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INCOME TAX

AUDIT
BY

YOGESH SAHANI
Table of Contents

TAX AUDIT

TAX AUDITOR

TAX AUDIT PROCEDURES AND AUDIT


REPORT

TAX AUDIT REPORT IN FORM 3CA AND 3CB


TAX AUDIT
MEANING:
A tax audit is an examination of your tax return by the IRS
to verify that your income and deductions are accurate. A
tax audit is when the IRS decides to examine your tax
return a little more closely and verify that your income and
deductions are accurate.
A tax audit is an examination of an organization's or
individual's tax return. Each year when tax season rolls
around, the Internal Revenue Service, as well as state
departments of taxation, kicks into overdrive to meet with
the onslaught of tax filings. The purpose of a tax audit is to
verify that the financial information is being reported
correctly
INCOME TAX SLABS :
Several changes in Tax Audit Report have been introduced vide Income Tax (7th Amendment)
Rules 2014 are applicable from this AY 2014-15 onwards. CBDT has amended Form 3CA,
Form 3CB & Form 3CD and the amended Forms now require explicit mention of the
observations/qualifications if any, by the auditor while issuing the true and correct audit report.
With the introduction of these changes, the tax auditors responsibilities to report detailed
information under the new/amended clauses has increased significantly.

KPMG GUIDE ON CHANGES IN TAX AUDIT REPORT :


In case an Assessee is liable to get his Accounts audited by an Accountant under any other Law for
the same accounting period, the assessee is not mandatorily required to get his audit done again
and is only required to submit a report in the form mentioned below. However, if the Accounting
Year is different from the Accounting Year for which the Audit was done under any other Act, the
Tax Audit would be required to be conducted again as per the Income Tax Act

TAX AUDIT EFILING:


As per Notification No. 34 dated 1st May 2013, efiling of Tax Audit report is now mandatory
from the assessment year 2013-14 onwards.
As per Rule 6G, tax audit report is to be furnished in Form 3CA & Form 3CB and the particulars
required to be furnished along with these tax reports should be in Form 3CD.
1. Form 3CA & Form 3CD- These Forms are used in case where the Accounts of the business or
profession of a person have already been audited under any other Law.
2. Form 3CB & Form 3CD These Forms are used in case where the Accounts of the business or
profession have not been audited earlier.
COMPUTATON OF TOTAL TURNOVER FOR THE PURPOSE OF TAX AUDIT:

ICAI has through a Guidance Note clarified the following points:-


1. Where a person is carrying on 2 Business/2 Professions the total turnover of both the
businesses shall be clubbed together and tax audit shall be liable to be conducted if the Total
Turnover exceeds Rs. 1 Crore/ Rs. 25 Lakhs as the case may be.
2. Where a person is carrying on business as well as profession and the Turnover of the
business is Rs. 1.2 Crore and the Gross Receipts of the profession is Rs 22 Lakhs. In such a
case, ICAI has clarified through a Guidance Note that the Assessee is liable to get the Tax
Audit done of both the business as well as profession because the Gross Receipts from the
business exceed the limit of Rs. 1 Crore. However, if his Total Turnover was Rs. 95 Lakhs
and Gross Receipts from business was Rs. 22 Lakhs, he would not be required to get his Tax
Audit done.
3. In case where a person has a total turnover of Rs. 98 Lakhs and has sold a Car for Rs. 8
Lakhs. In such a case, the total amount on adding up becomes Rs. 1.06 Lakhs i.e. above Rs.
1 Crore. Confusion arose whether the person is liable to get an audit done in this case and
ICAI has clarified that the turnover will not include any amount on the sale of the fixed asset
as it was held by the person for business use and not for the purpose of sale.

ICAI has further clarified that the amount received from the following items shall not be
included while computing the Total Sales/Total Turnover/ Gross Receipts:-
Sale Proceeds of Fixed Assets
Sale Proceeds of Assets held as Investments
Rental Income
Income by way of Interest unless assessable as Business Income
Any expense which is reimbursable to the Agent by the Client
PENALTY FOR NON COMPLIANCE OF SECTION 44 AB:
Non Compliance of the provisions of this act shall attract Penalty under section 271B of the Income Tax
Act. If any person required to get his audit done under section 44AB fails to do so before the specified
date shall be liable for penalty of % of the turnover/gross receipts subject to a maximum penalty of Rs.
1, 50,000.
However, Section 273B states that no penalty shall be levied under section 271B if there is a reasonable
cause for such failure. Some instances which have been accepted by the Tribunals/Courts as
Reasonable Cause are:-
1. Resignation of the Tax Auditor and Consequent Delay
2. Death or physical inability of the partner in charge of the Accounts
3. Labour Problems such as strikes, lock-outs for a long period
4. Loss of Accounts because of Fire/Theft etc. beyond the control of the Assessee
5. Natural Calamities

