Auditor’s Clean Opinion Cannot Be Questioned without Proper Evidence: ICAI clears CA Accused of Stock Overvaluation [Read Order]

The Institute of Chartered Accountants of India ( ICAI ) Disciplinary Committee acquitted a chartered accountant ( CA ) who had been charged with professional misconduct for allegedly providing a clean audit opinion in spite of alleged stock overvaluation.

The Committee held that mere suspicion, low profitability, or allegations unbacked by PROPER evidence cannot be a ground to question an auditor’s professional judgment, especially when audit procedures are documented and done in accordance with Standards on Auditing.

Coming to the facts, a complaint was filed by the Deputy Registrar ofCompanies (ROC), Gujarat, against CA Jignesh Kumar Pravinbhai Hirapara, statutory auditor of Sawariya International Private Limited, for the financial years 2015-16 and 2016-17.

The allegation was that the company had overvalued its inventory while reporting either losses or very low profits, and that the auditor, however, issued an unqualified (clean) audit opinion.

It was also alleged that the company had links with a wider financial misconduct network and that inventory records were inadequate.

Based on these allegations, the Director (Discipline) had earlier formed a prima facie opinion holding the CA guilty of lack of due diligence under Item (7) of Part I of the Second Schedule to the Chartered AccountantsAct, 1949.

The issue decided by the ICAI disciplinary committee was whether the auditor’s clean opinion amounted to negligence, considering that adverse remarks regarding inventory records were made under CARO, yet the main audit report under Sections 143(2) and 143(3) of the Companies Act, 2013 was not modified.

The Committee also examined whether low profits vis-à-vis high inventory values, by themselves, establish stock overvaluation attributable to auditor misconduct.

According to the ROC, who made the complaint argued that the auditory should should have qualified his audit opinion. It was contended that adverse CARO remarks required a modified audit opinion and that failure to do so reflected negligence.

The respondent - CA auditor submitted that valuation of inventory is the responsibility of the company’s management, and his role as statutory auditor was confined to testing, verifying, and evaluating the valuation methodology adopted.

The CA submitted that he performed sample-based inventory verification with matching purchase invoices, cross-checked valuation rates with the most recent purchase prices, and kept thorough audit working documents attesting to these processes in order to fulfill his audit requirements.

The committee, after going through the records, held that adverse remarks under CARO do not automatically mandate a qualified opinion, unless they result in a material misstatement or prevent the auditor from obtaining sufficient appropriate audit evidence. Noting SA 200 and SA 501, observed that where inventory records are inadequate, an auditor may perform alternative procedures and, if satisfied, still issue a clean opinion.

The ICAI also found that there was no documentary or technical evidence proving overvaluation of stock. It observed that low profits cannot, by themselves, establish overvaluation, and that legitimate business factors may explain inventory build-up.

The committee presided by, CA Charanjot Singh Nanda held that In the absence of any concrete evidence of overvaluation or negligent conduct, the Disciplinary Committee held that the CA was not guilty of professional misconduct under Item (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

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