Taxmann’s CRACKER | Advanced Auditing & Professional Ethics

Contents PAGE

Chapter-wise Marks Distribution

I-7

Syllabus

I-9

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I-13

Abbreviations

I-15

Chapter 1 Quality Control and Engagement Standards

1.1

Chapter 2 Auditing Planning, Strategy and Execution

2.1

Chapter 3 Risk Assessment and Internal Control

3.1

Chapter 4 Audit in an Automated Environment

4.1

Chapter 5 Professional Ethics

5.1

Chapter 6 Company Audit

6.1

Chapter 7 Audit Reports

7.1

Chapter 8 CARO, 2020

8.1

Chapter 9 Audit of Consolidated Financial Statements

9.1

Chapter 10 Audit of Dividends

10.1

Chapter 11 Audit Committee and Corporate Governance

11.1

Chapter 12 Liabilities of Auditor

12.1

Chapter 13 Internal Audit

13.1

I-5

I-6

CONTENTS

Chapter 14 Management and Operational Audit

PAGE

14.1

Chapter 15 Audit under Fiscal Laws

15.1

Chapter 16 Due Diligence, Investigation and Forensic Audit

16.1

Chapter 17 Peer Review and Quality Review

17.1

Chapter 18 Audit of Banks

18.1

Chapter 19 Audit of Non-Banking Financial Companies

19.1

Chapter 20 Audit of Insurance Companies

20.1

Chapter 21 Audit of Public Sector Undertakings

21.1

Chapter 22 Questions on Ind-AS

22.1

Chapter 23 Questions on Schedule III Past Exam Paper (Dec. 2021 - New Syllabus) – Suggested Answers

23.1 P.1

15

Audit under Fiscal Laws "Marks Distribution of Past Exams* (New Syllabus)"

9 8 7 Marks

6 5

4 3 2 1 0

Series1

May-18 5

Nov-18 5

May-19 4

Nov-19 4

Nov-20 0

Jan-21 8

Jul-21 8

Dec. 21 5

*From May 2019, Marks are given only for subjective questions.

15.1 - Audit of Public Trusts Q.1

Draft an Audit programme for conducting the audit of a Public Trust registered under section 12A of the Income-tax Act, 1961.

[May 09 (8 Marks)] Ans.: Audit Programme for conducting audit of a public trust: 1.

Preliminary: Obtain the following from the trust: x

A copy of resolution from the trust so as to determine the scope of audit.

x

A list of accounting records maintained by the trust.

x

A certified true copy of trust deed.

x

Trial Balance as at end of accounting period.

x

Balance Sheet and Profit & Loss account of the trust authenticated by the trustee.

2. Compliance and Substantive Checking (i) Examine the system of accounting and internal control. (ii) Vouch the transactions of the trust so as to ensure the following: (a) transaction falls within the ambit of the trust; (b) transaction is properly authorized by the trustees or other delegated authority; (c) Proper accounting of all incomes and expenses on the basis of the system of accounting followed by the trust; (d) Amount applied towards the object of the trust are covered by the objects of trust as specified in the trust deed. (iii) Check whether the financial statements agrees with the trial balance.

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3. Issuing Audit Report x

Audit Report shall be furnished in Form No. 10B.

x

Annexure to Form 10B requires certain information to be provided by the auditor, which need to be obtained from the trustees.

15.2 - Tax Audit u/s 44AB Q.2

Examine the applicability of tax audit provisions in the following cases: (a) DB Pvt. Ltd. has total turnover of ₹ 10.25 crore for the FY 2021-22. (b) ABC & Co. (a partnership firm) engaged in trading of electronic goods is expecting a turnover of ₹ 165 lacs for the FY 2021-22. (Assume the firm would not be able to ensure that the aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount and aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment). (c) Mr. Anand Khater, a Commission Agent is expecting commission receipts of ₹ 137 lacs during the FY 2021-22 (Assume he would not be able to ensure that the aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount and aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment). (d) Mr. Vishal Raka, owning an Agency of Samsung Mobile for the city of Pune and expects the turnover of ₹ 87 lacs during the FY 2021-22.

