synopsis - dacc.edu.in

DNYANSAGAR ARTS AND COMMERCE COLLEGE, BALEWADI, PUNE – 45

Subject: Auditing & Taxation Subject Code:304 Class: TY B.com

PROF. MUBINA ATTARI www.dacc.edu.in

SECTION:1 AUDITING

Unit 1: Introduction Principles of Auditing and Audit Process.

Synopsis

Auditing: Meaning, Objectives, Principles, Scope

Errors and Frauds in Auditing: Types of error, Location of error, Types of

Fraud, Difference between Fraud and error

Advantages of Auditing

Limitation of Auditing

Types of Audit.

Audit Process.

Internal control, Internal check and Internal Audit.

Auditing: Meaning

Auditing is a systematic examination of the books of records of business.

Meaning of Audit is a thorough inspection of the books of accounts of the organization.

The person who carries out an audit is the auditor

Audit is the examination or inspection of various books of accounts by

an auditor followed by physical checking of inventory to make sure that all departments

are following documented system of recording transactions. It is done to ascertain the

accuracy of financial statements provided by the organization.

Objectives




Principles

1. Principles of competency.

2. Principles of Independence

3. Principles of Integrity.

4. Principles of Confidentiality.

5. Principles of Objectivity.

6. Principles of Documentation.

7. Principles of Planning.

8. Principles of Audit Evidence.

9. Principles of Accounting system and Internal control.

10.Audit conclusions and Report.

Scope

The amount of time and documents which are involved in an audit, is an important

factor in all auditing. The audit scope, ultimately, establishes how deeply

an audit is performed. It can range from simple to complete, including all company

documents

Errors and Frauds in Auditing

Types of error

TYPES OF ERRORS

Clerical Errors Errors of Principle Compensating Errors Errors of Duplication

Errors of

Commission

Errors of

Omission

Partial Omission

Complete

Omission




Location of errors

The location of errors will be easier if the following steps are systematically taken.

* Check the total of the trial balance

* Compare the ledger account balances carried to the trial balance

* Check the total of debtors' and creditors' accounts and compare with the

balance of debtors' and creditors' amounts shown in the trial balance

* Verify the total of subsidiary books and their posting to ledgers

* Compare the items of trial balance of the current year with the items of trial

balance of the previous year to see if any balancing figure is omitted.

* Verify that all journal entries are posted into ledgers.

Advantages of Auditing

Audit Helps to Detect and Prevent Errors and Frauds.

Audit Helps to Maintain Account Regularly.

Audit Helps to Get Compensation.

Audit Helps to Obtain Loan.

Audit Facilitates the Sale of Business.

Audit Helps to Assess Tax.

Audit Facilitates to Compare.

Audit Helps to Adjust Account of Deceased Partner.

Limitation of Auditing

Rely on Experts − An Auditor has to rely on experts like engineers, valuers and lawyers for estimation and valuation of fixed assets and estimation of contingent liabilities.

Types of Fraud

Employee Fraud

Management Fraud

Embezzlement Misappropriation Manipulation Omission Misapplication

Internal control

of cash of Goods of Accounts of Events of accounting

System overridden

policies




Efficiency of Management − An Auditor does not comment on the efficiency of management working in client organization; no comments on future performance of an organization can be made through audited financial statements.

Checking of All Transactions − It is not possible for an Auditor to check all business transactions especially in big organizations where the number of transactions is very high. An Auditor has to rely on sampling and test checking.

Additional Financial burden − An organization has to bear additional financial burden on account of any fees and other such expenses for conducting an audit.

Not Easy to Detect Some Frauds − It is not easy for an Auditor to detect deeply laid frauds like forgery, misstatements and non-recording of transactions.

Types of Audit

Types of Audit

Ownership Periodicity Objectives Scope

Employer of Auditor Manner of

of audit Checking

Privat Continuous Financial Complete Internal Standard Audit Annual Operational Partial External Balance sheet Government Audit Interim Cash Audit Post and vouch Audit Statutory Audit Occasional Management Concurrent Tax Social Environment

Audit Process

The Audit process is a well-defined methodology for organizing an audit and is

adopted to accomplish audit objectives.




An audit process may consist of the following steps:

1. Define Audit Objectives

2. Audit Announcement

3. Planning

4. Fieldwork

5. Reporting

Audit program

1.Audit program is nothing but a list of examination and verification steps to be applied

and set out in such a way that the inter-relationship of one step to another is clearly

shown and designed

2.An audit program consists of a series of verification procedures to be applied to the

financial statements and accounts of a given company for the purpose of obtaining

sufficient evidence to enable the auditor to express an informed opinion on such

statements

3.An audit program covers various steps of auditing in an audit program like the

assessment of internal control, ascertaining accuracy and reliability of books of

accounts, inspection, vouching and verification, valuation of assets and liabilities,

scrutiny of accounts, presentation of financial statements.

The following points should be kept in view:

(1) Stay within the scope and limitation of the assignment.

(2) Determine the evidence reasonably available and identify the best evidence for

deriving the necessary satisfaction.

(3) Apply only those steps and procedures which are useful in accomplishing the

verification purpose in the specific situation.

(4) Consider all possibilities of error.

(5) Co-ordinate the procedures to be applied to related items.




Working paper

1.The audit working papers constitute the link between the auditor’s report and the client’s

records.

2.The objects of an auditor’s working papers are to record and demonstrate the audit work

from one year to another

3. Working papers are varied in nature. They may be recorded on paper or on electronic

or other media. Examples include:

Audit programmes.

Analyses.

Issues memoranda.

Summaries of significant matters.

