Audit under Central Excise (CERA / EA-2000) / How to handle audit - Central Excise Practice Manual (OLD) - Central Excise

AUDIT UNDER CENTRAL EXCISE (CERA/ EA-2000) 'Audit' means scrutiny of the records of the assesses and the verification of the actual process of receipt, storage, production and clearances of goods with a view to check whether the assessee is paying the central excise duty correctly and following the central excise procedures. Traditional audit Under the traditional/ conventional system of central excise audit, audit was done through various checks devised to reduce leakage of revenue. The various audit checks were as follows: - · Visits of officers to the factories of assesses · Stock taking of finished goods Cenvat goods · Surprise road checks to see that goods moving are accompanied by duty paying documents · Collection of information through secret informants · Scrutiny of returns Audit parties visit assesses unit without much preparation and verify statutory records. These records are found to be inadequate as it did not envisage checking internal records of assesses and records maintained under other laws like sales tax, income tax etc. Thus, the conventional audit system is found to be unworkable. Hence, the traditional audit was replaced by a new audit system, termed as Excise Audit-2000 (EA-2000). Also all statutory records were abolished and now assesses are allowed to maintain their own records in whichever form they like provided the essential information required for calculation of duty liability can be obtained from such records. Thus the auditors can rely on assessee's own private record. Excise Audit-2000 (Internal Audit as conducted by Excise department) The new system of audit called the Excise Audit 2000 [EA 2000] was first started in December 1999. With effect from 01-01-2002, the CBEC instructed that henceforth all audits would be conducted under EA 2000 system and the traditional system of audit was phased out. EA-2000 audit is based on the scrutiny of private records of the assessee. This is more systematic wherein the auditors are required to gather basic information about the assessee and analyze them to find out vulnerable areas before conducting the actual audit. The audit is therefore more focused and in-depth and at every stage of audit the assessee is consulted which makes this system user friendly. All assesses are subject to EA-2000 audit as contained in new audit manual and working papers. 'Audit Manual' is a document prepared for use of auditors. It gives detailed guidelines, formats and check lists for audit. Submission of records by assessee in case of EA-2000 audit As per rule 22(3) of CE Rules, assessee and 1 st / 2 nd stage dealers are required to submit following documents: - · Private records maintained by them with regard to receipt, purchase, manufacture, storage, sales or delivery of goods including inputs and capital goods. · Cost audit report u/s 233B of companies act. · Income tax audit report u/s 44B of income tax act. Time limit and frequency of EA-2000 audit [C.B.E. C. Letter F. No. 381/145/2005, dated 6-6-2006 ] No. Quantum of annual total duty payment in (in cash + CENVAT Credit) Frequency of audit 1. Units paying more than Rs.3 crore Every year 2. Units paying between Rs.1 crore and Rs.3 crores Once every two years 3. Units paying between Rs.50 lakhs and Rs.1 crore Once every five years 4. Units paying below Rs.50 lakhs 10% of the units every year In case of EOU a mandatory audit every year. Procedure of Excise Audit 2000 The steps in brief are mentioned below. It is important that the auditor records all of the steps, in Working Papers, as he goes along. The audit consists of following steps: - 1. Selection of assessee About 1000 to 1500 assesses come under the jurisdiction of a Central Excise Commissionerate. Out of these, 300 to 400 units are selected depending upon the manpower availability, the frequency prescribed and the risk factor i.e. assesses who have bad track record regarding evasion of duty, major audit objections etc. are given priority for conducting audit. 2. Desk review Auditors assigned to assessee are required to gather advance information about assessee. They can gather information departmental records, published documents like balance sheet, annual statements etc. and through market enquiries. The foremost duty of the auditor is to access the Assessee Profile (maintained for the purpose) and other information from the computer wherever computerized information is available. If the information is incomplete, the same should be entered so that in due course information becomes complete. Since this can be done without interacting with the assessee, this step is called 'desk review'. For doing 'desk review', Department has decided to take help of practicing Chartered/ Cost Accountants. They will be paid fees on per day basis. 3. Gathering and Documenting assessee information At the stage of desk review, auditors may have identified certain areas, which warrant closer examination. The auditor may require certain documents or information from the assessee to complete his preliminary investigation. For this, he may write a letter to assessee or send him a questionnaire to obtain this information. 