|
AUDIT STRATEGY-2008
“Eyes can’t see, what the mind does not know” in
this adage lies perhaps the very spirit of audit.
Seeking inspiration from these prescient words,
the committee reviewed literature pertaining to
tax audit methodologies in United States of
America and United Kingdom (Annex-C) and concluded
that there are some good techniques adopted by
those countries which can be adopted in Pakistan.
There are some clear
differences between the tax set up in Pakistan and
the models used by the western countries and these
factors have been duly considered while framing
our audit strategy.
The process of audit can be broadly classified
into three categories. There seems a clear
demarcation between these three different methods
of conducting audit but in actuality they are the
links of the same chain and are used according to
the prevalent situation. Generally speaking audit
starts from desk where the anomalies are initially
pointed out leading to subsequent culmination
through detailed and composite audit. These three
methods are as under:-
a)
DESK AUDIT
b)
DETAILED AUDIT
c)
COMPOSITE AUDIT
(a) DESK AUDIT
The Regional Tax Office Karachi has initiated a
pilot project of archiving returns of the Tax year
2008 with an idea that automated, accurate and
efficient data base is conveniently made available
to the officers. This initiative will enable them
to complete desk audit of maximum number of
returns in the minimum possible time. Ideally, all
returns should be subjected to desk audit
conducted which is a gigantic task. Therefore, it
has been suggested that a check list may be
provided to Taxation Officers enabling them to go
through the returns to ensure the accuracy of
declared information, calculation of tax and other
allied requirements. The focus should be
identification of big ticket cases (revenue
yielding / involving important legal issues) and
sending appropriate message to non-compliant
taxpayers
The returns filed, during desk audit are
scrutinized to detect any nonconformance that is
apparent from the submitted documents and
annexure. Usually, such audits include issues
related to calculation of tax liability,
depreciation claims, adjustments of tax credits
etc. These types of audits are the initial step in
the audit process and a number of issues are
settled without any interaction with the taxpayer.
The key points that need careful examination are
briefly elaborated as under (check list enclosed
as Annexure-II):
·
Checking the validity of the return
·
Verifying tax payments and their
timely deposit
·
Scrutinizing tax calculations
·
Necessary actions/corrections
Once the validity of the return has been
determined then it is studied in depth considering
the specific aspects of the return and the risk
factors involved therein which include examination
of Balance sheet, manufacturing & Trading account,
Profit & loss account, Depreciation/amortization
etc. The risk factors which require evaluation
both in corporate and non corporate cases are
separately enumerated as follows:-
i)
Risk Evaluation for Corporate Cases
ii)
Selection weightage for Corporate Cases
iii)
Risk Evaluation For Non-Corporate Cases
iv)
Selection weightage for non-corporate cases
Top......
(i)
Risk Evaluation for Corporate Cases
The broader aspects of risk evaluation for
corporate cases are summarized below:-
-
Cases where legal additions were made in prior
years and the same issue persists.
-
Cases of amalgamation/ take over during the
year.
-
Cases of group relief/group taxation.
-
Cases where claim of refund exceeds Rs. 5
million during the current tax year.
-
Cases where tax on amended income is higher by
Rs. 1 million than the tax on returned income in
any of the five preceding tax years .
-
Claim of losses (including BF losses) exceeding
Rs. 10 million.
-
Dividend income is > 20% of business
income.
-
Tax paid with return u/s 137 (Sl. No. 169/170)
exceeds by 20% of the advance tax paid u/s 147.
Balance Sheet (S . No. As per Return of
Total Income)
-
Sum total of reserves, accumulated profits,
surplus on revaluation, long term liabilities,
current liabilities, trade and other payables
etc. (S.No. 95 to 104) is equal to or more than
4 times of the paid up capital (Sl.No.94).
-
Accumulated profit & reserves (Sl. Nos. 95 + 96)
is more than 50% of the paid up capital.
-
Surplus on revaluation of assets (Sl. No. 97) is
more than 3 times of the sum total of the value
of land (Sl. No. 107), building (Sl. No. 108) &
Plant and Machinery (Sl. No. 109).
-
Capital work in progress (Sl. No. 110) is more
than Rs. 20 million.
-
Trade receivables (Sl. No. 118) are excessively
high i.e. if debtor is 4 times of 1/12th
of the sale for the year.
Manufacturing & Trading A/C P&L A/c etc.
1. Decline
in GP Rate: A-B> 2%
Where:
A=
GP to net sales ratio of preceding tax year
B=
GP to net sales ratio of current tax year
2. Decline
in NP Rate: A-B> 1%
Where:
A=
NP to net sales ratio of preceding tax year
B=
NP to net sales ratio of current tax year
3.
Purchases as per Income Tax Return vary by
10% or more as compared to the purchases declared
in the Sales Tax Return.
