Greetings of the day to every one!
I deeply apologies for the delay in writing my article but as you all know that as the Tax audit season going on, I am also engrossed in it and somehow tried to write this article with great efforts.
After successful completion of two series on “TAX AUDIT – A GLANCE”, this is my third series on the topic Audit reporting and its point wise interpretation’s. The first part explained about the general provisions and compulsory audits while second part said about the presumptive sections.
Once all the audit procedures are done and complied according to the provisions, any deviations if any, needs to be reported in prescribed format. Audit reports are not just small and ordinary documents and they shall be treated as reports of highest degree and importance. These audit reports are treated as statutory documents in many a cases. They need to be carefully drafted and any adverse mistake in reporting would cost the auditor his seizure of certificate.
A tax audit, as said earlier, is compulsorily to be performed by a practising full time CA and as per rule 6G he has to report in Form 3CA/3CB and 3CD. These reports are not to be given when the audit U/s. 44AB is not performed and in case of presumptive taxation sections. If the assess wants to avail a deduction U/s. 80-IA, 80-IB etc.., the auditor needs to give additional audit reports. Let’s go deep into understanding the meaning of Audit report, the types of report which can be given, the forms used and its point wise interpretation`s.
The first question arises is what this audit report is? In a very simple language, it is a formal opinion given by an auditor, after performing his audit/ evaluation on the auditee`s financial statements and books of accounts. It is issued by the third party sometimes as a tool of assurance against the auditee. Did you see the word “Tool of Assurance” which I have used? Due to this word, the importance and scope of Audit Report is enhanced. So, an auditor needs to perform his duty diligently and smartly.
The meaning of audit report is cleared now, but there are many types of audit reports. Let`s have a look at them in brief (only in brief, since this article focuses on what are the reporting requirements). The meaning of each type of report is explained in just two to three words which are as follows.
- The first comes the UNQUALIFIED report, which means “Everything is fine”;
- Second comes the QUALIFIED report, meaning of it is “Something is fine”;
- Third is the ADVERSE report, which means “nothing is fine”;
- The last one is DISCLAIMER of OPINION, which means “I don’t know anything”.
It would sound funny by reading the meanings in short written above, but the straight forward meaning in the simplest language is conveyed above.
An audit report can be divided in two parts whereby, the first one tells regarding the opinion of the auditor about the truth and fairness of the accounts audited by him and the second part states that the statement of particulars required to be furnished under section 44AB.
The reporting of the first part is done either in form 3CA or 3CB and for second part it is done in form 3CD. Let’s understand each form separately.
Form 3CA
When is this form used? It is actually used when the assesse is required to be audited under the influence of certain provisions of other acts/legislatives. The turnover limits are not counted for here.
An easier interpretation of the points in this form is as follows.
- The first Para of the report refers to the fact that the statutory audit was conducted by a CA or auditor as defined, by Co`s act. If the audit was conducted by some other person other than tax auditor his name is required to be mentioned.
- The second Para says about the opinion of the tax auditor.
- The third Para says about the reasons for negative opinion if any, expressed.
- The fourth paragraph says about the branch auditors (if audited by any other person)
- The report ends with the seal and signature of the person who conducts the audit, his membership no., place and date along with seal. These days Firm Registration number is also mandatorily.
Example to whom this form is applicable is a company, trust etc,
Form 3CB
Again the same question is to whom is this form applicable..? It is used when the person is required to get himself audited due to the turnover limits applicable (i.e. section 44AB). Form 3CD is issued only for the year ending 31st March only. If an assesse doesn’t follow this type of year end then the auditor has to make specific changes in financial statements to bring them in line with these provisions. He has to certify that the financial statements are in agreement to the books of accounts maintained at various offices and branches.
Point wise interpretation is given as follows-
- The first point says that the auditors have examined the balance sheet for the year ending 31st March along with the name and address of the auditee.
- The second one states that the Balance Sheet and Profit and Loss account have been in agreement with the books.
- The third point says about any discrepancy observed and
(i) The information explained and obtained were enough to carry out the audit,
(ii) The books are properly maintained,
(iii) The financial statements give a true and fair view as on 31st March.
- Form 3CD, as per section 44AB is annexed.
