Key Pointers from NFRA Order Alleging CA of Professional Misconduct

National Financial Reporting Authority (NFRA) being an independent regulatory authority is entrusted with the responsibility of overseeing the financial reporting ecosystem in India. To maintain transparency, reliability, and accountability in financial reporting and protect the interests of investors and stakeholders, NFRA has been proactively issuing Show Cause Notices (SCNs) to Chartered Accountant firms, pointing out deficiencies in their audit practices. Based on the replies received from Engagement Partners and a review of audit working papers, NFRA has issued non-compliance orders to audit professionals. This discussion involves a critical analysis of allegations leveled against the Engagement Partner (EP), including their responses, as well as NFRA’s conclusions on those responses.

1. Failure to Disclose Conversion of Loan from Related Party to Capital Advance

The company has converted the outstanding loan to the related party into capital advance without the approval of the Audit Committee. The auditor failed to report such conversion without obtaining the approval of the audit committee resulting in the non-compliance of section 177 of the Companies Act, 2013.

2. Insufficient Disclosure on Credit Risk Exposure of Trade Receivables

Auditor failed to question the accounting policies relating to trade receivables and obtain external confirmations of outstanding trade receivables. NFRA concluded that ratios and figures are sufficient to raise red flags to an auditor who will be expected to apply his professional skepticism and charged guilty of non-reporting under Ind AS 107.

3. Inappropriate Audit Opinion on Non-consolidation of Subsidiary

The company does not prepared the consolidated financial statements even when it holds 100% shares of a company ownership disputed in HC. However, no legal order is attached to the financial statements. The auditor is required to express an adverse opinion as misstatement is both material and pervasive to the financial statements but he relied on modified opinion.

4. Misleading Audit Opinion on the Audit of Internal Financial Control over Financial Reporting

The auditor issued the IFCoR report without obtaining sufficient and appropriate audit evidence and without evaluating the adequacy and effectiveness of the Internal Control as required by SA 315. He is grossly negligent in his professional duties and has failed to obtain sufficient and appropriate audit evidence, thereby violating SA 200.

5. Lack of Professional Judgment in determining Materiality

The auditor is required to determine the materiality for the financial statements as a whole while establishing the overall audit strategy. NFRA after examining the audit working papers charged the auditor of failure in determining materiality in accordance with SA 320.

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