Tax Audits

Introduction

The word “Audit” means examining something thoroughly. The audit is the systematic and independent review of the financial statements to give an opinion. As the organizations need to determine whether they are complying with the stated principles and regulatory requirements, they under the obligations for various audits throughout the financial year.  

Here in this article, we are discussing various types of audits and their applicability as per the relevant Acts.

Various Types of Audits

Statutory Audit:  

Statutory audit means reviewing whether the companies are fulfilling the statutory obligations, it includes Income tax, GST, TDS, ESI, PF compliances etc. It is one of the mandatory audits by the law. Every fiscal year from April 1 to March 31, the companies prepare their financial statements, including the Profit and loss account, Balance sheet, and Cash flow statement. Such statements are published for the general public to know the financial position of the companies. 

Who conducts the statutory audit?

The external and independent qualified professionals such as a practicing Chartered Accountant or CA firm or LLP are eligible and appointed as the statutory auditor. 

What is the objective of the statutory audit?

The primary objective of a statutory audit is to determine whether the company is providing the accurate and true and fair view of the financial position to its shareholders. The shareholders don’t manage the company, but the management and board of directors do. That is the reason the law requires that the independent person perform the audit of the company.

Moreover, other stakeholders like creditors, employees, investors, government, bankers also believe in the audited financials of the company. In case of any Income tax case, statutory audit reports also help for the Income-tax assessments. 

What is the applicability of statutory audit?

All companies (Private Limited Company, Limited Company, Companies covered under section 8, One Person Company, Nidhi or Producer Company) must audit their books of accounts irrespective of their nature of business, turnover, or capital employed. 

However, in case of LLP and proprietorship, there is a specific limit for the statutory audit:

Limited liability partnership (LLP): statutory audit is applicable if the turnover in any previous financial year exceeds Rs. 40 lakhs or the contribution of capital exceeds Rs.50 lakhs. 

Proprietorship: In the case of business, if the annual sales turnover exceeds Rs.1 crore in or in case of the profession, if annual gross receipts exceed Rs.25 lakhs.

Internal Audit: 

Internal audit is like the routine checkup of the business/company. The management of the company wants to keep track of the day to day affairs of their company, so they set up an internal audit. Internal audit is not limited to financial operations only, but it includes operational processes, and IT infrastructure and security protocols are also in order.

Who is eligible for performing internal audit?

An internal audit is undertaken in the company. Therefore, internal staff or independent parties can review the internal control system.

What is the purpose of the internal audit?

The internal audit’s objective is to evaluate and assess whether the organization is following the internal processes, norms, rules, and regulations and taking timely corrective actions. 

What is the applicability of internal audit?

According to the Company Act 2013 and Rule 13 of the Companies (Accounts) Rules 2014, few companies should have an internal auditing system compulsorily:

1. Every company listed on the stock exchange 

2. Every Unlisted Public Company following the below-mentioned criteria:

• Paid-up share capital of Rs. 50 crore rupees during the last fiscal year. 
• Turnover of Rs. 200 crore or more in the last fiscal year.
• Outstanding loans or borrowings from the public financial institutions or banks exceeding Rs. 100 crore at any time during the previous fiscal year.
• Outstanding deposits of Rs. 250 crore or more at any time during the previous financial year.

3. Every private company following the below-mentioned criteria:

• Has turnover of Rs 200 crore or more during the previous financial year. 
• Outstanding loans or borrowings from the public financial institutions or banks exceeding Rs. 100 crore at any time during the previous fiscal year.

Concurrent Audit: 

Concurrent audit is conducted of the bank branches. It is a systematic examination of the bank’s financial transactions at the moment when transactions take place. Hence, it is carried on the “monthly basis.” The concurrent audit covers all the bank transactions, including opening of an account, loan, and advances, cash verification, lockers payment, fraud areas, etc.

It is different from the internal audit as in concurrent audit, auditor stays in branch for a full month like any other branch employee. 

What is the purpose of Concurrent audit?

Concurrent audit works as a bank’s early warning system. It ensures that there is timely detection of irregularities and prevents fraudulent transactions at branches. Furthermore, concurrent audit measures that the bank branches follow the RBI guidelines.

Who conducts Concurrent audit?

Bank’s internal or retired staff or external auditors conducts concurrent audit. It is the discretion of individual banks to choose concurrent auditors.

In case banks consider engaging their officials for the concurrent audit, then the staff involved in concurrent audit must be independent. 

