Facts of the Case

DHFL, a listed housing finance company, was allegedly involved in large-scale financial irregularities and fraud. During NFRA’s Audit Quality Review of the statutory audit of DHFL for FY 2017-18, it was observed that several branch auditors had conducted audits of DHFL branches and issued Independent Branch Auditors’ Reports.

CA Akash Goel acted as the Engagement Partner for the audit of eight DHFL branches. NFRA's investigation revealed that he accepted the audit assignment without verifying whether his appointment complied with the statutory requirements prescribed under the Companies Act, 2013.

It was further found that the appointment letter relied upon by the auditor had been issued by an authorised signatory without approval of the shareholders, despite statutory auditors being required to be appointed under Section 139 of the Companies Act, 2013.

NFRA also observed serious deficiencies in audit planning, audit documentation, collection of audit evidence, risk assessment, materiality assessment and compliance with Standards on Auditing.

Issues Involved

  1. Whether the auditor accepted the audit assignment without ensuring a valid appointment under the Companies Act, 2013.
  2. Whether the auditor exercised due diligence and professional skepticism while accepting and performing the audit engagement.
  3. Whether the auditor complied with the applicable Standards on Auditing.
  4. Whether the auditor maintained sufficient audit documentation and obtained adequate audit evidence.
  5. Whether the conduct constituted professional misconduct under the Companies Act, 2013 and the Chartered Accountants Act, 1949.

Petitioner’s Arguments (NFRA)

  • The auditor accepted an invalid appointment without verifying compliance with Section 139 of the Companies Act, 2013.
  • The audit engagement lacked legal validity because the appointment was not approved by the competent authority.
  • The auditor failed to exercise due diligence and professional skepticism.
  • The audit file lacked sufficient documentation to establish that audit procedures were properly planned and executed.
  • There was non-compliance with SA 200, SA 210, SA 230 and other applicable auditing standards.
  • The Independent Branch Auditors’ Reports were issued without an adequate basis and were therefore misleading.
  • Such failures amounted to professional misconduct under Section 132(4)(c) of the Companies Act, 2013.

Respondent’s Arguments (CA Akash Goel)

  • The auditor contended that the responsibility for appointment rested upon the company management and not the branch auditor.
  • It was argued that the appointment letter provided the scope, objectives and reporting requirements of the audit.
  • The auditor claimed that audit procedures had been performed in accordance with the prescribed scope.
  • It was further argued that practical limitations prevented maintaining copies of every document reviewed during the audit.
  • The auditor denied violation of the Standards on Auditing and maintained that the audit was conducted using professional judgment and knowledge.

Court Order / Findings

NFRA rejected the explanations offered by the auditor and held that:

  • An auditor is under a legal obligation to independently ascertain whether the statutory requirements relating to appointment have been complied with.
  • Merely relying upon the company’s appointment letter is insufficient.
  • The appointment accepted by the auditor was legally invalid.
  • The auditor failed to comply with the Code of Ethics and mandatory provisions governing audit engagements.
  • The audit engagement letter did not satisfy the requirements of SA 210.
  • The audit file lacked fundamental documentation required under SA 230.
  • There was no adequate evidence regarding audit planning, risk assessment, materiality determination, internal control evaluation and substantive audit procedures.
  • The conduct demonstrated absence of professional skepticism, lack of due diligence and gross negligence.
  • The auditor was guilty of professional misconduct within the meaning of Section 132(4)(c) of the Companies Act, 2013.

Important Clarification

NFRA clarified that:

  • The responsibility to verify the legality of an audit appointment rests upon the auditor and cannot be shifted to company management.
  • An auditor must independently verify compliance with statutory appointment requirements before accepting an engagement.
  • Audit documentation is not a procedural formality; it forms the foundation for demonstrating compliance with auditing standards.
  • Oral explanations cannot substitute mandatory audit documentation.
  • Compliance with Standards on Auditing is essential even in branch audits and cannot be diluted because of the nature of the engagement.

Final Order

NFRA held CA Akash Goel guilty of professional misconduct and imposed:

  • Monetary Penalty: ₹1,00,000 (One Lakh Rupees)
  • Debarment: One year from being appointed as an auditor or internal auditor and from undertaking any audit relating to financial statements or internal audits of any company or body corporate.

Sections Involved

Companies Act, 2013

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

Chartered Accountants Act, 1949

  • Section 22
  • Clause (9) of Part I of the First Schedule

Standards on Auditing (SAs)

  • SA 200 – Overall Objectives of the Independent Auditor and the Conduct of an Audit
  • SA 210 – Agreeing the Terms of Audit Engagements
  • SA 230 – Audit Documentation
  • SA 300 – Planning an Audit
  • SA 315 – Identifying and Assessing Risks of Material Misstatement
  • SA 320 – Materiality in Planning and Performing an Audit

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/04/2023040161.pdf

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