AUDIT - PREPARATION AND VERIFICATION - Central Excise and Service Tax Audit Manual - CBEC - Service Tax

CHAPTER 6 AUDIT - PREPARATION AND VERIFICATION 6.1 Profiling of assessee/taxpayer: 6.1.1 Audit requires a strong database for profiling each assessee/taxpayer so that risk-factors relevant to an assessee/taxpayer may be identified in a scientific manner and audit is planned and executed accordingly. Some of the relevant data has to be collected from the assessee/taxpayer during the course of audit, while the rest is to be extracted from the registration documents and returns filed by the assessee/taxpayer as well as from his annual report, reports/returns submitted to regulatory authorities or other agencies, Income Tax returns, contracts with his clients, audit reports of earlier periods as well as audits conducted by other agencies, (like office of C AG), etc. 6.1.2 A comprehensive data base about an assessee/taxpayer to be audited is an essential pre-requisite for selection of units as well as for undertaking preliminary desk review and effective conduct of audit. A substantial amount of data is already available in ACES and EDW. Some of the data like those contained in annual financial statements keeps changing every year. 6.2 Assessee Master File (AMF) : The first step towards an effective audit is to collect all relevant information about the assessee/taxpayer from various sources, arrange it in a systematic manner so that the audit can be planned in a result-oriented manner. The AMF should contain all the useful information about an assessee/taxpayer, in the form of statistical data as well as in narrative form as required in Annexure CE-I/ST-I of this manual. This file should be useful not only for the future audits, but also as a ready reckoner for other purposes, such as for reply to the Parliament Questions and generating Management Information System (MIS) reports. 6.2.1 The Planning and Co-ordination section of Audit Commissionerate Hqrs/ MIS section of the audit circle should collect all relevant information and documents about the assessee/taxpayer from various sources (including the assessee/taxpayer himself), arrange it methodically in the assessee master file and regularly update it. 6.2.2 The hard copies of the documents as listed in Annexure CE-I/ST-I should be maintained for a period of 5 years. Documents pertaining to period older than 5 years, should be removed unless relevant to any current proceedings. Disposal of the documents removed from a master file should be done with the approval of Deputy Commissioner/Assistant Commissioner (Audit). 6.2.3 The Planning and Co-ordination section of an Audit Commissionerate Hqrs/ MIS section of the audit circle should also maintain a separate electronic folder for each assessee/taxpayer and make all entries for that particular assessee/taxpayer in that folder only. The folder should be updated after every subsequent audit. Initially, most of the information would be available in the form of hard copies and the updating has to be done manually. Progressively, the information would be maintained in electronic format with automated data transfer through networking system and could be automatically updated. 6.2.4 The electronic data should be kept in a properly secured format so that it can be altered or modified only by an authorised officer of the audit group. This folder should be protected by a password and should be made available to the officers of audit only with the prior approval of the Assistant/Deputy Commissioner (Audit) in writing. The data should, however, be accessible to all the concerned officers working in Audit Commissionerate. 6.2.5 The AMF of the assessee/taxpayer selected for audit should be handed over to the respective group under an acknowledgement for the purpose of conducting desk review. On completion of the entire process of audit, the audit group should update and return the AMF to the Planning and Co-ordination Section/ MIS Section. 6.2.6 It should be ensured that the AMFs are maintained under the direct control of the Dy./Asst. Commissioner in-charge of the circle. On being transferred, the Dy./Asst. Commissioner should handover all the master files to the new incumbent. 6.2.7 The master file should be updated periodically or after completion of each audit. The audit working papers, audit report, duly approved during the audit monitoring meeting, along with the latest documents should be filed properly in a file and the same shall be attached to the Master file folder of the assessee/taxpayer. Scanned/soft copies of the relevant documents should also be kept in the AMF folder. 6.2.8 Keeping in view the security of the information, the hard copies should be made available only if the information contained therein is not available in the electronic format. In any case, the file containing the hard copy should not be taken out of the MIS unless permitted by the Assistant/Deputy Commissioner of the MIS and after due entry in the file movement register. The information contained in these files would, however, be available to all the officers for any legitimate official purpose. 