4.
Sales as per Income Tax Return vary by 10%
or more as compared to the sales declared in the
Sales Tax Return.
5.
Salaries and Wages (Sl. No. 16) are equal
to or more than 30% of cost of the sales (i.e. Sl
No. 16>30% of sum total of Sl. Nos. 14, 15, 17,
18, 19, 20, 21, 22, 23, & 24).
6.
Deduction on account of Profit on Debt (Sl.
No. 50) is equal to or more than 50% of the P&L
expenses (i.e Sum total of Sl. Nos. 40 to 49, & 51
to 64).
7.
Inadmissible Expenses: Accounting
depreciation and amortization, accounting gain or
loss on disposal of intangibles, donations, WWF,
and various provisions charged to the accounts are
inadmissible expenses as per Income Tax Ordinance,
2001, therefore, if sum total of these claims
(i.e. Sl.Nos.23.24, 51, 54, 55, 56, 57, 58, 59, &
60) is equal to or more than inadmissible expenses
(Sl. No. 66).
8.
Claim of Bad Debt written off (Sl. No.61)
and Obsolete Stock/Stores/Spares written off (Sl.
No. 62).
Adjustments/ Computation
of Income
- Any disclosure of loss surrendered to
holding company (Sl.No.75) and loss acquired
from the subsidiary company.
-
If
Capital Gain (Sl. No. 80) is more than 50% of
the business income (Sl. No. 79).
-
Zakat
deduction (Sl. No.84) claimed.
- Straight deduction for charitable donation (Sl.
No. 86).
Depreciation/Amortization
- Addition in assets is more than 20%.of the
opening WDV of assets or more than Rs. 20
million during the year.
- Claim of Depreciation for motor vehicle
plying for hire (Sl.No.4 of Annexure-A).
Tax Computation/Final
Tax Statement
-
Any difference in tax due
on Final Tax Regime (FTR) income (Sl. No. 123 to
150) and tax collected/deducted at source on the
corresponding income as per Annexure-C.
-
If property income (Sl. No.
152) is declared at Rs. 400,000/- and above and
progressive tax rate has not been applied.
-
Claim of tax reductions,
credits and averaging (Sl. No. 160)
Top...... (ii)
Selection weightage for Corporate Cases:
The risk
based selection criteria for corporate persons
involves detection of risk factors from all parts
of the return and assigning weightage to each item
for risk assessment. High risk cases include:
-
From broader aspects part, if three items out of
total eight items are noticed, that case should
be picked up for detailed audit.
-
From Balance Sheet part if two items out of
total five items are noticed, that case should
be picked up for detailed audit.
-
From Manufacturing, Trading and P & L part, if
three items out of total eight items are
noticed, that case should be picked up for
detailed audit.
-
From Adjustment / computation part, if two items
out of total eight items are noticed, that case
should be picked up for detailed audit.
-
From Depreciation part, if one item out of two
items is noticed, that case should be picked up
for detailed audit.
-
From Tax Computation / Final Tax Statement, if
one item out of three items are noticed, that
case should be picked up for detailed audit.
Top......
(iii) Risk Evaluation For Non-Corporate Cases
The broader aspects of risk evaluation for
non-corporate cases are summarized below:
-
Cases where legal additions were made in prior
years and the same issue persists.
-
Cases where claim of refund exceeds Rs.
500,000 during the current tax year.
-
Cases where tax on amended income is higher by
Rs. 100,000 than the tax on returned income in
any of the five preceding tax years.
-
Claim of losses (including BF losses)
exceeding Rs. 1 million.
-
Dividend income is > 50% of business
income.
-
Tax paid with return u/s 137 (Sl. No. 44/45)
exceeds by 20% of the advance tax paid u/s 147.
Manufacturing & Trading A/C P&L A/c etc.
-
Decline in GP Rate: A-B> 2%
Where:
A=
GP to net sales ratio of preceding tax year
B=
GP to net sales ratio of current tax year
-
Decline in NP Rate: A-B> 1%
Where:
A=
NP to net sales ratio of preceding tax year
B=
NP to net sales ratio of current tax year
-
Purchases as per Income Tax Return vary by 10%
or more as compared to the purchases declared in
the Sales Tax Return.
-
Sales as per Income Tax Return vary by 10% or
more as compared to the sales declared in the
Sales Tax Return.
Adjustments/
Computation of Income
1.
If Capital Gain (Sl. No. 36) is more than
30% of the business income
(Sl. No. 25).
2.
Zakat deduction (Sl. No.30) claimed.
3.
Straight deduction for charitable donation
(Sl. No. 32).
Depreciation/Amortization
1
Addition in assets is more than 10%.of
the opening WDV of assets or more than Rs.
million during the year.
