Vikal's Project

A

Project Report

On

“TAX AUDIT”

Under

RAJESH MADAN & CO. (C.A)

A Project submitted to Guru Nanak Dev University Amritsar in partial fulfillment of the requirement for the degree of bachelor in commerce

Session 2007-08

Supervised By submitted by Vikal Sharma

Deptt. Of commerce B.Com-2 Univ. Roll No. College Roll No.

D.A.V COLEGEJALANDHAR

This is to certify that, VIKAL SHARMA S/O SH. SUNIL SHARMA student of B.COM-II (Prof.), Roll No. 3825, has undertaken project work on the topic “TAX AUDIT” at RAJESH MADAN & CO. , jalandhar under my supervision and guidance. During this course he is found to be sincere and hard working. To the best of my knowledge, the work is original and not been presented else.

V.K TIWARI(Principal)

Prof. T.R Dhingra (Head of Department) (Project Guide)

STUDENT DECLARATION

This is to certify that I VIKAL SHARMA S/O SH. SUNIL SHARMA student of B.COM-II(Prof.), has undergone summer training in “RAJESH MADAN & CO.” and prepared the report entitled “TAX AUDIT” based on it.All the theory contained in report is from the list of book given in end in bibliography. I have no copied from any report submitted earlier this or any other university. This is purely original and authentic work.

Dated: VIKAL SHARMA B.COM-II(Prof.) Roll. No……………

PREFACE

Section 44AB of the income tax act provides for compulsory audit of account of certain person from the assessment year 1985-86 accordingly. If the total sales turnover or gross receipt for the precious year exceed or exceed Rs. 4 Million in case of a business, or the gross receipt for the previous year exceed 1 Million in the case of a profession, such assesses have to get their accounts audited this provision seek to ensure that the book of account and other records of assesses are properly maintained and that the revenue authorities are provided with audited financial statement along with the data and information relevant for assessment. It also seems that through this provision, the government intends to take the help of chartered accountant in carrying out routine verification, so that the income tax authorities can attend to the more important aspect of a case.

ACKNOWLEDGEMENT

This project works itself is an acknowledgement to the sincere efforts of all the individual who have contributed for its completion.

I would like to pay my profound gratefulness and expressed my sincere gratitude to my project guide Proff…………………….. for her able guidance in carrying out my project success fully.

I am extremely grateful to Mr. RAJESH MADAN GUPTA (Proprietor) of M/S RAJESH MADAN & CO. for allowing me to get training in his firm.

Last but not least my special thanks to all the staff member of Deptt. Of commerce for helping me detailed information about the project that helped significantly in completion of this report.

VIKAL SHARMA

CONTANTS

Chapter No. Title Page No.

Chapter-1 Firm’s profile 1

Chapter-2 Objective & ResearchMethodology 2

Chapter-3 Introduction of auditing 3-12

Chapter-4 Tax Audit 13-15

Chapter-5 Tax Auditor 16

Chapter-6 Accounting Standard 17

Chapter-7 Tax Audit procedures 18-20

Chapter-8 Tax Audit Report 21-36

Chapter-9 Liability of auditor 37-41

Conclusion

Questionnaire

Bibliography

CHAPTER-1FIRM’S PROFILE

Chapter-1

PROFILE OF RAJESH MADAN & CO. (FIRM)

Prop. Rajesh Madan Gupta (C.A)

Address

Ph.

Fax

Email

Date of Registration

Registration number

Qualification

Membership No

Gross Receipt

Audit Case

CHAPTER-2

CHAPTER-2OBJECTIVE

&RESEARCH

METHODOLOGY

RESEARCH METHODOLOGY

RESEARCH DESIGNResearch design stand for advance planning of method to be adopted for

collecting the relevant data and the technique to be used in their analysis keeping in view the object of research.The present project of tax audit is based on practical training. Primary and secondary information collected.

INDIRECT ORAL INVESTIGATIONConvenient investigation and enquiry was applied while selecting the source

of data and information. Under this, the information regarding tax audit is necessary was collected from the Mr. Rajesh Madan Gupta C.A.(owner of the firm) for detail study of report.

OBJECT OF THE STUDY

1. To study about auditing.2. To study why people audit there account.3. To study the detail procedure of auditing.

LIMITATION

1. Due to shortage of time detailed study about training and the vast the knowledge could not be included in project report.

2. Problem in collection of information relating to project report.

CHAPTER-3

CHAPTER-3INTRODUCTION OF

AUDITING

INTRODUCTION OF AUDITING

In the ancient time, the method of accounting were so simple and crude and number of transactions was so small, that each businessman was able to chek himself all his transaction. At that time no one felt the necessity of auditing.