Ans.: Applicability of Tax Audit: (a) DB Pvt. Ltd. has to conduct the Audit of Books of Account u/s 44AB of the Act for the FY 2021-22 as the turnover exceeds ₹ 10 crores. (b) Sec. 44AD would be applicable to Partnership Firm. Thus, ABC & Co. can declare the minimum profit @ 8% of the turnover as its turnover during the PY 2021-22 is not expected to exceed ₹ 2 crores. If the firm do not opt for presumptive income scheme under section 44AD, it has to get books of account audited u/s 44AB of the Act. (c) Though Sec. 44AD is applicable to an Individual, it is not applicable to Commission income. In the given case, since, Mr. Anand earns the commission income, he cannot take the benefit of Sec. 44AD. His total turnover during the FY 2021-22 in respect of commission income is expected to exceed ₹ 1 crore, he would have to get his books of account audited u/s 44AB of the Act. (d) Though Sec. 44AD is applicable to an Individual, it is not applicable to Commission income. In the given case, since, Mr. Vishal earns the commission income, he cannot take the benefit of Sec. 44AD. His total turnover during the FY 2021-22 in respect of commission income is not expected to exceed ₹ 1 crore, therefore, he need not get his books of account audited u/s 44AB of the Act.

Q.3

A Co-operative Society having receipts above ₹ 100 lakhs get its accounts audited by a person eligible to do audit under Co-operative Societies Act, 1912, who is not a C.A. State with reasons whether such audit report can be furnished as tax audit report u/s 44AB of the Income-tax Act, 1961?

[Nov. 09 (3 Marks)] Or A Co-operative society having receipts over ₹ 2 crores have appointed Mr. D as the statutory auditor – Mr. D is eligible to do the same under the state Co-operative Societies Act. Mr. D is not a chartered accountant. Mr. D is also appointed to conduct the tax audit of the society u/s 44AB of the Income-tax Act, 1961. Comment.

[Nov. 17 (4 Marks)]

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Ans.: Tax Audit Report in case of Co-operative society: x

Proviso to Sec. 44AB of Income-tax Act, 1961 lays down that where the accounts of an assessee are required to be audited by or under any other law, it shall be sufficient compliance with the provisions of this section, if such person get the accounts of such organisation audited under such other law before the specified date and furnishes by that date, the report of the audit as required under such other law and a further report by an Accountant in the form prescribed under this section.

x

The term “accountant” as defined under section 288 under the Income-tax Act, 1961 means a chartered accountant within the meaning of the Chartered Accountants Act, 1949, who holds a valid certificate of practice.

x

Accordingly, the person who is not a Chartered Accountant as mentioned in the question, though is eligible to act as auditor of Cooperative Society under the Cooperative Societies Act, 1912, but is not eligible to carry out tax audit under Section 44AB of the Income-tax Act, 1961.

Conclusion: Audit report by a person other than Chartered Accountant cannot be furnished as tax audit report under Section 44AB of the Income-tax Act, 1961.

Q.4

Mr. X deals in a commodity and purchase and sales of that commodity is ultimately settled otherwise than by the actual delivery. During the financial year 2021-22 he purchased the commodity worth ₹ 95 Lacs and sold the same commodity for ₹ 104 Lacs and the contract was settled otherwise than by the actual delivery. X seeks your advice whether he is liable for tax audit u/s 44AB of the Income Tax Act. Ans.: Liability for Tax Audit in case of Speculative Transactions: x

Mr. X deals in commodity as a speculator. A speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery.

x

As such, in such transaction the difference amount is ‘turnover’. In the given case the difference of ₹ 104 lacs and ₹ 95 lakhs i.e., ₹ 9 Lakhs is the turnover.

x

In such transactions though the contract notes are issued for full value of the purchases or sales, but the entries in the books of account are made only for the differences.

Conclusion: Mr. X is not liable for Tax audit u/s 44AB of the Income-tax Act, 1961.