What is the applicability of Concurrent audit?

The bank audit is mandatory for the bank branches meeting specific criteria (as per the RBI Regulations) to get its operations audited on a concurrent basis.

However, as per the RBI Guidelines RBI/2019-20/64, the head of the internal audit of banks has the power for the coverage of business/branches for the concurrent audit. However, they need to take the prior approval of the Audit Committee.

GST Audit:

 GST audit involves the examination of records and returns maintained by the person registered under the GST act. The provisions of GST audit are prescribed under the Goods and Service Act, 2017.

What is the purpose of the GST audit?

The purpose of the GST audit is to ensure that the taxes paid, Input tax credit claimed, turnover declared, and such other compliances are as per the rules and regulations under the GST Act. As the taxpayer is required to self assess and pay their tax liability, there is a need for an expert to audit whether the taxpayer has correctly evaluated the GST liability.

Who conducts a GST audit?

A chartered accountant or practicing cost accountant is appointed for the GST audit. It should be noted that an internal auditor and GST practitioner is not eligible to perform the audit.

What is the applicability of the GST audit?

Any entity whose total turnover exceeds Rs. 2 crores during the financial year is under the obligation for the GST audit. However, in some particular circumstances, the GST commissioner may direct to perform the GST audit without any turnover limit.  

Income Tax Audit:

The Income Tax audit is an examination of an individual’s or organization’s tax returns by qualified professionals to verify the correctness of the income, expenditure, and deduction claimed. Moreover, Income tax audits also establish relevant evidence that helps in Income-tax assessments. 

Who conducts Income Tax audit?

The Chartered Accountant assigned for conducting the tax audit of organizations. They have to present their findings and observations in the tax audit report in the form 3CA/3CB and 3CD.

What is the purpose of the Income-tax audit?

Income tax audit ensures that the assessees are claiming the deductions and exemptions as per the prescribed provisions of the act. The authorities also rely on a tax audit to ensure that the assessee is paying the accurate tax to the government.

What is the applicability of the Income-tax audit?

The tax audits are mandatory only for the certain assessee, as mentioned below:

1. In case of business: Any individual carrying business with gross receipts, turnover or total sales exceeding Rs 100 lakhs

2. In the case of the profession: Any individual working in a profession has gross receipts of more than Rs. 50 lakhs. 

Sections which make audit compulsory:

Various audits are governed under different acts and their prescribed sections as below:

Type of Audit	Act	Sections that specify the provisions
Statutory Audit	The Companies act 2013 or any other statute governing the entity	Sections 139 to 147 of the companies act, 2013 specifies the provisions related to statutory audit and auditors.
Income Tax Audit	The Income tax act, 1961	Section 44AB of the Income tax act
Internal Audit	The Companies act 2013	Section 138 of the Companies act, 2013 makes the internal audit compulsory, and rule 13 of the Companies (Accounts) Rules 2014 specifies the classes of companies required by law to carry an internal audit,
GST Audit	Goods and Service Act, 2017	Section 35 of the CGST Act, 2017
Concurrent Audit	Reserve Bank of India (RBI) Act, 1934	RBI issues several circular impacting widely the scope and coverage of concurrent audit in banks.

Documents required

As the audits involve examination of day to day business, the auditor must have the essential documents ready for audit before the commencement of any audit. The standard of auditing SA 230 deals with the audit documentation, which includes audit programs, MOA, AOA, Letters of confirmations and representations, checklists, etc. 

The auditors should keep a record of documents gathered during the audit for evidence purposes. As at the time of filing the income tax return, the auditor or the assessee needs such supporting for the purpose of Income-tax assessment.

Here, we are going to share the exclusive “list of documents required” for various type of Income-tax audits:

Statutory/Internal audit:

The auditor should gain knowledge of the company’s process and key reports before the start of audit planning.

·       Audit engagement letter

·       Management representation letter (MRL)

·       MOA and AOA of the company

·       List of various registration obtained under laws

·       Opening trial balance

·       Audited financial statement of the previous year

·       Last year computation of income

·       Minutes of meeting

·       Annual returns filed with MCA

·       Shareholding pattern

·       List of KMPs, directors and related parties

·       Statutory compliances (TDS, PF, ESI, GST, Advance tax) returns and challans

·       Fixed assets register (FAR)

·       Form 26AS

·       Certificate Under Sec. 40(A)(3) & 269SS & 269T Of Income Tax

·       Loan and investment schedules

·       Bank statements

Concurrent audit

For the concurrent audit, the auditors must familiarize themselves with the RBI guidelines and Long Form Audit Report (LFAR).