- Last and important point says that according to the information and explanation given to the auditor the PARTICULARS IN FORM 3CD give a true and CORRECT view.
It ends with the seal and signature of the person who conducts the audit, his membership no., place and date along with seal along with the Firm Registration number.
Form 3CD – a statement of fact
The auditor may have various differences of opinion with regards to auditee`s financial statements. These differences are to be pointed out individually under various heads of 3CD report. This form contains 32 clauses and the auditor has to report extensively on various points. It needs to be annexed with the either form 3CA or 3CB as appropriate. Various official pronouncement’s, case laws, SA, AS and AS (IT) are to be considered too. The information in form 3CD shall be based purely on the books of accounts, records, information and explanation made available to the auditor for his examination.
Form 3CD [as per rule 6G (2)] and its point wise interpretations are as follows –
In the given below explanations, the text in BOLD is the real text to be given in the form, while the text in ITALICS is what the auditor needs to check and perform his duties (as interpreted by me). I am aware that there are many senior members on club who are auditors, I have given the words in italics only to explain other members as what an auditor needs to perform. Please don’t interpret my points in other manner.
PART - A
1. Name of the assesse:
Here the name of the assesse is to be mentioned.
2. Address:
The official registered address needs to be given preference and if no official address is available, the place of performance of business for the year or residential address can be given.
3. Permanent Account Number:
This is the most important number and act as an identification of assesse in Income tax department. Very soon this number is going to be replaced by Unique Identification Number (UID), through which a very tremendous change in transparency will be observed and the multiple PAN holders would be filtered out.
4. Status:
The status of the assesse in terms of the definition of “Person” as per section 2(31) of Income Tax Act needs to be reported.
{Remarks = Constitutional document of the entity is required every year to know the changes, if any.}
5. Previous year ended 31stMarch:
The year ending, as discussed earlier needs to be 31st March only.
6. Assessment Year:
As defined U/s. 2(9), Assessment year is the year in which the income of assesse is assessed.
PART – B
7. (a) If firm or Association of Persons, indicate names of partners / members and their profit sharing ratios:
It applies only if the assesse is an AOP or a Firm. The names of the partners / members are to be indicated and their profit sharing ratios. Profit sharing ratios include Loss Sharing Ratios too and hence they also need to be disclosed (if separate)
(b) If there is any change in the partners or members or in their profit sharing ratio since the last date of the preceding year, the particulars of such change:
This point says about the changes made in the profit (loss) sharing ratio any time during the year and about the reconstitution in the firm or association.
{Remarks = Auditor needs to check up the deed and obtain a certified copy of it.}
8. (a) Nature of business or profession (if more than one business or profession is carried on during the previous year, nature of every business or profession):
The principle line of business needs to be shown first. All the ancillary business lines also need the same level of explanations.
(b) If there is any change in the nature of business or profession, the particulars of such change:
Any changes, in the nature of business need to be mandatorily shown.
{Remarks = Auditor needs to check up the business reports, all minutes and the also check if the constitutional documents are altered or not, obtain a certified copy of it.}
9. (a) Whether books of account are prescribed under section 44AA, if yes, list of books so prescribed:
The answer is required only in Yes or No wordings,
(b) Books of account maintained (In case books of account are maintained in a computer system, mention the books of account generated by such computer system):
Under this, all the types of books maintained by the auditee are disclosed. ONLY THE BOOKS MAINTAINED.
(c) List of books of account examined:
Under this, the books of accounts, which are maintained by the auditee, verified / examined, are to be disclosed.
{Remarks = Auditor needs to check the compliance with rule – 6F here in case he is given Form 3CB and if he is given Form 3CA, the compliance from the relevant statues for the books has to be checked. References for supporting`s need not be disclosed.}
10. Whether the profit and loss account includes any profits and gains assessable on presumptive basis, if yes, indicate the amount and the relevant sections (44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB or any other relevant section):
The amount of profit under presumptive taxation sections needs to be disclosed if they are included in Income statement. For more clarity, profit earned under various sections may also be disclosed. To have a deeper knowledge on provisions of above sections, please visit Part – 2 of this series.
