DOCUMENTATION AND PRE-REQUISITES OF TAX AUDIT

BY

CA N S SRINIVASAN

� DOCUMENTATION

� PRE-REQUISITES OF TAX AUDIT

� BOTH INTER-RELATED

PRE-REQUISITES OF TAX AUDIT – ON THE PART OF THE ASSESSEE

� Awareness about applicability of tax audit.

� Awareness about the particular sub-clause of Section 44AB under which tax audit is attracted.

� Maintenance of books of accounts and other documents and records.

� Awareness about the compliance with applicable accounting standards.

� Awareness of putting in place appropriate internal controls and accounting controls.

� Appointment of Tax Auditor.

� Signing of engagement letter in proper format.

� Preparation of financial statements and Form 3CD.

APPLICABILITY OF TAX AUDIT

Audit under section 44AB is applicable to four categories of Assessee:

� The first category covers any person carrying on a business whose total sales, turnover or gross receipts exceed Rupees One Crore during the previous year.

� The Second category covers any person who is carrying on a profession whose gross receipts exceed Rs.25 lakhs.

� The Third category covers persons whose income is assessed on a presumptive basis under section 44AE, 44BB or 44BBB, where such assessee declares an income lesser than that presumed under the Sections 44AE, 44BB or 44BBB, they are required to get their accounts audited in accordance with Section 44AB.

� The Fourth category is of recent origin. This category covers those persons who declare a lower income than the amount presumed under section 44AD. The difference between the fourth and the third category is that, in the case of the fourth category, the assessees are subject to audit under section 44AB only if their income exceeds the basic exemption limit. The issue of basic exemption limit will be relevant only to assessees being an individual/AOP?

� Even foreign companies carrying on business in India through a Branch will be subject to tax audit, if the gross receipts of the branch exceed the threshold limits mentioned above since those branches are otherwise subjected to audit by virtue of Section 44DA(2).

ISSUES RE: APPLICABILITY OF TAX AUDIT

� Will be relevant in respect of companies which are carrying on a professional activity – e.g., Corporate Hospitals, Corporate Engineering and Consultancy firms etc.,

� Applicability to a partner of a professional firm in respect of salary or remuneration from the firm – To refer the decision in the cases of Usha A Narayanan v Deputy CIT (2014) 2 ITR (Trib) – OL 252 (KOL) and Sagar Dutta v Deputy CIT (2014) 2 ITR (Trib) – OL 422 (KOL)

� Issue of an assessee not complying with 44AB despite having more than the threshold gross receipts and offering income on estimate basis – To refer the decision CIT and anr v S K Gupta & Co., (2010) 322 ITR 86 (All)

� If assessee carrying on more than one business, the receipts/turnover of all businesses to be aggregated except the businesses for which assessee opts for presumptive taxation.

� Deciding on applicability in respect of speculation businesses.

� Applicability to NGOs

MAINTENANCE OF BOOKS OF ACCOUNTS AND OTHER DOCUMENTS AND

RECORDS

� Books of Accounts – Vide definition in Section 2(12A) – inclusive definition.

� Reference to other documents because of insertion of words “Nature of relevant documents“ in query No.11(c) of revised Form 3CD.

� The mode of maintenance of Books of Accounts – whether necessary to refer the accounting software used?

� Books of accounts under IFRS & Ind. AS

� Place of maintenance of Books of Accounts – New requirement in query No. 11(b) of revised Form 3CD.

� Whether to list out all the branches where Books of Accounts are maintained and also names of service providers who are engaged to maintain the Books of Accounts.

� Whether the branches are to be listed for this purpose even if all the branch accounts are centralized at the head office.

� What happens in the case of branches of foreign companies which claim portion of the head office expenses as permitted in Section 44DA.

� Other documents should include TDS certificates in respect of incomes, VAT returns, service tax returns, excise returns, stock records and statements, inventory and receivable statements furnished to banks etc.,

AWARENESS ABOUT THE COMPLIANCE WITH APPLICABLE ACCOUNTING

STANDARDS.

� Applicability of Accounting Standards to be decided with reference to status of assessee, nature of business and method of accounting followed.

� Especially, in the case of non-corporate assessees, to include statement on accounting policies if the assessee is following accrual system.

AWARENESS OF PUTTING IN PLACE APPROPRIATE INTERNAL CONTROLS

AND ACCOUNTING CONTROLS

� While most of the companies have some system of internal and accounting control in place, what is lacking is its proper documentation.

� Practical difficulties in respect of non-corporate assessees.

� To assist them in documenting the same and identifying and plugging the gaps, if any.

APPOINTMENT OF TAX AUDITOR

In the case of assessee is a Company:

The appointment of the auditor for tax audit in the case of a company need not be made at the general meeting of the members. It can be made by Board of Directors through a resolution or even by the Managing Director, if so authorized by the Board in this behalf.

