Key findings of NFRA with regard to audit of ILFS

SYNOPSIS OF AUDIT QUALITY REVIEW REPORT OF DELOITTE HASKINS & SELLS (LLP) by NFRA

Area

Contents

Para ref

Independence of Chartered Accountants

Independence of the auditor has not only to exist in fact, but also appear to so exist to all reasonable persons. The relationship between the auditor and his client should be such that firstly, he is himself satisfied about his independence and secondly, no unbiased person would be forced to the conclusion that, on an objective assessment of the circumstances, there is likely to be an abridgement of the auditors’ independence.

2.2.2(b)

In all phases of a Chartered Accountant’s work, he is expected to be independent, but in particular in his work as auditor, independence has a special meaning and significance

2.2.2(b)

Keeping the legal principles outlined above in view, NFRA had examined certain engagements (details are given in Annexure I) where services had been provided by the Audit Firm and its related entities (as defined by the Explanation to Section 144) to either IFIN, or its holding company, Infrastructure Leasing and Financial Services (ILFS) Ltd. In all these cases, the Audit Firm was found to have, either directly or indirectly, provided prohibited services to the auditee company, or its holding company.

2.2.3(c )

Staff rotation & familiarity threat

With regard to the familiarity threat to senior personnel, SQC 1 Para 26 requires the firm to establish criteria for the responses to the familiarity threat. Examples of responses are rotating senior personnel or requiring an Engagement Quality Control Review. The standard, therefore, provides an option of either rotating an EP or conducting a quality control review

2.2.17(c )

During the period from 2008 to 2018, there were between 29 to 51 professionals each year on the engagement. During such period, only 2 professionals (one was a Senior Manager and other was a Director), were on the engagement for 7 or more years. Neither of them was an EP or responsible for Engagement Quality Control Review.

2.2.17(c )

For listed entities, Engagement Quality Control Review is compulsory and not an option. Therefore, the conduct of such Quality Control Review cannot be treated as a substitute for putting in place a policy of staff rotation, or any other such mechanism, for averting familiarity threats. The Audit Firm has failed to show the existence of any such policy.

2.2.18(a)

Admittedly, for the period of 5 years prior to the last 2 years, the EP was the same person (CA Kalpesh Mehta). In this context, it is seen that Para 72 of the Master Directions – NBFC – SIND and Deposit Taking Company (Reserve Bank) Directions, 2016, (Master Directions, 2016) provides for the partners of the CA Firm who conduct the audit to be rotated every 3 years so that the same partner shall not conduct audit of the company continuously for more than a period of 3 years. Admittedly, the Audit Firm has violated this stipulation in the RBI Master Directions by having the same EP for a period of 5 years. While the EP for the year 2017-18 may have been a different person, the past performance of the engagement by the Audit Firm clearly shows a serious violation of the RBI Directions designed to counter the familiarity threats.

2.2.18(c)

Review of work by engagement partner

prima facie conclusion of the NFRA was based on the list of work papers reviewed by CA Udayan Sen, which clearly shows that almost all the important work of audit, i.e., independence evaluation, risk assessment, audit plan, audit procedures, audit evidence, communications with management or those charged with governance (TCWG) was not directed/supervised/reviewed by CA Udayan Sen.

Documentation of nature, timing and extent of audit procedure performed

Time recording by Auditor (EP and members of the ET) is mandatory in light of Para 9 of SA 230 that requires the auditor to record the nature, timing and extent of audit procedures performed in the Audit documentation.

2.3.10 ( e)

Communication with TCWG

No evidence has been produced from the Audit File to show what was discussed with the management/TCWG prior to the date of the audit report and the financial statement signing date.

2.4.1 (a)

There is no record of any communication addressed to the Audit Committee/Management/TCWG by the ET.

