BANK AUDIT

RECOGNIZING INVESTMENTS

In terms of extant instructions issued in September 2004, banks are permitted to exceed the limit of 25 per cent of total investments under HTM category, provided the excess comprises only of SLR securities and the total SLR securities held in the HTM category is not more than 25 per cent of their demand and time liabilities (DTL) as on the last Friday of the second preceding fortnight. This relaxation was allowed taking into account the requirement of maintenance of SLR of 25 per cent of DTL under Section 24 of the Banking Regulation Act, 1949 at that time. The SLR requirement has since been brought down to 23 per cent of DTL. Accordingly, it is proposed that:

• banks may exceed the present limit of 25 per cent of total investments under the HTM category provided:

(a) the excess comprises only of SLR securities; and

(b) the total SLR securities held in the HTM category is not more than 23 per cent of their DTL as on the last Friday of the second preceding fortnight, i.e., in alignment with the current SLR requirement.

This realignment from 25 per cent to 23 per cent, in line with the recommendations of the Working Group on Government Securities and Interest Rate Derivatives Markets, would be effected by way of reduction of at least 50 bps every quarter, beginning with the quarter ending June 2013.

RECOGNIZING ASSETS

RBI tightens loan restructuring normsWorried over rising non-performing assets (NPAs), the Reserve Bank of India on Thursday tightened rules for restructuring of most types of loans in line with global practices.

As per the latest RBI notification, provisioning on the newly restructured account has been raised to 5 per cent from June 1 from 2 per cent now.

However, for the old restructured account it will be done in a phased manner.

The RBI also said that existing “regulatory forbearance” would no longer be available from April 1, 2015.

“...it is clarified that no such incentive would be available on withdrawal of regulatory forbearance on restructuring with effect from April 1, 2015, except in cases of restructuring by change of DCCO (date of commencement of commercial operation) of infrastructure and non-infrastructure project loans as specified in this circular,” the Central Bank said.

As per existing guidelines, an account after restructuring is not classified as NPA. However, as per the new norms, restructured account would be treated as NPA.

“This may be made applicable with immediate effect in cases of new restructuring but in a phased manner during a two-year period for the existing standard restructured accounts,” it added.

As a result, the banks will have to do higher provision which will have negative impact bottom lines.

Banks are also advised that they should correctly capture the reduction in fair value of restructured accounts as it will have a bearing not only on the provisioning required to be made by them but also on the amount of sacrifice required from the promoters, it said. Further, it said, “there should not be any effort on the part of banks to artificially reduce the net present value of cash flows by resorting to any sort of financial engineering.” Banks are also advised to put in place a proper mechanism of checks and balances to ensure accurate calculation of erosion in the fair value of restructured accounts, it

added.

The RBI said it has been decided that banks should ensure that the unit taken up for restructuring achieves viability in eight years, if it is engaged in infrastructure activities, and in five years in other cases.

INSURANCE AUDIT

INVESTMENT REGULATIONS IRDA RELAXEDNew Delhi: Relaxing norms, regulator Irda today allowed insurance companies to invest in private equity and debt funds. “Insurers are permitted to invest in Category I & II AIFs (Alternative Investment Funds) under the extant Sebi regulations,” the Insurance Regulatory and Development Authority said in a circular. In March, life and general insurance companies were allowed to invest in Category I AIFs, comprising infrastructure funds, SME funds, venture capital funds and social venture funds. Category II AIFs comprise private equity funds and debt funds. The Irda logo. Image courtesy Irda AIFs are funds established or incorporated in India for the purpose of pooling in capital from India and overseas to be invested as per a pre-decided policy. Category I AIFs are those with positive spillover effects on the economy, for which certain incentives or concessions might be considered by Sebi, the government or other regulators. For Category II AIFs, there are no specific incentives or concessions. Irda said in Category II, at least 51 percent of the funds of such AIFs should be invested in infrastructure entities, SME entities, venture capital undertakings or social venture entities. Insurers, however, are not permitted to invest in AIFs that have the nature of funds and leverage funds, it added. The regulator said the overall exposure to venture funds and AIFs put together should not exceed 3 percent of the respective fund in the case of a life insurance company and 5 percent in the case of a general insurance company. Exposure to a single AIF or venture fund should not be more than 10 per cent of the fund size. The investment norms were relaxed after representations from stakeholders, including large insurance companies. Irda said the matter was referred to an expert committee on investment, which was of the view that insurance companies should be allowed to invest in Category II AIFs.

Housing finance companies and infrastructure finance companies will get higher funding from the insurance companies as the sector regulator IRDA has relaxed investment norms for these firms.

“The investments in the debt instruments issued by housing finance companies as specified in the investment regulations shall not be included under the exposure to Financial and Insurance Activities,” Insurance Regulatory and Development Authority (IRDA) said in a notification.

Presently, it said, such exposure to Housing finance companies and infrastructure finance companies is treated as exposure under Financial and Insurance Activities.

However, the industry exposure limits will continue to apply for such investments, it said.

