CA Firm Faces Severe Penalty from NFRA for Failure to Report Fraud
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- 2 Min Read
- By Taxmann
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- Last Updated on 15 July, 2023
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National Financial Reporting Authority (NFRA) is actively issuing one after another order against Chartered Accountants (CA) and their firm citing deficiencies in the quality of audits and gross negligence by auditors in conducting audits of financial statements. In its recent order, NFRA has alleged the Institute of Chartered Accountants of India (ICAI) member of lacking professional skepticism and due care in conducting an audit and subsequently charged him for non-reporting of fraud committed by the company. NFRA’s investigations inter alia revealed that the auditor failed to perform the risk assessment procedure to identify the Risk of Material Misstatements (RoMM) associated with the misappropriation of funds and fraudulent loan transactions with the related party.
1. Risk assessment procedures are required to be performed every year in order to understand the company and its environment. There is no evidence in the audit file about performing any risk assessment procedure at the planning stage of the audit. This is a case of non-compliance with SA 315, Identifying and Assessing Risk of Material Misstatement through Understanding of Entity and its Environment.
2. The Bank Reconciliation Statement (BRS) of the company clearly depicts the rotation of funds of the same amount on the same day to the same party. The auditor is required to understand the ever-greening of loans. The auditor failed to evaluate this ever-greening of loans and reporting this fraud to CG u/s 143(12) of the Companies Act, 2013.
3. The exemption u/s 185(3)(c) of the Companies Act is available to a company for loans given to its subsidiary only if such loans are utilized by the subsidiary company for its principal business activities. Auditor failed to report that the funds were utilized by the subsidiary for financing activities which was not its principal business.
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