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Tax Audit u/s 44AB A study on the application of Relevant Accounting Standards Chinnsamy Ganesan FCA DISA(ICA) Presentation at National Conference on Direct.

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Presentation on theme: "Tax Audit u/s 44AB A study on the application of Relevant Accounting Standards Chinnsamy Ganesan FCA DISA(ICA) Presentation at National Conference on Direct."— Presentation transcript:

1 Tax Audit u/s 44AB A study on the application of Relevant Accounting Standards Chinnsamy Ganesan FCA DISA(ICA) Presentation at National Conference on Direct Taxes and Allied Laws organised by the Direct Taxes Committee of ICAI and hosted by Mangalore Branch of SIRC of ICAI on

2 Structure of the discussion Peer Review Stage III Vs Tax Audit Tax Audit – latest ICAI announcements Accounting Standards issued by CBDT Accounting Standards applicability to Tax Audit AS Vis-à-vis Income Tax Act AS of ICAI Vs AS of Income Tax Act Implication of AS of ICAI on Taxation Common pitfalls in reporting

3 Peer Review – stage III Covers tax audit assignments Statement of Peer Review issued by ICAI Quality of audit report Compliance with Technical Standards Accounting Standards Compliance of Guidance Notes Auditing and Assurance Standards

4 AS and Tax Audit Case 1 Statutory Accounts year ended March 31, 2010 Case 2 Statutory Accounts year ended Dec 31, 2009

5 Accounting Standards under IT ACT NAS1 – Significant Accounting Policies NAS2 – Net Profit or Loss and Changes in accounting policies If an enterprise complies with NAS1 and NAS2 but does not comply with AS issued by ICAI – What to do?

6 Accounting Standards not applicable to Tax Audit – A myth or reality? General purpose financial statements To be subjected to audit – what about compilation? Subject to audit but not carrying on any Business or Industrial or Commercial activity Concept of Materiality

7 Accounting Standards not applicable to Tax Audit – A myth or reality? What about Not for Profit Organisations? Management or Auditors – who is responsible for compliance? What is the impact of Companies (Accounting Standards) Rules 2006? Any impact with the introduction of Roadmap to IFRS?

8 The Notified standards by and large follow the ICAI standards except for certain differences Companies (Accounting Standards) Rules 2006 Central Government, in consultation with NACAS, has issued the Companies (Accounting Standards) Rules, 2006 notifying accounting standards 1-7 and 9-29, effective for COMPANIES for accounting periods commencing on or after 7 December 2006 ICAI standards would remain applicable for non-corporate entities

9 AS of ICAI Vs AS under CAR 2006 Relaxation mainly for disclosures and not for recognition and measurement Applicable Only to NCEs Applicable Only to Companies Three Levels prescribed Two Levels prescribed AS of ICAI CAR 2006

10 Applicability – an overview (CAR 2006) Accounting StandardsNon SMCsTo SMCs AS 1 to 14 (except AS 3), 15, 16, 18, 19, 20, 22, 24, 25, 26, 28 and 29 AS 3, 17 AS 21, 23 and 27 (Only if regulator requires consolidation or entity prepares consolidated financial statements) Some relaxation on disclosures Care for applicability of AS 18

11 Applicability – an overview (NCEs) Accounting StandardsLevel ILevel IILevel III AS 1 to 14 (except AS 3), 15, 16, 19, 20, 22, 25, 26, 28 and 29 AS 3 and 17 AS 18 and 24 AS 21, 23 and 27 (Only if entity prepares consolidated financial statements) Some relaxation on disclosures AS 15 relaxation for entities with less than 50 employees

12 Form 3CA & 3CB Suggested reporting on Form 3CD Materiality Concept Responsibility and Scope Para Particulars given in Form No. 3CD and the Annexures thereto are furnished by the Companys management. In accordance with the Guidance Note on Tax Audit under Section 44 AB of the Income Tax Act, 1961 issued by the Institute of Chartered Accountants of India our examination is carried out on a test basis to obtain reasonable assurance that the particulars as disclosed in Form No. 3CD and the Annexures thereto together with the notes thereon are free of material misstatement.