6.3 Allocation of audits amongst the audit parties: The audit schedule should also mention the Group No. of the audit group to conduct audit of a particular unit. It must be ensured that the group members of the audit party are fully trained for conducting audit in accordance with the guidelines in this manual. 6.4 Action to be taken by the Audit Group: Once the audit schedule, with Group allocation, is finalised, the action shifts to audit groups. The group should have adequate time to complete the preparation for audits to be conducted as per the audit schedule. All units listed to be audited should be intimated at least 15 days before the commencement of audit verification in their premises. A format of the letter intimating the assessee/taxpayer about the audit and the records/documents to be provided to the auditors has been provided in Annexure CE II/ST-II of this manual. 6.5 Working Papers (Annexure CE-VIII/ST-VIII): 1. The working papers form the basis of audit objection. They also show the detailed steps undertaken by the auditor during the preparation for and conduct of the audit. Therefore they should be filled carefully, giving observations and conclusions of the auditor duly supported by evidences/documents, wherever required. 2. Each part of the working paper should be filled up on completion of the relevant audit step. The date on which such part is completed and working paper filled in should be mentioned.The working papers should be filled in by the auditors themselves and in no case should be handed over to the assessee/taxpayer for filling them up. 3. The completed working papers must be submitted by the Audit Group with the draft audit report made with the help of audit report utility (ARU). 4. Copies of supporting documents/records/evidences referred to in the working papers must be annexed at the end. Each copy should have a cross-reference to the relevant entry in the working paper. 5. Before the conduct of audit verification, the audit plan should be approved and signed by senior officer not below the rank of Commissioner/ Additional/ Joint Commissioner/Deputy/Assistant Commissioner of Audit Commissionerate, as the case may be. 6.6 Desk Review 6.6.1 Objective: The desk review lays emphasis on gathering data about the assessee/taxpayer, his operations, business practices and an understanding of the potential audit issues, understanding his financial and accounting system, studying the flow of materials, cash and documentation and run tests to evaluate the vulnerable areas. The preliminary review assists in development of a logical audit plan and focus on potential issues. 6.6.2 This is the first phase of the audit programme done in the office. The idea is to gather as much relevant information about the assessee/taxpayer and its operations, as much as possible, before visiting the unit. A good desk review under the supervision of senior officers is critical to the drawing up of good audit plan. The services of Assistant Director (Costs) allocated to CC Zone may be utilised effectively wherever required. 6.6.3 The auditor should immediately refer to the AMF ( Annexure-CE-I/ST-I refers ). Study of the AMF could throw up important points, which may merit inclusion in the audit plan. In addition, the auditor should also obtain the latest Trial Balance Sheet, Tax Audit Report, Annual Financial Statement, Cost Audit Report or any such document prepared or published after the last updating of AMF. From the scrutiny of these documents, certain points may further emerge for inclusion in the audit plan. The auditor should also incorporate the result of any parameters brought to light by risk analysis into the desk review for pin pointing specific issues for scrutiny during audit. An illustrative list of important documents required to be scrutinized from the audit angle is given at Annexure CE-III/ST- III). 6.6.4 All receipts of the taxpayer need to be tested for Service Tax liability. Analysis of exports turnover, turnover of non-taxable and exempted services gives a clear picture of the amounts which were not considered for Tax payment.It also helps to conclude whether such exemptions claimed are proper or not. (Part III (I) of Working papers in Annexure ST VIII refers). 6.6.5 Cost Accounting Records/Cost Audit: 1. Cost Accounting records are required to be maintained by certain companies inter alia by i) whose turnover exceeds ₹ 20 Crores ii) who are listed in any stock exchange as per Companies (Cost Accounting Record) Rules, 2011 2. Cost Audit is required/mandated for applicable companies of CAR Rules and; i) whose turnover exceeds ₹ 20 Crores, which are specified in Table I of order F. No. 52/26/CAB-2010 dated 06.11.2012 of Ministry of Corporate Affairs; ii) whose turnover exceeds ₹ 100 Crores and which are specified in Table II of Order of Ministry of Corporate Affairs, mentioned above and iii) listed companies (For details please refer the website of Ministry of Corporate Affairs at www.mca.gov.in ) For latest amendments and existing norms the Companies (Cost Records and Audit) Rules 2014 may be referred to. 6.6.6 From the AMF, Trial Balance and Annual Financial Statements (Profit Loss Account and Balance Sheet) it is possible to work out important financial ratios. The said ratios should be compared with the ratios of earlier year and wherever significant variation is noticed, these areas may be selected for audit verification. It may be kept in mind that any adverse ratio is only an indicator for verification of such an area and there may be valid reasons for the same. Therefore, only on the basis of such an adverse ratio, a point for verification can be selected. An illustrative list of important ratios is given at Annexure-CE-IV/ST-IV . 