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.

Checking, Vouching and Audit Report

Checking, Vouching and Audit Report

 1. Test Checking

Test Checking is an audit procedure where the auditor checks a representative sample of transactions and records instead of examining all transactions. This method helps in saving time and resources while still providing reasonable assurance about the accuracy and completeness of the financial statements. Test checking is based on the assumption that if the sample checked is error-free, the remaining unexamined items will also be free from material misstatement.

For example : An auditor is tasked with reviewing the payroll transactions of a company. Instead of examining every single payroll record (which could be very time-consuming), the auditor decides to test check by selecting a random sample of 20 payroll entries from the total records for the month. The auditor carefully examines these 20 entries for accuracy, completeness, and compliance with company policies and regulations.

If all 20 entries in the sample are found to be accurate and compliant, the auditor may conclude that the remaining payroll transactions (that were not examined) are also likely to be correct and in line with regulations. This method allows auditors to save time and resources while still obtaining reasonable assurance about the accuracy of the entire payroll process.

Key Points:

• Sampling: Selection of transactions or records on a random basis.
• Representative Sample: Ensures that the sample accurately represents the whole population.
• Statistical and Non-statistical Techniques: Use of both methods for sample selection.
• Reasonable Assurance: Provides confidence but not absolute certainty.

Features:

• Selective Examination: Involves examining a representative sample of transactions instead of all transactions.
• Statistical Methods: Often uses statistical sampling techniques to ensure the sample is representative.
• Random Selection: Transactions are selected randomly to avoid bias.
• Efficiency: Aims to save time and resources while still providing a reasonable assurance about the accuracy of the financial statements.

Advantages:

• Time-Saving: Reduces the time required for the audit process.
• Cost-Effective: Lowers audit costs by focusing on a sample rather than all transactions.
• Focus on High-Risk Areas: Allows auditors to concentrate on areas with higher risk of material misstatement.
• Reasonable Assurance: Provides sufficient evidence to form an audit opinion.

Disadvantages:

• Sampling Risk: There is a risk that the sample may not be representative, leading to incorrect conclusions.
• Incompleteness: Important errors or fraud might be missed if they are not part of the sample.
• Requires Judgment: The effectiveness depends on the auditor’s judgment in selecting the sample.
• Not Suitable for All Audits: May not be appropriate for audits requiring a high level of accuracy.

2. Vouching of Cash Book

Vouching is the process of examining documentary evidence to verify the accuracy and authenticity of transactions recorded in the books of accounts. When vouching the cash book, the auditor ensures that all cash transactions are properly recorded, authorized, and supported by valid documentation.

Key Points:

• Source Documents: Includes receipts, payment vouchers, bank statements, invoices, etc.
• Authorization: Ensures that transactions are approved by the appropriate authority.
• Accuracy: Verifies the correct amount, date, and classification of transactions.
• Completeness: Ensures no transaction is omitted.

Features:

• Examination of Documents: Involves checking supporting documents to verify transactions recorded in the books of accounts.
• Authenticity and Accuracy: Ensures transactions are genuine and recorded accurately.
• Authorization and Approval: Verifies that transactions are authorized by the appropriate personnel.
• Completeness: Ensures no transactions are omitted.

Advantages:

• Evidence-Based: Provides concrete evidence to support the transactions recorded.
• Detects Errors and Fraud: Helps in identifying discrepancies, errors, and potential fraud.
• Enhances Reliability: Increases the reliability of the financial statements.
• Comprehensive Check: Ensures a thorough examination of financial records.

Disadvantages:

• Time-Consuming: Can be very time-consuming, especially for large volumes of transactions.
• Labor-Intensive: Requires significant effort and resources to examine each document.
• Dependence on Documentation: Effectiveness relies heavily on the availability and quality of supporting documents.
• May Miss Collusion: Might not detect fraud involving collusion where documentation appears legitimate.

3. Verification and Valuation of Assets and Liabilities

Verification involves checking the existence, ownership, and title of assets and liabilities, while valuation ensures that they are recorded at the correct amount in the financial statements.

Key Points:

• Existence: Physical verification of assets.
• Ownership: Checking title deeds, agreements, or other legal documents.
• Valuation: Ensuring assets and liabilities are valued in accordance with applicable accounting standards.
• Disclosure: Proper presentation and disclosure in the financial statements.

4. Types of Audit Report

An Audit Report is a formal opinion issued by the auditor after examining the financial statements. The types of audit reports include:

Key Points:

• Unqualified (Clean) Report: Financial statements give a true and fair view.
• Qualified Report: Except for certain matters, the financial statements give a true and fair view.
• Adverse Report: Financial statements do not give a true and fair view.
• Disclaimer of Opinion: Auditor is unable to form an opinion due to lack of sufficient evidence.

Features:

• Formal Opinion: Provides a formal opinion on the financial statements' fairness and accuracy.
• Types of Opinions: Can be unqualified (clean), qualified, adverse, or a disclaimer of opinion.
• Comprehensive Analysis: Summarizes the auditor’s findings, including any significant issues encountered.
• User-Focused: Intended for stakeholders such as investors, creditors, and regulatory authorities.

