Audit regulator National Financial Reporting Authority (NFRA) found several audit failures on part of Rajendra K Goel & Co, an audit firm, in the performance of statutory audit of Jaiprakash Associates (JAL) for the financial year 2017-18.

In its final Audit Quality Review Report (AQRR), NFRA has made at least 10 observations to highlight various audit failures and lapses of the audit firm.

The observations include failure of the audit firm to appropriately and sufficiently evaluate the use of going concern basis of accounting by the management and thus failed to note the implications thereon in the Auditor’s report; not obtaining sufficient appropriate audit evidence to understand the impact that the insolvency petition against Jaypee Infratech Ltd (JIL) had on JAL.

NFRA 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. “This 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 Supreme Court, the audit firm should have issued a disclaimer of opinion,” the NFRA’s AQRR noted.

In another observation, the NFRA said that the audit firm’s reporting in the “basis of opinion” section of independent auditors report is false and misleading.

Auditing standards

The impact of the transactions violative of accounting and auditing standards, as identified in the AQRR are such that the profit before tax of ₹351.71 crore, as reported in the financial statements, would have turned into a loss of at least ₹3,215.77 crore. This impact is both material and pervasive. As a result, the audit firm was bounder under the Standards of Auditing (SA) to issue an adverse opinion, the AQRR said.

Also, the audit firm 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.

The standards of auditing states that widespread use of EOM paragraphs diminishes the effectiveness of auditor’s communication of such matters. Further, the audit firm failed to obtain sufficient appropriate audit evidence for providing these EOMs that was required as per SA706, the AQRR observed.