1 CONDUCTING TAX AUDIT Singrodia Goyal & Co. Chartered Accountants Chartered Accountants CA. Sanjeev...

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1 CONDUCTING TAX AUDIT Singrodia Goyal & Co. Chartered Accountants CA. Sanjeev Lalan

Transcript of 1 CONDUCTING TAX AUDIT Singrodia Goyal & Co. Chartered Accountants Chartered Accountants CA. Sanjeev...

Page 1: 1 CONDUCTING TAX AUDIT Singrodia Goyal & Co. Chartered Accountants Chartered Accountants CA. Sanjeev Lalan.

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CONDUCTING TAX AUDIT

Singrodia Goyal & Co. Chartered Accountants

CA. Sanjeev Lalan

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Applicability of Tax Audit – S. 44AB

Every person carrying on business whose Gross Turnover, Receipts

Or Total Sales exceed Rs. 1 Crore

Every person carrying on profession whose Gross Receipts exceed

Rs. 25 Lakhs

Where profits & gains of person from business are taxable on

estimated basis u/ss. 44AD, 44AE, 44BB or 44BBB & such person

claims his income to be lower than profits & gains so estimated

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Mandatory e-filing of Tax Audit report

• E-filing of tax audit report u/s. 44AB and other reports

and certificates made mandatory from AY 2013-14

onwards

• Notification No. 34/2013 [F.No. 142/5/2013-TPL]/SO

1111(E), dated 01/05/2013

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Tax AuditObjective: To ensure maintenance of proper records and to assist Income Tax

Department to assess correct income of assessee

Main report: Form 3CA: Applies where accounts of business or profession of

assessee have been audited under any other law Form 3CB: Applies in cases where accounts are not required to be

audited by any other law Annexure I – Financial Reporting

Annexure in Form 3CD to main report

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Tax Audit Report

Form 3CA – Report that Statutory Audit was conducted in

pursuance of Statute applicable to assessee Form 3CB – Report that Tax Audit is conducted in accordance with

provisions of section 44AB. Expression of opinion whether

financial statements give true & fair view of- State of affairs of assessee as represented by Balance Sheet Profit / Loss or Income / Expenditure as represented by Profit /

Loss Account Expression of opinion as to whether the particulars contained in

Annexure 3CD & Annexure I are True & Correct

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Tax Audit Procedures

Primary responsibility of assessee to prepare relevant information Tax Auditor (TA) to verify compliance Nature of Tax Audit Limits on conduct of Tax Audit. TA to-• Use professional skill & expertise• Apply Generally Accepted Auditing Procedures as applicable for

other audits• Apply techniques of reasonable test audit checks & compliance

tests depending upon internal controls of assessee• Follow principles of ‘Materiality’, ‘Prudence’ & ‘Substance Over

Form’

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Tax Audit Procedures

Refer to following publications issued by ICAI-

• Standards on Audit (SAs)

• Guidance Notes (GNs) on Audit Reports & Certificates for

Special Purposes

• GN on Tax Audit

• SA 700 - Auditor’s report on financial statements

• SA 705 – Modifications to the Opinion

• SA 706 – Emphasis of matters

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Standards on Audit (SAs) issued by ICAIS.No. Standards on Auditing Number Type Revised or Not Effective Date

1Overall Objectives of the Independent Auditor and the conduct of an audit in accordance with Standards on Auditing.

200 SA Revised Apr 1, 2010

2 Agreeing the terms of Audit Engagements 210 SA Revised Apr 1, 2010

3 Quality Control for Audit of Financial Statements 220 SA Revised Apr 1, 2010

4 Audit Documentation 230 SA Revised Apr 1, 2009

5 The Auditor’s Responsibility relating to Fraud in an Audit of Financial Statement 240 SA Revised Apr 1, 2009

6 Consideration of Laws and Regulations in an Audit of Financial Statements 250 SA Revised Apr 1, 2009

7 Communication with Those Charged with Governance 260 SA Revised Apr 1, 2009

8 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management 265 SA Apr 1, 2010