ORIGIN OF AUDITING

The auditing has it origin in the necessity in the development of some system to put a check on the persons whose duties were to records receipts and disbursements of money on the behalf of owners. In the ancient days auditing was confined to public account only. The historical records show that ancient Egyptian, the

Greeks and the Romans used to get their public account audited with the development of trade and commerce the need for recording transactions was felt by businessman. He stared taking the services of other for recording those transactions. This had necessitated the development of some system of check upon the persons who recorded such transactions on the behalf of businessman.

Luca Paciolo, an Italian, who has published his treatise as double entry system of book keeping for the first time in 1494. this system of double entry was capable of recording of all kind of mercantile transactions. He also described the duties and responsibility of an auditor. This system had its on auditing also; thereby the scope of duties was enhanced.

The audit its present shape is the result of large-scale production in consequence of Industrial Revolution during the 18th century. With the development of banking facilities, communication and transport means, the concept of corporate management had taken birth. The management and the owner were separate. It necessitated the ancestor to know their investment is safe or not. Shareholders need an independent person having expert knowledge in account to report on the working on the company and truthfulness of the profit or loss financial position disclosed by the management.

These developments have a direct effect on evolution of auditing. The audit of business account becomes common only in 19th century. The enormous increase in trade, commerce and industry made use if auditing of accounts unavoidable. Under these condition,the public become perfectly aware of necessity of audit, and the importance of audit increased to such an extent that account were not accepted as correct unless these were audited by Professional and qualified auditor. In these days independent firm of professional accountant have come into existence to audit the accounts of mercantile firms, but still the government departments.

AUDITING IN INDIA

Prior to 1913, no qualification for auditors were prescribed, it was Indian companies Act 1913 which had for the first time prescribed qualification for an auditor. The growth of auditing in India can be related with this Act which had made it compulsory for every company to get its accounts audited once in every year. Prior this provincial governmentWere authorized to issue certificates to accountant entitling them to act as auditor. The Bombay government first to start a diploma in accountancy which was known as Government diploma in Accountancy (G.D.A). The persons holding such diploma were qualified to act auditors in any province of country.

In 1932, auditor’s certificate Rules 1932 were passed and with this all the control over accountancy profession was transferred to central Government. This was with the view to maintain uniform standard in accounting and auditing throughout the country. Under these rules an auditor had to obtain certificate of Registered Accountants (R.S). The central Government had started maintaining of Register of Accountants and Indian Accountancy Board was also established.

In 1949, the Chartered Accountant Act was passed, since then full autonomy had been granted to the profession through institute of chartered Accountants. The institute of chartered Accountants of India was established by the Act of parliament on July 1, 1949. it regulates the profession, conducts examination and grants certificate of practice. Now a person had to pass the examination conducted by the institute and follow its rules and regulation. The institute maintains a register of members. A member can be:

1. Associate of the institute of chartered Accountant (A.C.A), the ordinary members.

2. Fellow of the institute of chartered Accountants (F.C.A), the ordinary members who have completed five years practice.

In 1956, the new companies Act replaced the Act of 1913. this Act and some further amendments have further increased the scope of account and audit of companies. It is now ensured that only independent professional with requisites qualification and training can be appointed as auditors. The provision are made regarding the manner of appointment and the power and duties of auditors. The scope of annual report and accounts has been enlarged.

In 1959, and other body, the institute of cost and works Accountants of India was recognized under the cost and works Accountants Act. As per. Sec 233-B of The Companies Act, 1956 the members of this institute are entitled to carry out cost audit.

A statutory provision has been made for the maintenance of proper cost account in certain companies and audit of their cost account.

The last five decades have seen rapid growth and diversification in accounting profession in India. The accountants have been recognized professional in the society. Professional accountants, apart from traditional financial and tax audit, are sought for management audit, project planning financial consultancy and mechanized accounting.

DEFINATION OF AUDITING

It is not easy to define the word’ audit’ precisely. The word audit is derived from latin word in which means ‘to here’. In olden days, a person was appointed to audit cash transaction only i.e. whether the person responsible for recording cash receipt and payments on the behalf of

business owner has done his job properly or not. Hence it was merely a cash audit. But now the word audit has a wider meaning.

Auditing is the verification of financial position as is disclosed by the balanced sheet and the profit and loss account. It is an examination of accounts to ascertain whether the balanced sheet and profit of loss of the business. For this purpose all the business transaction and the manner in which these are recorded must be examined.

Auditing is the intelligent and critical test of accuracy, adequacy and dependability of accounting statements. It is concerned with examination of accounting data to determine the extent of profit and loss account and balance sheet prepared from such data. Auditors enjoy distinctive professional status in the society because of specialized function auditing. Professional accountants by auditing, certify financial statements of organization. Auditing financial statement gain confidence of shareholders and other persons interested in the organization.