4. Evaluation of the Internal Controls The evaluation of Internal Controls is necessary for determination of the scope and extent of audit checks required for the assessee. The scope and the extent of the audit can be reduced if the internal controls are well designed and working properly. The reverse would be true if the internal controls are not reliable. In order to form an opinion about how effectively the prescribed procedures are actually followed, it is essential to test the application of internal controls in practice. Following are the ways of evaluating internal control system: - · Walk-through - 'Walk-through' is a process by which the auditor selects any transaction by sampling method and traces its movement from the beginning through various sub systems. · ABC Analysis - In ABC analysis the whole data population is classified into three categories as 'reliable' 'adequate' or 'poor' based on the importance. 5. Revenue Risk analysis. Having assessed the reliability of company's accounting records, the next is to assess the "potential" risk to the revenue. If the risk is low, i.e. if records are accurate the extensive tests may not be required. There are several methods to assess the revenue-risk, such as, comparison of the derived [from financial records] dutiable clearance and tax liability vis-à-vis clearance shown and duty paid. Trend analysis involves comparing operations from year to year and comparing with other units in the same sector. It will help highlight unusual situations or abnormal trends. 6. Touring of premises This is used to gather information about the systems such as systems followed for maintaining records in various sections, system of movement of goods and related documents within the unit. This gives the auditor overview of the procedure adopted by assessee and the possible loopholes through which revenue leakage can take place. If necessary the auditor speaks to the plant manager or foreman during the tour. 7. Preparing audit plan The auditor assesses all the information gathered about the assessee and develops a plan to examine detailed records related to the areas which appear to be vulnerable from revenue point of view. The draft Audit Plan is submitted for approval of Additional/ Joint Commissioner [Audit] and the audit is undertaken only after such approval. The auditor can also change the plan if certain new aspects come to the light or if area selected earlier do not require in-depth verification midway after obtaining approval of the superior. 8. Verification of records Verification is conduct of actual audit. The unit is visited on a scheduled date which is informed to assessee in advance. The auditor will carry out scrutiny of records of assessee as per the audit plan. 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 and other follow up action. Process of verification is carried out in the presence of assessee so that he can clarify doubts and provide required information to others. 9. Summarizing audit findings All the audit findings are placed at one place in the audit file. Where necessary, important objections and findings are reviewed with the immediate supervisor before discussing them with the assessee. 10. Discussing audit objectives with party It is important that the auditor informs the assessee of all the objections before preparing draft Audit Report, The assessee must have the opportunity to know the objections and to offer clarifications with supporting documents. This process will resolve potential disputes early and avoid unnecessary disputes. Auditor should not take procedural lapses too seriously, instead advice the assessee to adopt correct procedure. 11. Compliance of Audit objections Where the assessee is in agreement with the audit findings, in part or in full, the auditor requests that payments be made promptly to stop accrual of interest. Voluntary compliance should be encouraged so as to avoid protracted legal wrangles. Attention of the assessee is invited to sub section [of Section 11 A of the Central Excise Act, 1944]. 12. Future Compliance. This is the final step before the auditor leaves the assessee's premises. The auditor discusses with the assessee, steps to improve compliance including systemic improvement and modifications in the legal arrangements. 