9 Responsibility of Joint Auditors 299 SA Apr 1, 1996

10 Planning an Audit of Financial Statements 300 SA Revised Apr 1, 2008

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Standards on Audit (SAs) issued by ICAIS.No. Standards on Auditing Number Type Revised or Not Effective Date

11Identifying and Assessing the Risk of Material Misstatement Through Understanding the Entity and its Environment

315 SA Apr 1, 2008

12 Materiality in planning and performing an Audit 320 SA Revised Apr 1, 2010

13 The Auditor’s Responses to Assessed Risks 330 SA Apr 1, 2008

14 Audit Considerations Relating to an entity Using a Service Organization. 402 SA Revised Apr 1, 2010

15 Evaluation of Misstatements Identified during the Audits 450 SA Apr 1, 2010

16 Audit Evidence 500 SA Revised Apr 1, 2009

17 Audit Evidence – Specific Considerations for Selected items 501 SA Revised Apr 1, 2010

18 External Confirmations 505 SA Revised Apr 1, 2010

19 Initial Audit Engagements – Opening Balances 510 SA Revised Apr 1, 2010

20 Analytical Procedures 520 SA Revised Apr 1, 2010

21 Audit Sampling 530 SA Revised Apr 1, 2009

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Standards on Audit (SAs) issued by ICAIS.No. Standards on Auditing Number Type Revised or Not Effective Date

22Auditing of Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures

540 SA Revised Apr 1, 2009

23 Related Parties 550 SA Revised Apr 1, 201024 Subsequent Events 560 SA Revised Apr 1, 200925 Going Concern 570 SA Revised Apr 1, 200926 Written Representation 580 SA Revised Apr 1, 200927 Using the Work of Another Auditor 600 SA Apr 1, 200228 Using the Work of an Internal Auditor 610 SA Revised Apr 1, 201029 Using the Work of an Auditor’s Expert 620 SA Revised Apr 1, 2010

30 Forming an Opinion and Reporting on Financial Statements 700 SA Revised Apr 1, 2012

31 Modifications to the Opinion in the Independent Auditor’s Report 705 SA Apr 1, 2012

32 Emphasis of Matter Paragraphs and other Matter Paragraphs in the Independent Auditor’s Report 706 SA Apr 1, 2012

33 Comparative Information – Corresponding Figures and Comparative Financial Statements 710 SA Revised Apr 1, 2011

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Standards on Audit (SAs) issued by ICAIS.No. Standards on Auditing Number Type Revised or Not Effective Date

34The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements

720 SA Apr 1, 2010

35 Audits of Financial Statements Prepared in accordance with Special Purpose Frameworks 800 SA Apr 1, 2011

36Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statements

805 SA Apr 1, 2011

37 Engagements to Report on Summary Financial Statements 810 SA Apr 1, 2011

38 Standards on Quality Control 1 SQC Apr 1, 2009

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Brief Introduction to SA’s & other relevant standards

SA 200: OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH STANDARDS ON AUDITING It establishes the independent auditor’s overall responsibilities when

conducting an audit of financial statements in accordance with SAs. It also explains scope, inherent limitations of audit, objectives and

responsibilities of an auditor SA 210: AGREEING THE TERMS OF AUDIT ENGAGEMENTS

It deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with management and, where appropriate, those charged with governance

Consideration to be given by an auditor while engagement acceptance-preconditions for an audit are present

SA 220: QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS It deals with the specific responsibilities of the engagement partner

regarding quality control procedures viz. ethical compliance, independence, quality control review, for an audit of financial statements

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Brief Introduction to SA’s & other relevant standards SA 230: AUDIT DOCUMENTATION

This Standard on Auditing (SA) deals with the auditor’s responsibility for preparation and maintenance of an audit documentation

Keep detailed note of evidences relied upon

Maintain all working papers including notes on following-

• Work done while conducting audit & by whom

• Explanation & information given during course of audit & by

whom

• Decision on various points taken & judicial pronouncements relied

upon

• MRs / Certificates issued by client

Design audit programme as would reveal extent of checking & ensure

adequate documentation

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Brief Introduction to SA’s & other relevant standards