Letters of confirmation and representation.

Checklists.

Internal control, Internal check and Internal Audit.

Internal control: Internal controls are the mechanisms, rules, and procedures

implemented by a company to ensure the integrity of financial and accounting information,

promote accountability, and prevent fraud. Besides complying with laws and regulations

and preventing employees from stealing assets or committing fraud, internal controls can

help improve operational efficiency by improving the accuracy and timeliness of financial

reporting.

Internal check: Internal Check is an integral function of the internal control system. It

is an arrangement of duties of the staff members in such a way that the work performed

by one person is automatically and independently checked by the other

Features of Internal check

1. This technique is an integrate part of the complete system of internal control. 2. This technique is related to the division of work among the people maintaining the

accounts. 3. In this technique, no single employee records any transaction from the beginning to

the end. 4. In this technique, the work done by every employee is examined independently by

another employee. 5. In this technique, the work done by one employee is complementary to the work done

by another employee. The aim of this technique is to develop an automatic system for detection of frauds and

errors.

https://www.investopedia.com/terms/f/financial-statements.asp

https://www.investopedia.com/terms/f/financial-statements.asp




In this technique, the work of book-keeping and accountancy is mechanised to the

maximum possible extent.

Internal Audit: Internal Audit is a department or an organization of people within a

company that is tasked with providing unbiased, independent reviews of systems,

business organizations, and processes

Distinguish between 'Internal check and Internal Audit

1. Meaning: Internal Check is an arrangement of duties allocated in such a way that

the work of one person is automatically checked by another.

Internal Audit is an independent appraisal of the operations and records of the

company.

2. Object: The purpose of Internal Audit is to detect the errors and frauds which have

already been committed.

The purpose of Internal Check is to prevent or minimize he possibilities of errors,

frauds or irregularities.

3. Need for separate staff: for Internal Audit, a separate staff of employees is

engaged for the purpose.

For internal check, no new appointment is made. It, in fact represents only the

arrangement of duties of the staff in a particular way.

4. Nature of work: The work involved in the Internal Audit is just like that of a watch

man. Internal auditor has to report, from time to time, to the management about the

various in efficiencies and suggest improvements. It is also his duty to see that the

internal check system does not become static.

Internal Check, on the other hand, represents a process under which the work goes on

uninterruptedly and the checking too is more or less automatic.

5. Timing of work: Internal Audit starts when the accounting process of different

transactions is finished.

Internal Check is an operation during the course of transaction.

6. Internal audit: It is a device for checking the work, whereas internal check is a

device for doing the work.

7. Scope of work: The scope of Internal Check is very limited. The scope of Internal

Audit is comparatively board.




8. Involvement: A large number of employees are needed for the implementation of

Internal Check System.

Whereas, a much smaller number of persons are needed for implementing Internal

Audit implementation.




Unit 2: Checking, Vouching and Audit report

Synopsis Test Checking

Voucher

Vouching

Vouching of cash book.

Audit report

Audit certificate

Auditing and Assurance standard

Test Checking

It is the examination of few transaction of business, instead of checking all

transaction.

Voucher

It is a documentary evidence supporting a business transaction. It may include:

A receipt.

An invoice.

Bank Paying slip.

Debit note.

Credit note.

Gatekeeper’s books of entry.

Wage book.

Order book.

Type of Voucher

Primary

Secondary

Cash memo. Carbon copy of cash memo

Rent Receipts. counter foli of paying-slip

Wage Sheets.




Vouching

Vouching can be described as the essence or backbone of auditing. Vouching is defined

as the "verification of entries in the books of account by examination of documentary

evidence or vouchers, such as invoices, debit and credit notes, statements, receipts, etc.

Vouching of cash book

In a business concern, cash book is maintained to account for receipts and payments

of cash. It is an important financial book for a business concern. Hence

the auditor should see whether all receipts have been recorded in cash book and no

fictitious payment appears on the payment side of cash book. To ensure this an auditor

should check debit side of cash book which represents as receipts and credit side which

contains payment details

Vouching of Cash Receipts (Debit Side of Cash Book)

Opening Balance of Cash Book

Cash Received from Debtors

Repayment of Loan by Others

Rent Received

Sale of Investments

Sale of Fixed Assets

Interest and Dividend Received

Commission Received

Installments Received on Hire-Purchase Sale

Vouching of Cash Payments (Credit Side of Cash Book)

Opening Balance

Payment to Creditors

Payment of Salaries

Payment of Wages

Purchase of Plant and Machinery

Purchase of Land & Building

Rent Paid

Insurance Premium

Income Tax

Commission on Sale

Director’s Fees

Internal Control System for Cash Transactions.




Valuation of Assets and Liabilities.

Verification of assets and liabilities. Verification means 'proving the truth' or 'confirmation

of the truth'. Verification of assets and liabilities means proving the truth about the

existence and the correctness of the money value of the assets and liabilities appearing

in the balance sheet of the business

Verification of assets and liabilities are done to confirm the following −

Existence

Ownership

Proper valuation

Possession

Freedom from encumbrances

Proper recording

Objectives of Verification

Following are the objectives of Verification −

Confirmation about the existence of assets through physical verification.

Legal and official documents relating to assets are checked to confirm the ownership of assets.

It is confirmed that assets are free from any charge of lien.

Proof regarding proper valuation of assets.

To confirm that assets are properly accounted for in the books of accounts.

Vouching and Verification

Both are considered to be same thing but there are lots of difference between vouching and verification.

