Company Audit and Tax Audit

Company Audit

Qualification of Company Auditor

1. Chartered Accountant: To be appointed as a company auditor, a person must be a Chartered Accountant (CA) within the meaning of the Chartered Accountants Act, 1949.
2. Partnership Firms: A partnership firm where all the partners are CAs can be appointed as an auditor. The firm’s name is considered the name of the auditor.
3. Limited Liability Partnerships (LLPs): LLPs where all partners are CAs can also be appointed as auditors.

Disqualification of Company Auditor

1. Body Corporate: A company or any other body corporate cannot be appointed as an auditor.
2. Officers or Employees: Any officer or employee of the company cannot be appointed as an auditor.
3. Partner or Employee of Officer/Employee: A person who is a partner or in the employment of an officer or employee of the company.
4. Indebtedness: A person who is indebted to the company for an amount exceeding ₹1,000 or has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding ₹1,000.
5. Holding of Securities: A person who has directly or indirectly any interest in the company or its subsidiary or its holding company or associate company.

Appointment of Company Auditor

1. First Auditor: The first auditor of a company, other than a government company, is appointed by the Board of Directors within 30 days from the date of registration of the company. If the Board fails to appoint an auditor, the members can appoint one at an extraordinary general meeting within 90 days.
2. Subsequent Auditors: Subsequent auditors are appointed by the shareholders at each annual general meeting (AGM). The auditor so appointed will hold office from the conclusion of that meeting until the conclusion of the sixth AGM.
3. Government Companies: In the case of a government company or any other company owned or controlled, directly or indirectly, by the government, the Comptroller and Auditor General of India (CAG) appoints the auditor within 180 days from the commencement of the financial year.

Removal of Company Auditor

1. By the Company: An auditor appointed under Section 139 can be removed from office before the expiry of their term only by a special resolution of the company, after obtaining the previous approval of the Central Government.
2. Resignation: An auditor may resign from the company by submitting a notice in writing to the company and filing the resignation with the Registrar of Companies (RoC) within 30 days of resignation.

Rights of Company Auditor

1. Right to Access Books and Records: The auditor has the right to access the books of accounts and vouchers of the company at all times.
2. Right to Information and Explanations: The auditor can require any officer of the company to provide information and explanations necessary for the performance of their duties.
3. Right to Receive Notices and Attend Meetings: The auditor is entitled to receive all notices of and to attend any general meeting of the company.
4. Right to Report: The auditor can report to the members of the company on the accounts examined by them.

Duties of Company Auditor

1. Duty to Report: The auditor must make a report to the shareholders on the accounts examined by them and on every financial statement that is required to be laid before the company in general meeting.
2. Duty to Enquire: The auditor must enquire whether loans and advances made by the company are properly secured and whether the terms are prejudicial to the interests of the company or its members.
3. Duty to Ensure Compliance: The auditor must ensure that the financial statements comply with the accounting standards and are free from material misstatements.
4. Duty to Assist Investigations: The auditor is required to assist in any investigation ordered by the Central Government regarding the company’s affairs.

Liabilities of Company Auditor

1. Civil Liability: If the auditor is found guilty of negligence or breach of duty, they may be held liable to pay damages to the company or any third party who has suffered a loss due to such negligence.
2. Criminal Liability: An auditor may face criminal charges if they are found to have been involved in fraud or have willfully certified false statements.
3. Disciplinary Action: The auditor can be subject to disciplinary action by the Institute of Chartered Accountants of India (ICAI) if found guilty of professional misconduct.
4. Liability under Companies Act: Under Section 147 of the Companies Act, 2013, an auditor can be penalized for failing to comply with the provisions of the Act. Penalties can include fines and imprisonment.

These provisions ensure that the company auditor operates within a framework that promotes accountability, integrity, and transparency in the auditing process.

Tax Audit

Provisions under Income Tax Act, 1961

Section 44AA: Maintenance of Accounts by Certain Persons

1. Professionals: Persons carrying on specified professions (e.g., legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, etc.) are required to maintain books of account if their gross receipts exceed ₹1,50,000 in any of the three preceding years.
2. Business: Persons carrying on business or other professions must maintain books of account if their income exceeds ₹2,50,000 or their total sales, turnover, or gross receipts exceed ₹25,00,000 in any of the three preceding years.
3. Prescribed Books: The prescribed books include cash books, ledgers, journal (if applicable), and other documents that may be specified by the Income Tax authorities.

Section 44AB: Audit of Accounts of Certain Persons

1. Threshold for Business: Every person carrying on business must get their accounts audited if their total sales, turnover, or gross receipts exceed ₹1 crore in any previous year. However, if the cash receipts and payments do not exceed 5% of the total receipts and payments, the threshold is ₹10 crore.
2. Threshold for Profession: Every person carrying on a profession must get their accounts audited if their gross receipts exceed ₹50 lakh in any previous year.
3. Due Date: The audit report must be obtained and furnished by the specified due date, which is generally September 30 of the assessment year.

Section 44AD: Presumptive Taxation for Small Businesses

1. Eligibility: Resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding LLPs) can opt for presumptive taxation under Section 44AD.
2. Threshold: The scheme applies to businesses with a total turnover or gross receipts not exceeding ₹2 crore.
3. Deemed Income: 8% of the total turnover or gross receipts is deemed as the income. If the receipts are through banking channels or digital means, the deemed income is 6%.
4. Maintenance of Books: Persons opting for this scheme are not required to maintain books of account and are exempt from getting their accounts audited.
5. Continuity of Scheme: Once opted, the scheme must be followed for five consecutive years. If the scheme is opted out in any year, it cannot be opted again for the next five years.

Section 44ADA: Presumptive Taxation for Professionals

1. Eligibility: Resident professionals engaged in specified professions (legal, medical, engineering, etc.) can opt for presumptive taxation.
2. Threshold: The scheme applies to professionals with gross receipts not exceeding ₹50 lakh.
3. Deemed Income: 50% of the total gross receipts is deemed as the income.
4. Maintenance of Books: Persons opting for this scheme are not required to maintain books of account and are exempt from getting their accounts audited.

Section 44AE: Presumptive Taxation for Transporters

1. Eligibility: Any person owning goods carriages and engaged in the business of plying, hiring, or leasing such vehicles can opt for this scheme.
2. Threshold: The scheme applies to persons who own not more than 10 goods carriages at any time during the year.
3. Deemed Income: Income is deemed to be ₹7,500 per month or part of a month for each goods carriage (for heavy goods vehicles, the deemed income is ₹1,000 per ton of gross vehicle weight per month).
4. Maintenance of Books: Persons opting for this scheme are not required to maintain books of account and are exempt from getting their accounts audited.

Recent Amendments (as applicable up to 2024)

1. Increase in Turnover Limit for Section 44AB: For businesses predominantly operating in cashless transactions, the threshold limit for mandatory audit has been increased from ₹1 crore to ₹10 crore.
2. Rationalization of Section 44AD: Clarity has been provided regarding the continuity and opt-out conditions for the presumptive taxation scheme. Taxpayers are now required to adhere to the scheme for five consecutive years once opted. If they opt out, they cannot re-enter the scheme for the next five years.
3. Section 44ADA Inclusion: The inclusion of certain professions under Section 44ADA has been expanded to bring more professionals under the ambit of presumptive taxation.
4. Digital Receipts for Lower Presumptive Rate: For Section 44AD, the reduced presumptive income rate of 6% is specifically applicable to receipts through digital means and banking channels, encouraging digital transactions.

These amendments aim to simplify tax compliance for small taxpayers while encouraging digital transactions and reducing the cash economy.