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Structure of the discussion
Peer Review Stage III Vs Tax Audit
Tax Audit latest ICAI announcements Accounting Standards issued by CBDT
Accounting Standards applicability to Tax Audit
AS Vis--vis Income Tax Act
AS of ICAI Vs AS of Income Tax Act Implication of AS of ICAI on Taxation
Common pitfalls in reporting
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Peer Review stage III
Covers tax audit assignments
Statement of Peer Review issued by ICAI
Quality of audit report
Compliance with Technical Standards
Compliance with Technical Standards Accounting Standards
Compliance of Guidance Notes
Auditing and Assurance Standards
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AS and Tax Audit
Case 1
Statutory Accountsyear ended
March 31, 2010
Case 2
Statutory Accountsyear ended
Dec 31, 2009
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Accounting Standards under IT ACT
NAS1 Significant Accounting Policies
NAS2 Net Profit or Loss and Changes inaccounting policies
If an enterprise complies with NAS1 and NAS2but does not comply with AS issued by ICAI What to do?
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Accounting Standards not applicable to Tax
Audit A myth or reality?
General purpose financial statements
To be subjected to audit what about compilation?
Subject to audit but not carrying on any
Business or Industrial or Commercial activity
Concept of Materiality
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Accounting Standards not applicable to Tax
Audit A myth or reality?
What about Not for Profit Organisations?
Management or Auditors who is responsible for compliance?
What is the impact of
Companies (Accounting Standards) Rules 2006?
Any impact with the introduction of
Roadmap to IFRS?
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The Notified standards by
and large follow the ICAI
standards except for
certain differences
Companies (Accounting Standards) Rules 2006
Central Government, in consultation with NACAS, has issued the
Companies (Accounting Standards) Rules, 2006 notifying
accounting standards 1-7 and 9-29, effective for COMPANIES for
accounting periods commencing on or after 7 December 2006
ICAI standards would
remain applicable for non-
corporate entities
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AS of ICAI Vs AS under CAR 2006
Relaxation mainly for disclosures and not for recognition and
measurement
Applicable
Only to
NCEs
Applicable
Only to
Companies
Three
Levels
prescribed
Two
Levels
prescribed
AS of ICAI CAR 2006
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Applicability an overview (CAR 2006)
Accounting Standards Non SMCs To SMCs
AS 1 to 14 (except AS 3), 15,16, 18, 19, 20, 22, 24, 25, 26, 28and 29
AS 3, 17
AS 21, 23 and 27 (Only ifregulator requiresconsolidation or entity
prepares consolidatedfinancial statements)
Some relaxation on
disclosures
Care for applicability of AS
18
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Applicability an overview (NCEs)
Accounting Standards Level I Level II Level III
AS 1 to 14 (except AS 3), 15, 16,19, 20, 22, 25, 26, 28 and 29
AS 3 and 17
AS 18 and 24
AS 21, 23 and 27 (Only if entity
prepares consolidated financialstatements)
Some relaxation on
disclosures
AS 15 relaxation for
entities with less than 50
employees
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Form 3CA & 3CB
Suggested reporting on Form 3CD
Materiality Concept
Responsibility and Scope Para
Particulars given in Form No. 3CD and the Annexures
thereto are furnished by the Companys management. In
accordance with the Guidance Note on Tax Audit under
Section 44 AB of the Income Tax Act, 1961 issued by the
Institute of Chartered Accountants of India our examination
is carried out on a test basis to obtain reasonableassurance that the particulars as disclosed in Form No. 3CD
and the Annexures thereto together with the notes thereon
are free of material misstatement.
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AS 1 vis--vis Tax Audit
AS 1 Disclosure of Accounting Policies
Concept of prudence is not fully
considered
Certain provisions/ write off not allowedas expenditure
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AS 2 vis--vis Tax Audit
AS 2 Valuation of Inventories
Market value Vs Net realisable value
AS 2 does not prescribe valuation method
for inventory of shares, debenture etc
Section 145 A of the IT Act
Inclusive method under the IT Act
Exclusive method under AS 2
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AS 7 vis--vis Tax Audit
AS 7 Accounting for Construction Contracts
% completion method Vs completedcontract method
Accounting for foreseeable future loss
Presumptive taxation u/s 44ADPresent limit Vs limit proposed by DTC
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AS 10 vis--vis Tax Audit
AS 10 (Revised) Property, Plant and Equipment
Ready for the intended use Vs put to use
Whether depreciation claim is optional?
