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CHAPTER: 1

TAX AUDIT

1.1. MEANING:
A tax audit is an examination of your tax return by the IRS to verify that your income and
deductions are accurate. A tax audit is when the IRS decides to examine your tax return a little
more closely and verify that your income and deductions are accurate.
A tax audit is an examination of an organization's or individual's tax return. Each year when tax
season rolls around, the Internal Revenue Service, as well as state departments of taxation,
kicks into overdrive to meet with the onslaught of tax filings. The purpose of a tax audit is to
verify that the financial information is being reported correctly.
1.2 TAX AUDIT UNDER SECTION 44 AB:
Section 44AB provides for the compulsory audit of accounts of certain persons carrying on
business or profession. Section 44AB reads as under:
44AB. Audit of accounts of certain persons carrying on business or profession. Every
person, (a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be,
in business exceed or exceeds one crore rupees in nay previous year; or
(b) carrying on profession shall, if his gross receipts in profession exceed twenty-five lakh
rupees in any previous year; or
(c) carrying on the business shall, if the profits and gains from the business are deemed to be
the profits and gains of such person under section 44AD or section 44AE or section 44AF
or section 44BB or section 44BBB, as the case may be, and he has claimed his income to
be lower than the profits or gains so deemed to be the profits and gains of hi business, as
the case may be, in any previous year,

get his accounts of such previous year audited by an accountant before the specified date and
furnish by that date the report of such audit in the prescribed form duly signed and verified
by such accountant and setting forth such particulars as may be prescribed:
Provided that this section 44 BBA, on and from the 1 st day of April,1985 or, as the case may
be, the date on which the relevant section came into force, whichever is later:
Provided further that in a case where such person is required by or under any other law to get
his accounts audited, it shall be sufficient compliance with the provisions of this section if
such persons gets the accounts of such business or profession audited under such 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.
1.3 TAX AUDIT UNDER SECTION 44AB CHANGES FOR AY 14-15
An Assessee is liable to get his Tax Audit done by a Chartered Accountant mandatorily, if in the
previous year,
1.

The Person is carrying on business and his Total Sales/Turnover exceeds Rs. 1
Crore (Limit increased w.e.f 1st April 2012) or

2.

The Person is carrying on Profession, and his Gross Receipts exceed Rs. 25 Lakhs (Limit
increased w.e.f 1st April 2012) or

3.

The Person is carrying on business or profession and is covered under the provisions
of section 44AD, 44AE, 44AF, 44BB or 44BBB and claims that his income from the said
business is lower than the deemed profits and gains computed under the relevant section

The Due Date of filing the Tax Audit Report under Section 44AB is 30thSeptember of the
Assessment Year. However, for AY 2014-15 the due date for filing Tax Audit Report has
been extended from 30th Sept 2014 to 30th Nov 2014.
For all other assessees who are not liable to get their Tax Audit done under Section 44 AB the
Due Date of filing of Income Tax Return is 31st July.

1.4 INCOME TAX SLABS :


Several changes in Tax Audit Report have been introduced vide Income Tax (7th Amendment)
Rules 2014 are applicable from this AY 2014-15 onwards. CBDT has amended Form 3CA,
Form 3CB & Form 3CD and the amended Forms now require explicit mention of the
observations/qualifications if any, by the auditor while issuing the true and correct audit report.
With the introduction of these changes, the tax auditors responsibilities to report detailed
information under the new/amended clauses has increased significantly.
1.5 KPMG GUIDE ON CHANGES IN TAX AUDIT REPORT :
In case an Assessee is liable to get his Accounts audited by an Accountant under any other Law
for the same accounting period, the assessee is not mandatorily required to get his audit done
again and is only required to submit a report in the form mentioned below. However, if the
Accounting Year is different from the Accounting Year for which the Audit was done under any
other Act, the Tax Audit would be required to be conducted again as per the Income Tax Act

1.6 TAX AUDIT EFILING:


As per Notification No. 34 dated 1st May 2013, e-filing of Tax Audit report is now mandatory
from the assessment year 2013-14 onwards.
As per Rule 6G, tax audit report is to be furnished in Form 3CA & Form 3CB and the
particulars required to be furnished along with these tax reports should be in Form 3CD.

1. Form 3CA & Form 3CD- These Forms are used in case where the Accounts of the business
or profession of a person have already been audited under any other Law.
2. Form 3CB & Form 3CD These Forms are used in case where the Accounts of the business
or profession have not been audited earlier.

1.7 COMPUTATON OF TOTAL TURNOVER FOR THE PURPOSE OF TAX AUDIT:


ICAI has through a Guidance Note clarified the following points:1.

Where a person is carrying on 2 Business/2 Professions the total turnover of both the
businesses shall be clubbed together and tax audit shall be liable to be conducted if the Total
Turnover exceeds Rs. 1 Crore/ Rs. 25 Lakhs as the case may be.

2.

