Tax Audit Framwork Annex Tax Audit

TAX AUDIT
FRAMEWORK
Tax Audit Framework
TABLE OF CONTENTS
Page No.
1) Introduction 3
2) Tax Audit Concept 5
3) Statement of Additional Information 9
4) Contents of Engagement Letter for Audit under Section 177(8) 12

of the Income Tax Ordinance, 2001, Section 32A of the Sales
Tax Act 1990 and Section 46(4) of Federal Excise Act 2005
5) Audit Report 17
6) The Process of Tax Audit 20
7) Exclusions/ Exceptions 23
8) Fees 25
9) Procedures for Tax Audit 27
10) Selection of Auditors and Auditees for Tax Audit 30
11) Annexures
A – Independence Declaration by Tax Auditor 34
B - Engagement Letter 35
C - Auditors’ Report to the Commissioner of Income Tax 39
D - Auditors’ Report to the Collector of Sales Tax 40
Model statements of additional information for:
E Manufacturing 41
F - Services 59
G Banking 75
H- Oil & Gas Exploration 91
I - Insurance 110
J- Sales Tax & Federal Excise 124

Tax Audit Framework
TAX AUDIT –DEFINITIONS AND ABBREVIATIONS
TAX AUDIT Audit of Tax Statements
TAXPAYER Assessee who is required to get his Tax Statements audited by Tax
Auditor under Tax Audit Framework
TAX LAWS Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise
Act 2005
TAX AUDIT REPORT Audit Report issued by the Tax Auditor
TAX AUDITOR Firm of Chartered Accountants
TAX STATEMENTS Statement of Additional Information and Tax Returns
TAX RETURNS Income Tax Return and Sales Tax cum Excise Duty Return (in the
Form prescribed under the respective Tax Laws).
STATEMENT OF ADDITIONAL Statement required to be provided by the Taxpayer under the Tax
INFORMATION Audit Framework to the Tax Auditor.
MANAGEMENT Refers to the representatives of Taxpayer having executive authority

for the preparation of Tax Statements
ISAs International Standards on Auditing ( issued by International

Federation of Accountants)
FBR Federal Board of Revenue
ICAP Institute of Chartered Accountants of Pakistan (the Institute)
TAX AUDIT FRAMEWORK Framework notified by FBR vide SRO …… dated …….for the purpose
of tax audit.

Tax Audit Framework
1. INTRODUCTION

Tax Audit Framework
1. INTRODUCTION
1. FBR’s main objective of outsourcing the Tax audit through Chartered Accountants is to establish an
objective and effective tax audit system that will create deterrence to mis-declarations in the tax
returns filed by the tax payers. Such a system is expected to contribute in developing a culture of
compliance with tax laws over time that will help in improving the tax collections as well as improve
the tax to GDP ratio.
2. Under the current provisions of the tax laws (Income Tax Ordinance, 2001, Sales Tax Act, 1990 and
Federal Excise Act 2005), there is a system of self assessment that enables the tax payer to
determine his own tax liability. Under this system, there is major reliance on the tax payer to file
accurate and reliable tax return. The purpose of tax audit is to ensure that declarations made by the
tax payers are accurate and reliable. Main objective of the tax audit is to create deterrence for under
or incorrect declarations of income by the tax payers. In order to ensure tax payer’s confidence on
this system, the selection of tax payers to be audited will be done on a random basis, using an
appropriate system, that ensure objectivity in the selection process. Such a process will also be
adequately publicized and communicated to the tax payers.
3. In Pakistan, the audit of the financial statements is carried out in accordance with the International
Standards on Auditing (ISAs). Although the tax audit is not required to be conducted in accordance
with the ISAs, the auditor would be expected to consider the guidance and requirements contained in
ISAs as a best practice, wherever appropriate. Additionally, the audit should identify the risks of
material misstatements in the tax statements and the underlying financial statements, based on the
input from relevant tax officers, so as to focus his work on such areas.
4. The underlying considerations on the basis of which the concepts and guidance contained in this
framework have been developed include: (i) practices prevalent in other comparative jurisdictions (ii)
specific requirements of the fiscal statutes; and (iii) current practices adopted by the tax authorities for
tax audit. However, it is emphasized that an effective system of tax audit will evolve over time, and
the concepts and practices underlying such audit, will require suitable amendments based on the
experience gained in the conduct of the audit by Chartered Accountant firms.

Tax Audit Framework
2. TAX AUDIT CONCEPTS

Tax Audit Framework
2. TAX AUDIT CONCEPTS
A tax payer files return of income tax annually and an annual sales tax cum federal excise duty
return (which is a consolidation of monthly returns) with the FBR. The following are the concepts
for carrying out the tax audit under this Framework:
a. The audit of tax statements is aimed at providing credible information in the hands of the
assessing officers. The auditors unqualified tax audit report will provide a reasonable
assurance to the tax authorities that the tax statements do not contain any material
misstatement, and therefore, such statements form a valid basis for determination and
payment of relevant taxes by tax payer without any need for modification by the tax
authorities.
b. There will be a set of three documents subject to tax audit namely, the income tax return,
monthly sales tax cum federal excise duty return and statement of additional information
(collectively referred to as tax statements)
c. The statement of additional information to be prepared and submitted by the taxpayer will
include all the information deemed necessary for the purposes of tax audit. This statement
also helps the auditor to perform his audit procedures necessary to check information in the
tax returns filed by the tax payer.
d. Such statement of additional information shall include, but not be limited to, the accounting
policies, break down of the information on different components of the financial statements,
trend and ratio analysis, explanations regarding any significant variations compared to
corresponding figures, information and explanations on any unusual and significant
transactions, information on related parties and transactions, reconciliation between the
financial statements and tax returns and any further information deemed necessary by the tax
auditor.
e. Such statement of additional information would serve to create a bridge between the
accounting income and the taxable income. It will also bridge between production and sales
as reported in accounts and tax returns. Since the statement of additional information would
be audited, a reasonable assurance regarding the fairness of the taxable income would be
obtained.
f. The auditor would give his opinion on the information required to arrive at the taxable income
and sales tax and federal excise duty payable by issuing a signed report thereon. The report
shall explicitly state:
a. whether or not the income tax return and sales tax cum federal excise duty returns are in
agreement with the details provided in the statement of additional information;
b. whether or not the statement of additional information contains information as required by
the Tax Audit Framework applicable to the taxpayer; and
c. whether or not the information contained in the statement of additional information is fairly
stated in all material respects.
g. The tax audit report shall be addressed to the Commissioner of Income tax or Collector of
Sales tax, as the case may be.
h. The auditor’s responsibility shall be to issue a report on the tax statements based on the
results of audit procedures performed by him and using his professional judgment. The
responsibility of final assessment of income and tax payable remains with the relevant tax
officials of the FBR.

Tax Audit Framework
i. The relevant officer of tax department shall issue the order either accepting or altering the tax
return submitted by the taxpayer and, the tax auditor, in no way, shall be responsible for the
content of the order issued except to the extent of the audit report issued by him.
j. Any matter of contention regarding taxability or non-taxability of a particular item shall be

contestable in various legal arenas between the taxpayer and the tax department in the same
manner as laid down in Income Tax Ordinance 2001, Sales Tax Act 1990 and Federal Excise
Act 2005.
k. To ensure independence of the tax auditor, the statutory auditor or tax advisor of a company
shall not be appointed as Tax Auditor of that particular company. The decision of selection of
auditor will lie with the FBR having regard to particular circumstances of each case. For this
purpose, the auditor will give declaration before his appointment, format of which has been
specified in Annexure B.
l. The firm of Chartered Accountants who is offered an engagement by FBR to carry out the tax
audit will perform appropriate checks to ensure independence of the firm with regard to the
tax payer, before providing their consent. The procedures performed to check independence
and possible conflict of interests will be appropriately documented.
m. The FBR shall issue an engagement letter to the tax auditor and the taxpayer setting out the
nature, scope and timing of the tax audit engagement.
n. The form of report shall be in the prescribed format attached as Annexure C and/or
Annexue D, as the case may be. The tax statements in the prescribed form prepared by the
tax payer and covered by the audit report shall be annexed to the same.
o. The tax auditor may be appointed at any time after the filing of tax returns.
p. The FBR shall have the sole discretion for selecting the companies for conducting tax audit.
The Institute will provide information available with it relating to the chartered accountant
firms, at the request of the FBR.
q. Statement of additional information shall be prepared and submitted by the tax payer to the
tax auditor, signed by the Chief Executive Officer and Chief Financial Officer of the company.
In the absence of either of them, signed by a director of the company, supporting the return of
income filed. Such statement will effectively provide details relating to the line items in its
balance sheet and profit and loss components.
r. Audit of “Tax Statements” will encompass examination of the return of income, sales tax cum
federal excise duty return and statement of additional information with the audited financial
statement, books of account, related records and documents by performing such audit
procedures as considered appropriate under the circumstances by the tax auditor in
accordance with the Tax Audit Framework. Management of a tax payer is responsible for the
preparation and fair presentation of these “Tax Statements” in accordance with the
requirements of Income Tax Ordinance 2001, Sales Tax Act 1990 and Federal Excise Act
2005.
s. A pre-audit meeting will be undertaken amongst the tax auditor, the taxpayer and the
concerned tax officials, preferably Commissioner of Income Tax / Collector of Sales Tax &
Federal Excise, for the purpose of risk evaluation based on past year(s) records, in order to
finalize the ‘Statement of Additional Information’ to be audited.

Tax Audit Framework
t. A tax auditor appointed under this framework will not express an opinion on the amendments
emanating from difference of opinion between the tax department and taxpayer on the tax
treatment for any item as disclosed in the return of income. However, the auditor will provide
information relating to facts of the matter to the Commissioner of Income Tax / Collector of
Sales Tax & Federal Excise including a schedule explaining the history of the said matter in
the past year(s).
u. The audit of compliance to the withholding tax provisions (except for the transactions verified
by the tax auditor on test basis), shall be outside the scope of this frame work.
v. Audit of the taxpayer will be carried out at the premises of the taxpayer
w. A tax auditor shall obtain representation letter from the management of the tax payer when
the audit is completed. The date of the management representation shall be as near as
practicable to, but not after the date of the auditor's report. The management representation
shall be for tax audit period(s) referred to in the auditor’s report.
x. For the purpose of guidance following documents have been suggested:
• Independence declaration to be issued by tax auditor
• Engagement letter to be issued by the FBR
• Statement of additional information for taxation prepared by the taxpayer
• Audit report to be issued by the tax auditor

Tax Audit Framework
3. STATEMENT OF ADDITIONAL INFORMATION

Tax Audit Framework
3. STATEMENT OF ADDITIONAL INFORMATION
There will be a statement of additional information prepared and submitted by the tax payer to the tax
auditor supporting the return of income filed. Such statement will effectively provide details relating to
the line items in its balance sheet and profit and loss components. In view of the varied nature of
businesses and sectors of economy, under this framework, separate models of statement of
additional information have been developed to make these relevant for respective sectors. In the
Annexure E-J, the model statements of additional information are attached for companies falling in
sectors of:
• Manufacturing (Annexure E)
• Services (Annexure F)
• Banking (Annexure G)
• Insurance (Annexure H)
• Oil & Gas Exploration (Annexure I)
Statement of additional information for sales tax & federal excise purposes have also been developed
(Annexure J)
The information requested in respect of the income tax, sales tax and federal excise duty is under the
headings:
1. General Information
2. Accounting Policies and Methodology
3. Profit and Loss Account
4. Balance Sheet
5. Trends, Ratios and Analysis
6. Related Party Transactions
7. Non-recurring Transactions
8. Reconciliation with the Tax Return
The basis of preparation of statement of additional information will be the company’s books and
records and the statement will be in accordance with the company’s financial statements for the
relevant period as applicable. In case of any anomaly or where clarity is not available to the tax
payer, the basis used to present information in the statement of additional information will be clearly
stated.
For companies not clear as to which sector’s statement of additional information is to be used, they
should select sector that most closely relates to their business.
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Tax Audit Framework
While preparing the statement of additional information companies may tailor the nomenclatures used
in the model statements to suit their equivalent terminologies as used in their financial statements and
books and records.
The statement of additional information will be signed by the Chief Executive Officer and Chief
Financial Officer of the Taxpayer. In the absence of either of them it will be signed by a director of the
Taxpayer.
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Tax Audit Framework
4. CONTENTS OF ENGAGEMENT LETTER FOR AUDIT UNDER