AUDITING INVOLVE THE FOLLOWING STEP

1. A study of organization and its structure.

2. Analysis and review of system of accounting and internal control.

3. Testing arithmetical accuracy of record and collection and evaluation of evidence in support of transaction.

4. Verification of state of affair disclosed by the balance sheet and profit or loss account.

5. Preparation of report. Expressing opinion whether accounts presents a true and fair view.

FUNCTIONS OF AUDITING1. Reviewing system and procedure of business.2. Examining document evidence to establish the accuracy of recorded transaction.3. Reviewing the system of accounting and internal control.4. To verify the valuation and existence of assets.5. To examine the mathematical accuracy of accounting statements.6. To see whether the statuary requirement have been compiled with.7. Reporting as to what extent, account exhibit truth and fairness.8. To verify the distinction between capital and revenue items.9. To make recommendation for improvement in internal control and accounting system.

AUDITING Auditing begins where accountancy ends. After the accountant has completed his work an auditor is invited to verify the work an auditor is invited to work done by accountant. It is not the duty of auditor to prepare the accounts. He is concerned with critical examination and verification of account prepared by other. Auditor is an independent person appointed specially for the purpose of certification of work done by other. An auditor must be a competent person well versed in various accounting system and principles. As per the provision of companies act the must be charted accountant. Audit report

must be prepare only after the auditor has checked and verified thoroughly various accounting record. An accountant can not perform the function of an auditor. He cannot the certify the financial statement as correct and present true and fair view.

ADVANTAGES OF AN AUDIT

Sole trader is interested in knowing whether the business is conducted efficiency or not to maintain healthy relation among the partners, in case of partnership business, it is important that true financial statement must be made know to every partner. Because of separation of ownership and management in join stock companies , shareholders do have knowledge of day to day administration. Shareholder would like to know whether the amount invested by them is used or not. Answer for all such questions can be obtained by getting the accounts audited from a qualified.

Advantages of an audit

For owner of for the for the for the for otherBusiness & management creditor government Share holders bodies

A. For the owners of the business and shareholders

1. In case of sole trader, he can depend on the audited account. He can value his business on the basis of audited account for the purpose of sale of business or for admitting a new partner.

2. Dispute over the correctness of profits can be avoided. In case of partnership firm, audited accounts will be useful in valuing goodwill and business on admission and retirement of a partner.

3. Shareholders, who do not know about day to day administration of the company, can judge the performance of management from audited accounts.

4. Shareholder can value their shares on the basis of audited financial statements.

B. for the management

1. It helps the management in detecting and preventing and errors and fraud.2. It keep the accountant and staff vigilant while preparing book and records as they know in

advance that all the accounts are to be audited.3. Claims due to fir, theft and accident can be estimated from audited accounts.

4. Management gets advice on financial affair from the auditor who has export’s knowledge.5. Because the audited accounts are uniformity prepared over the year, comparison of such

statement becomes easier.6. Money can be easily borrowed from the financial institution and banks, if the businesses

are audited.7. It helps in reviewing the system of internal control and check.

C. for creditor

1. Long term and short term creditor can depend on audited financial statement while talking decision to grant to business houses.

D. for the government’s bodies

1. Taxation authorities depend on audited statement in assessing the income tax sale-tax and wealth-tax liability of the business.

2. Audited accounts can be produced in the court to provide evidence.3. Audited accounts are useful for the governments while granting subsidies etc.

E. for other

1. It can be used by insurance companies to settle the claim arising on accounts of loss by fire.

2. In case of amalgamation and absorption, the purchasing company can calculate purchase consideration on the basis of audited accounts.

3. Setting trade disputes for higher wages or bonus.

LIMITATION OF AUDIT

The audit of accounts suffer from several limitation also. Some of the limitation are asfollow:

1. The audit may not give complete picture. It the accounts are prepared with bad intention and for that fraud is committed, auditor may be able to fully unearth them.

2. Sometime the auditor has to depend on explanations, clarification and information from staff and client. He may or may not get correct or complete information.

3. Under law, shareholder appoints an auditor, but in fact director appoints him under such situation he may not be an independent auditor.

4. Auditor has to seek opinion of expert on certain matter on which he may not have expert’s knowledge. The auditor has to depend upon such report which may not be always correct.

5. The auditor may not serve its purpose unless the auditor are independent and bold. Lack of these qualities may force him to give clean report even though certain discrepancies existed.

6. Auditing is considered as a mechanical work. Auditor may not frame audit program from the viewpoint of particular situation.