13. Audit report At the end, the auditor prepares a 'draft audit report' where the auditor records all the findings against each of the detailed audit steps. All the Working papers are included as attachments to the final Audit Report. The Superintendent in-charge of the audit team discusses the major audit points raised in the 'draft audit report' with Assistant/Deputy Commissioner audit. After preliminary discussion the action points are identified by the audit team. Then the Audit Report is submitted for evaluation to the Audit Cell who will examine the sustainability of the objections raised by the auditors. After the evaluation, the audit report is finalized. If assessee has not paid duty on the spot, demand notices are issued to assessee by the department. Computer Assisted Audit Programme Large numbers of companies have started maintaining their records in electronic format. This has initiated the Department to develop computer assisted audit program and is auditing the units with high level of computerized record keeping. By using CAAP, the auditor analysis the business system of the assessee, understands the systems flow chart, computer programming flow d the layout of the files and finally determine the data transfer mechanism. After downloading the assesses data files the auditor prepares these files so as to make them readable for the audit software. Thereafter, the steps are the same as those in EA 2000 audits. CERA (Central Revenue Audit) CERA audits are conducted as a part of audit of government audits and thus, these audits are in no way connected or related to internal audits carried out by excise department. Features of Central Revenue Audit: - · Comptroller and Auditor General of India (C and AG) carries out CERA audit for all assesses i.e. excise as well as customs assesses. · C AG is an authority appointed under Article 148 of constitution of India. · C AG will prepare report on the basis of assesses own private record, cost audit report, income tax report etc. · The reports as prepared by C AG shall be submitted to president of India, who will than laid down these before each House of Parliament. · Frequency of CERA audits is as per the importance they attach and availability of time to CERA audit parties. Self Audit (Internal Audit as conducted by expert employees) Such audit can be conducted by expert employees or outside experts. Each company should conduct self audit of their excise operations for various purposes: - · To ensure that duty is not paid in excess and classification and valuation is correct. · All excise Rules and Procedures are being scrupulously followed. · Cenvat is claimed on all inputs and inputs are procured from such sources that Cenvat credit on all inputs is available. · All export benefits are availed. Special Audit Central Excise Act, 1944 provides for two types of audit. These are: - 1. Special Audit for valuation purposes under section 14A of CEA 2. Special Audit for Cenvat credit purposes under section 14AA of CEA. 1. Valuation Audit [section 14A] · Valuation audit can be ordered at any stage of enquiry, investigation or any other proceedings by the excise officer, if he is of the opinion that the value has not been correctly declared or determined by the manufacturer. · Any central excise officer not below the rank of AC/ DC can order for valuation audit. · The special audit for valuation can be ordered by proper officer only with the prior approval of the Chief Commissioner of Central Excise. · Central excise officer shall direct the manufacturer to get the accounts of his factory, office, depots, distributors or any other place, audited by a Cost accountant holding certificate of practice. · Cost accountant in valuation audit may pay attention to fairness net realisable value, additional charges not shown in invoice, material supplied by buyer, debit/ credit notes issued etc. · The cost accountant has to submit the duly signed and certified audit report with such particulars as may be prescribed by the central excise officer. · The report should be submitted within the time prescribed by central excise officer. Such period can be extended at the request of manufacturer but the maximum period for submission is 180 days from the date of receipt of order by the manufacturer. 2. Cenvat Credit Audit [section 14AA] · Audit of Cenvat credit availed or utilized can be ordered, if Commissioner has reason to believe that Cenvat credit availed or utilized - - is not within the normal limits having regard to the nature of goods, or - credit has been availed on account of fraud, willful misstatement, suppression of facts or collusion. · The Cenvat credit can be ordered by Commissioner. · The Commissioner shall direct the manufacturer to get the accounts of his factory, office, depots, distributors or any other place, audited by a Cost accountant holding certificate of practice. · Cost accountant in Cenvat credit audit may pay attention input-output norms, correlation of Cenvat credit account with financial accounts etc. · The cost accountant has to submit the duly signed and certified audit report with such particulars as may be prescribed by the central excise officer. · The report should be submitted within the period prescribed by the Commissioner. Special audits shall be in addition to any other audit under any other law for the time being in force or otherwise. The expenses of such audit and audit fees shall be paid by excise department. The manufacturer shall be given an opportunity of being heard in respect of any material gathered on the basis of the audit and proposed to be utilized in any proceedings under the Central excise act/ rules. Cost accountant has the power which are incidental and ancillary for such audit but he does not have the powers to punish, wherever required he may furnish the facts to AC/ DC who has the power to summon the person and call for the records.