SECTION 177(8) OF THE INCOME TAX ORDINANCE, 2001 AND
SECTION 32A OF THE SALES TAX ACT 1990
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Tax Audit Framework
4. CONTENTS OF ENGAGEMENT LETTER FOR AUDIT UNDER SECTION 177(8) OF THE INCOME
TAX ORDINANCE 2001, SECTION 32A OF THE SALES TAX ACT 1990 AND SECTION 46(4) OF
FEDERAL EXCISE ACT 2005
Objective and scope of the Tax Audit
1. The tax auditor shall examine the tax statements for taxation purposes with the underlying
financial statements, books of account, records and documents of the taxpayer (specify name,
N.T.N. and STRN) with a view to enable him to achieve a reasonable assurance that such return
is properly stated in accordance with the requirements of the Tax Audit Framework. The auditor
shall issue report on such return of income / sales at the conclusion of the audit. Such auditor’s
report may form the basis for the Deputy Commissioner of Income Tax and Deputy Collector of
Sales Tax & Federal Excise to frame his findings. After receiving the report of the auditors,
respective tax officials will issue a notice to the taxpayer and proceed in accordance with the
procedure laid down in the statue.
2. Audit of “Tax Statements” will encompass examination of the return of income, sales tax cum
federal excise duty return and statement of additional information with the audited financial
statements, books of account, related records and documents by performing such audit
procedures as considered appropriate under the circumstances by the tax auditor in accordance
with the Tax Audit Framework. In designing the audit procedures, the tax auditor will consider the
possible audit procedures (as considered appropriate by the auditor keeping in view the
knowledge of the business of that taxpayer), together with the specific instructions, if any,
regarding any areas of examination that need special focus, specified by the FBR.
3. An examination in accordance with the Tax Audit Framework is designed to provide reasonable,
and not absolute, assurance that the return of income, production and sales along with the
underlying financial statements which form the basis of such return are fairly stated. Reasonable
assurance is a concept relating to the accumulation of audit evidence necessary for the auditor to
form an opinion.
4. Auditors report will be addressed to the Commissioner of Income Tax/Collector of Sales Tax as
the case may be, and shall include a clear expression of opinion on the fairness of the return of
income, sales tax cum federal excise duty returns and statement of additional information.
5. In formulating the audit approach for the audit of the “Tax Statements”, it is necessary to
understand that the tax auditor would need to apply tests that are considered appropriate by him
using his professional judgment, on the information prepared by the taxpayer.
6. In giving the report, the tax auditor will have to use his professional skill and expertise and apply
such audit tests as the circumstances of the case may require. The extent, nature and timing of
audit procedures that are invariably applied on test basis depend on the risks identified by the tax
auditor, and his understanding of the design and effectiveness of internal control in the company.
7. It is essential to note that it is the primary responsibility of the taxpayer to prepare the information
in such manner so that the tax auditor can verify the compliance thereof. The extent of check
undertaken would have to be indicated by the tax auditor in the working papers and audit notes.
The tax auditor would be well advised to design tax audit program as would reveal the extent of
checking and to ensure adequate documentation in support of the information being verified.
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Tax Audit Framework
Responsibility of the Management
8 Management is responsible for the preparation and fair presentation of these “Tax Statements” in
accordance with the requirements of Income Tax Ordinance 2001, Sales Tax Act 1990 and
Federal Excise Act 2005. This responsibility includes: designing, implementing and maintaining
internal control relevant to the preparation and fair presentation of tax statements that are fairly
stated, selecting and applying appropriate accounting policies, and making accounting estimates
that are reasonable in the circumstances.
9. “Tax Statement” will be prepared by the management from its books and records. The accounting
principles will be the same as used in the preparation of financial statements and Statement of
Additional Information in accordance with the requirements of Income Tax Ordinance 2001, Sales
Tax Act 1990 and Federal Excise Act 2005.
Responsibility of the Tax Auditor
10 By accepting the tax audit under section 177(8) of the Income Tax Ordinance 2001, section 32A
of Sales Tax Act 1990 and section 46(4) of Federal Excise Act 2005, the auditor only accepts the
responsibility of carrying out the audit in accordance with this Tax Audit Framework. The basic
ethical principles that govern a usual audit are:
(a) Independence;
(b) Integrity;
(c) Objectivity;
(d) Professional competence and due care;
(e) Confidentiality;
(f) Professional behaviors; and
(g) Technical standards.
While a tax audit carried out under the above principles may lead to improvement in the tax
revenue for the FBR, there is no assurance that such an increase will occur in all or any of the
cases of audit.
Professional Skepticism
11. The auditor should plan and perform an audit with an attitude of professional skepticism
recognizing that circumstances may exist that cause the financial statements to be materially
misstated.
Inherent limitations
12. Owing to the limitation of time, difficulties in getting the relevant, reliable and timely information
required for an appropriate examination and other inherent limitations of any audit, there is an
inherent risk that even some misstatements in the tax statements may remain undiscovered.
Thus, such an examination should not be expected to result in uncovering all the cases of tax
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Tax Audit Framework
concealment or evasion. In fact, due to the inherent limitations of this nature of engagement, it is
possible that even some material errors and irregularities will remain undiscovered.
Inherent limitations that affect the auditor’s ability to detect misstatements result from factors such
as:
• The use of testing

• The inherent limitation of any accounting system and internal control system (for
example, the possibility of collusion)
• The fact that most audit evidence is persuasive rather than conclusive in nature.
Planning
13. The auditor should plan the audit so that the engagement will be performed in an effective
manner. The auditor shall establish an overall audit strategy that sets the scope, timing and
direction of the audit, and that guides the development of the audit plan. In establishing the
overall audit strategy, the auditor shall identify the characteristics of the engagement that define
its scope, ascertain the reporting objectives of the engagement to plan the timing of the audit and
the nature of the communications required, consider the factors that, in the auditor’s professional
judgment, are significant in directing the engagement team’s efforts, consider the results of
preliminary engagement activities and, where applicable and ascertain the nature, timing and
extent of resources necessary to perform the engagement.
Documentation
14 The auditor should prepare, on a timely basis, audit documentation that provides:
(a) A sufficient and appropriate record of the basis for the auditor’s report; and
(b) Evidence that the audit was performed in accordance with tax audit framework.
Indemnity
15 The FBR hereby indemnifies the auditors for any liability beyond their responsibilities assumed in
through this Framework. In any case, the maximum liability of the audit firms and their partners
will not exceed the amount of fees received by them for the tax audit.
Time Frame
16. While each tax auditor will agree with the Commissioner /Collector, the time frame for completion
of the audit and submission of audit report, it is recognized that due to the inherent problems that
may be encountered in gathering audit evidence, as the system is being introduced for the first
time, inordinate delays may occur due to unanticipated difficulties. In all such cases the tax
auditor will keep the Commissioner /Collector informed of such matters.
Audit fees
17. Fee will be charged on the basis mentioned in Section 8 of this framework and has to be
specified in each engagement letter accordingly.
18. Fifty percent of the audit fee shall be paid in advance by FBR, the balance amount shall be paid
by FBR on submission of the audit report.
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Tax Audit Framework
19. The work undertaken by the auditor to issue the report is permeated by judgment, in particular
regarding:
a) the gathering of audit evidence for example, in deciding the nature, timing and extent of
audit procedures; and
b) the drawing of conclusions based on the audit evidence gathered, for example, assessing
the reasonableness of the estimates made by management in preparing the financial
statements.
20. By accepting this engagement, the tax auditor accepts the responsibility of performing a tax audit
as described above.
21. The engagement letter will be issued by FBR and accepted by both tax auditor and tax payer.
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Tax Audit Framework
5. AUDIT REPORT
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Tax Audit Framework
5. AUDIT REPORT
As explained in the audit concept above the tax auditor is required to provide reasonable assurance
through confirmation or otherwise in respect of three matters, which are:
• whether or not the income tax return and sales tax cum federal excise duty returns are in
agreement with details provided in the statement of additional information;
• whether or not the statement of additional information contains information as required by the Tax
Audit Framework applicable to the tax payer; and
• whether or not the information contained in the statement of additional information is fairly stated
in all material respects
Each of the above statements is explained as follows:
whether or not the income tax return and sales tax Here the tax auditor is required to compare
cum federal excise duty returns are in agreement and confirm that the amounts in the returns of
with details provided in the statement of additional income tax, sales tax and federal excise duty
information are in agreement with the respective amounts
disclosed and verified by the tax auditor in the
statement of additional information. The
objective is to ensure that the taxable income /
taxable supplies are supported with books of
account and records of the taxpayer and there
is no inaccuracy in this regard vis a vis
statement of additional information that has
been verified.
whether or not the statement of additional The model statement of additional information
information contains information as required by the requires certain specific details. The basis of
Tax Audit Framework applicable to the taxpayer preparation of statement of additional
information is given in the preceding section.
With this background, the tax auditor is
required to confirm or otherwise that statement
of additional information is prepared as
required.
whether or not the information contained in the This statement is the crux of tax auditor’s work.
statement of additional information is fairly stated in Here, based on the verification procedures, the
accordance with Tax Audit Framework. tax auditor would provide his opinion as to
whether or not such information is fairly stated.
The meaning of “fairly stated” ’’ is taken to be
that based on the procedures performed as
considered appropriate by the tax auditor
based on the guidance contained in the
International Standards on Auditing (ISA) and
the guidance issued by the Institute in this
framework. It would also meant that the
statement of additional information (attached
as Annexure E to J of this framework and as
amended from time to time) do not contain any
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Tax Audit Framework
material misstatement, and is consistent with

the books and records of the company.
Further, as a number of amounts presented
will be from the company’s financial
statements, in confirming such information to
be ‘fairly stated’, the tax auditor will also be
confirming that the policies followed for
computation of such numbers are the same as
stated in the basis of preparation of financial
statements and such policies are consistent
with applicable accounting framework in
Pakistan.
The audit report formats are attached as Annexure “C and D”.
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Tax Audit Framework
6. THE PROCESS OF TAX AUDIT
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Tax Audit Framework
6. THE PROCESS OF TAX AUDIT
6.1 Introduction
Following paragraphs describe the process for the conduct of a tax audit. In this context, the
‘process’ means the interaction between the taxpayers and the tax department for the conduct of
a tax audit. Description in the aforesaid paragraphs is general, however on a case to case basis
both the participants may decide on any variation in that process. Nevertheless variations should
consistent with the general principles laid down in these paragraphs.
6.2 Pre-audit meeting / risk evaluation
6.2.1 A pre-audit meeting will be undertaken amongst the tax auditor, the taxpayer and the
concerned tax officials. It is expected that in that meeting all the concerned officers/
consultant relevant to a particular tax audit of the tax payer should be present. These
persons should preferably include Commissioner of Income Tax / Collector of Sales Tax
& Federal Excise. Tax auditor will be represented by ‘Engagement Partner’ for that
assignment.
6.2.2 Risk evaluation in case of a particular taxpayer should preferably take into account:
i. Past year(s) records / history including the past year(s)assessment / order-in-

original / order-in-appeal;
ii. Financial Statements and other information filed along with the return;
iii. Details of payment of taxes including advance taxes;
iv. Any other detail or information / data relevant to the taxpayer that is available
with the tax department.
6.2.3 On the basis of aforesaid information, the tax department and the tax auditor will identify
significant audit risks in the tax audit. The tax auditor should document the key risks and
salient features of the discussion in the pre-audit meeting. Based on such risk evaluation,
the tax auditor and relevant officials of the tax department will finalize the ‘Statement of
Additional Information’ to be audited as described in Section 3 of this framework. That
data of information to be audited is effectively the broad ‘Terms of Reference’ for that
audit.
6.2.4 The taxpayer is not expected to be involved in the risk-evaluation process.

6.2.5 For each engagement, the Commissioner / Collector and tax auditor shall place on record
the ‘Statement of Additional Information’ to be audited.
6.2.6 This information has to be arranged within 20 days of the issuance of the engagement
letter for a particular case.
6.3 Audit of the Statement of Additional Information by the Tax auditor
6.3.1 Commissioner / Collector shall arrange a meeting between the taxpayer and / or its
consultant and the engagement partner of the tax auditor. 6.3.2 Tax auditor shall
undertake all or most of the audit procedures, preferably at the premises of the taxpayer
or the place where the relevant information is maintained. Tax auditor shall, however, be
entitled to conduct the audit procedure at his offices or at the tax offices as is deemed fit.
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Tax Audit Framework
6.3.2 Tax auditor shall have the power to ask for any information that he requires for the
purpose of tax audit.
6.3.3 Specific audit procedures shall be determined by the tax auditor on case to case basis
However, the terms of reference shall generally allow but not limited to physical
verification of assets, cash counts, direct verification from the customers or supplier,
confirmation of balances from the banks and other institutions, seeking expert opinion on
various aspects, confirmation from local or international associates and subsidiaries and
related parties.
6.4 Preparation and discussion on the draft report
6.4.1 On the basis of procedures carried out with reference to statement of additional
information to be audited, the tax auditor shall prepare a draft report along with the
matters requiring special consideration and submit the same to the Commissioner /
Collector concerned.
6.4.2 Within a week of the submission of the said report the Commissioner / Collector shall call
a meeting of the taxpayer and the tax auditor where the issues arising from the draft
report shall be communicated to the taxpayer. Taxpayer shall be required to clarify the
position with regard to issues communicated. That meeting shall not be for the purposes
of seeking rebuttal or replies to various issues raised in the draft report. This will be
restricted to bringing in harmony the factual aspects / differences.
6.4.3 Taxpayer will be provided 15 days to clear such factual aspects.