According to analysts, the measures will help these companies to attract long term funds from insurance companies and help them in overcoming liquidity crunch.

Among other measures, the single investee debt exposure limits in housing finance companies have been enhanced to 20 per cent of equity plus free reserves from existing 10 per cent limit.

The 20 per cent limit mentioned above can be further increased by an additional 5 per cent with the prior approval of board of company, the notification said.

The group and promoter group exposure norms will continue to apply on the investments made in a housing finance company, it said.

These decisions were taken after representations from Housing finance companies and infrastructure finance companies.

nsurance companies will now have more leeway to invest in sectors such as IT and pharma. The Insurance Regulatory and Development Authority has increased the sector specific exposure limit for investments by insurers from 15 per cent to 20 per cent of their total investment.

Hitherto, insurers, both life and non-life, were permitted to take an exposure in a specific sector up to 15 per cent of their investments (which includes debt and equity), with the exception of banking and financial services where the limit is 25 per cent and infrastructure where there is no exposure limit.

According to IRDA investment norms, at any point of time, insurers are permitted to have excess weightage beyond 15 per cent in only one industrial sector (except BFSI and infrastructure sectors).In a circular issued on Wednesday, the regulator observed that the industrial weightage vis-a-vis the benchmark indices is dynamic and at present the IT industry contributes more than 15 per cent to the benchmark indices. As the weightage keeps on changing from time to time, the regulator said it has decided to give general permission to have a further exposure of 5 per cent in one industrial sector (not applicable to BFSI).

“This was a long pending request from the industry. We will be now able to allocate more funds to other sectors such as IT and pharma, which have been performing very well,” said the chief investment officer of a private life insurer.

For raising the investments in a specific sector, insurers are required to take prior permission from their board.

IRDA also relaxed norms for fixed deposit investments in the promoter group of insurance companies.

“Considering the representations from the industry and the Life Insurance Council, we have decided to permit fixed deposits, as stated in the regulations, in promoter group scheduled banks within the 5 per cent limit prescribed for Promoter Group subject to the overall limits,” said the regulator.

TAX AUDIT

An Assessee is liable to get his Tax Audit done by a Chartered Accountant mandatorily, if in the previous year,

1.The Person is carrying on business and his Total Sales/Turnover exceeds Rs. 1 Crore (Limit increased wef 1st April 2012) or

2.The Person is carrying on Profession, and his Gross Receipts exceed Rs. 25 Lakhs (Limit increased wef 1st April 2012) or

3.The Person is carrying on business or profession and is covered under the provisions of section 44AD, 44AE, 44AF, 44BB or 44BBB and claims that his income from the said business is lower than the deemed profits and gains computed under the relevant section

The Due Date of filing of Income Tax Return of an Assessee liable to get his Tax Audit done under Section 44AB is 30th September. In case of Corporate Assessee’s who are required to furnish a report under Section 92E for International transactions – the due date is 30th Nov.

For all other assessee’s who are not liable to get their Tax Audit done under Section 44 AB – the Due Date of filing of Income Tax Return is 31st July.

▪ Recommended Read: Income Tax SlabsIn case an Assessee is liable to get his Accounts audited by an Accountant under any other Law for the same accounting period, the assessee is not mandatorily required to get his audit done again and is only required to submit a report in the form mentioned below. However, if the Accounting Year is different from the Accounting Year for which the Audit was done under any other Act, the Tax Audit would be required to be conducted again as per the Income Tax Act (Circular No. 561 dated 22-05-1990 issued by CBDT)

Tax Audit efiling

As per Notification No. 34 dated 1st May 2013, efiling of Tax Audit report is mandatory from the assessment year 2013-14 onwards.

▪ Recommended Read: FAQ’s on Tax Audit efilingHowever, the CBDT vide F. No. 225/117/2013/ITA.II dated 26th Sept has decided to relax the requirement of efiling of tax audit report. The CBDT has announced that the assessees having difficulties in uploading the tax audit reports online may furnish the same manually before the jurisdictional officer. This report shall however be submitted electronically on or before 31st Oct. (Download Full Notification)

As per Rule 6G, tax audit report is to be furnished in Form 3CA & Form 3CB and the particulars required to be furnished along with these tax reports should be in Form 3CD.

1.Form 3CA & Form 3CD- These Forms are used in case where the Accounts of the business or profession of a person have already been audited under any other Law. (Download excel utility for efiling tax audit report in Form 3CA & Form 3CD)

2.Form 3CB & Form 3CD– These Forms are used in case where the Accounts of the business or profession have not been audited earlier.(Download excel utility for efiling tax audit report in Form 3CB & Form 3CD)

Computation of Total Turnover for the purpose of Tax AuditICAI has through a Guidance Note clarified the following points:-

1.Where a person is carrying on 2 Business/2 Professions – the total turnover of both the businesses shall be clubbed together and tax audit shall be liable to be conducted if the Total Turnover exceeds Rs. 1 Crore/ Rs. 25 Lakhs as the case may be.

