CA Final Paper 3 Advance Auditing & Professional Ethics Chapter 15. CA.Saubhik Sarkar

Transcription

1 CA Final Paper 3 Advance Auditing & Professional Ethics Chapter 15 CA.Saubhik Sarkar

2 1. Introduction 2. Audit of Public Trust 3. Audit for claiming deduction under Section 35 D & 35E 4. Tax Audit under Section 44AB 5.. Audit provision under VAT Law 6. Model Questions

3 Various status including legislation governing direct and indirect tax provision have incorporated audit provisions CBDT entrusted responsibility on auditor s via Tax Audit Introduction of audit provisions in newly introduced Value Added Tax (VAT) legislations

4 Section 12A of Income Tax Act, 1961 laid down condition as to registration of Trust Exemption from tax under section 11 & 12 of Income tax Act if certain conditions are fulfilled Total income of trust, without giving effect to Sec 11 and 12 exceeds Rs (maximum amount not chargeable to tax) accounts to be audited

5 Audit program is outlines as follows: Obtain resolution of trust Obtain letter of appointment from trust List of books and records maintained Assurance about system of accounting and internal control List of activities Certified true copy of trust deed

6 Auditor need to verify: Check books and records having regard to accounting and internal control Transactions falls within the ambit of trust Transactions are properly authorised by trustee Income and expenses are properly accounted Amount applied towards object of the trust are covered by trust deed Obtain TB, Balance sheet and Profit & Loss account

7 Annexures to Audit Report : Obtain from trustees, certified list of person covered by Section 13(3) Obtain from trustees, statement enlisting various items to Form 10B including explanation thereto Verify the information supplied by trustees with supporting documents

8 Nature Criteria Tax Audit required? Business Revenue> 100 lacs Yes Profession Receipts> 25 lacs Yes Special application to deemed profits and gains deemed U/s. 44AD, 44AE or 44AF

9 Tax Audits are required to be performed ONLY by a Chartered Accountant u/s 44AB of Income tax act. He can be Statutory Auditor or other CA in full time practice unless other statue specifies otherwise. Tax Audits include the issuance of Tax Audit Report in Form 3CA or Form 3CB. Form 3CA is used when the accounts of the business or profession of a person have been audited under any other law

10 Statutory Closure Tax Audit Report 31 March, 20XX Form 3CA Other than 31 March, 20XX Form 3CB The tax audit report shall include a statement of particulars in Form 3CD The tax audit period shall be ALWAYS for the year April to next March

11 Statement of particulars as per Form 3CD, tax auditor required to give opinion whether the same is true and correct. Tax Auditor doesn t enjoy power as per Sec 227 of companies Act, 1956 as given to Statutory Auditor. Interest of assessee needs to provide all information and explanation and produce books of accounts as required by tax auditor

12 Due date of filing of return of income advanced to 30th September of Assessment Year. Date of signing of tax audit report to be mentioned in the return. Form 3CD has 32 clauses, we will now discuss each one of the clauses and work to be performed and points to be noted while auditing

13 Form 3CD has two parts: Part A- General information about the Company (Clauses 1 to 6) Part B- Specific disclosure (Clauses 7 to 32)

14 Clause 1 & 2 - Name and Address of Assessee Check in Partnership deed, Memorandum of Association, Recent signed accounts etc Clause 3 - Permanent Account Number PAN Card, PAN Allotment Letter Ensure the name in the PAN card and form 3CD are same

15 Clause 4 - Status Ensure the status indicated in Form 3CD, based on the particulars as indicated in the immediately preceding previous year s Form 3CD / Income Tax Return. For Domestic Company - Sec 2(22A) of IT Act, 1961 For a Company in which public are substantially interested- Sec 2(18) of IT Act, 1961

16 Clause 5 Previous Year Indicate the previous year for the assessee Clause 6 Assessment Year Indicate the year in which income of the previous year is assessed

17 Partnership or Association of Persons: Clause 7(a)-If Firm or Association of Persons, indicate names of partners / members and their profit sharing ratios. Clause 7(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

18 Partnership or Association of Persons: Obtain copies of all the partnership deeds or deeds of constitution, as applicable for the relevant financial year. Identify the change if any in both partners or ratio or both Indicate the names of the partners and their profit sharing ratios from the deed in Form 3CD. If there is no change in the profit sharing ratios from the preceding previous year, obtain a representation to that effect.

19 Business Description: Clause 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) Clause 8(b)-If there is any change in the nature of business or profession, the particulars of such change.