2
Claim of Depreciation for motor
vehicle plying for hire (Sl.No.4 of Annexure-A).
Tax Computation/Final
Tax Statement
-
Any difference in tax due
on Final Tax Regime (FTR) income (Sl. No. 21)
and tax collected/deducted at source on the
corresponding income as per Annexure-C.
-
If property income (Sl. No.
86) is declared at Rs. 400,000/- and above and
progressive tax rate has not been applied.
-
Claim of tax reductions,
credits and averaging (Sl. No. 40).
Wealth
Statement
a.
Increase in business capital is more than
20% of the previous year.
b.
Increase in agricultural property by more
than 20% of the previous year.
c.
Increase in investment by more than 20% of
the previous year.
d.
Loans and advances exceeding Rs. 5 million.
e.
Motor vehicles worth exceeding Rs. 5
million.
f.
Furniture and fittings less than Rs.
200,000 in case of taxpayers declaring income of
Rs. 5 million and above.
g.
Default of Note 4(b) i.e. taxpayer not
submitting a balance sheet and also not attaching
a separate sheet with the wealth statement for the
assets and liabilities of the business.
h.
Default of the disclosure required as per
the Serial No. 6 of the notes to the wealth
statement i.e. non-furnishing of the details of
stocks, shares and debentures.
i.
Default of disclosure as per Sl. No. 7 of
the notes to the wealth statement i.e.
non-disclosure of the assets held in the name of
spouse, minor children and other dependants that
whether they were acquired by their own resources
or by funds transferred by the taxpayer etc.
J Default of the disclosure required as per the
Serial No. 9 of the notes to the wealth
statement i.e. non-furnishing of wealth
reconciliation statement where wealth statement is
filed for the first time.
Class of cases
It has been proposed that the following
classes of persons may be selected for detailed
audit considering the historical data and market
information:
·
Hospitals / Nursing Homes / Leading
consultants
·
Schools / education centers /tuition
centers
·
Jewelers
·
Beauty Parlors / cosmetic centers /
event managers
·
Flour Mills / Steel and Cement
related businesses
·
Haj – Umrah travel agents
Top......
(iv) Selection weightage for non-corporate
cases:
-
From broader aspects part, if two items out of
total six items are noticed, that case should be
picked up for detailed audit.
-
From Manufacturing, Trading and P & L part, if
two items out of four items are noticed, that
case should be picked up for detailed audit.
-
From Adjustment / computation part, if one items
out of total three items are noticed, that case
should be picked up for detailed audit.
-
From Depreciation part, if one item out of two
items is noticed, that case should be picked up
for detailed audit.
-
From Tax Computation / Final Tax Statement, if
one item out of three items are noticed, that
case should be picked up for detailed audit.
-
From Wealth Statement, if three items out of ten
items are noticed, that case should be picked up
for detailed audit
Top......
(b) DETAILED AUDIT:
Once a case is selected for audit after
discovering discrepancies in its declared
particulars through desk audit, additional and
detailed documents are now warranted for detailed
scrutiny and examination in order to conduct
detailed audit. The taxpayers whose income tax
affairs are selected for audit are thereby issued
notices to explain the detected differences and
anomalies supported by documentary evidence. This
type of audit is a comprehensive exercise
requiring probe of the record maintained by the
taxpayer and it is with the help of this
investigation that the veracity of a taxpayer’s
declarations are determined and any amendments, if
deemed necessary, are subsequently made.
A comprehensive checklist (Annex-B) has been
specifically designed to sequentially guide the
audit officers in conducting detailed audit.
Emphasis has been placed on detailed scrutiny of
the following:-
·
Specialized transactions like
pre-commencement expenses, arm’s length
transactions, amalgamation, proration of income &
expenses, re-characterization of capital gain into
ordinary income etc
·
Cash flow statement
·
Assets & Liabilities
·
Trading/ Profit & loss account
·
Tax accounting and computation chart
·
Third party information
Top......
(i)
Steps for conducting audit u/s 177:
1)
Selection of case for audit under section
177 by the CIT on the basis of risk areas conveyed
to the taxpayer while selecting the case.
2)
Assignment of case to the Taxation Officer
for conducting audit.
3)
Preparation of Work Sheet based on the Desk
Examination of Return and Financial Statements
attached thereto and areas which require thorough
examination.
4)
Based on above submission of audit plan to
A.C. showing the strategy to complete the audit
and estimated hours / time required to complete
the audit.
5)
Approval of the audit plan by the A.C.
6)
Proceeding with the audit plan by the
Taxation Officer by issuing IDR.
7)
Primary Narrative Report to provide clear
audit detection, summary of proposed
detections and their tax effect, rebuttal by the
taxpayer and any other information that helps
overall understanding. (This report may be
summarized where taxpayer’s contention has been
agreed to. Moreover, PNR may be discussed with
taxpayer in post audit conference).