6.6.7 Reconciliation of data with third party information :Duty/tax payment shown in the CE/ST returns can be reconciled with that shown in the financial accounts. Further, from the reconciled figure of duty/tax payment, assessable value of the sales can be worked out. This can then be compared with the sales figure shown in financial records. The difference, if any, must be analysed. The unit assessable value of the assessee/taxpayer can be compared with that of another assessee/taxpayer manufacturing the same item. This method would give an idea whether the valuation and duty calculation system of the assessee/taxpayer is a high/low risk area. A comparative chart of items from financial statement to be drawn for reconciling the data is annexed as Annexure-CE- V/ST-V . The auditor should check the data available in ST-3 returns with other documents such as gross trial balance, Income Tax Returns, Annual Audited accounts, Income Tax Audit report etc. and to carry out a preliminary reconciliation for the purpose of identifying any amount that might have escaped Service Tax. 6.6.8 Revenue Risk Analysis: Risk Analysis is a method of identifying potential revenue risk areas by employing modern techniques. It can be carried out by (i) reconciling various specific financial data, comparing it with different business accounts/documents, (ii) deriving certain data and comparing with the actual figures of the financial documents (iii) comparing the key data figures of the unit with the average of all industry figure of similar kind (if available) or past figures of the same assessee/taxpayer. The result of Revenue Risk Analysis should be filled in the relevant column of working papers. 6.6.9 Trend Analysis: Trend analysis is a type of computational support needed for the analysis preparatory to planning, by analysing historical data and working out future projections. Historical data is analysed to discover patterns or relations that would be useful in projecting the future production, clearances and values etc. 6.6.10 For audit purposes, either absolute values or certain ratios are studied over a period of time to see the trend and the extent of deviation from the average values during any particular period. The analysis of trends as mentioned in the relevant table of working papers may be carried out. (refer III 9 of Annexure CE-VIII/III C of Annexure-ST-VIII) 6.7 Gathering of information of the assessee/taxpayer 6.7.1Tour of premises/plant: CENTRAL EXCISE : Before start of audit verification, the auditor should know about the functioning of various areas, like marketing, production, purchase, stores and accounts. Such information can be gathered from the heads of various sections of the assessee/taxpayer during the visit to the unit. This is used to gather information about the systems. A physical tour of the unit/premises provides confirmation of much of the information gathered during previous steps and it also helps resolve issues noted earlier. Often, the tour brings out operations and technical details about inputs used and products/by-products/wastes manufactured, some of which may not have been considered during the discussions. It provides clues about important aspects of the operations of the unit. If necessary the auditor should speak to the plant manager or supervisor/foreman during the tour. The auditors should also go through the working papers prepared in the last audit in order to acquaint themselves with the broad procedures followed by various sections of the assessees/taxpayers as part of the desk review. The auditors may fix appointment with various section heads and during discussions the overall functioning of the unit can be found out and at the same time officers of the company can also explain various procedures adopted by them. Various types of records maintained for internal control purpose and reports generated by the units can also be found out by the auditors during discussions. Any important happenings like fire or natural calamity, introduction of new products, overall scenario of industry, new marketing techniques, new discounts, action of competitors etc. can also be found out by the auditors. Points noticed during desk review can also be enquired at this stage. For this purpose, a sample questionnaire has been prepared for discussion in the areas like purchase, sales, stores, tax accounting, job work given in Annexure-CE-VI/ST-VI . However auditors may add more questions depending upon the nature of the industry. The following guidelines should be kept in mind at the time of interview. i. Stay in control of the interview. ii. Follow a prearranged path of questioning, but be flexible. iii. Explain questions clearly and ensure that the question has been understood. iv. Listen carefully and observe reactions. v. Do not interrupt unless the interviewee appears to be deliberately changing the subject. vi. Avoid ambiguous and leading questions. vii.Display confidence and put the auditee at ease. viii. Summarize the interview at the end and seek clarification if necessary 6.7.1.1 The purpose of the tour is to gather information from the assessee/taxpayer about the various systems followed by him in the areas of purchase, stores, sales, job work, tax reporting etc. This information can be test-checked by conducting walk through. 