after reports emerged regarding alleged financial irregularities and fraud involving DHFL.
  3. During the review of the statutory audit conducted by Chaturvedi & Shah, NFRA noticed that approximately 250 branches of DHFL had been subjected to branch audits by 33 engagement partners.
  4. CA Sanjay Soni acted as Engagement Partner for the audit of seventeen DHFL branches.
  5. NFRA called for the audit files and examined the audit work performed.
  6. The investigation revealed that:
    • The appointment of branch auditors was not approved by shareholders.
    • The auditor accepted an appointment lacking statutory validity.
    • Independent Branch Auditors’ Reports were issued despite the defective appointment.
    • Audit documentation and compliance with auditing standards were inadequate.
  7. A Show Cause Notice was issued on 07.12.2022 alleging professional misconduct and violations of auditing standards.

 

Issues Involved

1. Whether the appointment of CA Sanjay Soni as Branch Statutory Auditor of DHFL branches was legally valid?

2. Whether acceptance of the audit engagement without verifying compliance with Section 139 of the Companies Act, 2013 amounted to professional misconduct?

3. Whether the auditor complied with the Standards on Auditing while conducting the branch audit?

4. Whether the audit documentation maintained by the auditor satisfied the requirements of SA 230?

5. Whether the audit opinion issued by the auditor was supported by sufficient and appropriate audit evidence?

6. Whether the conduct of the auditor constituted professional misconduct under the Chartered Accountants Act, 1949 and Section 132(4) of the Companies Act, 2013?

 

Petitioner’s Arguments (CA Sanjay Soni)

The auditor submitted that:

  • He was under the impression that his appointment was in order because earlier branch audit appointments had been made in a similar manner.
  • Any defect in appointment was attributable to the company and should not be treated as gross negligence on his part.
  • The appointment letter and acceptance thereof substantially complied with the requirements of SA 210.
  • The engagement was recurring in nature and there had been no material change in scope.
  • The audit file maintained was commensurate with the nature and scope of work assigned.
  • He was familiar with branch operations from previous years and conducted audit procedures accordingly.
  • The audit strategy, sample selection and verification procedures were performed in line with normal audit practices.
  • Therefore, there was no violation of the Standards on Auditing.

 

Respondent’s Arguments (NFRA)

NFRA contended that:

  • The appointment of branch auditors lacked shareholder approval as required under Section 139 read with Section 143(8) of the Companies Act, 2013.
  • The auditor failed to verify whether statutory requirements regarding appointment had been complied with.
  • Acceptance of an invalid appointment violated the Chartered Accountants Act, 1949 and Code of Ethics.
  • The auditor failed to comply with SA 210 relating to agreeing audit engagement terms.
  • The audit file lacked documentation regarding:
    • Risk assessment.
    • Audit planning.
    • Materiality determination.
    • Internal controls.
    • Audit sampling.
    • Verification procedures.
    • Review and conclusions.
  • The audit opinion was issued without sufficient appropriate audit evidence.
  • The auditor therefore failed to comply with several mandatory Standards on Auditing and was guilty of professional misconduct.

 

Court/Authority Findings

NFRA held as follows:

1. Invalid Appointment of Branch Auditor

NFRA found that the shareholders of DHFL had approved only Chaturvedi & Shah as statutory auditor for the company and its branches.

No separate appointment or ratification existed for branch auditors.

Therefore, acceptance of the engagement by CA Sanjay Soni as Branch Statutory Auditor was legally invalid.

 

2. Failure to Exercise Due Diligence

NFRA observed that the auditor failed to ascertain whether statutory requirements relating to appointment had been complied with.

This constituted lack of due diligence and professional negligence under the Chartered Accountants Act, 1949.

 

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

NFRA found that:

  • The engagement documentation did not contain the mandatory components required under SA 210.
  • The objective and scope of audit were inadequately documented.
  • Responsibilities of management and auditor were not properly recorded.
  • Applicable financial reporting framework was not adequately specified.

Accordingly, violation of SA 210 was established.

 

4. Violation of SA 230 – Audit Documentation

NFRA observed serious deficiencies in audit documentation.

The audit file lacked evidence relating to:

  • Audit planning.
  • Risk assessment.
  • Internal controls.
  • Materiality determination.
  • Audit procedures performed.
  • Conclusions reached.
  • Sampling methodology.
  • Verification of loans and branch operations.

NFRA held that the audit documentation failed to satisfy the requirements of SA 230.

 

5. Violation of SA 700 – Forming an Opinion and Reporting

NFRA held that:

  • No adequate basis existed for the unmodified audit opinion.
  • Materiality was not properly determined.
  • Audit procedures and conclusions were not documented.
  • Reasonable assurance could not be demonstrated.

Accordingly, the audit opinion was considered unsupported by audit evidence.

 

6. Non-Compliance with Other Auditing Standards

NFRA also found violations of:

  • SA 300 – Planning an Audit of Financial Statements.
  • SA 315 – Identifying and Assessing Risks.
  • SA 330 – Auditor’s Responses to Assessed Risks.
  • SA 320 – Materiality in Planning and Performing an Audit.
  • SA 450 – Evaluation of Misstatements.
  • SA 510 – Initial Audit Engagements.
  • 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 Clarifications

Mere Appointment Letter Is Not Sufficient

An auditor cannot rely solely on an appointment letter and must independently verify compliance with statutory appointment requirements.

Audit Documentation Is Fundamental

Oral explanations cannot substitute proper audit documentation. The audit file itself must demonstrate compliance with auditing standards.

Branch Audit Requires Full Compliance with Standards

Even where branch audit work is referred to by the statutory auditor, branch auditors remain independently responsible for compliance with all applicable Standards on Auditing.

Invalid Appointment Can Lead to Professional Misconduct

Acceptance of an audit assignment without verifying legal validity of appointment may amount to professional misconduct under the Chartered Accountants Act.

 

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

Standards on Auditing

  • SA 200
  • SA 210
  • SA 230
  • SA 300
  • SA 315
  • SA 320
  • SA 330
  • SA 450
  • SA 510
  • SA 520
  • SA 530
  • SA 580
  • SA 700

 

Court Order / Final Decision

NFRA concluded that CA Sanjay Soni committed professional misconduct by:

  • Accepting an invalid audit appointment.
  • Failing to exercise due diligence.
  • Failing to obtain sufficient appropriate audit evidence.
  • Failing to comply with multiple Standards on Auditing.
  • Issuing an audit opinion unsupported by adequate documentation.

Penalty Imposed

  • Monetary Penalty: ₹1,00,000 (One Lakh).

Debarment

  • Debarred for six months from:
    • Being appointed as auditor.
    • Being appointed as internal auditor.
    • Undertaking audits of financial statements.
    • Conducting internal audits of any company or body corporate.

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


Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/09/20230930874985168.pdf

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