{Remarks = Auditor needs to check up the compliance of presumptive taxation sections perfectly.}
11. (a) Method of accounting employed in the previous year:
The two methods of accounting as prescribed by the Finance Act, 1995 for PGBP & IOS, i.e. mercantile or cash system needs to be opted mandatorily by the assesse. The same shall be reported here
(b) Whether there has been any change in the method of accounting employed vis-a-vis the method
employed in the immediately preceding previous year:
Any change in method of accounting from the previous year to preceding previous year, if observed, needs to be reported here. The answer here shall be only in Yes or No.
(c) If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss:
If there was a change, then the details of changes made needs to be reported here.
(d) Details of deviation, if any, in the method of accounting employed in the previous year from accounting standards prescribed under section 145 and the effect thereof on the profit or loss:
The details of deviation observed after adopting the new method of accounting shall be disclosed if it is contradictory to the methods as prescribed by section – 145. If the deviation is not ascertained, its impact on current and future profits needs to be reported here.
{Remarks = Auditor needs to take a written confirmation from the client about the method of accounting followed as per AS-1. Apart from this, he also has to check for the compliance with respect to AS (IT)-1}
12. (a) Method of valuation of closing stock employed in the previous year:
The method of valuation of stock shall be reported for each class of inventory over here i.e. raw materials, WIP, Finished goods, Stock and spares, etc…,
(b) Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss:
Any deviations found, when compared to section 145 against the change in method of valuing the stock shall be reported. Its impact on profit also needs to be disclosed.
{Remarks = Auditor needs to study the procedure of valuing the stock which needs to be followed every year consistently along with the basis adopted in valuing it. In accordance to section 145A, he needs to verify that all taxes applicable have been added to cost valuation or not…,}
12A. Give the following particulars of the capital asset converted into stock-in-trade: -
(a) Description of capital asset;
(b) Date of acquisition;
(c) Cost of acquisition;
(d) Amount at which the asset is converted into stock-in-trade.
This point was added by a notification after April, 2006. The description of the asset, its date of acquisition (to know whether it is long term or short term), the cost of acquisition (the historical cost / purchase cost) and the conversion amount needs to be disclosed separately.
{Remarks = Auditor needs to check out the nature of asset, its reason for conversion and the method of conversion used. The implication of capital gains are not considered in reporting here}
13. Amounts not credited to the profit and loss account, being:
(a) the items falling within the scope of section 28:
Out of the 12 head`s present in section 28, any head which is not include in Profit and Loss account needs to be reported here.
(b) The proforma credits, drawbacks, refund of duty of customs or excise or service tax, or refund of sales tax or value added tax, where such credits, drawbacks or refunds are admitted as due by the authorities concerned:
Any of the above items, which were admitted as due by the authorities needs to be disclosed here. It means any the amount taken by the assesse`s where disallowed by the departments needs to be disclosed here.
(c) escalation claims accepted during the previous year:
Any escalations accepted or made during the year needs to be disclosed. Any claims, not credited to profit and loss account needs to be reported here.
(d) any other item of income:
Self-Explanatory and the amounts gathered on verification of books of accounts need to be disclosed here.
(e) Capital receipt, if any:
All capital nature transactions, if accounted through profit and loss account, needs to be disclosed here.
{Remarks = an auditor has to perform his duties more exhaustively here. For clause
(a) The auditor needs to obtain a management representation letter for the items falling under this clause.
(b) This area is quite complex since no practical evidences appear. He has to examine all the relevant records, communication, letters between the tax authorities and the auditee. An exhaustive scrutinize about this records is also recommended.
(c) This is the most vulnerable area where a client can push away the claim received in the next year and understate his profit. Auditor has to be cautious and check out the status and the acceptance of claim. If needed, he has to obtain a cross confirmation letter too.
(d) The auditor needs to scrutinize all the items available including recurring and non-recurring items.
(e) The auditor, to check out this clause, needs to use his professional expertise in knowing the item as capital or revenue in nature. He has to use various judgements and standards too.}
14. Particulars of depreciation allowable as per the Income-tax Act, 1961 in respect of each asset or block of assets, as the case may be, in the following form:
(a) Description of asset/block of assets.
(b) Rate of depreciation.
(c) Actual cost or written down value, as the case may be.