6.7.1.2 Before undertaking the tour to the factory, the auditor should also prepare a Questionnaire to gather information for evaluation of internal controls of the assessee/taxpayer. An illustrative Questionnaire is placed as Annexure-CE-VI/ST-VI for guidance of the auditor though he can modify the same according to the need. 6.7.2 SERVICE TAX: There should be no tour of premises in respect of a service tax assessee. It is only a walkthrough of systems that should be performed. 6.7.3 Evaluation of the Internal Controls. The objective of review of internal controls is to assess whether the assessee/taxpayer has reliable systems and controls in place that would produce reliable accounting/business records. Most medium to large companies have ERP systems in place, which account for all transactions from entry of raw material to clearance of final products. Auditors must have a look at these systems and more relevantly determine whether software being used exclusively for the transactions related to excise/service tax matters is integrated to the main ERP system or is running parallel to the main ERP. This assessment would be used by the auditor to decide on the extent of verification required and to focus on areas with unreliable or missing controls. It should be noted that this review must be commensurate with the size of operations. A small assessee/taxpayer might have little in terms of internal controls where as a large assessee/taxpayer would have sophisticated internal controls in place. If the internal controls are well designed and working properly, then it is possible to rely on the books maintained by the assessee/taxpayer. The scope and the extent of the audit can be reduced in such a case. The reverse would be true if the internal controls are not reliable. Audit should evaluate the soundness of internal control of sub-systems/areas like sales, purchase tax, accounting etc., and grade them as good, acceptable and poor (refer Part D of working papers) 6.7.3.1 In this regard, an auditor should normally examine the following: i. Characteristics of the company s business and its activities. ii. System of maintenance of records and accounts. iii. Identifying the persons handling records for accounting purposes. iv. Allocation of responsibilities at different levels. v. System of internal checks. vi. System of movement of documents having relation to duty/tax assessment. vii. Inter-departmental linkages of documents and information. viii. System of own internal audit. 6.7.4 Techniques for evaluation of the Internal Controls. (a) Walk-through: This is a process by which the auditor selects any transaction by sampling method and traces its movement from the beginning through various sub systems to the end. The auditor verifies this transaction in the same sequence as it had moved. By this method the auditor can get a feel of the various processes and their inter linkages. It is also a useful method to evaluate the internal control system of an assessee/taxpayer. The auditor can undertake walk through process of sales, purchase, excise, account adjustment systems etc., certain model Walkthrough routes are given in Annexure-CE-VI/ST-VI. Similarly, key controls may be examined for recording of all cash transactions: these controls may include scrutiny of numbered cash transaction invoices, daily reconciliation of cash invoices, separation of taxes etc. Undertaking a walk-through and conducting ABC analysis during this process would help the auditor in evaluating the system of internal controls in a scientific manner. (b) ABC Analysis: It is a known fact that in any field of activity an enormous data is generated and all data is not equally important. In order to filter out the irrelevant or relatively insignificant data, various techniques are applied. The ABC Analysis is one of such data management techniques. This technique is particularly useful when auditors are required to scrutinise and examine a large volume of data/documents within a limited time. In ABC analysis the whole data population is classified into three categories (i.e. A, B and C categories) based on the importance, as given below: is the class of data that is the most important from the point of view of managing and controlling the same. is the class of data, which should invariably be controlled, but the degree of control is not as intense as for A-category. is the class of data, which has far less revenue-implications and can be controlled by suitable test-checks. The auditor can apply ABC Analysis especially where the quantum of data/ information to be analysed is voluminous. In such a case, the auditor can classify them according to their tendency towards potential risk into A, B and C categories. To give an example, transactions with top five customers/clients of an assessee/taxpayer may alone be taken up for detailed examination by auditors. Similarly while verifying credit utilization by the assessee/taxpayer, documents relating to the receipt/procurement of major inputs may be examined. The technique of ABC analysis can also be suitably applied for evaluating the systems of internal controls while carrying out verification. 