20 Business Description: Identify the nature of business or profession on the basis of segmental details in Annual Accounts Ensure that the nature of business given in tax audit report matches with disclosure in e-filing of return of income. If the company is into manufacturing of different products then nature of business to be mentioned should be based on the codes given in Annexure. Review the board minutes from the audit file, directors report annexed to the audited financial statements to verify any evidence of change in the nature of the assessee s business.

21 Books of accounts: Clause 9(a)-Whether books of account are prescribed under section 44AA read with Rule 6F, if yes, list of books so prescribed. Clause 9(b)-Books of account maintained whether generated by Computer System or maintained manually on the Computer Clause 9(c)-List of books of account examined.

22 Books of accounts- Points to consider: Section 44AA requires compulsory maintenance of books of account and other documents by assessee. Rule 6F prescribes the specified books of account to include a cash book, journal, ledger, carbon copies of bills, receipts, etc

23 Books of accounts- Work to perform: Verify the books, records and documents maintained to check the compliance with requirements of Section 44AA of the Income-tax Act and make a note of any deviation In the case of computerised books, make a listing of all books / main reports generated through the system.

24 Clause 10- Presumptive Income Whether the profit and loss account includes any profits and gains assessable on presumptive basis, if yes, indicate the amount and the relevant section (44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB or any other relevant section) Verify the books, records and documents maintained to check the compliance with requirements of Sections 44AD / 44AE / 44AF etc

25 Method of accounting employed: Clause 11(a)-Method of accounting employed in the previous year.. Clause 11(b)-Whether there has been any change in the method of accounting employed vis-à-vis the method employed in the immediately preceding previous year.

26 Method of accounting employed: Clause 11(c)-If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss. Clause 11(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.

27 Method of accounting employed: Obtain a list of items of expense and income which are accounted for on a cash basis. Scrutinise the statement of miscellaneous income / expenses in the audit file for this purpose. Items accounted on cash basis to be reported in the form if the assessee is following mercantile system of accounting. Note here that as per section 145 an assessee can follow cash or mercantile system of accounting, but hybrid system of accounting is not allowed. If there is any change in the method of accounting, indicate the details of deviation, if any, in the method of accounting employed in the previous year from the Accounting Standards prescribed under Section 145 and the effect, if any, on the profit and loss account.

28 Method of accounting employed: Calcutta High Court in Show White Food Products Vs CIT(1983) and Madras High Court in CIT Vs Carborandum Universal Limited(1966) held that it is open to an assessee to change the method of accounting and such should be followed consistently, and the same has to be accepted by department even it results in reduction on tax liability.

29 Valuation of Inventories: Clause 12(a) Method of valuation of closing stock employed in the previous year Clause 12(b) Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss.

30 Valuation of Inventories: Clause 12 A Give the following particulars of the capital asset converted into stock-in-trade: - Description of capital asset - Date of acquisition - Cost of acquisition - Amount at which the asset is converted into stock-in-trade

31 Valuation of Inventories: Section 145A requires that : Purchases should be shown at gross value inclusive of any tax, duty or fee (by whatever name called). Sales should be recorded as inclusive of any tax, duty or fee (by whatever name called). Closing stock should be valued gross of any tax, duty or fee (by whatever name called).

32 Valuation of Inventories: - In case there is a deviation in the valuation of sales, purchases and closing stock from the method prescribed under Section 145A, the same needs to be disclosed and the effect, if any, on the profit and loss account needs to be quantified. - If the Company follows exclusive method of accounting CENVAT, AED,VAT etc the adjustment for same need to disclose with impact in profit or loss

33 Amount not credited to profit and loss account: Clause 13(a) - the items falling within the scope of section 28 Clause 13(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

34 Amount not credited to profit and loss account: Clause 13(c) - escalation claims accepted during the previous year Clause 13(d) - any other item of income Clause 13(e) - Capital receipt, if any.

35 Amount not credited to profit and loss account: Review the books of account, and ascertain whether items of the following nature have been credited to the profit and loss account - Profits on sale of license - Cash Assistance received or receivable against exports - Value of any benefit or perquisite - Amounts received under Keyman Insurance policies. - Income of trade similar association - Proforma credits under excise rules - Drawback and refund of excise duty, customs duty, service tax, VAT - Compensation received on termination of management - Income earned from contractor or others during construction period

36 Amount not credited to profit and loss account: Verify whether the above claims have been credited to the profit and loss account. If not, obtain the reasons there of Obtain a representation from the client regarding escalation claims, if any, accepted during the year. In case there are no such items obtain a representation from the Management to that effect.

