Audit procedures and applicability of accounting standards

[Tax Audit Report]

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/ income and expenditure account, of the profit/loss or income/expenditure.

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.

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. He will have to conduct the audit by applying the generally accepted auditing procedures which are applicable for any other audit.

He can apply the technique of test audit depending on the type of internal control procedures followed by the assessee.

The tax auditor will also have to keep in mind the concept of materiality depending upon the circumstances of each case.

He would be well advised to refer to the Statements on Standard Auditing Practices (SAPs) 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.

[Tax Audit Report]

if the statutory auditor of a person is also appointed to undertake tax audit, it is advisable to carry out both the audits concurrently.

[GJAFCA]

The mandatory AS also apply in respect of financial statements audited under section 44AB of the
Income-tax Act, 1961.


"While discharging their attest function, it will be the duty of the members of the Institute to ensure that the Accounting Standards are implemented in the presentation of financial statements covered by their audit reports. In the event of any deviation from the Standards, it will be also their duty to make adequate disclosures in their reports so that the users of such statements may be aware of such deviations."

[GJAFCA]

All the accounting standards issued by the Institute of Chartered Accountants of India have been made mandatory to follow by the specified enterprises. The date of mandatory applicability is different on enterprise to enterprise basis.

The esteemed readers may go the detailed article at the following link to know the entire law of applicability, the date of applicability of these accounting standards at a place:

http://www.knowledgebible.com/forum/...andards-(IFRS)

If you want to go through any accounting standard, please click the link below:

http://www.knowledgebible.com/forum/...Standards-(AS)

[GJAFCA]

145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.]

[GJAFCA]

Notifies the following accounting standards to be followed by all assessees following the mercantile system of accounting u/s 145(2)

NOTIFICATION NO. S.O.69(E)

DATED 25-1-1996

In exercise of the powers conferred by sub-section (2) of section 145 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies the following accounting standards to be followed by all assessees following the mercantile system of accounting, namely :

A. Accounting Standard I relating to disclosure of accounting policies :

(1) All significant accounting policies adopted in the preparation and presentation of financial statements shall be disclosed.

(2) The disclosure of the significant accounting policies shall form part of the financial statements and the significant accounting policies shall normally be disclosed in one place.

(3) Any change in an accounting policy which has a material effect in the previous year or in the years subsequent to the previous years shall be disclosed. The impact of, and the adjustments resulting from, such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in any year subsequent to the previous year, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted.

(4) Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purpose, the major considerations governing the selection and application of accounting policies are the following, namely :--

(i) Prudence.--Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information ;

(ii) Substance over form.--The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form ;

(iii) Materiality.--Financial statements should disclose all material items, the knowledge of which might influence the decisions of the user of the financial statements.

(5) If the fundamental accounting assumptions relating to going concerns, consistency and accrual are followed in financial statements, specific disclosure in respect of such assumptions is not required. If a fundamental accounting assumption is not followed, such fact shall be disclosed.

(6) For the purposes of paragraphs (1) to (5), the expressions,--

(a) "Accounting policies" means the specific accounting principles and the methods of applying those principles adopted by the assessee in the preparation and presentation of financial statements ;

(b) "Accrual" refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate ;

(c) "Consistency" refers to the assumption that accounting policies are consistent from one period to another ;

(d) "Financial statements" means any statement to provide information about the financial position, performance and changes in the financial position of an assessee and includes balance-sheet, profit and loss account and other statements and explanatory notes forming part thereof ;

(e) "Going concern" refers to the assumption that the assessee has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the foreseeable future.

B. Accounting standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies :

(7) Prior period items shall be separately disclosed in the profit and loss account in the previous year together with their nature and amount in a manner so that their impact on profit or loss in the previous year can be perceived.

(8) Extraordinary items of the enterprise during the previous year shall be disclosed in the profit and loss account as part of income. The nature and amount of each such item shall be separately disclosed in a manner so that their relative significance and effect on the operating results of the previous year can be perceived.

(9) A change in an accounting policy shall be made only if the adoption of a different accounting policy is required by statute or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements by an assessee.

(10) Any change in an accounting policy which has a material effect shall be disclosed. The impact of, and the adjustments resulting from such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in years subsequent to the previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted.

(11) A change in an accounting estimate that has a material effect in the previous year shall be disclosed and quantified. Any change in an accounting estimate which is reasonably expected to have a material effect in years subsequent to the previous year shall also be disclosed.

(12) If a question arises as to whether a change is a change in accounting policy or a change in an accounting estimate, such a question shall be referred to the Board for decision.

(13) For the purposes of paragraphs (7) to (12), the expressions :--
(a) "Accounting estimate" means an estimate made for the purpose of preparation of financial statements which is based on the circumstances existing at the time when the financial statements are prepared ;
(b) "Accounting policies" means the specific accounting principles and the method of applying those principles adopted by the assessee in the preparation and presentation of financial statements ;
(c) "Extraordinary items" means gains or losses which arise from events or transactions which are distinct from the ordinary activities of the business and which are both material and expected not to recur frequently or regularly. Extraordinary items include material adjustments necessitated by circumstances which though related to the years preceding the previous years are determined in the previous year :
Provided that income or expenses arising from the ordinary activities of the business or profession or vocation of an assessee though abnormal in amount or infrequent in occurrence shall not qualify as extraordinary items.
(d) "Financial statements" means any statement to provide information about the financial position, performance and changes in the financial position of an assessee and includes balance-sheet, profit and loss account and other statements and explanatory notes forming part thereof ;
(e) "Prior period items" means material charges or credits which arise in the previous year as a result of errors or omissions in the preparation of the financial statements of one or more previous years :
Provided that the charge or credit arising on the outcome of a contingency, which at the time of occurrence could not be estimated accurately shall not constitute the correction of an error but a change in estimate and such an item shall not be treated as a prior period item.
This notification shall come into force with effect from 1st day of April, 1996, and shall accordingly apply to the assessment year 1997-98 and subsequent assessment years.

(Sd.) K. D. Gupta, Joint Secretary to Government of India [No. 9949/F. No. 132/7/95-TPL]

[GJAFCA]

If the accounts of the business or profession of a person have been audited under any other law by the statutory auditor(s), 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/loss for the period covered by the audit. However, the said section envisages the certification of the particulars in the prescribed form on which the tax auditor has to express his opinion as to whether these are `true and correct'. In other words, where an audit has already been conducted and the opinion of the auditor has been expressed on the accounts, it would not be necessary to repeat the entire exercise to express similar opinion all over again. The tax auditor has only to annex a copy of the audited accounts and the auditor's 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

[GJAFCA]

In the case of a person whose accounts of the business or profession have been audited under 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 a copy of the audit report given by the statutory auditor with his report in Form No. 3CA along with Form No.3CD.

[GJAFCA]

Since the tax auditors carry the attestation function, they have to follow the standards on auditing issued by the ICAI.

The details of all the Standards on Auditing can be had at the following link:

http://www.knowledgebible.com/forum/...ting-Standards

[GJAFCA]

Part time certificate of practice holder (COP) can not conduct any attestation function hence is not eligible to conduct tax audit.