Advantages:

• Increases Credibility: Enhances the credibility of financial statements.
• Compliance: Ensures compliance with accounting standards and regulatory requirements.
• Informed Decision-Making: Provides valuable information for stakeholders to make informed decisions.
• Identifies Issues: Highlights significant issues and areas of concern for management and stakeholders.

Disadvantages:

• Limited Scope: The audit report is based on a sample and may not cover all aspects of the financial statements.
• Subjectivity: The auditor’s opinion may be influenced by their judgment and experience.
• Not a Guarantee: Does not guarantee the absolute accuracy of the financial statements.

Potential Misinterpretation: Users may misinterpret the auditor’s opinion, assuming it provides absolute assurance.

5. Audit Certificate

An Audit Certificate is a written confirmation of the accuracy of certain facts or data provided by the entity. Unlike an audit report, it is not an opinion but a factual confirmation.

Key Points:

• Factual Confirmation: Verifies specific facts or data.
• Limited Scope: Focuses on particular areas or transactions.
• Legal Requirements: Often required by laws or regulations.

6. Difference between Audit Report and Audit Certificate

• Audit Report: Provides an opinion on the overall financial statements.
• Audit Certificate: Confirms specific facts or figures.

7. Auditing and Assurance Standards (AAS)

Auditing and Assurance Standards provide guidelines to auditors for conducting audits. Here are brief explanations of AAS-1 to AAS-5:

AAS-1: Basic Principles Governing an Audit

• Lays down the basic principles and procedures for the auditor.
• Covers areas like independence, integrity, confidentiality, and documentation.

AAS-2: Objective and Scope of the Audit of Financial Statements

• Defines the objective of an audit, which is to express an opinion on the financial statements.
• Discusses the scope of the audit, including the auditor's responsibilities.

AAS-3: Documentation

• Emphasizes the importance of documentation as evidence of the auditor’s work.
• Provides guidelines on the form, content, and extent of audit documentation.

AAS-4: The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements

• Provides guidance on the auditor’s responsibility to detect fraud and errors.
• Discusses procedures and techniques for identifying and assessing the risk of fraud.

AAS-5: Audit Evidence

• Deals with the auditor’s responsibility to obtain sufficient appropriate audit evidence.
• Covers the nature, timing, and extent of audit procedures necessary to gather evidence.

These standards ensure that the audit is conducted systematically and consistently, providing reliable and credible information to stakeholders.

Introduction to Auditing

Definition of Auditing

Auditing is an independent examination of financial information of any entity, whether profit-oriented or not, irrespective of its size or legal form, when such an examination is conducted with a view to express an opinion thereon.

Nature of Auditing

1. Systematic Process: Auditing follows a structured and organized methodology to examine and verify financial records and transactions.
2. Evidence Gathering: Auditors collect and evaluate evidence to assess the accuracy and completeness of the financial statements.
3. Independence: Auditors must remain independent to maintain objectivity and impartiality, ensuring unbiased findings.
4. Opinion Expression: The audit culminates in the auditor's opinion regarding the fairness and compliance of the financial statements with applicable accounting standards.

Objectives of Auditing

Primary Objectives

1. Verification of Accuracy and Completeness: To confirm the accuracy and completeness of the entity's financial records.
2. True and Fair View: To ensure that the financial statements present a true and fair view of the entity's financial position.

Secondary Objectives

1. Detection and Prevention of Errors and Frauds: Identifying and preventing errors and fraudulent activities in the financial records.
2. Evaluation of Internal Controls: Assessing the effectiveness of the entity's internal control systems.
3. Providing Assurance to Stakeholders: Offering stakeholders confidence in the reliability of the financial information presented.

Advantages of Auditing

1. Reliability: Assures the accuracy and reliability of the financial statements.
2. Fraud Detection: Aids in detecting and preventing fraud and errors.
3. Internal Control Improvement: Evaluates and suggests improvements in the internal control systems.
4. Stakeholder Confidence: Enhances the confidence of investors, creditors, and other stakeholders.
5. Legal Compliance: Ensures the entity’s compliance with relevant laws and regulations.

Types of Errors and Frauds

Errors

1. Clerical Errors: Mistakes in recording transactions, such as arithmetic errors.
2. Errors of Omission: Transactions that are not recorded in the books of accounts.
3. Errors of Commission: Incorrect recording of transactions, such as entering wrong amounts.
4. Errors of Principle: Incorrect application of accounting principles, such as incorrect classification of expenses.

Frauds

1. Misappropriation of Assets: Theft or misuse of the entity’s assets.
2. Fraudulent Financial Reporting: Intentional misstatement or omission of financial information to deceive stakeholders.

Various Classes of Audit

1. Statutory Audit: Required by law for certain entities, such as public companies, to ensure compliance with regulatory requirements.
2. Internal Audit: Conducted by an organization’s internal auditors to improve internal controls and operational efficiency.
3. Tax Audit: Ensures compliance with tax laws and regulations.
4. Cost Audit: Verifies cost records and accounts to ensure cost efficiency.
5. Management Audit: Evaluates management’s efficiency and effectiveness in conducting business operations.

