Stage wise action for audit :
i. Preparation/updating of Taxable Person master file containing comprehensive Taxable Person profile.
ii. Collection of all relevant documents, data reconciliation statement and reply to questionnaire.
iii. Desk review on the basis of relevant documents and interview of the Taxable Person.
iv. Formulation and approval of audit plan based on desk review.
v. Conducting audit verification on the basis of the approved audit plan.
vi. Suggestions on correction/improvements to Taxable Person for future guidance.
vii. Preparation of draft audit report and its submission, along with working papers for discussion.
viii. Issue of final audit report.
ix. Follow up action, for monitoring the compliance of various points.
The objective of review of internal controls is to assess whether the Taxable Person has reliable systems and controls in place that would produce reliable accounting/ business records. Most medium to large companies have ERP systems in place, which account for all transactions from entry of raw material to clearance of final products. Auditors must have a look at these systems and more relevantly determine whether software being used exclusively for the transactions related to GST tax matters is integrated to the main ERP system or is running parallel to the main ERP. This assessment would be used by the auditor to decide on the extent of verification required and to focus on areas with unreliable or missing controls. It should be noted that this review must be commensurate with the size of operations. A small Taxable Person might have little in terms of internal controls where as a large Taxable Person would have sophisticated internal controls in place. If the internal controls are well designed and working properly, then it is possible to rely on the books maintained by the Taxable Person. The scope and the extent of the audit can be reduced in such a case. The reverse would be true if the internal controls are not reliable. Audit should evaluate the soundness of internal control of sub-systems/areas like supplies, purchase tax, accounting etc., and grade them as good, acceptable and poor.
The objective of audit verification is to perform verification activities and document them in order to obtain and record audit evidence. The verification techniques must be appropriate for audit objectives identified in the audit plan. It is important that in an audit, the objections that are raised are technically correct and stand up against scrutiny or challenge. Law being open to interpretation, it may be difficult to test the technical correctness of all objections. However, it should be correct to the extent that any professional auditor, working with and having access to the same research material would likely to come to the same conclusion. It also means that the auditor must demonstrate, in writing, the research and reasoning used to base his/her application of legislation, policies and jurisprudence.
The documents to be examined include Annual Financial Accounts containing Director’s Report, Statutory Auditor’s Report, Balance Sheet, Profit & Loss Account and Cost Audit Report. The auditor must go into details of the figures mentioned in the Annual Financial Statements and for that he must examine Trial Balance, Ledgers, Journal Vouchers, Invoices and Stock Ledgers. He may also examine Cash Flow Statement, Groupings, Cost Audit Report and Tax Audit Report. He should also check whether the Taxable Person is maintaining the statutory records as required under various statutes especially under the CGST & IGST Act, 2017.
A physical tour provides confirmation of much of the information gathered. It helps the auditor to familiarize himself with the manufacturing processes, identify the intermediate goods, by-products and wastes/rejects and locate other activities of the Taxable Person. During the tour to a particular section, the auditor should physically verify the samples of each of the listed documents maintained in that section. The plant tour should cover all areas, from receipt of raw material, through manufacturing process, to the finished goods, storage and the shipping areas. The auditor should ensure that he encompasses each and every aspect necessary for him to complete the Audit Working Papers. The purpose of this tour is to gather information from the Taxable Person about the various systems followed by him in the areas of purchase, stores, sales, job work, tax reporting etc.
An evaluation of Internal controls helps in formulating a detailed programme of verification of relevant internal controls of the taxable person. The level of deficiencies in internal controls would determine the coverage and depth of audit verification required for a particular sub-system in the business unit. In this regard, an auditor would normally examine the following:
RR Characteristics of the company’s business and its activities.
RR System of maintenance of records and accounts.
RR Identifying the persons handling records for GST purposes.
RR Allocation of responsibilities at different levels.
RR System of internal checks.
RR System of movement of documents having relation to GST assessment.
RR Inter-departmental linkages of documents and information, and
RR System of taxable person’s own internal audit.
An auditor needs to acquaint himself with the systems of control and documentation in operation. This knowledge is obtained either by discussion with various managers or by going through documents like procedure manuals, organization charts, job descriptions, flow-charts and records maintained. In the case of first audit, the auditor needs to maintain detailed written record of his observations of the internal control system.
During these verifications, the following information should be correctly obtained and recorded.
(i) Whether any input is exclusively consumed for fully exempted supplies.
(ii) Whether any inputs consumed for fully exempted as well as taxable supplies.
(iii) Whether any Capital goods on which input credit is availed are exclusively used for fully exempted supplies.
A financial audit may show that the financial records agree with the basic documents. This does not necessarily mean that the GST return is correct. Various factors may be the cause of an incorrect return e.g.: – taxable supplies may not have been recorded; purchase invoices may have been forged; input tax may have been paid and deducted but the deduction may not be allowable; discounts may have been allowed to related companies that may reduce the taxable value incorrectly; or goods may have been taken from stock for non-business reasons and not recorded in the accounts resulting in an evasion of the tax. These examples are not comprehensive but indicative why, only, the carrying out of a financial audit is not sufficient for the verification of a GST return.
A stock take is the responsibility of the taxable person and the auditor’s action should be restricted to the extent necessary to be satisfied that the stock records are correct. If they are considered to be suspect then best judgment based upon all available documentary evidence, (e.g. cost records), is to be used to assess the true stocks.
Cost accounting is the process of recording, classifying, analyzing, summarizing, and allocating costs associated with a process, and then developing various courses of action to control the costs. Cost accounting examines the cost structure of a business. It does so by collecting information about the costs incurred by a organization’s activities, assigning selected costs to products and services and other cost objects, and evaluating the efficiency of cost usage.
Cost Audit represents the verification of cost accounts and check on the adherence to cost accounting plan.
Cost Audit ascertains the accuracy of cost accounting records to ensure that they are in conformity with Cost Accounting principles, plans, procedures and objective.
Cost audit objective is to establish the accuracy of costing data and ensure efficient functioning of the industry. The objective of maintaining cost records is to track the resources consumed and only relevant costs are considered for pricing of the product or services. Similarly GST audit should ensure that the input tax credit is availed by the organization for taxable supplies only and the taxable value of the product or service is accurately determined and tax liability discharged accordingly.