37 Depreciation: Clause 14(a) Description of asset/block of assets. Clause 14(b) Rate of depreciation Clause 14(c) Actual cost or written down value, as the case may be.

38 Depreciation: Clause 14(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 (i) Modified Value added Tax credit claimed and allowed (ii) Change in rate of exchange of currency, (iii) Subsidy or grant or reimbursement, by whatever name called. Clause 14(e) Depreciation allowable. Clause 14(f) Written down value at the end of the year.

39 Depreciation: Obtain from the client a depreciation schedule Ensure that the fixed assets are correctly classified as per IT Act Verify the opening written down value from the previous year return

40 Depreciation: Ensure that the rate of depreciation for assets which have been put to use for less than 180 days is equal to 50% of the rate otherwise applicable. Ensure that CENVAT has been excluded from the cost of the asset Verify the claim of additional depreciation claimed by the assessee

41 Reconciliation of addition of Fixed Assets: - Consider additions as per IT depreciation schedule - Aggregate additions over 180 days and less than 180 days - Compare with additions as per audited financial statement - Explain reasons for differences if any

42 Reconciliation of deletion of Fixed Assets: - Consider deletions as per audited financial statement - Compute : Gross book value of assets sold Accumulated depreciation of assets sold (+ or -) profit or loss on sale of assets = Sale proceeds of assets sold

43 Particulars Amount Amount Additions made as per books 200 Add: Foreign Exchange Loss (realized) debited to P/L Account Add: Other items debited to P/L Account Less: Foreign Exchange Gains (realized) credited to P/L Account Total additions as per Tax Depreciation Schedule (25) 255

44 Particulars Amount Opening Bal of total unrealized exchange loss 700 Add Amount of exchange loss charged to the P&L 75 Less Amount of exchange loss realized during the year (25) Less Forex loss of earlier years realized during the current year (10) Unrealized exchange gain/loss carried forward 740

45 Amount deductible under Section 33 and 35 of IT Act: Clause 15(a) debited to the profit and loss account (showing the amount debited and deduction allowable under each section separately) Clause 15(b) not debited to the profit and loss account.

46 Bonus or Commission: Clause 16(a) Any sum paid to an employee as bonus or commission for services rendered, where such sum otherwise payable to him as profits or dividends. Section 36(1)(ii) Clause 16(b) Any sum received from employee 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- Section 36(1)(va)

47 Bonus/ Commission and PF: For Bonus and Commission: Enquire about such payments to key management personnel For PF : Ensure payment to PF within 15 th (due date) of the subsequent month Cheque realisation date should be reported in 3CD, clearance should be within 15 days from date of cheque.

48 Bonus/ Commission and PF: Points to remember: Employee contributions when not paid in time will be deemed as income.

49 Amount debited to Profit & Loss: Clause 17(a) Expenditure of capital nature Clause 17(b) Expenditure of personal nature (Section 37 of IT Act,1961 and Section 227 (1A) of Companies Act,1956) Clause 17(c) Expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. ( section 37(2B))

50 Amount debited to Profit & Loss: Clause 17(d) Expenditure incurred at clubs as entrance fees and subscription as cost for club services and facilities used Clause 17(e) Expenditure by way of penalty or fine for violation of any law for time being in force, any other penalty or fine, expenditure incurred for any purpose which is an offense or which is prohibited by law

51 Amount debited to Profit & Loss: Clause 17(f) Section 40(a)(i) Payments made to Nonresidents or outside India; Section 40(a)(ia) Payments of any interest, commission, brokerage, rent, royalties, fees for professional or technical services, contractors payment made to Residents; etc.

52 Amount debited to Profit & Loss: Clause 17(g) Interest, salary, bonus, commission or remuneration inadmissible under section 40(b) / 40(ba) and computation thereof Clause 17(h)(A) whether a certificate has been obtained from the assessee 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 - Yes/No Clause 17(h)(B) amount inadmissible under section 40A(3), read with rule 6DD [with break-up of inadmissible amounts]

53 Amount debited to Profit & Loss: Clause 17(i) Provision for payment of unapproved gratuity fund not allowable under section 40A(7) Clause 17(j) Any sum paid by the assessee as an employer not allowable under section 40A(9) Clause 17(k) Particulars of any liability of a contingent nature.