6.5 Preparation of Final Report
6.5.1 On the basis of the draft report and replies on factual aspects, within 15 days after the
reply from the taxpayer the tax auditor shall finalize the final report and submit the final
report along with all the relevant information to the concerned Commissioner / Collector.
The report shall be in the form as prescribed in Section 5 of this Framework. All the
relevant information shall also be placed and properly identified for the purposes of
reference.
6.6 While each tax auditor will agree with the Commissioner / Collector, the time frame for
completion of the audit and submission of audit report, it is recognized that due to the
inherent problems that may be encountered in gathering audit evidence, as the system is
being introduced for the first time, inordinate delays may occur due to unanticipated
difficulties. In all such cases the tax auditor will keep the Commissioner /Collector
informed of such matters.
6.7 No role subsequent to submission of Final Report
6.7.1 The role of tax auditor shall stand completed with the submission of final tax audit report
as stated in paragraph 6.5 above. There will be no requirement for presence in person or
furnishing any information during the course of adjudication / appeal and in any other
subsequent proceeding.
6.7.2 No tax audit or verification of tax statements can be carried out by any person
subsequent to the submission of final audit report, provided that Commissioner / Collector
may carry out further verification of tax statements subsequent to the submission of final
audit report with the prior consent of the tax auditor while explaining reasons of it and the
specific consent of the FBR.
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Tax Audit Framework
7. EXCLUSION / EXCEPTIONS
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Tax Audit Framework
7. EXCLUSION / EXCEPTIONS
(i) Legal issues
A tax auditor appointed under this framework will not express an opinion on the issues emanating
from difference of opinion between the tax department and taxpayer on the tax treatment for any item
as disclosed in the return of income. The auditor’s role will be restricted to provide information relating
to facts of the matter to the Commissioner of Income Tax / Collector of Sales Tax & Federal Excise
including a schedule explaining the history of the said matter in the past year / years.
(ii) Withholding tax audit
The audit of compliance to the withholding tax provisions, (except for the transactions verified by the
tax auditor on test basis), shall be out side the scope of this frame work. However, FBR may appoint
a firm of Chartered Accountants to conduct audit of withholding tax compliance on the terms and
conditions to be separately agreed on case to case basis.
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Tax Audit Framework
8. FEES
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Tax Audit Framework
8. FEES
The level of fee is to be mutually agreed between the tax auditor and FBR, which largely depends
upon the volume of work involved and estimated time to be incurred on the audit engagement. In
principle it is however suggested that there has to be a minimum threshold of tax audit fee. To achieve
the desired objective, the following minimum tax audit fee is suggested (which may be increased by
consent having regard to specific circumstances of an audit engagement).
Schedule of Minimum Tax Audit Fee:

Type of entity Minimum
Fee
Listed companies
Turnover up to 500 million 350,000
Turnover over 500 million up to 1 billion 450,000
Turnover over 1 billion up to 3 billion 550,000
Turnover above 5 billion 1,350,000

Type of entity Minimum

Fee
Economically Significant Entities
Turnover above 5 billion 1,350,000
Medium Sized Entities
Turnover over 200 million up to 500 million 275,000
Turnover over 500 million up to I billion 350,000
Small Sized Entities 175,000

The out of pocket expenses shall be reimbursed at 10% of the tax audit fee. Outstation traveling
(including boarding and lodging) will be reimbursed on actual.
26

Tax Audit Framework
9. PROCEDURES FOR TAX AUDIT
27

Tax Audit Framework
9. PROCEDURES FOR TAX AUDIT
Draft audit procedure is suggested as follows:
1. Planning
Review, analysis and comparison of industry information e.g.
¾ Industry surveys, rankings, statistics, ratios, forecasts
¾ Industry trade publications, magazines and publications
¾ Tax Department’s Data
¾ Major industry issues
Taxpayer-specific information
¾ Return of income / supplies and financial statements
¾ Key performance indicators
¾ Products, process and technology structure
¾ Understand taxpayer’s historical performance
Profitability trend
Taxable income to accounting profits
Dutiable / Taxable Supplies to Total Turnover
Taxpayer’s compliance history / trend
Key issues involved in preceding audits / assessments
Risk Profiling - Identify core areas / transactions
¾ Routine transactions
¾ Non-routine transactions
Findings, discussions with Commissioner / Collector and conclusions
2. Audit Plan
Determination of information required

Design procedures for significant classes of transactions
Develop materiality levels for core areas / transactions
28

Tax Audit Framework
Discuss and agree with the Commissioner / Collector
3. Execution of Audit Plan
Assess core areas / transactions
¾ Existence
¾ Completeness
¾ Accuracy
¾ Valuation
¾ Ownership
¾ Third party verifications
¾ Inspection
¾ Physical verification
¾ Compliance to tax laws
Obtain substantive audit evidences
Review the subsequent events
4. Findings, Conclusions & Reporting
Conformity of contents of return with relevant provisions of law
Errors, omission, misstatements and concealments detected during audit process
Appropriateness of evidence obtained
Tax implications of omission, misstatement and concealments under relevant provisions
Review of findings – four eye test

Preparation and submission of draft audit report to the Commissioner / Collector
Discussions with the Commissioner / Collector and taxpayer on draft audit report
Revision (if any) and submission of final audit report to the Commissioner / Collector
29

Tax Audit Framework
10. SELECTION OF AUDITOR AND AUDITEE FOR TAX AUDIT
30

Tax Audit Framework
10. SELECTION OF AUDITOR AND AUDITEE FOR TAX AUDIT
A. General
1. Statutory auditor or tax advisor of a company shall not be appointed as Tax Auditor of
that particular company.
2. Firm whose any of its partner is working in two firms will not be considered for
appointment as Tax Auditor if his other firm is also the statutory auditor or tax consultant.
3. Network firms registered with the Institute may also be considered as a partnership firm
for the purpose of appointment as Tax Auditor.
4. Selection of Audit firm has to be the sole discretion of FBR without any direct or indirect
involvement of the Institute.
5. In order to avoid discretionary allocation of auditee to a specific firm or firms, selection of

firm may also be made on computerized basis.
B. Selection of auditor
Financial sector
• For audit of Banks, firms may be selected through computer balloting from Category ‘A’,
‘B’, ‘C’ of SBP Panel of Auditors
• For audit of NBFCs, Insurance, Modarabas and other companies in the financial sector,
firms may be selected through computer balloting from Category ‘A’, ‘B’ & ‘C’ of SBP
Panel of Auditors
Non Financial sector
• For audit of Listed and Economically Significant Entities (ESE), firms may be selected
through computer balloting from ICAP QCR rated partnership firms
• For audit of Medium Size Entity (MSE), firms may be selected through computer balloting
from ICAP QCR rated partnership and sole proprietorship firms
• Small Size Entity (SSE) – Non QCR rated sole proprietorship firms and partnership firms
C. Selection of auditee
FBR may classify the taxpayers under the following categories:
Financial sector
• Banks / DFIs (Total 56)
• Other Financial institutions (Insurance, Modarabas, Mutual Funds, Leasing, Investment

Banks) (Total 273)
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Tax Audit Framework
FBR may further classify the above companies according to their asset base, number of branches
etc.
Non Financial sector
1. Listed companies (divided into sectors as per Stock Exchange) – Total 489 companies
2. Economically Significant Entities (ESEs) (divided into sectors as per Stock Exchange) – FBR
need to identify such companies from their database
3. Medium Size Entities (MSEs) (divided into sectors as per Stock Exchange) – FBR need to
identify such companies from their database
4. Small Size Entities (SSEs) (divided into sectors as per Stock Exchange) – FBR need to
identify such companies from their database
ESE (Definition as per 5th Schedule of Companies Ordinance, 1984)
An entity is considered to be economically significant if it has:
(i) turnover in excess of Rs. 1 billion, excluding other income;
(ii) number of employees in excess of 750;
(iii) total borrowings (excluding trade creditors and accrued liabilities) in excess of Rs. 500
million.
In order to be treated as economically significant any two of the criterion mentioned in (i), (ii)
and (iii) above have to be met. The criteria followed will be based on the previous year’s
audited financial statements. Entities can be delisted from this category where they do not fall
under the aforementioned criteria for two consecutive years.
MSE (Definition as per 5th Schedule of Companies Ordinance, 1984)
A Medium-Sized Entity (MSE) is an entity that:
(a) is not a listed company or a subsidiary of a listed company;
(b) has not filed, or is not in the process of filing, its financial statements with the Securities
and Exchange Commission of Pakistan (SECP) or other regulatory organisation for the
purpose of issuing any class of instruments in a public market;
(c) does not hold assets in a fiduciary capacity for a broad group of outsiders, such as a
bank, insurance company, securities broker/dealer, pension fund, mutual fund or
investment banking entity;
(d) is not a public utility or similar entity that provides an essential public service;
(e) is not economically significant on the basis of criteria as defined in paragraph 3 below;
and
(f) is not a Small-Sized Entity (SSE) as defined in paragraph 4 below.
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Tax Audit Framework
SSE (Definition as per 5th Schedule of Companies Ordinance, 1984)

A Small-Sized Entity (SSE) is an entity that:
(i) has paid up capital plus undistributed reserves (total equity after taking into account
any dividend proposed for the year) not exceeding Rs. 25 million; and
(ii) has employees not exceeding two hundred and fifty at any time during the year; and
(iii) has annual turnover not exceeding Rs. 250 million, excluding other income.
In order to qualify as a Small-Sized Entity, both of the above mentioned-conditions must be

satisfied.
33

Tax Audit Framework
Annexure “A”
Independence Declaration
The Date: ____________
Federal Board of Revenue Letter Ref: ________
(Address)
Dear Sir
Name of Company ____________
Tax Year ____________
In connection with our appointment as tax auditor of the above named company for the tax year ………..
we wish to confirm that:
• the firm is independent in accordance with the independence requirements of the Code of Ethics
issued by The Institute of Chartered Accountants of Pakistan;
• the firm was not the statutory auditor of the company for the year ended ….; and
• the firm has neither provided taxation services during the tax year ………. nor is providing
taxation services to the company.
Signature of Firm
34

Tax Audit Framework
Annexure “B”
ON FBR’S LETTERHEAD
ENGAGEMENT LETTER
(Name of Tax Auditor) (Name of Taxpayer)
Date
Dear Sir
1. We wish to confirm our understanding of the Tax Audit engagement through this letter.
2. Tax Audit comprises of audit of Tax Statements in accordance with the terms narrated in this letter.
3. In accordance with the responsibilities to report to the Commissioner /Collector under the Tax Audit
Framework, tax auditor will conduct the tax audit of ___________________ as referred to in the
Tax Audit Framework for the tax year________. Upon completion of the audit, tax auditor will issue
audit report on Tax Statements.
4. The audit of compliance to the withholding tax provisions (except for the transactions verified by the
auditor on test basis),, shall be outside the scope of this frame work.
5. In arriving at the opinion, tax auditor is required to consider the following matters, and to report on
any in respect of which the tax auditor is not satisfied:
i. the income tax return and sales tax cum federal excise duty returns are in agreement
with details provided in the statement of additional information;
ii. the statement of additional information contains information as required by the Tax Audit
Framework applicable to the tax payer; and
iii. the information contained in the statement of additional information is fairly stated in all
material respects.
6. The objective of tax audit is the issuance of opinion on the tax statements. The audit will be
conducted in accordance with the requirements of Tax Audit Framework. The framework requires
that the tax auditor plan and perform the audit to obtain reasonable assurance whether the tax
statements are fairly stated. An audit includes examining, on a test basis, evidence supporting the
amounts and the disclosures in the tax statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
tax statements presentation.
7. The preparation of tax statements is the responsibility of the of the tax payer. In this regard, the
management is responsible for properly recording all transactions in the accounting records and for
establishing and maintaining internal control sufficient to permit the preparation of tax statements in
conformity with relevant tax laws. The audit of the tax statements does not relieve management of
this responsibility. The management is also responsible for making available to the tax auditor,
35

