TMI Blog2017 (2) TMI 465X X X X Extracts X X X X X X X X Extracts X X X X ..... bt about the genuineness of the transactions and ought to have been detected and reported by the respondent. Suffice it to highlight that in paras 26 and 27 of the report the Committee highlighted the modus operandi adopted by PCL and AIL to form a loop with no cash flow coming in, but sales, stocks and receivables increases. The obligation of the auditor concerning transactions which are merely book entries was highlighted i.e. the duty of the auditor to enquire whether the transactions were prejudicial to the interest of the company being not discharged by the auditors. The Committee also highlighted that as an auditor it was the obligation of the respondent to comment about the internal control procedures of the company. With reference to AAS-3 and AAS-4, the Committee further brought out the obligations of the auditor to be discharged in the course of the audit. The Committee has also highlighted the duties of the auditor to maintain the working papers and documents and noted that in spite of repeatedly directed to do so, the respondent did not produce the papers and took the plea that since the year 2003 he had surrendered the certificate of practice, therefore he was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion committed by AIL surface. That IDBI, a creditor of PCL circulated a background note to the effect that with effect from 1988-89 the increase in stock of PCL was much higher than the profits generated and similar was the position with AIL with effect from the year 1992-93. That the two companies had adopted a modus operandi, being, booking as sales of software reported developed by PCL was shown to third parties who would in turn show delivery to AIL as a purchaser and from AIL sales were shown to PCL. This loop was repeated many times. IDBI estimated the value of current assets generated through the said process to the tune of ₹ 362 crores being only paper entries, required to be written off. In these circumstances the consortium became suspicious and directed to carry out a special audit. M/s.G.Jai Associates was assigned the job to carry out a special audit of the stock of PCL. Report submitted by the special auditor made starting revelations regarding financial irregularities by PCL; fraud and breach of trust by the Directors of PCL. Serious irregularities committed by the statutory auditors in discharge of their statutory duties were highlighted. Confronted with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alysis/review of the sales to certain parties accounts (whose accounts are clubbed under the supplier s sub ledger) revealed that SWT sales have been, inter alia, made to the certain selected parties during the year 01.01.1996 to 31.12.1996. 2.2a) Certain amounts have been shown as paid on behalf of AIL to certain selected SWT debtors through State Bank of Bikaner and Jaipur which may be taken by the Banks for the verification with the bank statements. 2.2b) Details of amounts debited to AIL s accounts with corresponding credit entries appearing in the selected SWT debtors accounts. 2.2c) Amounts debited to AIL s account as purchase returns during the period 01.01.1996 to 31.12.1996 amounted to ₹ 7403 lacs. 4.3.12 Valuation of Stocks PCL uses weighted average cost (for the main group) for valuing the various stocks. This cost is arrived by determining the weighted average cost of opening stock plus purchases during the year. Moreover, the weighted average cost as determined at the end of year as per the audited accounts is applied throughout the year. For instance, in the current stock statements (January to June 1997), the weighted average cost as determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sults of the Company and the background note circulated by IDBI and observed that a major portion of the Company s profit flowed from increase in stock. Further, in the later years, namely, from 1988-89 onwards that the increase in stock was always higher than the net profit. 27. The modus operandi which was adopted by PCL and AIL was booking as sales of a software reportedly developed by PCL to an outsider party which in turn would be passed on to AIL as purchaser which again would be supplied to PCL as sales. In this process, this loop getting repeated many times but there was no cash flow while the sales and stock/receivables kept on increasing. However, the Company was required to pay the difference in the process booked by PCL to the party and the party to AIL. It was also observed that the dividends were not paid out of the generated funds but out the borrowed funds. Further, it was also noticed that the said process continued till the financial year ending 31st March, 1996. 28. In the aforesaid context, the Committee also noted that as per Section 227(1A)(b) of the Companies Act, 1956 the Auditor shall inquire: (b) whether transactions of the company which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e importance of fraud risk factors in the assessment of the inherent or control risk of material misstatement, the auditor documents fraud risk factors identified and the response considered appropriate by the auditor. 31. Further, as per AAS-3, Documentation: 1. Auditing and Assurance Standard (AAS)1, Basic Principles Governing an Audit (Paragraph 11), states, The auditor should document matters which are important in providing evidence that the audit was carried out in accordance with the basic principles. The purpose of this Standard is to amplify the basic principles outlined above. 2. Documentation, for purposes of this Standard, refers to the working papers prepared or obtained by the auditor and retained by him, in connection with the performance of his audit. 3. Working papers: .. aid in the planning and performance of the audit; .. aid in the supervision and review of the audit work; and .. provide evidence of the audit work performed to support the auditor s opinion. 32. In view of above, it is very clear that the auditors are required to maintain the working papers and document the same for his reference purposes whereas in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions had been carried out by the Company along with the other companies revealed that the Respondent ought to have applied his professional skepticism and should not have accepted these transactions as genuine. Moreover, in view of the Committee, the manner in which the transactions were booked in the books of accounts of the Company ought to have raised an alarm that the financial statements were suspected to have material misstatements which as a prudent auditor, the respondent did not try to assess and accordingly failed in his duties to carry out the audit in a diligent manner and in other words helped the management to defraud the bank and public at large of the funds which they had invested in the Company. 8. Suffice it to highlight that in paras 26 and 27 of the report the Committee highlighted the modus operandi adopted by PCL and AIL to form a loop with no cash flow coming in, but sales, stocks and receivables increases. The obligation of the auditor concerning transactions which are merely book entries was highlighted i.e. the duty of the auditor to enquire whether the transactions were prejudicial to the interest of the company being not discharged by the audi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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