Audit regulator National Financial Reporting Authority (NFRA) has found several audit failures on the part of SRBC & CO LLP in its statutory audit of the books of crisis-ridden IL& FS Transportation Networks Ltd ( ITNL) for the financial year 2017-18.

The Audit Quality Review Report (AQRR) released on Thursday, it has highlighted at least nine major observations including the point that the initial appointment of SRBC & Co LLP, and the continuation of SRBC & Co LLP as statutory auditor of ITNL, was prima facie illegal and void.

The instances discussed in this Report are of such significance that, in NFRA’s view, the Audit Firm did not have any justification for issuing the Audit Report asserting that the audit was conducted in accordance with the Auditing Standards (SAs).

The AQRR has also observed that the Audit Firm has failed to appropriately and sufficiently evaluate the use of the going concern basis of accounting by the Management and has thus failed to note the implications thereof in the Auditor’s Report.

In assessing the Risks of Material Misstatements (ROMM), the Audit Firm did not discuss the susceptibility of the financial statements to material misstatement due to fraud, did not identify and assess revenue recognition and management override of controls as serious potential risks, which ultimately resulted in several violations of applicable Ind AS and SAs, as highlighted in the AQRR, thus making the Financial Statements subject to serious material misstatements and therefore unreliable, the NFRA has concluded.

Also, ITNL’s financial exposure to its subsidiaries, associates and joint ventures amounting to ₹ 3,346 crore was not properly valued as per the applicable Accounting Standards because the Audit Firm had failed to obtain sufficient appropriate evidence to justify the valuation of ITNL’s investment and loans to these entities.

The Company’s losses during 2017-18 were understated by at least ₹ 2021 crore on account of unjustified reversal of Expected Credit Loss (ECL) on loans given to the SPV and on trade receivables and due to incorrect impairment valuation. This excludes the impact due to wrong treatment of the letter of comforts amounting to ₹ 2654 crore, which should have been correctly treated as financial guarantees as per the accounting standards, the effect of which on profit/loss is not quantified.

NFRA further concluded an apparent attempt to obscure material information in the Financial Statements by vague and misleading disclosures by the management regarding ECL reversal.

The Audit Firm’s Engagement Quality Control (EQC) partner has failed to report material misstatements known to him to appear in a financial statement with which he is concerned in his professional capacity and has not exercised due diligence to obtain sufficient information to objectively evaluate the significant judgements of the Engagement Team and conclusions reached by them, the AQRR showed.

Also, the Audit Firm has failed to maintain documents as per SA 230 ( auditing standard). The integrity of the Audit File is questionable due to tampering and inconsistency pointed out at several places in the AQRR, according to NFRA.

Meanwhile, a statement issued by SRBC&Co LLP said “Over the past two years, we have co-operated fully with NFRA and provided the requested information. We are disappointed with the conclusions in the Audit Quality Review report of ITNL for FY2017-18. SRBC & Co LLP (SRBC) had performed the audit as per the applicable standards and highlighted the issue relating to going concern in our limited review report for the June 2018 quarter. We are presently doing a detailed review of the report.”

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