(d) Additions / deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of
- Modified Value Added Tax credit claimed and allowed under the Central Excise Rules, 1944, in respect of assets acquired on or after 1st March, 1994,
- Change in rate of exchange of currency, and
- Subsidy or grant or reimbursement, by whatever name called.
(e) Depreciation allowable.
(f) Written down value at the end of the year.
The particulars of asset owned by the assesse, its block wise classification, the rate of depreciation applicable, the WDV at the year-end is to be reported. All additions made during the year are to be shown separately in two columns i.e. before and after 180 days. The cost of asset derived and the treatment for the special transactions like the subsidy received, foreign currency translation gain losses and the tax paid are to be shown.
{Remarks = an auditor has to check the assets classification, its block wise classification, the WDV worked out at the end and the rate of depreciation applicable. The arrival of the cost of asset needs to be checked. Most important item is the use of CENVAT credit. As per the guidance note on CENVAT CREDIT RULES, the inclusive method is to be followed and a credit of 50% is allowed.}
15. Amounts admissible under sections 33AB, 33ABA, 33AC (wherever applicable), 35, 35ABB, 35AC, 35CCA, 35CCB, 35D, 35DD, 35DDA, 35E:-
(a) Debited to the profit and loss account (showing the amount debited and deduction allowable under each section separately):
Particular deductions are available to assesses here if they are engaged in this kind of business. A note is given here about what all expenditures are debited to profit and loss account.
(b) Not debited to the profit and loss account:
Not all business expenditure is to be debited to profit and loss account. The deduction is available in case of section 33AB and 33 ABA where only if the amount deposited is qualified for deduction, but accounting standards do not give any type of treatment for recognizing them as expenditure. So such amounts need not be disclosed here.
{Remarks = an auditor has to specifically check the compliance of such sections along with its documents and communications. If he is unable to verify them, then he has to rely on management representation letter since cross verifying with such authorities is too cumbersome}
16. (a) Any sum paid to an employee as bonus or commission for services rendered, where such sum was otherwise payable to him as profits or dividend. [Section 36(1) (ii)]:
All the sums paid by an assesse in lieu to his employees in lieu of profits or dividend needs to be reported here.
(b) Any sum received from employees towards contributions to any provident fund or superannuation fund or any other fund mentioned in section 2(24) (x); and due date for payment and the actual date of payment to the concerned authorities under section 36(1) (va):
Under this clause, the auditor has to report about the entire amount received from his employees with regards to the terminal benefits individually along with the dates of receipt and their deposit dates.
{Remarks = an auditor has to scrutinise all the ledger of employees and their contribution towards various funds / schemes. He has to check the payment challans for the timely deposits and go through the returns. For any additions of employees made during the year, their agreement and the communication made to respective departments need to be checked.}
17. Amounts debited to the profit and loss account, being:
(a) Expenditure of capital nature:
This point interprets in disclosing of any item in which capital expenditure was incurred. The intention behind this is about the allowability of the expenditure.
(b) Expenditure of personal nature:
There are many instances where personal expenditure is booked in Profit and Loss account. Such expenditures have to be reported since they attract disallowability.
(c) Expenditure on advertisement in any souvenir, brochure, tract pamphlet or the like, published by a political party:
These types of expenditures also attract disallowability and they need to be disclosed separately. Section 37 (2B) comes into picture here.
(d) Expenditure incurred at clubs:
(i) As entrance fees and subscriptions;
(ii) As cost for club services and facilities used;
The above expenditure incurred needs to be shown separately and the all the expenditure irrespective of their nature regards to clubs needs to be reported here.
(e) (i) Expenditure by way of penalty or fine for violation of any law for the time being in force;
(ii) Any other penalty or fine;
(iii) Expenditure incurred for any purpose which is an offence or which is prohibited by law:
This clause is quite interesting. It first says that all the penalties and fines have to be reported and at the next instance there, it states that auditor has to state just the facts and not to check for its disallowability. The point (i) says only the expenditure by way of penalty / fine is made for law being in force while (ii) says any other law. It covers only penalty and fines and not interest on late payments, penalty on breach of contracts, foreclosure of any term loans etc…,
(f) Amounts inadmissible under section 40(a):
This section says about section 200, 200(1), chapter XVII B, STT Payments, wealth tax, tax on profits etc…, I would request you to go through the section 40(a) since it needs much more depthness in understanding.