2.4.1 (b)

The Audit Firm’s contention that discussions with the Management are embedded within each work paper, as prima facie, all information obtained by them from the company are provided by the Management, and hence would not require separate documentation is not acceptable, since this is a clear admission that nothing really was communicated to TCWG. This argument completely ignores the requirement of SA 260 (Revised) which is about communication FROM the Audit Firm to the company on all important and serious issues arising from the audit and which is distinct from the documentation and evidence provided by the company to the Audit firm

2.4.3 (b)

The Audit Firm has also disregarded and violated the requirements of Para 23 (read with Para A54) of SA 260 (Revised) which provides that “where matters required by this SA to be communicated are communicated orally, the auditor shall document them, and when and to whom they were communicated. Where matters have been communicated in writing, the auditor shall retain a copy of the communication as part of the audit documentation. Documentation of oral communication may include a copy of the minutes prepared by the entity retained as part of the audit documentation where those minutes are an appropriate record of the communication�.

2.4.3 (c)

NFRA is, therefore, reinforced in its conclusion that the Audit Firm has grossly failed in complying with the Requirements of the SAs pertaining to communications with TCWG and the Management.

2.4.4

The objective of the SA 260 (Revised) is to provide TCWG with timely observations arising from the audit that are significant and relevant to their responsibility to oversee the financial reporting process. The Audit Firm has not been able to show a single communication with TCWG in this regard. Contrary to the claims of the Audit Firm, no document minuting discussions held with TCWG is available in the Audit File.

2.4.6 (a)

Para A9 of SA 260 (Revised), inter alia, requires the auditor to communicate significant matters arising from the audit of the financial statements that are relevant to TCWG. Para 23 of SA 260 (Revised) states that where matters required by this SA to be communicated are communicated orally, the auditor shall document them, and when and to whom they were communicated.

2.4.6 (d)(i)

Evaluation of risk of material misstatement matters

It is to be noted that, unlike in other countries, both accounting standards and auditing standards have the force of law in India, and are to be considered as equivalent to subordinate legislation, being notified under the enabling provisions of the Companies Act, 2013.

2.5.3(a)

The NFRA noted that the client company was identified and notified by the RBI as a Systemically Important (SI) NBFC. Quite apart from all other considerations, and the non-specific and non-relevant details traversed in the various work papers that had been made available to NFRA, the fact that the client company was identified as a SI-NBFC itself should have qualified it for being put into a very high risk category. Nowhere in the Audit File there was evidence that the auditors took note of the SI-NBFC Character of the company into risk assessment

2.5.4(a)

Given the special position of the auditor of a SI-NBFC, it was incumbent on the auditor to challenge the management on the matters relating to the RBI Inspection Reports and, in the absence of satisfactory explanation from the management, to directly ascertain and verify the position from the RBI. The actions of the auditor in not having done so, and having accepted the stand of the management without question, shows clearly a gross dereliction of duty and negligence on the part of Audit Firm.

2.5.4(d)

The Audit Firm seems to imply that this communication of the RBI was not available to them. This explanation we held to be unacceptable for the reason that this clearly showed the complete lack of due diligence and professional skepticism on the part of the Audit Firm. Had proper enquiries been made both with TCWG and the RBI, it is certain that this communication would have been formally made available to the Audit Firm. This is also specifically required by Para 18 onwards of SA 250. The Audit Firm’s compliance with this seemed to have been limited only to inquiries with the management, with no attempt at independent corroboration of the position.

2.5.4(g)

The Audit Firm having considered the RBI matters in their WP 29203 i.e., “Memo on RBI Matters� duly noting the above observations had failed to perform substantial audit procedures that would have provided concrete evidence to assess the NPA categorization of accounts done by the Company, and, instead, merely accepted the company’s representation made to RBI in response to the inspection report. The Audit Firm in its working paper has justified the NPA Accounts by the Company on the basis of the Security Cover and the related exposures.