REVISION OF TAX AUDOT REPORT:

Tax Audit Report efiled cannot be revised under normal circumstances. However, in case the Accounts
are revised in the following circumstances, the Audit Report efiled can also be revised:-
1. Revision of Accounts of a Company after its adoption in the Annual General Meeting
2. Change in Law with Retrospective effect
3. Change in Interpretation of Law

In case the Tax Audit report efiled is revised, the Auditor shall state that it s a Revised Report and shall
also state the reasons for the same.
TAX AUDITOR
TAX AUDITOR:
Tax auditors ensure that individuals and companies comply with local, state and federal tax laws.
They also advise their clients on tax issues and assist with tax filings. A college education is
usually required, and professional certification can improve employment potential.
1. Explanation to section 44AB (i):
The term accountant has been defined in sub-clause (i) of Explanation to Section 44AB as
under: Explanation: For the purposes of this section, accountant shall have the same meaning as
in the Explanation below sub-section (2) of Section 288.
2. Explanation to Section 288(2):
The above mentioned Explanation reads as under:
Accountant means a chartered accountant within the meaning of chartered Accountants Act, 1949
and includes, in relation to any state, any person, who by virtue of the provisions of sub-section
(2) of Section 226 of the Companies Act, 1956, is entitled to be appointed to act as an auditor of
companies registered in that state.
3. Provision to Section 44AB:
The provision to Section 44AB also lays down that where the accounts of an assessee are required
to be audited by or under any other law, it shall be sufficient compliance with the provisions of
this section, if such person gets the accounts of such business or profession audited under such
other law before the specified date and furnishes by that date the report of the audit as required
under such other law a further report by an
accountant in the form prescribed under this section. In the case of any assessee like a co-operative
society where the accounts under the relevant law are allowed to be audited by a person other than
a chartered accountant, the statutory auditor need not be a chartered accountant. However, a tax
auditor has to be a chartered accountant even if statutory audit has been conducted by a person
other than a chartered accountant. Section 44AB does not stipulate that only the statutory auditor
appointed under the Companies Act or other similar statute should perform the tax audit. The tax
audit can therefore; he conducted either by the statutory auditor or by any other chartered
accountant in practice.
4. Firm of CA:
Though the section refers to the accounts being audited by an accountant which means a chartered
accountant as defined above, the statement of audit can also be done by a firm of chartered
accountants. This has been a recognized practice under the Act. In such a case, it would be
necessary to state the name of the partner who has signed the audit report on behalf of the firm.
The member signing the report as a partner of a firm or in his individual capacity should give his
membership number below his name.
5. Communication with previous Auditor:
Tax audit under Section 44AB being a recurring audit assignment, for expressing professional
opinion on the financial statements and the statement of particulars, the member accepting the
assignment should communicate with the member who had done tax audit in the earlier years as
provided in the Chartered Accountants Act.
6. Letter of Appointment:
The tax auditor should obtain from the assessee a letter of appointment for conducting the audit as
mentioned in Section 44AB. It is advisable that such an appointment letter should be signed by the
person competent to sign the return of income in terms of the provisions of Section 140.
7. Statement of Particulars:
The tax auditor should get the statement of particulars, as required in the annexure to me audit
report, authenticated by the assessee before he proceeds to verify the same.

8. Report to be submitted to Assessee:


The tax auditor is required to submit his report to the person appointing him viz. the assessee.

9. Persons not Eligible:


As per the Code of Conduct by ICAI, a chartered accountant who is in employment of a concern
or in any other concern under the same management or a chartered accountant who is responsible
for writing or the maintenance of the books of account of the assessee cannot be appointed as tax
auditor. The audit of accounts of a professional firm of chartered accountants, under Section 44AB
cannot be conducted by any partner or employee of such firm. A chartered accountant, who is a tax
consultant of the assessee. If the internal auditor is working in a professional capacity (as an
independent chartered accountant not being an employee of the assessee) he can conduct the tax
audit.

