CHECKLIST FOR TAX AUDIT UNDER SECTION 44AB OF THE INCOME TAX ACT, 1961
Table of Contents
ICAI ISSUES CHECKLIST FOR TAX AUDIT UNDER SECTION 44AB
ICAI has designed checklist to assist the practicing members in in enhancing the quality of tax audit under section 44AB of the Income tax Act, 1961. It is result of coordinated effort of Direct Taxes Committee and the Taxation Audit Quality Review Board of ICAI
IS CHECKLIST MANDATORY?
The checklist for tax audit designed by ICAI is only recommendatory in nature.
GUIDANCE NOTE ON TAX AUDIT UNDER SECTION 44AB OF THE INCOME TAX ACT, 1961
This checklist has been broadly based on the text of the Guidance Note on Tax Audit under section 44AB of the Income tax Act, 1961/ Implementation Guide w.r.t. Notification No. 33/2018 dated 20.7.2018 effective from 20.8.2018/ Technical Guide on Income Computation and Disclosure Standards. The detailed guidance given in these publications of Direct Taxes Committee of ICAI should be duly referred while conducting the tax audit. This document is not to be considered as a replacement / gist of these publications but should be read along with them.
The above-mentioned publications may be revised from time to time depending on the changes in the Act/ Tax Audit Report Format. In case, there is any conflict between the text of the above mentioned publications of ICAI and this document, the text mentioned in publications Guidance Note on Tax Audit under section 44AB of the Income tax Act, 1961/ Implementation Guide w.r.t. Notification No. 33/2018 dated 20.7.2018 effective from 20.8.2018/ Technical Guide on Income Computation and Disclosure Standards shall prevail.
IF TAX AUDIT CHECKLIST CONFLICT WITH STANDARDS ON AUDITING
While giving the tax audit 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. The tax Auditor will have to conduct the audit by applying the generally accepted auditing procedures which are applicable for any other audit. He is advised to refer to the Standards on Auditing (SAs) as may be relevant, issued by ICAI. In case, there is any conflict between the texts of the Standards on Auditing (SAs) issued by ICAI and this document, the text mentioned in SAs issued by ICAI shall prevail.
Where the auditor issues Form No. 3CB, as the audit of financial statements is being done under section 44AB of the Income tax Act, 1961, the auditor should in relation to audit of the financial statements ensure compliance of:
- Accounting Standards issued by ICAI
- Standards on Auditing
- Framework for presentation of Financial Statements issued by ICAI
Commonly found Errors – Taxation Audits Quality Review Board of ICAI
The Taxation Audits Quality Review Board of ICAI has come across certain commonly found errors/ non-compliances while conducting review of Tax Audit Reports. Some of them, which need specific attention of members, have been mentioned, below for reference:
a) Revised SA 700, Forming an Opinion and Reporting on Financial Statements (Para 11.9 of the Guidance Note on Tax Audit under Section 44AB of the Income-Tax Act, 1961)
ICAI had pursuant to the issuance of the Revised SA 700, Forming an Opinion and Reporting on Financial Statements, prescribed a revised format of the auditor’s report on financial statement. Since Form No. 3CA and Form No. 3CB are required to be filed online in a preset form and the same are not in line with the requirements of SA 700, there is no specifically allocated field for providing information relating to the respective responsibilities of the assessee and the tax auditor as required in terms of the principles laid out in SA 700. However, having regard to the importance of these respective responsibility paragraphs from the perspective of the readers of the tax audit report, it is suggested that these respective responsibility paragraphs relating can be provided in the space provided for giving observations, etc., under clause (3) of Form No.3CA or Clause (3) and Clause (5) of Form No.3CB as the case may be.
The illustrative Assessee’s responsibility paragraph and Tax Auditor’s responsibility paragraphs in respect of Form No.3CB has been given in the Guidance Note. The same are to be suitably reworded to meet the situation envisaged in Form No.3CA.
Commonly Found Errors:
a) Many of the Tax Audit reports do not have the paragraphs elating to Assessee’s responsibility and Tax Auditor’s responsibility as required by the Guidance Note in respect of SA 700.
b) Some of the tax audit reports contained a reference about the attached physically signed tax audit reports which mention these Paragraphs thereby complying with the requirement of SA 700. However, as per the Guidance Note on Tax Audit the same are specifically required to be mentioned / reported under clause (3) of Form No.3CA or Clause (5) of Form No.3CB, as the case may be.
Observations/Comments/ Discrepancies/ Inconsistencies by Auditor (Para 14.5 of the Guidance Note on Tax Audit under section 44AB of the Income-tax Act,1961)
“Where any of the requirements in this form is answered in negative or with qualification, the report shall state the reasons thereof. The tax auditor should state this qualification in the audit report so that the same becomes a comprehensive report and the user of the audited statement of particulars can realize the impact of such qualifications.”
Also as per Para 15.5 of the Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961:
Under clause (a) of paragraph 3 of Form No.3CB, the tax auditor has to report his “observations/comments/ discrepancies/inconsistencies,” if any. The expression “Subject to above” appearing in clause (b) makes it clear that such observations/comments/ discrepancies/ inconsistencies which are of qualificatory nature relate to necessary information and explanations for the purposes of the audit or the keeping of proper books of accounts or the true and fair view of the financial statements, respectively to be reported on in paragraphs (A), (B) and (C) under clause (b) of paragraph 3. While reporting on clause (a) of paragraph 3 of Form No. 3CB the tax auditor should report only such of those observations/ comments/ discrepancies/ inconsistencies which are of qualificatory nature which affect his reporting about obtaining all the information and explanations which were necessary for the purposes of the audit, about the keeping of proper books of account by the head office and branches of the assessee and about the true and fair view of the financial statements. Further, only such observations/comments/ discrepancies/inconsistencies which are of a qualificatory nature should be mentioned under clause (a). Any other observations/comments/ discrepancies/ inconsistencies, which do not affect the reporting on the matters specified above may form part of the notes to accounts forming part of the accounts. In case the tax auditor has no observations/comments/ discrepancies/ inconsistencies to report which are of qualificatory nature, “NIL” should be reported in this part of paragraph 3.The tax auditor may then give his report as required by sub-paragraphs (A), (B), and (C) of paragraph 3 and paragraph 4.
Commonly Found Error:
In certain tax audit reports that were examined, it has been observed that the qualification paragraph i.e. clause (3) of Form No.3CA or Clause (5) of Form No.3CB, as the case may be, contained a reference to Notes to Form No. 3CD. These notes did not mainly contain the qualifications but also contain general additional information.
As per the Guidance Note (paragraphs mentioned above) only qualifications/ observations should be reported in the space provided in the form No. 3CA/3CB itself while the additional information which are not in the nature of qualification could be attached as notes.
Tax Audit and UDIN
While issuing the tax audit report under section 44AB of the Income tax Act, 1961, the Auditor should generate appropriate UDIN and refer the same in its Report. For detailed Frequently Asked Questions (FAQs) on UDIN kindly refer: https://udin.icai.org/faqs
Code of Ethics
A member of the Institute in practice shall not accept, in a financial year, more than the “specified number of tax audit assignments” under Section 44AB of the Income Tax Act, 1961. For details the Tax Auditor may refer to Chapter VI Tax Audit Assignments under Section 44 AB of the Income Tax Act, 1961 in Volume-II of Code of Ethics 2020 at: https://resource.cdn.icai.org/60018code-of-ethics-2020vol2.pdf
