Auditors Should Gather Independent Evidence over Management Assertions during Audits: ICAI Disciplinary Committee
An auditor should not only depend on representation received from the management but should also collect other necessary evidence which are necessary and relevant at the time of doing the audit.
ICAI – CA – Chartered accountant ICAI – Audit – Accounting – Management assertions – TAXSCAN
ICAI – CA – Chartered accountant ICAI – Audit – Accounting – Management assertions – TAXSCAN
The Institute of Chartered Accountants of India ( ICAI ) reprimanded the Chartered Accountant ( CA ) with a Fine of Rs. 1,00,000/- stating that the CA has merely relied upon the representations of the management and failed to exercise requisite due diligence while auditing and was grossly negligent in reporting material fact and misstatement.
The ICAI disciplinary committee observed that an auditor should not only depend on representation received from the management but should also collect other necessary evidence which are necessary and relevant at the time of doing the audit.
A complaint has been lodged by the Complainant on behalf of the Cost Audit Branch of the Ministry of Corporate Affairs against the Respondent, who served as the statutory auditor for M/s Danfoss Power Solutions India Private Limited during the financial year 2015-16.
According to the complaint, despite the Company's engagement in manufacturing products falling under the CETA code 8481, making cost record maintenance mandatory, the Respondent, in their CARO report, stated otherwise. The turnover of the Company for the preceding financial year exceeded Rs. 35 crores, triggering the requirement for cost record maintenance as per Section 148(1) of the Companies Act 2013.
The Committee noted that the Respondent-CA failed to comply with auditing standards SA 200, SA 250, and SA 580, contravening Section 143(9) of the Companies Act. Despite the Company's acceptance of missing the amendment specifying cost record obligations, the Respondent's reliance solely on management's representations was deemed inadequate.
The Respondent's submission of preliminary objections was dismissed by the Committee, emphasising that the Disciplinary Directorate should identify specific misconduct acts, regardless of clause mentions in complaints.
The Committee further noted that though the management of the Company in response to the show cause notice issued had accepted the fact that they had missed the amendment dated 31st December, 2014 in Cost Audit Rules, 2014 due to which they had given the representation to the Respondent that cost records are not applicable on the Company, however, the said acceptance of the Company does not absolve the Respondent from his duties to exercise due diligence during the course of audit. Thus, the contention of the Respondent that he obtained the written representation letter from the Company and in accordance with guidance notes relied on them is not tenable.
The Disciplinary Committee observed that the Company had sought to compound the offence in response to a notice issued under Section 148 of the Companies Act, 2013. Therefore, the Respondent's argument that no action had been taken by the Ministry of Corporate Affairs (MCA) against him is untenable, as the act of seeking to compound an offence inherently implies an admission of wrongdoing.
Further found that the Respondent solely relied on management's representations without verifying compliance with prescribed cost record maintenance. This negligence resulted in a misreporting of material facts. Despite the Company's acknowledgment of the error regarding the product falling under cost record requirements, the Committee remained unsatisfied with the Respondent's defence. Both the Company and the Respondent admitted to the mistake in their submissions before the Ministry.
After consideration of the facts of the case vis-à-vis oral and written submissions of the Respondent, the committee was not satisfied with the submissions of the Respondent and noted that the Respondent has merely relied upon the representations of the management and failed to exercise requisite due diligence while auditing and was grossly negligent in reporting material fact and misstatement.
Accordingly, it was held that the Respondent-CA guilty of Professional Misconduct falling within the meaning of Items (5), (6) and (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
To Read the full text of the Order CLICK HERE
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