SA 250: CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS It deals with the auditor’s responsibility to identify instances of non–

compliance with laws and regulations having direct/indirect effect on the material amounts and disclosures in financials statements

However, auditor not primarily responsible for non-compliance as well as non-detection as the same rests on the Management and TCWG

SA 300: PLANNING AN AUDIT OF FINANCIAL STATEMENTS Initial Audit Engagements-Acceptance (SA 220) and communication with

previous auditor Recurring Audit Engagement- Planning Activities

SA 500: AUDIT EVIDENCE It explains what constitutes audit evidence in an audit of financial

statements, and It deals with the auditor’s responsibility to design and perform audit

procedures viz. inspection, observation, inquiry, recalculation, analytical procedures, reperformance, to obtain sufficient appropriate audit evidence to draw reasonable conclusions so as to enable him to express an opinion

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Brief Introduction to SA’s & other relevant standards SA 500: AUDIT EVIDENCE

It explains what constitutes audit evidence in an audit of financial statements, and

It deals with the auditor’s responsibility to design and perform audit procedures viz. inspection, observation, inquiry, recalculation, analytical procedures, re-performance, to obtain sufficient appropriate audit evidence to draw reasonable conclusions so as to enable him to express an opinion

SA 501: AUDIT EVIDENCE—SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS It deals with specific considerations by the auditor in obtaining sufficient

appropriate audit evidence in accordance with SA 230, SA 500 (Revised) and other relevant SAs, with respect to certain aspects of inventory, litigation and claims involving the entity, and segment information in an audit of financial statements

SA 505: EXTERNAL CONFIRMATIONS This Standard on Auditing (SA) deals with the auditor’s use of external

confirmation procedures to obtain audit evidence in accordance with the requirements of SA 330 and SA 500 (Revised).

SA 510: INITIAL AUDIT ENGAGEMENTS—OPENING BALANCES This Standard on Auditing (SA) deals with the auditor’s responsibilities relating

to opening balances when conducting an initial audit engagement

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Brief Introduction to SA’s & other relevant standards SA 550: RELATED PARTIES This Standard on Auditing (SA) deals with the auditor’s responsibilities regarding related

party relationships and transactions when performing an audit of financial statements. Related Parties as per SA 550:a) person or other entity that has control or significant influence, directly or indirectly

over the reporting entityb) Another entity over which the reporting entity has control or significant influence,

directly or indirectlyc) entity under common control with the reporting entity Related Parties as per 40A(2):a) relative of the assesseeb) director of company or partner of the firm, member of association of persons or

Hindu undivided family or partner of firm, or any relative of such director, partner or member

c) individual who has a substantial interest in the business or any relative of such individual

d) company, firm, association of persons or Hindu undivided family having a substantial interest in the business or its director, partner or member or its relative

e) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or its director, partner or member or its relative

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Brief Introduction to SA’s & other relevant standards SA 560: SUBSEQUENT EVENTS

It deals with the auditor’s responsibilities relating to effect of subsequent events on financial statements and auditor’s report

SA 570: GOING CONCERN It deals with the auditor’s responsibility in the audit of financial

statements with respect to management’s use of the going concern assumption in the preparation and presentation of the financial statements

Conditions that may cast doubt about the assumption:a) Net current liability positionb) Negative operating cash flowsc) Substantial operating lossesd) Inability to comply with the terms of loan agreementse) Loss of key management without replacement.f) Loss of a major market, key customer(s)g) Changes in law or government policy expected to adversely affect the entity

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Brief Introduction to SA’s & other relevant standards

SA 580: WRITTEN REPRESENTATIONS It deals with the auditor’s responsibility to obtain written

representations from management and, where appropriate, those charged with governance

SA 700: FORMING AN OPINION AND REPORTING ON FINANCIAL STATEMENTS Objective: expressing clearly an opinion (including basis thereof)

through a written report It also deals with the form and content of the auditor’s report issued as

a result of an audit of financial statements

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Brief Introduction to SA’s & other relevant standards