Idle machinery under AS 10
Recognition criteria for Subsequent
expenditure
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AS 11 vis--vis Tax Audit
AS 11 The effect of changes in foreignexchange rates
AS 11 controversy still continues even afterthe introduction of Companies AccountingStandards Rule 2006
Treatment of unrealised forex loss adjustedin the carrying value for Income TaxDepreciation
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AS 12 vis--vis Tax Audit
AS 12 Accounting for Government Grants
If condition attached subsidy can not be fullyreduced from the cost as per AS 12
To be reduced from Cost of asset for IT
depreciation computation
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AS 13 vis--vis Tax Audit
AS 13 Accounting for Investments
Current Investments to be written down to
market value if it is lower
Permanent diminution in value of Long-Term Investments to be provided for
If so provided not allowable under IT ActOnly on disposal
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AS 15 vis--vis Tax Audit
AS 15 Accounting for Retirement Benefits
Provision for Gratuity Sec 40 A (7)/ 43B
Provision for Compensated Absence 43B
Bonus Vs performance incentives
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AS 16 vis--vis Tax Audit
AS 16 Borrowing Costs
Concept of Qualifying Assets
Suspension of borrowing cost whetheradmissible under the Income Tax Act
Capitalisation of borrowing Costs Vs 36 (1)(iii)
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AS 18 vis--vis Tax Audit
AS 18 Related Party Transactions
Divided position of definition of related
party
Reconciling and considering the impact ofdisclosures
AS 18 Vs 40 (A) (2)(b)
Loans to Directors and their relatives
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AS 19 vis--vis Tax Audit
AS 19 Accounting for Leases
Depreciation allowability on finance leases
Lessor under the Income Tax Act
Lessee under AS 19
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AS 22 vis--vis Tax Audit
AS 22 Taxes on Income
No concept of deferred tax under the IT Act
Reversal of DTA for MAT computation recent judicial pronouncement
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AS 26 vis--vis Tax Audit
AS 26 Intangible Assets
Amortisation over useful economic life
Retirement of intangibles to be fullycharged off
Depreciation rate specifically mentionedunder IT Act Distinction between Intangible Asset and
Computer Software
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AS 28 vis--vis Tax Audit
AS 28 Impairment of Assets
Impairment to be tested at every balancesheet date and loss to be accounted as an
expense
Not allowable till the asset is disposed
Reversal of Impairment Loss will not haveany impact in IT Computation
Impact on MAT Computation a grey area
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AS 29 vis--vis Tax Audit
AS 29 Provisions, Contingent Liabilities andContingent Assets
Legal Vs Constructive obligation
Provision towards Asset RetirementObligation
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AS 30,31 and 32 vis--vis Tax Audit
Financial Instruments Standards
Fair valuation
Mark to Market Losses
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Changes in Accounting Policy Whether necessary to be mentioned in the Auditors
Report even if not material
Forex differences adjusted in carrying value of
fixed assets not removed for IT depreciation, ifunrealised
Related party transactions not reconciled with 40A(2) (b) disclosures
43B opening and closing unpaid position VsCurrent Liabilities
Common pitfalls in reporting
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Common pitfalls in reporting
Interest accrued on Loans Vs disclosure under 43B
Funded interest of term loans Vs 43B
Reconciling the excise duty records with financialstatement figures (CENVAT/ VAT Disclosures)
Reconciliation of movement in loan accounts withdisclosure under 269 SS and 269 T Share Application money Vs Loan IFST whether to be disclosed Security Deposits received
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TDS payable account analysis Vs Chapter XVII-BdisclosuresYear end provisions Vs during the year
payments
Non-deduction of TDS on outstanding expenses Liabilities outstanding under current liabilitiesYear end provisions on estimated basis
Reconciliation of quantitative details Raw Materials Finished goods
Common pitfalls in reporting
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99401 30403
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