2.Where a person is carrying on business as well as profession and the

Turnover of the business is Rs. 1.2 Crore and the Gross Receipts of the profession is Rs 22 Lakhs. In such a case, ICAI has clarified through a Guidance Note that the Assessee is liable to get the Tax Audit done of both the business as well as profession because the Gross Receipts from the business exceed the limit of Rs. 1 Crore. However, if his Total Turnover was Rs. 95 Lakhs and Gross Receipts from business was Rs. 22 Lakhs, he would not be required to get his Tax Audit done.

3.In case where a person has a total turnover of Rs. 98 Lakhs and has sold a Car for Rs. 8 Lakhs. In such a case, the total amount on adding up becomes Rs. 1.06 Lakhs i.e. above Rs. 1 Crore. Confusion arose whether the person is liable to get an audit done in this case and ICAI has clarified that the turnover will not include any amount on the sale of the fixed asset as it was held by the person for business use and not for the purpose of sale.

ICAI has further clarified that the amount received from the following items shall not be included while computing the Total Sales/Total Turnover/ Gross Receipts:-

▪ Sale Proceeds of Fixed Assets▪ Sale Proceeds of Assets held as Investments▪ Rental Income▪ Income by way of Interest unless assessable as Business Income▪ Any expense which is reimbursable to the Agent by the Client

Penalty for Non Compliance of Section 44AB

Non Compliance of the provisions of this act shall attract Penalty under section 271B of the Income Tax Act. If any person required to get his audit done under section 44AB fails to do so before the specified date shall be liable for penalty of ½% of the turnover/gross receipts subject to a maximum penalty of Rs. 1,50,000

However, Section 273B states that no penalty shall be levied under section 271B if there is a reasonable cause for such failure. Some instances which have been accepted by the Tribunals/Courts as “Reasonable Cause” are:-

1.Resignation of the Tax Auditor and Consequent Delay2.Death or physical inability of the partner in charge of the Accounts3.Labour Problems such as strikes, lock-outs for a long period4.Loss of Accounts because of Fire/Theft etc. beyond the control of the

Assessee5.Natural Calamities

Revision of Tax Audit Report

Tax Audit Report efiled cannot be revised under normal circumstances. However, in case the Accounts are revised in the following circumstances, the Audit Report efiled can also be revised:-

1.Revision of Accounts of a Company after its adoption in the Annual General Meeting

2.Change in Law with Retrospective effect3.Change in Interpretation of Law (Eg: CBDT Circular, Notifications,

Judgements etc.)In case the Tax Audit report efiled is revised, the Auditor shall state that it’s a Revised Report and shall also state the reasons for the same.

Limitation on CA’s for the number of Tax Audits

The Maximum no. of Tax Audit Assignments under Section 44AB which can be taken by a CA has been restricted to 45 by ICAI. Thus if a firm has 4 partners, the maximum no. of Tax Audits that can be taken by a firm would be 45*4=180. If the Firm undertakes all the 180 Tax Audit Assignments, the partners would not be in a position to undertake any tax audit assignment in their personal capacity. Now that tax audit efiling is mandatory, the chartered accountant conducting the tax audit would also be required to prepare the tax audit report in electronic format.

E filing of Audit report has been made mandatory for assessees from assessment year 2013-14. CBDT has notified Income-tax (3rd Amendment) Rules, 2013 vide NOTIFICATION NO. 34/2013 [F.NO.142/5/2013-TPL]/SO 1111(E), DATED 1-5-2013.Under these rules ,various rules regarding Income tax return for assessment year has been amended. This will be additional work and expense for assessees who's accounts are liable to audited under specified sections . After this notification ,CAs will charge more fees from their clients to submit Audit report in e filing compliant. Further it will  also be a headache for CA as manual  tax audit report is much easier to fill , however in e filing, you have to file each and every column ,cell at right place and in right format ,otherwise audit report will not be validated and XML file can not be generated.So it is challenging Job for CAs also.

As per Notification 34/2013 dated 01.05.2013, e filing of Audit report under following section is mandatory from assessment year 2013-14.

4.Audit report under Sec. 44AB in respect of books of account;

5.Audit report under Sec. 92E in respect of international transaction; or6.Audit report under Sec. 115JB in respect of MAT computation.Rule 12 has been suitably amended :In sub-rule(2), the following proviso shall be inserted, namely:- 

"Provided that where an assessee is required to furnish a report of audit under sections 44AB, 92E or 115JB of the Act, he shall furnish the same electronically."; 

INCOME-TAX (THIRD AMENDMENT) RULES, 2013 - AMENDMENT IN RULE 12 & SUBSTITUTION OF FORMS SAHAJ (ITR-1), ITR-2, ITR-3, SUGAM (ITR-4S), ITR-4 AND ITR-V

NOTIFICATION NO. 34/2013 [F.NO.142/5/2013-TPL]/SO 1111(E), DATED 1-5-2013

In exercise of the powers conferred by section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:—

1. (1) These rules may be called the Income-tax (3rd Amendment) Rules, 2013.

(2) They shall be deemed to have come into force with effect from the 1st day of April, 2013.