Where a person is carrying on business as well as profession and the Turnover of the
business is Rs. 1.2 Crore and the Gross Receipts of the profession is Rs 22 Lakhs. In such a
case, ICAI has clarified through a Guidance Note that the Assessee is liable to get the Tax
Audit done of both the business as well as profession because the Gross Receipts from the
business exceed the limit of Rs. 1 Crore. However, if his Total Turnover was Rs. 95 Lakhs
and Gross Receipts from business was Rs. 22 Lakhs, he would not be required to get his Tax
Audit done.

3.

In case where a person has a total turnover of Rs. 98 Lakhs and has sold a Car for Rs. 8
Lakhs. In such a case, the total amount on adding up becomes Rs. 1.06 Lakhs i.e. above Rs.
1 Crore. Confusion arose whether the person is liable to get an audit done in this case and
ICAI has clarified that the turnover will not include any amount on the sale of the fixed asset
as it was held by the person for business use and not for the purpose of sale.

ICAI has further clarified that the amount received from the following items shall not be
included while computing the Total Sales/Total Turnover/ Gross Receipts:

Sale Proceeds of Fixed Assets

Sale Proceeds of Assets held as Investments

Rental Income

Income by way of Interest unless assessable as Business Income

Any expense which is reimbursable to the Agent by the Client

1.8 PENALTY FOR NON COMPLIANCE OF SECTION 44 AB:


Non Compliance of the provisions of this act shall attract Penalty under section 271B of the
Income Tax Act. If any person required to get his audit done under section 44AB fails to do so
before the specified date shall be liable for penalty of % of the turnover/gross receipts subject
to a maximum penalty of Rs. 1, 50,000.
However, Section 273B states that no penalty shall be levied under section 271B if there is a
reasonable cause for such failure. Some instances which have been accepted by the
Tribunals/Courts as Reasonable Cause are: 1.

Resignation of the Tax Auditor and Consequent Delay

2.

Death or physical inability of the partner in charge of the Accounts

3.

Labour Problems such as strikes, lock-outs for a long period

4.

Loss of Accounts because of Fire/Theft etc. beyond the control of the Assessee

5.

Natural Calamities

1.9 REVISION OF TAX AUDOT REPORT:

Tax Audit Report e-filed cannot be revised under normal circumstances. However, in case the
Accounts are revised in the following circumstances, the Audit Report e-filed can also be
revised: 1.

Revision of Accounts of a Company after its adoption in the Annual General Meeting

2.

Change in Law with Retrospective effect

3.

Change in Interpretation of Law

In case the Tax Audit report efiled is revised, the Auditor shall state that its a Revised Report
and shall also state the reasons for the same.

CHAPTER: 2
TAX AUDITOR
2.1 TAX AUDITOR:
Tax auditors ensure that individuals and companies comply with local, state and federal tax
laws. They also advise their clients on tax issues and assist with tax filings. A college education
is usually required, and professional certification can improve employment potential.
1. Explanation to section 44AB (i):
The term accountant has been defined in sub-clause (i) of Explanation to Section 44AB as
under: Explanation: For the purposes of this section, accountant shall have the same meaning
as in the Explanation below sub-section (2) of Section 288.
2. Explanation to Section 288(2):

The above mentioned Explanation reads as under:


Accountant means a chartered accountant within the meaning of chartered Accountants Act,
1949 and includes, in relation to any state, any person, who by virtue of the provisions of subsection (2) of Section 226 of the Companies Act, 1956, is entitled to be appointed to act as an
auditor of companies registered in that state.
3. Provision to Section 44AB:
The provision to Section 44AB also 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 gets the accounts of such business or profession
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 a further report by an accountant in the form
prescribed under this section. In the case of any assessee like a co-operative society where the
accounts under the relevant law are allowed to be audited by a person other than a chartered
accountant, the statutory auditor need not be a chartered accountant. However, a tax auditor has
to be a chartered accountant even if statutory audit has been conducted by a person other than a
chartered accountant. Section 44AB does not stipulate that only the statutory auditor appointed
under the Companies Act or other similar statute should perform the tax audit. The tax audit can
therefore; he conducted either by the statutory auditor or by any other chartered accountant in
practice.
4. Firm of CA:
Though the section refers to the accounts being audited by an accountant which means a
chartered accountant as defined above, the statement of audit can also be done by a firm of
chartered accountants. This has been a recognized practice under the Act. In such a case, it
would be necessary to state the name of the partner who has signed the audit report on behalf of
the firm. The member signing the report as a partner of a firm or in his individual capacity
should give his membership number below his name.