Tax Audit Framework
upon request, all of the original accounting records and related information, and personnel to whom
the tax auditor may direct inquiries. Further, that all detailed accounting schedules, in support of
each component of the balance sheet and the profit and loss account along with the tax statements
complying with applicable disclosure requirements will be prepared by the Taxpayer.
8. As considered necessary by the tax auditor and based on the guidance from the applicable
International Standards on Auditing, the tax auditor will make specific inquiries of management and
others about the representations embodied in the tax statements and the effectiveness of internal
control over tax statements reporting. Auditing standards also require to obtain a representation
letter covering matters material to the tax Statements from certain members of management
together with information of uncorrected misstatements in the tax statements that are immaterial.
The results of the audit tests, the responses to the inquiries and the written representations of
management comprise the evidential matter upon which the tax auditor intends to rely in forming
the opinion on the tax statements.
9. The management of the Taxpayer is responsible for safeguarding the Company’s assets and for
the prevention and detection of fraud and error. The management is also responsible for identifying
and ensuring that the Company complies with the laws and regulations applicable to its activities.
The tax auditor will design the audit to obtain reasonable, but not absolute, assurance of detecting
errors or fraud that would have a material effect on the tax statements as well as other illegal acts
having a direct and material effect on the tax statements. The audit will not include a detailed audit
of transactions, such as would be necessary to disclose errors or fraud that did not cause a
misstatement of the tax statements. It is important to recognise that there are inherent limitations in
the auditing process. Audits are based on the concept of selective testing of the data underlying
the tax statements, which involves judgment regarding the areas to be tested and the nature,
timing, extent and results of the tests to be performed. Audits are, therefore, subject to the
limitation that errors, fraud or other illegal acts having a direct and material financial statement
impact, if they exist, may not be detected. Because of the characteristics of fraud, particularly those
involving concealment through collusion and falsified documentation, an audit designed and
executed in accordance with generally accepted auditing standards might not detect a material
fraud. Further, while effective internal control reduces the likelihood that errors, fraud or other
illegal acts will occur and remain undetected, it does not eliminate that possibility. For these
reasons tax auditorcannot ensure that errors, fraud or other illegal acts, if present, will be detected.
However, tax auditor will communicate usany illegal act, material errors, or evidence that fraud may
exist which is identified during the audit.
10. The audit is not designed to identify weaknesses in the Company’s system of internal financial
controls. The review of internal financial control systems is performed only to the extent required to
express an opinion on the Taxpayer’s tax statements. This consideration will not be sufficient to
enable tax auditor to provide assurance on the effectiveness of internal control over financial
reporting.
11. The audit report is intended for the benefit of only those to whom it is addressed. The audit will not
be planned or conducted in contemplation of reliance by any third party or with respect to any
specific transaction. Therefore, items of possible interest to a third party will not be specifically
addressed and matters may exist that would be assessed differently by a third party, possibly in
connection with a specific transaction.
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Tax Audit Framework
12. All data relating specifically to the Taxpayer’s business and any other information which reasonably
should be understood to be confidential to the Taxpayer are confidential information of the
Taxpayer (‘Confidential Information’). Tax auditor will use the ‘Confidential Information’ only in
relation to the provision of services provided by Tax auditor to the FBR and will not disclose such
‘Confidential Information’ to any third party without the Taxpayer’s prior written consent save as
provided in this letter. Tax auditor will not be obligated to treat as confidential any information
disclosed by the Taxpayer which: (i) Is rightfully known prior to its disclosure by the Taxpayer; (ii) is
released by the Taxpayer to any other person or entity without restriction; (iii) is independently
developed by Tax auditor without any use of or reliance on ‘Confidential Information’ ; (iv) is in or
enters the public domain without breach of this confidentiality obligation; and / or (v) may be lawfully
obtained from any third party.
13. Tax auditor may disclose ‘Confidential Information’ and personal data including information subject
to privilege (i) to third parties such as professional advisers; and (ii) national and international
regulatory bodies e.g. the Institute of Chartered Accountants of Pakistan, the Securities and
Exchange Commission of Pakistan, the State Bank of Pakistan etc., or courts as may be required
by any law, statute, rule or regulation, professional standards including any foreign law, statute, rule
or regulation as long as it is determined by us to be applicable to us. Tax auditor may also share
‘Confidential Information’ and personal data with other firms (meaning an affiliate of the firm
conducting the tax audit) for independence, risk management and quality review purposes.
14 The working papers and files for this engagement created by the tax auditor during the course of
the audit, including electronic documents and files, are the sole property of Tax Auditor and would
be subject to Quality Control Review by the Institute of Chartered Accountants of Pakistan (ICAP)
without any reference to the Taxpayer.
15. The working paper files are retained for a period of only five years, after which these are destroyed.
This is done to manage the physical bulk of files and documentation, and reduce the cost of
storage. However, should FBR require tax auditor to maintain the working papers beyond the above
period, tax auditor will make a charge in respect thereof.
16. During the engagement tax auditor may from time to time communicate with Taxpayer
electronically. However, as the electronic transmission of information cannot be guaranteed to be
secured or error free and such information could be intercepted, corrupted, lost, destroyed, arrive
late or be incomplete or otherwise be adversely affected or unsafe to use. Accordingly, while tax
auditor will use reasonable procedures to check for the then most commonly known viruses before
sending information electronically, tax auditor will not have any liability to taxpayer arising from or in
connection with the electronic communication of information to taxpayer or FBR.
17. Any additional services that FBR may request and that tax auditor agrees to provide will be the
subject of separate written arrangements.
.
18. Fee of the Tax audit will be Rs._________. Fifty percent of the audit fee shall be paid in advance by
FBR, the balance amount shall be paid by FBR on submission of the audit report.
19. The contract formed by this engagement letter, when accepted, shall be governed by, and
construed in accordance with the laws of Pakistan.
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Tax Audit Framework
20. Please acknowledge receipt of this letter and your agreement to the terms of the engagement as
set out herein by signing the enclosed copy of the letter in the space provided. Kindly return one
copy to our offices and retain one copy for your records.
Yours truly
Accepted by:
_____________ _____________
Tax Auditor Taxpayer
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Tax Audit Framework
Annexure “C”
Auditors’ Report to the Commissioner of Income Tax on Tax Statements
We have examined the annexed income tax return and statement of additional information for taxation
purposes (referred to as Tax Statements) of _______________________ (mention name of tax payer
with NTN) for the Tax Year ___________.
Management’s Responsibilities
Management is responsible for the preparation and fair presentation of these tax statements in
accordance with the requirements of Income Tax Ordinance, 2001 . This responsibility includes:
designing, implementing and maintaining internal control relevant to the preparation and fair presentation
of tax statements that are free from misstatement.
Basis of Opinion
In accordance with our responsibilities as stated above we have performed procedures to obtain evidence
about the amounts and disclosures in the tax statements. The procedures selected depended on our
judgment, including the assessment of risks of material misstatements in the tax statements, whether due
to fraud or error.
Our engagement provides reasonable assurance. An auditor cannot obtain absolute assurance because
there are inherent limitations in the examination process that affect our responsibility to detect material
misstatements. These inherent limitations result from the procedures performed, use of testing, inherent
limitations of internal control and the fact that most evidence is persuasive rather than conclusive.
Accordingly, our examination is not an absolute assurance that tax statements are free from material
misstatement.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our
report.
Auditor’s Opinion
In our opinion:
a) the income tax return is in agreement with details provided in the statement of additional
information;
b) the statement of additional information contains information as required by the Tax Audit
c) the information contained in the statement of additional information is fairly stated in all material
respects in accordance with the Tax Audit Framework.
(The above statements from shall be tailored where the answer is in negative with full details why the auditor has
concluded for such report.)
Signature of Firm
Name of engagement partner
Date:
Place:
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Tax Audit Framework
Annexure “D”
Auditors’ Report to the Collector of Sales Tax on Tax Statements
We have examined the annexed sales tax cum federal excise duty return and statement of additional
information for taxation purposes (referred to as Tax Statements) of _______________________
(mention name of tax payer with STN) for the Tax Year ___________.
Management’s Responsibilities
Management is responsible for the preparation and fair presentation of these tax statements in
accordance with the requirements of Sales Tax Act 1990 and Federal Excise Act 2005. This responsibility
includes: designing, implementing and maintaining internal control relevant to the preparation and fair
presentation of tax statements that are free from misstatement.
Basis of Opinion
In accordance with our responsibilities as stated above we have performed procedures to obtain evidence
about the amounts and disclosures in the tax statements. The procedures selected depended on our
judgment, including the assessment of risks of material misstatements in the tax statements, whether due
to fraud or error.
Our engagement provides reasonable assurance. An auditor cannot obtain absolute assurance because
there are inherent limitations in the examination process that affect our responsibility to detect material
misstatements. These inherent limitations result from the procedures performed, use of testing, inherent
limitations of internal control and the fact that most evidence is persuasive rather than conclusive.
Accordingly, our examination is not an absolute assurance that tax statements are free from material
misstatement.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our
report.
Auditor’s Opinion
In our opinion:
d) the sales tax cum federal excise duty return are in agreement with details provided in the
statement of additional information;
e) the statement of additional information contains information as required by the Tax Audit
f) the information contained in the statement of additional information is fairly stated in all material
respects in accordance with the Tax Audit Framework.
(The above statements from shall be tailored where the answer is in negative with full details why the auditor has
concluded for such report.)
Signature of Firm
Name of engagement partner
Date:
Place:
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Tax Audit Framework
Annexure “E”
MODELSTATEMENT OF ADDITIONAL INFORMATION FOR INCOME TAX PURPOSES –

MANUFACTURING COMPANIES
TABLE OF CONTENTS
Serial Number Name of the attachment containing the additional information
4. Balance Sheet
8. Reconciliation with the Tax Return Filed
41

Tax Audit Framework

GENERAL INFORMATION
Income Tax Description Information subject to audit

Ordinance 2001;
section reference
Name of the company
Registered address
National tax number
Status
Tax year
Nature of business
42

Tax Audit Framework

ACCOUNTING POLICIES AND METHODOLOGY

Ordinance 2001;
section reference
S32, 33, 34, 35 & Method of 1. The company's policy statement pertaining to
R32 accounting the method of accounting followed by the
company, whether it is accrual based
accounting or cash based accounting.
2 The company's policy statement pertaining to

the method of computation of the cost of
stock-in-trade, whether it is computed on the
basis of absorption-cost method or prime-cost
method.

the cost formula used to compute the value of
stock, whether it is the FIFO method or the
average-cost method.
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Tax Audit Framework
MODEL STATEMENT OF ADDITIONAL INFORMATION FOR INCOME TAX PURPOSES –

PROFIT AND LOSS ACCOUNT

Ordinance, 2001;
section reference
Sales 1. Reconciliation of sales as per invoice reports

to sales as per the general ledger and
financial statements.
2 Break-up of sales into sales falling under the

normal tax regime and final tax regime,
including local sales on which tax deducted at
source constitute final tax, export sales and
sales of commercial imports
3 Reconciliation of sales as per sales tax

returns and as per the general ledger.

returns and as per the income tax return.
Deductions from 1 Details regarding the nature and amounts of

sales major components of deductions from sales,
including discounts. Confirm whether such
deduction and discounts form part of the sales
invoice.
Purchases 1 Reconciliation of purchases of store and

spares & stock in trade as per invoice reports
to purchases as per the purchase ledger and
accruals.
2 Reconciliation of purchase as per sales tax

3 Break-up of purchases into local purchases

and imports.
4 Break-up of imports into commercial import

and own consumption.(Details of tax
chargeable on commercial imports under final
tax regime along with sales tax charged on
actual value and on through value addition
44

Tax Audit Framework
mechanism)
S36 Long term 1 Copy of the particular long term contract.

contracts
2 Details of total cost allocated to the contract

and incurred before the end of the tax year.
3 Total estimated cost at the beginning of the

contract.
4 Tax chargeability of contracts whether falling

under Final Tax Regime.
Cost of goods 1 Cost of imported goods sold.

sold
2 Cost of manufactured goods sold.
3 Quantitative analysis of goods manufactured

to ascertain goods sold along with
reconciliation of the same with quantities of
goods sold as per reports along with reasons
for any significant variation.
4 Analysis of production loss for three years

along with reasons for variation.
Administrative,
distribution and
other operating
expenses
S21 Deductions not 1 Amount of any tax, cess or rate paid or

allowed payable in Pakistan or any foreign country,
the said tax, cess or rate being levied on
profits or on the basis of profits.
2 Amount and break-up of taxes deducted at

source.
3 Amount of any payments made by the

company on which either tax has not been
deducted or deposited at source.
R10 4 Amount of entertainment (and advertisement

expenses) incurred during the year in
45

Tax Audit Framework
contravention of the requirements of the

Income Tax Ordinance, 2001.
5 Any amounts contributed to non-recognised

provident funds, unapproved superannuation
funds and unapproved gratuity funds.
6 Amount of contributions made to any fund

established for the benefit of employees of the
company in respect of which tax is not
deducted under section 149 of the Income
Tax Ordinance, 2001 on any payments made
by the fund against which the recipient of the
payment is chargeable under the head
'salary'.
7 Details of stock option, whether scheme is

exclusive and company specific or based on
group having multinational source. Details and
amounts charged or taken through group
charge back mechanism. Whether tax is
considered as deductible on exercise of
option or shares, etc and reported in
periodical statements.
8 Amount of any fines or penalties paid or

payable by the company for violation of any
law, rule or regulation.
9 Amount of any expenditure incurred for the

purposes other than in connection with
business.
10 Amount of appropriations or amounts carried

to a reserve fund or capitalised in any way.
11 Amount and description of expenditure under

a single account head which in aggregate
exceeds Rs. 50,000 made other than by a
crossed cheque or cross banking instrument
12 Amount and description of payments in

violation of the requirement of banking
channels for amounts exceeding Rs. 15,000.
13 Amount and description of expenditures of a

capital nature other than that for which
deductions are specifically allowed under the
46

Tax Audit Framework
14 Amount of salaries, wages and other benefits

paid to the employees of the company in
S26 Scientific 1 Amount of the scientific expenditure incurred

research during the year.
expenditure
S27 Employee training 1 Amount of the expenditure incurred on

and facilities employee training and facilities.
S61 & CL61,PT I, Charitable 1 Party-wise details of donations made during

Second schedule donation the year.
S70 Recouped 1 Amount and nature of any loss or expenditure

expenditure which has been allowed as a deduction in
prior years and which has been recouped in
the current year.
S34(5) Unpaid liability 1 Details of liabilities which have remained

unpaid over three years or subsequent
payment made out of such liabilities which
had been taxed previously and deduction
allowable on payment.
S106 Thin 1 In case of foreign-controlled resident

Capitalization company, foreign debt-to-foreign equity ratio
in excess of three to one at any time during a
tax year, disallowed for the profit on debt paid
by the company in that year on that part of the
debt.
S150, 151, 152, Deduction of 1 Amount of taxes deducted at source, under

153, 155, 156, taxes at source / relevant heads, whether being final or not.
156A, 156B, 233, Taxes withheld at
233A, 234, 234A, source
235 & 236
Taxation
S147 Advance tax 1 Details of the quarterly advance tax paid by

the company during the year.
S148 Imports 1 Tax paid at source during the year on the

assessed value of such commercial imports.
47

Tax Audit Framework
S154 Exports 1 Amount of tax paid as final tax in respect of

export proceeds realised during the year,
whether tax liability on Final Tax Regime is
charged on accrual basis or actual tax
deduction or collection basis.
If accrual basis is followed then reconciliation

is required for the purposes of identification of
tax deducted during the year out of sales
recorded last year and tax deducted on them
during the year. Relevant exercise is also be
made for determining over or under tax
charge
2 Amount of export proceeds realised during the

year.
Allocation of
common
expenditure
S67 Apportionment of 1 Amount and description of expenses that is

deductions allocatable on the basis of gross receipts for
the particular classes of income to which they
are allocatable.
2 Amount and description of expenses that is

specifically allocatable to particular classes of
income only, along with the rationale for such
apportionment.
3 Clearly identified classes of income, being

segmented into income taxable under NTR
and PTR, being further segmented into
different heads of income under NTR and
PTR.
Tax losses
S56, 56A & 57A Set off of tax losses 1 Amount and description of tax losses under
each respective head of income set off
against the taxable income under another
head of income as per the requirements of the
S57, 58 & 59 Carry forward of tax 1 Amount and description of tax losses under
losses each respective head of income, that were not
wholly set off, carried forward as per the
requirements of the Income Tax Ordinance,
48

