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AUDIT - PREPARATION AND VERIFICATION

Service Tax - Central Excise and Service Tax Audit Manual - CBEC - 06 - CHAPTER 6 6.1 Profiling of assessee/taxpayer: 6.1.1 Audit requires a strong database for profiling each assessee/taxpayer so that risk-factors relevant to an assessee/taxpayer may be identified in a scientific manner and audit is planned and executed accordingly. Some of the relevant data has to be collected from the assessee/taxpayer during the course of audit, while the rest is to be extracted from the registration documen .....

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ve conduct of audit. A substantial amount of data is already available in ACES and EDW. Some of the data like those contained in annual financial statements keeps changing every year. 6.2 Assessee Master File (AMF): The first step towards an effective audit is to collect all relevant information about the assessee/taxpayer from various sources, arrange it in a systematic manner so that the audit can be planned in a result-oriented manner. The AMF should contain all the useful information about a .....

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cuments about the assessee/taxpayer from various sources (including the assessee/taxpayer himself), arrange it methodically in the assessee master file and regularly update it. 6.2.2 The hard copies of the documents as listed in Annexure CE-I/ST-I should be maintained for a period of 5 years. Documents pertaining to period older than 5 years, should be removed unless relevant to any current proceedings. Disposal of the documents removed from a master file should be done with the approval of Depu .....

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ogressively, the information would be maintained in electronic format with automated data transfer through networking system and could be automatically updated. 6.2.4 The electronic data should be kept in a properly secured format so that it can be altered or modified only by an authorised officer of the audit group. This folder should be protected by a password and should be made available to the officers of audit only with the prior approval of the Assistant/Deputy Commissioner (Audit) in writ .....

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rect control of the Dy./Asst. Commissioner in-charge of the circle. On being transferred, the Dy./Asst. Commissioner should handover all the master files to the new incumbent. 6.2.7 The master file should be updated periodically or after completion of each audit. The audit working papers, audit report, duly approved during the audit monitoring meeting, along with the latest documents should be filed properly in a file and the same shall be attached to the Master file folder of the assessee/taxpa .....

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ese files would, however, be available to all the officers for any legitimate official purpose. 6.3 Allocation of audits amongst the audit parties: The audit schedule should also mention the Group No. of the audit group to conduct audit of a particular unit. It must be ensured that the group members of the audit party are fully trained for conducting audit in accordance with the guidelines in this manual. 6.4 Action to be taken by the Audit Group: Once the audit schedule, with Group allocation, .....

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apers (Annexure - CE-VIII/ST-VIII): 1. The working papers form the basis of audit objection. They also show the detailed steps undertaken by the auditor during the preparation for and conduct of the audit. Therefore they should be filled carefully, giving observations and conclusions of the auditor duly supported by evidences/documents, wherever required. 2. Each part of the working paper should be filled up on completion of the relevant audit step. The date on which such part is completed and w .....

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relevant entry in the working paper. 5. Before the conduct of audit verification, the audit plan should be approved and signed by senior officer not below the rank of Commissioner/ Additional/ Joint Commissioner/Deputy/Assistant Commissioner of Audit Commissionerate, as the case may be. 6.6 Desk Review 6.6.1 Objective: The desk review lays emphasis on gathering data about the assessee/taxpayer, his operations, business practices and an understanding of the potential audit issues, understanding h .....

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of senior officers is critical to the drawing up of good audit plan. The services of Assistant Director (Costs) allocated to CC Zone may be utilised effectively wherever required. 6.6.3 The auditor should immediately refer to the AMF (Annexure-CE-I/ST-I refers). Study of the AMF could throw up important points, which may merit inclusion in the audit plan. In addition, the auditor should also obtain the latest Trial Balance Sheet, Tax Audit Report, Annual Financial Statement, Cost Audit Report or .....

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eceipts of the taxpayer need to be tested for Service Tax liability. Analysis of exports turnover, turnover of non-taxable and exempted services gives a clear picture of the amounts which were not considered for Tax payment.It also helps to conclude whether such exemptions claimed are proper or not. (Part III (I) of Working papers in Annexure ST -VIII refers). 6.6.5 Cost Accounting Records/Cost Audit: 1. Cost Accounting records are required to be maintained by certain companies inter alia by i) .....

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tioned above and iii) listed companies (For details please refer the website of Ministry of Corporate Affairs at www.mca.gov.in) For latest amendments and existing norms the Companies (Cost Records and Audit) Rules 2014 may be referred to. 6.6.6 From the AMF, Trial Balance and Annual Financial Statements (Profit & Loss Account and Balance Sheet) it is possible to work out important financial ratios. The said ratios should be compared with the ratios of earlier year and wherever significant v .....