Q.5

Concession Ltd. is engaged in the business of manufacturing of threads. The company recorded the turnover of ₹ 10.13 crore during the financial year 2021-22 before adjusting the following: Discount allowed in the Sales Invoice

₹ 8,20,000

Cash discount (other than allowed in Cash memo/ sales invoice) ₹ 9,20,000 Trade discount

₹ 2,90,000

Commission on Sales

₹ 6,00,000

Sales Return (F.Y. 2020-21)

₹ 1,60,000

Sale of Investment

₹ 6,60,000

You are required to ascertain the effective turnover to be considered for the prescribed limit of tax audit and guide the company whether the provisions relating to tax audit applies.

[MTP-March 19, Nov. 21] Ans.: Computation of Turnover for the purpose of determining requirement of Tax Audit: As per section 44AB of the Income-tax Act, 1961, audit is required in case of every person carrying on business, if his total sales, turnover or gross receipts in business exceed ₹ 1 crore and in case of every person carrying on a profession, if his gross receipts from profession exceed ₹ 50 lakhs in any previous year.

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However, in the case of a person whose aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount and aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment, the limit of ₹ 1 crore shall change to ₹ 10 crores.

As per Guidance Note on Tax Audit issued by the ICAI, the following points merit consideration for the purpose of computing turnover: (i)

Discount allowed in the sales being in the nature of trade discount will be deducted from the turnover.

(ii)

Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and hence should not be deducted from the turnover.

(iii)

Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade discount. If it is in the nature of commission on sales, the same cannot be deducted from the figure of turnover.

(iv)

Price of goods returned should be deducted from the turnover even if the returns are from the sales made in the earlier year/s.

(v)

Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part of turnover. However, if the shares, securities, debentures etc., are held as stock-in-trade, the sale proceeds thereof will form part of turnover.

Accordingly, the turnover of concession limited may be computed as under: Recorded turnover during the year

₹ 10,13,00,000

Less: Discount allowed in the Sales Invoice

(8,20,000)

Trade discount

(2,90,000)

Sales Return

(1,60,000)

Effective turnover

₹ 10,00,30,000

Conclusion: As the effective turnover of Concession Ltd. is more than ₹ 10 Crore, the provisions related to tax audit are applicable to the company.

Q.6

Mr. A engaged in business as a sole proprietor presented the following information to you for the FY 2021-22. Turnover made during the year ₹ 1124 lacs. Goods returned in respect of sales made during FY 2020-21 is ₹ 20 lacs not included in the above. Cash discount allowed to his customers ₹ 1 lac for prompt payment. Special rebate allowed to customer in the nature of trade discount ₹ 5 lacs. Kindly advise him whether he has to get his accounts audited u/s 44AB of the Income-tax Act, 1961.

[Nov. 13 (4 Marks)] Ans.: Computation of Turnover for the purpose of determining requirement of Tax Audit: As per section 44AB of the Income-tax Act, 1961, audit is required in case of every person carrying on business, if his total sales, turnover or gross receipts in business exceed ₹ 1 crore and in case of every person carrying on a profession, if his gross receipts from profession exceed ₹ 50 lakhs in any previous year.

However, in the case of a person whose aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount and aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment, the limit of ₹ 1 crore shall change to ₹ 10 crores.

As per Guidance Note on Tax Audit issued by the ICAI, the following points merit consideration for the purpose of computing turnover:

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Audit under Fiscal Laws (i)

Discount allowed in the sales being in the nature of trade discount will be deducted from the turnover.

(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and hence should not be deducted from the turnover. (iii) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade discount. (iv) Price of goods returned should be deducted from the turnover even if the returns are from the sales made in the earlier year/s.

Accordingly, the turnover of Mr. A may be computed as under: Recorded turnover during the year

₹ 11,24,00,000

Less: Trade discount

(5,00,000)

Sales Return

(20,00,000)

Effective turnover

₹ 10,99,00,000

Conclusion: As the effective turnover of Mr. A is more than ₹ 10 Crore, the provisions related to tax audit are applicable to Mr. A. Q.7

Comment with respect to computation of total sales, turnover or gross receipts in business exceeding the prescribed limit under section 44AB of Income-tax Act, 1961. (i)

Discount allowed in the sales invoice

(ii)

Cash discount

(iii) Price of goods returned related to earlier year (iv) Sale proceeds of fixed assets.