SA 705: MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT This Standard on Auditing (SA) deals with the auditor’s responsibility to

issue an appropriate report in circumstances when, in forming an opinion in accordance with SA 700 (Revised), the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary

Determination of type of modification

Nature of Matter Effect-Material but not pervasive

Effect-Material and pervasive

Financial statements are materially misstated

Qualified Opinion Adverse Opinion

Inability to obtain sufficient appropriate audit evidence

Qualified Opinion Disclaimer of Opinion

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Brief Introduction to SA’s & other relevant standards

SA 706: EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER PARAGRAPHS IN THE INDEPENDENT AUDITOR’S REPORT It deals with the auditor’s responsibility to draw user’s attention to

important matters whether or not disclosed in the financial statements by making a specific reference in the auditor’s report through “Emphasis of matter” para and “Other Matter” para.

SA 710: COMPARATIVE INFORMATION— CORRESPONDING FIGURES AND COMPARATIVE FINANCIAL STATEMENTS It deals with the auditor’s responsibilities regarding comparative

information in an audit of financial statements. If the prior period financial statements were not audited, the auditor

shall state in the auditor’s report that the corresponding figures are unaudited

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Brief Introduction to SA’s & other relevant standards SQC 1: QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND

REVIEWS OF HISTORICAL FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS The purpose of this Standard on Quality Control (SQC) is to establish

standards and provide guidance regarding a firm’s responsibilities for its system of quality control for audits and reviews of historical financial information, and for other assurance and related services engagements. This SQC is to be read in conjunction with the requirements of the Chartered Accountants Act, 1949, the Code of Ethics and other relevant pronouncements of the Institute

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Clauses 1 to 12, 28 to 32

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Annexure to Tax Audit Report (Form - 3CD)

Clauses 1-6:

Name of the assessee

Address

Permanent Account Number

Status

Previous Year Ended

Assessment Year

Importance of PAN records in all the above clauses.

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Annexure to Tax Audit Report (Form - 3CD)

Clause 7: Is applicable to Firms & Association of Persons Names of partners / members & their profit-sharing ratios [Sub-

Clause (a)] Changes in the constitution, or profit-sharing, of Partnership /

Association & the particulars of change [Sub-Clause (b)]

Clause 7: Relevant Issues Will change in remuneration paid to partners without change in

profit-sharing ratio would require any disclosure in tax audit report?

When partner in representative capacity retires & admitted as partner in individual capacity, will it amount to change in partnership?

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Annexure to Tax Audit Report (Form - 3CD)

Clause 8: Nature of Business / Profession (If more than one business /

profession is carried out, then nature of every business /

profession) [Sub-Clause (a)] Particulars of change in business / profession [Sub-Clause (b)]

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Annexure to Tax Audit Report (Form - 3CD)

Clause 8: Relevant Issues If assessee starts another business whose gross receipts are not

material compared to existing business, would it still amount to

change in business? If assessee manufactures certain products & also sells certain

components which are used in manufacture of product, would he

be categorized as trader or manufacturer? If nature of business covers vast no. of activities, is it sufficient for

TA to obtain management representations?

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Annexure to Tax Audit Report (Form - 3CD)

Clause 9: Whether books of accounts are prescribed as per S. 44AA? [Sub-

Clause (a)] Books of Accounts maintained (In case of computerized system of

accounting, mention books of account generated by such system)

[Sub-Clause (b)] List of books examined [Sub-Clause (c)]

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Annexure to Tax Audit Report (Form - 3CD)

Clause 9: Relevant Issues Where stock records are not maintained due to high volume of

transactions, what is TA’s stand? Would post audit print-outs of accounts prepared be sufficient

evidence of audit without audit ticks?