5. Communication with previous Auditor:


Tax audit under Section 44AB being a recurring audit assignment, for expressing professional
opinion on the financial statements and the statement of particulars, the member accepting the
assignment should communicate with the member who had done tax audit in the earlier years as
provided in the Chartered Accountants Act.
6. Letter of Appointment:
The tax auditor should obtain from the assessee a letter of appointment for conducting the audit
as mentioned in Section 44AB. It is advisable that such an appointment letter should be signed
by the person competent to sign the return of income in terms of the provisions of Section 140.
7. Statement of Particulars:
The tax auditor should get the statement of particulars, as required in the annexure to me audit
report, authenticated by the assessee before he proceeds to verify the same.
8. Report to be submitted to Assessee:
The tax auditor is required to submit his report to the person appointing him viz. the assessee.
9. Persons not Eligible:
As per the Code of Conduct by ICAI, a chartered accountant who is in employment of a
concern or in any other concern under the same management or a chartered accountant who is
responsible for writing or the maintenance of the books of account of the assessee cannot be
appointed as tax auditor. The audit of accounts of a professional firm of chartered accountants,
under Section 44AB cannot be conducted by any partner or employee of such firm. A chartered
accountant, who is a tax consultant of the assessee. If the internal auditor is working in a
professional capacity (as an independent chartered accountant not being an employee of the
assessee) he can conduct the tax audit.
10. Removal:

There is no specific procedure for removal of a tax auditor appointed under section 44AB. IT is,
how3evr, possible for the management to remove a tax auditor where there are any valid
grounds for such removal. This may arise where the tax auditor has delayed the submission of
audit report under Section 44AB for an unreasonable period and if it is found that there is no
possibility of getting the audit report before the specified date. In such cases, the assessee may
be justified in removing the tax auditor.
2.2 JOB DESCRIPTION OF A TAX AUDITOR:
Tax auditors evaluate the finances of a company, individual, agency or organization to ensure
they're in accordance with tax laws and regulations. They use principles and practices of
accounting, such as internal controls and record keeping, to accomplish this. Specific functions
of a tax auditor are based on whether they're auditing a company, government agency or an
individual. Some specific functions of a tax auditor could include:

Determining tax liability

Examining tax returns

Assessing assets

Auditing payroll and records

Interviewing financial stakeholders

Advising on tax laws and regulations

Preparing reports of audit results

2.3 TYPES OF AUDITOR:


1. Internal Auditors
Internal audits are performed by an employee within an organization. These audits can serve
multiple purposes, including the identification of fraud, wasteful spending and

mismanagement of funds. Internal auditors could be responsible for assessing records and
recommending improvement for efficiency, compliance and data security.
2. External Auditors
External audits are performed by an impartial third party, often a Certified Public Accountant
(CPA) from an accounting firm. For the purpose of tax audits, the auditor might advise the
client on tax advantages and file tax forms for the company.
3. Government Auditors
Government employees, such as those that work for the Internal Revenue Service (IRS),
ensure the accuracy of governmental records and provide random tax audit services for
companies, nonprofit organizations and individuals. They evaluate corporate and individual
tax returns, expenditures, receipts and bookkeeping practices to ensure compliance with tax
codes and regulations.
2.4 EDUCATION REQUIREMENTS FOR TAX AUDITORS:
According to the U.S. Bureau of Labor Statistics, most auditor positions require a bachelor's
degree in accounting, though some employers might favor those with master's degrees in
business or accounting. Graduates of associate degree programs and those with related
experience as accounting clerks or bookkeepers might qualify for some entry-level positions
under the supervision of a licensed or experienced auditor.
2.5 CERTIFICATION AND CONTINUING EDUCATION:
Federal law requires those who submit reports to securities exchanges must earn CPA
certification. The licensure exam is administered by a State Board of Accountancy. Usually,
applicants need a degree to qualify for testing, though some states allow experience in the field
to substitute for educational requirements. Those with CPA certification often must complete a
determined number of continuing education courses or credits to maintain the designation.

A number of associations offer continuing education opportunities and additional certification


options. Organizations, such as the American Institute of CPAs, the Association for
Accountants and Financial Professionals in Business and the National Association of State
Boards of Accountancy, offer conferences, seminars, self-study guides and online resources
that can offer continuing education credit. Professionals can also choose to earn supplementary
certifications, such as the Certified Management Accountant or Certified Financial Manager,
to establish expertise in a variety of accounting practices and controls.
2.6 EMPLOYMENT OUTLOOK AND SALARY INFORMATION:
The U.S. Bureau of Labor Statistics (BLS) reports that employment of tax examiners, tax
collectors and revenue agents - all of whom work for government agencies - was expected to
decrease 4% between 2012 and 2022. The number of jobs for accountants and auditors during
the same time period were predicted to rise 13%. As of May 2013, tax examiners, tax
collectors and revenue agents earned median salaries of $50,610. During that time,
accountants and auditors made a median of $65,080 per year, according to the BLS.
2.7 TAX AUDITOR RESPONSIBILITIES AND DUTIE:
1. Maintain all required paperwork according to required policies and procedures.
2. Maintain all procedure manual and ensure efficient corporate procedures for same and
prepare quarterly reports for same.
3. Administer all internal audits and ensure compliance to all transaction tests and documents.
4. Ensure compliance to all statutes and analyze accounting systems and evaluate all tax
controls to assist to reduce taxes.
5. Ensure adherence to all code and assist to manage all data develop from audits and provide
required training to all auditors and evaluate all audit files as per requirement.