[May 15 (4 Marks)]

Ans.: Computation of Total Sales:

Q.8

(i)

Discount allowed in the sales invoice: Deducted from turnover as it reduces the sale price.

(ii)

Cash discount: Not to be deducted being in the nature of financing charge.

(iii)

Price of goods returned related to earlier year: Deducted from turnover.

(iv)

Sale proceeds of fixed assets: Will not form part of turnover as these are not held for resale.

M/s. SB & Co. has been appointed as tax auditor under section 44AB of Income-tax Act, 1961 by Woodcraft Interior Consultants, a professional partnership firm, having turnover ₹ 11.25 Crores. M/s RS & Co. are the statutory auditors of the firm but they are unable to give their report on the financial statements of the firm. M/s. SB & Co., have, however, completed their tax audit and want to issue their reports. Comment.

[May 17 (4 Marks)] Ans.: Tax Audit Report in case of Partnership firm assessee: x

Proviso to Sec. 44AB of Income-tax Act, 1961 lays down that where the accounts of an assessee are required to be audited by or under any other law, it shall be sufficient compliance with the provisions of this section, if such person get the accounts of such organisation audited under such other law before the specified date and furnishes by that date, the report of the audit as required under such other law and a further report by an Accountant in the form prescribed under this section.

x

There is no statutory requirement of audit of a firm under the provisions of Partnership Act, 1932.

So, appointment of two auditors one as tax auditor and another as statutory auditor does not appears to be correct.

x

It is also provided u/s 44AB that the tax auditor should report whether in his opinion the particulars in respect of Form 3CD are true and correct. The audit report is in the form of 3CA if accounts are being examined under the requirements of provisions of any other Act, otherwise report should be in Form 3CB.

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In the present case, assessee is a partnership firm and appoints separate persons as tax auditor and statutory auditor. Statutory auditor is not able to give their report on financial statements of firm.

Conclusion: Form No. 3CA requires the tax auditor to enclose a copy of the audit report conducted by the statutory auditor. Where the report of the statutory auditor is not available for whatever reasons, it will be possible for the tax auditor to give his report in Form No. 3CB and to certify the relevant particulars in Form No. 3CD. Note: There is no requirement of statutory audit under Partnership Act, 1932. Hence while answering the question, this fact also needs to be stated.

Q.9

Mr. PK is conducting the Tax audit u/s 44AB of the Income-tax Act, 1961 of MG Ltd. for the year ended 31st March, 2022. There is a difference of opinion between Mr. PK and the Management in respect of certain information to be furnished in Form No. 3CD. As a tax auditor, Mr. PK has to report whether the statement of particulars in Form 3CD are true and correct and the same is to be annexed to the report in Form No. 3CA. Advise on the matters to be considered by Mr. PK while furnishing the particulars in Form No. 3CD. [Nov. 19 – New Syllabus (4 Marks)] Ans.: Form 3CD - Considerations for auditor while furnishing particulars in Form 3CD: While furnishing the particulars in Form No. 3CD it would be advisable for the tax auditor to consider the following:

Q.10

1.

If a particular item of income/expenditure is covered in more than one of the specified clauses, care should be taken to make a suitable cross reference to such items at the appropriate places.

2.

If there is any difference in the opinion of the tax auditor and that of the assessee in respect of any information furnished in Form No. 3CD, the tax auditor should state both the view points and also the relevant information in order to enable the tax authority to take a decision in the matter.

3.

If any particular clause in Form No. 3CD is not applicable, he should state that the same is not applicable.

4.

In computing the allowance or disallowance, he should keep in view the law applicable in the relevant year, even though the form of audit report may not have been amended to bring it in conformity with the amended law.

5.

In case the prescribed particulars are given in part to the tax auditor or relevant form is incomplete and the assessee does not give the information against all or any of the clauses, the auditor should not withhold the entire audit report. In such a case, he can qualify his report on matters in respect of which information is not furnished to him.