8)
Completion of Audit Report and submission
to the AC for approval.
9)
Approval of audit report by A.C. If the AC
is dissatisfied with the audit report then instead
of approving it, he may order for re-audit. In
case the audit report is approved then it may
result in :
i)
Amendment of assessment under section
122(1)/(4) of Income Tax Ordinance, 2001.
ii)
Acceptance of plea of taxpayer i.e. no
amendment.
iii)
Revision of return by the taxpayer under
section 114(6) read with Section 122(3) of Income
Tax Ordinance, 2001.
Top......
(ii) Precautions before completing the audit:
(a)
Event log on the proforma available in
Audit Manual (order sheet) is to be properly
maintained. Continuous notation of calls, visits
and / or documentation which is sent or received
during the audit is to be entered therein.
(b)
Steps (3) to (5) are to be taken
simultaneously by the Taxation Officer in
consultation with Additional Commissioner
resulting in approval of audit plan by AC. IDR
should be issued in consultation with AC and it
should cover all the details and explanation
required from the taxpayer.
(c)
Step (7) & (8) may be taken simultaneously.
If the amendment of assessment under section
122(1)/(4) is envisaged then notices u/s.122(9)
should be prepared simultaneously with step (7) &
(8) so that amendment of assessment is done
expeditiously.
(d)
While amending order u/s 122(1)/(4) of
Income Tax Ordinance, 2001 only those issues of
disagreement which are confronted through notice
u/s.122(9) may be discussed and order to be passed
accordingly.
Top......
(c) COMPOSITE AUDIT:
Field audits and personal visits are part of the
audit strategy. This type of audit and field
visits are carried out only when it is inevitable
due to the reason that some facts can only be
verified through such methods. Field audit
techniques should be used prudently as they run
somewhat contradictory to the concept of taxpayer
facilitation.
In Pakistan, the power to enter and search
premises is allowed U/s 175 of the Income Tax
Ordinance 2001. However, the officers of the
department can only exercise the mentioned power
with the prior written approval of the relevant
Commissioner of Income Tax. Composite audit may be
conducted in conformance with the national audit
plan. Information sharing between the two major
wings, Income Tax & Sales Tax, of FBR with a plan
to assist one another in broadening their scope
and maximize their output. This method can allow
the audit officers to compare the taxpayer profile
and match the declarations to detect any
incoherence, concealment or false statement.
Commissioners
of Income Tax-Audit Division & Collectors of Sales
Tax (Audit) may prepare joint strategy for
composite audit of revenue yielding sectors or
classes of Taxpayers in line with the guidelines
stipulated in National Audit Program.
Top......
ANNEXURE-A
Desk Audit check list
General:
|
Item |
Yes |
No |
Proposed
Action / Remarks |
|
Return of total income for
companies |
|
|
|
|
Whether all the columns in return are
duly filled in? |
|
|
|
|
Whether all the documents along with
accounts attached? |
|
|
|
|
Whether all applicable annexures duly
filled in & attached? (See last page for
annexures) |
|
|
|
|
Tax Payments |
|
|
|
|
Whether copies of paid challans
attached? |
|
|
|
|
Whether CPR number mentioned? |
|
|
|
|
If yes, cross verify from FBR e-portal |
|
|
|
|
Tax deducted (various heads,
check separately) |
|
|
|
|
Cross verify serial # 123 to 150 with
Annex-C |
|
|
|
|
Advance tax u/s 147 |
|
|
|
|
Whether installment correctly worked
out? |
|
|
|
|
Whether all installments timely
deposited? |
|
|
|
|
Tax paid with return u/s 137 |
|
|
|
|
WWF |
|
|
|
|
Whether amount correctly worked out? |
|
|
|
|
Whether amount timely deposited? |
|
|
|
|
Donations (for credits) |
|
|
|
|
Zakat (if paid under Z & U ordinance) |
|
|
|
|
Action/Correction: |
|
|
|
|
Notice of Deficiency/short documents
issued? |
|
|
|
|
Whether Notice of Deficiency complied? |
|
|
|
Note: Examine return carefully in the light
of selection criteria/risk factors
Top......
Specific
|
Sr. # |
Item |
Yes |
No |
Proposed Action/ Remarks |
|
1 |
Whether legal additions were made in prior
years and the same issue persists? |
|
|
|
|
2 |
Whether there is any amalgamation/ take over
during the year? |
|
|
|
|
3 |
Whether group relief / group taxation claimed? |
|
|
|
|
4 |
Whether claim of refund exceeds Rs. 5 million
during the current tax year? |
|
|
|
|
5 |
Whether tax on amended income is higher by Rs.
