SIR C O F IC A I- Se m ina r ó A u gu st 0 9 , 2 0 1 7 · ¾ Copy of entity creation ( Partnership Deed, MOA/ AOA, etc as applicable)

Presented by

CA S Prabhavathy Audit Manager

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SIRC OF ICAI- Seminar – August 09, 2017

OVERVIEW

Documentation Qualifications

Why What if no How to

Documentation Documentation Document

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Why Documentation SQC

The firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements and that reports issued by the firm or engagement partner(s) are appropriate in the circumstances.

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Why Documentation…….. Contd

The firm should establish policies and procedures for engagement teams to complete the assembly of final engagement files on a timely basis after the engagement reports have been finalized.

The firm should establish policies and procedures designed to maintain the confidentiality, safe custody, integrity, accessibility and retrievability of engagement documentation.

The firm should establish policies and procedures for the retention of engagement documentation for a period sufficient to meet the needs of the firm or as required by law or regulation.

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Why Documentation………. Contd • ICAI Guidance Note “The liability of the tax auditor in respect of tax audit will be the same as in

any other audit assignment.” • Standards on Auditing Being like any other audit, the Basic principles governing an audit shall be

applicable for a Tax Audit also. SA-200- “Basic Principles Governing an Audit” (Paragraph 11), states,

“The auditor should document matters which are important in providing evidence that the audit was carried out in accordance with the basic principles.”

Documentation, for purposes of this Standard, refers to the working papers prepared or obtained by the auditor and retained by him, in connection with the performance of his audit.

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Why Documentation……...Contd

SA 230-Audit Documentation means, “The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached.”

The Standard further states proper documentation helps in providing:

Evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of the auditor

Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements

An audit document shall also include auditor’s discussions of significant matters with management including the nature of such matters.

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Why Documentation……… Contd

• Peer Review

The objective:

Assessing the maintenance of Quality of Attestation Service Engagements performed by Practice units through:

Compliance with Technical standards and

Existence of proper systems (including documentation systems)

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What if no Documentation

Possible disqualification from tax practice under Section 288 sub-section 5 of the Income Tax Act, 1961 if any person, who is a legal practitioner

or an accountant is found guilty of misconduct in his professional capacity by any authority entitled to institute disciplinary proceedings against him, an order passed by that authority shall have effect in relation to his right to attend before an income-tax authority as it has in relation to his right to practise as a legal practitioner or accountant, as the case may be .

A qualified report from the Peer Reviewer

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What if no Documentation……..Contd

Professional misconduct/ Disciplinary proceedings by ICAI

Few common deficiencies that have triggered disciplinary proceedings involving tax audit

• Submission of incomplete/blank tax audit reports

• Books found incomplete during subsequent search

• Difference between the tax audit report profit and the financial statements.

• Incorrect inventory valuation

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The only Change is on ICDS- Clause 13 (d) to 13 (f)

Clause 13(e) requires-

-Reconciliation between the Income as per financials and the Income computed as per Tax accounting standards and its impact on profit or loss

Clause 13(f) requires-

-Disclosures related to various Tax accounting standards

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How to document

Master Documents : • Tax Audit Engagement letter • NOC from previous Auditor if first time

tax auditor • Tax Audit Management Representation

letter • Tax Audit Requirement Questionnaire

cum Checklist • Signed financials along with Notes on

accounts of current year and previous year

• Record of Method of sample selection and the samples selected

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How to document…… Contd

Engagement letter to necessarily state the following powers of the tax auditor specifically:

Access to all information of which the management is aware that is relevant to the preparation of the financial statements such as records, documentation and other matters,

Furnishing Additional information that the auditor may request the management for the purpose of the audit and

Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

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Other Support Documents • Basic documents/ details Copy of entity creation ( Partnership Deed, MOA/ AOA, etc as

applicable) Copies of PAN and TAN Copies of statutory registration certificates like VAT, Service tax

etc. Details of Partners or Members Details of Books maintained along with location Details of Branches Copies of any other audit reports (VAT, Service tax, Internal audit

report etc)

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How to document…… Contd • Stock

Signed Closing Stock statement along with Stock movement summary and physical verification report

Working for the deviations, if any, in the method of valuation reported

Details of capital asset converted into Stock-in-trade

• Investments

List of investments along with reconciliation of opening and closing balances.

Copy of Sale deed or Demat statements or Share certificates etc for new investments along with details of market value

Details of payment made along with supportings.

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Fixed assets

Copy of relevant Ledgers along with Supporting bills, invoices, etc.

Supporting for adjustments like subsidy etc.

Copy of Sale note for deletion

Obtain copy of the depreciation working and record the reasons along with supporting if any for depreciation not charged items or change in the method.