6.

The information in Form No. 3CD should be based on the books of account, records, documents, information and explanations made available to the tax auditor for his examination.

7.

In case the auditor relies on a judicial pronouncement, he may mention the fact as his observations in Form No. 3CA or Form No. 3CB, as the case may be.

Mr. A engaged in business as a sole proprietor presented the following information to you for the FY 2021-22. Turnover expected to be made during the year ₹ 1024 lacs. Goods returned in respect of sales made during FY 2020-21 is ₹ 20 lacs not included in the above. Cash discount allowed to his customers ₹ 1 lac for prompt payment. Special rebate allowed to customer in the nature of trade discount ₹ 5 lacs. Further, the aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed five per cent of the said amount and aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five per cent of the said payment. Kindly advise him whether he has to get his accounts audited u/s 44AB of the Income-tax Act, 1961. [MTP – March 21]

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Ans.: Turnover limit for the purpose of Tax Audit: The following points merit consideration as stated in the Guidance note on Tax Audit issued by the ICAI: (i)

Price of goods returned should be deducted from the figure of turnover even if the return are from the sales made in the earlier years.

(ii)

(iii)

Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and is not related to turnover. The same should not be deducted from the figure of turnover.

Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade

discount.

Applying the above stated points to the given problem, 1. Total Turnover 2. Less –

1024 Lac

Goods Returned

20 Lac

Special rebate allowed to customer in the nature of trade discount

5 Lac

would be deducted Balance

999 Lac

Since the aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount and aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment, limit for tax audit is ₹ 10 crores.

Conclusion: A would not be required to get his accounts audited u/s 44AB of the Income-tax Act, 1961 as ₹ 999 lac is below prescribed tax audit limit i.e. ₹ 10 crores.

Q.11

UT & Co. is a Chartered Accountant Firm, that provides consultancy services. Recently, it got queries from different clients with respect to applicability of tax audit provisions to their businesses.

In response to such queries, UT & Co., asked from them details such as turnover, total receipts and total payments made during the year respectively along with mode of receipt/payment, whether filing return of Income under normal tax provisions or presumptive tax provisions such as sections 44AD, 44AE, etc.

So, in the trailing mail, UT & Co., got the aforesaid details from different clients, which it classified into following categories for ease of framing an opinion, as follows: Client

Turnover

% of Cash

% of Cash

Sr. No.

(₹ in crore)

Receipts in

Payments in

Total Receipts

Total Payments

5%

5%

1

9.5

Remarks

Has been filing return as per the regular provisions of income tax.

2

1.8

7%

4%

Has declared business income as per presumptive taxation under section 44AD of the Income-tax Act, 1961.

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0.85

6%

4%

Has declared business income as per presumptive taxation under section 44AD of the Income-tax Act, 1961 during last 2 previous years but during current previous year has declared income lower than as per section 44AD and the total income is less than basic exemption limit.

4

3.2

8%

6%

Has declared business income as per presumptive taxation under section 44AE of the Income-tax Act, 1961 during last 4 previous years but during current previous year has declared income lower than as per section 44AE and the total income is less than basic exemption limit.

On behalf of UT & Co., please provide your opinion, along with reasons, as a consultant in case of aforesaid clients that whether tax audit is applicable to them or not?

[RTP-Nov. 21]

Ans.: Applicability of Tax Audit: Client

Opinion

Sr. No.

(Tax Audit

Reason

applicable or not) 1

No

As the turnover is upto ₹ 10 crore, Cash Receipts and Cash Payments are upto 5% of total receipts & total payments, respectively, and has been filing return as per the regular provisions of income tax, so tax audit is not applicable.

2

No

Even though turnover exceeds ₹ 1 crore and Cash Receipts are greater than 5% of Total Receipts but as the business income has been declared as per presumptive taxation under section 44AD of the Income-tax Act, 1961, so tax audit is not applicable.

3

No

Even though business income as per presumptive taxation under section 44AD of the Income-tax Act, 1961 has been declared during last 2 previous years but has not been declared during the current previous year but as the total income is less than basic exemption limit, so tax audit is not applicable.