(g) Interest, salary, bonus, commission or remuneration inadmissible under section 40(b)/40(ba) and computation thereof:
This point needs a study of Section 40(b) / 40(ba). All the amounts in excess of the limits specified, paid to partners or members has to be reported here.
(h) (A) whether a certificate has been obtained from the assesse regarding payments relating to any expenditure covered under section 40A(3) that the payments were made by account payee cheques drawn on a bank or account payee bank draft, as the case may be:
The answer requires being in Yes / No only.
(B) Amount inadmissible under section 40A(3), read with rule 6DD [with break-up of inadmissible amounts]:
All the amounts inadmissible along with their description are to be disclosed here.
(i) Provision for payment of gratuity not allowable under section 40A(7):
The amount of gratuity unallowable due to violations, need to be disclosed here.
(j) Any sum paid by the assesse as an employer not allowable under section 40A(9) :
The sums paid in forming any recognised bodies are to be disallowed as per this section.
(k) Particulars of any liability of a contingent nature:
As per Accounting Standards, there shall be disclosure for contingent liabilities too and any such contingent liability found during audit needs to be reported here.
(l) Amount of deduction inadmissible in terms of section 14A in respect of the expenditure incurred in relation to income which does not form part of the total income:
Clause added in 2006, says that the auditor has to check for the disallowabilities declared by the client U/s. 14A. Amazingly, the same has to be reported too.
(m) Amount inadmissible under the proviso to section 36(1)(iii):
Same as clause (l) above.
{Remarks = this is another grey area and the auditor also has to work extensively here. Clause
(a) The tax auditor has to make reviews and obtain information about the books of accounts and its necessary ledgers along with their classification and group head know the about misclassification of the expenditures;
(b) In identifying the personal expenditures, the auditor has to use his personal skills and experience. The most common areas of booking such personal expenditure are the travelling expenses;
(c) The auditor has to verify all the expenditure relating to advertisements in political parties souvenirs and Boucher since the same is allowed as deduction U/s. 80GGB;
(d) The auditor has to check for the personal payments made during the renewal or payment of entrance fees. he also needs to verify that such memberships are genuine and not of personal natures;
(e) Regarding this point, the tax auditor has to obtain a written confirmation for the client for the type of penalty, its nature and effect, the payment mode and the procedure for recording the same in books of accounts. This is the only place where materiality is also considered;
(f) The tax auditor needs to give his views also to enable the Tax authority to take decisions. He is required to give a in depth analysis of all the points in this section;
(g) The auditor has to calculate and verify whether the assesse is complying the provisions or not;
(h) This is a great hassle to a tax auditor whether payment is made by crossed cheques or not. Therefore, the auditor is given a benefit by giving a fact that they have been checked at sample basis (since tax audit report requires true and CORRECT view;
(i) Auditor needs to verify the order of CIT for approving the gratuity fund here. The effective due date and the trust deed provisions are to be thoroughly checked.
(j) The auditor under this clause needs to check out for all such payments made by the assesse. He has to go through the bank and cash vouchers thoroughly and find out the payments made if any. Apart from this, the auditor has to report exhaustively on this too.
(k) Auditor has to check for the contingencies report on the beginning of the year and evaluate its status. Apart from this, he may take help of an expert also. He has to give a note in case if he doesn’t find any information on such matters.
(l) The auditor has to obtain a MANAGEMENT REPRESENTATION letter, since it is the reliance made on the information generated from internal sources.
(m)– DO –}
17A. Amount of interest inadmissible under section 23 of the Micro Small and Medium Enterprises Development Act, 2006:
Inserted by CBDT Not. no. 36/2009 Dated, 13-4-2009, requires reporting for the amount of interest inadmissible U/s. 23of MSMED, 2006. An extract from the guidance note is as follows “Section 23 of the MSME Act lays down that an interest payable or paid by the buyer, under or in accordance with the provisions of this Act, shall not for the purposes of the computation of income under the Income-tax Act,1961 be allowed as a deduction.”
{Remarks =the tax auditor has a varied amount of duties to be performed here too. (i)He shall check for the status of the enterprise and its coverage.
