The AQR report is for the statutory audit conducted by DHS for IL&FS Financial Services Ltd (IFIN) for the 2017-18 period.
"The NFRA has concluded in this AQR report that the failure to comply with the standards onauditing are of such significance that DHS did not have adequate justification for issuing theaudit report asserting that the audit was conducted in accordance with the standards on auditing.
"Besides, the quality control system and processes of DHS were found to be severely inadequateand ineffective," the release said.
The crisis at diversified IL&FS group, which had also sparked off concerns in the overall financial system, came to light late last year.
An executive summary of the AQR report released by the NFRA said independence of the auditor was compromised by the provisions of non-audit services for substantial fees.
"DHS did not display the required professional skepticism, and did not challenge the management on important issues," it noted.
Further, the auditing watchdog found that the auditor did not adequately question the going concern assumption on the basis of which the management had prepared the financial statements.
"DHS did not question the management and challenge the inflation of profit by over Rs 180 crore through inclusion of the value of a derivative asset which was entirely unjustified," the regulator said.
Further, it noted that the engagement quality control review, as said to have been carried out, has been "shown to have been a complete sham".
Noting that the risk of misstatement due to fraud was ruled out by DHS, the report said that led to"inadequate audit responses".
Among others, the watchdog said the DHS accepted the management's stand of not disclosing that Net Owned Funds (NOF) and Capital to Risk Assets Ratio (CRAR) of IFIN as on March 31, 2018 were both negative and the situation would have led to cancellation of the company's NBFC license.
"DHS certified the accounts showing positive NOF and CRAR, acceprting the explanations of the management which were clearly contrary to law," it said.
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