2.5.4(m)

The reason that revenue recognition was considered a fraud risk was because Para 26 of SA 240 requires “the auditor to presume that there are risks of fraud in revenue recognition and evaluate which types of revenue, revenue transactions or assertions, give rise to such risks�.
Accordingly, your statement that “the only inference that can be drawn is that the ET suspected that revenues from interest would be fundamentally inflated is not correct since no such risk was identified by us in our professional judgement for these matters.

2.5.7

The ET, in their professional judgement and based on performing the procedures under SA 240 to identify risk of fraud, had considered a component of revenue viz ‘interest income and interest accrued on loans and advances having the risk that periodic interest report is generated/ interest computation are inaccurate incomplete due to manual intervention of interest computation for loans not regularised in the system’ as a “presumed� risk of fraud in accordance with Para 26 of SA 240.

2.5.7

Having identified compliance with Prudential Norms etc. as a significant risk, the operational responses had, however, been restricted to “interest income� at the account level. The testing had been restricted to verification of the arithmetical accuracy of interest computation.
2.5.12 No testing of interest receipt defaults/delays in the receipt of interest, grant of new loans to enable payment of interest/payment of instalments etc. seemed to have been made, going by the evidence in the Audit file.

2.5.11 & 2.5.12

The Audit Firm had been grossly negligent in considering and evaluating the effect of management override of controls on account of sanctioning of such loans and failed to evaluate the circumstances that required the company to sanction the loans manually instead of following the established policies and procedures. This preponderance of manual overrides should also have alerted the Audit Firm to the possibility of fraud that needed to be reported under Sec 143(12). However, nothing was done in this regard.

Also, having analysed the COD listing of manual approvals, NFRA had come across various cases of sanctioning of loans/ modification in the conditions attached to existing loans which were subsequently pointed out by the RBI in their report. The audit documentation clearly indicates that the Audit Firm in such cases has relied on the management representations completely instead of performing adequate audit procedures.

2.5.17

Based on the RBI inspection report, there was clear evidence of negligence on part of the Audit Firm in performing adequate audit procedures and, where required, substantial audit procedures, to evaluate risk of material misstatement on account of management override of controls.

2.5.17

There is a clear non-compliance with Section 143(9) of the Companies Act, 2013. The Companies Act refers only to SAs prescribed by that statute and to no other. Hence, any reference to any SAs other than so prescribed is clearly non-compliant with the Companies Act. NFRA, as a body constituted under the Companies Act, 2013, obligated to consider only what is compliant with that Act.

2.5.20

The purpose of SQC 1 is to establish standards and provide guidance regarding a firm’s responsibilities for its system of quality controls for assurance and related service engagements. Based on these standards and guidance, a firm is expected to develop specific and clearly defined policies and procedures in order to comply with professional standards and regulatory and legal requirements.
Keeping all these factors into consideration, the Audit Firm needed to have established and documented the procedures and criteria for risk categorisation.

2.5.20 (c )

Audit Firm’s acceptance of requirement of risk categorisation based on its own SQC policy, it is, therefore, clear that the Audit Firm was required under SQC 1 and Standards on Auditing to appropriately deal with categorisation and minimisation of engagement risk. To contend that this is not a requirement of SQC 1 and the SAs is, therefore, not a correct reading.

2.5.20 (c )

Framework for the Preparation and Presentation of Financial Statements’ issued by ICAI and notified under the Act further establishes the fact that the financial statements contain notes and supplementary schedules and other information. The disclosure of NOF and CRAR being part of the notes and supplementary schedule, and hence, also being an indivisible component of the notes and schedules and other information forming part of the financial statements, is clearly a direct requirement of law and a deemed requirement of the accounting standards.
NOF and CRAR are very important indicators for investors, lenders and other creditors of an NBFC, who are defined as the users of the financial statements. Hence, the Audit Firm is not only non-compliant with the requirements of SA 250, but also with SA 700 (Para 47) among other reporting and disclosure related non-compliances.

