Communicating KAM Para in the Auditor’s Report is not a Substitute for Expressing a Modified Opinion | NFRA

The investigation conducted by the National Financial Reporting Authority (NFRA) revealed several critical issues in the company’s financial practices. These issues included unilaterally writing back significant liabilities and categorizing them as Other Income, as well as the adoption of a flawed accounting policy for valuing finished goods at the estimated market price instead of the more standard Lower of Cost or Net Realizable Value approach. In assessing the role of the auditor in these deficiencies, NFRA raised concerns about the following key aspects:

a) Auditor failed to comply with SA 505, External Confirmation, and SA 700, Forming an opinion and reporting on financial statements, by not re-assessing the risks posed by the restraint on their audit and not performing alternative audit procedures to mitigate such risk and given unmodified opinion ignoring the restraint imposed by the management on their independent audit.
b) Auditor failed to comply with SA 501 which mandates an auditor to attend the physical count of the inventory and if it is impracticable to attend the physical count and not possible to apply alternative audit procedures, then the auditor is required to modify the audit opinion. In current scenario, the auditor failed to modify his report on such lapse.
c) Auditor did not complied with SA 701 by adding KAM para in audit report without communicating the same with the management/ TCWG prior to their inclusion in the KAM.
d) Auditors were restrained from obtaining external confirmation in respect of the extinguishment of liabilities. Even then, the Auditors concluded that they had obtained sufficient appropriate audit evidence and stated that the FS was free from material misstatements and issued unmodified opinion, thereby violating the principles of SA 705.

NFRA charged the auditors with a monetary penalty of Rs.5,00,000 and debarment of 3 years from being appointed as an auditor.

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