Vouching relates to confirmation of the correctness and authenticity of accounting entries as appeared in the books of accounts whereas verification confirms the existence, ownership and valuation of assets as appears in the balance sheet. The Auditor’s duty is not only vouching the entries appearing in the books because vouching cannot prove the existence of the related asset or liabilities at the balance sheet date.




Verification of Liabilities

Following are the objectives of verification of liabilities −

Creditors reflect a true position as to liabilities of the business.

All liabilities are disclosed in the balance sheet whether recorded in the books or not.

Value of liabilities is according to the generally accepted accounting principles.

Liabilities are properly classified and disclosed in the balance sheet.

Objectives of Verification

Following are the objectives of Verification −

Confirmation about the existence of assets through physical verification.

Legal and official documents relating to assets are checked to confirm the ownership of assets.

It is confirmed that assets are free from any charge of lien.

Proof regarding proper valuation of assets.

To confirm that assets are properly accounted for in the books of accounts.

Vouching and Verification

Both are considered to be same thing but there are lots of difference between vouching and verification.

Vouching relates to confirmation of the correctness and authenticity of accounting entries as appeared in the books of accounts whereas verification confirms the existence, ownership and valuation of assets as appears in the balance sheet. The Auditor’s duty is not only vouching the entries appearing in the books because vouching cannot prove the existence of the related asset or liabilities at the balance sheet date.

Verification of Liabilities

Following are the objectives of verification of liabilities −

Creditors reflect a true position as to liabilities of the business.

All liabilities are disclosed in the balance sheet whether recorded in the books or not.

Value of liabilities is according to the generally accepted accounting principles.

Liabilities are properly classified and disclosed in the balance sheet.




Confirmation and Verification

Let us now understand what confirmation and verification is required by the auditor.

Auditor requires confirmation from third party and management about any fact or figure. Few of the examples in which the Auditor requires confirmations are as follows

Confirmation from debtors about balances.

Confirmation from creditors about balances.

Confirmation from banks about bank balances, fixed deposits, interest accrued, overdraft or cash credit limit balance, etc.

Confirmation from financial institutions about loan and interests.

Confirmation from management about contingent liabilities, etc.

Verification

Verification means inspection of assets by the Auditor and it includes identification, weighing and counting of assets. Following items require physical verification −

Land and Building

Plant and Machinery

Stock-in-hand

Stores and consumables

Investments

Securities

Cash-in-hand

Bills receivable

Thus, confirmation and verification are altogether different processes of audit and both are equally important too.

Valuation of Assets and Liabilities

Valuation means estimation of various assets and liabilities. It is the duty of Auditor to confirm that assets and liabilities are appearing in the balance sheet exhibiting their proper and correct value. In the absence of proper valuation of assets and liabilities, they will exhibit either overvalued or under-valued.

It is therefore required for an Auditor to exercise reasonable care and skill to analyze the basis of valuation from technical experts and satisfy himself that assets shown in Balance-sheet are properly valued accordance with the generally accepted conventions and accounting principles.

Components of Valuation




Methods of valuation of assets are as hereunder −

Cost Price − This is the cost price paid at the time of acquisition of assets plus the freight charges, octroi charges, and commissioning and installation charges, etc. to bring that asset in usable condition.

Book Value − This is the value as appearing in the books of accounts; the cost price less depreciation.

Realizable Value − A Value which can be realized from the sale of assets.

Market Value − A value which the asset can fetch at the time of sale.

Replacement Value − A value on which an asset can be replaced.

Conventional Value − It means the cost price less depreciation written off ignoring any kind of fluctuation in the price.

Scrap Value − If the asset is not in working condition and sold as scrap, then the sale value

of asset is scrap value.

Audit report

An audit report should be clear, specific and complete, in order that anyone who has an

occasion to read it may know exactly what is wrong with the company. The auditor should

review and assess the conclusions drawn from the audit evidence obtained as the basis

for the expression of an opinion on the financial statements. This review and assessment

involve considering whether the financial statements have been prepared in accordance

with an acceptable financial reporting framework applicable to the entity under audit. It is

also necessary to consider whether the financial statements comply with the relevant

statutory requirements.

The auditor’s report should contain a clear written expression of opinion on the financial

statements taken as a whole.

Basic Elements of the Auditor’s Report:

1. Title

2. Addressee

3. Introductory Paragraph:

4. Management’s Responsibility for the Financial Statements:

5. Auditor’s Responsibility

6. Auditor’s Opinion:

7. Other Reporting Responsibilities:

8. Signature of the Auditor

9. Date of the Auditor’s Report

10. Place of Signature




Types of Audit report

Unqualified report Qualified report Disclaimer report Adverse report

Unqualified report: An unqualified opinion should be expressed when the

auditor concludes that the financial statements give a true and fair view in

REPORT presentation of the financial statements.

An unqualified opinion also indicates that:

(a) the financial statements have been prepared using the generally accepted

accounting principles, which have been consistently applied

(b) the financial statements comply with relevant statutory requirements and

regulations

(c) there is adequate disclosure of all material matters relevant to the proper

presentation of the financial information, subject to statutory requirements, where

applicable.

Qualified report: The auditor shall express a qualified opinion when:

(i) The auditor, having obtained sufficient appropriate audit evidence,

concludes that misstatements, individually or in the aggregate, are

material, but not pervasive, to the financial statements

(ii) The auditor is unable to obtain sufficient appropriate audit evidence on

which to base the opinion, but the auditor concludes that the possible

effects on the financial statements of undetected misstatements, if any,

could be material but not pervasive.

Disclaimer report: The auditor shall disclaim an opinion when the auditor is

unable to obtain sufficient appropriate audit evidence on which to base the

opinion

the auditor concludes that the possible effects on the financial statements of

undetected misstatements, if any, could be both material and pervasive.

