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Let us consider the following questions:

1. Objective of Work?

2. Where to start?

3. How to Proceed?

4. What to Check & document in working paper file?

5. Knowledge base / Study paper?

Tax Audit:

1. Objective:

In case of Tax Audit, the objective is to report whether the assessee has complied with the relevant provisions of the Income Tax Act. Sometimes, the auditor also has to ensure that the financial statements give true & fair view of business operations.

The objective of the auditor may vary based on the type of assesse & audit assignment. For example, if the assesse is a company, and the auditor has under taken to do only tax audit, he need not check whether the accounts of the company reflect a true and fair view of the business. It will be sufficient if he ensures that the relevant provisions of the Income Tax Act have been complied with.

On the other hand, if the assesse say for example is a partnership concern, it may be so that the auditor himself has to prepare the final accounts of the partnership firm. In such a case he also needs to ensure that the accounts give a true & fair view of the business operations, in addition to checking the compliance with the provisions of the Act.

In short, the auditor is providing the report to the Income Tax Department & not to the shareholder/owner.

2. Where to start?

Go through PY file and note the following –

~ Type of Assesse - Co. / Trust etc.

~ Knowledge of Assessee's business etc.

~ Relevant provisions of the Act applicable to the assesse.

3 & 4. How to proceed, what to Check & document?

Have an Audit Programme. It will change based on the scope of the auditor’s work. An example of audit programme is given below –

~ Opening Balance Check

~ Preparation of Financials & IT Return

~ Vouching for Income & Expenses (If time permits 100 % vouching, else go for sampling)

~ Verification of Assets & Liabilities - For Ex: Checking Fixed Assets purchased with relevant bills,   checking the loan A/c statement for loan taken/repaid etc.

~ The IT department has given a tax audit checklist in Form 3CD. Go through all the questions in 3CD & find out the answers. Try to document working papers where possible. 3CD checklist along with its annexures will form part of the tax audit report.

~ Prepare tax audit report in Form 3CA / 3CB as the case may be.

~ Check for applicability of MAT or AMT for the assessee by working out the same & checking by filling the ITR form.

~ Put down your queries for discussion with the Management and obtain representation letters.

~ Finalize after resolving the queries.

~ Fill up the relevant ITR form and tax audit form by downloading them from the website. (From this year onwards, e-filing of tax audit report has been made compulsory)

~ Upload & complete the return filing process.

5. Knowledge base / study paper?

a) Have your own copy of Guidance Note on Tax Audit by ICAI.

b) Have a copy of 3CA / 3CB & 3CD format.

c) Have notes from the relevant sections of the Income Tax Act w.r.t. each question in From 3CD.

d) Have notes on sampling methods in Audit.

e) Download / take print out of instructions w.r.t. e-filing of IT return & Tax Audit Report.

(Note that along with the tax audit report, we have to upload the balance sheet & profit and loss account of the assesse in the required format).

f) Make notes on applicability of MAT or AMT for the assessee & also how to work out the same (Have a standard format).

g) Document all your study paper in a file. Also ensure that you have a soft copy of your notes for quick reference.

You can always improve on the above points based on your experience & perception.

- Vignesh A. (CA-Final)

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Category Income Tax, Other Articles by - Vignesh A.