PEER REVIEW – DOCUMENTATION – TAX AUDIT
Auditing as a profession has grown in the society to undertake the responsibility of assuring the users of financial statements regarding their accuracy, usability, reliability and transparency. Hence, this profession calls for a high level of professional capability and excellence on the part of the auditor. A professional’s personality is only as good as his current state of knowledge and skills. However, even the best of the professionals need approbation. They are only human beings. They need and deserve the reconfirmation of their abilities and the way they work, from their peers. Such reconfirmation that professional seek is provided by the process of “Peer Review” (PR).
Peer Review Board was established by the Council of the Institute in March 2002 to conduct the system of PR. As you must be aware, it has been made mandatory for the auditors of the listed company to undergo PR on/before 31st March 2009. If they fail to do so, their reappointment is made invalid. Earlier, only Bank audit units were covered under PR. It is mandatory for all the practice units who are auditing listed companies and also Bank branches.
Quality is the prime driving factor of this whole concept of PR. Its aim is to ensure that the practice units comply with the technical standards for maintaining the quality of the attestation works they perform.
Attestation services includes auditing, verification of financial transactions, books, accounts or records or preparation, verification or certification of financial accounting and related statements as defined U/Sec 2(2)(ii) of the CA Act,1949 but does not include
(i) Management consulting
(ii) Representing clients before authorities
(iii) Engagements for the compilation of financial statements
(iv) Engagements to prepare tax returns or advising clients in taxation matters
(v) Engagements solely to assist the client in preparing, compiling or collating information other than financial statements
(vi) Testifying as expert witness and
(vii) Providing expert opinion on AS or applicability of certain laws.
PR shall focus on
a) Compliance with technical standards
b) Quality of reporting
c) Office system and procedure with regard to compliance of attestation service systems and procedures
d) Training programs for staff (including articled and audit clerks) concerned with attestation functions including appropriate infrastructure.
Technical Standards include
(i) Accounting Standards
(ii) A.A.S now renamed as “Engagements and quality control statements”
(iii) Framework for preparation and presentation of financial statements & Framework of statements on SAP and Guidance Notes on related services
(v) Guidance Notes
(vii) Compilations of provisions of the various relevant statutes &/or Regulations which are applicable in the context of the specific engagements being reviewed.
As of now, there are totally 32 accounting standards issued by the Institute. All these accounting standards are mandatory except A.S 3 – Cash flow statements. For small and Medium Enterprises, certain relaxations are there.
The ICAI has prescribed several mandatory Auditing Standards also. Besides this, based on the trends and needs of the sector the ICAI has been issuing several statements and Guidance Notes which deal with the profession of auditing. The aim of these prescriptions is to strengthen transparency, enhance objectivity and fix responsibility on the auditor.
The basic concepts in auditing deal with the true and fairness and materiality aspects.
The Auditing and Assurance Standards (A.A.S) have been renamed as ‘Engagement and Quality Control Standards’ w.e.f 01.04.2008.
‘Statements’ are mandatory. Hence their non-compliance or deviation shall be disclosed adequately in the audit reports. Material departures may lead to qualifying the report.
‘Guidance Notes’ are recommendatory in nature. Hence the auditor while discharging his attest function may consider the disclosure of deviations from the Guidance Notes at his discretion.
In general, if we can call accounting standards as necessary ingredients for cooking the food, we can call the auditing standards as prescriptions for serving the food – when where and how.
When a member is not able to perform an audit in accordance with the auditing standards then he should draw attention to his report to the material departures there from.
Every professional work needs to be backed up by adequate documents, more so when an auditor is performing an audit. AAS 3 (SA 230) deals in detail about the documents to be maintained when discharging the attest function. Broadly documents can be classified into two files ie, Permanent & Current. Further they can be classified into mandatory records and recommendatory records. Working papers are part of mandatory records. Recommendatory records include the Practice Unit’s profile, Staff details, general office procedures etc.
The mandatory documents include audit plan, audit programme, the nature, timing and extent of audit procedures, data sampling and verification details, the observations, explanations and conclusions drawn there from.