2.5.20 (f)

presumed risk of fraud in revenue recognition due to fraud pertaining to NPAs that could be suppressed and defaults ignored, or NPAs that could be made ‘regular’ by evergreening of loans has been rebutted by the Audit Firm in terms of Para 47 of SA 240 on the grounds of “professional judgement and past/previous experience�. However, in accordance with Para 12 of SA 240 and Para 15 of SA 200, the auditor should have maintained professional skepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s past experience of the honesty and integrity of the entity’s management and TCWG.

2.5.20 (h)

SA 240 explains that misstatement in the financial statements can arise either from fraud or error. It further explains that the distinguishing factor between fraud and error is where the underlying action that results in the misstatement of the financial statements is intentional or unintentional. These two categories of the source of risk, viz, fraud and error are therefore, mutually exclusive and collectively exhaustive. A significant risk is defined in the glossary of terms as an identified and assessed risk of material misstatement that, in the auditor’s judgement, requires special consideration.

2.5.20 (h)(iv)

Para 27 of SA 240 states that the auditor shall treat those assessed risks of material misstatement due to fraud as significant risks. Para A131 of SA 315 explains that significant risks often relate to significant non-routine transactions or judgmental matters. The paragraph further explains that routine, non-complex transactions that are subject to systematic processing are less likely to give rise to significant risks.

2.5.20 (h)(v)

The identification of risk has influenced the testing of controls and the substantive procedures actually employed by the Audit Firm in this connection. It is seen that the Audit Firm has taken the listing of NPAs provided by the management as given and has subjected the interest calculation and recognition of interest in these accounts to verification to see that credit was not taken for the interest receipts against these identified NPAs. However, the basic question of whether the list of NPAs provided was itself comprehensive and did not leave out any case that needed to be considered has not been subject to testing. This is a clear failure on the part of the Audit Firm to maintain professional skepticism throughout the audit as required by Para 12, Para A7 and A8 of SA 240

2.5.20 (h)(vii)

SAs 240, 315 or 330 do not state that management override of controls cannot be a risk of material misstatement at assertion level. SA 240 in fact, inter alia, states that although the level of risk of management override of controls will vary from entity to entity, the risk is nevertheless present in all entities. Due to the unpredictable way in which such override could occur, it is a ROMM due to fraud and thus a significant risk. It further establishes the need for the auditor to design and perform audit procedures to, in fact, minimise the risks at assertion level, irrespective of the auditor’s assessment of the risks of management override of controls (Para 31 and 32 of SA 240).

2.5.20 (j)

(ii) Further, no tests were performed on “entries made to unrelated accounts and “entries posted after closing date for quarter�. This is despite the fact that these events are listed in the Audit Firm’s software and are also a requirement under Para A43 of SA 240.
(iii) No testing was carried out for entries “made either before or during the preparation of the financial statements that do not have account numbers�, as required under Para A 43 of SA 240.

2.5.20 (j) (ii) & (iii)

Consideration of RBI Inspection matters

The Audit Firm had evidently ignored the specific RBI directions and had accepted the management’s view and supported the treatment of the TTSL shares as long term investments. For the reasons explained above, this treatment, especially in the light of specific RBI directions to the contrary, appeared to be calculated to support the management in the misstatement of its accounts.

2.6.3 (b)

The Audit Firm had quoted a Reserve Bank of India report to support their view that the Black Scholes Option Pricing Model is permitted to be used in the circumstances of this particular case. The RBI report refers to the permitted use of the Black Scholes Model to value an option that is not traded. However, this does not mean that the Black Scholes Option Model can be used in a situation where the underlying itself is not traded as in this particular case.

2.6.3 (d)

The Audit Firm had explained that they were not required to keep all agreements that were verified by them during the course of audit in the Audit File. This statement was found to be completely violative of the basic principles underlying audit documentation. What was produced by the Audit Firm in response to the prima facie conclusions was a copy of a mail dated 23.05.2018 along with some annexures (Annexure 3 D.a. to Annexure 3 D.d. of the Audit Firm’s response). This e-mail and annexures were not part of the Audit File and NFRA stated that it would be fully within its rights to ignore the said documents thus produced.