Tax Audit Framework
2001.
S59AA Group taxation 1 Statement to the effect whether the option to

be taxed as a single fiscal unit has been
exercised, if applicable.
S59B Group relief 1 Amount of any assessed losses surrendered

by the company to its holding company,
subsidiary company, or another subsidiary of
the holding company along with a statement
to the effect that the requirements of the
Income Tax Ordinance, 2001 have been
satisfied in this regard.
Any other items 1 Details regarding the nature, amount and

(from the profit description of any other items not covered by
and loss account) the aforementioned clauses.
Different 1 Amount, nature and description of any items,

treatment in prior pertaining to the current year, which have
years been treated in a different manner in the
returns filed in prior years or orders pertaining
to assessments finalised in prior years.
2 A statement to the effect that the above items

have been accordingly treated in the current
year along with reasons in case of not doing
so.
3 Detail of items treated as capital receipts, etc

considered as not chargeable to tax.
Confirmation whether all the items covered

above have been correctly reflected in the tax
return.
49

Tax Audit Framework

BALANCE SHEET

Ordinance,
2001; section
reference
Property, plant and

equipment &
Intangibles
S22, 23, 23A, Depreciation and initial 1 Tax depreciation and amortization schedule
R12 & S24 allowance, amortization for the year, prepared in accordance with the
of intangibles requirements of the Income Tax Ordinance,
2001 (refer the attachment)
2 First year allowance schedule for the year in

accordance with the requirements of the
3 Asset-wise accounting gain / (loss) on

disposal of depreciable assets and
intangibles.
4 Asset-wise tax gain / (loss) on disposal of

depreciable assets and intangibles in
5 Asset wise sale proceeds on disposal of

operating assets and intangibles.
6 Comparison of carrying amounts of property,

plant and equipment, and intangibles, as per
the financial statements and tax depreciation /
amortization schedule, specifically identifying
differences in additions, if any.
7 Statement by the client as to the fair market

value of the depreciable assets and
intangibles disposed off.
8 List of depreciable assets and intangibles that

are seized to be used in the business, if any.
50

Tax Audit Framework
9 Fair market value of the depreciable assets

and intangibles that are seized to be used in
business, if any.
10 If the company has acquired intangibles

during the year (the company is entitled to
amortize and claim deduction in respect of the
cost of intangibles having normal useful life
exceeding one year)
Investments
S37 Capital gains 1 Detailed schedule of long term investments

indicating cost and dates of acquisition.
2 Accounting gain / (loss) on disposal of long

term investments.
3 Tax gain / (loss) on disposal of long term

investments.
4 Consideration received for disposal of long

term investments.
S108 Loans Between Transactions to be seen for knowing these are

Associates not back date entries and are routed through
banking channels.
Deposits, Prepayments
and Other receivables
S25 Pre-commencement 1 Details of the pre-commencement expenditure

expenditure incurred along with relevant supporting
documentation.
S35 Stores and spares & 1 The opening value of stock-in-trade as at the
stock in trade opening balance sheet date.
2 The cost of stock-in-trade acquired during the

year.
3 The closing value of the stock-in-trade as at

the closing balance sheet date.
4 Break-up of opening and closing values of

stock in trade into manufactured goods and
commercial imports.
5 Net realisable values of items appearing in the
51

Tax Audit Framework
opening and closing stock-in-trade listings.
6 The amount of stock provided for during the

current year.
7 The amount of stock provision utilised (write-

off or reversal) during the year.
8 Extent of physical verification of closing stock

in trade, if performed; otherwise a statement
explaining the reasons for non performance of
physical verification along with the explanation
regarding how the closing balance of stock in
trade has been verified.
9 Reconciliation of stock in trade consumed /

sold prepared in the following format:
10 Item wise list of stock in trade that is no longer

to be used by the business, If any.
11 Fair market value of such stock in trade that is

no longer to be used in the business, if any.
S29 Bad debts 1 Detailed party-wise breakup of bad debts

written off during the year.
2 Detailed party-wise breakup of reversal of bad

debts previously written off during the year.
3 Details of any legal actions taken by the client

to recover the debt, if any.
Other receivables 1 Nature, amount and description of significant

items appearing in the other receivables
balance.
Tax refunds due from 1 Reconciliation of sales tax and FED as per the
the Government return with amounts as per general ledger
account codes.
Reserves 1 Details of amount transferred to the

participatory reserve created as per the
relevant law.
2 Value of the company's participatory

redeemable capital.
3 Details of amount applied by the company
52

Tax Audit Framework
from the said reserve.
Liabilities against
assets subject to
finance leases
S28 Profit on debt, financial 1 Schedule of lease rentals paid by the

costs and lease company to the specified persons during the
payments year.
2 Amount charged as finance costs pertaining

to lease rentals during the year.
Retirement benefits Please refer the administrative, distribution

obligation and other operating expenses area.
S34(5), 34(5A) & Liability unpaid for 1 Ageing of trading liabilities and accruals
34(6) more than 3 years indicating the decommissioning cost (along
with unwinding of discount) claimed as
deduction in current or prior years.
2 Details regarding subsequent payment of

liability offered for tax as a result of operation
of S34(5) of the Income Tax Ordinance, 2001.
Provisions 1 Break-up of closing balance of provisions

indicating the ageing and nature of amounts.
2 Schedule of amounts provided for during the

year.
3 Schedule of provisions utilised during the

year.
Accrued interest / mark

up
S28 Profit on debt, financial 1 Schedule of profit on debt, the proceeds of

costs and lease which have been utilised by the company for
payments the purpose of the company's business.
2 Amount and description of other transactions

referred to in S28 of the Income Tax
Ordinance, 2001.
Any other items (from 1 Details regarding the nature, amount and
the balance sheet) description of any other items not covered by
the aforementioned clauses.
53

Tax Audit Framework

TRENDS, RATIOS AND ANALYSIS

Ordinance, 2001;
section reference
1. Variance and ratio analysis of the gross profit

for three years along with the reasons for
variations.
2 Variance and ratio analysis of the net profit for

three years along with the reasons for
variations.
3 Stock in trade turnover ratios for three years

(only applicable to companies engaged in
manufacturing and trading).
4 Raw materials consumed as a percentage of

cost of goods manufactured, for three years
manufacturing).
5 Industry-wise ratio analysis with comments for

significant variations.
54

Tax Audit Framework

RELATED PARTY TRANSACTIONS

Ordinance, 2001;
section reference
S85, 108, R20-27 Transactions with 1. Party-wise break-up of related party

related parties transactions indicating the nature of
relationship, the nature and amount of the
transaction and the trade terms governing
such transaction.
2 Nature of related party transaction viz. sales,

purchase, allocation of expenses, technical
fee, franchise and royalty fee etc. Whether tax
on payments to non residents has been
deducted, if not underlying justification for the
same.
55

Tax Audit Framework

NON-RECURRING TRANSACTIONS

Ordinance, 2001;
section reference
Non-recurring 1. Nature, amount and description of material

transaction non-recurring transactions carried out during
the year.
Definition of non-recurring transaction
A transaction is considered non-recurring which, either by virtue of number of occurrences (e.g. one-off)
or amount, is exceptional in nature.
56

Tax Audit Framework

RECONCILIATION WITH THE TAX RETURN FILED

Ordinance, 2001;
section reference
Reconciliation 1. Nature, amount and description of any

between differences between the additional information
statement of and the tax return filed, along with the
additional explanations and reasons thereof
information and
tax return filed
57

Tax Audit Framework
Raw and Stores

Finished
packing and
Quantity goods
materials spares
Opening balance
Purchases /
Manufactured
Less: Closing balance
Sold / Consumed
Sold / Consumed as
per the financial
statements
Difference
58

Tax Audit Framework
Annexure “F”
MODEL STATEMENT OF ADDITIONAL INFORMATION FOR INCOME TAX PURPOSES – SERVICE

SECTOR
TABLE OF CONTENTS
4. Balance Sheet
59

Tax Audit Framework

SECTOR
GENERAL INFORMATION

Ordinance 2001;
section reference
Name of the company
Registered address
National tax number
Status
Tax year
Nature of business
60

Tax Audit Framework

SECTOR

Ordinance 2001;
section reference
61

Tax Audit Framework

SECTOR

Ordinance, 2001;
section reference
Sales 1. Reconciliation of sales/Services revenue as per

invoice reports to sales as per the general ledger
and financial statements.
2 Reconciliation of sales as per sales tax returns in

case of services chargeable to sales tax and as per
the general ledger.
3 Reconciliation of sales as per sales tax returns and

as per the income tax return.
Deductions from 1 Details regarding the nature and amounts of major

sales components of deductions from sales, including
discounts. Confirm whether such deduction and
discounts form part of the sales invoice.
Cost of Service 1 Break up of operating cost
2 Reconciliation of operating cost as per invoice

reports with the general ledger and accruals.
Income from long

term contracts
S36 Long term 1 Copy of the particular long term contract.

contracts
2 Details of total cost allocated to the contract and

incurred before the end of the tax year.
3 Total estimated cost at the beginning of the

contract.
Administrative,
distribution and
other operating
expenses
S21 Deductions not 1 Amount of any tax, cess or rate paid or payable in
62

Tax Audit Framework
allowed Pakistan or any foreign country, the said tax, cess

or rate being levied on profits or on the basis of
profits.
2 Amount and break-up of taxes deducted at source.
3 Amount of any payments made by the company on

which either tax has not been deducted or deposited
at source.
R10 4 Amount of entertainment (and advertisement

expenses) incurred during the year in contravention
of the requirements of the Income Tax Ordinance,
2001.
5 Amount of any amounts contributed to unrecognised

provident funds, unapproved superannuation funds
and unapproved gratuity funds.

company in respect of which tax is not deducted
under section 149 of the Income Tax Ordinance,
2001 on any payments made by the fund against
which the recipient of the payment is chargeable
under the head 'salary'.
7 Details of stock option, whether scheme is exclusive

and company specific or based on group having
multinational source. Details and amounts charged
or taken through group charge back mechanism.
Whether tax is considered as deductible on exercise
of option or shares, etc and reported in periodical
statements.
8 Amount of any fines or penalties paid or payable by

the company for violation of any law, rule or
regulation.
9 Amount of any expenditure incurred for the

purposes other than in connection with business.
10 Amount of appropriations or amounts carried to a

reserve fund or capitalised in any way.
11 Amount and description of expenditure under a

single account head which in aggregate exceeds
Rs. 50,000 made other than by a crossed cheque or
cross banking instrument
63

Tax Audit Framework
12 Amount and description of payments in violation of

the requirement of banking channels for amounts
exceeding Rs. 15,000.
13 Amount and description of expenditures of a capital

nature other than that for which deductions are
specifically allowed under the Income Tax
Ordinance, 2001.
14 Amount of salaries, wages and other benefits paid

to the employees of the company in contravention of
the requirements of the Income Tax Ordinance,
2001.
S26 Scientific 1 Amount of the scientific expenditure incurred during

research the year.
expenditure
S27 Employee training 1 Amount of the expenditure incurred on employee

and facilities training and facilities.
S61 & R CL61,PT I, Charitable 1 Party-wise details of donations made during the
Second schedule donation year.
S70 Recouped 1 Amount and nature of any loss or expenditure which

expenditure has been allowed as a deduction in prior years and
which has been recouped in the current year.
S34(5) Unpaid liability 1 Details of liabilities which have remained unpaid

over three years or subsequent payment made out
of such liabilities which had been taxed previously
and deduction allowable on payment.
S150, 151, 152, Deduction of 1 Amount of taxes deducted at source, under relevant
153, 155, 156, taxes at source / heads, whether being final or not.
233A, 234, 234A, source
235 & 236
Taxation
S147 Advance tax 1 Details of the quarterly advance tax paid by the
company during the year.
Allocation of
common
expenditure
64

Tax Audit Framework

deductions allocatable on the basis of gross receipts for the
particular classes of income to which they are
allocatable.

income only along with the rationale for such
apportionment.

segmented into income taxable under NTR and
PTR, being further segmented into different heads
of income under NTR and PTR.
Tax losses
S56, 56A & 57A Set off of losses 1 Amount and description of tax losses under each
respective head of income set off against the
taxable income under another head of income as
per the requirements of the Income Tax Ordinance,
2001.
S57, 58 & 59 Carry forward of 1 Amount and description of tax losses under each
losses respective head of income, that were not wholly set
off, carried forward as per the requirements of the
S59AA Group taxation 1 Statement to the effect whether the option to be

taxed as a single fiscal unit has been exercised, if
applicable.
S59B Group relief 1 Amount of any assessed losses surrendered by the

company to its holding company, subsidiary
company, or another subsidiary of the holding
company along with a statement to the effect that
the requirements of the Income Tax Ordinance,
2001 have been satisfied in this regard.