6.8 Preparatory Visit: The above steps viz., tour/study or evaluation of internal controls/walk through etc., are required to be completed by making a preparatory visit during the Desk Review stage itself, in respect of audit of Large Units of Central Excise , by giving advance intimation to the assessee/taxpayer ( Annexure CE - XI ). 6.8.1 In respect of audit of Medium and Small units of Central Excise and all units of Service Tax , these steps can be carried out during the stage of actual audit verification. 6.8.2 The auditor should invariably record the findings, which are to be kept in the AMF in the format as mentioned at Part D of Working Paper ( Annexure CE-VIII ). 6.8.3 During the subsequent audit of large units, the preparatory visit for desk review need not be made.During the verification, the auditor should verify and comment as to whether the system is in place or not. 6.9 Audit Plan 6.9.1 The objective of preparing an audit plan is to outline a logical series of review and examination steps that would meet the goals and standards of an audit in an efficient and effective manner. 6.9.2 Audit Plan is the most important stage before conduct of audit. All the previous steps are actually aimed at preparation of a purposeful Audit Plan. Therefore, it is important that all previous steps are completed and the relevant Working Paper of each of the steps is filled up before commencing preparation of an audit plan. By now, the auditor is in a position to take a reasonable view regarding the vulnerable areas, the weak points in the systems, abnormal trends and unusual occurrences that warrant detailed verification. Certain unanswered or inadequately answered queries about the affairs of the assessee/taxpayer may also be added to this list. 6.9.3 Audit plan should be a detailed plan of action, preferably in a standard format. The audit plan should be consistent with the complexity of the audits (Annexure CE-VII/ST-VII). 6.9.4 The summary results of desk review, along with the completed Working Papers, should be submitted to the Deputy/Assistant Commissioner for approval and guidance, if any. 6.9.5 The audit plan must be discussed with the Deputy Commissioner / Assistant Commissioner of the Circle and should be finalised after approval by the Commissioner/Additional/Joint Commissioner/Deputy/Assistant Commissioner as the case may be . 6.9.6 The audit group should put up documents received,along with filled in Questionnaire and working papers in the prescribed proforma,related to top 5 units of each audit circle mentioned in the Annual Plan for audit coverage to the Commissioner and the rest to the Additional / Joint Commissioner (Audit) through Deputy / Assistant Commissioner (Audit), for approval of the audit plan, after carrying out preliminary reconciliation, identifying discrepancies, if any, and carrying out detailed examination of the records and information (including that already captured in the Master File on assessee/taxpayer). 6.9.7 In the case of mofussil circles where ADC/JC is not available: i. In respect of large and medium units, the audit parties should forward the draft audit plans to the Additional/Joint Commissioner, through the DC/AC of the circle, by e-mail, for approval. The audit of the respective units should not be conducted till receipt of the approval of the ADC/JC, through e-mail.While sending the desk review and the draft audit plan, the information that is available in electronic format in the assessee/tax payer s profile should also be sent. ii. In respect of small units, the Deputy/Assistant Commissioner of the Circle is competent to approve the audit plan.However, the approved audit plan should be forwarded to the Additional/Joint Commissioner, through e-mail, at least 10 days before the conduct of actual audit so as to enable the ADC/JC to communicate additions, if any, before the actual audit takes place. 6.10 Audit Verification 6.10.1 The objective of audit verification is to perform verification activities and document them in order to obtain and record audit evidence. The verification techniques must be appropriate for audit objectives identified in the audit plan. It is important that in an audit, the objections that are raised are technically correct and stand up against scrutiny or challenge. Law being open to interpretation, it may be difficult to test the technical correctness of all objections. However, it should be correct to the extent that any professional auditor, working with and having access to the same research material would likely to come to the same conclusion. It also means that the auditor must demonstrate, in writing, the research and reasoning used to base his/her application of legislation, policies and jurisprudence. 