7. Auditing is a post-mortem examination. What is the use of such examination when event have already happened.

8. It is very difficult to verify certain item i.e. stock in trade.9. Success of audit depends on the sincerity with while auditor has performed his duties.

CHAPTER-4TAX AUDIT

CHAPTER-4

TAX AUDIT

Audit under the income Tax

The income tax act 1961 contain several provision for audit of account of public charitable trusts, non corporate assesses and other assesses and meet the specific objective of the act. Section 288 define accountant as a chartered accountant within the meaning of the chartered Accounts act. 1949 and any other person who is entitled to be appointed as an auditor of a company under section 266 of the companies act, 1956. it is clear that any chartered accountant, whether in practice or not, is also covered by the definition of the term accountant. It may, therefore, prima facie appear that even a non-practicing member of the institute may be covered by definition of accountant. However, section 7 of the Chartered Accountant Act, 1949 require every member who practices as a Chartered Accountant too hold a certificate must hold a certificate of practice. Therefore although it is not directly inherent in the definition of accountant given by Section 288, it is nevertheless a necessary requirement that the member concerned must hold a certificate of practice. Therefore although it is not directly inherent in the definition of accountant given by section 288, it is nevertheless a necessary requirement that the member concerned must hold a certificate of practice.

Audit of account in concerned with the claim for deduction under section35D and 35E: The condition under which certain specific preliminary expenditure incurred before the commencement of business and once the business and once the business commenced on expending an industrial section 35D of the Act. The manner in which deduction are allowed in respect of expenditure on the act are stated in Section 35E of the Act. In respect of non- corporate assesses, there deduction are admissible only if the accounts for, the year or year in which the above specified expenditure is incurred are audited by an accountant and the report of such audit is furnished by the assesses along with the return of income.

Audit under Section 80HHC: Section 80HHC provide that the profits derived from the export of good or merchandise and ores are allowed as a deduction while computing the total income of an Indian company or of any person resident in proceeds are receivable in India in convertible foreign exchange within the specified period. For claiming this deduction, the assesses has to furnish in the prescribed from along with the return of accountant shall be required to examine the invoice of exports sale book, entries in the book regarding receipt of convertible foreign exchange etc. and verify whether the profits have been computed in accordance with the provisions of section 28 to 44D of the income tax Act.

TAX AUDIT UNDER SECTION 44ABSection 44AB provides for the compulsory audit of certain persons carrying on business or profession. Section 44AB reads as under:Audit of accounts of certain persons carrying on business or profession.

Every person-

(a) Carrying on business shall, if his total sales turnover or gross receipt as the case may be In business exceed or exceeded forty lakes rupees in any previous year.(b) Carrying on profession shall, if his gross receipts in profession exceed ten lacks Rupees in any previous year. (c) Carrying on the business shall if the profits and gains from the business are deemed to be the profits and gains of such persons under section 44AD or section 44AE or section 44AF as the case may be and he has claimed his income to lower then the profits or gains so deemed to be the profits and gains of his business as the case may be in any previous year,

Get his accounts of such previous year audited by an accountant before the specified date and furnished before that date the report of such audit in the prescribed from duly signed and verified by such accountant and setting forth such particular as may be prescribed.

Provide that this section shall not apply to the person who derived income of the nature referred to In section 44b or section 44B or section 44BBB, on and from the 1st day of April 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later.

Provide further that in a case where such person is required by or under any other law a get his accounts audited, it shall be sufficient compliance with the provision of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnish before that date the report of the audit as required under such other law and a further report in form prescribed under this section.

CHAPER-5TAX AUDITOR

CHAPTER-5

TAX AUDITOR

The term accountant has been defined in sub-clause (1) of explanation below sub-section (2) of section 288.The above-mentioned explanation reads as under:

Accountant means a chartered accountant within the meaning of chartered accountant Act, 1949 and includes, in relation to any state, any person who by virtue of the provisions of sub section (2) of section 266 of the companies Act 1956, is entitled to be appointed to act as an tax auditor of companies registered in the state.

CHAPER-6ACCOUNTING STANDARD

CHAPTER-6

ACCOUNTING STANDARD

Accounting standard under taxation law: The finance Act, 1995 substituted a new Section 145w.e.f. assessment year 1997-98. The section deals with method of accounting and is reproduced below:

(1) Income chargeable under the head profits and gain of business or profession or income from other source shall subject to the provision of sub section (2) be computing regularly employed by the assesses.

(2) The central government may notify in the official gazette from time to time accounting standard to be followed by any class of assesses 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 assesses, or where the method of accounting provided in sub section (1) or accounting standard as notified under sub section (2) have not been regularly followed by the assesses the assessing officer may an assessment in the manner provide in section144.