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econciled with that shown in the financial accounts. Further, from the reconciled figure of duty/tax payment, assessable value of the sales can be worked out. This can then be compared with the sales figure shown in financial records. The difference, if any, must be analysed. The unit assessable value of the assessee/taxpayer can be compared with that of another assessee/taxpayer manufacturing the same item. This method would give an idea whether the valuation and duty calculation system of the .....

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lysis: Risk Analysis is a method of identifying potential revenue risk areas by employing modern techniques. It can be carried out by (i) reconciling various specific financial data, comparing it with different business accounts/documents, (ii) deriving certain data and comparing with the actual figures of the financial documents & (iii) comparing the key data figures of the unit with the average of all industry figure of similar kind (if available) or past figures of the same assessee/taxpa .....

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are studied over a period of time to see the trend and the extent of deviation from the average values during any particular period. The analysis of trends as mentioned in the relevant table of working papers may be carried out. (refer III 9 of Annexure -CE-VIII/III C of Annexure-ST-VIII) 6.7 Gathering of information of the assessee/taxpayer 6.7.1Tour of premises/plant: CENTRAL EXCISE: Before start of audit verification, the auditor should know about the functioning of various areas, like marke .....

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manufactured, some of which may not have been considered during the discussions. It provides clues about important aspects of the operations of the unit. If necessary the auditor should speak to the plant manager or supervisor/foreman during the tour. The auditors should also go through the working papers prepared in the last audit in order to acquaint themselves with the broad procedures followed by various sections of the assessees/taxpayers as part of the desk review. The auditors may fix ap .....

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echniques, new discounts, action of competitors etc. can also be found out by the auditors. Points noticed during desk review can also be enquired at this stage. For this purpose, a sample questionnaire has been prepared for discussion in the areas like purchase, sales, stores, tax accounting, job work given in Annexure-CE-VI/ST-VI. However auditors may add more questions depending upon the nature of the industry. The following guidelines should be kept in mind at the time of interview. i. Stay .....

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of the tour is to gather information from the assessee/taxpayer about the various systems followed by him in the areas of purchase, stores, sales, job work, tax reporting etc. This information can be test-checked by conducting walk through. 6.7.1.2 Before undertaking the tour to the factory, the auditor should also prepare a Questionnaire to gather information for evaluation of internal controls of the assessee/taxpayer. An illustrative Questionnaire is placed as Annexure-CE-VI/ST-VI for guidan .....

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tems 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 excise/service 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 .....

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the internal controls are not reliable. Audit should evaluate the soundness of internal control of sub-systems/areas like sales, purchase tax, accounting etc., and grade them as good, acceptable and poor (refer Part D of working papers) 6.7.3.1 In this regard, an auditor should normally examine the following: i. Characteristics of the company s business and its activities. ii. System of maintenance of records and accounts. iii. Identifying the persons handling records for accounting purposes. iv .....

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The auditor verifies this transaction in the same sequence as it had moved. By this method the auditor can get a feel of the various processes and their inter linkages. It is also a useful method to evaluate the internal control system of an assessee/taxpayer. The auditor can undertake walk through process of sales, purchase, excise, account adjustment systems etc., certain model Walkthrough routes are given in Annexure-CE-VI/ST-VI. Similarly, key controls may be examined for recording of all ca .....

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relatively insignificant data, various techniques are applied. The ABC Analysis is one of such data management techniques. This technique is particularly useful when auditors are required to scrutinise and examine a large volume of data/documents within a limited time. In ABC analysis the whole data population is classified into three categories (i.e. A, B and C categories) based on the importance, as given below: is the class of data that is the most important from the point of view of managin .....

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To give an example, transactions with top five customers/clients of an assessee/taxpayer may alone be taken up for detailed examination by auditors. Similarly while verifying credit utilization by the assessee/taxpayer, documents relating to the receipt/procurement of major inputs may be examined. The technique of ABC analysis can also be suitably applied for evaluating the systems of internal controls while carrying out verification. 6.8 Preparatory Visit: The above steps viz., tour/study or e .....

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findings, which are to be kept in the AMF in the format as mentioned at Part D of Working Paper (Annexure -CE-VIII). 6.8.3 During the subsequent audit of large units, the preparatory visit for desk review need not be made.During the verification, the auditor should verify and comment as to whether the system is in place or not. 6.9 Audit Plan 6.9.1 The objective of preparing an audit plan is to outline a logical series of review and examination steps that would meet the goals and standards of a .....