54 Amount debited to Profit & Loss: Clause 17(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; Amendment :Insertion of Rule 8D vide Notification No. 45 dated 24th March 2008 prescribes method for determining amount of expenditure in relation to income not includible in total income Clause 17 (m): Amount inadmissible under the proviso to section 36(1)(iii)

55 Scan general ledger Accounts for: Repairs & Maintenance (Enquire about material amounts CAPEX may be charged off) Staff Welfare (Other than contractual obligations Use judgment) Advertisement/Promotional expenses Enquire about such items with the client. Entertainment Enquire and report Verify delays in statutory remittances from workpapers and enquire on interest on delays if any

56 Scan general ledger Accounts for: Interest, royalty, fees for technical services or other sum chargeable under the act paid to a Non resident, without deducting TDS Any interest, commission, brokerage, fees for professional services and fees for technical services payable to a resident and contractors or subcontractors on which TDS is not deducted) Any sum paid on account of any rate or tax levied on the profits or gains of any business or profession

57 Browse Rates & taxes for Wealth Tax if it is included, it needs to be removed since this expense is disallowed 40A(7) Gratuity not funded/ Gratuity funded 43B i.e. allowbility on payment basis. For 40 A(7) provision for gratuity shall be disallowed. Browse Provision for gratuity A/c, for actual cash outflow, report the provision component. 40A(9) Enquire about such payments/ Scrutinize Staff welfare/general Expenses/Donations

58 Section 14 Determine various classifications of income. Verify whether all incomes are subject to tax. Verify the existence of Tax exempt income. Ensure whether the Mgmt. has identified expenditure relatable to the above. Determine the basis of allocation & report

59 36(1)(iii), verify the purpose of Loans if any, Verify the Loan agreements/arrangements. Check for Interest Payment disclosure in Financials Ensure the Loan taken for capital purposes, have been added to the cost of the asset till date of put to use.

60 Clause 17A- Amount inadmissible under Section 23 of Micro Small and Medium Enterprise Development Act, 2006: New Clause inserted by CBDT through notification No 36/ 2009 dated Interest inadmissible under Section 23 of MSMED Act, 2006 need to be reported here

61 Clause 18- Particulars Of All Payments Made To Persons Specified In Section 40A(2)(b): Peruse the Financials for Related Party Disclosures Report transactions with assesses holding more than 20% or more Equity Capital Report payments such sitting fees, remunerations to Directors

62 Clause 19- Amounts Deemed To Be Profits Under Section 33AB Or 33ABA Or 33AC: Amount withdrawn from such deposit account other than specific purpose is to be deemed income chargeable as profit and gains of business Tax Auditor require to verify the same and report in case of deviation

63 Profit under Section 41 (Clause 20): Receipt of Deduction/Allowances allowed in earlier year received in previous year Bad debts written off now received Receipt in respect of income from discontinued businesses. Verify whether Bad Debts earlier written off has not been adjusted with bad debts written off during the year.

64 Clause 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.

65 Clause 21: In respect of any sum referred to in clause (a), (b), (c), (d), (e) or (f) of section 43B, the liability for which: (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);

66 Any sum paid under Section 43B: Scrutinize Outstanding Liabilities / Provisions/ Creditors to determine unpaid liabilities pertaining to 43B Verify carry forward of previous year unpaid liabilities with previous year s 3CD Annexure. Verify Payments/ Adjustments have been properly recorded.(payments should have been made within 139(1) due dates, 30 th September for Companies) Check whether Interest on Loans have not been structured as a loan and interest is paid on interest. Such structuring of loans will be disallowed.

67 Clause 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. Clause 22(b) Particulars of income or expenditure of prior period credited or debited to the profit and loss account.

68 Verify opening balances with previous year s 3CD Review the Excise Accounts in general ledger & Excise Registers / Reconciliation. Review the total debits /total Credits in RG 23A/23C for Excise Credits & Utilisation Verify Computations to arrive at Closing Balances.

69 Clause 22(b) Particulars of income or expenditure of prior period credited or debited to the profit and loss account. For Prior Period items verify Signed Financials /Notes/workpapers for indication of such items debited in Profit & Loss account.

70 Amounts borrowed on hundi & Particulars of loan (Clause 23 and 24): Clause 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].