2.6.3 (f)

NFRA concluded that it is very clear that the ET had completely failed to obtain sufficient appropriate audit evidence to satisfy itself about the credit risk associated with the fulfilment of the put option by SREPPL.

2.6.4

(a) The Audit Firm did not obtain sufficient, appropriate audit evidence to support the value of the derivative asset included in the Balance Sheet as at 31st March, 2018;
(b) The Audit Firm did not do the due diligence necessary to obtain and critically evaluate such evidence as was provided to it by the management;

2.6.6

NFRA concludes that not only is the Audit Firm’s contention about appropriateness of Black Scholes model for the valuation of the derivative asset incorrect, the Audit Firm has also even failed to challenge the assumptions or verify the bases of various assumed values provided by the Company, or by the so-called independent expert. Thus, the entire value of Rs 184.31 crores of the derivative asset included in the profit for the year and the balance sheet is bereft of any supporting evidence.

2.6.8(q)

In fact, and to the contrary, what has happened is fraudulent accounting because a high valuation has been given to the put option at a time when both the value of the underlying and the creditworthiness of the put option writer had been completely discredited. Clearly the value of the underlying was zero, as has been brought out by the RBI’s Inspection Reports. At the same time, the creditworthiness of the put option writer was not properly assessed. On any reasonable assessment, the creditworthiness of the put option writer should have been taken only at default level, given the past track record. The elaborate scheme of credit enhancement for the put option that had been worked out was effectively based upon the monetization of ILFS Group assets themselves.

2.6.8( r)(vii)

RBI Inspection matters

There is nothing in the Audit File, or in the submissions made by the Audit Firm, to corroborate the claim made that these documents had been taken into consideration in the audit process. Even if these two documents were taken into consideration, without in anyway conceding any status to them as admissible audit evidence.

2.7.3(b)

The Audit Firm has given a 11-page Annexure [Annexure 2.8.3.(e)] and reference of 14 Working Papers to show that they have complied with SA 250. NFRA has examined all the working papers. However, none of the papers challenge the Management stand regarding NOF/CRAR or the alleged interpretive issue of “companies in the same group�. There is no independent analysis carried out by the Audit Firm regarding the issues raised by RBI or the legal position in this regard. The Audit Firm has thus misled NFRA by providing a list of voluminous Working Papers to cover up its failure to comply with the SA 250.

2.7.5(f)

Management's written representations relating to RBI Inspection

Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. Furthermore, the fact that the management has provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfilment of management’s responsibilities, or about specific assertions

2.8.3(b)

Clearly, the requirements of SA 580 needed the Auditor to obtain corroborating evidence for the matters covered by the written representation before accepting the same. Clearly, the claims of the management about the outcomes of the meetings that they had with RBI were completely inconsistent with the stand of the RBI that had been in evidence throughout the period when this matter was under discussion. In other words, the written representation forwarding the unacknowledged minutes of the meetings with the RBI officers was inconsistent with this overwhelming past evidence, and the Auditor was duty bound in terms of Para 3 and Para 16 of SA 580 to perform other audit procedures to attempt to resolve the matter. And in the event of being unable to resolve the matter, a disclaimer of opinion needed to have been made in line with Para 19 of SA 580.

2.8.3(b)

Audit Firm had completely supported the stand taken by the management without conducting any independent enquiry. This is despite the fact that the evidence provided by the statutory position, as well as the regulator’s observations, were completely inconsistent with the management representations. This is also a clear violation of Para 16 and Para A 23 of SA580.

2.8.6(b)

In fact, the Audit Firm instead of exercising due diligence and professional skepticism, misled the Audit Committee by completely supporting the management stand without conducting any independent enquiry.