Thus, disclaimer report is issued when there is insufficient evidence to form an

opinion




Adverse report: The auditor shall express an adverse opinion when the

auditor, having obtained sufficient appropriate audit evidence, concludes that

financial statement do not give a true and fair view, and the matter od

disagreement with management is material and pervasive.

Audit certificate

An Auditor's certificate is a written confirmation of the accuracy of the facts relating to

the accounts for a particular time or to a specific matter.

Auditor is called for issuing certificate for the following:

(a) Import and Export certificate.

(b) Bonus computation certificate.

(c) Deposit Return certificate.

(d) Newspaper circulation certificate

considered while preparing a certificate:

1. Limitations of the examination should be stated. 2. Indicate the specific record covered by the auditor. 3. Fundamental assumption made for certifying. 4. Manner of the conduct of audit. 5. The information and explanations obtained. 6. Title of the certificate should be mentioned.

7. Certificate should be a self-contained document. 8. If figures from audited statements are made, then it should be mentioned in the 9. certificate. 10. Auditor should address the certificate to the client or the public authority, or person 11. requiring it as the case may be.

Auditing and Assurance standard

Auditing and Assurance standard1 (SA200)

This SA explains basic rules for auditing of any organization. These rules are

very simple but it is needed for all type of examination of accounts. This standard

classifies these rules in 10 points.

1. Integrity, objectivity and independence: auditor should do his auditing work

independently. He should not be affected due to the any approach. Whether




he is auditing of his relative or any other person, he should be impartial all the

time. Only then, his examination will be useful.

2. Confidentiality: Businessman shares many confidential information to the

auditor. It is the rule for auditor; he should not share it with other. He may only

share if as per any law, it is compulsory.

3. Skill and Competence: For solving auditing problem, auditor should use his

skills and competence.

4. Work Performed by Others: Sometime auditor has to depend on other

auditors and employees for completing his audit work. So, it is the duty of

auditor, he should appoint them as per their qualification and skill.

5. Documentation: Auditor should collect all the documents which is needed for

his audit. All document should be classified and keep in a direction that it can

easily be found when it is needed.

6. Planning: Auditor should make the plan of audit. He should complete the

audit on the time. Auditor will also make the plan about “How to audit ledger

accounts and financial statements?”

7. Audit Evidence: Audit evidence is the base of better audit. These evidence

are relating to financial information. If he has to give his opinion on the

financial information, he should obtain its all proofs.

8. Accounting System and Internal Control: Auditor should check

both accounting system and internal control system before accepting it as it is.

If there is the need of improvement in it, he can bring it in the notice.

9.Audit Conclusions and Reporting: Auditor should conclude in his reports:

Financial information follows all statutory requirements. Financial information are prepared on the basis of accounting policies. Audit report must be in written and a clear opinion on the financial information.

10.Effective Date: All the auditing and assurance standard apply on or after

1st April 1985

Audit Evidence under AAS – 5 (SA500)

As per AAS - 5, audit evidence means the collection of important information for

checking of accounting reports. You know, this world is working on the basis of proofs.

http://www.svtuition.org/2010/02/accounting.html

http://www.svtuition.org/2010/02/accounting.html




Following are the Main Ways for Collecting Audit Evidences:-

Inspection

Observation

Inquiries and Confirmation

Computation.

Analytical Reviews

1. Inspection

Inspection is the main method of audit evidence. If any auditor says that

accounting reports are not showing true and fair views, then interested parities

will demand its proofs. At that time, he will explain that he did inspection and lots

of transactions which are recorded in the accounting records are without sources.

We also examined the records and found unreliable. So, auditor should come

physically to the office of company and check accounts one by one and write it in

inspection notes which will become his audit proof. He should also check the

assets physically.

2. Observation

In the observation way of collecting audit evidence, auditor will observe the process

of accounting records which are done by others. For example, there are large

quantities of stock in the store which were counted by store keeper. Auditor can take

sample and ask the quantity. Now, store keeper will count it. Auditor will observe

whether he is counting correctly or not. On this basis, he will make his observation

report and it will be his audit evidence for telling counting process is wrong or

correct.

3. Inquiries and Confirmation

Inquiries are the set of questions which are asked by auditor from inside personnel

and outside persons for knowing useful information regarding accounting records of

company. This inquiries may be written or oral. If it is oral, auditor will write the

responses of his inquiries when he will free in same day. Confirmation is also

response of auditor's query.

4. Computation

Computation is the calculation of figures which are showing in the accounting

records. Auditor can fix the duty of his assistant to calculate the total of bills and




ledger balances and then he see whether there is difference or not in his calculation.

This audit evidence will be helpful for knowing arithmetical accuracy in the books of

accounts.

5. Analytical Reviews

In analytically reviews, auditor calculates different accounting ratios and analyse the

past financial statements for checking the variations in the figures of financial

statements.

Following Audit Evidence is Must :-

1. Existence of Asset : Whether an asset is exist in the company or not. Evidence

can get after physical checking only.

2. Right and Obligations on the Assets and Liabilities : Whether asset is of

company or not. Its proof shows its original buying bill. Whether an liability is the

obligation of company or not. Its proof will be the loan agreement document.

3. Correct Valuation: Whether valuation is correct or not, for confirming this, just go

to market and know the correct value of specific asset of company

4. Correct Measurement: Whether quantity is measure correctly or not depends on

the person who is responsible for this. Through above observation way, you can

check whether person is measuring correct or not.

5. Correct Presentation and Disclosure: To check whether all financial statements

are presented and disclosure on the basis of statutory requirement or not.