6. Analyze all pre audits and develop required audit plans according to procedures and establish
appropriate guidelines.
7. Provide support to all activities and maintain implement of all audit plans and supervise
implementation of all tax audits within required timeframe.
8. Prepare and submit various comprehensive reports and administer all tax statutes and assist
tax payer to complete all audits.
9. Assist to perform all complex audits for all businesses.
10. Analyze all accounting system to administer all additional liabilities.
11. Evaluate all refunds and perform required calculations for all tax assessment and participate
in all closing conference and prepare audit reports.
12. Maintain knowledge on all tax laws and strategies and prepare reports for same.

CHAPTER 3
TAX AUDIT PROCEDURES AND AUDIT REPORT

3.1 TAX AUDIT PROCEDURES:


Audit procedures are techniques and steps that corporate reviewers use to assess a company's
operating performance. Auditors keep a close eye on internal controls, financial systems and
corporate accounting principles. Closely monitoring financial mechanisms helps auditors ensure
that employees record operating data in accordance with accounting norms. In modern
economies, "cooking the books" is a phrase that makes corporate management's blood run cold.

Cooking the books, also known as fraudulent financial reporting, causes a firm to incur losses
resulting from investor lawsuits and regulatory penalties.
1. True and fare:
In the case of an audit the tax auditor is required to express his opinion as to whether the
financial statements give a true and fair view of the state of affairs of the assessee in the case of
the balance sheet and in the case of the profit and loss account or income and expenditure
account, of the profit and loss or income/expenditure.
2. True and correct:
As regards the statement of particulars to be annexed to the audit report, he is required to give
his opinion as to whether the particulars are true and correct.
3. Audit Tests:
In giving his report the tax auditor will have to use his professional skill and expertise and apply
such audit tests as the circumstances of the case may require, considering the contents of the
audit report.
4. Procedures:
He will have to conduct the audit by applying the generally accepted auditing procedures which
are applicable for any other audit.
5. Materiality:
The tax auditor will also have to keep in mind the concept of materiality depending upon the
circumstances of each case.
6. SA:
He would be well advised to refer to the standards on Auditing and Assurances issued by ICAI,
the Statement on Auditing Practices as well as the Guidance Note on Audit Reports and

Certificates for Special Purposes while determining the extent of test checks and materiality in
each particular case.
7. Concurrent Statutory and Tax Audits:
If the statutory auditor is also appointed to undertake Tax audit, it is advisable to carry out both
the audits concurrently.
8. Information and Records:
Section 227 of the Companies Act gives certain powers to the auditors to call for the books of
account, information, documents, explanations, etc. and to have access to all books and records.
No such powers are4 given to the tax auditor appointed under Section 44AB. However, since
the appointment of the tax auditor is made by assessee, it will be in the interest of the assessee
to furnish all the information or explanation, the tax auditor will be required to report the same
and qualify his report.
9. Working papers:
The audit report given under Section 44AB is to assist the income-tax department to assess the
correct income of the assessee. In order that the tax auditor may be in a position to explain any
questions which may arise later on, it is necessary that he should keep detailed notes about the
evidence on which he has relied upon while conducting the audit6 and also maintain all his
working papers.
Such working papers should include his notes on the following, amongst other matters:
a)
b)
c)
d)
e)

work done while conducting the audit and by whom;


explanations and information given to him during the course of the audit and by whom;
decision on the various points taken;
the judicial pronouncements relied upon by him while making the audit report; and
Certificates issued by the client/management letters.

10. No Need for Re-unit:

If the accounts of the business or profession of a person have been audited under any other law
by the statutory auditors, it is not necessary for the tax auditor appointed under Section 44AB to
conduct the audit once again in the matter of expression of true and fair view of the state of
affairs of the entity and of its profit and loss for the period covered by the audit. The tax auditor
has only to annex a copy of the audited accounts and the auditors report and other documents
forming part of these accounts to his report and verify the particulars in the prescribed form for
expressing his opinion as to whether these are true and correct.
11. Test Checks:
He can apply the technique of test check dep3ending on the type of internal control procedures
followed by the assessee. The tax auditor may be require to apply reasonable tests on the total
information to be prepared by the assessee in respect of certain items in the prescribed form,
e.g., in verification of payments for purchase/expanses exceeding Rs.20,000 in cash. While the
entity may have to prepare the details for the entire year, the tax auditor may have to ensure that
no items have been omitted in the information furnished and a reasonable test check would
reveal whether or not the information furnished is correct. The extent of check undertaken
would have to be indicated by the tax auditor in his working papers and audit notes. The tax
auditor would be well advised to so design his tax audit programme as would reveal the extent
of checking and to ensure adequate documentation in support of the information being certified.
12. E-filing:
The Tax Audit report is to be submitted electronically (e-filed) w.e.f. the current assessment
year 2013-2014.
3.2 DIFFERENT TYPES OF AUDIT PROCEDURES:
There are three different types of audit procedures: data selection, reliability validation, and
relevance confirmation. The selection of the procedures used typically depends on the type of
audit, the scope, and the level of internal control. An audit procedure is defined as the specific

tests that the auditor performs when gathering the evidence required to evaluate if the audit
objectives are met.