(from the profit description of any other items not covered by the
and loss account) aforementioned clauses.

treatment in prior pertaining to the current year, which have been
years treated in a different manner in the returns filed in
prior years or orders pertaining to assessments
finalised in prior years.
65

Tax Audit Framework
2 A statement to the effect that the above items have

been accordingly treated in the current year along
with reasons in case of not doing so.
Confirmation whether the above items have been

correctly reflected in the tax return.
66

Tax Audit Framework

SECTOR
BALANCE SHEET

Ordinance, 2001;
section reference
Property, plant
and equipment &
Intangibles
S22, 23, 23A, R12 Depreciation and 1 Tax depreciation and amortization schedule
& S24 initial allowance, for the year, prepared in accordance with the
amortization of requirements of the Income Tax Ordinance,
intangibles 2001.

3 Asset wise accounting gain / (loss) on

intangibles.


6 Comparison of carrying amounts property,



67

Tax Audit Framework

business, if any.
Investments


term investments.

investments.

term investments.
General 1 Provide details regarding loans given to

information employees and the basis of mark-up charged
thereon.
Deposits,
Prepayments and
Other receivables
S25 Pre- 1 Details of the pre-commencement expenditure

commencement incurred along with relevant supporting
expenditure documentation.

balance.



Tax refunds due 1 Reconciliation of sales tax and FED as per the
from the return with amounts as per general ledger
Government account codes.

68

Tax Audit Framework
relevant law.

redeemable capital.

Liabilities against
assets subject to
finance leases
S28 Profit on debt, 1 Schedule of lease rentals paid by the

financial costs and company to the specified persons during the
lease payments year.

Retirement Please refer the administrative, distribution

benefits and other operating expenses area.
obligation
Provisions &
other Liabilities
S34(5), 34(5A) & Liability unpaid for 1 Ageing of trading liabilities and accruals
34(6) more than 3 years indicating the decommissioning cost (along
with unwinding of discount) claimed as



year.

year.
Accrued interest /
mark up
S28 Profit on debt, 1 Schedule of profit on debt, the proceeds of

financial costs and which have been utilised by the company for
69

Tax Audit Framework
lease payments the purpose of the company's business.

Ordinance, 2001.

(from the balance description of any other items not covered by
sheet) the aforementioned clauses.

return.
70

Tax Audit Framework

SECTOR

Ordinance, 2001;
section reference

variations.

variations.
71

Tax Audit Framework

SECTOR

Ordinance, 2001;
section reference

such transaction.
2 Nature of related party transaction viz. sales,

purchase, allocation of expenses, technical
fee, franchise or royalty fee etc. Whether tax
to non residents has been deducted on
technical fee
72

Tax Audit Framework

SECTOR

Ordinance, 2001;
section reference

transaction non-recurring transactions carried out during
the year.
73

Tax Audit Framework

SECTOR

Ordinance, 2001;
section reference

additional explanations and reasons thereof
information and
tax return filed
74

Tax Audit Framework
Annexure “G”
MODEL STATEMENT OF ADDITIONAL INFORMATION FOR INCOME TAX PURPOSES – BANKS
TABLE OF CONTENTS
4. Balance Sheet
75

Tax Audit Framework
GENERAL INFORMATION

Ordinance, 2001;
section reference
Name of the bank
Registered address
National tax number
Status
Tax year
Nature of business
Principal Nature of business
76

Tax Audit Framework

Ordinance, 2001;
section reference
S32, 33, 34, 35 & Method of 1. The bank’s policy statement pertaining to the
R32 accounting method of accounting followed by the
2 The bank's policy statement pertaining to the

method of recognition of mark-up income /
expense on Sale and repurchase agreements.

method of recognition of Translation gains
and losses.

method of recognition of mark-up / interest on
advances and returns on investments.

method of recognition of others such as gains
/ losses on termination of lease contracts,
premium on foreign currency options,
commission income, dividend income etc.

method of recognition change in the fair value
of derivative financial instruments.
7 Shariah compliant accounting treatment which

needs adjustment to harmonize the tax with
normal accounting as envisaged in the
Seventh Schedule

77

Tax Audit Framework

Ordinance, 2001;
section reference
Revenue 1. Details of mark-up/return/interest/ earned as per

the financial statements.
2. In case of non resident banks
Details of payments received from Head Office

or other branches of the Head Office on account
of any royalty, fee, and compensation for any
services rendered to them by the Pakistan
Branch or any interest received on funds lent
except in connection with normal banking
business.
Cost of Fund 1 Details regarding the nature and amounts of

major components of mark-up/return/interest
expense incurred by the bank.
Administrative,
distribution and
other operating
expenses
S21 Deductions not 1 Amount of any tax, cess or rate paid or payable
allowed in Pakistan or any foreign country, the said tax,
cess or rate being levied on profits or on the
basis of profits.

source.
3 Amount of any payments made by the company

on which either tax has not been deducted or
deposited at source.
4 Amount of entertainment incurred during the

year in contravention of the requirements of the
5 Amount of any amounts contributed to

unrecognised provident funds, unapproved
78

Tax Audit Framework
superannuation funds and unapproved gratuity

funds.

company in respect of which tax is not deducted
under section 149 of the Income Tax Ordinance,
2001 on any payments made by the fund
against which the recipient of the payment is
chargeable under the head 'salary'.

considered as deductible on exercise of option
or shares, etc and reported in periodical
statements.
8 Amount of penal interest paid to the State Bank

of Pakistan or any fines or penalties paid or
payable by the company for violation of any law,
rule or regulation.
9 Amount of any expenditure incurred for

business.
10 Amount of appropriations or amounts carried to

a reserve fund or capitalised in any way.
11 Amount and description of expenditure under a

single account head which in aggregate
12 Amount and description of payments in violation

of the requirement of banking channels for
amounts exceeding Rs. 15,000.


contravention of the requirements of the Income
79

Tax Audit Framework
Tax Ordinance, 2001.
15 Details of specific payments to non-resident and

evidence of deduction of tax
16 Confirmation whether the above items have

been correctly reflected in the tax return.
S27 Employee 1 Amount of the expenditure incurred on

training and employee training and facilities.
facilities
S61 & CL61,PT I, Charitable 1 Party-wise details of donations made during the
Second schedule donations year.

expenditure which has been allowed as a deduction in prior
years and which has been recouped in the
current year.
In case of Non resident banks
1 Details of payments to Head Office or other

branches of the Head Office on account of
royalty, fee, and compensation for any services
rendered by them to the Pakistan Branch or any
interest paid on funds borrowed except in
connection with normal banking business.
SBP Circular 326 2 Certificate from the State Bank of Pakistan

regarding admissibility of interest paid, if any, on
foreign currency deposits received from the
head office or other branches under the Foreign
Currency Accounts Scheme introduced by the
State Bank of Pakistan vide Exchange Control
Department's Circular No.18/ECP.16 (326)/85
dated September 3, 1985.
S34(5) Unpaid liability 1 Details of liabilities which have remained unpaid

over three years or subsequent payment made
out of such liabilities which had been taxed
previously and deduction allowable on payment.

156A, 156B, 233, Taxes withheld
233A, 234, 234A, at source
235 & 236
80

Tax Audit Framework
Taxation
S147 Advance tax 1 Details of the quarterly advance tax paid by the
company during the year.
103 Foreign Tax 1 In case of banks having branches outside

Credit Pakistan, Foreign Tax Credit, the bank is
entitled to foreign tax credit in respect of foreign
income tax paid outside Pakistan.
S150 Withholding tax 1 Amount of tax withheld on payment of dividend

on dividend to the members / Shareholders.
Allocation of
common
expenditure
1 Amount of specific expenses incurred abroad

for Pakistan branches which are to be claimed
as a deduction for tax purposes duly supported
by a certificate of your head office auditors.
2 Amount of allocated head office expenses (i.e.

executive or general administration expenses),
to be claimed for tax purposes duly supported
by a certificate of your head office auditors.
Tax losses
S56, 56A & 57A Set off of losses 1 Amount and description of tax losses under
each respective head of income set off against
the taxable income under another head of
income as per the requirements of the Income
Tax Ordinance, 2001.
S57, 58 & 59 Carry forward of 1 Amount and description of tax losses under
wholly set off carried forward as per the
2001.
S59B Group relief 1 Amount of any assessed losses surrendered by

the subsidiary company to its holding company,
the holding company along with a statement to
the effect that the requirements of the Income
Tax Ordinance, 2001 have been satisfied in this
81

Tax Audit Framework
regard.
S29 Bad debts 1 Detailed party-wise breakup of bad debts written

off during the year.

3 Details of any legal actions taken by the client to

recover the debt, if any.
4 Party-wise details of bad debts disallowed in

earlier years which are now mature to be
reclaimed. Details of efforts made for recovery
of each debt which leads to re-establishment of
the claim for allowance during the current year
5 Party wise details of bad debts recovered during

the year which have been taxed in earlier years
showing the assessment year / tax year in
which such bad debt was originally claimed and
disallowed
Loans
S29A Provision 1 Details of income arising out of consumer loans.

regarding
consumer loans
2 Details of any bad debts arising out of such

consumer loans which have not been wholly set
off against the reserve allowed to be created
under S29A of the Income Tax Ordinance,
2001.
3 Details of any reversals in respect of such

consumer loans.
S30 Profit on non- 1 Details of profit accruing on such debts.

performing
debts of a
banking
company or a
DFI
2 Details of the suspense account to which such

profit is credited as per the Prudential
Regulations issued by SBP.
82

Tax Audit Framework
3 Details of any subsequent recovery of profit on

such debts.
4 Details of any reversals in respect of such

provisions.
General 1 Provide details regarding loans given to

information employees and the basis of mark-up charged
thereon.
2 Confirmation whether all the items covered

return.

and loss the aforementioned clauses.
account)

treatment in pertaining to the current year, which have been
prior years treated in a different manner in the returns filed
in prior years or orders pertaining to
assessments finalised in prior years.

year along with reasons in case of not doing so.
83

Tax Audit Framework
BALANCE SHEET

Ordinance, 2001;
section reference
Property, plant
and equipment &
Intangibles
S22, 23, 23A, R12 Depreciation and 1 Tax depreciation and amortization schedule for
& S24 initial allowance, the year, prepared in accordance with the
intangibles 2001 (refer the attachment).
2 Initial allowance schedule for the year in

3 Asset wise accounting gain / (loss) on disposal

of depreciable assets and intangibles.
4 Asset wise tax gain / (loss) on disposal of




value of the depreciable assets and intangibles
disposed off.


84

Tax Audit Framework
business, if any.
10 If the bank has acquired intangibles during the

year (the bank is entitled to amortize and claim
deduction in respect of the cost of intangibles
having normal useful life exceeding one year)
11 Amount of claim of depreciation in respect of

fixed assets used by the Pakistan branches
and the cost of which is recorded in head office
books.
Investments

indicating cost and dates of acquisition, with
the segregation of amount related to current
year and disposal of investments over one
year.

term investments.

investments.

term investments.
Deposits,
Prepayments and
Other receivables


balance.
Liabilities against
assets subject to
finance leases
S28 Profit on debt, 1 Schedule of lease rentals paid by the company

financial costs and to the specified persons during the year.
lease payments
85

Tax Audit Framework
2 Amount charged as finance costs pertaining to

lease rentals during the year.
Retirement benefits Please refer the administrative, distribution and

obligation other operating expenses area.
Other payables &

Provisions
S34(5), 34(5A) & Liability unpaid for 1 Aging of trading liabilities and accruals.
34(6) more than 3 years



year.
3 Schedule of provisions utilised during the year.

86

Tax Audit Framework

Ordinance, 2001;
section reference
1 Variance and ratio analysis of the gross profit

variations.

variations.
87

Tax Audit Framework

Ordinance, 2001;
section reference
S85, 108, R20-27 Transactions with 1 Party-wise break-up of related party

such transaction.
88

Tax Audit Framework

Ordinance, 2001;
section reference
S85, 108, R20-27 Non-recurring 1 Nature, amount and description of material

transactions non-recurring transactions carried out
during the year.
89

Tax Audit Framework

Ordinance, 2001;
section reference
S85, 108, R20-27 Reconciliation 1 Nature, amount and description of any

additional explanations and reasons thereof.
information and
tax return filed
90

Tax Audit Framework
Annexure “H”
MODEL STATEMENT OF ADDITIONAL INFORMATION FOR INCOME TAX PURPOSES - OIL

EXPLORATION COMPANIES
TABLE OF CONTENTS
4. Balance Sheet
91

Tax Audit Framework
MODEL STATEMENT OF ADDITIONAL INFORMATION FOR INCOME TAX PURPOSES- OIL

GENERAL INFORMATION

Ordinance 2001;
section reference
Name of the company
Registered address
National tax number
Status
Tax year
Nature of business
Details of 'Petroleum
Concession Agreements'
(PCA) and 'Production
Sharing Agreements' (PSA)
indicating the following:
- name of PCA / PSA
- effective date of PCA / PSA
- tax clause including the

exact wording.
92

Tax Audit Framework



Ordinance 2001;
section reference

method.