(ii)Schedule VI and Sec – 22 of MSME requires disclosures in Financial Statements, so the same needs to be checked,
(iii) Obtain list of suppliers and verify them,
(iv)Verify the interest payable to parties thoroughly.}
18. Particulars of payments made to persons specified under section 40A(2)(b):
This clause needs to disclose about all the payments made to specified persons as defined by this section. The AO may disallow the same if he finds that they had been paid unreasonably or in excess of the market standards.
{Remarks =the auditor has to obtain a list of all the persons who are related to the assesse and scrutinise their ledger accounts. He has to report for all the transactions made with him}
19. Amounts deemed to be profits and gains under section 33AB or 33ABA or 33AC:
This section specifies about the provisions for the specified businesses. The assesse has to deposit some amount every year and whenever he withdraws it, he shall use the same for the business and utilise it completely in that year of withdrawal itself. If the amount is not utilised in that year then the same is treated as income and reported in this clause.
{Remarks =the auditor has to check out the amount of drawings made during the year. He shall check out for all the vouchers and supporting`s which help the auditor in knowing the genuineness of the expenditure.}
20. Any amount of profit chargeable to tax under section 41 and computation thereof:
This clause demands the auditor to state the profit chargeable under this section irrespective of the fact of crediting the same in profit and loss account or not. If the amount is mentioned in profit and loss account then it the fact of such needs to be reported.
{Remarks =the auditor has to obtain a list of all the amounts chargeable to tax under this section along with relevant evidences. He needs to check out the past records to satisfy him for the correctness of the information.}
21. In respect of any sum referred to in clause (a), (b), (c), (d), (e) or (f) of section 43B, the liability for which: —
(A) Pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was
(a) Paid during the previous year;
(b) Not paid during the previous year.
This clause states about all the disallowances made during the previouspreceding year and get themselves eligible for the current previous year i.e. They are shown as opening on the previous year. The details of such disallowances becoming eligible needs to be disclosed i.e. whether they are paid in this year or not.
(B) Was incurred in the previous year and was
(a) Paid on or before the due date for furnishing the return of income of the previous year under section 139(1);
(b) Not paid on or before the aforesaid date.
This clause states that the disallowance was made during the current previous year and they have been paid off before completion of its assessment and filing of return and if they do not become eligible then the reason for it.
{Remarks =the auditor has to obtain a list of all the amounts chargeable to tax under this section along with relevant evidences. He needs to check out the past records to satisfy him for the correctness of the information.}
22. (a) Amount of Modified Value Added Tax credits availed of or utilized during the previous year and its treatment in the profit and loss account and treatment of outstanding Modified Value Added Tax credits in the accounts.
Here, the auditor has to mention the amount of MODVAT credit earned during the year and used for set-off. He has to also report the outstanding amount available for utilisation in next years.
(b) Particulars of income or expenditure of prior period credited or debited to the profit and loss account.
This is redundant if the assess uses cash system of accounting. Prior period items have to be report here separately.
{Remarks =the auditor has to
(a) Check the statutory records to obtain the credit avail amount i.e. RG – 23 (part -1 and part -2). Verify the reconciliation statement of them too.
(b) If the BOA is to be audited under provisions of some other act, check for the annual reports. If the BOA is to be verified by the audit sections only then check for the vouchers and other supporting documents from the previous year itself}
23. Details of any amount borrowed on hundi or any amount due thereon (including interest on the amount borrowed) repaid, otherwise than through an account payee cheque [Section 69D]:
This point needs to declare about the amounts paid other than account payee cheque (i.e. almost in cash). The provision here are exactly equal to provisions of section 40A(3).
{Remarks =the auditor has to verify the whole list of borrowings and repayments. He shall check the same with all the supporting`s available. This is practically impossible and the auditor can thus give a note regarding such payments of hundi`s}
24. (a) Particulars of each loan or deposit in an amount exceeding the limit specified in section 269SS taken or accepted during the previous year :—
(i) Name, address and permanent account number (if available with the assesse) of the lender or depositor;
(ii) Amount of loan or deposit taken or accepted;
(iii) Whether the loan or deposit was squared up during the previous year;
(iv) Maximum amount outstanding in the account at any time during the previous year;
(v) Whether the loan or deposit was taken or accepted otherwise than by an account payee cheque or an account payee bank draft:
The reporting under this clause is to be ignored if the assesse is a government/banking or a corporation established by central, state or provisional act. In case of others, each loan or deposit accepted from others need to be stated as per the details given above along with their PAN`s.