71 Amounts borrowed on hundi & Particulars of loan (Clause 23 and 24): Particulars of each loan or deposit in an amount exceeding the limit specified in section 269SS taken or accepted during the previous year (Clause 24(a)) Particulars of each repayment of loan or deposit in an amount exceeding the limit specified in section 269T made during the previous year (Clause 24(b)) Whether a certificate has been obtained from the assessee regarding taking or accepting loan or deposit, or repayment of the same through an account payee cheque or an account payee bank draft. Clause 24(c))

72 Brought forward loss, depreciation : Clause 25(a) Details of brought forward loss or depreciation allowance Clause 25(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

73 Brought forward loss, depreciation : Verify from the returns which have been filed till date to arrive at the brought forward loss and depreciation allowance. No loss is allowed to be carried forward, unless the Return of Income of that year is filed on or before the due date. (Section 80). Verify from the intimation under section 143(1)(a) if any change has been made in the above figures. Check whether the assessee has received any notice under Section 143(2).

74 Brought forward loss, depreciation : Check whether the assessment has been completed under section 143(3) and a order has been passed effecting the brought forward loss and depreciation allowance. Obtain a representation from the client regarding status of assessment

75 Brought forward loss, depreciation : Check whether the company has a unabsorbed loss Check whether the company carry forward the business losses Check the shareholding of the company as on 31st March of current financial year and whether there has been change in shareholding pattern

76 Deduction under Section Chapter VI-A (Clause 26): Deductions in respect of certain payments Deduction in respect of certain income Other deductions

77 Deduction under Section Chapter VI-A (Clause 26): Obtain a schedule from the client indicating the deductions which are proposed to be availed. Vouch the proof of expenditure/conditions of entitlement to such deductions. Verify whether the deductions comply with the provisions of the Income-tax Act.

78 Clause 27 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 ( Yes or no)

79 Tax deducted at source (Clause 27): Ensure 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 Obtain a Statement of payments on month wise basis for all items Check whether tax deduction is done for all the payments Check whether the remittance of tax is done before the due date

80 Get the details separately for each head indicating the following: Tax required to be deducted but not deducted Tax required to be deducted but short deducted Tax deducted late Tax deducted but not paid within financial year / due date for year end accruals Cross verify the disclosure under this column with disclosure under section 40(a)(i) and (ia)

81 Quantitative details (Clause 28(a): In the case of a trading concern, give quantitative details of principal items of goods traded tracing to the audited financial statements: - opening stock - purchases during the previous year - sales during the previous year - closing stock - shortage/excess, if any

82 Quantitative details (Clause 28(b): In the case of a manufacturing concern, give quantitative details of the principal items of raw materials, finished products and byproducts tracing to the audited financial statements: - opening stock; - purchases during the previous year; - consumption during the previous year; - sales during the previous year - closing stock; - yield of finished products: - percentage of yield: - shortage/excess, if any

83 Corporate Dividend Tax (Clause 29): In the case of a domestic company, verify the details of tax on distributed profits under section 115-O in the following manner: - total amount of distributed profits - total tax paid thereon - dates of payment with amounts

84 Cost Audit (Clause 30): Ensure whether any cost audit was carried out, if yes, enclose a copy of the report of such audit [See section 139(9)]. Obtain a representation from the client mentioning whether cost audit under Section 233B of the Companies Act, 1956 for the year under audit was prescribed. Obtain a copy of the cost audit report. If cost audit is not complete by the time of the tax audit, this should be stated in Form 3CD.

85 Excise Audit (Clause 31): Ensure whether any audit was conducted under the Central Excise Act, 1944, if yes, enclose a copy of the report of such audit. Obtain a representation from the client mentioning whether excise audit was carried out for the year under audit. Obtain a copy of the excise audit report if excise audit was conducted. If excise audit is not complete by the time of the tax audit, this should be stated in Form 3CD.

86 Accounting Ratios (Clause 32): Obtain the audited trial balance or the audited profit and loss account and compute the following ratios: - Gross profit / Turnover - Net profit / Turnover - Stock-in-trade / Turnover - Material consumed/ Finished goods produced

87 General: The annexures to Form 3CD must be filled up failing which the Form will be considered as incomplete for the purposes of filing. The annexures also have to be signed by the auditor.

88 Annexure 1 has two parts Part A & Part B: Part A needs to specify factors such as the name of the assessee, PAN number, status as also the relevant code pertaining to the main area of the business or professional activity Part B needs to provide some parameters of the business activity. To name a few - Reserves and Surplus/Profit and Loss Account, Secured loans, Unsecured loans, Current liabilities and provisions, Total of Balance Sheet, Gross turnover/gross receipts, Gross profit, Commission received etc. These parameters can be filled from the latest financial statements i.e. balance sheet and the Profit & Loss Account

89 Annexure II contains details of FBT: Section 115WM was inserted by Finance (No. 2) Act, 2009, which provided that nothing contained in Chapter XII - H [Income-Tax on Fringe Benefits] shall apply in respect of any assessment for the assessment year commencing on April 01, 2010 or any subsequent assessment year. In view of the insertion of section 115WM, Annexure II is not applicable.

