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 (AQR) of the statutory audit of DHFL for FY 2017-18.
  3. During the review, NFRA observed that approximately 33 engagement partners had signed Independent Branch Auditors’ Reports for nearly 250 DHFL branches.
  4. CA Shrishail Veeranna Mantgol acted as the Engagement Partner for the audit of one DHFL branch located at Gulbarga (Kalaburagi).
  5. NFRA found that the appointment of branch auditors had not been approved by the shareholders in the Annual General Meeting as required under the Companies Act, 2013.
  6. Despite the absence of such approval, the auditor accepted the assignment, represented himself as Branch Statutory Auditor, and issued an Independent Branch Auditor’s Report.
  7. NFRA further examined whether the audit had been conducted in accordance with applicable Standards on Auditing and whether proper audit documentation existed.

Issues Involved

1. Whether the auditor accepted the audit engagement without a valid appointment under the Companies Act, 2013?

2. Whether the auditor failed to exercise due diligence before accepting the appointment?

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

4. Whether the auditor maintained sufficient audit documentation supporting the audit opinion?

5. Whether issuance of an unmodified audit opinion without adequate audit evidence amounted to professional misconduct?

Petitioner’s / Auditor’s Arguments

The auditor contended that:

  • The appointment was accepted in good faith.
  • The branch audit report was addressed to the statutory auditors and not to the members of the company.
  • The engagement was in substance a component audit, special audit, or sub-audit as contemplated under SA 600.
  • The scope and methodology were specified by management.
  • The description "Statutory Auditor for the Branch" was merely a misnomer.
  • He was not appointed under Section 139 of the Companies Act, 2013.
  • Protection under the Doctrine of Indoor Management was available.
  • Being a continuing auditor, a separate engagement letter was not required.
  • Discussions with branch officials and existing knowledge of branch operations justified the audit procedures adopted.
  • There was sufficient compliance with the Standards on Auditing.

 

Respondent’s / NFRA’s Arguments

NFRA observed that:

  • The auditor accepted appointment as Branch Statutory Auditor despite the absence of shareholder approval.
  • The appointment letter, acceptance letter, audit working papers, confirmation letters, and audit report consistently described the engagement as a statutory branch audit.
  • The auditor failed to verify compliance with statutory requirements relating to auditor appointment.
  • The auditor violated ethical requirements and failed to exercise professional skepticism.
  • Audit documentation was insufficient and did not demonstrate the nature, timing, extent, or results of audit procedures.
  • The audit opinion lacked adequate evidentiary support.
  • Several mandatory Standards on Auditing were violated.

 

Sections Involved

Companies Act, 2013

  • Section 132(4)
  • Section 139
  • Section 140
  • Section 143(1)
  • Section 143(4)
  • 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

NFRA Rules, 2018

  • Rule 11(6)

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

Court Order / Findings

NFRA held that:

Invalid Appointment

The auditor accepted an audit engagement without ensuring that the appointment complied with statutory requirements under the Companies Act, 2013.

Failure of Due Diligence

The auditor failed to ascertain whether the appointment had been approved by shareholders as mandated by law.

Violation of SA 210

The auditor failed to properly document and agree upon the terms of engagement and did not establish the objective and scope of the audit in accordance with SA 210.

Violation of SA 230

The audit file lacked sufficient documentation evidencing:

  • Audit planning.
  • Risk assessment.
  • Understanding of internal controls.
  • Audit procedures performed.
  • Audit evidence obtained.
  • Conclusions reached.

Violation of SA 700

The auditor issued an unmodified audit opinion despite insufficient evidence supporting such opinion.

Violation of Other Standards

NFRA found non-compliance with SA 300, SA 315, SA 320, SA 330, SA 510, SA 520, SA 530, and SA 580.

Professional Misconduct Established

NFRA concluded that the auditor committed professional misconduct by:

  • Failing to exercise due diligence.
  • Acting with gross negligence.
  • Failing to obtain sufficient information necessary for expressing an audit opinion.
  • Failing to follow generally accepted auditing procedures.

 

Important Clarification

NFRA clarified that:

  • The shareholders of DHFL had approved only Chaturvedi & Shah as statutory auditor for the company and its branches.
  • No separate branch statutory auditor had been approved by shareholders.
  • The protection of the Doctrine of Indoor Management was unavailable because the Chartered Accountants Act and auditing standards required independent verification of the validity of the appointment.
  • Even though the appointment itself was invalid, NFRA independently examined compliance with auditing standards because the branch audit report was relied upon by the statutory auditor.
  • Audit documentation is fundamental to audit quality and cannot be substituted by subsequent explanations.

 

Penalty and Sanctions

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 relating to financial statements,
  • Undertaking internal audits of any company or body corporate.

 

Link to download the order - https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/09/2023093060187848.pdf

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