1 million than the tax on returned income in
any of the five preceding tax years? |
|
|
|
|
6 |
Whether claim of losses (including BF losses)
exceeds Rs. 10 million? |
|
|
|
|
7 |
Whether Dividend income is > 20% of
business income?
|
|
|
|
|
8 |
Whether Tax paid with return u/s 137 (Sl. No.
169/170) exceeds by 20% of the advance tax
paid u/s 147? |
|
|
|
|
9 |
Whether sum total of reserves, accumulated
profits, surplus on revaluation, long term
liabilities, current liabilities, trade and
other payables etc. (S.No. 95 to 104) is equal
to or more than 4 times of the paid up capital
(Sl.No.94)? |
|
|
|
|
10 |
Whether sum total of accumulated profit &
reserves (Sl. Nos. 95 + 96) is more than 50%
of the paid up capital? |
|
|
|
|
11 |
Whether Surplus on revaluation of assets (Sl.
No. 97) is more than 3 times of the sum total
of the value of land (Sl. No. 107), building (Sl.
No. 108) & Plant and Machinery (Sl. No. 109)? |
|
|
|
|
12 |
Whether Capital work in progress (Sl. No. 110)
is more than Rs. 20 million? |
|
|
|
|
13 |
Whether Trade receivables (Sl. No. 118) are
excessively high i.e. if debtor is 4 times of
1/12th of the sale for the year?
|
|
|
|
|
14 |
Whether Decline in GP rate is 2% of the prior
year?
|
|
|
|
|
15 |
Whether Decline in NP rate is 1% of the prior
year?
|
|
|
|
|
16 |
Whether Purchases as per Income Tax Return
vary by 10% or more as compared to the
purchases declared in the Sales Tax Return?
|
|
|
|
|
17 |
Whether Sales as per Income Tax Return vary by
10% or more as compared to the sales declared
in the Sales Tax Return? |
|
|
|
|
18 |
Whether Salaries and Wages (Sl. No. 16) are
equal to or more than 30% of cost of the sales
? |
|
|
|
|
19 |
Whether Deduction on account of Profit on Debt
(Sl. No. 50) is equal to or more than 50% of
the P&L expenses (i.e Sum total of Sl. Nos. 40
to 49, & 51 to 64)? |
|
|
|
|
20 |
Whether accounting depreciation and
amortization, accounting gain or loss on
disposal of intangibles, donations, WWF, and
various provisions charged to the accounts
(i.e. Sl.Nos.23.24, 51, 54, 55, 56, 57, 58,
59, & 60) is equal to or more than
inadmissible expenses (Sl. No. 66) ? |
|
|
|
|
21 |
Whether there is any claim of Bad Debt written
off (Sl. No.61) or Obsolete
Stock/Stores/Spares written off (Sl. No. 62) ? |
|
|
|
|
22 |
Whether there is any disclosure of loss
surrendered to holding company (Sl.No.75)
and/or loss acquired from the subsidiary
company? |
|
|
|
|
23 |
Whether Capital Gain (Sl. No. 80) is more than
50% of the business income (Sl. No. 79)? |
|
|
|
|
24 |
Whether Zakat deduction (Sl. No.84) claimed?
|
|
|
|
|
25 |
Whether there is any straight deduction for
charitable donation (Sl. No. 86)? |
|
|
|
|
26 |
Whether addition in assets is more than 20%.of
the opening WDV of assets or more than Rs. 20
million during the year? |
|
|
|
|
27 |
Whether there is any claim of Depreciation for
motor vehicle plying for hire (Sl.No.4 of
Annexure-A)? |
|
|
|
|
28 |
Whether there is any difference in tax due on
Final Tax Regime (FTR) income (Sl. No. 123 to
150) and tax collected/deducted at source on
the corresponding income as per Annexure-C? |
|
|
|
|
29 |
If property income (Sl. No. 152) is declared
at Rs. 400,000/- and above whether progressive
tax rate has been applied or not? |
|
|
|
|
30 |
If there is any claim of tax reductions,
credits and averaging (Sl. No. 160)? |
|
|
|
Top......