In the case of assessee is firm or a proprietary concern:

The appointment can be made by a Partner or the Proprietor or a person authorized by the assessee.

In the case of other assessee:

The appointment can be made by Managing Committee/Governing Body and persons responsible for running the affairs of business/entity.

SIGNING OF ENGAGEMENT LETTER IN PROPER FORMAT

� Before signing the engagement letter in the template of the tax auditor, assessee to ensure that all the matters specified therein are actually available in their organization.

PREPARATION OF FINANCIAL STATEMENTS AND FORM 3CD

Assessee to keep ready following statements:

� Financial statements with Notes on Accounts

� Supporting documents like VAT returns, TDS returns, Service Tax returns, Fixed Assets Register, Stock Register and Books of Accounts.

� Form 3CD with all particulars duly filled with supporting schedules and documents like proof for payment of statutory dues, past year’s tax returns etc.,

� Reconciliation of disclosures of same aspect in different financial statements (e.g., related party transactions, purchases etc.,)

PRE-REQUISITES OF TAX AUDIT – RE: TAX AUDITOR

� Tax audit appointment

� Communication with previous Tax auditor if it is a new appointment and getting his NOC.

� Communication with statutory auditor if considered necessary by way of healthy tradition.

� Signing of all encompassing audit engagement letter with the assessee

� Maintaining list of tax audits being conducted (Partner-wise in case of firms) and ensuring that acceptance of the tax audit is within the ceiling prescribed by ICAI.

� All the above aspects are also part of audit documentation.

DOCUMENTATION

Following aspects will fall within the ambit of documentation requirements:

� Audit appointment documentation – SA 210

� Management Representation letter – SA 580

� Types of Reports (3CA/3CB)

� Deciding on overall audit objectives and conduct of the audit as per standards on auditing – SA 200

� Acquiring knowledge of business and its documentation – SA 310

� Audit planning – SA 300

� Collection of audit evidence vide SA 500 (Audit evidence), SA 501 (specific considerations in obtaining audit evidence) SA 505 (external confirmations), SA 580 (written representations) and SA 520 (analytical procedures)

� Collection of information relating to RPTs - SA 550.

� Reliance on expert opinion if warranted – SA 620 and reliance on the work of internal auditor – SA 501.

� Qualifications and disclaimers in the audit reports – SA 700

� Audit documentation – SA 230

RE: AUDIT ENGAGEMENT LETTER

In the audit engagement letter, the tax auditor to express the following:

� Our audit will be conducted in accordance with the guidance issued by ICAI and authoritative pronouncements with the objective of our expressing an opinion on financial statements and verifying the statement of particulars prepared by you in prescribed form as required under Sec.44AB of Income Tax Act 1961 and Rule 6G of Income Tax Rules 1962.

� Our audit will be conducted in accordance with standard auditing practices and you will appreciate that the establishment and maintenance of an adequate system of internal control is the responsibility of the management and our audit should not be relied on to disclose defalcations and other irregularities.

� The Income Tax Act 1961 requires the management to maintain such accounting records as will enable you to prepare and furnish timely and correctly the prescribed particulars in Form 3CD.

� As part of our audit process, we will request the management for written confirmation concerning representation made to us in connection to the tax audit and to ensure that no information has been omitted or withheld from us.

RE: TAX AUDIT REPORTS

� Form 3CA for all companies and other entities required to be audited under the respective Acts and having April to March as previous year.

� Form 3CB for all non-corporates and corporates having different previous year.

� Form 3CD contains list of various details to be furnished and certified.

RE: AUDIT REPORT FORM 3CA

� Possible that statutory audit and tax audit are conducted by different persons/firms.

� Name, address and PAN to be specified.

� Address -> which address? (whether PAN address, present registered office address or corporate office address)

� To enclose copies of statutory audit report and AFS.

� Whether to get the same certified as true copy by assessee or statutory auditor?

� Where consolidated accounts also presented, whether to enclose consolidated financial statements also?

� Whether to enclose audited financial statements prepared under other Acts like VAT?

� While referring to books of accounts examined, new requirement to comment on other documents as well.

� Other documents would include all documents in support of particulars in Form 3CD

� Provision made for qualifications vis-à-vis Form 3CD particulars.

� Changes made in audit report format under Companies Act 2013 to be noted.

RE: AUDIT REPORT IN FORM 3CB

� Books of accounts as defined in Section 2(12A).

� While referring to Head Office and branches, only number of branches required to be mentioned. List of branches need not be furnished.

� This would include overseas branches as well.

� Since in all branches, at least some of the books of accounts (e.g., stock records, VAT returns, petty cash book, bank statements) will be kept preferable to include all branches.

� Branches would not include franchise outlets.

� What about dedicated e-trade servers?

� Applicability of SA-700 re: forming an opinion and reporting on financial statements – not applicable as per ICAI announcement dated 22.8.2013 – still auditors advised to follow SA in conducting tax audit.

