CA Debarred by NFRA for Audit Evidence Failure, Lists Mandatory Audit Procedures for Verification of Revenue
The NFRA imposed a monetary penalty of Rs. Three Lakhs and debarred the CA-EP for two years from being appointed as an auditor or internal auditor or from undertaking any audit regarding financial statements or internal audit functions and activities of any company or corporate
CA – NFRA – Audit Evidence Failure – Lists Mandatory Audit Procedures – Verification of Revenue – taxscan
CA – NFRA – Audit Evidence Failure – Lists Mandatory Audit Procedures – Verification of Revenue – taxscan
The National Financial Reporting Authority ( NFRA ) has taken decisive action against a Chartered Accountant ( CA ), debarring them for 2 years and imposing a penalty of Rs. 3,00,000 for audit misconducts. The NFRA's analysis revealed numerous audit failures, including a failure to obtain sufficient evidence for revenue verification and non-compliance with SA provisions.
The NFRA initiated action under section 132(4) of the Companies Act, 2013 against the CA, who served as the Engagement Partner (EP), for professional misconduct during the statutory audit of Bilcare Limited for the fiscal years 2014-15, 2015-16, and 2016-17.
This action was prompted by information received from the Securities and Exchange Board of India ( SEBI ), indicating discrepancies in the Financial Statements for these years regarding the recognition of interest costs on borrowings classified as Non-Performing Assets (NPAs) by banks. As Bilcare was listed on the Bombay Stock Exchange (BSE), it fell under NFRA's jurisdiction.
The CA-EP failed to adhere to relevant Standards of Auditing (SA) and demonstrated gross negligence by not applying professional skepticism and due diligence in the audit process. Material misstatements in the Financial Statements resulted from the partial recognition of interest costs on borrowings as NPAs, leading to understated losses ranging from 56.5 to 114.32 crores, approximately 30% to 173% of the reported losses.
Instead of issuing a modified opinion, the CA-EP provided an unmodified opinion for FYs 2014-15 to 2016-17, and referenced the matter in an Emphasis of Matter (EOM) paragraph in the Auditor's report for FY 2016-17, contrary to SA requirements.
Additionally, sufficient appropriate audit evidence to verify revenue, a high-risk item for fraud, was not obtained. Proper audits of Related Party Transactions (RPTs), including loans & advances amounting to 16.87% of revenue, were not conducted. Moreover, false Companies (Auditor's Report) Order (CARO) declarations were made regarding granting loans & advances to related parties.
Regarding the failure to obtain sufficient audit evidence to verify revenue, the NFRA has listed out the mandatory audit procedures in line with the requirements of SAs 200, 240 and 315.
The NFRA stated that “We observe that to verify revenue, the auditors are required to perform and document, at least the below mentioned audit procedures in line with the requirements of SAs 200, 240 and 315:
- Understanding of business entity & relevant industry,
- Understanding of business environment of the company,
- Understanding of Internal controls governing the generation of revenue,
- Evaluation of accounting policy being followed by the company in line with the applicable accounting framework,
- Verification of sales through the customers contracts, credit terms and reconciliation of the same through the cash flow to the bank accounts and through statutory returns,
- Verification of the periodic revenue figures like daily, monthly, quarterly, half-yearly etc.,
- Assessment of periodical Cash Flow Statements prepared by the management,
- Identification of debtors and assessment of time period for realisation of cash from the debtors,
- Analytical and Cut-off procedures to be performed for verification of revenue,
- Assessment of Management's performance vis-a-vis the company's expectations, as could be available in the Budgets.”
The regulating authority noted that despite the above-mentioned mandatory requirements of the SAs, there was no audit documentation of working of the EP on revenue verification, except some documentation on the planning of audit procedures and a checklist in Yes / No format, which does not establish obtaining of sufficient appropriate audit evidence by the EP.
In response to these findings, the NFRA has imposed a monetary penalty of Rs. Three Lakhs and debarred the CA-EP for two years from being appointed as an auditor or internal auditor or from undertaking any audit regarding financial statements or internal audit functions and activities of any company or corporate. This Order will take effect 30 days from its issuance.
Also read: NFRA Set to start First Annual Inspection of Key Audit Firms by April 2024
To Read the full text of the Order CLICK HERE
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