Practical Guide to Tax Audit - Rajkumar S. Adukia

General Considerations by Tax Auditor

9.1       Basic principles

Following are the basic principles which govern the auditor’s professional responsibilities and which should be complied with whenever an audit is carried out.

Documentation

The auditor should document the matters, which are important in providing audit evidence that the audit was carried out in accordance with the basic principles, which are governing audit.

Audit evidence

The auditor should obtain sufficient and appropriate audit evidence, which will enable him to draw reasonable conclusions there from on which base his opinion on the financial information. 

Confidentiality

The auditor should respect the confidentiality of information acquired in the course of his work and should not disclose any such information to a third party without specific authority or unless there is a legal or professional duty to disclose.

Skills and competence

The audit should be performed and the report has to be prepared with due professional care by persons who have adequate training, experience and competence in auditing.

Integrity, objectivity and independence

The auditor should be straightforward, honest and sincere in his approach to his professional work. He must be fair and must not allow prejudice or bias to override his objectivity. He should maintain an impartial attitude and both be and appear to be free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity.

Due professional care

The tax auditor should exercise due professional care in performing and reporting. All those involved should fulfill assigned responsibilities in a professional manner.

Peer review

The Institute of Chartered Accountants of India has set up the Peer Review Board to ensure adherence to technical standards and existence of proper systems for maintaining quality of work.

The term ‘peer’ means a person of the same ability, rank, title in other words an equal match.

Review means to subject to a formal inspection or appraisal and reassessment of the matter in question.

Thus, Peer Review means:

Ø      Review of work done by a professional by another professional of similar standing.

Ø      An examination and review of the system and procedures to determine whether they have been put in place by practice unit for ensuring the quality of attestation services as envisaged and implied/mandated by technical standards and whether these are effective or not during the period under review.

9.2       Areas of focus by peer review

      1.          Compliance with Technical Standards.

      2.          Independence.

      3.          Quality of Reporting.

      4.          Office system and procedure.

      5.          Training programs for staff (including Articled and Audit Clerks) concerned with audit functions.

Compliance with technical standards

An auditor is expected to comply with:

      1.          Accounting Standards issued by the Institute of Chartered Accountants of India.

      2.          Auditing and Assurance Standards issued by the Institute of Chartered Accountants of India.

      3.          Guidance Notes issued by the Institute of Chartered Accountants of India.

      4.          Notifications/Directions including those of self-regulatory nature.

      5.          Relevant Statutes/Regulations.

      6.          Ethical requirements and adherence to code of conduct.

In case of non-compliance with the AS, the chartered accountant should make appropriate qualifications/disclosures in the audit report.

Independence policy

      1.          Before accepting an engagement, it must be ensured that there is no power of direction from executive or operational levels of the entity.

      2.          Auditor has to refrain from getting involved in matters in which he has vested interest.

      3.          Auditor should not accept gift or gratuities above a specified value. Anything above this value would be perceived as influencing the independence and integrity. The Audit Manager should be informed of receipt of any gifts.

      4.          Auditor should refrain from taking undue hospitality or goods and services on terms (not available to others) from the client.

      5.          Auditors should avoid all relationships with managers and staff in the audited entity and other parties which may influence, compromise or threaten the ability of auditors to act and be seen to be acting independently. Specifically,

a)      No member of the audit team should have been the member a director or officer of the client in the past year or the period under audit.

b)      No member of the audit team should be an immediate family member or close family member who is a director or officer of the client.

c)      Any member of the firm should not be director in the client entity.

d)      Auditor should not be the member or adviser in any of the management committees.

      6.          Member of audit team should be independent of audit client .The firm should not have a material direct or indirect financial interest in the client. Specifically,

a)      Any member of the audit team or the firm should not be a stakeholder in the client enterprise.

b)      No loan or guarantee should be taken from the client.

c)      No member of the audit team should be, or having recently been, an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the engagement.

d)      Fees should not be based on the outcome of engagement.

e)      Fees cannot be charged as percentage of revenue or profit.

      7.          When it is felt that the threat to independence cannot be eliminated or reduced to acceptable level, the engagement should be discontinued or refused.

Quality of reporting

In the case of a tax audit, the tax auditor is required to give his opinion as to whether the particulars annexed in the audit report are true and correct. In giving his report the tax auditor will have to use his professional skill and expertise and apply such audit tests depending on the circumstances and, considering the contents of the audit report.

The Audit program and Audit contents should be documented properly. The basis for arriving at audit conclusions should be documented. The work allocation, number of man days required should be documented. The managements comment on Draft Audit Report should also be documented.

Office systems and procedures

An auditor should take care of the following:

      1.          Personnel policies should be clearly laid down.

      2.          A manual for policies and procedures should be documented and maintained.

      3.          Appointment letters for staff and personnel files should be properly maintained.

      4.          Records of staff meetings should be maintained.

      5.          Checklist for Auditing and Assurance Standards, guidance notes etc., should be prepared to ensure compliance with all the standards while performing a particular engagement.

      6.          Written guidelines on the responsibility at each level should be prepared.

      7.          Staff performance should be evaluated periodically.

Training programs for staff (including Articled and Audit clerks) concerned with audit functions

      1.          The accounting firm has to make arrangements so that personnel can participate in general and industry-specific continuing professional educations and            professional development activities. The firm may designate a person to develop requirements for firm requirements and program materials for professional development. These can include:

Ø      Setting guidelines for participation by personnel in professional development programs, and considering requirements of the ICAI.

Ø      Maintaining appropriate documentation evidencing that personnel have met the professional education requirements.

Ø      Providing training for newly employed personnel to inform them of their professional responsibilities and firm policies.

Ø      Provide publications and other material to inform personnel of their responsibilities and opportunities.

Ø      Developing in-house staff training programs on focus on general and industry-specific accounting and auditing topics.

      2.          There should be an orientation program for new employees.

      3.          A library for continuing education of staff containing developments in Auditing and Assurance Standards, Guidance Notes and monitoring continuing professional education of staff, if maintained would be very useful to the audit staff.

Other Pages from This e-book

Introduction to Tax Audit | Audits Done Under Income Tax Act, 1961 | Maintenance of Accounts by Certain Persons Carrying on Profession or Business-Sec. |  44AA | Sec. 44AB and Related Provisions of the Income Tax Act, 1961 | A study on Section 44AB | Important Terms and Definitions | Appointment as Tax Auditor | Audit Process | General Considerations by Tax Auditor | Specimen Documentation | Guidance on Form 3CD | Accounting Standards Issued by ICAI | FORM NO. 3CA | FORM NO. 3CB | New Form 3CD as amended by Notification no. 208/2006 dated 10-8-2006 | Relevant Income Tax Provisions | Annexure I to Form 3CD | Annexure II to Form 3CD | About the publisher