2. In the Income-tax Rules, 1962 (hereinafter referred to as the said rules), in rule 12,—(a) in sub-rule (1),-

(A) for the figures "2012", the figures "2013" shall be substituted;(B) in item (a),—

(i) in sub-item (iii), after the words "income from race horses", the words "and does not have any loss under the head" shall be inserted;(ii) for the proviso, the following proviso shall be substituted, namely:—"Provided that the provisions of this clause shall not apply to a person who,-

(I) is a resident, other than not ordinarily resident in India within the meaning of sub-section (6) of section 6 and has,—

(i) assets (including financial interest in any entity) located outside India; or(ii) signing authority in any account located outside India;

(II) has claimed any relief of tax under sections 90 or 90A or deduction of tax under section 91; or(III) has income not chargeable to tax, exceeding five thousand rupees.";

(C) in clause (ca), for the proviso, the following proviso shall be substituted, namely:—"Provided that the provisions of this clause shall not apply to a person who,-

(I) is a resident, other than not ordinarily resident in India within the meaning of sub-section (6) of section 6 and has,—

(i) assets (including financial interest in any entity) located outside India; or(ii) signing authority in any account located outside India;

(II) has claimed any relief of tax under sections 90 or 90A or deduction of tax under section 91; or(III) has income not chargeable to tax, exceeding five thousand rupees.";

(b) in sub-rule(2), the following proviso shall be inserted, namely:-"Provided that where an assessee is required to furnish a report of audit under sections 44AB, 92E or 115JB of the Act, he shall furnish the same electronically.";(c) in sub-rule (3), in the proviso,-

(A) in clause (a),—

(i) for the words "an individual or a hindu undivided family", the words "a person, other than a company and a person required to furnish the return in Form ITR-7" shall be substituted;(ii) for the words "ten lakh rupees" the words "five lakh rupees" shall be substituted;(iii) for the figures "2012-13", the figures "2013-14" shall be substituted;

(B) after clause (aaa), the following clause shall be inserted, namely:-"(aab) a person claiming any relief of tax under section 90 or 90A or deduction of tax under section 91 of the Act, shall furnish the return for assessment year 2013-14 and subsequent assessment years in the manner

specified in clause (ii) or clause (iii);"(C) in clause (b), after the words, brackets and figure "in clause (i)", the words, brackets and figures "or clause (ii) or clause (iii)" shall be inserted.

(d) in sub-rule 4, after the words, brackets and figures "of sub-rule (3)", the words and figures "and the report of audit in the manner specified in proviso to sub-rule (2)" shall be inserted.(e) in sub-rule (5), for the figures "2011", the figures "2012" shall be substituted.

4. In the said rules, in Appendix-II, for "Forms SAHAJ (ITR-1), ITR-2, ITR-3, SUGAM (ITR-4S), ITR-4 and ITR-V, the "Forms SAHAJ (ITR-1), ITR-2, ITR-3, SUGAM (ITR-4S), ITR-4 and ITR-V" shall be substituted.

entral Excise Audits – Practical Perspective for Assessees

Central Excise Audits have always been considered as grinding and comprehensive for the assesses because of nature of duty and complicated legal structure. The clearances, manufacture records, cenvat, job work, returns, stock, valuation, registers and other all sought of records is a clear indication of the depth required to ensure a smooth and hassle free audit is taken by the assessee.

In this write-up, our intent is to discuss on the length & breadths of the excise audit with a practical blend. The following shall be few aspects out of the major avenues in which this article can be sub-visited.

a)  Frequency of Auditsb)  Governing Legal Provisionsc)  Discussion on Departmental Manuald) Common parts of Standard Audit Notice

e) Most common areas of Audit:

a. Standard Audit Programme – Department Manualb. Classification of Major Inputs & Outputsc. Availment of Exemption based on classificationd. Documentation & Recordse.  Job Work Proceduresf.  Cenvat Proceduresg.  Export Proceduresh. Valuation Proceduresi. Reconciliation Proceduresj. Other Miscellaneous Procedures

f) Ratios / Trends are Keyg) Role of Pre-Audit is Essentialh) Conclusion

Let’s now discuss these at length.

a) Frequency of Audits

As per EA-2000 norms of Central Excise Audits, the following shall be the audit frequency.

Amount of annual total duty (Cash + envat) paid by the assesseeAbove 3 CroresBetween 1 Cr – 3 CrBetween 50 Lacs and 1 CroresLess than 50 Lacs

b) Governing Legal Provisions

(i) As per section 11A (5) – Show Cause Notice Provisions,

Where, during the course of any audit, investigation or verification, it is found that any duty has not been levied or paid or has been short-levied or short-paid or erroneously refunded for the reason mentioned in clause (a) or clause (b) or clause (c) or clause (d) or clause (e) of sub-section (4) but the details relating to the transactions are available in the specified record, then in such cases, the Central Excise Officer shall within a period of five years from the relevant date, serve a notice on the person chargeable with the duty requiring him to show cause why he should not pay the amount specified in the notice along with interest under section 11AA and penalty equivalent to fifty per cent of such duty.

