The Institute of Chartered Accountants of India (ICAI) imposed a 50000 fine on failure to verify scrap sale transactions during an audit is gross professional misconduct under Chartered Accountants (CA) Act.
CA. Sudhakar C did the statutory audit of M/S. Metal Closures (P) Ltd (‘the Company’). The Company was enjoying comprehensive credit facilities under a consortium arrangement aggregating to Rs. 183.65 crores, with SBI being the Lead Bank (“Complainant Bank”).
It was alleged that the respondent failed to disclose the alleged fictitious debtors and the correct position of debtors, the fact that sales transactions were created and entered in the books of account of the Company year after year as well as that of inventory.
It was viewed that firstly, the Respondent being an auditor was responsible in respect of sales and debtors – to examine the available records to verify the validity, accuracy and recoverability of the debtor balances. Further, the extent of such examination was to be assessed through the evaluation of the efficacy of internal controls.
It was stated by the respondent that he had verified debtors from VAT returns that too on a test check basis which signifies that he had verified the sates transaction as reflected in VAT returns but failed to check either the debtor’s balance as outstanding at the end of the period or the recoverability of the said debtors.
The Respondent submitted to have verified related party information from the register maintained under Section 370 of the Companies Act, 1956 and that, as per him, the management of the Company had withheld the information about the existence of such parties and transactions with them.
The Committee noted that the submissions of the Respondent that the management was responsible for the preparation of these financial statements that give an accurate and fair view of the financial position, financial performance and cash flows of the Company by the Accounting Standards.
It was submitted that the Respondent had verified the Sales on a test check basis and cross-verified with VAT returns filed with Commercial Tax Authorities. Since the total sales were in agreement with VAT monthly returns, the Respondent formed an opinion that there was no fictitious sale
The Committee viewed that under the provisions of SA-501, he was required to perform audit procedures to obtain sufficient appropriate audit evidence regarding the existence of inventory
In the absence of such exercise on the part of the Respondent, the Committee viewed that the Respondent was grossly negligent while conducting the audit of the financial statements of the Company. He failed to obtain sufficient audit evidence to express his opinion on the financial statements.
A Coram comprising of Smt. Anita Kapur, Dr. K. Rajeswara Raol, CA. Vishal Doshi and CA. Sushil Kumar Goyal held the respondent Guilty of Professional Misconduct falling within the meaning of Item (7) and (8) of Part I of Second Schedule to the Chartered Accountants Act, 1949.
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