2.8.6(d)

Evaluation of going concern assumption

Audit Firm is not only violative of the spirit but also the very letter of SA 570 (Revised). As clearly provided by Para 10 (b) of SA 570 (Revised), the auditor was duty bound to discuss with the management the basis for the intended use of the going concern assumption in a situation where the management had itself not performed such an assessment, as was the admitted situation in this case.

2.9.3(b)

Para 10 (b) of SA 570 (Revised) is under the Requirement portion of the SA. As is the convention relating to the Requirements portion, all such Requirements are made Unconditional and Mandatory by the use of the word “shall�. Given the situation described in the paragraph, the Audit Firm did not have any discretion in the matter. The discussion with the management and enquiry with them that the SA required, had to be complied with and the same had to be documented as per the requirements of the SA relating to documentation. By their own admission, the Audit Firm had not conducted any such discussions and enquiry, neither is any proof of such discussion and enquiry available in the Audit File.

2.9.3(c )

Para 12 of SA 570 (revised) requires that the auditor shall evaluate Management’s assessment of the entity’s ability to continue as a going concern. Para A8 further adds that Management’s assessment of the entity’s ability to continue as a going concern is a key part of the auditor’s consideration of Management’s use of the going concern basis of accounting. As clearly provided by Para 10 (b) of SA 570 (Revised), the auditor was duty bound to discuss with the Management the basis for the intended use of the going concern assumption in a situation where the Management had itself not performed such an assessment. Even though the Audit Firm claims to have had a checklist based discussion with the Management on the entity’s ability to continue as a going concern, the assessment is found to be completely insufficient.

2.9.8 (a)

The evaluation of the going concern assumption as claimed to be done by the Audit Firm is found to be completely insufficient as a guide to future liquidity. It is not supported by any future cash flow statement or an analysis of adverse key ratios as required by Para A3 of SA 570 (Revised). The decrease in the Net worth of the company as on 31st March 2018 and the major reduction in the Profit earned during the year, were not given due importance. The Audit Firm failed to test the source of the cash generated and the company’s ability to meet the immediately arising future liabilities.

2.9.8 (e)

Besides, such a justification that independent directors didnot raise the issue of going concern is clearly a complete negation of the attitude of professional skepticism that the auditor is expected to maintain. This is a requirement that is all pervasive in the SAs. As explained in SA 200, “A belief that Management and Those Charged With Governance (TCWG) are honest and have integrity, does not relieve the auditors of the need to maintain professional skepticism or allow the auditor to be satisfied with less than persuasive audit evidence when obtaining reasonable assurance� (Para A22).

2.9.8 (g)

Use of “Emphasis of Matter� paragraph to discharge responsibilities with regard to going concern basis is not supported by SAs. As per Para 6 of SA 706, EOM should be used to draw attention to matters that are fundamental to users’ understanding of the financial statements, provided the Auditor has obtained sufficient appropriate audit evidence that the matter is not materially misstated in the financial statements

2.9.8 (j)

(a) The Audit Firm has not obtained the Management’s assessment of the applicability of the going concern assumption; consequently, no evaluation of such assessment has been made.
(b) The Audit Firm did not obtain sufficient appropriate audit evidence as required by the SAs, especially SA 570 (Revised), to evaluate the Management’s assessment of this assumption, such as it may have been.
(c) The evidence discussed above indicates that there were serious doubts about the justification of the case of the Going Concern assumption in the present case. The Audit Firm has completely failed in displaying the required professional skepticism and obtaining sufficient appropriate evidence on this matter.

2.9.9

Documentation of EQCR processes

(c )it can hardly be contended, as Audit Firm has sought to do, that mere check box “Yes� or “No� responses are sufficient to “enable an experienced auditor having no previous connection with the audit to understand� the work that has been performed by the EQCR Team.
(d) Both Paras 24 and 25 of SA 220 lay down what information needs to be documented. The word “document� cannot be interpreted to mean mere ‘yes’ or ‘no’ responses to a set of standard questions prepared as a general all purpose template. The documentation needs to have specific reference to the facts of the case in question and must provide the evidence as required by the SAs, all taken together.
(e) Therefore, the documentation of the EQCR processes does not provide any evidence of the proper and complete performance of the EQCR work by the EQCR Team.