4 The company's policy in respect of pre-

commercial discovery exploration
expenditure.
93

Tax Audit Framework


Ordinance, 2001;
section reference
Sales 1. Reconciliation of sales as per invoice reports

to sales as per the general ledger and
financial statements.


returns and as per the income tax return.
Deductions from 1 Details regarding the nature and amounts of

sales major components of deductions from sales,
including discounts. Confirm whether such
deduction and discounts form part of the sales
invoice.
Purchases 1 Reconciliation of purchases of store and

spares & stock in trade as per invoice reports
to purchases as per the purchase ledger and
accruals.
2 Reconciliation of purchase as per sales tax

3 Break-up of purchases, if any.
Cost of goods
sold
1 Cost of goods sold.
2 Quantitative analysis of goods manufactured

94

Tax Audit Framework
3 Analysis of production loss for three years

4 Concession wise details of revenues,

expenditure incurred, depletion allowance,
loss adjustment, tax payable, adjustment of
royalty, etc.
5 Details of expenditure incurred on current

Petroleum Concessions and details of
pertinent accounting treatment adopted for
them.
6 Details of absorptive expenditure and

treatment adopted. Whether the treatment
conforms to the stipulations made Fifth
Schedule read with respective Concession
Agreement.
7 Basis adopted for calculation of depletion

allowance, whether the terms agreed with the
Ministry of Petroleum GOP
8 Basis of claim royalty payment in case of loss

and where tax is payable.
9 Basis followed for adjustment of losses in

different concession and whether such losses
are adjusted based on basis agreed in
respective concessions.
Administrative,
distribution and
other operating
expenses
S21 Deductions not 1 Amount of any tax, cess or rate paid or


source.
3 Amount of any payments made by the

company on which either tax has not been
deducted or deposited at source.
4 Amount of any amounts contributed to

unrecognised provident funds, unapproved
95

Tax Audit Framework
superannuation funds and unapproved

gratuity funds.

'salary'.

8 Amount of any fines or penalties paid or

9 Amount of any expenditure incurred for

business.
10 Amount of appropriations or amounts carried

to a reserve fund or capitalized in any way.

12 Amount and description of payments in

channels for amounts exceeding Rs. 15,000.


96

Tax Audit Framework
15 Confirmation whether the above items have

been correctly reflected in the tax return.
S26 Scientific 1 Amount of the scientific expenditure incurred

research during the year.
expenditure
S27 Employee training 1 Amount of the expenditure incurred on

S61 & CL61,PT I, Charitable 1 Party-wise details of donations made during

Second schedule donations the year including the donations made under
the Concession Agreements.

the current year.
Rule 2(4) Pre-commercial 1 PCA / PSA wise details of expenditure

discovery incurred prior to commencement of
expenditure commercial production.
2 Details of fixed assets acquired prior to

commencement of commercial production on
which depreciation is allowed after
commencement of commercial production, on
the original cost.
Rule 3 Well head value 1 Amount of 'well head value' (WHV) used for
the purpose of calculating depletion
allowance. If WHV is an amount other than
sales, provide a reconciliation indicating the
deductions or additions to sales for calculating
WHV.
2 Amount of WHV used for payment of royalty

to the Government. Reconciliation between
sales and WHV as stated above is also to be
provided.

233A, 234, 234A, source
235 & 236
97

Tax Audit Framework
Taxation
S147 Advance tax 1 Details of the quarterly advance tax paid by

S148 Imports 1 Tax paid at source during the year on the

assessed value of imports.
Allocation of
common
expenditure

deductions allocatable on the basis of gross receipts for
the particular classes of income to which they
are allocatable.

income only, along with the rationale for such
apportionment.

segmented into income taxable under NTR
and PTR, being further segmented into
different heads of income under NTR and
PTR.
Tax losses
S56, 56A & 57A Set off of losses 1 Whether Rule 2 (3)(a) or 2(3)(b) of Part 1 of
and Rule 2(3) the Fifth Schedule to the Income Tax
Ordinance, 1979 or the Income Tax
Ordinance, 2001 has been selected for
claiming expenditure deemed to be lost under
Rule 2(2). Indicate separately for each PCA
and PSA.
2 If Rule 2(3)(b) has been selected, the amount

and description of tax losses under each PCA
/ PSA along with similar details of PCA / PSA
against whose income it has been adjusted
S57, 58 & 59 Carry forward of 1 Amount and description of tax losses under
wholly set off, carried forward as per the
98

Tax Audit Framework
2001.
S59AA Group taxation 1 Statement to the effect whether the option to

be taxed as a single fiscal unit has been
excercised, if applicable.
S59B Group relief 1 Amount of any assessed losses surrendered

by the company to its holding company,
the holding company along with a statement
to the effect that the requirements of the
Income Tax Ordinance, 2001 have been
satisfied in this regard.



so.

return.
99

Tax Audit Framework

BALANCE SHEET

Ordinance, 2001;
section reference
Property, plant
and equipment &
Intangibles
S22, 23, 23A, R12 Depreciation and 1 Whether or not a separate clause for
& S24 initial allowance, depreciation is available in the taxation article
amortization of of each PCA / PSA.
intangibles
2 Tax depreciation and amortization schedule

for the year, prepared in accordance with the
2001 (refer the attachment).

4 Asset-wise accounting gain / (loss) on

intangibles.

6 Asset-wise sale proceeds on disposal of



100

Tax Audit Framework


business, if any.

amortize and claim deduction in respect of the
cost of intangibles having normal useful life
exceeding one year)
Investments


term investments.

investments.

term investments.
S108 Loans Between Transactions to be seen for knowing these are

Associates not back date entries and are routed through
banking channels.
Deposits,
Prepayments and
Other receivables


balance.
Stores and spares

& stock in trade
S35 Stock in trade 1 The opening value of stock-in-trade as at the
101

Tax Audit Framework
opening balance sheet date.
2 The cost of stock-in-trade acquired during the

year.
3 The closing value of the stock-in-trade as at

4 Break-up of opening and closing values of

commercial imports.
5 Net realisable values of items appearing in the

opening and closing stock-in-trade listings.
6. The amount of stock provided for during the

current year.
7 Extent of physical verification of closing stock

8 Reconciliation of stock in trade consumed /

sold prepared in the following format:
Trade debts




balance.
Tax refunds due 1 Reconciliation of sales tax and FED as per the
from the return with amounts as per general ledger
Government account codes.

102

Tax Audit Framework
relevant law.

redeemable capital.

Liabilities against
assets subject to
finance leases


Retirement 1 Please refer the administrative, distribution

obligation
S34(5), 34(5A) & Liability unpaid 1 Ageing of trading liabilities and accruals
34(6) for more than 3 indicating the decommissioning cost (along
years with unwinding of discount) claimed as



year.

year.
Accrued interest /
mark up
S28 Profit on debt, 1 Schedule of profit on debt, the proceeds of

financial costs and which have been utilised by the company for
lease payments the purpose of the company's business.
103

Tax Audit Framework

Ordinance, 2001.

104

Tax Audit Framework


Ordinance, 2001;
section reference

variations.

variations.
3 Stock in trade turnover ratios for three years

manufacturing).
4 Raw materials consumed as a percentage of

manufacturing).
105

Tax Audit Framework


Ordinance, 2001;
section reference

such transaction.
106

Tax Audit Framework


Ordinance, 2001;
section reference

transactions non-recurring transactions carried out during
the year.
107

Tax Audit Framework


Ordinance, 2001;
section reference

information and
tax return filed
108

Tax Audit Framework

Raw and Stores

Finished
packing and
Quantity goods
materials spares
Opening balance
Purchases /
Manufactured
Sold / Consumed
Sold / Consumed as
per the financial
statements
Difference
109

Tax Audit Framework
Annexure “I”
MODEL STATEMENT OF ADDITIONAL INFORMATION FOR TAXATION PURPOSES- INSURANCE

CO.
TABLE OF CONTENTS
4. Balance Sheet
110

Tax Audit Framework
MODEL STATEMENT OF ADDITIONAL INFORMATION FOR TAXATION PURPOSES - INSURANCE

CO.
GENERAL INFORMATION
Sales Tax Act 1990 Description Information subject to audit

/ Federal Excise
Act 2005; section
reference
Name of the company
Registered address
National tax number
Status
Tax year
Nature of business
111

Tax Audit Framework

CO.

Ordinance, 2001;
section reference

the method of recognition of income from
premiums on insurance undertaken.

the method of recognition of claims lodged by
policy holders and its recording in books of
accounts.
112

Tax Audit Framework

CO.

Ordinance, 2001;
section reference
Revenue 1. Details of premium/investment/other income

earned as per the general ledger and financial
statements.
Deductions
1 Details of premium paid on re insurance

carried out with resident and non resident re
insurers along with details of taxes withheld
from such payments.
2 Details of claims paid during the year along

with a reconciliation with claims received and
outstanding claims as per balance sheet
3 Details of amounts allowable in terms of Rule

5(b) of the Fourth Schedule to the Income Tax
Ordinance, 2001
Profit & Loss

Expenses
S21 Deductions not 1 Details of any tax, cess or rate paid or

2 Details and break-up of taxes deducted at

source.
3 Details of any payments made by the

company on which tax has not been paid or
deducted and paid at source.
4 Details of contributions made to any fund

113

Tax Audit Framework

'salary'.

6 Details of any fines or penalties paid or

7 Details of any expenditure incurred for

business.
8 Details of appropriations or details carried to a

reserve fund or capitalised in any way.

10 Details and description of payments in

channels exceeding Rs. 15,000.
11 Details and description of expenditures of a

12 Details of salaries, wages and other benefits

13 Details of payments to non-resident on which

tax is not deducted at source.
14 Details of expenses paid in excess of the

limits laid down in the Insurance Ordinance,
2000.
114

Tax Audit Framework
S27 Employee training 1 Details of the expenditure incurred on

S61 & CL61,PT I, Charitable 1 Party-wise details of donations / zakat made

Second schedule donations during the year.
S70 Recouped Details and nature of any loss or expenditure

the current year.
Exchange gain Details of exchange gains and losses relating

and Losses to foreign currency loans obtained specifically
for importing plant and machinery which were
charged to the Profit and Loss Account during
the year.

233A, 234, 234A, source
235 & 236
Taxation
S147 Advance tax Details of the quarterly advance tax paid by

103 Foreign Tax Credit The company is entitled to foreign tax credit in
respect of foreign income tax paid outside
Pakistan.
S 59B Group relief 1 Details of any assessed losses surrendered

by the subsidiary company to its holding
company, subsidiary company, or another
subsidiary of the holding company along with
a statement to the effect that the requirements
of the Income Tax Ordinance, 2001 have
been satisfied in this regard.
2 Confirmation whether all the items covered

return.

115

Tax Audit Framework


so.
116

Tax Audit Framework

CO.
BALANCE SHEET

Ordinance, 2001;
section reference
Property, plant
and equipment &
Intangibles
S22, 23, 23A, R12 Depreciation and 1 Tax depreciation and amortization schedule
& S24 initial allowance, for the year, prepared in accordance with the
intangibles 2001 (refer the attachment).
2 Initial year allowance schedule for the year in

3 Asset wise accounting gain / (loss) on

intangibles.


the financial statements and tax depreciation
/ amortization schedule, specifically
identifying differences in additions, if any.

the financial statements and tax depreciation
/amortization schedule, specifically
identifying differences in additions, if any.

117

Tax Audit Framework
8 List of depreciable assets and intangibles

that are seized to be used in the business, if
any.

business, if any.

amortize and claim deduction in respect of
the cost of intangibles having normal useful
life exceeding one year)
11 Amount of claim of depreciation in respect of

fixed assets used by the Pakistan branches
and the cost of which is recorded in head
office books.
Investments


term investments.

investments.

term investments.
Deposits,
Prepayments and
Other receivables
S25 Pre- 1 Details of the pre-commencement

commencement expenditure incurred along with relevant
expenditure supporting documentation.

balance.
Liabilities against
assets subject to
finance leases
118

Tax Audit Framework


Retirement 1 Please refer the administrative, distribution

obligation
Trade and other

payables &
Provisions
S34(5), 34(5A) & Liability unpaid for 1 Aging of trading liabilities and accruals.
34(6) more than 3 years

of S34(5) of the Income Tax Ordinance,
2001.


year.

year.

119

Tax Audit Framework
MODEL STATEMENT OF ADDITIONAL INFORMATION FOR TAXATION PURPOSES -INSURANCE

CO.

Ordinance, 2001;
section reference
1 Variance and ratio analysis of the gross profit

variations.
2 Variance and ratio analysis of the net profit

variations.
120

Tax Audit Framework

CO.

Ordinance, 2001;
section reference
S85, 108, R20-27 Transactions with 1 Party-wise break-up of related party

such transaction.
121

Tax Audit Framework
MODEL STATEMENT OF ADDITIONAL INFORMATION FOR TAXATION PURPOSES- INSURANCE

CO.

Ordinance, 2001;
section reference
Non-recurring 1 Nature, amount and description of material

the year.
122

Tax Audit Framework
MODEL STATEMENT OF ADDITIONAL INFORMATION FOR TAXATION PURPOSES -INSURANCE

CO.