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tems, abnormal trends and unusual occurrences that warrant detailed verification. Certain unanswered or inadequately answered queries about the affairs of the assessee/taxpayer may also be added to this list. 6.9.3 Audit plan should be a detailed plan of action, preferably in a standard format. The audit plan should be consistent with the complexity of the audits (Annexure -CE-VII/ST-VII). 6.9.4 The summary results of desk review, along with the completed Working Papers, should be submitted to t .....

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oned in the Annual Plan for audit coverage to the Commissioner and the rest to the Additional / Joint Commissioner (Audit) through Deputy / Assistant Commissioner (Audit), for approval of the audit plan, after carrying out preliminary reconciliation, identifying discrepancies, if any, and carrying out detailed examination of the records and information (including that already captured in the Master File on assessee/taxpayer). 6.9.7 In the case of mofussil circles where ADC/JC is not available: i .....

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units, the Deputy/Assistant Commissioner of the Circle is competent to approve the audit plan.However, the approved audit plan should be forwarded to the Additional/Joint Commissioner, through e-mail, at least 10 days before the conduct of actual audit so as to enable the ADC/JC to communicate additions, if any, before the actual audit takes place. 6.10 Audit Verification 6.10.1 The objective of audit verification is to perform verification activities and document them in order to obtain and rec .....

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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. 6.10.2 Audit verification involves verification of data and actual verification of documents submitted at the time of desk review, verification of points mentioned in the audit plan. 6.10.3 Verification of points mentioned in the audit plan: The auditor should conduct the verification in a syst .....

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ay obscure a significant fact. During the process, he must cross check the entries made by the assessee/taxpayer in various records and note discrepancies, if any. In all cases involving discrepancies, the auditor should make detailed enquiries regarding the cause of the discrepancies and their revenue implication. 6.10.4 The auditor should also examine the documents submitted to various Government departments/ Regulatory Authorities such as Customs, Income Tax, Commercial Tax/ VAT, Banks, etc. .....

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filed by the assessee/taxpayer. 6.10.5 The audit verification gives maximum opportunity to the auditor to go through the assessee/taxpayer s records in his unit. Therefore, auditor may come across a new set of information or documents, not earlier known, during any of the earlier stages. Further, while examining an issue, the auditor may come across a fresh issue also requiring detailed examination. In such a situation, the auditor should, after obtaining the approval of his Dy. Commissioner/Ass .....

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nvolve some general steps as discussed below: 6.11 Physical Verification of Documents: All important documents are already verified at the time of desk review. However, in case of any discrepancy noticed and pointed out in the Audit Plan, a detailed scrutiny of the financial records of the assessee/taxpayer becomes imperative. The documents to be examined include Annual Financial Accounts containing Director s Report, Statutory Auditor s Report, Balance Sheet and Profit & Loss Account. If ne .....

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documentary and legal evidence. This will greatly help in explaining and discussing the objections with the assessee/taxpayer and other follow up action.It needs to be ensured that all audit documentation is complete, accurate and of professional quality. Working Papers are a synopsis of audit operations conducted by the Audit Group. Entry of all items mentioned in the audit plan must be made in the working papers, during Audit Verification. 6.11.2 In case of Central Excise audits, as well as S .....

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e and gather details of their location. Such information should be forwarded to the jurisdictional Service Tax authorities to verify proper discharge of service tax liability and for taking necessary action in case of any defaults. 6.12 Working papers should support the audit effort and results. They should: i. Be clear, concise, legible, organized, indexed, and cross-referenced; ii. Disclose the audit trail and techniques used in the examination of each significant item; iii. Support the conclu .....

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n. 6.13 Apparently, the financial and other documents maintained by the assessee/taxpayer for his private use and in compliance of other statutes are of great importance which may reveal substantial short/non-payments of duty. Annexure-CE-IX/ST-IX provides an illustrative list of such records/ documents, as also the relevant information that can be gathered from them. The auditor may take note of the same during Gathering information about the assessee/taxpayer and the system followed by him , a .....

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g out audit of Central Excise cases, the Service Tax return filed by the assessee/taxpayer should also be scrutinized in order to ensure that CENVAT credit claimed in both the returns does not vary and vice versa. Further, where both the returns are filed in the same Commissionerate, audit of both the activities should be undertaken simultaneously. If these returns are being filed separately (one with the Excise Commissionerate and the other with the Service Tax Commissionerate, then this can be .....

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e/taxpayer should have the opportunity to know the objections and to offer clarifications with supporting documents. This process will resolve potential disputes at an early stage and avoid unnecessary litigation. 6.16 The ultimate aim of conducting an audit is to increase the level of tax compliance of assessee/taxpayer. Therefore, no audit can be considered to be complete unless the auditor has made all efforts to ensure maximum recovery of short levy before leaving the premises of the assesse .....

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