Audit Programme

An audit programme is a detailed plan outlining the auditing work to be performed, specifying the procedures to be followed and the time frame for completion.

Audit Note Book

An audit note book is a diary maintained by the auditor to record all important points, queries, and observations made during the audit process. It serves as evidence of the work done and assists in future audits.

Working Papers

Working papers are documents prepared or obtained by the auditor during the audit process. They provide evidence of the audit work performed and support the auditor's opinion.

Internal Control, Internal Check, and Internal Audit

Internal Control

A system designed to ensure efficient operations, reliable financial reporting, and compliance with laws and regulations. It includes policies, procedures, and practices put in place to achieve these objectives.

Internal Check

A component of internal control involving the continuous review of financial and operating activities by employees to prevent and detect errors and frauds. It ensures that no single person has control over all aspects of any significant transaction.

Internal Audit

An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps in evaluating and improving the effectiveness of risk management, control, and governance processes.

These comprehensive aspects of auditing ensure that the financial information presented by an entity is accurate, reliable, and in compliance with relevant standards and regulations, thereby fostering trust and confidence among stakeholders.

 

Short Notes on :

Working Papers

Internal Control

Q. Discuss the nature and advantages of auditing.

Ans : Nature of Auditing:

·         Independent Examination: Auditing is a process where an independent party (auditor) examines an organization’s financial statements to ensure they present a true and fair view. This independence is crucial to avoid bias and maintain objectivity.

·         Systematic Process: The auditing process follows a structured approach, including planning, gathering evidence, analyzing data, and forming an opinion. This methodical approach ensures thoroughness and accuracy in evaluating financial information.

·         Objective Review: Auditors provide an impartial assessment of financial statements, ensuring they comply with accounting standards and accurately reflect the financial position and performance of the organization.

 

Advantages of Auditing:

·         Enhances Credibility: Audited financial statements carry more weight with investors, stakeholders, and regulatory bodies, enhancing the organization's credibility and trustworthiness.

·         Detects Errors and Fraud: Auditors identify discrepancies, errors, and fraudulent activities, helping to rectify issues and maintain the integrity of financial reporting.

·         Improves Internal Controls: The audit process often reveals weaknesses in internal controls, prompting improvements that enhance financial and operational efficiency.

·         Compliance with Regulations: Regular audits ensure that the organization adheres to laws and regulations, reducing the risk of legal penalties and ensuring regulatory compliance.

·         Facilitates Decision-Making: Reliable audited financial statements provide stakeholders, including management and investors, with accurate information to make informed decisions regarding the organization.

 

Q. Describe the various classes of audit.

Ans : Various Classes of Audit

Internal Audit: Conducted by an organization’s own employees, the internal audit assesses the effectiveness of internal controls, risk management, and governance processes. Aims to improve organizational operations, efficiency, and compliance with policies and procedures.

External Audit: Performed by independent auditors outside the organization, this audit assesses the fairness and accuracy of financial statements in accordance with accounting standards. Provides assurance to stakeholders that the financial statements are free from material misstatement and comply with legal and regulatory requirements.

Government Audit: Conducted by government agencies or entities to review the use of public funds and ensure compliance with government regulations. Ensures accountability in the use of public resources and adherence to laws and regulations.

Forensic Audit: Focuses on investigating financial discrepancies, fraud, and illegal activities. Aims to uncover evidence of fraud or misconduct and is often used in legal proceedings and investigations.

Compliance Audit: Reviews an organization’s adherence to external laws, regulations, or internal policies. Ensures that the organization is following established rules and regulations and helps avoid non-compliance issues.

Operational Audit: Evaluates the efficiency and effectiveness of an organization’s operations and processes. Aims to improve performance, achieve organizational objectives, and identify areas for operational enhancement.

 

Short Notes

Working Papers:

Working papers are detailed records and documentation prepared by auditors during the audit process. They include notes, calculations, and evidence that support the audit findings and conclusions. Working papers serve as evidence for the auditor’s opinion, help in organizing audit work, and provide a basis for review and verification. They ensure that the audit work is properly documented and can be reviewed by others if needed. Working papers can include lead schedules (summaries of financial statement balances), trial balances, audit test results, and correspondence with management.

 

Internal Control:

Internal control refers to the policies and procedures put in place by an organization to safeguard its assets, ensure accurate financial reporting, and promote operational efficiency. The main objectives of internal control are to prevent and detect errors and fraud, ensure the accuracy of financial statements, and promote compliance with laws and regulations. Effective internal controls help in achieving organizational goals and maintaining financial integrity.

Examples: Examples of internal controls include:

Segregation of Duties: Dividing responsibilities among different employees to reduce the risk of errors or fraud.

Approval Processes: Requiring authorization for transactions to ensure they are legitimate and appropriate.

Physical Safeguards: Implementing measures to protect assets, such as secure storage and access controls.

Regular Reconciliation: Comparing and reconciling records to detect discrepancies and ensure accuracy.