4

Yes

Has been declaring total income as per presumptive taxation under section 44AE of the Income-tax Act, 1961 during last 4 previous years but during current previous year has declared income lower than as per section 44AE, so tax audit is applicable.

.

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15.3 - Methods of Accounting & ICDSs (Sec. 145) Q.12

As the tax auditor of a non-corporate entity u/s 44AB of the Income-tax Act, 1961, how would you ensure compliance of section 145 of the Income-tax Act, 1961?

Ans.: Compliance of Section 145: x

Sec. 145(1) of Income-tax Act, 1961 requires that the income chargeable under the head ‘PGBP’ or ‘Other sources’ shall, be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

x

Sec. 145(2) provides that the C.G. may notify in the Official Gazette from time to time Income Computation and Disclosure Standards to be followed by any class of assessee or in respect of any class of income.

x

Sec. 145(3) provides that where the A.O. is not satisfied about the correctness or completeness of the accounts of the assessee, or where method of accounting provided u/s 145(1) have not been regularly followed by the assessee or income has not been computed in accordance with the Standards notified u/s 145(2), the A.O. may make an assessment in a manner provided in Sec. 144 of the Income-tax Act.

x

Auditor has to therefore ensure the following: (a) That the entity follows either the cash or accrual method of accounting and same is to be reported in clause 13(a) of form 3CD. (b) Accounting policies has been disclosed separately. (c)

Provisions as stated in Income Computation and Disclosure Standards (ICDS) notified by Central Government u/s 145(2) has been complied with.

15.4 - Form 3CD Q.13

You are appointed as tax auditor of Mr. X a practicing advocate in Agra. During the previous year he collected GST of ₹ 7 lakhs but utilized for personal use. The department issued a show cause notice to him why the tax collected by him in not deposited to the Government account. He appeared before the department and stated his inability to pay the sum due to financial crisis. The proceedings are still pending. Mr. X requests you not to disclose his GST registration details while filling particulars to be furnished in From No. 3CD. As a tax auditor how would you deal with this?

[May 16 (4 Marks)] Ans.: Reporting Requirement of Form 3CD: x

Clause (4) of Form 3CD, requires tax auditor to mention the registration number or any other identification number, if any, allotted, in case the assessee is liable to pay indirect taxes like excise duty, service tax, sales tax, GST, customs duty, GST etc. Auditor is required to furnish the details of registration numbers as provided to him by the assessee.

x

The reporting is however, to be done in the manner or format specified by the e-filing utility in this context. The information may be obtained and maintained in the following format: S. No.

x

Relevant Indirect Tax Law which requires registration

Place of Business/profession/ service unit for which registration is in place/ or has been applied for

Registration/ Identification number

In the present case Mr. X has defaulted in payment of GST for the previous year. Consequently, the department issued a show cause notice for such non-payment of tax. The arguments are still going on between the department and assessee. He also restrained his tax auditor from disclosing GST registration details in tax audit report.

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Conclusion: Instruction of Mr. X is not acceptable as clause 4 of Form 3CD requires tax auditor to furnish the details of registration number or other identification number of assessee, if assessee is required to pay indirect taxes like excise duty, service tax, GST etc.

Q.14

Arihant Pvt. Ltd. is engaged in the business of providing corporate/professional training programs.

It has an annual turnover of ₹ 74 crore. The Company is subject to tax audit for which the work has been started by the tax auditor. For the financial year ending 31 March 2022, the Company applied for GST registration for 5 new locations for which registration certificates have not yet been received by the Company. However, the registration number is available on the portal of relevant authority which can be verified by checking the details of the Company. In this case what should be the audit procedures to verify this registration number?

[RTP – May 21] Ans.: Reporting of Registration Number under Indirect Taxes in Form 3CD: Clause 4 of Form No. 3CD requires the tax auditor to ensure whether the assessee is liable to pay indirect tax like excise duty, service tax, sales tax, GST tax, custom duty, etc. If yes, the registration number or GST number or any other identification number allotted for the same need to be furnished.