6.10.2 Audit verification involves verification of data and actual verification of documents submitted at the time of desk review, verification of points mentioned in the audit plan. 6.10.3 Verification of points mentioned in the audit plan: The auditor should conduct the verification in a systematic manner, following the sequence of steps envisaged in the working papers. While conducting audit verification, special care should be taken to examine all those issues pointed out in the audit plan. The auditor should try to determine whether the apparent weaknesses in the internal control system of the manufacturer/service provider have led to any loss of revenue. He should also identify the procedural infractions on part of the assessee/taxpayer, which are recurrent in nature and which may obscure a significant fact. During the process, he must cross check the entries made by the assessee/taxpayer in various records and note discrepancies, if any. In all cases involving discrepancies, the auditor should make detailed enquiries regarding the cause of the discrepancies and their revenue implication. 6.10.4 The auditor should also examine the documents submitted to various Government departments/ Regulatory Authorities such as Customs, Income Tax, Commercial Tax/ VAT, Banks, etc. by the assessee/taxpayer. This should be used in cross verification of the information filed by the assessee/taxpayer for the Central Excise/Service Tax assessment. Annexure-CE-IX/ST-IX gives utility of some of the documents/ registers of the assessee/taxpayer that can be made use of by the auditor during the course of verification. Extensive use of information available with open sources such as electronic and print media, internet etc should also be resorted to for verification of information filed by the assessee/taxpayer. 6.10.5 The audit verification gives maximum opportunity to the auditor to go through the assessee/taxpayer s records in his unit. Therefore, auditor may come across a new set of information or documents, not earlier known, during any of the earlier stages. Further, while examining an issue, the auditor may come across a fresh issue also requiring detailed examination. In such a situation, the auditor should, after obtaining the approval of his Dy. Commissioner/Asst. Commissioner, go beyond the scrutiny envisaged under the Audit Plan and record the reasons for doing so. Despite audit verification being a structured process, it is flexible enough to accommodate needs on the spot.At the end of each entry in working papers, auditor must indicate the findings. If any of the planned verifications is not conducted, the reasons for the same must also be recorded. While the process of verification for each audit would be unique in terms of Audit Plan, it should involve some general steps as discussed below: 6.11 Physical Verification of Documents: All important documents are already verified at the time of desk review. However, in case of any discrepancy noticed and pointed out in the Audit Plan, a detailed scrutiny of the financial records of the assessee/taxpayer becomes imperative. The documents to be examined include Annual Financial Accounts containing Director s Report, Statutory Auditor s Report, Balance Sheet and Profit Loss Account. If necessary, the auditor must go into details of the figures mentioned in the Annual Financial Statements and for that he must examine Trial Balance, Ledgers, Journal Vouchers and Invoices. He may also examine Cash Flow Statement, Groupings, Cost Audit Report and Tax Audit Report. He should also check whether the assessee/taxpayer is maintaining the statutory records as required under various statutes especially under the Companies Act, 2013. 6.11.1 Audit objections raised must be fully supported by documentary and legal evidence. This will greatly help in explaining and discussing the objections with the assessee/taxpayer and other follow up action.It needs to be ensured that all audit documentation is complete, accurate and of professional quality. Working Papers are a synopsis of audit operations conducted by the Audit Group. Entry of all items mentioned in the audit plan must be made in the working papers, during Audit Verification. 6.11.2 In case of Central Excise audits, as well as Service Tax audits, if the auditors notice that the assessee has availed or utilised taxable services from service providers, they may attempt to ascertain from the assessee as to whether such service providers are registered with the department or not. In case such information is not available, the auditors should prepare a list of all such service providers who had provided total taxable services valued at more than Rs. Ten lakhs in a financial year from the documents available with the assessee and gather details of their location. Such information should be forwarded to the jurisdictional Service Tax authorities to verify proper discharge of service tax liability and for taking necessary action in case of any defaults. 