Unit 3: Company Auditor.

Synopsis

Auditors Qualification.

Disqualification.

Appointment of auditor

Removal of an auditor.

Rights and duties of a company auditor

Liabilities of a company auditor

Auditors Qualification.

Qualification of a Company Auditor:

According to Section 226(1) and 226(2) of the Companies Act, the prescribed

qualifications of an auditor are as follows:

Qualification [sec226 (1)]:

1. The auditor of a co. may be either, an individual or a firm

2. In the case of an individual, he should be a Chartered Accountant within the meaning

of Chartered Accountants Act 1949 i.e. he should be holding certificate of practice.

3. In the case of firm of auditor’s all the partners of a firm shall be chartered accountants

practicing in India within chartered accountants Act1949.

Qualification [Sec 226(2)]:

A person holding a certificate issued by central govt. under restricted state auditors rules

prior to the enactment of part B state laws 1951 can also be auditor of the co.

The central government in empowered to frame rules relating to granting renewals,

suspension or cancellation of such certificates.

Disqualification of a Company Auditor

According to section 226(3) of the Companies Act, the following persons shall not be

appointed as auditors of a company:

1. A body corporate. A company cannot audit any other company,

2. An officer or employee of the company.




3. A person who is either a partner or employee of an officer or employee of the

company.

4. A person who has taken debt from the company for amount exceeding Rs. 1,000.

5. A person who has taken guarantee of another person who has taken a loan

exceeding Rs. 1,000 from the company. 6. A person who holds shares or debentures of the company cannot audit that company.

Appointment of auditor

Removal of an auditor.

Particulars Non-Government co Listed/Specified co Government Company co

1. Application for 1st Auditor post Incorporation

-Appointed by the Board Of Directors.

-Appointed by Board Of Directors.

-Appointed by the Comptroller and Auditor General of India.

-This has to be done within 30 days from the date of Registration.



-Appointment can also be done by Members at Extraordinary General Meeting within 90 days of information.

-Appointment can also be done by Members at Extraordinary General Meeting within 90 days of the information

-Appointment can also be done by Board of Directors within 30 days of incorporation

2. Auditor at First AGM. The written consent and a certificate.

-The appointment is done by the members


-The appointment is done by the Comptroller and Auditor General of India

for a maximum term of 5/10 consecutive years

-He should be appointed within 180 days from the 1st of April

3. Appointment of Subsequent Auditor



-The appointment is done by the Comptroller and Auditor General of India within 180 days from the 1st of April

for a Maximum term of 5/10 consecutive years

4. Casual Vacancy due to resignation and other reasons

-The appointment is by the members within 3 months of the recommendations of Board and he will hold office till the next AGM

The appointment is done by the : -CAG (Comptroller and Auditor General) within 30 days

OR

-BOD within the next 30 days




Removal of first auditor: The company can remove the first auditor appointed by the

directors, in a general meeting. The central government’s approval is not needed for the

removal of first auditor’s .

Removal of subsequent auditor: Any subsequent auditor can be removed from the

office before the expiry of his term only by the company in its general meeting , after

obtaining the prior approval of the central government and following the same procedure

as laid down for appointment of an auditor in the place of a retiring auditor.

Rights and duties of a company auditor

Rights: Rights to access the books and records: Company auditor has rights to access

the books and records of the company. He can refer to any book..

Right to get explanations from company staff: Company auditor has right to get explanations from company staff. If such explanations are not received he qualifies his report.

Right to receive notice of general meetings: Company auditor has right to

receive notice of general meetings. He can attend the general meetings.

Right to visit branches: Company auditor has right to visit branches. But there

should be no separate auditors to those branches and it should be a home branch

Right to seek legal and technical advises: Company auditor has right to seek

legal and technical advises. But, in his report, he should express his own opinion but not that of experts concern.

Right to claim remuneration: Company auditor has right to claim remuneration. His remuneration will be fixed by appointing authority and it will be paid by company.

Right to refuse to commence the audit: Company auditor has right to refuse to

commence the audit. Till making the records up to date, he cannot start his work.

Right to question the board: Company auditor has right to question the board.

Board also should give explanation to him.

Right to qualify his report: Company auditor has right to qualify his report. If he

comes across any dis-satisfactory point, he can mention the same in his report.

Right of indemnity: Company auditor has right of indemnity. He can reimburse

expenses incurred by him in connection with conduction of audit work.




Duties:

Duties towards the shareholders:

1. Report shareholders about true and fair state of affairs of the company

2. State that balance sheet and profit and loss a/c give all information required by law

3. State that balance sheet and profit and loss a/c agree with the books of account

4. State that balance sheet and profit and loss a/c agree with accounting standards

5. State that he has obtained all the necessary information

6. State whether the company has maintained all books as required by law;

7. State the reasons of qualification in his report

8. State that he has received the audit report on the branch accounts audited by other

auditor and how he has dealt with the same in preparing his report

9. Auditor shall state in his report whether:

a) The loans taken are properly secured and the terms of loans are not against the

interests of the company

b) Loans given are shown as fixed deposits and the terms of loans are not against the

interests of the company

10. Transactions recorded as book entry are not against the interests of the company

11. Personal expenses of directors have not been charged to revenue a/c of company;

12. The company fulfils the requirements of CARO 2003.

Duties towards Company:

1. Prospectus: According to Sec 56, the auditor is required to certify profits or losses,

assets & Liabilities and dividend paid etc in the prospectus.

2. Statutory Report: Section 165 requires that the auditor has to certify the statutory

report.