Clause 10:

Mention profit assessable on presumptive basis which is included

in profit & loss account and relevant section under which it is

assessable

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Annexure to Tax Audit Report (Form - 3CD)

Clause 11: Method of Accounting followed in P.Y [Sub-Clause (a)] Any change in method of accounting in relation to last P.Y [Sub-Clause (b)]

Details of such change and its effect on profit / loss [Sub-Clause (c)] Details of deviation in method employed from accounting standards

prescribed u/s. 145 & effect on profit / loss [Sub-Clause (d)]

Relevant Issues Does change in accounting policy amount to change in ‘method of

accounting’? If preceding P.Y’s accounts were not subject to tax audit, is it sufficient to

rely only upon information & explanations provided by client?

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Annexure to Tax Audit Report (Form - 3CD)Clause 12: Method of Valuation of Closing Inventory employed in P.Y [Sub-

Clause (a)] Details of deviation of such method of valuation from method

prescribed u/s. 145A & effect on profit / loss [Sub-Clause (b)] What is objective behind S. 145A?Whether there is any effect on Profit & Loss Account by adopting

‘Inclusive Method’ as per S. 145A ?

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Annexure to Tax Audit Report (Form - 3CD)

Clause 12: Relevant Issues Where closing inventories are valued at market price (being lower than

cost), should excise duty be added to such amount for complying with S.

145A?

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Annexure to Tax Audit Report (Form - 3CD)

Clause 22: Amount of CENVAT Credit utilized during P.Y. & treatment in profit /

loss account & treatment of CENVAT Credit outstanding [Sub-

Clause (a)] Particulars of prior period Income / Expenditure credited / debited

to Profit / Loss Account [Sub-Clause (b)]

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Annexure to Tax Audit Report (Form - 3CD)Clause 22: Relevant Issues

CENVAT Credit Where CENVAT Credit as per assessees books is reconciled with Credit as per

Excise Department, which entries are to be considered under this clause?

Prior-Period Items Where particular item is considered as prior period item by TA but not by

statutory auditor, what is TA’s duty in this respect? How should sales tax refund determined as result of order passed in last month

of preceding P.Y but received in current P.Y, be treated? How should claim made for short supply of RM in preceding P.Y, settled in this

P.Y, be treated? Wage disputes started in preceding P.Y but settled in current P.Y-Whether

increase in wages pertaining to earlier P.Ys paid in current P.Y should be disclosed as prior period item?

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Annexure to Tax Audit Report (Form - 3CD)

Clause 23:

Amount borrowed on hundi (including interest thereon) repaid other than

through account payee cheque (section 69D)

Clause 24:

Particulars of each loan / deposit exceeding limits specified u/s. 269SS taken or

accepted during P.Y-

Name, address & PAN of lender / depositor

Amount of loan / deposit

Whether loan / deposit was squared up during P.Y

Maximum amount outstanding at any time in P.Y

Whether loan / deposit was taken / accepted otherwise than by account payee

cheque or account payee bank draft [Sub-Clause (a)]

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Annexure to Tax Audit Report (Form - 3CD)Clause 24: Particulars of loan / deposit repaid exceeding limits specified u/s. 269T during

P.Y- Name, address & PAN of payee Amount of repayment Maximum amount outstanding at any time during P.Y Whether repayment was made otherwise than by account payee cheque

or account payee bank draft [Sub-Clause (b)] Whether certificate has been obtained from assessee regarding taking or

accepting, or repayment of same through account payee cheque / draft [Sub-Clause (c)]

Such particulars are not necessary in case of government companies, banking companies or corporations established under Central, State or Provincial Act

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Annexure to Tax Audit Report (Form - 3CD)Clause 24: Relevant Issues What are reporting requirements in case where deposit is received along

with interest by other than account payee cheque or draft? Where current account is maintained for sister concern in respect of

purchase of goods, cheque received, etc., how should same be

approached by TA? What is treatment of booking amount received against sale of goods? Where asset is purchased under hire purchase finance, payment for

which is made by account payee cheque by financier to supplier, is such

loan taken by assessee in infringement of S. 269SS? Does S. 269SS include loans from finance companies & co-operative

banks?