(ii) Special Audit provisions under 14A & 14AA

If at any stage of enquiry, investigation or any other proceedings before him, any Central Excise Officer not below the rank of an Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise, having regard to the nature and complexity of the case and the interest of revenue, is of the opinion that the value has not been correctly declared or determined by a manufacturer or any person, he may, with the previous approval of the Chief Commissioner of Central Excise, direct such manufacturer or such person to get the accounts of his factory, office, depots, distributors or any other place, as may be specified by the said Central Excise Officer, audited by a cost accountant or chartered accountant, nominated by the Chief Commissioner of Central Excise in this

behalf. {Section 14A of Central Excise Act,1944}

If the Commissioner of Central Excise has reason to believe that the credit of duty availed of or utilised under the rules made under this Act by a manufacturer of any excisable goods—

(a) ...(b) ..

he may direct such manufacturer to get the accounts of his factory, office, depot, distributor or any other place, as may be specified by him, audited by a cost accountant or chartered accountant nominated by him.  {Section 14AA of Central Excise Act,1944}

(iii) Power of Auditors / Departmental officers to verify records

Every assessee, and first stage and second stage dealer shall, on demand make available to the officer empowered under sub-rule (1) or the audit party deputed by the Commissioner or the Comptroller and Auditor- General of India, or a cost accountant or chartered accountant nominated under section 14 A or section 14 AA of the Act the records as specified under Rule 22 of Central Excise Rules, 2002. {Rule 22 of Central Excise Rules , 2002}

c) Discussion on departmental manual – Few Important Abstracts

a. Major ingredients of assessment

i. Classification and rate of dutyii. Valuation

iii. Quantity Removediv. Cenvat Credit

b. Procedure of Excise Audit 2000

The steps in brief are mentioned below. It is important that the auditor records all of the steps, in Working Papers, as he goes along.

i.  Selection of Assesseeii.  Preliminary or Desk Review.iii. Gathering Information about the Assessee and the Systems followed by him.iv. Evaluation of the Internal Controls.

1.  Walk-through2. ABC Analysis

v. Revenue Risk analysis.vi. Trend analysis.vii. Developing the Audit Plan.viii. Tour of the Premises/Plantix. Verificationx. Summarising Audit Findings.xi. Informing the Divisional Deputy/Assistant Commissioner of major audit points.xii. Reviewing results with the Assessee.xiii. Compliance of Audit objections.xiv. Future Compliance.xv. Reporting.xvi. Audit Follow up:

d) Common parts of standard show cause notice.

a.  Part – A – “The Internal Audit Party headed by Shri ..... will take up the audit of the accounts/records of your unit on any day after 15 working days of the issue of this

letter. It is requested that the following documents for the last five year or the period not taken up for audit already. which ever is applicable, may be furnished immediately to this office.”

b. Part – B – Documents most commonly seeked.

i. Copies of Balance Sheet alongwith Schedules and Profit & Loss account alongwith Annexures and notes to the accounts, Trial Balance and Annual Financial Statement.

ii. Annual returns submitted to the Registrar of Companies, Sales Tax, Income Tax Returns along with Annexures (Form 3 CD).

iii. Director's reports

iv. Returns if any submitted to Banks/Financial Institutions.

v. Cost Audit, Tax Audit and Internal Audit Reports, wherever applicable.

vi. Date of last audit;

vii.  Copy of Central Excise Registration;

viii.  List of commodities manufactured with process of manufacture/dealt in specifically detailed out format

ix. Statement showing production, clearance, value & duty paid through PLA & Cenvat for

the last five year or the period not taken up for audit already. may be enclosed. Cenvat availed on inputs, Capital goods and input services may also be given in a separate chart (The Statement should tally with ER-I).

x.  List of records maintained as required to be submitted to RO as per sub Rule (2) of Rule 22 of the Central Excise Rules, 2002

xi. Copies of ER-4, ER-5, ER-6 & ER-7 return.

xii.  PLA & Cenvat Account Details

c.  Part-C – Voluntary compliance of Audit Objections - For voluntary compliance of the Audit objections raised by the Audit parties, there exists a provision under Section 11A (2B) of the Central Excise Act wherein only applicable excise duty and interest can be paid on the spot and a letter seeking waiver of penalty/show cause notice can be given by the assessee thus leading to better compliance and less litigations

d. Part D- Annexure for detailed mix of records required.

e) Most common areas of audit

1) Standard Audit Programme - Different steps in auditing are -

Preparatory or preliminary review: In this phase the audit party gathers as much relevant information as possible about the assessee and its operations in the office. The details to be gathered are, reason for selection, result of last audit, profile of the assessee giving details of ownership, goods manufactured etc. private records, special procedures, revenue realised, details of anti-evasion action if any, income tax returns, sales tax returns, annual reports, Cost audit

reports, changes in law during the audit period, classification and price declaration, etc.

