Order No. 019/2024 dated 05.07.2024

National Financial Reporting Authority (NFRA), India’s independent regulator for auditing and accounting matters, issued Order No. 019/2024 on 5th July 2024 under Section 132(4) of the Companies Act, 2013, penalizing:

• Singh Ajay & Co.
• CA Priyank Mittal, Engagement Partner

for serious professional misconduct in the statutory audit of Vikas Proppant and Granite Limited for FY 2020-21.

The action was initiated after information was received from Securities and Exchange Board of India (SEBI) highlighting accounting irregularities and audit failures.

📌 Background of the Case

NFRA’s investigation revealed that despite multiple red flags in the financial statements, the Engagement Partner issued an unmodified audit opinion.

The regulator found widespread non-compliance with:

• Standards on Auditing (SAs)
• Indian Accounting Standards (Ind AS)
• Companies Act, 2013 provisions
• Quality control requirements

NFRA categorized the failures across critical audit areas, reflecting gross negligence and lack of due diligence expected in audits of Public Interest Entities (PIEs).

🔎 Key Audit Lapses Identified

1️Failure in Audit Planning (SA 300 & SA 315)

• No documented audit strategy or plan.
• No evidence of understanding the entity and its environment.
• Engagement Partner admitted documentation was largely absent.

NFRA reiterated that absence of documentation equals absence of compliance.

2️Failure to Verify Opening Balances (SA 510)

• First-year audit engagement.
• No work papers verifying opening balances.
• Differences existed between prior year closing and current year opening figures.

The EP admitted that opening balances were not verified.

3️Failure to Determine Materiality (SA 320)

• No documentation of materiality.
• No performance materiality calculated.
• No audit evidence showing basis of threshold determination.

This reflects foundational audit failure.

4️Non-Provisioning of Expected Credit Loss (Ind AS 109)

• Trade receivables: ₹171.46 crores
• Sales: ₹23.60 crores

Receivables were more than seven times annual sales.

No ECL provisioning was made.
No audit testing performed.
No qualification in audit report.

NFRA held that auditors cannot rely on management’s absence of policy to justify non-provisioning.

5️Failure to Assess Going Concern (SA 570)

Red flags included:

• Heavy losses
• Minimal bank balance
• Salaries paid by sister concerns
• Adverse net current position
• Receivables constituting 91% of net worth

Yet no going concern evaluation documentation existed.

6️Improper Audit of Related Party Transactions (SA 550)

Key alarming figures:

• RPTs worth ₹2306.32 crores
• 97% of trade payables to related parties
• 68% of trade receivables from related parties
• Entire sales during the year to related parties

Despite this:

• No arm’s length testing
• No documentation of identification process
• No proper compliance evaluation under Section 177 & 188

Yet the auditor certified compliance.

7️Non-Charging of Depreciation (Ind AS 16 & 116)

• Leasehold land and plant & machinery were not depreciated.
• Auditor acknowledged material weakness in ICFR.
• Still issued unmodified audit opinion.

Ind AS 16 clearly states depreciation does not cease merely because an asset is idle.

8️Failure to Assemble Audit File (SA 230 & SQC 1)

• Audit file not completed within 60 days.
• Incomplete documentation submitted to NFRA.
• EP admitted documents were scattered.

Audit documentation is the backbone of defensible audit quality.

9️⃣Critical Lapse: Failure to Obtain External Confirmations (SA 505)

One of the most serious lapses noted was non-compliance with SA 505 – External Confirmations.

The company had:

• Trade receivables of ₹171.46 crores
• Trade payables exceeding ₹130 crores
• Bank balances and advances requiring verification

However:

• No external confirmations were obtained.
• No alternative procedures were performed.
• EP admitted confirmations were management’s responsibility.

NFRA clearly held that obtaining sufficient and appropriate audit evidence is the auditor’s responsibility, not management’s.

💡 Practical Perspective: Leveraging Technology for SA 505 Compliance

In today’s regulatory environment, manual balance confirmations create operational inefficiencies and documentation gaps.

Digital confirmation platforms now enable:

• Bulk third-party confirmations
• Automated tracking
• Real-time audit trails
• Immutable documentation
• Centralized response management

For example, tools like WrapTax Bulk Confirmation Tool help auditors comply with SA 505 effectively by digitizing and securing the confirmation process.

🔗 You can explore the tool here:
👉 https://www.wraptax.com/bulkconfirmation

Such technology solutions assist in:

• Reducing confirmation delays
• Maintaining complete documentation
• Ensuring audit trail integrity
• Enhancing professional scepticism through independent verification

In light of NFRA’s strict stance, technology-backed confirmations are no longer optional — they are becoming a practical necessity.

⚖️ Professional Misconduct Established

NFRA held the Engagement Partner guilty under multiple clauses of the Chartered Accountants Act, 1949, including:

• Failure to disclose material facts
• Failure to report material misstatements
• Gross negligence
• Failure to obtain sufficient information
• Failure to highlight departures from audit procedures

The Audit Firm was also held liable for systemic failure in quality control mechanisms.

💰 Penalty & Sanctions

Under Section 132(4)(c) of the Companies Act, 2013:

✔ Monetary Penalty

• ₹3,00,000 on Audit Firm
• ₹2,00,000 on CA Priyank Mittal

✔ Debarment

• CA Priyank Mittal debarred for 2 years from acting as auditor or internal auditor of any company or body corporate

The order becomes effective 30 days from issuance.

📊 Key Takeaways for Tax & Audit Professionals

As professionals, this order reinforces critical principles:

🔹 Documentation is Non-Negotiable

Verbal explanations cannot replace audit evidence.

🔹 Professional Skepticism is Mandatory

Receivables disproportionate to sales demand investigation.

🔹 Ind AS Compliance Must Be Independently Evaluated

Idle assets still require depreciation.

🔹 External Confirmations Must Be Obtained

SA 505 compliance cannot be delegated to management.

🔹 Quality Control is a Firm-Level Responsibility

Firms must ensure robust engagement supervision and EQCR appointment.

🏛 Final Thoughts

This order by NFRA is a strong reminder that statutory audit is a public trust function, not a routine compliance activity.

Failure to comply with Standards on Auditing, Ind AS, and statutory requirements will attract regulatory scrutiny and sanctions.

For Chartered Accountants and audit firms, the message is clear:

Audit quality, documentation, independence, and scepticism are not optional — they are the foundation of the profession.