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Advanced Auditing

Notes At present, the Companies Act contains provisions relating to maintenance of Cost Records
under section 209 (1) (d) and Cost Audit under section 233B of the Companies Act in respect of
specified industries. The Audit Committee felt that Cost Records and Cost Audit were important
instruments that would enable companies make their operations efficient and exist in a
competitive environment. The Committee noted that the present corporate scenario also included
a sizeable component of Government owned enterprises or companies operating under
administered price mechanism or a regime of subsidies. It would be relevant for the Government
or the regulators concerned with non-competitive situations to seek costing data. The Committee,
therefore, took the view that while the enabling provision may be retained in the law providing
powers to the Government to cause Cost Audit; legislative guidance has to take into account the
role of management in addressing cost management issues in context of the liberalized business
and economic environment. Further, Government approval for appointment of Cost Auditor
for carrying out such Cost Audit was also not considered necessary.

13.1 Audit(s) Under the Income Tax Act, 1961

The Income-tax Act, 1961 (hereinafter referred to as the Act) contains several provisions for audit
of accounts of public charitable trusts, non-corporate assesses and other assesses to meet the
specific objectives of the Act. Under the Act, several sections such as 12A, 35D, 35E, 44AB, 80-IA,
142 (2A), etc., require audit of accounts for tax purposes. We shall discuss the requirements of
some of these provisions from the audit angle.

Who can audit the Accounts under the Income-tax Act: Normally, in all the sections referred to
above, subject to the exceptions specifically provided, the audit is to be conducted by an
‘accountant’, as defined in the Explanation below Section 288(2) of the Act. The Explanation to
Section 288(2) defines ‘accountant’ as a Chartered Accountant within the meaning of the Chartered
Accountants Act, 1949 and any other person who is entitled to be appointed as an auditor of a
company under Section 226(2) 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-practising member of the Institute may be covered
by the definition of ‘accountant’. However, Section 7 of the Chartered Accountants Act, 1949
requires every member who practices as a Chartered Accountant to hold a certificate of practice.

Notes If a member wants to render his services which amount to “practice”, must hold a
certificate of practice.

Further, it may be noted that by the virtue of a resolution of the Council, with effect from 1 st
April 2005, a member in part-time practice (namely holding a certificate of practice and also
engaging himself in any other business and/or occupation) is not entitled to perform attest
functions including tax audit. 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.

13.1.1 Audit of Public Trusts

Section 12A of the Act deals with the conditions as to registration of trust etc. According to this
section, exemption from Income tax would be available under sections 11 and 12 of the Income
tax Act in relation to the income of any trust or institution provided the following conditions are
satisfied:

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