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Unit 2: Auditing Practices

8. The audited financial statements, together with a report by the Board of Directors, must be Notes
sent to shareholders and trustees for debenture holders at least ....................... before the
date of the annual general meeting.
9. There is no need to prepare ....................... Accounts.

2.3 Tax Audit

Every company with a total sales turnover or gross receipts over ` 4 million must have its
accounts audited in accordance with the Income tax Act. This audit is in addition to the statutory
audit under the Companies Act and mainly involves verification and confirmation of certain
facts, figures and information that are generally required by the Tax authorities in the course of
assessment proceedings and that broadly relate to the following:
1. Books of account examined.

2. Methods of accounting employed and their consistency.
3. Methods of valuation and quantitative reconciliation of inventories.
4. Amounts of expenditure incurred under various headings that are not allowable in full or
that result indirect benefits to directors or their relatives or officers.
5. Borrowings and repayments of certain types of loans.
6. Prior-period adjustments.
7. Deductions of tax at source and deposit thereof with appropriate authorities.

These particulars must be certified as true and correct based on the auditor’s opinion land
information and explanation received.
The tax audit requirements also apply to other types of business entities whose total sales
turnover or gross receipts in business exceed ` 4 million and to entities carrying on a profession
whose gross receipts in the profession exceed ` 1 million in any year.

Notes Every company with a total sales turnover or gross receipts over ` 4 million must
have its accounts audited in accordance with the Income tax Act.

2.4 Cost Audit

Companies are required to maintain cost accounting records, and they may be directed by the
Government to have a cost audit. Unlike the financial audit and tax audit, which are carried out
from year to year, a cost audit is carried out only upon specific order of the Government. The
cost auditor submits a report to the Company Law Boards of the Central Government and sends
a copy to the company.

2.5 Accounting Profession

The bodies of accountants whose members are engaged in public practice in India and that are
recognized by the Government are the Institute of Chartered Accountants of India and the
Institute of Cost and Works Accountants of India. The memberships of the two bodies in 1995
were over 70,000 and 15,000 respectively. The financial audit and the tax audit of a company are
conducted by members of the former body; the cost audit is performed by members of the latter
body.

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