Inspection Report: MSKA & Associates (2023) · 132.2-2023-03

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राष्ट्रीय वित्तीय रिपोर्टिंग प्राधिकरण National Financial Reporting Authority

INSPECTION REPORT

2023

Audit Firm: M/s MSKA & Associates
Firm Registration No. 105047W
Inspection Report No.132.2-2023-03
January 02, 2025

NFRA, 7th Floor,
HT House, 18-20, K. G. Marg, New Delhi 110001

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Contents

Part – A

Executive Summary …………………………………………………………………………………..3
Inspection Overview .............................................................................................................................5
Audit Quality Inspection Approach ....................................................................................................5
Inspection Methodology .......................................................................................................................6
Audit Firm’s Profile..............................................................................................................................6

Part - B

Review of Firm-Wide Audit Quality Control System........................................................................7

• A. Leadership Responsibilities for Quality within the Firm ...........................................................7
• B. Independence Requirements...........................................................................................................8
• C. Audit Documentation ...................................................................................................................10
• D. Policies and procedures for Complaints and Allegations.....................................................11
• E. Client acceptance and continuance policy..............................................................................11
• F. Assignment of Engagement Partner & other ET members ..................................................12
• G. Learning and development.......................................................................................................13

Part - C

Review of Individual Audit Engagement Files Focusing on Selected Areas of Audit...................14

• A. Related Party Transactions .............................................................................................14
• B. Internal Control over Financial Reporting (ICFR) - Revenue.........................................18
• C. Impairment of Non-Financial Assets...............................................................................21

Part - D

Chronology of Inspection of M/s MSKA & Associates....................................................................23
Appendix A: The Firm’s response to this inspection report………………………………………24

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PART A

Executive Summary

Section 132 of the Companies Act 2013 mandates the National Financial Reporting Authority (NFRA) to inter alia monitor compliance with Auditing Standards, to oversee the quality of service of the professions associated with ensuring compliance with such standards, and to suggest measures required for improvement in quality of their services. Under this mandate, NFRA initiated audit quality inspections of the Chartered Accountants firm M/s MSKA & Associates in January 2024. The scope of the inspection included a review of firm-wide quality controls to evaluate Audit Firm’s adherence to SQC-1 and review of selected audit documentation of the annual statutory audit of financial statements for the year ending 31.03.2023. Three significant audit areas were identified in respect of each audit engagement viz., Related Party Transactions, ICFR - Revenue and Impairment of Non-Financial Assets, due to their inherent higher risk of material misstatement. The on-site inspection was carried out between January to February 2024.

During the inspection, the Inspection Team held discussions with the Audit Firm personnel, reviewed policies and procedures and examined documents to arrive at the prima facie observations. These observations were conveyed to the Audit Firm. After examining the replies, NFRA conveyed a draft inspection report to the Audit Firm. The replies and documents submitted by the Audit Firm have been examined and this report is issued. The observations in this report are based on policy documents and/or results of samples tested by the inspection team. The key observations are summarised as follows:

• a. Absence of formal documentation regarding the Firm’s governance and management structure indicate non-compliance with first element of SQC 1 - Leadership Responsibilities for Quality within the firm. The Firm acknowledged need of formal documentation in this matter. (Para 11 to 15)
• b. The Firm could not adequately demonstrate its analysis of self-review and self-interest threat as required under the Code of Ethics and provisions of the Companies Act before acceptance of non-audit services. Further, the Inspection team observed the need for improvement in the Firm's internal review of compliance with independence requirements by its personnel. The Firm acknowledged this as an improvement area and started taking necessary action from FY 2023-24 including discontinuing providing non-audit services by its network firms in India to its NFRA regulated audit clients. (Para 16 to 22)
• c. The Firm's control over the creation, changes, and review of Audit Work Paper (AWP) is inadequate since application used for maintaining audit documentation allows for AWP modification after final signing off without mandating the modifier to sign-off after such modification. This flaw in documentation integrity also allows for signing off blank AWPs. This is non-compliance with para 8 & 9 of SA 230 (Audit Documentation) and para 79 of SQC 1. Further, violation of SQC 1 and SA 220 was noticed due to EQCR signing off AWPs after the audit report date. Further, the duality of electronic and physical audit documentation raises concerns about reliability and non-compliance with Standards on Auditing. The Firm intimated about steps taken to enhance audit documentation. (Para 23 to 28)
• d. The Firm’s policies and procedures regarding clients acceptance and continuation need to be strengthened in respect of evaluation of non-audit services, sufficiency of audit fees, and sufficiency and competency of resources etc., to maintain audit quality. The Firm acknowledged need of formal documentation in this matter. (Para 30 to 32)
• e. In respect of review of related party transactions in one selected company, the firm's audit procedures were found deficient in evaluating the fraud risk associated with the recognition of provisions for doubtful loans in respect of loans given to overseas joint venture and subsidiaries during FY 2022-23. Similar provisions for loans given to same parties were recognized in previous years and were written off in FY 2021-22. The Engagement Team (ET) was required to assess the fraud risk related to these entries, as per specific auditing standards (SA 240, SA 315, SA 330, SA 540, and SA 550). (Para 39 to 42)
• f. The audit procedures performed in respect of Related Party Transactions and Related Party Disclosures across all five selected companies are found to be inadequate; and in respect of four selected companies, Related Party Disclosures were found incomplete, inaccurate, and non-compliant with relevant accounting standards (Ind AS 24) and the Companies Act, 2013 on one or more counts. Key issues include failure to disclose transaction’s terms and conditions, incorrect interest rates, and misrepresentation of balances. In some cases, important transactions and personal guarantees were not disclosed, and audit procedures were inadequate. Errors were also identified in disclosures related to investments, loans, and director information. These deficiencies reflect a lack of diligence, incomplete documentation, and non-compliance with statutory requirements, potentially leading to misleading financial statements. (Para 43 to 63)
• g. In respect of all five selected companies, the audit procedures for ICFR revenue showed one or more deficiencies including inadequate testing of ITGC controls, insufficient sample sizes for tests of control (TOC) and insufficient documentation of TOC. Key areas like agreements, pricing, customer creation, invoicing, and collections lacked proper evidence or detailed testing in the audit file. For specific companies, important controls like NPA recognition, evergreening of gold loan through rollover of existing loan (including accrued interest) involving repledge of already pledged gold, dealer approvals, and revenue completeness were inadequately tested or omitted. (Para 64 to 78)
• h. In case of two selected companies, the audit of non-financial asset impairment showed significant deficiencies. For one case, no impairment test was conducted for goodwill allocated to a project, and there was a lack of documentation for the ready reckoner rates and land title verification for goodwill. In second case, the valuation by a third-party firm was not evaluated, impairment testing assumptions were unclear, and there was no evidence of approval dates. (Para 79 to 82)

Inspection Overview

1. Section 132 of the Companies Act 2013 (Act) inter alia mandates the NFRA, to monitor compliance with Auditing and Accounting Standards, to oversee the quality of service of the professions associated with ensuring compliance with such standards, and to suggest measures required for improvement in the quality of their services. The relevant provisions of NFRA Rules prescribe the procedures in this regard, which include evaluation of the sufficiency of the quality control system of Auditors and the manner of documentation of their work. Under this mandate, NFRA initiated this year’s audit quality inspections in January 2024. The overall objective of audit quality inspections is to evaluate the compliance of the Audit Firm/Auditor with auditing standards and other regulatory and professional requirements, and the sufficiency and effectiveness of the quality control systems of the Audit Firm/Auditor, including:

• (a) adequacy of the governance framework and its functioning;
• (b) effectiveness of the firm’s internal control over audit quality; and
• (c) system of assessment and identification of audit risks and mitigating measures

2. Inspections involve a review of the quality control policy, review of certain focus areas, test check of the quality control processes, and test check of audit engagements performed by the Audit Firm during the year.

3. Inspections are intended to identify areas and opportunities for improvement in the Audit Firm’s system of quality control. Inspections are not designed to review all aspects and identify all weaknesses in the governance framework or system of internal control or audit risk assessment framework; nor are they designed to provide absolute assurance about the Audit Firm’s quality of audit work. In respect of selected audit assignments, inspections are not designed to identify all the weaknesses in the audit work performed by the auditors in the audit of the financial statements of the selected companies. Inspection reports are also not intended to be either a rating or a marketing tool for Audit Firms.