·       Verification/Reconciliation of the following things are part of the concurrent audit.

·       Know Your Customer (KYC)

·       Cash transaction including cash verification

·       House keeping

·       Remittances (DD/NEFT/RTGS/TT)

·       Loans and Advances

·       Deposits

·       Bank Guarantee (BG)/Letter of credit (LC)

·       Foreign exchange transactions

·       Treasury operations

·       Non-performing assets classification (NPA)

·       Other statutory compliances (TDS, GST and other applicable duties & taxes)

·       Any fraud prone areas/suspense remittances/ unusual transactions

·       Revenue leakage

·       Inter branch transactions

·       Locker summery

·       Gold loan

GST audit

·       GST registration certificate

·       GST returns – GSTR 3B, GSTR-1 and GSTR – 2A

·       GST Invoices

·       E-way bills for matching with invoices

·       Calculation of ITC claimed, utilized and reversal for non payment

·       Letter of credits in case of export

Income tax audit

The income tax audit report is submitted as per the specified forms of form 3CD and required the following documents:

·       Letter of appointment and acceptance

·       Last year audit report (if available)

·       Audited financial statements (Profit and loss account and balance sheet)

·       List of all inadmissible expenses

·       Company’s registration numbers under various acts

·       Stock details

·       Certificates with reference to Loans and repayment for complying with section 269SS and 269T.

·       Reporting details of primary adjustment to transfer pricing

·       Reporting details of each cash receipt or payment in excess of the limit specified under section 269 ST

Also Read : Company Registration Required Time & Documents , Income Tax Audit Section

Who can sign and disqualification of auditor 

Section 141 of the Companies Act, 2013 deals with the “Eligibility, qualifications and disqualifications of auditors.” The provisions of section 141 are as below:

Eligibility for signing audit report:

The Chartered Accountants are eligible for the appointment and signing of the audit reports

In the case of a firm or LLP, if the majority of the partners are practicing in India, then the firm can be appointed as auditor. Further, the signing authority shall lie with the Chartered accountants of the firm only.

Disqualifications of the auditors:

Completely disqualified: 

• A body corporate or individual except Limited Liability Partnership (LLP) registered under LLP Act, 2008
• A person who is already engaged in full-time employment  
• A person or firm’s partner holding appointment or reappointment as its auditor and at the date of such appointment or reappointment holding, he/she is already appointment as auditor of more than twenty companies;
• Any person convicted by a court of an offense involving fraud and a period of ten years has not elapsed from the date of such conviction;
• Any person (including his subsidiary/associate company/any other form of entity) is engaged in consulting and specialized services (specified in section 144) on the date of appointment.

Disqualification based on relationship:

• Any employee or officer of the company 
• Any person who is a partner, officer or employee, who is in the employment of the company 
• A person whose relative is appointed as a a director or key managerial personnel;

Disqualification based on conflict of interest:

• If a person himself, his relative, or partner:

(i) is holding any security of or interest in the company exceeding one thousand rupees 

(ii) is indebted to the company above Rs. 5 lakh.

(iii) has provided any security or guarantee of Rs. 1 lakh or more in connection with the indebtedness of any third person to the company 

• A person or a firm has a direct or indirect business relationship with the company

Note: Here “company” includes “company’s subsidiary, or its holding or associate company or a subsidiary of such holding company”

Statistics of the Income-tax
assessments 

Number of Income-Tax Returns Filed (Including
Revised Return) in the previous three financial years*

                                                                                                                                                                                                    (Rs. In Crores)

PAN Category	FY 2016-17	FY 2017-18	FY 2018-19
AOP	1,62,490	2,07,247	2,05,333
BOI	5,556	6,981	6,537
COMPANY	8,03,990	9,42,834	9,64,862
FIRM	11,81,369	13,93,792	14,09,744
GOVERNMENT	108	239	349
HUF	11,63,543	12,88,544	12,14,410
AJP	10,899	11,455	10,673
LOCAL	3,394	3,483	3,959
INDIVIDUAL	5,22,05,021	6,45,58,970	6,32,50,002
AOP(TRUST)	2,64,519	2,92,047	2,92,173
TOTAL	5,58,00,978	6,87,06,068	6,73,57,82

 

*Source: Income tax department time series data