Ordinance, 2001;
section reference
Reconciliation 1 Nature, amount and description of any

between statement differences between the additional information
of additional and the tax return filed, along with the
information and tax explanations and reasons thereof.
return filed
2 Amount of tax refundable is adequately

disclosed in the financial statement.
123

Tax Audit Framework
Annexure “J”
MODEL STATEMENT OF ADDITIONAL INFORMATION FOR SALES TAX & FEDERAL EXCISE
PURPOSES
TABLE OF CONTENTS
4. Balance Sheet
124

Tax Audit Framework
PURPOSES
GENERAL INFORMATION
Sales Tax Act 1990 Description Information subject to audit

/ Federal Excise
Act 2005; section
reference
Name of the company
Registered address
No. and address of branches,

offices, outlets, warehouse,
etc
Sales Tax Registration No.
Registration Status
Financial Year
Principal Nature of business
125

Tax Audit Framework
PURPOSES
Sales Tax Act Description Information subject to audit

1990 / Federal
Excise Act 2005;
section reference
7, 22 & 73 Method of 1. The company's policy statement pertaining to

accounting the method of accounting followed by the
Stock in Trade 1. The company's policy statement pertaining to

method.
2. The company's policy statement pertaining to

3. The company's policy statement as to the

procedure of goods inward, production,
storage and sale along with documentation
involved therein. Likewise, procedure of
rendering of services
4. Steps (in order) and authorities involved in

movement of goods from inception till final
sale / service and flow of information /
documents from one authority to other
Revenue 1. The company's policy statement pertaining to

Recognition policy of Revenue Recognition
Fixed Assets 1. The company's policy statement pertaining to

capitalisation of fixed assets
Tax & Duty 1. The company's policy statement on the

Structure overall tax / duty regime applicable to the it,
e.g., VAT, Retail Price, Minimum Valuation
Addition, Fixed Value Addition, Zero Rated,
etc along with the reference of ancillary
126

Tax Audit Framework
provision of the Act or notification
Operations 1. The company's policy statement on major

inputs used in business with their respective
tax / duty applicable thereon
2 The company's policy statement on visible

and invisible wastage in production of finished
goods and packing materials
3 The company's policy statement regarding

procedure of filing of sales tax returns and
payment of tax.
127

Tax Audit Framework
PURPOSES

1990 / Federal
Excise Act 2005;
section reference
22, 25, 36 Sales 1. Sales Reconciliation of the following types:
- Between invoice reports and audited

accounts
- Between sales tax returns and
audited accounts
- Between income tax return and sales
tax return
- Between special returns and monthly
returns
- Between excise and sales tax records
- Between audited and management
accounts, if any particularly foreign
reporting package
2. Details of summaries filed under section 26(5)

and Annual Returns
3. Break-up of sales into sales falling under the

normal tax regime, retail price mechanism,
zero rated, exempt, sales under
concessionary notifications, minimum value
addition / fixed value addition, multiple rate
sales, export sales and sales of commercial
imports.
4. Month wise position of sales tax cum federal

excise returns for the audit period
5. Reasons for declining sales trends, if any
6. Analysis of both visible and invisible wastage

occurred in production of finished goods and
packing materials for the last 2 years and
reasons for variation
7. Details of Debit / Credit Notes issued /
128

Tax Audit Framework
received
8. Discount Policy
9. Details of gate passes, bilty, etc issued during

the audit period
10. Party-wise break-up of transactions with

associated companies indicating the nature of
such transaction.
11. Details of goods;
- distributed free of cost to customers,

employees, directors, vendors, clients,
guests, etc during the audit period
- consumed in-house as part of taxable

activity
12. Party wise details of tax withheld by

withholding agents, certificates issued to the
company along with the tax period in which
they were so claimed in the return
13. Price Structure of all the products during the

audit period separately indicating the date of
change of such prices
14. Average price(s) of identical products in the

open market, if available, for the last 2 years
and reasons for differences with company's
declared prices
15. Details of all scrap / waste material / by

product
16. In case of sale / exports under DTRE,

reconciliations supported by shipping bills
Purchases 1. Purchase Reconciliation of the following

types:
2. - Between invoice reports and audited

accounts
- Between tax return and audited

accounts (indicating the head of account
129

Tax Audit Framework
in the financial statements)
- Between income tax return and sales tax

return
- Between special returns and monthly

returns
3. Break-up of purchases into taxable, zero

rated, exempt, imports, etc
4 Reasons for heavy purchases / imports, piling

of unusual stock, if any
5 Details of major suppliers and their sales tax

registration #
6. Goods purchased in auction during the year

and evidences thereof
7. Records of commercial imports and period of

subsequent consumption / sale thereof
8. Analysis of Gross Profit for the last 2 years

and reasons for variations
9. Quantitative analysis of goods manufactured

10. Analysis of production loss for three years

11. Details of adjustment notes filed and

adjustment advices issued to the company
8 read with SRO 12 Detail of Vehicles (falling under Chapter 87 of

490(I)/2004 of Custom Act 1960) purchased/imported, Foods
Sales Tax Act & Beverages consumed, Gift & Give Always
1990 & Section made, Electricity & Gas Supplied to residential
3A, 6 read with colonies and bills of mobile telephones (only
SRO 655(I)/2007 for services sector liable to sales tax under
Inadmissible / Provincial Ordinance 2000)
Conditional Input
Adjustments
13. Details of input taxes claimed for prior periods
130

Tax Audit Framework
with date of respective invoices
14. List of input tax / excise duty claimed on major

goods and services during the audit period
and their specific usage in taxable activity
15. Details of apportioned input tax / excise duty
16. Details where payment of purchase proceeds

was not made via banking channels and
beyond the maximum time allowed under
section 73 of the Sales Tax Act 1990
17. Details of all purchases exceeding Rs. 50,000

with cross reference of the bank statement
18. Details where purchase proceeds were

knocked off in accounts
19. Details where purchase proceeds were

discharged by way of consideration other than
cash
20. Details where federal excise duty was

adjusted without realising the sale proceeds
and duty thereon
21. Details of federal excise and special excise

adjusted in the returns and nature of usage
thereof in the business activity
22. Details of input tax claimed as 'stock in trade'
23. Details of royalty, technical fee, franchise fee,

insurance paid during the audit period
24. Details where the value addition tax was not

adjusted by the company in tax return
25. Whether separate subsidiary record

maintained for all commercial imports to keep
a track on imported value, value addition tax
paid and ultimate profit earned thereon? If not,
what is the average profit margin on sale of
imported goods in the tax period?
26. Details where credit and debit notes were not

obtained / issued.
131

Tax Audit Framework
27. Details of excise duty (under sales tax mode)

claimed by the company during the audit
period.
28. Details of tax periods in which exemption from

section 8B was claimed by the company and
basis thereof
29. Details where FED adjustment was claimed

on goods which were not directly used as
input goods for the manufacture of goods
specified in 1st Schedule
30. Instances where FED adjustment was claimed

on accrual basis
31. Details of insurance proceeds, if any, received

from insurance company
32. Confirmation whether all the items covered

return.
132

Tax Audit Framework
PURPOSES
BALANCE SHEET

1990 / Federal
Excise Act 2005;
section reference
22, 25, 36 Property, plant 1. Details of fixed assets disposed off during the
and equipment year
2. Details of fixed assets disposed off during the

year on which input tax was claimed by the
company
3. Details of plant and machinery acquired by

the company
4. Details of assets capitalised during the audit

period on which respective input tax was
prorated over 12 months time
Stock in trade 1. The opening value of stock-in-trade as at the

opening balance sheet date.
2. The cost of stock-in-trade acquired during the

year
3. The closing value of the stock-in-trade as at

4. Break-up of opening and closing values of

commercial imports.
5. Quantity reconciliation of stock movement

during the audit period especially goods
manufactured and sold during the audit period
6. Extent of physical verification of closing stock

133

Tax Audit Framework
7. Details of goods charged off in accounts as

obsolete, damaged, slow moving, expired and
treatment given in tax records
8. Reasons for difference in inventory, if any,

between books and physical count
Stores & Spares 1. Stores, spares, components and sub

components purchased during the year.
2. Details of stores / parts purchased as zero

rated
Tax refunds due 1. Details of claim(s) supported along with

from the refund acknowledgement receipt
Government
2. Details of sales tax refund / excise drawback

which could not be adjusted in the returns and
separately filed with the department
3. In case of export refunds, the objection memo

or analysis sheet generated by STARR
Bank Balances 1. Details of all bank accounts and their

declaration to the concerned Collectorate
2. Nature of all significant Credit Entries

appearing in bank accounts with their cross
reference with sale invoices / sales ledger
control account
Advance from 1. Customer and date wise reconciliation

customers between opening balances of advances,
advances received during the year, adjusted
against sales during the audit period and
closing balance thereof
Tax / Duty 1. Details of tax / duty payable and reconciliation

Payable between sales tax control A/c and return
2. Details of arrears, additional tax or penalty

payable by the company
3. Details of tax paid under amnesty scheme
4. Reasons for filing revised return (in case of

self revision)
134

Tax Audit Framework
5. Details where application for condonation is

made by the company under section 74
Contingencies 1. Details of all sales tax / excise duty matters

under dispute or sub judice before any Court /
Authority
135

Tax Audit Framework
PURPOSES
Description Information subject to audit

variations.
2. Variance and ratio analysis of the net profit for

variations.
3. Stock in trade turnover ratios for three years

manufacturing and trading).
4. Raw materials consumed as a percentage of

manufacturing).
136

Tax Audit Framework
PURPOSES

Ordinance, 2001;
section reference

such transaction.
137

Tax Audit Framework
PURPOSES
CONTRACTUAL AGREEMENTS

1990 / Federal
Excise Act 2005;
section reference
Toll Manufacturing Agreements
DTRE Exemptions
Authorization for Zero Rating issued by Tax

Department under the Sales Tax Rules 2006
Lease Agreements
Rental Agreements
Hire Purchase Agreements
Import / Export Agreements
Financing / Loan Agreements
Sale / Purchase Agreements
138

Tax Audit Framework
PURPOSES

1990 / Federal
Excise Act 2005;
section reference

the year.
or amount, is exceptional in nature
139

Tax Audit Framework
PURPOSES

Ordinance, 2001;
section reference

information and
tax return filed
140

Tax Audit Framework
PURPOSES
Raw and Stores

Finished
packing and
Quantity goods
materials spares
Opening balance
Purchases /
Manufactured
Sold / Consumed
Sold / Consumed as
per the financial
statements
Difference
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TAX AUDIT

2) Tax Audit Concept 5

3) Statement of Additional Information 9

4) Contents of Engagement Letter for Audit under Section 177(8) 12

6) The Process of Tax Audit 20

9) Procedures for Tax Audit 27

10) Selection of Auditors and Auditees for Tax Audit 30

TAX AUDIT –DEFINITIONS AND ABBREVIATIONS

TAX AUDIT Audit of Tax Statements

TAX AUDIT REPORT Audit Report issued by the Tax Auditor

TAX AUDITOR Firm of Chartered Accountants

TAX STATEMENTS Statement of Additional Information and Tax Returns

MANAGEMENT Refers to the representatives of Taxpayer having executive authority

ISAs International Standards on Auditing ( issued by International

FBR Federal Board of Revenue

ICAP Institute of Chartered Accountants of Pakistan (the Institute)

2. TAX AUDIT CONCEPTS

2. TAX AUDIT CONCEPTS

j. Any matter of contention regarding taxability or non-taxability of a particular item shall be

x. For the purpose of guidance following documents have been suggested:

• Independence declaration to be issued by tax auditor

• Engagement letter to be issued by the FBR

• Statement of additional information for taxation prepared by the taxpayer

• Audit report to be issued by the tax auditor

3. STATEMENT OF ADDITIONAL INFORMATION

3. STATEMENT OF ADDITIONAL INFORMATION

• Oil & Gas Exploration (Annexure I)

2. Accounting Policies and Methodology

3. Profit and Loss Account

5. Trends, Ratios and Analysis

6. Related Party Transactions

8. Reconciliation with the Tax Return

4. CONTENTS OF ENGAGEMENT LETTER FOR AUDIT UNDER

Objective and scope of the Tax Audit

Responsibility of the Management

Responsibility of the Tax Auditor

(d) Professional competence and due care;

(f) Professional behaviors; and

(g) Technical standards.

• The use of testing

Each of the above statements is explained as follows:

material misstatement, and is consistent with

The audit report formats are attached as Annexure “C and D”.

6. THE PROCESS OF TAX AUDIT

6. THE PROCESS OF TAX AUDIT

6.2 Pre-audit meeting / risk evaluation

i. Past year(s) records / history including the past year(s)assessment / order-in-

6.2.4 The taxpayer is not expected to be involved in the risk-evaluation process.

6.4 Preparation and discussion on the draft report

6.4.3 Taxpayer will be provided 15 days to clear such factual aspects.

(i) Legal issues

(ii) Withholding tax audit

Schedule of Minimum Tax Audit Fee:

Turnover up to 500 million 350,000

Turnover over 500 million up to 1 billion 450,000

Turnover over 1 billion up to 3 billion 550,000

Turnover over 3 billion up to 5 billion 900,000

Turnover above 5 billion 1,350,000

Type of entity Minimum

Turnover over 1 billion up to 3 billion 550,000

Turnover over 3 billion up to 5 billion 900,000

Turnover above 5 billion 1,350,000

Medium Sized Entities

Review, analysis and comparison of industry information e.g.

Taxable income to accounting profits

Dutiable / Taxable Supplies to Total Turnover

Taxpayer’s compliance history / trend

Key issues involved in preceding audits / assessments

Risk Profiling - Identify core areas / transactions

Findings, discussions with Commissioner / Collector and conclusions

Determination of information required

Discuss and agree with the Commissioner / Collector

Assess core areas / transactions

Obtain substantive audit evidences

Review the subsequent events

Conformity of contents of return with relevant provisions of law

Errors, omission, misstatements and concealments detected during audit process

Appropriateness of evidence obtained

Tax implications of omission, misstatement and concealments under relevant provisions

Review of findings – four eye test