(b) Particulars of each repayment of loan or deposit in an amount exceeding the limit specified in section 269T made during the previous year:—
(i) Name, address and permanent account number (if available with the assessee) of the payee;
(ii) Amount of the repayment;
(iii) Maximum amount outstanding in the account at any time during the previous year;
(iv) Whether the repayment was made otherwise than by account payee cheque or account payee bank draft:
Any repayments made to government / banking or a corporation established by central, state or provisional act shall be ignored. In case of others, if any repayment is more than Rs. 20,000 or more than such information needs to be reported.
(c) Whether a certificate has been obtained from the assesse regarding taking or accepting loan or deposit, or repayment of the same through an account payee cheque or an account payee bank draft:
This needs to be reported in YES / NO format only.
{Remarks =the auditor has to
(a) Obtain all information regarding each loan taken and deposit accepted and verify the same.
(b) Thoroughly verify the repayments made during the year.
(c) Obtain a certificate for any loan taken and deposit accepted and its repayment made along with the compliance made for this sections mentioned.}
25. (a) Details of brought forward loss or depreciation allowance, in the following manner, to the extent available:
Here, a particular format of reporting is given i.e. the auditor has to report the AY for which the loss needs to be carried forward, the nature of loss, the amount of the loss declared in that year and the loss determined by the assessing officer.
(b) Whether a change in shareholding of the company has taken place in the previous year due to which the losses incurred prior to the previous year cannot be allowed to be carried forward in terms of section 79:
This point says about the change in composition of shareholding from current year to last year. The carried forward of loss is determined with respect to individual years and then mentioned here.
{Remarks =the auditor has to
(a) Check all the previous years return of income, their assessment orders, revisional or rectification orders to find out the above amounts.
(b) The auditor has to verify the register of members and their shareholding records to confirm if there are any changes in ownership}
26. Section-wise details of deductions, if any, admissible under Chapter VIA:
The auditor has to ONLY report those type of deductions which are related to BOA`s audited by him for that particular branch or HO. Chapter VI A deductions need not require much explanation by me.
{Remarks =the auditor has to verify all the deductions carefully for that branch or HO. In case, if he is relying on other auditors work he has to specifically mention the fact of it}
27. (a) Whether the assessee has complied with the provisions of Chapter XVII-B regarding deduction of tax at source and regarding the payment thereof to the credit of the Central Government:
The answer required is to be given in YES / NO only and chapter XVII-B, after revision, gives a wider scope on auditors for provisions regarding TDS and all..,
(b) If the provisions of Chapter XVII-B have not been complied with, please give the following details, namely:-
(i) Tax deductible and not deducted at all
(ii) Shortfall on account of lesser deduction than required to be deducted
(iii) Tax deducted late
(iv) Tax deducted but not paid to the credit of the Central Government.
The tax auditor is required to report for all the transactions for which he finds that the provisions of chapter XVII-B is not complied with. He has to report in the following above manner.
{Remarks =the auditor has to
(a) Apply all the judgements in the light of above laws applicable and the judicial pronouncements.
(b) This clause is just the reporting and the auditor has to take into consideration materiality and test check concepts into his mind}
28. (a) In the case of a trading concern, give quantitative details of principal items of goods traded:
(i) Opening stock;
(ii) Purchases during the previous year;
(iii) Sales during the previous year;
(iv) Closing stock;
(v) shortage/excess, if any.
This is applicable to trading assesses only and the auditor shall mention the principle items of goods traded along with the op. balance, purchases, sales, closing stock, shortage and excess, is any.
(b) In the case of a manufacturing concern, give quantitative details of the principal items of raw materials, finished products and by-products:
A. Raw materials:
(i) Opening stock;
(ii) Purchases during the previous year;
(iii) Consumption during the previous year;
(iv) Sales during the previous year;
(v) Closing stock;
(vi) Yield of finished products;
(vii) Percentage of yield;
(viii) shortage/excess, if any.
