Audit Fee ₹3,000, Fine ₹1 Lakh: ICAI Order on an Auditor Who Took Management's Figures at Face Value

Small audits get the least time. The fee is low, the entity is simple, and the file is often closed in a day. This ICAI order shows why the fee says nothing about the risk: an audit billed at ₹3,000 a year ended, about ten years later, with a ₹1 lakh fine and three months' removal from the Register.

This is the second article in our series Real orders, real lessons. We describe what the order says, without naming the member, and what a small firm can take from it. The first was the "junior staff" defence.

The case in brief

What the department found

According to the complaint, the society received contributions for scientific research and claimed exemptions and deductions under the Income-tax Act. The survey found that the contributions were being paid back to the donors in cash, through a web of bogus purchases that the society claimed as application of income. Brokers and middlemen took a commission on each round, and the donors claimed a weighted deduction for the "donation".

The auditor's report for both years did not report any of this. The complaint went further and alleged that he was involved in the scheme; the Committee made no such finding. It held him guilty of negligence under Clause (7) — for not doing the checks that would have revealed it.

The defence

• He audited the accounts from the bank statements, bills, vouchers and records the society produced.
• 100% of receipts and 90% of payments went through banking channels, so he had "no reason" to doubt the transactions.
• It was not possible to examine the donors in person, and an auditor "can't verify the 2nd layer & 3rd layer of any transaction".
• He said most of the donors were from outside India and, "due to lack of time", he could not examine all relevant details of the donors — though, as the order records, he was duty bound to do so.

What the Committee held

• He failed to give any just reason in his favour and in fact admitted that, for lack of time, he did not perform thorough checks and donor verifications.
• Asked to describe the audit procedures he followed, he only repeated that he relied on the documents produced by the society. The Committee held that he "failed to exercise the minimal level of due diligence".
• As auditor, he was required to verify the nature and authenticity of the purchases in the financial statements. Instead, the Committee observed, it appeared that he "merely relied upon the financial statement prepared by the management of the Society at its face value" without verifying the records of the donors and the purchases.
• If he had verified the purchases "by verification of goods inward register or supplier confirmation or other GST or TDS compliances etc., he could have come to know about the said bogus purchases".
• He "not only failed to obtain sufficient information to express his opinion, but he was also grossly negligent". Guilty under Clause (7).

Five lessons for small audits

1. A bank payment is not evidence that a purchase is genuine

The defence leaned on the fact that almost everything went through banks. That shows money moved; it does not show goods came in. Purchases need evidence of receipt — an inward register, stock records or delivery documents — and a link to the supplier.

2. Confirm the parties that matter

The Committee named supplier confirmation as one of the checks that would have exposed the purchases. For significant suppliers, donors and balances, consider sending confirmations and keep the replies — or record the alternative procedure when a reply does not come. See audit letters, including balance confirmations.

3. Use the data that already exists

The order mentions GST and TDS compliance as a check. For FY 2012-13 and 2013-14 that would have meant VAT and service tax records, since GST began in July 2017; today it means GSTR-2B and the supplier's filings. Comparing purchases with the supplier's filings, and expenses with TDS deducted, is quick and often revealing.

4. Ask, and keep the question and the answer

When the Committee asked what procedures he had followed, he could only repeat that he relied on the client's documents. A written list of queries, with the client's replies and attachments, is the simplest record of an auditor's scepticism. See the year-end audit query list.

5. "Lack of time" is not a defence

A low fee or a tight deadline does not reduce the standard. If an audit cannot be done properly in the time available, that is a question to settle before accepting it — not a defence afterwards.

A short check for any small audit

• Large or new expense and purchase heads compared with last year, with a reason for each big movement.
• A sample of purchases traced to inward records and to the supplier — not only to the bank statement.
• Confirmations sent to major suppliers, donors or parties, with replies on file.
• Purchases and expenses compared with GST and TDS data where available.
• Queries raised in writing, with the replies kept against each query.

None of these needs a forensic audit. The point of the order is that the basic checks were not done, and he could not show that they were.

Frequently asked questions

Sources

• ICAI Disciplinary Committee — findings (08.02.2024) and order (20.08.2024), case PR/G/108/2017/DD/114/2017/DC/1662/2022 (PDF)
• Chartered Accountants Act, 1949 — Second Schedule, Part I, Clause (7)
• ICAI — SA 500 Audit Evidence
• ICAI — SA 505 External Confirmations

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