6.12 Working papers should support the audit effort and results. They should: i. Be clear, concise, legible, organized, indexed, and cross-referenced; ii. Disclose the audit trail and techniques used in the examination of each significant item; iii. Support the conclusions reached and cover all queries raised; iv. Include audit evidence (e g., copy of a financial statement, an invoice, a contract, a bank statement, etc.) to support the assessment; v. Link results to supporting working papers e.g. the objections identified in the working papers must agree with the summary of audit results or statement of audit objections and the audit report; vi. See that audit reports are clear and disclose all material and relevant information; and vii. Take follow up action. 6.13 Apparently, the financial and other documents maintained by the assessee/taxpayer for his private use and in compliance of other statutes are of great importance which may reveal substantial short/non-payments of duty. Annexure-CE-IX/ST-IX provides an illustrative list of such records/ documents, as also the relevant information that can be gathered from them. The auditor may take note of the same during Gathering information about the assessee/taxpayer and the system followed by him , and go through them during Audit Verification . 6.14. Checking of cross utilization of credit on inputs and inputservices: Manufacturers who are also providing taxable services, are required to file ER-1 Return and ST-3 Return separately. It is possible that the assessee/taxpayer may misuse the CENVAT credit facility by declaring different amounts of credit taken or utilized in ER-1 and ST-3 returns especially when the periodicity of filing both the returns are different. Therefore, while carrying out audit of Central Excise cases, the Service Tax return filed by the assessee/taxpayer should also be scrutinized in order to ensure that CENVAT credit claimed in both the returns does not vary and vice versa. Further, where both the returns are filed in the same Commissionerate, audit of both the activities should be undertaken simultaneously. If these returns are being filed separately (one with the Excise Commissionerate and the other with the Service Tax Commissionerate, then this can be tackled by undertaking integrated audit for Central Excise and Service Tax. While undertaking the combined audit, both the Central Excise and Service Tax returns should be scrutinized in order to verify whether CENVAT credit claimed in both the returns is different. 6.15 Apprising the assessee/taxpayer of irregularities noticed and ascertaining his view point It is important that the auditor discusses all the objections with the assessee/taxpayer before preparing draft audit report. The assessee/taxpayer should have the opportunity to know the objections and to offer clarifications with supporting documents. This process will resolve potential disputes at an early stage and avoid unnecessary litigation. 6.16 The ultimate aim of conducting an audit is to increase the level of tax compliance of assessee/taxpayer. Therefore, no audit can be considered to be complete unless the auditor has made all efforts to ensure maximum recovery of short levy before leaving the premises of the assessee/taxpayer.As the Audit system adopts a transparent methodology, it is necessary that all the audit objections noticed by the Audit Group are conveyed to the assessee/taxpayer with a view to ascertain his point of view before preparing the Draft Audit Report. Accordingly, the audit objections should be intimated in writing to the assessee/taxpayer, clearly stating that the same is not in the nature of any show cause notice and is only a part of participative and fact-finding audit scheme under which even the preliminary and tentative audit observations are being shared with the assessee/taxpayer for ascertaining his point of view. Where satisfactory explanation or evidence is submitted to the auditor, the findings should be revised as necessary after approval of Deputy/ Assistant Commissioner. However, if a response from the assessee/taxpayer is not forthcoming, draft audit paras should be prepared on the basis of available records after citing the lack of cooperation on part of the tax payer, in the Audit Report. 6.17 It is the auditor s responsibility to explain all the objections to the assessee/taxpayer and to make all attempts to resolve any disagreements before those are finalised. It is also the auditor s responsibility to make sure that the senior officers are aware of potential disagreement and the position taken by the assessee/taxpayer. 6.18 Suggestions to Tax Payer/Assessee for future compliance 6.18.1 Before leaving the assessee/taxpayer s premises, the auditor must discuss future compliance issues with the senior management of the assessee/taxpayer. The auditor should also discuss the steps that management can take to reduce specific errors detected during the audit and to improve compliance by suggesting improvements in the accounting systems etc. Written or verbal assurances as given by assessee/taxpayer should be recorded in the Audit Report. 6.19 If, in any way, the department can assist the assessee/taxpayer to reduce errors and improve compliance, such offer of assistance should be made.