Facts of the Case

The Serious Fraud Investigation Office (SFIO) conducted an investigation into the affairs of SRS Limited and its group companies and shared its findings with NFRA. The investigation revealed alleged falsification of financial statements, inflated purchases and sales through round-tripping and layering of transactions, and falsified debtor balances.

SRS Limited was a listed company and therefore fell within the jurisdiction of NFRA. During the statutory audit of SRS Limited for FY 2017-18, M/s SVP & Associates acted as Joint Statutory Auditor. CA Pankaj Kumar served as the Engagement Partner, while CA Apoorve Bansal acted as the Engagement Quality Control Reviewer (EQCR).

During NFRA's investigation, serious deficiencies were observed in the audit process. The audit file contained no evidence of formal appointment of the EQCR, no documentation of review procedures, and no records demonstrating that the EQCR had objectively evaluated significant audit judgments or conclusions reached by the engagement team.

Consequently, NFRA initiated proceedings under Section 132(4) of the Companies Act, 2013 and issued a Show Cause Notice to CA Apoorve Bansal alleging professional misconduct and failure to discharge responsibilities as an Engagement Quality Control Reviewer.

Issues Involved

  1. Whether CA Apoorve Bansal possessed sufficient experience and authority to act as Engagement Quality Control Reviewer for the audit of a listed company.
  2. Whether the EQCR complied with the requirements of SA 220 and SQC 1 while reviewing the statutory audit of SRS Limited.
  3. Whether there was adequate documentation of review procedures, evaluation of significant judgments, and independence assessments.
  4. Whether the conduct of the EQCR amounted to professional misconduct under the Companies Act, 2013 and the Chartered Accountants Act, 1949.
  5. Whether NFRA possessed jurisdiction to initiate proceedings against an Engagement Quality Control Reviewer.

Petitioner’s Arguments

CA Apoorve Bansal contended that:

  • He had been associated with M/s SVP & Associates since October 2013 and had worked on several audit assignments, including audits of listed companies.
  • He qualified as a Chartered Accountant in 2016 and possessed adequate knowledge and competence to perform the role of EQCR.
  • SA 220 and SQC 1 did not expressly mandate that an EQCR must have previously acted as an Engagement Partner for listed company audits.
  • Significant audit matters were discussed with the Engagement Partner through emails and personal interactions.
  • Any absence of documentation in the audit file was attributable to the Engagement Partner and not to him.
  • NFRA lacked jurisdiction because the EQCR was not an “Auditor” within the meaning of NFRA Rules, 2018.
  • The allegations relating to lack of professional competence and due care were unsupported and based on assumptions rather than evidence.

 

Respondent’s Arguments

NFRA argued that:

  • The EQCR had only about two years of post-qualification experience when he undertook the assignment for a listed entity audit.
  • SA 220 and SQC 1 require an EQCR to possess sufficient and appropriate experience and authority comparable to that required for acting as an Engagement Partner on listed entity audits.
  • The audit file contained no evidence of review of significant audit matters, including:
    • Going concern assessment;
    • Materiality determination;
    • Fraud risk evaluation;
    • Audit planning and audit programme;
    • Independence review.
  • No documentation existed to demonstrate compliance with SA 220 and SQC 1.
  • The alleged email communications relied upon by the EQCR were not substantiated through supporting documents.
  • Section 132(4)(a) of the Companies Act, 2013 empowers NFRA to investigate any member of the Institute of Chartered Accountants of India for professional misconduct, thereby covering an EQCR.

 

Court Order / Findings

NFRA held that:

1. Lack of Required Experience

CA Apoorve Bansal accepted the assignment as EQCR without possessing sufficient and appropriate experience and authority required under SA 220 and SQC 1.

The authority observed that an individual with approximately two years of post-qualification experience was reviewing the work of an Engagement Partner having thirty-two years of professional experience, thereby undermining the objective of an independent quality review.

2. Failure to Perform EQCR Duties

NFRA found no evidence showing:

  • Review of significant audit judgments;
  • Review of audit working papers;
  • Assessment of going concern issues;
  • Review of fraud-related matters;
  • Evaluation of materiality;
  • Review of independence requirements;
  • Proper documentation of quality control procedures.

The authority concluded that the EQCR failed to perform the responsibilities mandated under SA 220 and SQC 1.

3. Violation of Code of Ethics

NFRA held that the EQCR failed to comply with the fundamental principles of:

  • Professional Behaviour;
  • Professional Competence and Due Care.

The authority observed that the conduct displayed gross negligence and lack of due diligence in performing professional responsibilities.

4. Professional Misconduct Established

NFRA concluded that CA Apoorve Bansal was guilty of professional misconduct under:

  • Section 132(4) of the Companies Act, 2013;
  • Section 22 of the Chartered Accountants Act, 1949;
  • Clause 7 of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

The misconduct consisted of failure to exercise due diligence and gross negligence in the discharge of professional duties.

Important Clarification

NFRA clarified that:

  • An Engagement Quality Control Reviewer is independently accountable for compliance with SA 220 and SQC 1.
  • Mere verbal appointment or informal discussions cannot substitute mandatory documentation requirements.
  • The absence of review documentation is itself a serious deficiency.
  • NFRA’s jurisdiction extends to any Chartered Accountant member involved in professional misconduct, including Engagement Quality Control Reviewers.
  • EQCR functions as an important quality-control mechanism in audits of public interest entities and cannot be performed casually or without adequate expertise.

Sections Involved

Companies Act, 2013

  • Section 132(4)
  • Section 132(4)(a)
  • Section 132(4)(c)
  • Section 139
  • Sections 143, 147 and 448

Chartered Accountants Act, 1949

  • Section 22
  • Clause 7 of Part I of the Second Schedule

NFRA Rules, 2018

  • Rule 3
  • Rule 11

Standards on Auditing and Quality Control

  • SA 220 – Quality Control for an Audit of Financial Statements
  • SQC 1 – Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information and Other Assurance Engagements

 

 

Final Order

NFRA imposed the following sanctions:

Monetary Penalty

₹1,00,000 (Rupees One Lakh)

Debarment

CA Apoorve Bansal was debarred for one year from:

  • Being appointed as an auditor;
  • Being appointed as an internal auditor;
  • Undertaking any audit relating to 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/2023/09/20230926471885312.pdf

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