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CONDUCTING TAX AUDIT. CA. Sanjeev Lalan. Singrodia Goyal & Co. Chartered Accountants. Applicability of Tax Audit – S. 44AB. Every person carrying on business whose Gross Turnover, Receipts Or Total Sales exceed Rs. 1 Crore

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CONDUCTING TAX AUDIT

CA. Sanjeev Lalan

Singrodia Goyal & Co.

Chartered Accountants

applicability of tax audit s 44ab
Applicability of Tax Audit – S. 44AB
  • Every person carrying on business whose Gross Turnover, Receipts Or Total Sales exceed Rs. 1 Crore
  • Every person carrying on profession whose Gross Receipts exceed Rs. 25 Lakhs
  • Where profits & gains of person from business are taxable on estimated basis u/ss. 44AD, 44AE, 44BB or 44BBB & such personclaims his income to be lower than profits & gains so estimated
mandatory e filing of tax audit report
Mandatory e-filing of Tax Audit report
  • E-filing of tax audit reportu/s. 44AB and other reports andcertificates made mandatoryfrom AY 2013-14 onwards
  • Notification No. 34/2013 [F.No. 142/5/2013-TPL]/SO 1111(E), dated 01/05/2013
tax audit
Tax Audit

Objective:

  • To ensure maintenance of proper records and to assist Income Tax Department to assess correct income of assessee

Main report:

  • Form 3CA: Applies where accounts of business or profession of assesseehave been audited under any other law
  • Form 3CB: Applies in cases where accounts are not required to be audited by any other law
  • Annexure I – Financial Reporting

