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NFRA sums up mandatory audit procedures under SAs for verifying revenue, while penalizing & debarring auditor for lapses

To verify revenue, the auditors are required to perform and document, at least the below mentioned audit procedures in line with the requirements of SAs 200, 240 and 315:

• Understanding of business entity & relevant industry,
• Understanding of business environment of the company,
• Understanding of Internal controls governing the generation of revenue,
• Evaluation of accounting policy being followed by the company in line with the applicable accounting framework,
• Verification of sales through the customers contracts, credit terms and reconciliation of the same through the cash flow to the bank accounts and through statutory returns,
• Verification of the periodic revenue figures like daily, monthly, quarterly, half-yearly etc.,
• Assessment of periodical Cash Flow Statements prepared by the management,
• Identification of debtors and assessment of time period for realisation of cash from the debtors,
• Analytical and Cut-off procedures to be performed for verification of revenue,
• Assessment of Management's performance vis-a-vis the company's expectations, as could be available in the Budgets.

Despite the above-mentioned mandatory requirements of the SAs, there was no audit documentation of working of the EP on revenue verification, except some documentation on the planning of audit procedures and a checklist in Yes / No format, which does not establish obtaining of sufficient appropriate audit evidence by the EP. The contention of the EP that Bilcare was a small entity and he was its statutory auditor for the past 29 years, and his argument for the need to document the understanding of the entity in relatively brief and simple form in case of Bilcare is not acceptable, as we do not find any audit documentation in this regard. Para Al44 of SA 315 referred to by the EP, also requires that the documentation should include the key elements of the understanding obtained by the auditor, including those on which the auditor based the assessment of risk of material misstatement. Such documentation was not done by the EP. The EP's long association with the company and his experience of honesty and integrity of the management cannot relieve him of the duty of exercising professional skepticism, as Para A22 of SA 200 states that nevertheless, a belief that management and those charged with governance are honest and have integrity does not relieve the auditor of the need to maintain professional skepticism or allow the auditor to be satisfied with less-than persuasive audit evidence when obtaining reasonable assurance. It is also noted that para 18 and 19 of SA 200 requires the auditor to comply with all the relevant SAs and understand the entire text of SAs including application and other explanatory material. It is evident, therefore, that the EP failed to perform audit in accordance with SAs in so far as audit of revenue is concerned.

For failure to disclose in his report the material non-compliances by the company, for failure to exercise due diligence in the audit of the company in accordance with the SAs and applicable regulations and failure to analyse and report the appropriateness of accounting policy for recognition of interest cost on NPA loans in the financial statements, auditor (Engagement partner) liable to pay a monetary penalty of Rs 3,00,000/- (Rupees Three Lakhs only) and debarred for 2 years (Two years) from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.

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