B. Finished products/By-products :
(i) Opening stock;
(ii) Purchases during the previous year;
(iii) Quantity manufactured during the previous year;
(iv) Sales during the previous year;
(v) Closing stock;
(vi) Shortage / excess, if any.
The auditor has to report for all the practical available goods produced here. In other cases, he may report as NOT APPLICABLE or NOT MAINTAINED.
{Remarks =the auditor has to obtain a certificate of stocks and their procedure for stock taking. The stock reported above is traced to Sales tax / Customs / Excise duty department and cross verified. Then the market standard rate is applied to get the value of sale and purchases form which profit is arrived automatically. Thus, forming most important part of tax audit.}
29. In the case of a domestic company, details of tax on distributed profits under section 115-O in the following form:—
(a) Total amount of distributed profits;
(b) Total tax paid thereon;
(c) Dates of payment with amounts.
This part shows the amount of profits distributed as dividends and the tax paid on them. The date of declaration and payment has to be given too.
{Remarks =the auditor has to verify that all accounting entries have been passed properly and the
compliance of all provisions along with the list of members eligible on test check basis}
30. Whether any cost audit was carried out, if yes, enclose a copy of the report of such audit [See section 139(9)]:
The tax auditor is not require to express an opinion on the cost audit conducted but only the fact that such audit has been conducted.
{Remarks =the auditor has to verify the appointment communication`s made to a tax auditor and make a review of the cost audit report for any changes required.}
31. Whether any audit was conducted under the Central Excise Act, 1944, if yes, enclose a copy of the report of such audit:
The tax auditor is not require to express an opinion on the audit done but only the fact that it has been conducted is to be mentioned.
{Remarks =the auditor has to make a review of the cost audit report given for any changes required and has to obtain a management representation letter that such audit was (not) conducted.}
32. Accounting ratios with calculations as follows:—
(a) Gross profit/Turnover;
(b) Net profit/Turnover;
(c) Stock-in-trade/Turnover;
(d) Material consumed/Finished goods produced.
The ratios mentioned above are not applicable only to profession`s and they arecalculated based on the terminology mentioned under the respective Accounting Standard only.
{Remarks =this point is correlated to point no. 28 and they are mentioned for cross references to be conducted by the department to avoid any misfeances in profits.}
The report ends with the seal and signature of the person who conducts the audit, his membership no., place and date along with seal along with the Firm Registration number also.
Apart from this, there are two annexures required to be annexed with this report i.e. extract of Point statement and Income statement, FBT schedule. (redundant as of now)
Now friends, this is what the law said about the Tax audit reporting and all.., but, I have personally raised some questions which the tax preparers needs to answer. (Senior members are most welcomed to answer my queries).
- What turnover needs to be considered if an assesse has just made some time pass transactions while dealing with futures and options in one shot?
- When IFRS is going to get implemented from 1st April, 2012 the financial year ending becomes redundant since many countries have many types of financial year endings so a change in this is advised.
- On one hand the Tax preparers say that they want to make easier the tax laws in India, then why can`t they continue with HYBRID system of accounting? I agree that, it’s too cumbersome for the AO in making assessments but such methods may also be preferred which is internationally followed.
- These days form 26AS has made lives of the assesse too good, but less is at the better when comes to auditors view. There is no such reporting which is to be considered for the credit`s received since this problem finds its root in the person who deducts tax at source but fails to remit or remit wrongly. A solution to this problem is to be sought out from the tax preparers.
- While considering the percentage calculations, there is no clarity with regards to what types of inventories come into calculations. A notification for this may help out.
- FBT is scrapped, but does reporting requirements bind us to give a report on FBT too?
This is just a part of queries raised by me and there are much loop holes which requires an immediate action since the tax laws are changing at an amazing speed but not it’s reporting, whereby at the end an auditor is held responsible.
Here are the links to my previous series –
Tax Audit – A Glance
/articles/tax-audit-a-glance-11159.asp
Tax Audit – A Glance (Part – II)
/articles/tax-audit-a-glance-part-ii--11231.asp
Coming up next:
- Company Audit Report and its point wise interpretations;
- Deferred Tax concept;
- M.A.T.
Regard
Karan Teli
(Life is just an Illusion)
CAclubindia