Gathering and documenting the systems information: This phase starts as soon as the party reaches the unit. The party gathers and documents systems information by interviewing key personnel and tries to understand the organisational pattern, obtains annual reports and reports submitted to other departments/institutions, studies tax accounting systems. The auditors also find out about trading activity, captive consumption, exports, purchase procedure and policy, imports, job work, ISO reports and other revenues.

Tour of the premises/plant: This is a very important element of the audit programme. The audit party gets an opportunity to physically verify many facts as understood during the first two phases and clarify doubts in this phase. The tour should cover all areas and should be thorough.

Evaluation of internal controls: An understanding of the organisational chart of the unit, review of accounts and general ledger and a general systems review enables the auditor to understand and study the impact of various subsystems that have an impact on indirect tax revenue. The evaluation of internal controls involves study of tax accounting, revenue accounting and expenditure accounting. ‘Walkthrough’ method can be a very effective tool in evaluation of internal control.

Risk loss analysis (Reasonableness test): Based on the studies made in the earlier steps, the audit party has to analyse

and work out what would be the risk to revenue because of deficiencies of accounting system and what would be reasonable. The analysis will be used for development of Audit plan.

Trends analysis: Study of trends in revenue, modvat availment, profit, prices and quantum of the items manufactured over a period will help the audit party in identifying areas which are to be looked into.

Development of Audit plan: After completing all the steps detailed above, the auditors develop an audit plan in a narrative or list format which will be consistent with the complexity of the audit.

Verification in accordance with the plan: The Audit Programme has detailed guidelines for verification of each and every aspect of the audit work and auditors are expected to use the guidelines and other techniques effectively to achieve best results.

Preparation of audit findings: After completion of the audit, audit findings are to be prepared. Every finding should be substantiated with adequate evidence in the relevant Working Papers.

Review of results with the assessee: Findings with Working Papers to substantiate the findings especially relating to short levies are to be handed over to the assessee and reviewed. Wherever the assessee agrees with the findings, he may be persuaded to pay the amount and pay the correct duty in future. Where the findings relate to procedural deficiencies, an

undertaking will be sought from the assessee about future compliance.

Review with the Range officer/Divisional Asstt. Commissioner: The audit party should also have a discussion with the concerned RO/AC before preparing the final Audit report. This will ensure greater accuracy in the report.

Finalisation of Report: The final report will contain the details of findings of the audit party along-with results of review with the assessee and the Range Officer/Divisional Asstt. Commissioner.

2) Classification of Major Inputs & Outputs

a. Classification under central excise is an avenue of extreme significance. The rate of duty, the benefits of tariff and based notifications are all dependent on the classification of such item.

b. It is imperative for the assessee to ensure that proper list of items manufactured and raw material purchased is well documented along with its relevant classification tariff heads

c. "Interpretative Rules" of CETA, 1985 must be adhered to strictly.

d. Necessary judgements clarifying the classification of the product is also an essential classification procedure.

3) Availment of Exemption based on classification

a. If any exemption is available to any commodity, the same may be ascertained and the applicable rate of duty should be determined. If such exemption is subject to certain conditions, it shall be necessary to follow those conditions.

b. Necessary judgements clarifying the compliance of the conditions are also an essential exemption procedure.

4) Documentation & Records

a. Invoice

i. Removals only on invoice (Refer Rule 11)ii.  Ensure Proper format & Serial numberii.  Authorisations / Authenticationsiv. Number books / Intimationsv. Computerised Invoicesvi. Cancellation of invoice proceduresvii. Supplementary Invoice procedures

b. Private records as detailed in Rule 22

i.  Records shall mean all the records prepared or maintained by the assessee for accounting of transactions in regard to receipt, purchase, manufacture, storage, sales or delivery of the goods including inputs and capital goods. All accounts, agreements, invoice, price-list, return, statement or any other source document ,whether in writing or in any other form shall be treated as records. Source documents are those documents which form the basis of accounting of transactions and include sales invoice, purchase invoice, journal voucher, delivery challan and debit or credit note.

c. Statutory records

i. Income tax returns, ROC returns, Sales tax returns.

d. Excise registers (including cenvat registers)

e.  Excise returns – ER-1 to ER-8 (as applicable) , PLA & other details.

f.  Computerised records – Audit trail justifications

5) Job Work Procedures

a. Ensuring proper job work proceduresb. Job Work registersc. Inter-unit job work proceduresd. Reversals under Cenvat Credit Rules,2004e. Proper implementation of challan system is also essential

6) Cenvat Procedures

a. Cenvat should be availed as per definitions of Rule 2 of Cenvat Credit Rules, 2004 in regard to capital goods, input services and inputs and supplemented with rule 9 and rule 6 of CCR, 2004.

b. Proper reversals under Rule 3(5) / (5A) / (5B) and complementing invoice and challan procedures

c.  Rule 6 compliance for manufacture of dutiable and exempt goods simultaneously (or services where applicable)

d. Where the input service is distributed the same shall be as per 7A of CCR, 2004.

e.  Compliance of other cenvat procedures as applicable.