Annexure -B
Check list for the Auditors
|
|
Identification
|
|
|
|
|
|
Item |
Yes |
No |
If
yes proposed
Action / Remarks |
|
|
Return of total income for
companies R-1 |
|
|
|
|
|
Whether all the columns in return are
duly filled in? |
|
|
|
|
|
Whether all the documents along with
accounts attached? |
|
|
|
|
|
Whether all applicable annexures duly
filled in & attached? (See last page for
annexures) |
|
|
|
|
|
Tax Payments |
|
|
|
|
|
Whether copies of paid challans
attached? |
|
|
|
|
|
Tax deducted (various heads,
check separately) |
|
|
|
|
|
Advance tax u/s 147 |
|
|
|
|
|
Tax paid with return u/s 137 |
|
|
|
|
|
WWF |
|
|
|
|
|
Donations (for credits) |
|
|
|
|
|
Zakat (if paid) |
|
|
|
|
|
Verification/Declaration |
|
|
|
|
|
Whether name, NIC and signatures of
filer available? |
|
|
|
|
|
Whether authority to sign the return
mentioned? |
|
|
|
|
|
Whether date and seal of the company
shown? |
|
|
|
|
|
Action/Correction: |
|
|
|
|
|
Notice of Deficiency/short documents
issued? |
|
|
|
|
|
Whether Notice of Deficiency complied? |
|
|
|
Tax Accounting / Computation Chart
|
|
Item |
Yes |
No |
If
yes proposed
Action / Remarks |
|
|
Are the accounting profit / income
correctly reported? |
|
|
|
|
|
Are the suo-moto additions in the
computation chart in order? |
|
|
|
|
|
Have the deductions made in the
computation chart according to law? |
|
|
|
|
|
Is there any deduction made for
admissible provision? |
|
|
|
|
|
Is there any adjustment made before
reaching Taxable income? |
|
|
|
|
|
Is the taxable income accurately
worked? |
|
|
|
Trading / Profit & Loss Account
|
|
Item |
Yes |
No |
If
yes proposed
Action / Remarks |
|
|
Whether sales are verifiable, made to
registered persons & sales tax paid? (verify
from sales tax date / TMS) |
|
|
|
|
|
Whether purchases are made from the
verifiable parties and tax withheld on
payments wherever applicable? |
|
|
|
|
|
Whether closing stock of previous year
matches with opening stock of current year? |
|
|
|
|
|
Whether stock valuation is made
according to law as provided in § 35 |
|
|
|
|
|
Whether the treatment accorded to
payment of Sales Tax & Excise duty in order? |
|
|
|
|
|
Whether any extra ordinary items
booked under the head direct expenses? |
|
|
|
|
|
Whether Selling & Marketing
expenses verifiable and tax have been
withheld on payments wherever applicable? |
|
|
|
|
|
General Administrative expenses |
|
|
|
|
|
Whether salary is paid after deduction
of tax at source and perquisites have been
worked out in accordance with the provision of
§ 13, 20, 21? |
|
|
|
|
|
Whether lease rentals claimed? Whether
depreciation is also charged on leased assets? |
|
|
|
|
|
Whether financial expenses verifiable
and debt on which mark up is paid is a
qualified debt? Is there any loan from
associates? (ref § 108) |
|
|
|
|
|
Whether expenses under the head Repair
and Maintenance are verifiable and no capital
expense is included in this head, verifiable
parties, tax withheld wherever applicable? |
|
|
|
|
|
Are all the P & L expenses in
accordance with the provisions of § 13, 20,
21? |
|
|
|
|
|
Specialized Transactions |
|
|
|
|
|
Whether pre-commencement
expense (if claimed) in accordance with the
provision of § 25 |
|
|
|
|
|
Whether any capital gains shown and
claimed exemption --- is there any possibility
of re-characterization of capital gain
into ordinary income? (§ 109) |
|
|
|
|
|
Whether there is any transaction
between the associates, (Related Party).
Is the transaction at arm’s length
or otherwise (§ 108) |
|
|
|
|
|
Is there any transaction which is
un-explained in terms of investment or
expense (§ 111) |
|
|
|
|
|
Whether deductions have properly
apportioned in view of laid down provision §
67? (pro-ration) |
|
|
|
|
|
Whether set off of losses in case of
amalgamation has been properly recorded
in view of § 57A |
|
|
|
|
|
Gain on disposal of assets has been
properly worked out or non-recognition
has been misapplied?
(§ 75 – 79). Is there any
deduction made on account loss on disposal of
assets? |
|
|
|
|
|
Whether any transaction with a
non-resident has been observed?
Transactional analysis & ADT
(§ 105, 107) |
|
|
|
Cash Flow Statement
|
|
Whether operating cash flow examined
and found in order? |
|
|
|
|
|
Whether adjusting entries in operating
cash flow examined & found in order? |
|
|
|
|
|
Is there any discrepancy found in
employment of cash i.e. cash availability for
a particular transaction? |
|
|
|
|
|
Whether cash flow from investing
activities examined and found in order? |
|
|
|
|
|
Whether cash flow from financing
activities examined and found in order? |
|
|
|
Balance Sheet
|
|
Liabilities |
|
|
|
|
1 |
Whether Stock and Shares have been
shown in accordance with provisions of company
ordinance, 1984? Any capital introduced or new
shares issued? |
|
|
|
|
2 |
Account Payable/Creditors have been
treated in accordance with the provisions of §
34. Is the list of creditors available in the
notes to the audited accounts? |
|
|
|
|
3 |
Bank Loan, names of banks disclosed
for veracity of the transaction and what
assets have been offered to the lending agency
as a security? |
|
|
|
|
4 |
Is there any running finance involved?