3. Public Deposits: Section 58AA requires the auditor to report about whether the

company has followed all rules and guideline of RBI in regard to public deposits or not.

4. Signature on Audit Report: Section 229: It is duty of auditor to sign on his report.




5. Insolvency (Section 488): If the company wants itself to be declared insolvent, it is

duty of auditor to prepare profit and loss a/c for the current period.

Duties towards Government:

1. CARO-2003: The auditor has to report para-wise that the company has fulfilled all the

requirements of CARO-2003.

2. Assist the Investigation u/s 237: It is duty of auditor to assist the investigation ordered

by the CG u/s 237.

Duties towards General Public:

1.His office is of confidence and faith. He must be reliable in all respects.

2. He should reveal all material information regarding the state of affairs of the company

to the company as well as to the general public.

3. While issuing prospectus u/s 56, he should see that the prospectus does not include

any misleading information or material.

Liabilities of a company auditor

Liability for Negligence: While conducting the work of audit, auditor should take proper

care and should show proper skills. Otherwise it amounts to negligence.

For example: Mr. X is a sole trader and Mr. A is his auditor. A has conducted audit work so negligently and therefore he could not find misappropriation of cash,




amounting to Rs. 10000/-. Now A is liable to pay such amount to X, it is called liability for negligence.

Contractual Liability: In case of optional audits rights, duties, liabilities etc of auditor will be of contractual nature. So there may be terms between auditor and client according to which auditor has to become liable on certain agreed occasions. Contractual liability is agreed liability.




Unit 4: Tax Audit

Synopsis Meaning. Scope of auditor’s role under the income tax act. Certificate of claiming exemptions. Selective tax audit.

Meaning.

A tax audit is a formal examination conducted by the IRS to verify information or uncover fraud and inaccurate tax returns. The IRS selects tax returns to examine both randomly and intentionally. If the audit is selected randomly, the IRS will simply take a closer look to make sure all information are accurate. The IRS will intentionally audit certain tax returns if there are issues, errors, or possible frauds in reporting the tax return. Tax audits can be broken down into four different types:

1. Correspondence Audit: This is the least serious type of tax audit. A

correspondence audit refers to the IRS request of additional information to verify the accuracy or details of your tax return.

2. Office Audit: An office audit refers to the in-person interview with an IRS manager to process your audit. To avoid making statements that can be used against you, it's highly advisable to consult with an attorney or a tax professional before you attend the interview.

3. Field Audit: This is the most serious type of audit because the IRS agents will visit you at home or business. They may ask to see things that are related to the tax you've reported.

4. Random Audit: As mentioned above, tax returns can be randomly selected for

an audit. A random audit is made without any particular reason. The IRS auditor will review the entire tax return to make sure the information was entered correctly.

https://dictionary.findlaw.com/definition/audit.html




Scope of auditor’s role under the income tax act.

Category of person Threshold

Business

Carrying on business (not opting for presumptive taxation scheme*)

Total sales, turnover or gross receipts exceed Rs 1 crore in the FY

Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB

Claims profits or gains lower than the prescribed limit under presumptive taxation scheme

Carrying on business eligible for presumptive taxation under Section 44AD

Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit

Carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one financial year of the lock-in period i.e. 5 consecutive years from when the presumptive tax scheme was opted

If income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for

Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44AD

If the total sales, turnover or gross receipts does not exceed Rs 2 crore in the financial year, then tax audit will not apply to such businesses.

Profession

Carrying on profession Total gross receipts exceed Rs 50 lakh in the FY

Carrying on the profession eligible for presumptive taxation under Section 44ADA

1. Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme

2. Income exceeds the maximum amount not chargeable to income tax




Certificate of claiming exemptions

CA certificate in case of exemption or deduction claim by the assesse. CBDT Should make it mandatory to obtain the CA certificate in case of exemption or deduction claim by the assessees is in excess of certain amount for other than audit and salaried assessees for verifying the correctness and genuineness of claim.




Unit 5: Audit of computerized system

Synopsis

Meaning.

Types of EDP accounting system.

Problems of EDP environment.

Controls in an EDP environment.

Audit approach in an EDP environment

Computer Assisted Audit techniques.

Meaning

It is the audit of all information system assets, to ensure that they are adequately

safeguarded against vulneraries of natural and manmade disasters. The type is

identified with reference to the risk exposure. It is performed by qualified information

system auditors. The detection of frauds and errors are by ensuring various safeguards

prescribed by the systems men, internal and external auditors qualified to perform

systems audit.

EDP Audit is an analysis of an organization's computer and information systems in order

to evaluate the integrity

Types of EDP accounting system

There are various methods of data processing but there are some very popular methods

when it comes to “electronic data processing”. These methods are widely adopted in

almost every industry. Depending on the nature of requirement of data processing,

some of the most popular methods of electronic data processing are explained below:

Time-sharing

Real-time processing

Online processing

Multiprocessing

Multitasking

Interactive processing

Batch processing

Distributed processing

https://planningtank.com/computer-applications/data-processing-methods-types




Problems of EDP environment.

1.Theft of Computer Time: Information created by one person may be easily copied by

another person who can claim that the data is his own and he is the actual creator. In

computers there is nothing like original copy and duplicate copy.

2. Manipulation of Programs: An intruder, rival or competitor can manipulate, modify

or delete one or more programs of a company making the complete software unusable

3.Theft of Data: Data stored in a computer can be copied into floppies and could be

delivered to competitors. With modern communication networks available, insiders of

the company may send confidential information of a company to another. Hackers can

connect to network and steal data.

4. Stealing Software: An intruder, rival or competitor can manipulate, modify or delete

one or more programs of a company making the complete software unusable.