7) Export Procedures

a. The conditions and procedure relating to export without payment of following type of duties are contained in Notification Nos. 42/2001-Central Excise (N.T.) to 45/2001-Central Excise (N.T.), all dated 26th June, 2001 issued under rule 19 of the Central Excise Rules, 2002

b. The conditions and procedure relating to export under claim of rebate are contained in Notification 19/2004-Central Excise (N.T.) dated 6th September 2004 and notification No. 20/2004-C.E. (N.T.) dated the 6th September, 2004 issued under rule 18 of the Central Excise Rules, 2002

c. Refund of any duty of excise is governed by Section 11B of the Central Excise Act, 1944. By definition, refund includes rebate of duty paid on goods exported out of India or on materials used in the manufacture of goods exported out of India.

d. Proper presentation of refund claims and concerned limitation periods

e. ARE-1/ ARE-3, CT-3/1, CT-3 registers, LUT’s , Shipping bills and other documents to be properly maintained.

8) Valuation Procedures

a. Valuation as per Section 4 / 4A & Section 3 (whichever applicable)b.  Proper costing sheets of the products to be documentedc. Valuation procedures and rules to be complied with strictlyd. Refer 2012 (283) E.L.T. 161 (S.C.) – Fiat India Landmark judgement

9) Reconciliation Procedures

a. Reconciliation of stock and raw materialb. Consumption and production reconciliationc. Sales as per excise and sales tax reconciliationsd. Cenvat reconciliationse. Other reconciliations as per affairs of the company

10) Other Miscellaneous Procedures

a. Compliance of Warehousing proceduresb. Compliance of SSI proceduresc. Compliance of testing , re-testing and others procedures.d. Procedural correspondences required with department

f) Ratios / Trends are key

a. This include analysis of important ratios for last three years having implication under Central Excise such as Cenvat Credit availed / Total Duty payable, Cenvat Credit / PLA a/c, Exempted / Excisable turnover, Electricity Units consumed / Finished goods manufactured etc. The main intention here is to notice unusual trends.

g) Role of Pre-Audit is Essential

a. It is imperative that the Auditee/manufacturer conducts a pre-audit to the actual audit to ensure that all the issues are identified. The procedural non compliance shall be corrected while any duty/interest if identified shall be paid duly.

g) Conclusion

Excise audit requires a precise and careful handling by the assessee companies. Also as practically seen in several cases the audit objections are normally made the part of show cause notice in toto by the department unless a strong and technically sound reply is filed by the assessee. Hence the same even gains more significance.  For voluntary compliance of the Audit objections raised by the Audit parties, the provisions of Section 11A(2B) can be adhered to.

COMPANY AUDIT

The companies act, 2013 has come into existence on 29.08.2013 that replaces a nearly six decade-old legislation and overhauls the way corporate function and are regulated in the country. This article contains the description of some provisions related to audit and auditors which have been modified in companies Act, 2013. Appointment of first auditor in case of every company except govt. company or company owned/ controlled by CG/SG/CG and SG [139(6)]:- Appointment of first auditor shall be made by board within 30 days of registration of company. If Board fails to appoint the first auditor within given time then it shall inform to members and members shall make the appointment of first

auditor within 90 days of information at an EGM. The First Auditor shall hold office till the conclusion of first AGM. NOTE: No time period is mentioned for Board to inform the members about the Non appointment of first auditor. Appointment of first auditor in case of govt. company or company owned/ controlled by CG/SG/CG and SG139(7):- Appointment of first auditor shall be made by CAG within 60 days of registration of the company. If CAG fails to appoint the first auditor within given time then Board of such company shall appoint first auditor within 30 days. If Board fails to appoint the first auditor within given time then it shall inform to members and members shall make the appointment of first auditor within 60 days of information at an EGM. The First Auditor shall hold office till the conclusion of first AGM. NOTE: No time period is mentioned for Board to inform the members about the Non appointment of first auditor. Appointment of Subsequent Auditor in case of every company except Govt. Company or company owned/ controlled by CG/SG/CG and SG[139(1)]:- Appointment of auditor shall be made by members at First AGM and every subsequent 6th AGM. Company shall intimate the auditor about appointment. After intimating, company shall obtain written consent and certificate (in accordance with the conditions prescribed in section 141) from auditor. Then, company is required to file a notice with the registrar about the appointment within 15 Days of the meeting. Note: The Auditor shall hold office for a period of 5 Years. Note: Company can ratify such appointment at any AGM falling between 5 years from such appointment Conditions for appointment of Subsequent Auditor in case of Listed Companies or companies of such class [139(2)]:- If an individual is appointed as an auditor for 1 term i.e. for 5 consecutive years then that individual will not be eligible for reappointment for next 5 years from the expiry of his term as an auditor of company.Whereas, if an audit firm