Permanent File :
This should contain the letter of engagement, correspondence with retiring auditor, constitution of the entity, nature and history of business, location and process details, internal controls evaluation sheets, methods of accounting, EDP security etc, earlier year’s financial statements etc.
Current File :
This should contain annual appointment letter, acceptance letter, draft financial statements, work estimate, work assignment, queries raised and explanations received, checklists, authorization levels, Management Representation letter, other expert’s opinion, applicable accounting standards and their appliance details, detailed working papers and conclusions, analytical tests conducted and results, third party confirmations and certificates, finalized Balance Sheet and P&L account with all schedules duly signed by the Management, draft and finalized Audit Report.
Standards on Quality Control (SQCs) :
SQC 1, “Quality Control for Firms that Perform Audit and Reviews of Historical Financial Information, and other Assurance and Related Services Engagements”
This is the mother standard for all other standards and is all pervasive standard in respect of quality control. This is applicable for all the audit services from 01.04.2009. Some of the relevant auditing standards are as follows.
A.A.S 3 (SA 230) Documentation
A.A.S 5 (SA 500) Audit Evidence – External/internal
A.A.S 7 (SA 501) Reliance on the work of internal auditor
A.A.S 8 (SA 300) Audit Planning
A.A.S 9 (SA 620) Reliance on expert opinion.
A.A.S 34 (SA 501) Additional Consideration for specification of
There is no exhaustive list suitable for any one audit. If it is a charitable trust that is audited, to issue Form 10B audit report all the questions in that audit report are to be answered first by the management, then after due verification only the auditor should issue the Audit Certificate. Similarly in the case of a limited company, the CARO 2003 queries are to be answered with due working papers.
TAX AUDIT UNDER SECTION 44AB OF THE INCOME TAX ACT 1961 :
It is the duty of the management, where tax audit is applicable, to prepare all the required details as per Form 3CD. After due verification only, the auditor has to issue the Form 3CA/Form 3CB audit report together with Form 3CD certificate. This is a statutory compliance. The purpose of the audit is not only to assure the tax department the true and fairness of the financial statement but to assure
a) Proper maintenance of books and records
b) From the I.T Act point of view, the allowable and disallowable expenses, taxable and exempt incomes which facilitates the work of the revenue authorities.
c) To ensure the compliance and reliability of various income tax provisions.
A reasonable sample checklist for conducting tax audit
Particulars Relevant Standards
|1) Appointment Letter defining scope||AAS-26|
|2) Management representation letter||AAS-11|
|3) List of related parties & transactions||AS-18 & AAS-23|
|4) Trial Balance||AAS-5|
|5) Financial statements duly signed by the owners||AAS-5|
|6) Notes on accounts and Disclosure
of accounting policies
|7) Valuation of Inventories and for the total year
quantitative inflow, outflow statement.
|8) Bank balance confirmation||AAS-30|
|9) Bank loan statements||AAS-30, Sec 43B of I.T Act|
|10) Major sundry debtors and creditors
|11) Analytical Ratio analysis||AAS-14|
|12) Sample purchase and sales bills||AAS-5|
|13) Proof of assets purchased &
revenue expenditure capitalized
|AAS-5, A.S 10, AS-11 & A.S 16, Sec 36(1)(iii) & 43A of I.T Act.|
|14) Extraordinary Items nature & disclosure||AS-5|
|15) Notes on the nature of business||AAS-20|
|16) Depreciation calculation statement||AS-6, Sec 32 of I.T Act|
17) Liabilities including contingent liabilities A.S 29 with detailed working
18) Statutory Compliances Relevant P.F, ESI, Bonus, VAT
Auditing starts with vouching. Selecting a right sample size to represent the total data and to draw right conclusions is the process of auditing. After applying all the above tools only, audit conclusions are to be drawn by way of a report. Though the above given lists are not exhaustive, depending upon the nature and size of the auditee, and the systems and procedures adopted by the auditee the whole process of auditing varies from case to case.