PRINCIPLES OF AUDIT - Central Excise and Service Tax Audit Manual - CBEC - Service Tax

Chapter 4 PRINCIPLES OF AUDIT 4.1 The objective of audit of assessees/taxpayers is to measure the level of compliance of the assessee/taxpayer in the light of the provisions of the Central Excise Act, 1944 and the Finance Act, 1994 and the rules made thereunder. It should be consistent with departmental instructions and should make use of professional audit methodology and procedures. The basic principles are: i. The audit should be conducted in a systematic and penetrative manner. ii. Emphasis should be on the identified risk areas and on scrutiny of records maintained in the normal course of business. iii. Audit efforts should be based on materiality i.e. degree of scrutiny will depend on the nature of risk factors identified. iv. Recording of all checks and findings. v. Audit should normally be distinct from anti-evasion operation in as much as it can detect irregularities only to the extent of their reflection in the books of accounts. 4.2 Standards for conduct of audit: 4.2.1 In keeping with the principles of audit outlined above, audit has to be conducted in a transparent and systematic manner with focus on business records of the assessee and taxpayer and according to the audit plan for each assessee and taxpayer. The assessee and taxpayer participation in the course of audit is also envisaged so that instead of raising purely technical objections (without any revenue implications), substantive issues are also focussed upon. 4.2.2 The auditor should ensure that audit is conducted in a focused manner with optimum utilisation of time and resources available at hand. The auditor must use his judgement and experience to determine the materiality of any discrepancies and/or irregularities observed and decide what action is necessary under the circumstance, for example, i. Cumulative effect of small items : An error of one isolated item might be insignificant but the cumulative effect of many individually unimportant items would signify systemic failure. In fact, the relative materiality of an individual item has to be viewed against the net effect on over-all compliance and interest of revenue. ii. General or Particular Items : An error made in a particular transaction may be an aberration if it is a stray, single instance but the effect may be material, if it is of recurring nature. Thus frequency of error is of importance. iii. Effect in relation to scale of a assessee/taxpayer operation : An error may appear to be small in itself, but may have sizable implication due to the huge scale of operations of an assessee/taxpayer. 4.2.3 Integrated audits: Coordinated and integrated audit covering two or more duties/taxes for assessee/taxpayer i.e. Central Excise, Service Tax and Customs (OSPCA) having common PAN shall be carried out instead of individual audit for each tax separately, operation of which is detailed in subsequent paras/chapters. For carrying out integrated audits in exclusive Service Tax Commissionerates, necessary legal enablement has been made in the jurisdictional Notifications No. 20/2014-ST and 21/2014-ST, both dated 16.09.2014. 4.2.4 Period to be covered during audit Every audit should invariably cover the retrospective period up to the previous audit by the departmental audit group or of the last 5 years, whichever is less and should extend up to the last completed Financial Year preceding the date of commencement of the audit. 4.3 Duration of audit 4.3.1 Efforts should be made to complete each audit within the following general time limits:- The indicative duration for conduct of Audit that is inclusive of desk review, preparation and approval of audit plan, actual audit and preparation of audit report wherever necessary, for each category would be as under: i. LTUs 8 to 10 working days ii. Large taxpayers 6 to 8 working days iii. Medium taxpayers 4 to 6 working days. iv. Small taxpayers 2 to 4 working days The above mentioned working days are indicative and applicable for conduct of Central Excise/Service Tax audit covering one year period. In case the audit coverage is for five years, the number of days may be increased to maximum of 16/12/8 days for Large, Medium and Small taxpayers respectively. In other words the number of days for conduct of audit may be increased proportionately, with an increase of 25% of working days for every additional year of coverage. If an integrated audit is to be conducted covering both Central Excise, Service Tax and OSPC audits, especially in case of large units, more number of working days are to be allocated for effective conduct of audit. 4.3.2 The duration, as above, covers the effective number of working days spent by the audit group for the audit of a particular assessee and taxpayer from desk review to preparation of audit report (i.e. days spent in office as well as at the assessee and taxpayer premises). In exceptional cases, the aforesaid period may be extended with the approval of Deputy/Assistant Commissioner (Audit). Further, in accordance with the requirements of the audit of a particular assessee and taxpayer such duration can suitably be reduced with the express, prior concurrence of the Deputy/Assistant Commissioner (Audit), provided the verification as per the audit plan has been completed in the prescribed manner. 4.4 Stage wise action for audit i. Preparation/updating of assessee master file containing comprehensive assessee/taxpayer profile. ii. Selection of assessees/taxpayers for audit. iii. Collection of all relevant documents, data reconciliation statement and reply to questionnaire. iv. Desk review on the basis of relevant documents and interview of the assessee/taxpayer. v. Formulation and approval of audit plan based on desk review. vi. Conducting audit verification on the basis of the approved audit plan. vii. Suggestions on correction/improvements to assessee/taxpayer for future guidance. viii. Preparation of draft audit report and its submission, along with working papers, to the senior officers. ix. Discussion on the draft audit report during MCM and approval of the objections raised therein. x. Issue of final audit report with the help of Audit Report Utility (ARU). xi. Preparation of Modus Operandi circular to be submitted to the Zonal Additional Director General (Audit) and the Directorate General of Central Excise Intelligence. xii. Follow up action, for monitoring the compliance of various points. xiii. Ensuring timely issuance of SCNs, wherever warranted. xiv. Recovery of revenue detected.