is appointed as auditor for 2 term i.e. for 10 consecutive years then that audit firm will not be eligible for reappointment for next 5 years from the expiry of its term as an auditor of company Note: Audit firm having common partner to the old audit firm of the company will not be eligible for appointment. Note: Any existing listed company is required to comply with the above mentioned provisions within 3 years from the commencement of this act. Appointment of Subsequent Auditor in case of Govt. Company or company owned/ controlled by CG/SG/CG and SG [139(5)]:- Appointment of auditor shall be made by CAG within 180 days from the commencement of financial year. The Auditor shall hold office for a till the conclusion of AGM Appointment of auditor in Casual Vacancy in every company except Govt. Company or company owned/ controlled by CG/SG/CG and SG [Section 139(8)(i)]:- If casual vacancy is arising by resignation then vacancy shall be filled by the Company in its meeting within 3 months from the date of recommendation of the Board. Whereas casual vacancy is arising by other than resignation then vacancy shall be filled the Board within 30 days. Appointment of auditor in Casual Vacancy in case of Govt. Company or company owned/ controlled by CG/SG/CG and SG [Section 139(8)(ii)]:- Casual vacancy shall be filled by CAG within 30 days. If CAG fails to fill the vacancy within given time then BOD shall fill the vacancy within 30 days. Rotation of Auditors [ 139(3)]: 1. Member can rotate auditing partner and his team for any interval2. Audit can be conducted by 1 or more auditor Audit Committee[177] and  Role Audit Committee  in

appointment of auditors[139(11)]:- Every Listed Company shall form Audit Committee consisting of minimum 3 directors. Whereas, Majority of directors should be independent and ability to read & understand financial statement Role: Appointment, remuneration and term of appointment of auditor shall be made after considering the recommendations of the Audit Committee Note: Committee existing before commencement of this act shall be reconstitute within 1 year of commencement in accordance of above mentioned provisions Duty of auditor when he or it resign [140(2)]:- Auditor is required to file a statement specifying the reasons and fact of resignation within 30 days of resignation with ROC and company or CAG in case of Govt. Companies. If auditor fails to comply with above mentioned provisions then he shall be punishable with fee of Rs. 50,000- Rs. 500,000. Duty of Company in case of representation received from auditor [140(4)]:-Company is required to send a copy of the representation to every member and if copy of representation is not sent then a copy shall be filed with registrar. Role of Tribunal in case auditor found guilty of fraud [140(5)]:- Tribunal may by itself or on application by CG/any concerned person order to change the auditor. And if the application is made by CG then tribunal shall pass an order within 15 days of application. In case of final order is passed then the auditor shall not be appointed for a period of five years in any other company and be further liable for monetary as well as penal punishment. Disqualifications of Auditors [141(3)]:- 1. If any partner of the person  holding  interest  or  security  in  the  company  or  its subsidiary,  or  of  its  holding  or  associate  company  or  a  subsidiary  of  such  holding company 

2. If any  relative  of the person holding  interest  or  security whose face value exceeds Rs. 1000 or such sum as may be prescribed in  the  company  or  its subsidiary,  or  of  its  holding  or  associate  company  or  a  subsidiary  of  such  holding company. Note: Relative means member of HUF, Husband and wife or related with person as may be prescribed 3. If any  relative  of the person is a director or employee of director or key managerial personnel 4. Limit of indebt or guarantee is not mentioned and specified that any amount which may be prescribed 5. If person or firm has business relationship with in  the  company  or  its subsidiary,  or  of  its  holding  or  associate  company  or  a  subsidiary  of  such  holding company or associate company 6. Any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialized services Note: consulting and specialized services means- 1. accounting and book keeping services;2. internal audit;3. design and implementation of any financial information system;4. actuarial services;5. investment advisory services;6. investment banking services;7. rendering of outsourced financial services;8. management services; and9. any other kind of services as may be prescribed10. Any person convicted by court of offence involving fraud and 10 years has not elapsed from the date of such conviction11. Person holding appointment as auditor of more than 20 companies.12.Person in full time employment Remuneration of Auditors [142(1)]:- Remuneration shall be decided by members at a general meeting except for the remuneration of first auditor which shall be decided by board.

 Power of Auditor [143(1) Proviso]:- Auditor of holding company has the right of access to the records of all subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries Duties of Auditor [143(9),(12),(13),(15) and 146]:- 1. Every auditor need to comply with auditing standard [143(9)].2. Auditor shall report the fraud to the CG within prescribed time and manner and the same shall not be construed as breach of duty[143(12) & (13)]3. If auditor fails to comply with above mentioned provisions then he shall be punishable with fee of Rs. 100,000 Rs. 500,000 [143(15)].4. Auditor has to attend general meeting unless exempted by the company [146]. Eligibility of LLP's as auditors[141(2)]:- LLP's can be appointed as auditors of company but only chartered accountant partners are authorized to act  and sign on behalf of firm. Auditor not to render certain services [144]:- Auditor cannot provide following services to the company, its holding company or its subsidiaries, or associate company: 1. Accounting and book keeping service; Internal audit;2. Design and implementation of any financial information system;3. Actuarial services;4. Investment advisory services;5. Investment banking services;6. Rendering of outsourced financial services;7. Management services; and8. Any other kind of consultancy services. Note: If auditor is providing such services before the commencement of this act then he has to comply with the above mentioned provision before the closure of the first financial year after the date of such commencement.