The primary purpose of an audit usually is to evaluate the level of compliance with internal and
external policies, identity the effectiveness of internal controls, and provide a report to external
and internal audiences. There are a range of different types of audit, from financial to health and
safety. The purpose of the audit procedures, however, remains the same.

Typically, the method used to select the data depends on the characteristics of the data itself. For
transactional data that is available electronically, a random selection program typically is used.
It can be very important for the data selection to be random within a specific classification of
data. For example, an audit of safety-report completion over a three-year period should include
the random selection of reports filed throughout the period, and not a series of sequential reports
filed in a short time frame.
Validating the reliability of the data typically requires a series of audit procedures that focus on
tracking the original source of the data, identifying who generated the original data, and how it
was completed. It is important to use an independent verification method, preferably one that
cannot be altered to provide proof that the data is reliable. This type of information is called
an audit trail, and is used to prove who accessed the data and when.

An effective audit usually is focused on specific tasks or areas of operation. It is not an


opportunity to explore interesting information or to look for possible patterns in behavior. One
of the most important audit procedures from a supervisory perspective is relevance. All the data
collected and tests performed must be directly relevant to the scope of the audit.

Skills typically required to conduct an audit include attention to detail, precision, and a full
understanding of business rules and requirements. Financial statement audits must be conducted
by a licensed accountant who has completed a certification program. Auditors working in other
areas, such as workplace safety or information technology, typically have significant education
and experience in these fields. Written communication skills usually are very important, as
auditors are required to provide a written report at the end of the audit process.

3.3 TAX AUDIT REPORT:


An audit report is a written opinion of an auditor regarding whether an entitys financial present
fairly its financial position. This is written in a standard format, as mandated by generally
accepted auditing standards (GAAS). GAAS requires or allows certain variations in the report,
depending upon the circumstances of the audit work that the auditor engaged in. For example,
the report may include a qualified opinion, depending upon the existence of any scope
limitations that were imposed upon the auditor's work.
1. Provisions:
Section 44AB requires the tax auditor to submit the audit report in the prescribed form and
setting forth the prescribed particulars. Sub-rule 1 of rule 6G provides that the report of audit of
accounts of a person required to be furnished under Section 44AB shall
a) in the case of a person who carries on business or profession and who is required by or
under any other law to get his accounts audited, be in Form No. 3CA;
b) in the case of a person who carries on business or profession, but not being a person
referred to in clause (a), be in From No. 3CB
Sub-rule (2) of Rule 6G further provides that the particulars which are required to be furnished
under Section 44AB shall be in Form No.3CD.
2. Part I of Report:

It may thus be noted that the audit report is in two parts. The First part requires the tax auditor
to give his opinion as to whether or not the accounts audited by him give a true and fair view:
In case of the balance sheet of the state of affairs as at the last date of the accounting year.
In case of the profit and loss account, of the profit or loss of the assessee for the relevant
accounting year.
3. Part II of Report:
The second part of the report states that the statement of particulars required to be furnished
under section 44AB is annexed to the audit report in Form No. 3CD. The tax auditor is required
to give his opinion whether the prescribed particulars furnished by the assessee are true and
correct.
4. True and Fair V/S True and Correct:
In paragraph 3 of Form no.3CB the auditor has to report that the financial statements audited
by him give a true and fair view. The requirement in paragraph 3 of Form No.3CA and
paragraph 4 of Form no.3CB relating to particulars in Form No. 3CD are true and correct.
The terminology true and fair is widely understood though not defined even by the companies
Act, 1956. on the other hand, the words true and correct lay emphasis on factual accuracy of
the information. IN this context reference is invited to AS-1 and AS (IT)-1 relating to disclosure
of accounting policies. These standards recognize that the major considerations governing the
selection and application of accounting policies are (i) prudence, (ii) substance over form and
(iii) materiality. Therefore, while giving particulars in Form No.3CD these aspects should be
kept view. In particular, considering the nature of particulars to be given in a Form No.3CD, the
aspect of materiality should be considered. In other words, particulars should h be given in the
respect of material items and the auditors should ensure factual accuracy y relating to these
particulars. Even in case of immaterial items, particulars are required to be given by auditor for
e.g., delay in TDS deposit, untimely payment of PF/ESI dues.
5. Statutory Audit:

In the case of a person whose accounts of the business or profession have been audited any
other law; it is not required for the tax auditor appointed under section 44AB to give his
opinion, as to whether or not the accounts give a true and fair view as indicated herein above. It
would only be necessary for him to annex a copy of the audited accounts as well as copy of the
audit report given by the statutory auditor with his report in Form NO.3CA along with Form
no.3CD.
6. Both Business and Profession:
In the case of a person who carries on business and also renders professional services but who is
not required by or under any other law to get his accounts audited, report should be given in
From No. 3CB. The statement of particulars should be given in Form No.3CD. Even where
separate sets of accounts are maintained in respect of business and profession activities Form
no. 3CB and Form No.3CD should be used.
7. Accounting year:
In the case of person having their accounting year which is different from the financial year,
accounts of the financial year are required to be prepared and audited. The audit report shall be
in Form NO.3CB.