Whether the debt is qualified and mark up
charged as per prevalent market rate? |
|
|
|
|
5 |
Whether accrued expenses have been
booked in view of § 34 of the Income Tax
Ordinance, 2001? Is the reporting of
transaction consistent and regular as per
accounting policy of the company? |
|
|
|
|
6 |
Whether all the liabilities verifiable
and conta-entries matching? |
|
|
|
|
7 |
Whether Debt: Equity ratio of the
company is in line with the provision of § 106
?(Thin Capitalization) |
|
|
|
|
|
Assets |
|
|
|
|
1 |
Fixed assets, Land & Building ---
addition/deletion involved, schedule of cost,
depreciation, work in process, withholding tax
deductions proof available? |
|
|
|
|
2 |
Plant, Machinery and Equipment.
Whether assets are on lease, purchased or
rent? Whether depreciation is being charged or
only lease rentals are being expensed out ---
proofs, verifications? |
|
|
|
|
3 |
Capital work in progress – what is the
treatment accorded in the depreciation
schedule, what is the method of costing
adopted? |
|
|
|
|
4 |
Accounts Receivable/Debtors, whether
all parties are identifiable? |
|
|
|
|
5 |
Prepaid Expenses, Accrued Income and
other Short-term Receivables? The names &
addresses of the parties are available for
veracity of the expenses or accruals? |
|
|
|
|
6 |
Whether Intangible Assets have been
shown? What method for amortization adopted?
Is it in conformity with provision laid down
in § 24? |
|
|
|
|
7 |
Whether Inventory/Closing Stock valued
as per provisions of § 35 |
|
|
|
|
8 |
a) Have the ratios at the end of
Balance sheet examined?
b) Whether directors report studied? |
|
|
|
Annexures with the Return (Company)
|
Annex |
Description |
Observations |
|
I |
Particulars of directors of a company |
|
|
II B |
Income/Loss from business of a company |
|
|
II C |
Adjustments in book profits (excl
spec. bus) |
|
|
II D |
C/F, B/F unabsorbed depreciation,
amortization & Business losses |
|
|
II E |
Depreciation & Amortization |
|
|
II F |
Gain/Loss on disposal of depreciable
assets & Intangibles |
|
|
II G |
Bifurcation of Normal / PTR income |
|
|
IV |
Income from Property |
|
|
V |
Capital Gains / Losses |
|
|
VI |
Income / Loss from other sources |
|
|
VII |
Foreign Income |
|
|
VIII |
Tax credits, reductions & averaging |
|
|
IX |
Tax on retirement benefits, salary
arrears, profit on debt. |
|
|
X |
Tax already paid & adjustments |
|
|
XI |
Statement of final tax (PTR) |
|
|
XII |
Key information about a company |
|
Other Income / Extra ordinary items
Exempt Income
Ratio Analysis ------ Comparable Industry
standards / Benchmarks
|
No. |
Item |
Ratio |
Benchmark |
|
1 |
Gross profit to Net Sales (%) |
|
|
|
2 |
Net profit to Net Sales (%) |
|
|
|
3 |
Wages to Net Sales (%) |
|
|
|
4 |
Direct expenses to Net Sales (%) |
|
|
|
5 |
Selling & Marketing exp to Net Sales |
|
|
|
6 |
Financial Charges to Net Sales (%) |
|
|
|
7 |
Admn exp. to Net Sales (%) |
|
|
Manufacturing Concerns
Addition in Plant & Machinery
Existing Installed capacity =
Addition during the year =
Increase / Change in production =
Input/Output analysis
Depreciation claims
Banking Companies
Method of accounting --- recording of various
transactions --- accounting policy
Booking of provisions in view of prudential
regulations
Non-performing loan in four categories
Write off of bad loans
Gain or loss on disposal of assets (Tangible &
Intangible)
Payments to staff in terms of perks &
privileges
Investments in capital market--- gain exempt
----- apportionment of expenses (ratios)
Top......
‘ANNEXURE-C’
Audit Selection Mechanism in Other
Countries
a. United States of America
Internal
Revenue Service (I.R.S.)
Internal Revenue Service
(IRS) is the revenue collecting agency in USA. It
resembles any private sector organization focusing
on its customers having specific needs. IRS has
following main divisions:
The Wages &
Investment Division which caters for the tax
matters of 120 Million individual taxpayers.
The Small
Business & Self - Employed Division which
caters for the tax matters of 30 million
self-employed taxpayers and corporations /
partnerships with assets worth less than $ 10
Million.
The Large
and Mid Size Business Division caters for
corporations and partnerships having assets worth
$10 million or greater.
