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Unit 13: Tax and Cost Audit

If a person is carrying on business(es), coming within the scope of sections 44AD, 44AE, 44AF, Notes
44BB or 44BBB but he exercises his option given under these sections to get his accounts audited
under Section 44AB, tax audit requirements would apply, in respect of such business(es) even if
the turnover of such business(es) does not exceed 40 lakhs. In the case of a person carrying on
businesses covered by sections 44AD, 44AE, 44AF, 44BB or 44BBB and opting for presumptive
taxation, tax audit requirement would not apply in respect of such businesses, If such person is
carrying on other business(es) not covered by presumptive taxation, tax audit requirements
would apply in respect thereof if the turnover of such business(es), other than the business
covered by presumptive taxation thereof, exceed 40 lakhs.

13.1.4 Approach to Tax Audit under VAT

The audit approach of the tax auditor under the value added tax system will be more or less
similar to the approach, which is adopted by the auditor while conducting the tax audit under
the provisions of section 44AB of the Income-tax Act, 1961. However, the reporting requirements
vary to a considerable extent.
While the auditor has to apply the basic principles of audit he has to keep in mind that the
requirements of VAT audit are different and accordingly he should design his audit programme.

While designing the audit program the auditor has to ensure that the program includes the
performance of such audit checks as would generate the information which would enable him to
ensure the following and also to draw his audit reports.

(i) The turnover of sales/purchases of goods has been properly determined keeping in view
not only the generally accepted accounting policies but the definition of turnover of sales
in the relevant VAT law. The sales turnover arrived at by applying the generally accepted
accounting policies may not be the same as required under the VAT law.

Example: The sale proceeds of a fixed asset will not form a part of turnover or sales as per
the generally accepted accounting policies but will form a part of turnover or sales for the
purpose of VAT law.
Similarly the price of goods returned is deducted from the turnover or sales even if the
returns are from the sales effected in the previous years, while under VAT law, the goods
returned are to be deducted only if they are made within the prescribed time, say six
months from the date of sale. Thus, the results of the audit procedure adopted by the
auditor should be such as will give him a reasonable assurance regarding the figures of
sales reported in the returns. Not only that, he should also be able to get the exact quantum
of the sales under reported or over reported duly classified for different tax rates and its
impact on overall tax liability. The sales as per the financial statements may include the
turnover or sales effected by all the branches, but for the purposes of VAT law the turnover
or sales of only those branches will be included which are included in one registration
certificate.

(ii) The turnover of purchases should be tested by applying audit checks as will enable the
auditor to get the purchases eligible for grant of input tax credit segregated from other
purchases. Further, the purchases on which the input tax credit is available in full and the
purchases on which it is available partially should also be ascertained correctly.

!

Caution The auditor should get the exact amount of input tax credit available; compare the
same with the credit claimed in the returns and report on the excess/short claim of the
credit in the returns filed.

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