10. Removal:
There is no specific procedure for removal of a tax auditor appointed under section 44AB. IT is,
how3evr, possible for the management to remove a tax auditor where there are any valid grounds
for such removal. This may arise where the tax auditor has delayed the submission of audit report
under Section 44AB for an unreasonable period and if it is found that there is no possibility of
getting the audit report before the specified date. In such cases, the assessee may be justified in
removing the tax auditor.
TYPES OF AUDITOR:

1. Internal Auditors
Internal audits are performed by an employee within an organization. These audits can serve
multiple purposes, including the identification of fraud, wasteful spending and mismanagement of
funds. Internal auditors could be responsible for assessing records and recommending
improvement for efficiency, compliance and data security.

2. External Auditors
External audits are performed by an impartial third party, often a Certified Public Accountant
(CPA) from an accounting firm. For the purpose of tax audits, the auditor might advise the client
on tax advantages and file tax forms for the company.

3. Government Auditors
Government employees, such as those that work for the Internal Revenue Service (IRS), ensure the
accuracy of governmental records and provide random tax audit services for companies, nonprofit
organizations and individuals. They evaluate corporate and individual tax returns, expenditures,
receipts and bookkeeping practices to ensure compliance with tax codes and regulations.

EDUCATION REQUIREMENTS FOR TAX AUDITORS:


According to the U.S. Bureau of Labor Statistics, most auditor positions require a bachelor's
degree in accounting, though some employers might favor those with master's degrees in business
or accounting. Graduates of associate degree programs and those with related experience as
accounting clerks or bookkeepers might qualify for some entry-level positions under the
supervision of a licensed or experienced auditor
TAX AUDITOR RESPONSIBILITIES AND DUTIE:

1. Maintain all required paperwork according to required policies and procedures.


2. Maintain all procedure manual and ensure efficient corporate procedures for same
and prepare quarterly reports for same.
3. Administer all internal audits and ensure compliance to all transaction tests and
documents.
4. Ensure compliance to all statutes and analyze accounting systems and evaluate all
tax controls to assist to reduce taxes.
5. Ensure adherence to all code and assist to manage all data develop from audits and
provide required training to all auditors and evaluate all audit files as per requirement.
6. Analyze all pre audits and develop required audit plans according to procedures and
establish appropriate guidelines.
7. Provide support to all activities and maintain implement of all audit plans and
supervise implementation of all tax audits within required timeframe.
8. Prepare and submit various comprehensive reports and administer all tax statutes and
assist tax payer to complete all audits.
9. Assist to perform all complex audits for all businesses.
10. Analyze all accounting system to administer all additional liabilities.
11. Evaluate all refunds and perform required calculations for all tax assessment and
participate in all closing conference and prepare audit reports.
12. Maintain knowledge on all tax laws and strategies and prepare reports for same .
TAX AUDIT PROCEDURES AND
AUDIT REPORT
TAX AUDIT PROCEDURES:
Audit procedures are techniques and steps that corporate reviewers use to assess a
company's operating performance. Auditors keep a close eye on internal controls, financial
systems and corporate accounting principles. Closely monitoring financial mechanisms
helps auditors ensure that employees record operating data in accordance with accounting
norms. In modern economies, "cooking the books" is a phrase that makes corporate
management's blood run cold. Cooking the books, also known as fraudulent financial
reporting, causes a firm to incur losses resulting from investor lawsuits and regulatory
penalties.
TAX AUDIT PROCEDURES
1. True and fare:
In the case of an audit the tax auditor is required to express his opinion as to whether the
financial statements give a true and fair view of the state of affairs of the assessee in the case of
the balance sheet and in the case of the profit and loss account or income and expenditure
account, of the profit and loss or income/expenditure.
2. True and correct:
As regards the statement of particulars to be annexed to the audit report, he is required to give
his opinion as to whether the particulars are true and correct.
3. Audit Tests:
In giving his 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, considering the contents of the
audit report.
4. Procedures:
He will have to conduct the audit by applying the generally accepted auditing procedures which
are applicable for any other audit.
5. Materiality:
The tax auditor will also have to keep in mind the concept of materiality depending upon the
circumstances of each case.
6. SA:
He would be well advised to refer to the standards on Auditing and Assurances issued by ICAI, the
Statement on Auditing Practices as well as the Guidance Note on Audit Reports and
Certificates for Special Purposes while determining the extent of test checks and materiality in
each particular case.
7. Concurrent Statutory and Tax Audits:
If the statutory auditor is also appointed to undertake Tax audit, it is advisable to carry out both the
audits concurrently.
8. Information and Records:
Section 227 of the Companies Act gives certain powers to the auditors to call for the books of
account, information, documents, explanations, etc. and to have access to all books and records.
No such powers are4 given to the tax auditor appointed under Section 44AB. However, since the
appointment of the tax auditor is made by assessee, it will be in the interest of the assessee to
furnish all the information or explanation, the tax auditor will be required to report the same and
qualify his report.
9. Working papers:
The audit report given under Section 44AB is to assist the income-tax department to assess the
correct income of the assessee. In order that the tax auditor may be in a position to explain any
questions which may arise later on, it is necessary that he should keep detailed notes about the
evidence on which he has relied upon while conducting the audit6 and also maintain all his
working papers.
Such working papers should include his notes on the following, amongst other matters:
a) work done while conducting the audit and by whom;
b) explanations and information given to him during the course of the audit and by whom;
c) decision on the various points taken;
d) the judicial pronouncements relied upon by him while making the audit report; and
e) Certificates issued by the client/management letters.
10. No Need for Re-unit:
If the accounts of the business or profession of a person have been audited under ant other law by
the statutory auditors, it is not necessary for the tax auditor appointed under Section 44AB to
conduct the audit once again in the matter of expression of true and fair view of the state of
affairs of the entity and of its profit and loss for the period covered by the audit. The tax auditor
has only to annex a copy of the audited accounts and the auditors report and other documents
forming part of these accounts to his report and verify the particulars in the prescribed form for
expressing his opinion as to whether these are true and correct.
11. Test Checks:
He can apply the technique of test check dep3ending on the type of internal control procedures
followed by the assessee. The tax auditor may be require to apply reasonable tests on the total
information to be prepared by the assessee in respect of certain items in the prescribed form, e.g.,
in verification of payments for purchase/expanses exceeding Rs.20,000 in cash. While the entity
may have to prepare the details for the entire year, the tax auditor may have to ensure that no items
have been omitted in the information furnished and a reasonable test check would reveal whether
or not the information furnished is correct. The extent of check undertaken would have to be
indicated by the tax auditor in his working papers and audit notes. The tax auditor would be well
advised to so design his tax audit programme as would reveal the extent of checking and to ensure
adequate documentation in support of the information being certified.
12. E-filing:
The Tax Audit report is to be submitted electronically (e-filed) w.e.f. the current assessment year
2013-2014.
TAX AUDIT REPORT IN FORM 3CA AND 3CB
TAX AUDIT REPORT IN FORM 3CA:
1. Use where Statutory Audit Done:
This form is to be used in a case where the accounts of the business or
profession of a person have been audited under any other law.
2. Annex Statutory Audit Report:
The first part of the report refers to the fact that the statutory audit of
the assessee was conducted by a chartered accountant or any other
auditor in pursuance of the provisions of the relevant Act, and the copy
of the audit report along with the audited profit and loss account and
balance sheet and the documents declared by the relevant Act to be
part of or annexed to the profit and loss account and balance sheet, are
annexed to the report in Form No.3CA
3. Different Auditors:
In a case where the tax auditor carrying out the audit under Section
44AB is different from the statutory auditor, a reference should be
made to the name of such statutory auditor.
4. Same Auditors:
In case the statutory auditor is carrying out the audit under section
44AB, the fact that he has carried out the statutory audit under the
relevant Act should be stated.
5. Particulars in 3CD: INCOME TAX AUDIT PAGE 27
The next paragraph states that the statement of particulars required to be furnished under section
44AB is annexed with the report in Form No.3CD. The tax auditor has to state further that, in his
opinion and to the best of his information and according to the explanations given to him, the
particulars given in the said annexure are true and correct.
6. Qualification:
Where any of the requirements in his form is answered in negative or with qualification, the report
shall state the reasons therefore. The tax auditor should state this qualification in the audit report
so that the same becomes a comprehensive report and the user of the audited statement of
particulars can realize the impact of such qualifications.
7. Branch Tax Audit Report:
If the audit under section 44AB of branches is carried out by branch auditors or other chartered
accountants, they should submit the report in Form No.3CA to the management or the principal tax
auditor appointed for the head office under section 44AB. SA 600 Using the Work of Auditor
discusses the procedures in this regard as well as the principal tax auditor s responsibility in
relation to his use of the wor5k of the branch auditor. The principal tax auditor should submit his
consolidated report on the registered office head office and branch accounts and report in his tax
audit report as under.
I/We have taken into consideration the audit report and the audited statements of accounts, and
particulars received from the auditors, duly appointed under the relevant law, of the branches not
audited by me/us. If the assessee is unable to obtain relevant information in respect of the
overseas branches duly certified by the overseas auditor, the relevant facts should be suitably
disclosed and reported upon.
8. Membership No.:
Item No.4 of the notes to Form No.3CA requires that the person, who signs this audit report, shall
indicate reference of his membership No. with ICAI and the status such as proprietor or partner
under which he has signed the report.
TAX AUDIT REPORT IN FORM NO.3CB