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Annexure to Tax Audit Report (Form - 3CD)Clause 24: Relevant Issues Where payment to creditor is made by sister concern of assessee, will

same be required to be reported under this clause? Where repayment of loan is made by crossed cheque to creditor of

assessees lender, will same be covered under this clause? Where in loan account there is no transaction apart from interest to be

paid & TDS on such interest due, should same be reported under this

clause? Where creditors for supplies are converted into unsecured loans, what

are reporting requirements? Current account loans taken & repaid on different dates during P.Y, should

same be disclosed in respect of each credit entry under this clause?

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Annexure to Tax Audit Report (Form - 3CD)Clause 24: Relevant Issues Where assessee makes payments of LIC Premium or Advance Tax on behalf of its

depositors in account payee cheque of amounts exceeding limits specified in S. 296T,

would same be required to be disclosed? What is position if transfer entries are made in books as authorized by letter of

depositor? Opening balance of loan account is Rs. 1 lakh & only Rs. 10,000 has been accepted

during P.Y, should same be reported? Opening balance of loan account is Rs. 1 lakh & there absolutely no movement in

account either by way of further acceptance / repayment or interest during P.Y,

should same be reported? Is any comment required from TA in respect of contravention of provisions of Ss.

69D, 269SS & 269T?

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Annexure to Tax Audit Report (Form - 3CD)

Clause 25: Details of brought forward loss or depreciation allowance, in

following manner [Sub-Clause (a)]-

Where change in shareholding of company has taken place in P.Y

due to which losses incurred in preceding P.Ys cannot be carried

forward as per S. 79 [Sub-Clause (b)]

Serial No Assessment Year

Nature of Loss / Allowance (in Rs.)

Amount as returned (in Rs.)

Amount as assessed (give reference to relevant order)

Remarks

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Annexure to Tax Audit Report (Form - 3CD)Clause 28: In case of trading concern, quantitative details of principal goods traded-

Opening Stock Purchases during P.Y Sales during P.Y Closing Stock Short / Excess [Sub-Clause (a)]

In case of manufacturing concern, quantitative details of raw materials, finished goods

& / or by-products- Opening Stock Purchases during P.Y Consumption / Production during P.Y Closing Stock Short / Excess

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Annexure to Tax Audit Report (Form - 3CD)

Clause 28: Yield of finished products * Percentage of yield *[Sub-Clause (b)]

*Information may be given to the extent available; applies to raw

materials only

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Annexure to Tax Audit Report (Form - 3CD)Clause 28: Relevant Issues How must quantitative details be disclosed in case of retail traders where there

are variety of items traded? Will TA be justified in conducting his audit in proper manner if he accepts MRs

regarding quantitative details of items, in case there is no mechanism to record stock?

How should TA report in case of civil contractor or construction company under this clause?

Where assessee was not valuing work-in-progress because processing time was minimal, how should TA report this issue under this clause?

In case where units of raw materials & closing stock are not same, how should yield & shortage / excess of stock be measured?

Are assessees rendering technical services required to maintain quantitative details of drawing materials like tracing papers, etc?

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Annexure to Tax Audit Report (Form - 3CD)Clause 29:

In case of domestic company , details of tax on distributed profits

u/s. 115-O in following form- Total amount of distributed profits [Sub-Clause (a)] Total tax paid thereon [Sub-Clause (b)] Dates of payment with amounts [Sub-Clause (c)]

Relevant Issues

Where tax audit is completed after dividend is declared but before

dividend distribution tax is paid, will it be sufficient compliance to

report on dividend declared in preceding P.Y but paid in current P.Y?

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Annexure to Tax Audit Report (Form - 3CD)

Clause 30: Enclose a copy of Cost Audit Report, if anyClause 31: Enclose a copy of Excise Audit Report, if anyClause 32: Calculate following ratios:• Gross Profit / Turnover• Net Profit / Turnover• Stock-in-trade / Turnover• Material Consumed / Finished Goods Produced

Page 45: 1 CONDUCTING TAX AUDIT Singrodia Goyal & Co. Chartered Accountants Chartered Accountants CA. Sanjeev Lalan.

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