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TMI BlogAUDIT - PREPARATION AND VERIFICATIONX X X X Extracts X X X X X X X X Extracts X X X X ..... ady 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 Annex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ping 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 verificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditor 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ify 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial 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 availe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riodicity 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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