Annexure in Form 3CD to main report

tax audit report
Tax Audit Report
  • Form 3CA – Report that Statutory Audit was conducted in pursuance of Statute applicable to assessee
  • Form 3CB – Report that Tax Audit is conducted in accordance with provisions of section 44AB. Expression of opinion whether financial statements give true & fairview of-
    • State of affairs of assesseeas represented by Balance Sheet
    • Profit / Loss or Income / Expenditure as represented by Profit / Loss Account
  • Expression of opinion as to whether the particulars contained in Annexure 3CD& Annexure I are True & Correct
tax audit procedures
Tax Audit Procedures
  • Primary responsibility of assesseeto prepare relevant information
  • Tax Auditor (TA) to verify compliance
  • Nature of Tax Audit
  • Limits on conduct of Tax Audit.
  • TA to-
    • Use professional skill & expertise
    • Apply Generally Accepted Auditing Procedures as applicable for other audits
    • Apply techniques of reasonable test audit checks & compliance tests depending upon internal controls of assessee
    • Follow principles of ‘Materiality’, ‘Prudence’ & ‘Substance Over Form’
tax audit procedures1
Tax Audit Procedures
  • Refer to following publications issued by ICAI-
    • Standards on Audit (SAs)
    • Guidance Notes (GNs) on Audit Reports & Certificates for Special Purposes
    • GN on Tax Audit
    • SA 700 - Auditor’s report on financial statements
    • SA 705 – Modifications to the Opinion
    • SA 706 – Emphasis of matters
brief introduction to sa s other relevant standards
Brief Introduction to SA’s & other relevant standards
  • SA 200: OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH STANDARDS ON AUDITING
  • It establishes the independent auditor’s overall responsibilities when conducting an audit of financial statements in accordance with SAs.
  • It also explains scope, inherent limitations of audit, objectives and responsibilities of an auditor
  • SA 210: AGREEING THE TERMS OF AUDIT ENGAGEMENTS
  • It deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with management and, where appropriate, those charged with governance
  • Consideration to be given by an auditor while engagement acceptance-preconditions for an audit are present
  • SA 220: QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS
  • It deals with the specific responsibilities of the engagement partner regarding quality control procedures viz. ethical compliance, independence, quality control review, for an audit of financial statements
brief introduction to sa s other relevant standards1
Brief Introduction to SA’s & other relevant standards
  • SA 230: AUDIT DOCUMENTATION
  • This Standard on Auditing (SA) deals with the auditor’s responsibility for preparation and maintenance of an audit documentation
        • Keep detailed note of evidences relied upon
        • Maintain all working papers including notes on following-
          • Work done while conducting audit & by whom
          • Explanation & information given during course of audit & by whom
          • Decision on various points taken & judicial pronouncements relied upon
          • MRs / Certificates issued by client
        • Design audit programme as would reveal extent of checking & ensure adequate documentation
brief introduction to sa s other relevant standards2
Brief Introduction to SA’s & other relevant standards
  • SA 250: CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
  • It deals with the auditor’s responsibility to identify instances of non–compliance with laws and regulations having direct/indirect effect on the material amounts and disclosures in financials statements
  • However, auditor not primarily responsible for non-compliance as well as non-detection as the same rests on the Management and TCWG
  • SA 300: PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  • Initial Audit Engagements-Acceptance (SA 220) and communication with previous auditor
  • Recurring Audit Engagement- Planning Activities
  • SA 500: AUDIT EVIDENCE
  • It explains what constitutes audit evidence in an audit of financial statements, and
  • It deals with the auditor’s responsibility to design and perform audit procedures viz. inspection, observation, inquiry, recalculation, analytical procedures, reperformance, to obtain sufficient appropriate audit evidence to draw reasonable conclusions so as to enable him to express an opinion
brief introduction to sa s other relevant standards3
Brief Introduction to SA’s & other relevant standards
  • SA 500: AUDIT EVIDENCE
  • It explains what constitutes audit evidence in an audit of financial statements, and
  • It deals with the auditor’s responsibility to design and perform audit procedures viz. inspection, observation, inquiry, recalculation, analytical procedures, re-performance, to obtain sufficient appropriate audit evidence to draw reasonable conclusions so as to enable him to express an opinion
  • SA 501: AUDIT EVIDENCE—SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS
  • It deals with specific considerations by the auditor in obtaining sufficient appropriate audit evidence in accordance with SA 230, SA 500 (Revised) and other relevant SAs, with respect to certain aspects of inventory, litigation and claims involving the entity, and segment information in an audit of financial statements
  • SA 505: EXTERNAL CONFIRMATIONS
  • This Standard on Auditing (SA) deals with the auditor’s use of external confirmation procedures to obtain audit evidence in accordance with the requirements of SA 330 and SA 500 (Revised).
  • SA 510: INITIAL AUDIT ENGAGEMENTS—OPENING BALANCES
  • This Standard on Auditing (SA) deals with the auditor’s responsibilities relating to opening balances when conducting an initial audit engagement
brief introduction to sa s other relevant standards4
Brief Introduction to SA’s & other relevant standards
  • SA 550: RELATED PARTIES
  • This Standard on Auditing (SA) deals with the auditor’s responsibilities regarding related party relationships and transactions when performing an audit of financial statements.
  • Related Parties as per SA 550:
    • person or other entity that has control or significant influence, directly or indirectly over the reporting entity
    • Another entity over which the reporting entity has control or significant influence, directly or indirectly
    • entity under common control with the reporting entity
  • Related Parties as per 40A(2):
    • relative of the assessee
    • director of company or partner of the firm, member of association of persons or Hindu undivided family or partner of firm, or any relative of such director, partner or member
    • individual who has a substantial interest in the business or any relative of such individual
    • company, firm, association of persons or Hindu undivided family having a substantial interest in the business or its director, partner or member or its relative
    • a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or its director, partner or member or its relative
brief introduction to sa s other relevant standards5
Brief Introduction to SA’s & other relevant standards
  • SA 560: SUBSEQUENT EVENTS
  • It deals with the auditor’s responsibilities relating to effect of subsequent events on financial statements and auditor’s report
  • SA 570: GOING CONCERN
  • It deals with the auditor’s responsibility in the audit of financial statements with respect to management’s use of the going concern assumption in the preparation and presentation of the financial statements
  • Conditions that may cast doubt about the assumption:
    • Net current liability position
    • Negative operating cash flows
    • Substantial operating losses
    • Inability to comply with the terms of loan agreements
    • Loss of key management without replacement.
    • Loss of a major market, key customer(s)
    • Changes in law or government policy expected to adversely affect the entity
brief introduction to sa s other relevant standards6
Brief Introduction to SA’s & other relevant standards
  • SA 580: WRITTEN REPRESENTATIONS
  • It deals with the auditor’s responsibility to obtain written representations from management and, where appropriate, those charged with governance
  • SA 700: FORMING AN OPINION AND REPORTING ON FINANCIAL STATEMENTS
  • Objective: expressing clearly an opinion (including basis thereof) through a written report
  • It also deals with the form and content of the auditor’s report issued as a result of an audit of financial statements
brief introduction to sa s other relevant standards7
Brief Introduction to SA’s & other relevant standards
  • SA 705: MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT
  • This Standard on Auditing (SA) deals with the auditor’s responsibility to issue an appropriate report in circumstances when, in forming an opinion in accordance with SA 700 (Revised), the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary
  • Determination of type of modification
brief introduction to sa s other relevant standards8
Brief Introduction to SA’s & other relevant standards
  • SA 706: EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER PARAGRAPHS IN THE INDEPENDENT AUDITOR’S REPORT
  • It deals with the auditor’s responsibility to draw user’s attention to important matters whether or not disclosed in the financial statements by making a specific reference in the auditor’s report through “Emphasis of matter” para and “Other Matter” para.
  • SA 710: COMPARATIVE INFORMATION— CORRESPONDING FIGURES AND COMPARATIVE FINANCIAL STATEMENTS
  • It deals with the auditor’s responsibilities regarding comparative information in an audit of financial statements.
  • If the prior period financial statements were not audited, the auditor shall state in the auditor’s report that the corresponding figures are unaudited
brief introduction to sa s other relevant standards9
Brief Introduction to SA’s & other relevant standards
  • SQC 1: QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS
  • The purpose of this Standard on Quality Control (SQC) is to establish standards and provide guidance regarding a firm’s responsibilities for its system of quality control for audits and reviews of historical financial information, and for other assurance and related services engagements. This SQC is to be read in conjunction with the requirements of the Chartered Accountants Act, 1949, the Code of Ethics and other relevant pronouncements of the Institute
annexure to tax audit report form 3cd
Annexure to Tax Audit Report (Form - 3CD)
  • Clauses 1-6:
  • Name of the assessee
  • Address
  • Permanent Account Number
  • Status
  • Previous Year Ended
  • Assessment Year
    • Importance of PAN records in all the above clauses.
annexure to tax audit report form 3cd1
Annexure to Tax Audit Report (Form - 3CD)