The Tax
Exemption and Government Entities Division
which caters for exempt organizations, pension
plans etc.
IRS has been
restructured in a business format to take care of
the needs of the taxpayers while at the same time
have been equipped enough to create an effective
deterrence. The objective is voluntary compliance
that taxpayers declaring true and accurate picture
of their income. The ultimate objective is optimal
tax collection by the revenue agency with
available resources at its disposal.
Audit Selection
Mechanisms
Some of the methods used
by IRS for selection of tax returns for audit
include:
i) Potentially
abusive tax avoidance transactions
— This is based on some
information gathered from various sources like
data-matching, complaints, third party etc. but
the reliability and authenticity of the
information is completely verified before
proceedings.
ii) Computer Scoring
— IRS makes
use of the developed Software programs for return
selection. These computer programs allocate a
score to each return that is used to identify the
risk. The program titled Discriminatory Indicator
Factor (DIF) quantifies the risk based on concrete
criterion programmed in software. The other
program with the name Unreported Income DIF (UDIF)
allocates a score to the return showing the
potential of unreported income. These programs
help IRS personnel filter the potential returns
and help them select some returns for audit. The
auditor reviews selected items of filed returns
before finalizing the detailed audit. It is
important to mention that the composition of the
DIF is a well-guarded secret of IRS.
iii) Random
Selection:
Some proportion of the filed returns is selected
randomly.
iv) Large
Corporations
— Returns filed by large corporations are examined
annually for any tax anomaly. Specifically, the
idea is to look for questionable treatment of some
heads of income, gains, deductions or credits.
v) Information
Matching —
Information from employers, interest statement
from bank etc is matched through a software
program and in case any difference is noticed, the
same is confronted to the taxpayer.
vi) Related
Examinations
— Related business partners, directors, investors
etc to complete the audit cycle and cross verify
related party transactions.
vii) Other
— Local offices with
the approval of higher level management can select
returns for audit due to specific local level
information. (newspapers, segment deviation etc.)
Top......
b.
United Kingdom
Her Majesty Inland
Revenue and Customs Department
HM Revenue & Customs (HMRC)
came into being on 18th April 2005 upon
merger of Inland Revenue service with Customs and
Excise Department. It deals with the collection,
administration and allied matters of all taxes -
Direct Taxes, Indirect Taxes.
Self Assessment and
Audit Selection
The Self-Assessment
Scheme for Income and Capital Gains tax was
introduced in UK on April 6, 1996. The objective
was to enhance taxpayers understanding and
compliance to tax laws. Further, it targeted
saving costs through lowering costs and saving
resources.
Philosophy
The whole philosophy
of Self Assessment is based on narrowing down the
“tax gap” the difference between tax collected and
the amount that might have been collected if full
compliance had been made and is based on three
stated steps:
identifying the taxpayers
Getting
Tax Returns
Inquiring
into Returns
Therefore, the job is
to reduce the tax gap and the starting point to
identify new taxpayers and bring them into tax net
by making them file their tax returns. This will
broaden the tax base and make the whole tax system
equitable with people paying their due taxes. Once
these returns have been filed the last step is to
inquire into these returns for correctness as well
as to create deterrence so that returns are not
intentionally filed with inaccurate data.
Methodologies
HMRC has the
jurisdiction of opening any enquiry pertaining to
returns within stipulated time period. The Inland
Revenue generally adopts three different
methodologies to select a case for audit:
i) Random Enquiries:
One in every thousand return is selected centrally
and the local office conducts a detailed enquiry.
ii) Mandatory
Reviews:
The local office must review certain type of
transaction in which likelihood of revenue impact
is large. An example could be capital gains
arising out of trading of unquoted shares. In this
category enquiry will only be warranted if review
depicts some anomaly. Similar, big-ticket
transactions or unique transactions like British
Petroleum completing a pipeline in some part of
the world will first be looked into for any
anomaly.
iii) Risk
Assessment:
In this category the cases are awarded a risk
score against set
criteria. This is done
through sector specific software programs.
Types of Inquiries
The Inland Revenue can
only open one inquiry into a person’s tax affairs
for a tax year. Therefore, it is utmost important
to fully identify the risk areas and potential
yield if the inquiry is opened. Therefore, a
prudent decision to this effect is taken
considering all the deciding factors. Once
decision of audit is taken, it is important to
identify the category or level of inquiry25:
i) Full Business
Enquiry:
This type of enquiry looks into detail every
aspect of the business and may require production
of underlying record if warranted.
ii) Business Aspect
Enquiry:
This type of enquiry looks at selected parts of
the filed return, which may include selected head
of income or transactions etc.
iii) Non Business
Enquiry:
This type of enquiry is geared towards
non-business items on the filed returns.
Top..... |
