Failure to Assemble Audit File within 60 days of Completion of Audit: NFRA Debars CA and Firm for 2 Years [Read Order]

A CA ( Chartered Accountant ) and his firm was debarred by the financial reporting authority for failure to submit the audit file within 60 days of completion of the audit. The NFRA also imposed a penalty of Rs. 2 lakhs on the accountant.

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The reporting authority found that the auditors failed to meet requirements of the Standards on Auditing ( SA ) in respect of several significant areas, reflecting gross negligence and lack of due diligence to perform audit of a Public Interest Entity (PIE).

The Chartered Accountant ( EP ) was the statutory auditor of the Vikas Proppant and Granites Limited. However, based on the investigation conducted by the NFRA, it found major audit lapses.

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The CA was charged with failing to assemble the audit file within 60 days of completing the audit. According to Paragraph 75 of SQCI, in conjunction with Paragraph A21 of SA 230, “an appropriate time limit to complete the assembly of the final audit file is ordinarily not more than 60 days after the date of the auditor’s report.”

For the fiscal years 2018-19 and 2019-20, the Independent Auditor’s Reports were dated May 22, 2019, and June 27, 2020, respectively. The EP did not adhere to the requirements outlined in SA 230 and SQCI II.

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NFRA’s letter dated January 17, 2023, requested the CA to submit the audit file by February 2, 2023. The CA requested an extension, which was granted until February 24, 2023. However, the CA submitted the audit file on March 7, 2023, without including the required affidavit regarding the completeness of the audit file.

On April 17, 2023, NFRA requested the CA to submit the affidavit within 10 days. In response, the CA requested additional time to provide extra documents in an email dated April 26, 2023, but did not mention the affidavit. No further communication regarding the affidavit or additional documents was received from the CA.

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The failure to compile the audit file within the 60-day timeframe mandated by SA 230 and SQCI is evident. Audit documentation is crucial as it underpins the auditor’s report and serves as evidence that the audit was conducted in compliance with the applicable Standards on Auditing (SAS ) and regulatory requirements. Without proper documentation, it is impossible to verify if the necessary audit procedures were performed.

The EP was charged with other following misconducts:

1. failure to plan the audit and failure to understand the nature of the entity and its environment;
2. failure to evaluate the Internal Audit Function;
3. failure to determine materiality and performance materiality;
4. failure to report the non-provisioning in respect of the Expected Credit Loss;
5. non evaluation of the arm’s length pricing carried out for Related Party Transactions;
6. failure to report non charging of depreciation of lease hold land and plant & machinery;
7. failure to obtain sufficient and appropriate audit evidence through external confirmations; and
8. failure to determine the appointment of an Engagement Quality Control Reviewer (EWR)

The NFRA observed that the CA in this case was obligated to adhere to the Standards on Auditing (SAS) to ensure audit quality and uphold the credibility of the financial statements of listed companies.

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Thus it imposed a penalty of Rs. 2 lakhs and debarred the CA and its firm from being appointed as auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.

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