Wednesday, 1 January 2020

Unit 13: Tax and Cost Audit

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Unit 13: Tax and Cost Audit

For ensuring compliance sometimes audit become a necessity.

Therefore, various statutes, including legislations governing direct and indirect tax provisions have incorporated audit provisions in some or the other form.

The Explanation to Section 288(2) defines ‘accountant’ as a Chartered Accountant within the meaning of the Chartered Accountants Act, 1949 and any other person who is entitled to be appointed as an auditor of a company under Section 226(2) of the Companies Act, 1956.

It may be noted that by the virtue of a resolution of the Council, with effect from 1st April 2005, a member in part-time practice (namely holding a certificate of practice and also engaging himself in any other business/ and or occupation) is not entitled to perform attest functions including tax audit.

The audit report is required to be furnished to the relevant year.

Failure to furnish the report will disentitle the trust or institution to the benefit of Sections 11 and 12.

The conditions under which certain specified preliminary expenditure incurred before the commencement of business and once the business is commenced on expanding an industrial undertaking or in connection with setting up a new industrial unit can be amortised are stated in Section 35D of the Act.

The manner in which deductions are allowed in respect of expenditure on any prospecting operations relating to certain specified minerals listed in the Seventh Schedule to the Act are stated in Section 35E of the Act.

In respect of assesses other than a company or a co-operative society, these deductions are admissible only if the accounts for, the year or years in which the above specified expenditure is incurred are audited by an “accountant” as defined in explanation below sub-section (2) of section 288 of the Income-tax Act, 1961 and the report of such audit is furnished by the assesse along with the return of income.

Rule 6AB of the Income-tax Rules 1962 provides that the report of audit required to be furnished by the abovementioned assesses under sections 35D and 35E should be in Form No.3B.

Under the provisions of sections 44AD and 44AF, an assesse can opt to be assessed on presumptive basis, so long as the gross receipts/total turnover from any of the business (es) do not exceed 40 lakhs.

Once the total turnover/gross receipts from any such business(es) exceed 40 lakhs, a tax audit will be required under clause (a) of Section 44AB.

While the auditor has to apply the basic principles of audit he has to keep in mind that the Notes requirements of VAT audit are different and accordingly he should design his audit programme.

While performing the audit under VAT law the auditor is expected to conduct the audit presuming himself to be the tax assessor.

His audit report will therefore have to be comprehensive commenting on each and every aspect which goes to the root of quantification of tax liability.

The auditor is expected to give his opinion on the adequacy of accounting records, correctness and completeness and arithmetical consistency of returns filed.

The origin of the concept of cost audit could be traced to the Second World War period when the practice of assigning cost plus contracts started.

However, probably India is the only country in the “free” world where cost audit is statutorily prescribed.

Cost audit can offer valuable assistance to the management in its decision making process since it ensures reliable cost accounting data and information.

The management will be in a position to know what price is to be fixed for a product, whether the wastages are avoidable, whether to re-organize purchase or sales or inventory systems to make the work more efficient and so on.

The object with which the statutory requirement of cost audit has been included in the Companies Act can only be ascertained by a study of the cost audit report requirements.

They include control over cost, wastage and losses, efficiency in the utilisation of human, material, and other resources, determination of appropriate selling price, proper maintenance of cost records appropriate use of the costing system, etc.

Assessee: Income Tax Act 1961 (Act no.43) defines 'assesse' as a person by whom any tax or any other sum of money is payable.

Cost Records: All ledgers, supporting records, schedules, reports, invoices, vouchers, and other records and documents reflecting the cost of projects, jobs, production centres, processes, operations, products, or services, or the cost of any of the component parts thereof.

Deed of Trust: A written instrument legally conveying property to a trustee often used to secure an obligation such as a mortgage or promissory note.

Tax Audit: Type of forensic audit, performed by the government appointed auditors, to determine if the appropriate taxes were paid in full by the entity being audited.

Tax deducted at source (TDS): A method of tax collection on income assessments in India.

Closing stock: A business's remaining stock at the end of an accounting period.

Turnover: In accounting, it is defined as the number of times an asset is replaced during a financial period.

Value Added Tax (VAT): An indirect tax on consumption levied at each discrete point in the chain of production and distribution, from raw material to end use.

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