3.4 TYPES OF TAX AUDIT REPORT:


Audit Report is a formal statement usually made after an inquiry, examination or review of
specified matters under report and includes the reporting auditors opinion thereon.
The auditor should review and assess the conclusion drawn from the audit evidence obtain and
express an opinion on the financial statements. The auditors report contains the written
expression of opinion on the financial statements taken as a whole.

Audit report is of two types:


1. Unqualified opinion.
2. Qualified opinion.
1. Unqualified Opinion:
An unqualified opinion is expressed when the auditor concludes that he financial statements
give a True and Fair view of the statements of affairs (balance Sheet) or the profit /Loss during
the year.
An unqualified opinion indicates that:
The financial statements have been prepared using the generally accepted accounting
principles which have been consistently applied.
The Financial statements comply with relevant statutory requirements and regulations.
There is adequate disclosure of all material matters relevant to the proper presentation of
the financial information subject to statutory requirements.
2. Qualified Opinion:
A Qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot
be expressed. In other words, the financial statements are not True and Fair. However, the
disagreement with the management is not so material and pervasive so as to require an adverse
opinion. A Qualified opinion is expressed as subject to; or; except that for.
Qualified opinion is divided into two:
A) Disclaimer:
A disclaimer of opinion is expressed when the auditor is unable to obtain audit evidence.
Therefore, he is not able to express an opinion on the financial statements. Such a situation may
arise, if
There is a limitation on the scope of the auditors work by the management.

If the books of accounts are destroyed by fire, flood or any any other natural calamity.
If the books of accounts are unavailable due to search and seizure operation conducted by
the IT department.
B) Adverse:
An adverse opinion is expressed by the auditor when mis-statement in the financial statement is
material and pervasive. The auditor concludes that a qualification of the report is not adequate
to disclose the misleading or incomplete nature of the financial statement. He will write the
effect of the profit & loss statement.

CHAPTER 4
TAX AUDIT REPORT IN FORM 3CA AND 3CB

4.1TAX AUDIT REPORT IN FORM 3CA:


1. Use where Statutory Audit Done:
This form is to be used in a case where the accounts of the business or profession of a person
have been audited under any other law.

2. Annex Statutory Audit Report:


The first part of the report refers to the fact that the statutory audit of the assessee was
conducted by a chartered accountant or any other auditor in pursuance of the provisions of the
relevant Act, and the copy of the audit report along with the audited profit and loss account and
balance sheet and the documents declared by the relevant Act to be part of or annexed to the
profit and loss account and balance sheet, are annexed to the report in Form No.3CA
3. Different Auditors:
In a case where the tax auditor carrying out the audit under Section 44AB is different from the
statutory auditor, a reference should be made to the name of such statutory auditor.
4. Same Auditors:
In case the statutory auditor is carrying out the audit under section 44AB, the fact that he has
carried out the statutory audit under the relevant Act should be stated.
5. Particulars in 3CD:
The next paragraph states that the statement of particulars required to be furnished under section
44AB is annexed with the report in Form No.3CD. The tax auditor has to state further that, in
his opinion and to the best of his information and according to the explanations given to him,
the particulars given in the said annexure are true and correct.
6. Qualification:
Where any of the requirements in his form is answered in negative or with qualification, the
report shall state the reasons therefore. The tax auditor should state this qualification in the audit
report so that the same becomes a comprehensive report and the user of the audited statement of
particulars can realize the impact of such qualifications.
7. Branch Tax Audit Report:

If the audit under section 44AB of branches is carried out by branch auditors or other chartered
accountants, they should submit the report in Form No.3CA to the management or the principal
tax auditor appointed for the head office under section 44AB. SA 600 Using the Work of
Auditor discusses the procedures in this regard as well as the principal tax auditors
responsibility in relation to his use of the wor5k of the branch auditor. The principal tax auditor
should submit his consolidated report on the registered office head office and branch accounts
and report in his tax audit report as under.
I/We have taken into consideration the audit report and the audited statements of accounts, and
particulars received from the auditors, duly appointed under the relevant law, of the branches
not audited by me/us. If the assessee is unable to obtain relevant information in respect of the
overseas branches duly certified by the overseas auditor, the relevant facts should be suitably
disclosed and reported upon.
8. Membership No.:
Item No.4 of the notes to Form No.3CA requires that the person, who signs this audit report,
shall indicate reference of his membership No. with ICAI and the status such as proprietor or
partner under which he has signed the report.