5. Controlling Access: Controlling of hardware and software should be the first system

security. The system should be under lock and key to prevent hardware theft. Physical

and electronic access control techniques including keyboard locks, automatic logs,

restricted access to systems and limited after-hour use.

6. Passwords: Passwords should be provided at all levels of system. They should be

changed frequently or as and when needed so that unauthorized users cannot enter into

the system.

7. Backup Copies: It is necessary to take frequent backups of all software and keep

them separate from the usual media. Backups are often taken on tapes and are used to

restore data when the primary data from the system fails. Software programs should

also be taken if necessary.

8. Security for Backup: Backups should be kept in secure place. Loss of backups means disaster for the company. Protection of backups includes fireproof containers and away from the computer installation site to avoid any natural disaster. 9. Network Control: Most companies may have computers that exchange data with

each other using a networking architecture. In such cases, PC users can connect with another person/users and access files or services from the machine. Since outsiders [competitors] can also get connected to our network, special interest

should be shown on security of systems and data located on the internet

10. Data Encryption: It refers to the means of converting data into an unrecognizable form, transmitting it over a network and decrypting it back so that the original contents




can be revealed. If an unauthorized person taps into the file, could not go through its contents.

Controls in an EDP environment

Internal Control in an Electronic Data Processing system Internal controls in computer-based accounting system are of two basic types:

1) General controls or organization controls 2) Application or procedural controls

2) General controls

Systems development and control Administrative controls

This control covers the environment in which computer processing is conducted. Some of the objectives of general control include: a) To ensure adequate segregation of duties, that is, division of functional responsibilities b) To protect information contained in computer records etc.

Systems development and control

This covers the following areas:

Standards: There should be standard procedures to be followed anytime an application

is introduced. This will include adequate feasibility studies covering investigation, fact

recording and analysis of gathered facts. It also covers the design of new systems,

implementation and most importantly systems change over procedure.

Documentation: There should be proper documentation using flow charts, decision

tables, structured English etc and all these should be incorporated in a manual for use. Testing: The new system should be fully tested before being used operationally. Programs should be checked with test and live data while the whole system should be tested using parallel running or pilot operation technique.

File conversion: Before the new system becomes operational, master files should be

set up completely and accurately. This can be achieved by a complete print out of the

contents of master files and crosschecking the results with manually maintained

records. This process is referred to as conversion checks.




Authorization: Each system development stage should be reviewed by a responsible

officer in the EDP department and it must be approved by the steering committee or

board of directors but most importantly, it must be acceptable to user department.

Conclusion.

It is important to consult with auditors because they would want to ensure that sufficient

control is present in the new system to maintain reliable accounting records.

Administrative Controls

a) Division or segregation of duties: Data processing staff should not initiate

transactions or authorize normal transactions while users should not operate the

computer by self to process transactions.

b) Control over computer operators: There should be control over computer

operators using manual with details of standard procedures to be followed always.

There should be frequent and independent review of computer usage by references to

clerical and machine logs.

There should be rotation of operators’ duty and a minimum of two operators per shift.

c) File control:

File storage procedure

File identification procedures:

Protection

File reconstruction procedures:

d) General security:

Application or procedural control This includes:

Input, processing, output and master file controls. These controls are to ensure the

completeness and accurate processing of data.

Input controls: There should be segregation of duties between users and EDP

functionals. For example, input should be originated by users only, and amendments

should be done by authorized personnel

Processing control: This relates to all arithmetic and logic operations or input carried

out by programmed procedures such as edit controls or data vet.

Output control: There should be reconciliation or matching of input totals established

prior to processing to computer generated output totals




Computer Assisted Audit techniques.

Computer Assisted Audit Techniques (CAATs) is the tool which is used by the

auditors. This tool facilitates them to make search from the irregularities from the given

data. With the help of this tool, the internal accounting department of any firm will be

able to provide more analytical results

There are two broad categories of CAAT:

Audit software: Audit software is used to interrogate a client's system. It can be either

packaged, off-the-shelf software or it can be purpose written to work on a client's

system. The main advantage of these programs is that they can be used to scrutinize

large volumes of data, which it would be inefficient to do manually. The programs can

then present the results so that they can be investigated further

Test data: Test data involves the auditor submitting 'dummy' data into the client's

system to ensure that the system correctly processes it and that it prevents or detects

and corrects misstatements. The objective of this is to test the operation of application

controls within the system

Advantages of CAATs

CAATs allow the auditor to:

Independently access the data stored on a computer system without dependence on the client;

Test the reliability of client software, i.e. the IT application controls (the results of which can then be used to assess control risk and design further audit procedures);

Increase the accuracy of audit tests; and Perform audit tests more efficiently, which in the long-term will result in a more

cost effective audit. Disadvantages of CAATs

CAATs can be expensive and time consuming to set up, the software must either be purchased or designed (in which case specialist IT staff will be needed);

Client permission and cooperation may be difficult to obtain; Potential incompatibility with the client's computer system; The audit team may not have sufficient IT skills and knowledge to create the

complex data extracts and programming required; The audit team may not have the knowledge or training needed to understand the

results of the CAATs; and Data may be corrupted or lost during the application of CAATs.




SECTION:2 TAXATION

Unit 1 Income Tax Act-1961(Meaning, Concept and Definitions)

Synopsis

Income

Person

Assessee

Assessment year

Pervious year

Agricultural Income

Exempted Income

Residential Status of an Assessee

Fringe benefit Tax

Tax deducted at Source

Capital and Revenue Income and expenditure.

