Auditor Debarred by NFRA for Non-compliance with the Standards of Auditing

The National Financial Reporting Authority (NFRA) has recently released an order in relation to a member of the Institute of Chartered Accountants of India (ICAI) who held the role of Engagement Partner (EP) in the statutory audit of a company involved in commodity futures trading. The accusations against the EP include failure to perform standard audit procedures to uncover fraudulent accounting practices, non-compliance with auditing standards, and failure to question management about inaccurate reporting. Additionally, the EP’s responses to the allegations and the NFRA’s conclusions on those responses have been examined comprehensively.

1. Lack of sufficient professional skepticism in assessing the Revenue Recognition Policy

The company is manipulating the sales and purchases of its commodity market futures trading. The management of the company has explained its policy of re-classification of un-realized sales booked for unsettled commodity futures outstanding at the day’s end to the purchases next day. Auditor failed to demonstrate to NFRA that he has obtained circular from the SEBI in support of his contention that purchases and sales had to be booked on a daily basis even when there was no actual sale or purchase during the day.

2. Failure to assess the fraud risks in the revenue recognition process

The company experienced a significant increase in revenue, followed by a sharp decline in the subsequent year. However, the Engagement Partner (EP) failed to recognize the presence of fraud risk in accordance with SA 240. NFRA observed that information obtained from the broker, as well as the stock exchanges, clearly indicated the extent of variation between the actual amount of the trade executed and the trade reported by the Company, but the EP failed to perform this basic audit test.

Click Here To Read The Full Story