Facts of the Case

The National Financial Reporting Authority (NFRA) initiated an investigation into the role of CA Sunil R. Jumani, who acted as the Engagement Partner and Branch Auditor for four branches of Dewan Housing Finance Corporation Limited (DHFL) during FY 2017-18.

During NFRA's Audit Quality Review of DHFL's statutory audit conducted by Chaturvedi & Shah, NFRA observed that approximately 33 branch auditors had signed independent branch auditors’ reports for nearly 250 branches of DHFL.

Upon investigation, NFRA found that the appointment of these branch auditors, including CA Sunil R. Jumani, 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 Sunil R. Jumani accepted the engagement as Branch Statutory Auditor, conducted the branch audit, and issued Independent Branch Auditors’ Reports for four DHFL branches.

NFRA further found significant deficiencies in audit planning, audit documentation, risk assessment procedures, materiality determination, audit evidence collection, sampling methodology, analytical procedures, and audit reporting.

 

Issues Involved

1. Whether a Chartered Accountant can accept a branch statutory audit assignment without verifying compliance with Section 139 of the Companies Act, 2013?

2. Whether acceptance of an audit engagement without valid shareholder approval amounts to professional misconduct?

3. Whether failure to maintain proper audit documentation and comply with Standards on Auditing constitutes professional misconduct under the Chartered Accountants Act, 1949?

4. Whether issuance of an audit opinion without sufficient audit evidence violates the Standards on Auditing and the Companies Act, 2013?

 

Petitioner’s Arguments (NFRA)

NFRA contended that:

  • The appointment of CA Sunil R. Jumani as Branch Statutory Auditor lacked shareholder approval and was therefore legally invalid.
  • The auditor failed to exercise due diligence before accepting the audit engagement.
  • The auditor accepted an appointment merely based on a management-issued appointment letter.
  • The audit engagement violated ethical requirements prescribed under the Chartered Accountants Act and Code of Ethics.
  • The audit file did not contain adequate documentation supporting audit procedures performed.
  • The auditor failed to comply with multiple Standards on Auditing including SA 200, SA 210, SA 230, SA 300, SA 315, SA 320, SA 330, SA 520, SA 530 and SA 700.
  • The audit opinion issued was unsupported by sufficient and appropriate audit evidence.

 

Respondent’s Arguments (CA Sunil R. Jumani)

The Respondent submitted that:

  • The management had informed him that the Board possessed authority to appoint branch auditors.
  • Secretarial compliances were certified by an independent Practicing Company Secretary.
  • The branch audit was accepted under Section 143(8) of the Companies Act.
  • The terms of engagement were adequately defined by the company.
  • Audit planning had been performed based on professional judgment.
  • The audit was personally conducted by him without assistance.
  • Materiality and risk assessments were considered during the audit process.
  • Analytical procedures and sampling procedures had been carried out.

 

Court Findings / NFRA Findings

NFRA rejected the Respondent’s explanations and held that:

1. Invalid Appointment Accepted

The auditor failed to independently verify whether the requirements of Section 139 of the Companies Act, 2013 had been complied with before accepting the appointment.

NFRA held that reliance on management representations or secretarial certifications was insufficient.

The auditor was required to independently ascertain compliance with statutory appointment requirements.

 

2. Violation of SA 210 (Agreeing the Terms of Audit Engagements)

NFRA found that:

  • No proper audit engagement letter was executed.
  • Essential terms required under SA 210 were missing.
  • The objective and scope of the audit were not properly documented.

Accordingly, SA 210 was violated.

 

3. Violation of SA 230 (Audit Documentation)

NFRA observed that the audit file lacked evidence relating to:

  • Understanding of branch operations.
  • Internal control evaluation.
  • Audit planning.
  • Risk assessment procedures.
  • Materiality determination.
  • IT controls evaluation.
  • Verification of trial balance items.
  • Supporting audit evidence.

The audit documentation failed to demonstrate the nature, timing, extent and results of audit procedures.

 

4. Violation of SA 300, SA 315, SA 320, SA 330, SA 520 and SA 530

NFRA found absence of documentation supporting:

  • Overall audit strategy.
  • Risk assessment procedures.
  • Materiality calculations.
  • Auditor’s response to assessed risks.
  • Analytical review procedures.
  • Audit sampling methodology.

 

5. Violation of SA 700 (Audit Opinion)

NFRA held that:

  • The auditor failed to obtain reasonable assurance.
  • No sufficient appropriate audit evidence existed.
  • Materiality and risk assessment procedures were absent.
  • The unmodified audit opinion was unsupported.

Consequently, the audit opinion was held to be baseless.

 

Important Clarifications

Independent Verification is Mandatory

An auditor cannot rely solely upon:

  • Management representations,
  • Appointment letters issued by management,
  • Secretarial compliance certificates,

for accepting an audit engagement.

The auditor must independently verify statutory compliance relating to appointment.

Audit Documentation is the Foundation of Audit Quality

NFRA emphasized that:

If audit procedures are not adequately documented, they are presumed not to have been performed.

Valid Appointment is a Precondition

Acceptance of a statutory audit assignment without legal appointment approval itself can amount to professional misconduct.

Audit Opinion Must Be Evidence-Based

An audit opinion issued without sufficient appropriate audit evidence is unsustainable under auditing standards.

 

Sections Involved

Companies Act, 2013

  • Section 132
  • Section 132(4)
  • Section 139
  • Section 140
  • Section 143(8)
  • Section 143(9)
  • 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

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

 

Final Order

NFRA held CA Sunil R. Jumani guilty of professional misconduct and ordered:

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 companies or body corporates.

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/2023/09/202309301218193129.pdf

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