2.10.3

Paragraph 60 of SQC 1 relates to policies and procedures regarding EQCR. Para 63 is about the criteria for eligibility of EQCR. Para 65 brings out matter to be included in the EQCR including evaluation of firm’s independence, significant risk identified during the engagement, judgements made particularly with respect to materiality and significant risk etc. Hence the argument of the Audit Firm that SA 230 is not applicable to EQCR is completely misleading.

2.10.6 (a)

Further, the definition of “Auditor� as given in SA 200 states that the term is used to refer to the person or persons conducting the audit, usually the EP or other members of the ET or, as applicable, of the firm. Thus, the term ‘auditor’ includes other persons which are conducting the audit and are members of the firm. EQCR team members also carry out the audit of the client and are members of the firm. The definition gives EP as an example but does not restrict the scope to only to the ET

2.10.6 (a)

Thus, the process required objective evaluation and separate working needs to be done for the purpose of evaluation of significant judgments and to verify the results. The same was not done by the reviewer. It has been shown clearly above that SA 230 is applicable to the EQCR. Therefore, EQCR should have documented its working properly and separately from the working of the Audit team.

2.10.6 (b)

the EQCR partner was required to document reasons and the bases for its conclusions and not merely provide check box “Yes or “No� responses. Therefore, the contention of the Audit Firm that “Para 25� of SA 220 requires only an affirmation from the EQCR on compliance with the statements is completely invalid.

2.10.6 (c)

the EQCR has failed in appraising the quality of the work performed. The EQCR has also failed miserably in providing an objective evaluation of the significant judgements the ET made and the conclusions they reached in formulating the report. Thus, the Audit Firm has failed in complying with various provisions of SQC 1, SA 220 and SA 230.
the Audit Firm has completely failed to maintain documents as per SA 230. The EQCR has also failed to document various requirements as required by Para 25 of SA 220. The review of multiple audit work papers and signatures on the same date without any kind of independent analysis and work papers show that the evidence of EQCR involvement is false and has been created subsequently

2.10.6 (f)

Compliance: Policies & Procedures

NFRA concludes that the documentation of the Quality Control Policies and Procedures of an Audit Firm should be in the form of a single document that is both comprehensive and concise, and contains, in a systematic, structured and coherent manner, all the dos and don’ts that need to be adhered to by employees of the Audit Firm.

2.11.4

Clearly there was a surfeit of information relating to laws and regulations in foreign countries which the majority of the workforce of the Audit Firm in India will have no occasion whatsoever to deal with in the course of their employment.

2.11.6

NFRA therefore concluded that the Audit Firm does not have a policy document as required by SQC 1.
The absence of a policy document as required by SQC 1 was identified as a serious non-compliance with the SAs.

2.11.8

NFRA concluded that the Audit Firm should, without any further delay, prepare a comprehensive, concise and systematically structured policy document to conform to SQC 1 and provide the same to the Authority for its perusal at the earliest.

2.11.9

Closing para

Both the inadequacies of the QC policies and processes on the one hand, and the non-compliance with such policies as exist on the other, have been clearly brought out in this AQRR. Specifically, NFRA wishes to draw attention to the large scale and serious violations of Independence requirements, the clear display of the lack of the required professional skepticism, the lack of insistence on obtaining sufficient appropriate audit evidence, the repeated assertions that there could be more than one EP for an engagement, the evident confusion in assessing the ROMM and its impacts on the Audit responses and evidence obtained, and the sham character of the EQCR, as evidence of the need to revamp the QC policies and processes of the Audit Firm;

2.11.11(b)