Share Capital

Movement in share capital along with ledgers

Copy of bank statements

Share valuation report or workings for FMV

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Loans

Obtain details of loans taken and repaid during the year along with ledgers and other supportings

PAN & Address of the loan vendors

Obtain copy of bank statements or other relevant records.

14A

Ledger copies of various exempt or non-taxable income.

Ledger copies of related expenses.

Supporting for 14A disallowance along with workings.

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TDS

Ledger copies of various expenses on which tds is applicable

Supportings for lower or non-deduction of TDS along with reasons

Note on existing controls for TDS.

TDS returns and challans.

TDS consol files downloaded from TRACES.

Reconciliation between books and returns.

Record reasons for allowance or disallowance (like subsequent payment details)

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Other Statutory liabilities

Ledger copies of various statutory liabilities like PF, ESI, Service tax etc

Copies of payment challans and returns.

Proof of subsequent payment of statutory liabilities as at the year end till the due date of filing of Returns.

Supporting for allowance or disallowance of any amount.

External experts reports if any (Eg-Actuarial report).

Reconciliation of input and output credits tallied with Returns.

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• Others

Details of various deductions (Sec 10A, etc) along with supportings for eligibility and claim.

Details of Related Party Transactions.

Extract from cash book for payments exceeding Rs. 20,000

Details of Capital expenditure, personal expenditure, advertisement charges and payment made to club along with supportings

Details of dividend paid if any with corresponding DDT payments

Copies of notices for demands and refund under various Act

Copy of assessment order for previous year along with returns for carry forward of losses

26AS

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Qualifications

• When there is difference of opinion between the Auditor and the assessee, the auditor can qualify his report. However, the auditor need not qualify the report all the time. Based on the nature and materiality, he can

issue modified opinion ( qualified/ adverse/ disclaimer) or

make suitable disclosure

• Specific reference to the 3CD clauses should be given in Paragraph 4 of 3CB where the auditor has expressed his reservations, difference of opinion, disclaimer etc.

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Qualifications…….. Contd • Items that may trigger qualification:

Non-compliance to Accounting standards

Non-availability of vouchers/records

Creditors under Micro, Small and Medium Enterprises Development Act, 2006 not ascertainable

Prior period expenses not ascertainable from books of account

Fair market value of shares u/s56 (2) (viia)/(viib) not ascertainable

GP ratio not ascertainable

Non-availability of stock records

Non-maintenance of records relating to personal expenditure

Reports of audits carried by Excise/Service tax Department were not made available

TDS returns could not be verified with the books of account

Valuation of closing stock is not verifiable

Yield/percentage of wastage is not ascertainable

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Qualifications…….Contd

• Examples

Non-adjustment of capital grants received from Government against the Fixed Assets capitalized (refer to Note No. XX), which is not in accordance with Accounting Standard 12 issued by ICAI, as a result of which Current Liabilities (Government Grant) and Fixed Assets are over stated by XXXX (Previous Year XXXX) and the effect on depreciation, accounted in Profit and Loss Account of the Company is XXXX.

Non-provision of doubtful advances and deposits amounting to XXX (Previous Year XXX) as referred to in Note No.XX, which in our opinion are doubtful of recovery

Non-receipt of confirmation from and reconciliation of Sundry Debtors, Sundry Creditors, Advances, deposits and balances on various other accounts, as referred to in Note No. X, the impact where of on the Profit and Loss Account and Balance Sheet of the entity could not be ascertained.

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Qualifications…….. Contd

• Other Observations/ Disclosures: Assessee's Responsibility for the Financial Statements and the Statement of

Particulars in Form 3CD

Tax Auditor's Responsibility

Clause 21(d)- Reporting on amounts disallowed or treated as deemed income u/s 40A(3) and 40A(3A) respectively

Management Representation has been obtained from the assessee to the effect that the relevant provisions have been complied with. In respect of information to be reported under this clause, it is not possible for us to verify whether the payments in excess of Rs. 20,000/- have been made otherwise than by crossed cheque or bank draft, as the necessary evidence is not in the possession of the Assessee

Clause 34 - Obligations/ requirements under Chapter XVIIB and XVIIBB

The details have been drawn from the e-TDS returns filed by the assessee and the default list indicated in the TRACES and accordingly are set out in subclauses (a), (b) and (c) of this clause 34

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Additional slide – If time permits

CAG report- Performance Audit on Appreciation of Third party (Chartered Accountant) Reporting in Assessment Proceedings

Cases where CAs failed to report full and correct information

Allowance of depreciation and amortisation

Allowance of brought forward losses/depreciation

Allowance of personal/capital expenditure

Allowance of exemptions/deductions

Incorrect certifications of claims

Incorrect/incomplete information in Tax Audit Report/Certificate

Irregular allowance of provisions

Charging of tax on Book profit under Section 115JB.

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Audit not documented

= Audit not done

(Document and be happy)

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