Therefore, the auditor is primarily required to furnish the details of registration numbers as provided to him by the assessee. The reporting is required to be done in the manner or format specified by the e-filing utility in this context.

In the given case, Arihant Pvt. Ltd. is engaged in the business of providing corporate/professional training programs. The Company is subject to tax audit. For the financial year ending 31 March 2022, the Company applied for GST registration for 5 new locations for which registration certificates have not yet been received by the Company. However, the registration number is available on the portal of relevant authority.

Tax auditor should verify the registration number for the locations for which registration certificates have not been received from online portal of the relevant authority.

The auditor should also ensure that the details furnished while checking the registration number pertains to the company only. If the company has filed any returns for these locations, the auditor should enquire for the same from the management and should check those returns to verify the correctness of the registration numbers. In addition, the auditor should also obtain specific representation in respect of this point from the management.

Q.15

BB Ltd., a non-resident company, is engaged in the business of extraction of mineral oils, having turnover of ₹ 20 lakhs during the financial year 2021-22. The company claims that its profits and gains chargeable to tax under the head "Profits & gains of business or profession" is lower than the deemed income chargeable under section 44BB of the Income-tax Act, 1961. Therefore, it decided to get its accounts audited under section 44AB of the Income-tax Act, 1961. Discuss reporting requirement of Form 3CD in this behalf.

Ans.: Reporting Requirement of Form 3CD: x

BB Ltd., is a non-resident company which is engaged in the business of extraction of mineral oils, hence, its income is chargeable in accordance with the provisions of section 44BB of the Incometax Act, 1961. But as the company is claiming lower income in comparison to deemed income u/s 44BB, provisions of Sec. 44AB in relation to audit has to be complied with.

x

Clause (8) of Form 3CD, requires tax auditor to mention the relevant clause of section 44AB under which the audit has been conducted. Accordingly, auditor is required to mention clause (c) of Sec. 44AB which requires tax audit.

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Further, as per Clause (12) of Form 3CD, if the profit and loss account of the assessee includes any profits and gains assessable on presumptive basis, the tax auditor has to indicate the amount and the relevant sections.

Conclusion: Under Clause 8, auditor is required to indicate the relevant clause of section 44AB under which audit is to be conducted and in addition under clause 12, auditor is required to indicate the amount of profits of business covered u/s 44BB and the relevant section.

Q.16

ABC Ltd., is consistently following accounting standards as required u/s 133 of the Companies Act, 2013. During your tax audit u/s 44AB of the Income-tax Act, 1961, the board of directors informed you that profits of the company is properly arrived at and the ASs applicable to it have been followed consistently and as such, there need not be any adjustments to be made as per ICDS notified u/s 145 of Income-tax Act, 1961. Based on the requirement of Law in this regard, examine the validity of the stand of management in this regard.

[May 18–New Syllabus (5 Marks)] Ans.: Reporting for Adjustment to be made to the Profits or Loss for complying with ICDSs: x

Central Government has, in exercise of the powers conferred u/s 145(2) of Income-tax Act, 1961, notified ten income computation and disclosure standards (ICDSs) to be followed by all assessees (other than an individual or a HUF who is not required to get his accounts of one previous year audited in accordance with the provisions of Sec. 44AB), following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profit and gains of business or profession” or “Income from other sources”.

x

Clause 13(d) of Form No. 3CD of the tax audit report requires the tax auditor to state whether any adjustment is required to be made to the profits or loss for complying with the provisions of income computation and disclosure standards notified under section 145(2) of the Income-tax Act, 1961.

x

Further, the tax auditor is also required to report under Clause 13(e), if answer to Clause 13(d) above is in the affirmative i.e. the auditor is required to give details of such adjustments as follows: Increase in Profit (₹) ICDS I

Accounting Policies

ICDS II

Valuation of Inventories

ICDS III

Construction Contracts

ICDS IV

Revenue Recognition

ICDS V

Tangible Fixed Assets

ICDS VI

Changes in Foreign Exchange Rates

ICDS VII

Governments Grants

ICDS VIII

Securities

ICDS IX

Borrowing Costs

ICDS X

Provisions, Contingent Liabilities & Contingent Assets

Decrease in Profit (₹)

Net Effect (₹)

Total Conclusion: Contention of the management that they are following Accounting Standards and need not to make any adjustments as per ICDS, is not correct. Thus, ABC Ltd. is required to adjust the profits in compliance with ICDS.