Clause 7:

  • Is applicable to Firms & Association of Persons
  • Names of partners / members & their profit-sharing ratios [Sub-Clause (a)]
  • Changes in the constitution, or profit-sharing, of Partnership / Association & the particulars of change [Sub-Clause (b)]

Clause 7:Relevant Issues

  • Will change in remuneration paid to partners without change in profit-sharing ratio would require any disclosure in tax audit report?
  • When partner in representative capacity retires & admitted as partner in individual capacity, will it amount to change in partnership?
annexure to tax audit report form 3cd2
Annexure to Tax Audit Report (Form - 3CD)

Clause 8:

  • Nature of Business / Profession (If more than one business / profession is carried out, then nature of every business / profession) [Sub-Clause (a)]
  • Particulars of change in business / profession [Sub-Clause (b)]
annexure to tax audit report form 3cd3
Annexure to Tax Audit Report (Form - 3CD)

Clause 8: Relevant Issues

  • If assesseestarts another business whose gross receipts are not material compared to existing business, would it still amount to change in business?
  • If assesseemanufactures certain products & also sells certain components which are used in manufacture of product, would he be categorized as trader or manufacturer?
  • If nature of business covers vast no. of activities, is it sufficient for TA to obtain management representations?
annexure to tax audit report form 3cd4
Annexure to Tax Audit Report (Form - 3CD)

Clause 9:

  • Whether books of accounts are prescribed as per S. 44AA? [Sub-Clause (a)]
  • Books of Accounts maintained (In case of computerized system of accounting, mention books of account generated by such system) [Sub-Clause (b)]
  • List of books examined [Sub-Clause (c)]
annexure to tax audit report form 3cd5
Annexure to Tax Audit Report (Form - 3CD)

Clause 9:Relevant Issues

    • Where stock records are not maintained due to high volume of transactions, what is TA’s stand?
    • Would post audit print-outs of accounts prepared be sufficient evidence of audit without audit ticks?
  • Clause 10:
  • Mention profit assessable on presumptive basis which is included in profit & loss account and relevant section under which it is assessable
annexure to tax audit report form 3cd6
Annexure to Tax Audit Report (Form - 3CD)

Clause 11:

  • Method of Accounting followed in P.Y [Sub-Clause (a)]
  • Any change in method of accounting in relation to last P.Y [Sub-Clause (b)]
  • Details of such change and its effect on profit / loss [Sub-Clause (c)]
  • Details of deviation in method employed from accounting standards prescribed u/s. 145 & effect on profit / loss [Sub-Clause (d)]
  • Relevant Issues
  • Does change in accounting policy amount to change in ‘method of accounting’?
  • If preceding P.Y’s accounts were not subject to tax audit, is it sufficient to rely only upon information & explanations provided by client?
annexure to tax audit report form 3cd7
Annexure to Tax Audit Report (Form - 3CD)

Clause 12:

  • Method of Valuation of Closing Inventory employed in P.Y [Sub-Clause (a)]
  • Details of deviation of such method of valuation from method prescribed u/s. 145A & effect on profit / loss [Sub-Clause (b)]
    • What is objective behind S. 145A?
    • Whether there is any effect on Profit & Loss Account by adopting ‘Inclusive Method’ as per S. 145A ?
annexure to tax audit report form 3cd8
Annexure to Tax Audit Report (Form - 3CD)

Clause 12:Relevant Issues

  • Where closing inventories are valued at market price (being lower than cost), should excise duty be added to such amount for complying with S. 145A?
annexure to tax audit report form 3cd9
Annexure to Tax Audit Report (Form - 3CD)

Clause 22:

  • Amount of CENVAT Credit utilized during P.Y. & treatment in profit / loss account & treatment of CENVAT Credit outstanding [Sub-Clause (a)]
  • Particulars of prior period Income / Expenditure credited / debited to Profit / Loss Account [Sub-Clause (b)]
annexure to tax audit report form 3cd10
Annexure to Tax Audit Report (Form - 3CD)

Clause 22: Relevant Issues

CENVAT Credit

  • Where CENVAT Credit as per assessees books is reconciled with Credit as per Excise Department, which entries are to be considered under this clause?

Prior-Period Items

  • Where particular item is considered as prior period item by TA but not by statutory auditor, what is TA’s duty in this respect?
  • How should sales tax refund determined as result of order passed in last month of preceding P.Y but received in current P.Y, be treated?
  • How should claim made for short supply of RM in preceding P.Y, settled in this P.Y, be treated?
  • Wage disputes started in preceding P.Y but settled in current P.Y-Whether increase in wages pertaining to earlier P.Ys paid in current P.Y should be disclosed as prior period item?
annexure to tax audit report form 3cd11
Annexure to Tax Audit Report (Form - 3CD)

Clause 23:

  • Amount borrowed on hundi (including interest thereon) repaid other than through account payee cheque (section 69D)

Clause 24:

    • Particulars of each loan / deposit exceeding limits specified u/s. 269SS taken or accepted during P.Y-
      • Name, address & PAN of lender / depositor
      • Amount of loan / deposit
      • Whether loan / deposit was squared up during P.Y
      • Maximum amount outstanding at any time in P.Y
      • Whether loan / deposit was taken / accepted otherwise than by account payee cheque or account payee bank draft [Sub-Clause (a)]
annexure to tax audit report form 3cd12
Annexure to Tax Audit Report (Form - 3CD)

Clause 24:

  • Particulars of loan / deposit repaid exceeding limits specified u/s. 269T during P.Y-
    • Name, address & PAN of payee
    • Amount of repayment
    • Maximum amount outstanding at any time during P.Y
    • Whether repayment was made otherwise than by account payee cheque or account payee bank draft [Sub-Clause (b)]
  • Whether certificate has been obtained from assesseeregarding taking or accepting, or repayment of same through account payee cheque / draft [Sub-Clause (c)]
  • Such particulars are not necessary in case of government companies, banking companies or corporations established under Central, State or Provincial Act
annexure to tax audit report form 3cd13
Annexure to Tax Audit Report (Form - 3CD)

Clause 24: Relevant Issues

  • What are reporting requirements in case where deposit is received along with interest by other than account payee cheque or draft?
  • Where current account is maintained for sister concern in respect of purchase of goods, chequereceived, etc., how should same be approached by TA?
  • What is treatment of booking amount received against sale of goods?
  • Where asset is purchased under hire purchase finance, payment for which is made by account payee cheque by financier to supplier, is such loan taken by assesseein infringement of S. 269SS?
  • Does S. 269SS include loans from finance companies & co-operative banks?
annexure to tax audit report form 3cd14
Annexure to Tax Audit Report (Form - 3CD)

