BCAS Workshop on How to conduct Tax Audit 31 August 2012

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1 BCAS Workshop on How to conduct Tax Audit 31 August 2012 By Himanshu Kishnadwala INTRODUCTION Audit required vide section 44AB of IT Act Limits Sales / Gross Turnover or Gross Receipts exceed AY to AY AY to AY AY onwards In case of Business 40 lakhs 60 lakhs 1 crore In case of Profession 10 lakhs 15 lakhs 25 lakhs From AY onwards, audit u/s 44AB also necessary where assessee claims non-applicability of sec 44AD Audit u/s 44AB also necessary u/s 44AE and u/s 44AF (upto AY ) CNK 2 1

2 INTRODUCTION Auditincaseofnoncorporateentities Entireaudittobeconducted TrueandFairviewofFS TaxAuditincaseofCompanies OnlyparticularsinForm3CDtobecertified ReliancetobeplacedonreportofStatutoryAuditor SA600 Usingtheworkofanotherauditor Some additional verification maybe necessary Co-relation of particulars given in Form 3CD with disclosures infs(e.g.as18,caroreport,etc.) CNK 3 INTRODUCTION Format of the Financial statements (for non corporate entities) Recommended by ICAI (follows old schedule VI format) For firms to also state whether registered or not Whether previous years figures to be given? Format of the Financial statements (for corporate entities) Normally in Revised Schedule VI Companies having year-end different from 31 March? whether to follow existing Schedule VI or Revised Schedule VI? ICAI GN on 44AB suggests to use format prescribed under governing law CNK 4 2

3 Compliance with ICAI Code of Ethics Appointment and NOC procedures Same person cannot conduct Internal & Tax Audit Ceiling on number of tax audit assignments 45 per partner HO and branch considered as 1 assignment audits conducted under section 44AD, 44AE and 44AF not to be included in the limits Minimum Fees to be charged: Council decision for minimum fees (notified in 2009) repealed with effect from 7 th June 2011 preferable to follow ICAI recommended scale of fees Record of tax audit assignments in prescribed format CNK 5 Applicability of Accounting Standards Corporate entities Mandatory as per Companies(AS) Rules, 2006 ConcessionstoSMCsfromsomeAS Non-corporate entities Compliancenot givenbyanystatute(exceptforas1&as2 issued under section 145 of Income Tax Act) As per ICAI guidelines mandatory for auditors while reporting exemptions for SMEs from some AS Inpractice,importantASlikeAS1,AS2,AS7,AS10,AS11, etc. need to be followed as otherwise the FS may not give True and Fair view Consider implications u/s 145 if AS not followed CNK 6 3

4 CONCEPT OF TURNOVER For proprietorships: total turnover for each business Whether to include excise, sales tax, service tax? ICAI GN on 44AB at variance with GN on VAT and GN on Revised Schedule VI Whether to include: Other Operating Revenue? Sale of capital assets? Other Income? CNK 7 CONCEPT OF TURNOVER AsperGNontermsusedinFS,SalesTurnoverisdefinedas: aggregate amount for which sales are effected or services rendered by an enterprise Guide to Company Audit mentions Total turnover is the aggregate amount for which sales are effected, giving the amountofsalesinrespectofeachclassofgoodsdealtwithby the company and indicating quantities separately AsperGNonTaxAudit,turnovermaybeinterpretedtomean the aggregate amount for which sales are effected or services rendered by an enterprise CNK 8 4

5 CONCEPT OF TURNOVER Statement of CARO and Part II of existing Schedule VI defines turnover as aggregate amount for which sales are effected by the company. Sales effected would include sale of goods as well as services rendered by the company. Para 10 of AS 9 requires disclosure of Gross Turnover with separate deduction for Excise Duty. GNonVATstates VATiscollectedfromcustomersonbehalfof VATauthoritiesand shouldnotberecordedasrevenueofthe enterprise CNK 9 CONCEPT OF TURNOVER AsperGNonRevisedScheduleVI Excise Duty to be included since format of Revised Schedule VI clearly mentions Excise Duty as a deduction from Sales, the same would be necessary. Service Tax/ VAT: Such taxes are generally collected from the customer on behalf of government. Depending on whether company is acting as agent or principal, such taxes should be included in Sales(i.e. Gross or excluded(i.e. Net). CNK 10 5

6 CONCEPT OF TURNOVER Which limit applies 60 lakhs or 15 lakhs?? Nursing home Interior decorators Management consultants Coaching classes Dealer in shares/securities Gain on sale on investments Insurance agents, Financial Planning Advisors, etc. CNK 11 FORM 3CA, 3CB When to use 3CA and 3CB? Giving comments in Para 3(a) of Form 3CB Effect thereof? Whether safeguards the auditor? Adding responsibility and scope Para in 3CB Results in amending Form 3CB Whether required? Applicability of SA 700? CNK 12 6

7 Form 3CA, 3CB Notes to Accounts to normally specify: Method of accounting followed accrual or cash Inventory valuation Fixed Assets and Depreciation Investments Accounting of Forex fluctuations Items that may require qualification: Mandatory AS not followed (esp. for Companies) Non provision of Income Tax Non provision of Employee bonus and retirement benefits Confirmations for balances Inventory valuation on estimated basis CNK 13 Form 3CD Form 3CD revised effective 10 th August 2006 For a proprietor having 2-3 different business whether same or different Form 3CD? Primary responsibility of management To be certified by management Contains Parts A/B and 2 Annexures Annexure I contains 2 parts A/B CNK 14 7

8 Form 3CD 3CD Part A Part B Annexures I and II Clauses 1 to 6 Clauses 7 to 32 CNK 15 Form 3CD Annexures to 3CD Annexure I Annexure II Part A (similar to Part A of main 3CD Clauses 1 to 6) Part B (Parameters) CNK Value of Fringe Benefits * * Not applicable from AY

9 Form 3CA, 3CB Signatures Form 3CA / 3CB to be signed by Chartered Accountant Mention of Firm Registration Number (FRN) Mention of membership number Form 3CD also to be signed by assessee? Preferable for CA to put initials / stamp on each page / annexure of 3CD CNK 17 Form 3CD whether comments necessary in following cases? No interest charged on loans to relatives Insufficient household withdrawals Books not closed Investments, assets (like car, flat) held in names of partners and not name of firm No quantity records are maintained Stocks not tallying with bank CNK 18 9

Documentation Documentation for 3CD should be separate Checklistfor3CD For debatable issues, separate management representations, if required

10 Documentation Documentation for 3CD should be separate Checklistfor3CD For debatable issues, separate management representations, if required ImportantforPeerReviewsincetaxauditisalsoan attest function. TofollowSA230 Golden principle for Documentation: WRITE what you do and DOwhat you write CNK 19 Questions Thank you CNK 20 10

CA. Mehul Shah B. Com, F.C.A., DISA (ICAI).

Tax Audit - Certain Clauses with Special reference to Documentation Overview of Companies Act 2013 CA. Mehul Shah B. Com, F.C.A., DISA (ICAI). Care, Pair, and Share INTRODUCTION Audit required vide section