NFRA Debars CA and Firm for 2 Years Over Multiple Audit Lapses, Imposes ₹5 Lakh Penalty [Read Order]

The NFRA ( National Financial Reporting Authority ) has debarred the CA ( Chartered Accountant ) and his firm for committing multiple audit lapses for two years. It also imposed a penalty of Rs. 5 lakhs.

The CA and his firm was an Engagement Partner for the statutory audit of Vikas Proppant and Granite Limited for the Financial Year (FY) 2020-21. The authority found the following major audit lapses :

1. Failure to plan the audit and failure to understand the nature of the entity and its environment.
2. Failure to verify opening balances (as per SA 510)
3. Failure to determine materiality and performance materiality
4. Failure to report the non-provisioning in respect of the Expected Credit Loss
5. Failure to report on the entity’s ability to continue as a Going Concern.
6. Failure to evaluate the arm’s length pricing regarding the compliance of Section 17 & 188 of Companies Act, 2013 for the Related Party Transactions
7. Failure to report non-charging of depreciation of leasehold land and Plant and Machinery
8. Failure to assemble the Audit File within 60 days of the completion of the audit
9. Failure to obtain sufficient and appropriate audit evidence through external confirmations
10. Failure to determine appointment of Engagement Quality Control Reviewer (EQCR) (as per SA 220)
11. Failure to Determine TCWG and Communicate with them

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Regarding the failure to plan the audit and understand the entity and its environment, auditors are required to gain a comprehensive understanding of the company’s business, including its industry, regulatory framework, ownership, governance, capital structure, and financial reporting framework. This is mandated by Paragraph 11 of SA 315.

However, the audit file lacked documentation that reflected the auditors’ understanding of these aspects, as required by Paragraph 11 of SA 300. In a letter dated November 9, 2023, the Engagement Partner (EP) confirmed to NFRA that no documentation was available concerning his understanding of the audited entity and its environment, and that most of the discussions were conducted verbally, noted the NFRA.

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With regards to failure to verify opening balances, due to the lack of evidence in the audit file showing that the auditors verified the opening balances, as indicated by the discrepancies in Table I, it was evident that the auditors failed to obtain sufficient appropriate audit evidence regarding the opening balances, noted the NFRA. Consequently, this constitutes a violation of SA 510.

The NFRA has detailed the reasons for the audit lapses. With regards to the audit firm, the authority observed that “As per para 3 of SQC I, the firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements, and that reports issued by the firm or engagement partner(s) are appropriate in the circumstances.”

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Following an investigation and proceedings and after providing the audit firm and the Engagement Partner (EP) an opportunity, the NFRA found both the EP and the firm guilty of professional misconduct. Thus, it imposed a monetary penalty of 2 lakhs on the EP and 3 lakhs on the audit firm.

Additionally, the EP is barred for two years from being appointed as an auditor or internal auditor, or from undertaking any audit of financial statements or internal audit functions of any company or body corporate.

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