Clause 24: Relevant Issues

  • Where payment to creditor is made by sister concern of assessee, will same be required to be reported under this clause?
  • Where repayment of loan is made by crossed cheque to creditor of assessees lender, will same be covered under this clause?
  • Where in loan account there is no transaction apart from interest to be paid & TDS on such interest due, should same be reported under this clause?
  • Where creditors for supplies are converted into unsecured loans, what are reporting requirements?
  • Current account loans taken & repaid on different dates during P.Y, should same be disclosed in respect of each credit entry under this clause?
annexure to tax audit report form 3cd15
Annexure to Tax Audit Report (Form - 3CD)

Clause 24: Relevant Issues

  • Where assesseemakes payments of LIC Premium or Advance Tax on behalf of its depositors in account payee cheque of amounts exceeding limits specified in S. 296T, would same be required to be disclosed?
  • What is position if transfer entries are made in books as authorized by letter of depositor?
  • Opening balance of loan account is Rs. 1 lakh & only Rs. 10,000 has been accepted during P.Y, should same be reported?
  • Opening balance of loan account is Rs. 1 lakh & there absolutely no movement in account either by way of further acceptance / repayment or interest during P.Y, should same be reported?
  • Is any comment required from TA in respect of contravention of provisions of Ss. 69D, 269SS & 269T?
annexure to tax audit report form 3cd16
Annexure to Tax Audit Report (Form - 3CD)

Clause 25:

  • Details of brought forward loss or depreciation allowance, in following manner [Sub-Clause (a)]-
  • Where change in shareholding of company has taken place in P.Y due to which losses incurred in preceding P.Ys cannot be carried forward as per S. 79 [Sub-Clause (b)]
annexure to tax audit report form 3cd17
Annexure to Tax Audit Report (Form - 3CD)

Clause 28:

  • In case of trading concern, quantitative details of principal goods traded-
    • Opening Stock
    • Purchases during P.Y
    • Sales during P.Y
    • Closing Stock
    • Short / Excess [Sub-Clause (a)]
  • In case of manufacturing concern, quantitative details of raw materials, finished goods & / or by-products-
    • Opening Stock
    • Purchases during P.Y
    • Consumption / Production during P.Y
    • Closing Stock
    • Short / Excess
annexure to tax audit report form 3cd18
Annexure to Tax Audit Report (Form - 3CD)

Clause 28:

  • Yield of finished products *
  • Percentage of yield *[Sub-Clause (b)]
  • *Information may be given to the extent available; applies to raw materials only
annexure to tax audit report form 3cd19
Annexure to Tax Audit Report (Form - 3CD)

Clause 28: Relevant Issues

  • How must quantitative details be disclosed in case of retail traders where there are variety of items traded?
  • Will TA be justified in conducting his audit in proper manner if he accepts MRs regarding quantitative details of items, in case there is no mechanism to record stock?
  • How should TA report in case of civil contractor or construction company under this clause?
  • Where assesseewas not valuing work-in-progress because processing time was minimal, how should TA report this issue under this clause?
  • In case where units of raw materials & closing stock are not same, how should yield & shortage / excess of stock be measured?
  • Are assessees rendering technical services required to maintain quantitative details of drawing materials like tracing papers, etc?
annexure to tax audit report form 3cd20
Annexure to Tax Audit Report (Form - 3CD)

Clause 29:

In case of domestic company , details of tax on distributed profits u/s. 115-O in following form-

  • Total amount of distributed profits [Sub-Clause (a)]
  • Total tax paid thereon [Sub-Clause (b)]
  • Dates of payment with amounts [Sub-Clause (c)]
  • Relevant Issues
  • Where tax audit is completed after dividend is declared but before dividend distribution tax is paid, will it be sufficient compliance to report on dividend declared in preceding P.Y but paid in current P.Y?
annexure to tax audit report form 3cd21
Annexure to Tax Audit Report (Form - 3CD)

Clause 30:

  • Enclose a copy of Cost Audit Report, if any

Clause 31:

  • Enclose a copy of Excise Audit Report, if any

Clause 32:

  • Calculate following ratios:
  • Gross Profit / Turnover
  • Net Profit / Turnover
  • Stock-in-trade / Turnover
  • Material Consumed / Finished Goods Produced