The National Financial Reporting Authority (NFRA) recently issued an order highlighting significant deficiencies in the audit conducted by CA Rakesh Puri, who served as the Engagement Partner (EP) for the statutory audit of Sun and Shine Worldwide Limited (SSWL). The investigation, initiated based on information from the Securities and Exchange Board of India (SEBI), uncovered material misstatements in SSWL's financial statements. The NFRA's order outlines the failures of CA Rakesh Puri, emphasizing the importance of adhering to auditing standards, questioning management representations, and identifying material misstatements.
SSWL, a company involved in commodity futures trading, came under scrutiny for overstatement of sales and purchase figures in its financial statements for the fiscal years 2012-13 and 2013-14. SEBI raised concerns about these discrepancies, prompting NFRA to investigate the matter. M/s Y.D. & Co., with CA Rakesh Puri as the EP, served as the statutory auditor during this period.
Key Findings and Lapses
The NFRA order identifies several key issues and deficiencies in the audit conducted by CA Rakesh Puri:
1. Failure to investigate significant increases in revenue
CA Rakesh Puri overlooked a staggering 1026% increase in revenue from operations between 2012-13 and 2013-14. This alarming increase should have triggered concerns about potential material misstatements or fraud in revenue recognition. Unfortunately, the EP failed to address these red flags, indicating negligence.
2. Lack of documentation and verification
The audit file lacked evidence that CA Rakesh Puri verified transactions through brokers, exchanges, or bank reconciliation. Discrepancies between reported values and actual trade amounts, as identified by SEBI, were not subjected to basic audit tests for validation.
3. Failure to check contract notes
The EP did not verify commodity trades' contract notes with the sole broker, IndoThai Commodities Private Limited. The EP's reliance on the company's selected sample of contract notes deviated from auditing standards' requirements for appropriate sample size and selection method (SA 530).
4. Improper audit planning and non-understanding of the entity
CA Rakesh Puri was charged with inadequate planning, failing to comply with SA 300. The audit file lacked documentation regarding the understanding of SSWL's business nature. The EP's generic checklist and work papers did not adequately reflect the specific risks and complexities associated with SSWL.
5. Failure to ensure preconditions for the audit
The EP did not engage with SSWL's directors, visit the company's premises, or participate in board/audit committee meetings. Reliance on documents received via post alone for conducting the audit and issuing the audit certificate was a significant concern. The EP also failed to independently perform external confirmations of debtor and creditor balances.
The NFRA's order highlights several critical leanings for auditors and professionals:
1. Adherence to auditing standards
It is imperative for auditors to strictly adhere to established auditing standards and guidelines. Failure to do so can lead to significant lapses and potential misstatements.
2. Professional skepticism and due diligence
Auditors must exercise professional skepticism, critically assess financial information, and diligently investigate any anomalies or discrepancies. Neglecting such responsibilities can have adverse consequences for investors and stakeholders.
3. Understanding the entity
Auditors need to have a thorough understanding of the nature of the business they are auditing. Failure to comprehend the entity's operations and risks can hinder their ability to identify material misstatements or irregularities.
4. Proper audit planning
Adequate audit planning is crucial to ensure the effectiveness and efficiency of the audit process. Auditors should develop tailored audit plans that address the specific risks and complexities associated with the audited entity.
5. Compliance with preconditions for the audit
Auditors should fulfill the preconditions for the audit, such as visiting the entity's premises, engaging with directors, and participating in relevant meetings. Relying solely on documents received via post may compromise the quality and reliability of the audit.
The NFRA's order pertaining to CA Rakesh Puri's audit of SSWL sheds light on significant deficiencies in the auditing process. The case serves as a reminder of the importance of adhering to auditing standards, exercising professional skepticism, and ensuring a thorough understanding of the audited entity. Auditors must take heed of these learnings to maintain the integrity and credibility of financial reporting, thereby safeguarding the interests of investors and stakeholders.
The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global services.