15.11

Audit under Fiscal Laws Q.17

Chapter 15

As an auditor of a partnership firm under section 44AB of the Income-tax Act, 1961, how would you report on the following: Technical support is received from Mr. DND, a non-resident for installation of a new machinery. He has raised invoice dated 01/05/2021 in USD equivalent to ₹ 5,00,000. The entire dues are cleared through appropriate banking channel on 25/06/2021.

[July 21 – Old Syllabus (2 Marks)] Ans.: Reporting requirements of adjustments in profit and loss account: Technical support received from Mr. DND, a non-resident, is for installation of new machinery and therefore, it would have been capitalized as the cost of machinery. It is assumed that amount paid through bank was after complying with TDS requirements.

Therefore, the tax auditor will report the same in accordance with Clause 13(f) of Form 3CD i.e., Disclosure as per ICDS. S. No. ICDS V

Q.18

ICDS Tangible Fixed Assets.

Disclosure Addition of ₹ 5,00,000 technical support fee to Nonresident being capitalized as the cost of machinery

As a tax auditor of RM & Co. for the AY 2022-23, how would you deal and report the following: RM & Co. has borrowed ₹ 75 lakhs from a bank @10% p.a. for purchase of machinery. The machinery was purchased on 30.09.2021, but was put to use on 10.04.2022. The interest paid to bank for the year 2021-22 was charged to Profit and Loss Account.

[Dec. 21 – Old Syllabus (2 Marks)] Ans.: Reporting requirements of adjustments in profit and loss account: Interest paid to bank is for the period prior to date when the asset put to use, therefore, it would have been capitalized as the cost of machinery. Therefore, the tax auditor will report the same in accordance with Clause 13 (f) of Form 3CD i.e., Disclosure as per ICDS. S. No. ICDS V

Q.19

ICDS Tangible Fixed Assets.

Disclosure Interest for the period prior to date when the asset put to use has been charged to Profit and Loss account.

T Ltd. previous year ended on 31st March 2022. During that period, it made a claim for refund of customs duty which was admitted as due by the customs authorities during April 2022. T Ltd. neither credited the claim in the profit and loss account nor reported the same in clause 16(b) of Form 3CD for the reason that this has been admitted as due by the authorities only in the next financial year. Further T Ltd. had changed the method of determination of cost formula for the purpose of stock valuation from FIFO basis to Weighted Average Cost basis, but that was also not reflected in clause 13(b) of Form 3CD which requires reporting on change in accounting method employed. Comment.

[May 12 (6 Marks)] Ans.: Reporting requirement of Claim of Custom Duty Refund and change in Accounting policy: x

As per Clause 16(b) of form 3CD, the details of custom duty refund, if admitted as due but not reported in Profit and Loss account, are to be stated. But the claim which have been admitted as due after the relevant previous year need not be reported.

x

Hence non-reporting of claim of refund of custom duty in Form 3CD is in order.

x

Clause 13(b) of Form 3CD required reporting in case of change in method of accounting employed. But in the present case there is a change in accounting policy. Change in Accounting policy cannot be treated as change in method of accounting, hence does not require any reporting under clause 13(b) in Form 3CD.

x

Hence non-reporting of method of valuation in Form 3CD is in order.

15.12

CRACKER

Advanced Auditing & Professional Ethics AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO NO. OF PAGES BINDING TYPE

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PANKA J GARG TAXMANN JANUARY 2022 9TH EDITION 9789393656278 536 PAPERBACK

Rs. 990 | USD 50 Description This book is prepared exclusively for the requirement of the Final Level of Chartered Accountancy Examination. It covers the entire revised, new syllabus as per the ICAI. The Present Publication is the 9th Edition & Updated till 31st October 2021 for CA-Final | New Syllabus, with the following noteworthy features: u

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