4.2 TAX AUDIT REPORT IN FORM NO.3CB


1. No Separate Statutory Audit:
In the case of a person who carries on business or profession but who is not required by or
under any other law to get his accounts audited the audit report has to be given in Form
No.3CB.
2. Examination of Final Accounts:
The tax auditor has to state whether he has examined the balance sheet as at 31 st March of the
relevant previous year and the profit and loss account/income expenditure account for the year

ended on the date. Further, such a balance sheet and the profit and loss account must be attached
with the audit report.
3. Final Accounts Agree with Books:
The tax auditor has to certify that the balance sheet and the profit and loss account income and
expenditure account are in agreement with the books of accounts maintained at the head office
and branches. He has also to mention the total number of branches.
4. Opinion: He has to state whether:
he has obtained all the information and explanations which, to the best of his knowledge
and belief, were necessary for the purposes of the audit;
in his opinion proper books of accounts have been kept by the head office

and

branches of the assessee so far as appears from his examination of the books;
in his opinion and to the best of his information and according to the explanation given to
him the said accounts, read with notes thereon, if any, give a true and fair view;
a) in the case of the balance sheet of the state of the affairs of the assessee as at 31 st
March, and
b) in the case of the profit and loss account/income and expenditure account of the
profit/loss or surplus/deficit of the assessee for the year ended on that date.
5. Qualifications:
The tax auditor should make his opinion subject to such observations which are of qualificatory
nature. Any other observations may form port of the notes to accounts forming part of the
accounts. In case the tax auditor has no observation to report which are of qualificatorly nature,
the relevant portion may be deleted.
6. Opinion on Form 3CD:
Paragraph 4 of Form No. 3CB provides that the prescribed particulars are furnished in Form
No.3CD annexed to the report and whether in his opinion and to the best of his information and
according to the explanations given to him, they are true and correct. The auditor may have a

difference of opinion with regard to the particulars furnished by the assessee and he has to bring
these differences under various clauses in Form No.3CD. The auditor should make a specific
reference to those clauses in Form No. 3CD in which he has expressed his reservations,
difference of opinion, disclaimer etc. in this paragraph.
7. Branch Tax Audit Report
If the assessee has branches he can request the tax auditor appointed under section 44AB to
audit the head office and branch accounts. In the alternative, the assessee can appoint separate
tax auditors for branches. The branch tax auditor in such a case will have to give an audit report
in For No.3CB to the management or the tax auditor appointed for the audit of head office
accounts. The tax auditor appointed for the audit of head office cab rely on the report of branch
tax auditors subject to such checks and verifications as he may choose to make and shall submit
his consolidated report on the head office and branch accounts. He should make suitable
reference to the audit conducted by separate branch tax auditors in the same manner as stated
above.
8. Unaudited Business Books:
If the tax auditor is called upon to give his report only in respect of one or more businesses
carried on by the assessee and the books of accounts of the other businesses are not produced as
the same are not required to be audited under the Act. The tax auditor should mention the fact
that audit has not been conducted of those businesses whose books of account had not been
produced. However, if the financial statements include, inter alia, the results of such business
for which books of account have not been produced, the auditor should qualify his report in
Form No.3CA/3CB.

CHAPTER 5
STATEMENT OF PARTICULARS IN FORM NO. 3CD

5.1 STATEMENT OF PARTICULARS IN FORM NO. 3CD:


1. Provision:
The statement of particulars given in Form No.3CD as annexure to the audit report contains
thirty-two clauses. The tax auditor has to report whether the particulars are true and correct.
This Form is a statement of particulars required to be furnished under section 44AB.Thesame is

to be annexed to the reports in Forms Np3CA and 3CB in respect of a person who carries on
business or profession and whose accounts have been audited under any other law and in
respect of person who carries on business or profession but who is not required by or under any
other law to get his accounts audited respectively.
2. Preparing 3CD:
The tax auditor should obtain from the assessee, the statement of particulars in Form No.3CD
duly authenticated by him. It would be advisable for the assessee to take into consideration the
following general principles while preparing the statement of particulars.
(a)Case Law:
He can rely upon the judicial pronouncements while

taking any particular view about

inclusion or exclusion of any items in the particulars to be furnished under any of the
specified clauses. It there is conflict of judicial opinion on any particulars issue, he may
refer to the view which has been followed while giving the particulars under any
specified clause.

(b) AS and SA:


The accounting Standards (AS), Guidance Notes, Standards on Auditing and Assurance
Standards AASs) issued by the Institute from time to time should be followed.
3. Verifying 3CD: While furnishing the particulars in Form No.3CD it would be advisable for
the tax auditor to consider the following:
(a) Cross References:

If a particular item of income/expenditure is covered in more than one of the specified


clauses in the statement of particulars, care should be taking to make a suitable cross
refer3ence to such items at the appropriate places.
(b) Difference of Opinion:
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.
(c) Not Applicable:
If any particular clause in Form No.3CD is not applicable, he should state that the same is
not applicable.
(d)Law Applicable:
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.
(e)Qualification:
In case the prescribed particulars are given in part or piecemeal to the tax auditor or
relevant form is incomplete and the assessee does not give the information against all or
any or 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. In the absence of relevant information, the tax auditor would have no option but to
state in his report that the relevant information has not been furnished by the assessee.
(f)Basis:

The information in Form No.3CD should be based on the books of accounts, records,
documents, information and explanation made available to the tax auditor for his
examination.
4. is it a Certificate?
A. Tax Audit Report in two Parts:
The tax audit report is in two parts. The first part requires the auditor to give his opinion
as to whether or not the accounts audited by him give a true and fair view and the second
part of the report is in the form of an Annexure containing statement of particulars in
respect of certain specified matter. The tax auditor has to report whether particulars are
true and correct.
B. Report V/S Certificate:
In this context, it is important to appreciate the distinction between the terms report and
certificate. Briefly speaking, the term Certificate is used where the auditor verifies
the accuracy of facts while the term report is used in case the auditor is expressing an
opinion.
C. Certificate on 3CD:
Strictly speaking, having regard to the usage of the word true and correct, these
particulars require definitive information compiled from the books of account. Hence, it
can be said that an auditor conducting tax audit certifies the information contained in
the statement of particulars.
D. Certifies All Clauses:
However, having regard to the distinction, it is significant to examine whether all the
clauses included in the statement of particulars are capable of being simply certified on
the basis of books of account or there are some clauses in respect of which different
auditors(s) may hold different opinion.

5. Valuation of Stock:
For instance, clause 12 dealing with valuation of closing stock would require the auditor to
examine and opine on the basis adopted for ascertaining the cost and, thus, to ensure that
method followed for valuation of stock results in disclosure of correct profits and gains.
6. Depreciation:
Similarly, clause 14 relating to depreciation would require the auditor to exercise judgement
having regard to the facts and circumstances of the case, etc.
7. Judgement and Opinion:
Thus, there are several matters on which the auditor is required to exercise judgement while
giving his report on various amounts included in the statement of particulars. No doubt that the
auditor obtains the statement of particulars in Form No.3CD duly authenticated by the assessee,
it does not merely involve checking the corresponding figures with the documents and books of
account by requires the auditor to exercise his judgement which may at times lead to different
figures by different figures by different persons reporting thereon. There can also be situations
leading to difference of opinion between the tax auditor and the assessee.
8.Report on 3CD too:
Therefore, it can be said that an auditor conducting tax audit reports on certain information,
apart from certifying certain factual information contained in the statement of particulars
annexed to the tax report under section 44AB of the Income-tax Act, 1961.
CHAPTER 6
FORMS FOR TAX AUDIT U/S 44AB
FORM NO. 3CA
AUDIT REPORT UNDER SECTION 44B OF THE INCOME-TAX ACT, 1961,
IN A CASE WHERE THE ACCOUNTS OF THE BUSINESS OR

PROFESSION OF A PERSON HAVAE BEEN


AUDITED UNDER ANY OTHER LAW
I/We report that the statutory audit of (mention name and address
of the assessee with permanent account number) was conducted by*
me/us/M/sin pursuance of the provision of the Act,
and *I/We annex hereto a copy of *my/their audit report dated. along with a
copy each ofa) the audited * profit and loss account/income and expenditure account for the year ended
on 31st March.
b) the audited balance sheet as at 31st March.and
c) documents declared by the said Act to be part of, or annexed to, the * profit and loss
account/income and expenditure account and balance sheet.
2. The statement of particulars required to be furnished under section 44AB is annexed herewith
in Form No. 3CD
3. In *my/our opinion and to the best of* my/our information and according to explanation
given to* me/us, the particulars given in the said Form No. 3CD are true and correct.

***Signed
Name:
Date

Place.

Address:
FORM NO.3CB

AUDIT REPORT UNDER SECTION 44AB OF THE INCOME-TAX ACT, 1961 IN THE
CASE OF A PERSON REFERRED TO IN CLAUSE (b)
OF SUB-RULE (1) OF RULE 6G

*I/We have examined the balance sheet as at 31st March and the * profit and
loss account/income and expenditure account for the year ended on that date, attached herewith,
of. (mention name and address of the assessee with permanent
account number)
2. *I/We certify that the balance sheet and the * profit and loss account/income and expenditure
account are in agreement with the books of account maintained at the head office at
and**. branches.
3. (A) *I/We report the following observations/comments/discrepancies/inconsistencies, if
any...
(B) Subject to above:
*I/We obtained all the information and explanations which, to the best of * my/our
knowledge and belief were necessary for the purposes of the audit.
In *my/our opinion, proper books of account have been kept by the head office and
branches of the assessee so far as appears from*my/our examination of the books.
In *my/our opinion and to the best of *my/our information and according to

the

explanations given to *me/us, they said accounts, read with notes thereon, if any, gives
true and fair view: i. in the case of the balance sheet, of the state of the affairs of the assessee as at 31 st
ii.

Marchand
in the case of the * profit and loss account/income expenditure account of the
*profit/loss or*surplus/ deficit of the assessee for the year ended on that date.

4. The statement of particulars required to be furnished under section 44AB is annexed herewith
in Form No.3CD. In *my/our opinion and to the best of * my/our information and according to
explanation given to *me/us, the particulars given in the said Form No.3CD are true and
correct.
..
****Signed

Place:
Date..

Name:
Address.

BIBLIOGRAPHY

WEBSITES:

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BOOKS:

ADVANCED AUDITING

Dr. Varsha M. Ainapure