13 AS 1 vis-à-vis Tax Audit AS 1 Disclosure of Accounting Policies Concept of prudence is not fully considered Certain provisions/ write off not allowed as expenditure

14 AS 2 vis-à-vis Tax Audit AS 2 Valuation of Inventories Market value Vs Net realisable value AS 2 does not prescribe valuation method for inventory of shares, debenture etc Section 145 A of the IT Act Inclusive method under the IT Act Exclusive method under AS 2

15 AS 7 vis-à-vis Tax Audit AS 7 Accounting for Construction Contracts % completion method Vs completed contract method Accounting for foreseeable future loss Presumptive taxation u/s 44AD Present limit Vs limit proposed by DTC

16 AS 10 vis-à-vis Tax Audit AS 10 (Revised) Property, Plant and Equipment Ready for the intended use Vs put to use Whether depreciation claim is optional? Idle machinery under AS 10 Recognition criteria for Subsequent expenditure

17 AS 11 vis-à-vis Tax Audit AS 11 The effect of changes in foreign exchange rates AS 11 controversy still continues even after the introduction of Companies Accounting Standards Rule 2006 Treatment of unrealised forex loss adjusted in the carrying value for Income Tax Depreciation

18 AS 12 vis-à-vis Tax Audit AS 12 Accounting for Government Grants If condition attached subsidy can not be fully reduced from the cost as per AS 12 To be reduced from Cost of asset for IT depreciation computation

19 AS 13 vis-à-vis Tax Audit AS 13 Accounting for Investments Current Investments to be written down to market value if it is lower Permanent diminution in value of Long- Term Investments to be provided for If so provided not allowable under IT Act Only on disposal

20 AS 15 vis-à-vis Tax Audit AS 15 Accounting for Retirement Benefits Provision for Gratuity – Sec 40 A (7)/ 43B Provision for Compensated Absence – 43B Bonus Vs performance incentives

21 AS 16 vis-à-vis Tax Audit AS 16 Borrowing Costs Concept of Qualifying Assets Suspension of borrowing cost whether admissible under the Income Tax Act Capitalisation of borrowing Costs Vs 36 (1) (iii)

22 AS 18 vis-à-vis Tax Audit AS 18 Related Party Transactions Divided position of definition of related party Reconciling and considering the impact of disclosures AS 18 Vs 40 (A) (2)(b) Loans to Directors and their relatives

23 AS 19 vis-à-vis Tax Audit AS 19 Accounting for Leases Depreciation allowability on finance leases Lessor under the Income Tax Act Lessee under AS 19

24 AS 22 vis-à-vis Tax Audit AS 22 Taxes on Income No concept of deferred tax under the IT Act Reversal of DTA for MAT computation – recent judicial pronouncement

25 AS 26 vis-à-vis Tax Audit AS 26 Intangible Assets Amortisation over useful economic life Retirement of intangibles to be fully charged off Depreciation rate specifically mentioned under IT Act Distinction between Intangible Asset and Computer Software

26 AS 28 vis-à-vis Tax Audit AS 28 Impairment of Assets Impairment to be tested at every balance sheet date and loss to be accounted as an expense Not allowable till the asset is disposed Reversal of Impairment Loss will not have any impact in IT Computation Impact on MAT Computation – a grey area

27 AS 29 vis-à-vis Tax Audit AS 29 Provisions, Contingent Liabilities and Contingent Assets Legal Vs Constructive obligation Provision towards Asset Retirement Obligation

28 AS 30,31 and 32 vis-à-vis Tax Audit Financial Instruments Standards Fair valuation Mark to Market Losses

29 Changes in Accounting Policy Whether necessary to be mentioned in the Auditors Report even if not material Forex differences adjusted in carrying value of fixed assets not removed for IT depreciation, if unrealised Related party transactions not reconciled with 40A (2) (b) disclosures 43B opening and closing unpaid position Vs Current Liabilities Common pitfalls in reporting

30 Interest accrued on Loans Vs disclosure under 43B Funded interest of term loans Vs 43B Reconciling the excise duty records with financial statement figures (CENVAT/ VAT Disclosures) Reconciliation of movement in loan accounts with disclosure under 269 SS and 269 T Share Application money Vs Loan IFST whether to be disclosed Security Deposits received

31 TDS payable account analysis Vs Chapter XVII-B disclosures Year end provisions Vs during the year payments Non-deduction of TDS on outstanding expenses Liabilities outstanding under current liabilities Year end provisions on estimated basis Reconciliation of quantitative details Raw Materials Finished goods Common pitfalls in reporting

32 Thank you

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