� Opinion on true and fair view of financial statements to be expressed.

� In the case of a company to ensure that same accounting policies followed in AFs under Companies Act are followed in these statements also (vide S.115JB).

� Provision made for audit qualification

RE: STATEMENT IN FORM 3CD

� Onerous reporting requirement of certifying particulars as “true and correct”.

� No scope to circumscribe the opinion with disclaimers.

� Need to get the same authenticated by assessee.

� Annexure to 3CD removed in revised format.

� Hence reference to annexure in main report format also deleted.

� Provision made for specifying qualifications/observations.

� Whether this space can be used to make disclaimers, especially in the case of large assessees with voluminous transactions.

QUERIES 1 TO 12 OF FORM 3CD

� Name of the assessee – to mention name as appearing in PAN.

� In case of change of name during the year, to ensure that new PAN obtained or else to mention this fact.

� Preferably address as per PAN to be specified. In addition, address of registered office/principal place of business can be specified, if it is different.

� If there is change of address during the year, to ensure that address correction in PAN has been carried out.

� If there is change in PAN during the year, new PAN to be disclosed together with disclosure of fact of change of PAN during the year.

� How above disclosure of changes to be made in e-filing?

� Disclosure of information regarding Excise/Service Tax/Sales Tax/Customs Duty registration is a new requirement in the format. Even though they have used the suffix “etc.,” in the query, it is presumed that it will include only registration for any other purpose which involves payment of tax.

� To consider whether this would require disclosure of property tax assessment number, electricity service connection number, since the query uses the phrase “registration number or any other identification number”

� If the assessee is having business operations abroad and is paying VAT in those countries, whether VAT registration number in that country also to be furnished – To discuss.

� As far as status is concerned, normally there should not be any scope for dispute except in case of turn key projects which are executed on consortium basis wherein there could be disputes as to whether it should be assessed jointly as AOP or each of the partners to be assessed separately.

� Where a private trust is carrying on business, status of the trust will be similar to the composition of the beneficiaries and it can be either individual/AOP.

� If PAN is allotted with “AOP-Trust” status, can the status be filled as “individual”?

� Requirement to indicate relevant clause of Section 44AB is a new requirement and is welcome. Only in cases where there are uncertainties as to whether it is business or profession, there will be confusion in mentioning the particular clause of Section 44AB.

� While mentioning details of change in constitution of partnership firms and if those firms have carried forward loss, the effect of this disclosure on carry forward of that loss pursuant to Section 78 to be kept in mind. Its impact on disclosure to new query No.32 also to be considered.

� While furnishing details of nature of business/profession, as per the revised form, these details are required to be furnished in respect of each business/profession.

� It is not clear whether these details are to be furnished even in respect of those businesses which are subjected to presumptive tax.

� As far as books of accounts are concerned, the new requirement is to list out the addresses where they are maintained. Similarly, the requirement to furnish list of and nature of relevant documents examined is a new requirement.

� While specifying the profits and gains of presumptively taxed businesses, care should be taken to ensure that such profits are less than the presumptive income. If they are more, then, the actual profits should be disclosed in the return of income as presumptive income.

PRACTICAL DOCUMENTATION RE: TAX AUDIT

� Letter of Appointment with Board Resolution copy wherever applicable.

� Letter of communication with previous tax auditor and his no objection in case of new appointments.

� Bilateral signing of detailed engagement letter spelling out relative obligations of the assessee and the tax auditor.

� Permanent documentation regarding the assessee like name, certificate of registration, evidence for office address, PAN, TAN, TIN, Service Tax Registration, Copy of Partnership Deed/Memorandum/Bylaws, Bank account details, list of branches and their VAT registration etc.,

� Note on nature of business carried on duly authenticated by the assessee.

� Mapping of internal control and accounting control systems and procedures.

� Even in respect of small non-corporate assessees, suggested to have a brief note on internal control system.

� Detailed tax audit checklist.

� List of various supporting documents required for 3CD details (e.g., proof for payment of statutory dues, TDS remittances, related party payments etc.,

� Brief note on the audit plan adopted for conducting the tax audit including the audit schedule as well as the staff who carried out the audit.

� Documentation of the audit procedure selected for obtaining audit evidence.

� Documentation of sample transactions and documents verified.

� Audited financial statements of the assessee duly authenticated.

� Documentation of assessees’ responses for the tax audit queries and how the same are resolved or not.

� Reconciliation of the figures as appearing in different documents like audited financial statements, tax computation, TP documentation, VAT returns, Service Tax returns, TDS returns etc.,

� Brief note on justification for audit qualifications, if any.

� Final tax audit report with Annexures duly authenticated by assessee.

� Systematic filing of all the audit working papers including the documents obtained by way of audit evidence.

� To ensure that the dates in all the documents and statements are prior to tax audit report date.

� Similarly, all audit documentation should be dated prior to tax audit report date.