NFRA flags lapses in statutory audit of Jaiprakash Associates in 2017-18; says impact 'material, pervasive'

Audit regulator NFRA on Friday flagged serious lapses in the statutory audit of Jaiprakash Associates Ltd (JAL) for 2017-18, including that transactions violative of accounting and auditing standards would have resulted in more than Rs 3,200 crore loss instead of a profit before tax in the particular financial year.

The infrastructure company’s statutory audit for 2017-18 was conducted by Rajendra K Goel & Co.

In its 207-page Audit Quality Review Report (AQRR), including annexures, issued on Friday, NFRA has made ten observations. It has listed out the lapses and said the audit firm failed to comply with requirements of various Standards on Auditing (SAs) and provisions of Standards on Quality Control (SQC).

“The audit firm’s reporting in the ‘Basis of opinion’ section of Independent Auditors Report is false and misleading.

“The impact of the transactions violative of accounting and auditing standards, as identified in this AQRR are such that the profit before tax of Rs 351.71 crores, as reported in the financial statements, would have turned into a loss of at least Rs 3,215.77 crores. This impact is both material and pervasive,” the watchdog said.

As a result, NFRA said the audit firm was bound under the SAs to issue an adverse opinion.

The regulator noted that the audit firm also compromised with the effectiveness of the auditor’s report by “widespread use of Emphasis of Matter (EOM) paragraphs”.

“The audit firm has provided eight EOMs in the financial statements of FY 2017-18… Further, the audit firm failed to obtain sufficient appropriate audit evidence for providing these EOMs,” the report said, adding there was also failure in appropriately and sufficiently evaluating the use of going concern basis of accounting by the management.

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Another observation is that the audit firm did not obtain sufficient appropriate audit evidence to understand the impact that the insolvency petition against JIL (Jaypee Infratech Ltd) had on the company.

The watchog noted that the audit firm did not perform any audit procedures to understand as to why JAL was made a party to the insolvency petition and that indicates “gross negligence and total lack of due diligence on the part of the audit firm”.

“Even assuming, but not admitting, that the Audit Firm was not able, after exercising due diligence, to ascertain the impact of the pendency/ongoing CIRP/legal proceedings of JIL with the NCLT Allahabad and the Hon’ble Supreme Court of India, the audit firm should have issued a disclaimer of opinion,” it said.

CIRP refers to Corporate Insolvency Resolution Process.

Among other lapses, NFRA pointed out that JAL’s financial exposure in its subsidiaries, associates and joint ventures amounting to Rs 6,894.02 crore was not properly valued as per the applicable accounting standards. “The audit firm failed to obtain sufficient appropriate evidence on correct valuation of JAL’s investment in these entities,” it added.

The jurisdiction of the NFRA, an oversight body for auditors, extends to all listed companies as well as large unlisted public companies.



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