1. No Separate Statutory Audit:


In the case of a person who carries on business or profession but who is not required by or under
any other law to get his accounts audited the audit report has to be given in Form No.3CB.
2. Examination of Final Accounts:
The tax auditor has to state whether he has examined the balance sheet as at 31st March of the
relevant previous year and the profit and loss account/income expenditure account for the year
ended on the date. Further, such a balance sheet and the profit and loss account must be attached
with the audit report.
3. Final Accounts Agree with Books:
The tax auditor has to certify that the balance sheet and the profit and loss account income and
expenditure account are in agreement with the books of accounts maintained at the head office and
branches. He has also to mention the total number of branches.
4. Opinion: He has to state whether:
he has obtained all the information and explanations which, to the best of his knowledge and
belief, were necessary for the purposes of the audit;
in his opinion proper books of accounts have been kept by the head office and branches of the
assessee so far as appears from his examination of the books;
in his opinion and to the best of his information and according to the explanation given to him
the said accounts, read with notes thereon, if any, give a true and fair view;
a) in the case of the balance sheet of the state of the affairs of the assessee as at 31st March, and
b) in the case of the profit and loss account/income and expenditure account of the profit/loss or
surplus/deficit of the assessee for the year ended on that date.
5. Qualifications:
The tax auditor should make his opinion subject to such observations which are of qualificatory nature.
Any other observations may form port of the notes to accounts forming part of the accounts. In case the
tax auditor has no observation to report which are of qualificatorly nature, the relevant portion may be
deleted.
6. Opinion on Form 3CD:
Paragraph 4 of Form No. 3CB provides that the prescribed particulars are furnished in Form No.3CD
annexed to the report and whether in his opinion and to the best of his information and according to the
explanations given to him, they are true and correct. The auditor may have a difference of opinion with
regard to the particulars furnished by the assessee and he has to bring these differences under various
clauses in Form No.3CD. The auditor should make a specific reference to those clauses in Form No.
3CD in which he has expressed his reservations, difference of opinion, disclaimer etc. in this paragraph.
7. Branch Tax Audit Report
If the assessee has branches he can request the tax auditor appointed under section 44AB to audit the
head office and branch accounts. In the alternative, the assessee can appoint separate tax auditors for
branches. The branch tax auditor in such a case will have to give an audit report in For No.3CB to the
management or the tax auditor appointed for the audit of head office accounts. The tax auditor appointed
for the audit of head office cab rely on the report of branch tax auditors subject to such checks and
verifications as he may choose to make and shall submit his consolidated report on the head office and
branch accounts. He should make suitable reference to the audit conducted by separate branch tax
auditors in the same manner as stated above.
8. Unaudited Business Books:
If the tax auditor is called upon to give his report only in respect of one or more businesses carried on by
the assessee and the books of accounts of the other businesses are not produced as the same are not
required to be audited under the Act. The tax auditor should mention the fact that audit has not been
conducted of those businesses whose books of account had not been produced. However, if the financial
statements include, inter alia, the results of such business for which books of account have not been
produced, the auditor should qualify his report in Form No.3CA/3CB.
Conclusion

Indian tax compliance requires careful and timely attention. Detailed


understanding of various rules and regulations often demand the study of
previous tax decisions by Indian courts. Tax litigation is common in India and
can be both time-consuming and expensive. However, with proper front-end
planning and professional advice, the tax liability and compliance costs can be
kept at manageable levels. The regulations permit taxpayers to obtain advance
rulings on tax issues involving non-residents from the authorities.
THANK
YOU