90 Major steps in Tax Audit under VAT: Knowledge of business Obtaining a list of all accounting records maintained by auditee Ascertaining the major accounting policies adopted by the auditee Evaluation of Internal control Knowledge about VAT Law and allied law.

91 Model Questions

92 State whether a Tax audit report can be revised and if so state those circumstances. (4 marks)(november 2008)

93 Normally report of Tax Auditor cannot be revised later, however accounts are revised in few circumstances, and Tax Auditor may revise his audit report: a) Revision of accounts of a Company after adoption in AGM. b) Change in law with retrospective effect c) Change in interpretation of law, CBDT circular, judgment, notification etc.

94 Draft an Audit programme for conducting the audit of Public Trust registered under Section 12A of Income Tax Act. (8 marks)(june 2009)

95 Audit programme to include: Check books and records having regard to accounting and internal control Transactions falls within the ambit of trust Transactions are properly authorised by trustee Income and expenses are properly accounted Amount applied towards object of the trust are covered by trust deed Obtain TB, Balance sheet and Profit & Loss account

96 As the tax auditor of a noncorporate entity u/s 44AB of the Income Tax Act, 1961, how would you ensure compliance of section 145 of the Income Tax Act (8 marks)(june 2009)

97 Compliance of Section 145 of IT Act: Ensure compliance with AS(IT) -1: Disclosure of accounting policy AS(IT)-2: Disclosure of prior period and extra ordinary items and disclosure of accounting policies Items accounted on cash basis to be reported in the form if the assessee is following mercantile system of accounting. Note here that as per section 145 an assessee can follow cash or mercantile system of accounting, but hybrid system of accounting is not allowed. If there is any change in the method of accounting, indicate the details of deviation, if any, in the method of accounting employed in the previous year from the Accounting Standards prescribed under Section 145 and the effect, if any, on the profit and loss account.

98 Compliance of Section 145 of IT Act:: Calcutta High Court in Show White Food Products Vs CIT(1983) and Madras High Court in CIT Vs Carborandum Universal Limited(1966) held that it is open to an assessee to change the method of accounting and such should be followed consistently, and the same has to be accepted by department even it results in reduction on tax liability.

99 ABC printing press, a propriety concern, made a turnover of Rs. 63 lacs for year ended The management explained its auditor Mr Z that it undertakes different job work orders from customers. The raw material required for every job are dissimilar. It purchased the raw material as per specification of each customer, and there is hardly any balance in raw material except pending work in progress at the year end. Because of variety and complexity of materials, it is impossible to maintain stock register. Give your comment. (5 marks)(november 2009)

100 Auditor need to verify specified job order received and different raw material purchased for each job separately Use of different paper, ink may be verified. Practice in similar printers may be obtained Auditor need to verify and certify the details of stock and books maintained. If not properly maintained the same needs to be reported.

101 A Co-operative Society having receipts above Rs. 60 lakhs gets its accounts audited by a person eligible to do audit under Co-operative Societies Act, 1912, who is not a Chartered Accountant. State with reasons whether such audit report can be furnished as tax audit report under Section 44AB of the Income Tax Act, 1961? (3 marks)(november 2009)

102 Proviso to Section 44AB lays down where the accounts of an assessee are required to be audited by or under any other law, it shall be sufficient with the provision of this section, if such person get the accounts of such organisation audited under such law before the specified date and furnish report accordingly. In co-operative society under relevant law person other than CA can do the audit Thus, it shall be sufficient compliance with the provisions of this section and can be considered under Section 44AB.

103 Write short note on the major steps required under preparation of Tax Audit under VAT. (5 marks)(may 2010)

104 Major steps in Tax Audit under VAT: Knowledge of business Obtaining a list of all accounting records maintained by auditee Ascertaining the major accounting policies adopted by the auditee Evaluation of Internal control Knowledge about VAT Law and allied law.

105 1. Introduction 2. Audit of Public Trust 3. Audit for claiming deduction under Section 35 D & 35E 4. Tax Audit under Section 44AB 5.. Audit provision under VAT Law 6. Model Questions

106