Written in : June 1999

Over ten years back, the government said that all business and professional entities above a certain size should get their accounts audited by a chartered accountant and obtain a specific tax audit report which should go with the tax return filed by it.

The idea of such a break from the past was simple: the department was relying more and more on voluntary compliance by taxpayers and needed some assurance that the accounts were in order. Who better to trust than a chartered accountant? Hence, the tax audit requirements. Under the law, businesses having a turnover of over Rs.40 lakhs and professionals having a turnover of over Rs.10 lakhs are required to get tax audit done. The move met with much resistance from businessmen. However, it is now over a decade since this was introduced and experience has taught much to both taxpayers and the department.

The department has, learning from this experience, now introduced a new tax audit report. It has replaced the old report with the new one and has asked that all tax audits should be reported in this, new format.

The report is a big departure from the old one and deserves a deep understanding. It will now alter, for good, your worldview about tax audit and the auditor.

Of late, the department is relying more and more on voluntary compliance and less than 5% of the cases are taken up for scrutiny. This necessarily requires a systemic check on the correctness of the accounts on which the return is based.

While it is not possible to discuss clause-by-clause the entire report, let us discuss some highlights from it today and in the next article or two.

The new tax audit report was notified on June 4, 1999 and would apply to all reports issued after that date. That is, it applies to all tax audits done hereafter for assessment year 1999-2000 and even before that (if they are done delayed).

The approach of the department is totally different now. It asks for more and more information to be verified and certified by CAs. In fact, as a friend commented, we would almost be certifying your entire return of income and the only other thing not asked is to sign it on your behalf. The changes are that big.

The report format also now asks for qualitative information and not merely quantitative. It requires the auditor to do more than merely check books and accounts. You will understand this as you read on and also see the audit report itself.

As a small example, the auditor is now required to report whether there is a change in the nature of business during the year and if so, give the particulars of the change.

Let us now examine the significant changes asked for by the new forms. I shall not discuss all changes – only some interesting ones.

Earlier, the auditor was required to mention if there was a change in your method of accounting during the year. Now he is also required to quantify the effect on the profit or loss.

The auditor is also now required to report if your accounts have any deviation from accounting standards prescribed the government. If you recall, the government has prescribed some accounting standards (I had discussed these several months back) which were necessarily to be followed by all in maintaining the books and accounts. The auditor will now check whether the books are maintained according to the standards or not. If there is a deviation, he will have to report and also quantify the effect of such changes to the profit or loss. This is a complex issue.

A new change in the tax laws require you to value your closing stocks (and opening stock, purchases and sales) by adding the gross value of excise duty etc and by ignoring any modvat credit you are entitled to. The auditor is now required to verify that you have adhered to the new requirements of law and if there is a deviation its effect on the profit or loss. This, again, is a big requirement.

The auditor is required to state if the Profit & Loss Account made by you does not contain items which your tax officer should be looking at closely. For instance, the auditor is required to state if the following types of items are not credited to the P&L Account:

• amounts which the law considers to be income;
• proforma credits, duty drawbacks, sales and income tax refunds, etc
• escalation claims accepted during the year
• amounts considered as capital receipts.

All this is new duty on the auditor and requires him to travel beyond the books of accounts.

All businesses would file their depreciation statements with the returns of income. Now the auditor is required to verify and certify that.

Specifically, the law requires the auditor to state many details from the depreciation statement including fine details like when an asset was put to use, if it was purchased during the year.

The auditor is also required to quantify the depreciation allowable under the law and the written down value at the end of the year.

We shall discuss some other changes in the next article