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The National Financial Reporting Authority (NFRA) has found serious lapses in the statutory audit of IL&FS Transportation Networks Ltd (ITNL) for FY18, stating that the company’s losses during the said fiscal were understated by at least Rs 2,021 crore.

In its Audit Quality Review Report (AQRR) of the statutory audit of ITNL for 2017-18, the NFRA concluded that the initial appointment and continuation of SRBC & Co LLP as the statutory auditor of ITNL for FY18 was “prima facie illegal and void”.

The NFRA concluded that the audit firm failed to appropriately and sufficiently evaluate the use of the going concern basis of accounting by the management and thus failed to note the implications thereof in the auditor’s report.

The NFRA said ITNL’s financial exposure to its subsidiaries, associates and joint ventures amounting to Rs. 3,346 crore was not properly valued as per the applicable Accounting Standards.

“The company’s losses during 2017-18 were understated by at least Rs 2,021 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,” read an official release issued by the NFRA on Thursday.

“This is excluding the impact due to incorrect treatment of the letter of comforts amounting to Rs 2,654 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,” it added.

Further, the NFRA noted that the audit firm’s EQC (Engagement Quality Control) partner failed to report material misstatements known to him to appear in a financial statement with which he is concerned in his professional capacity. It also said that he did not exercise due diligence to obtain sufficient information to objectively evaluate the significant judgements of the engagement team and conclusions reached by them.

“The audit firm has failed to maintain documents as per SA (Standard on Auditing) 230. The integrity of the audit file is questionable due to tampering and inconsistency pointed out at several places in the AQRR,” the release said.

The IL&FS group faced a severe liquidity crisis in 2018 after it reported Rs 91,000 crore in debt. Subsequently, the corporate affairs ministry had to supersede the IL&FS board.

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