Income [sec.2(24)]

Income is a periodically monetary return with some sort of regularity. It may be recurring in

nature. It may be broadly defined as the true increase in the amount of income which comes to a

person during a fixed period of time. Income includes all the receipts in the form of cash /any

kind.

Profits & Gains,

Dividends,

Voluntary contributions received by a trust,

Perquisites in the hand of employee

special allowance or benefit

City compensatory allowance/dearness allowance

Any benefits or perquisites to a Director

Capital Gains

Any benefits or perquisite to a representative assessee




Any sum chargeable

Insurance profit

Winnings from lottery

Employees contribution towards provident fund

As per definition the given list is not exhaustive. All sorts of receipts other than above

mentioned comes under the meaning of income.

Person

The term “Person” Includes

An individual

A Hindu Undivided family(HUF)

A company

A firm

An association of persons (AOP) or

a body of individuals (BOI), whether incorporated or not

A local authority; and

Every artificial juridical person not felling within any of the preceding sub-

clauses are - An individual includes a natural person. I.e. a human being. It

includes a male, female, child or lunatic or idiot person also. However

income of a minor child is taxed in the hands of his parents, while income of

a lunatic or idiot person is taxable in the hands of a representative assessee

in accordance with the law.

A Hindu undivided family is the normal condition of Hindu Society. The members

of Hindu Undivided Family are living in a state of union unless the contrary is

stated. A Hindu Undivided Family (H.U.F.) is a unit of assessment under the

Income-Tax Act. It consists of all the persons lineally descended from a common

ancestor. Hindu Undivided Family consists of males and females.

A company is an artificial person.

Assessee

“Assessee” means a person by whom income tax or any other sum of money is payable

under the Act. It includes every person in respect of whom any proceeding under the Act

has been taken for the assessment of his income or loss or the amount of refund due to

him or a person who Is assessable in respect of income or loss of another person or




who it deemed to an assessee, or an assessee in default under any provision of the Act.

This term includes the following persons : Every person in respect of whom any

proceeding under this act has been taken for the assessment of his income or of the

income of any other person in respect of which he is assessable, or of the loss

sustained by him or by such other person, or of the amount of refund due to is or to such

other person. Every person who is deemed to be an assessee under any provision this

Act. Every person who is deemed to be an assessee in default under any provision of

this Act. According to the above definition, it is not necessary that the assessee must

pay tax on his own income. He may also be liable to pay tax on the income of others,

e.g. the legal representative will be treated as an assessee for assessing the income of

the deceased person. A person, who is under a legal obligation to deduct tax at source

on payment of salary, dividend, interest etc. does not deduct tax or after deducting tax,

fails to deposit the same in the Govemment’s treasury, is treated as an assessee in

default. A person representing a non resident minor or lunatic Is treated as an assessee

for computing the income of that person.

Assessment year

Assessment Year means the period of 12 months commencing on the 1®* of April immediately after the previous year [P.Y] Assessment is the year in which the income of the previous year is assessed to tax. The Income earned during a particular year is

assessed to tax in the following year

Previous year

Previous Year means the Financial Year immediately preceding the Assessment Year.

But in some cases Previous Year may not be of 12 months period as in the case of

business or profession, newly setup or source of income newly coming into existence.

The Previous Year shall be the year beginning the date of setting up of the business of

quotation or the date on which the new source of income comes into existence.

Residential Status of an Assesses

The Indian Income Tax is a tax on a person in relation to his income. Assessee i.e.,

persons by whom the tax is payable, are classified as: individual, Hindu Undivided

family; companies; Local Authorities; Firms and Other Association of Person.

They are further divided in to three categories with reference to their residence viz.

Residents and Ordinarily Residents;




(ii) Residents but not Ordinarily Residents; and

(iii) Non-residents in India.

The incidence of taxation varies with the residential status of an Assesses, while the

classification according to the legal status of assesses is necessary for the following

reasons : There are different rates of income tax for assesses of different legal status.

There are different maximum exemption limits in the case of different classes of

assesses, e.g. individuals. Hindu undivided families, companies, co-operative societies

etc. There are different provisions for allowances and investment. There are different

tests for residence. Basic conditions determining an individual is Resident: u/s 6(1) an

individual is said to be resident in India in any Previous Year, if he satisfies at least one

of the following basic conditions:

He is in India in the Previous Year for a period if182 days or more or

He is in India for a period of 60 days or more during the Previous Year and

365 days or more during 4 years immediately preceding the Previous Year.

Basic conditions to test as to when a Resident

Individual is ordinarily resident in India

a resident individual is treated as “Resident and ordinarily resident” in India if he

satisfies the following 2 additional conditions:

he has been resident in India in at least 2 out of 10 Previous Year [according to basic

conditions noted above] immediately preceding the relevant Previous Year; and

he has been in India for a period of 730 days or more during 7 years immediately

preceding the relevant Previous Year. Resident but not ordinarily resident.

An individual becomes resident but not ordinarily resident in India in any of the following

circumstance:

If he satisfies at least one of the basic conditions but none of the additional conditions; ii)

If he satisfies at least one of the basic conditions and one of the two additional

conditions




Unit2. Computation of Taxable Income under the different Heads of

Income

Synopsis Income from Salary – Salient features, meaning of salary, Allowances and

tax Liability, Perquisites and their Valuation, Deductions from salary.

Income from House Property -Basis of Chargeability, Annual Value, Self

occupied and let out property, Deductions allowed

Income from Salary

Profits and Gains of Business and Professions-Definitions, Deductions

expressly allowed and disallowed.

Capital Gains-Chargeability-definitions-Cost of Improvement Short term

and long term gains-deductions.

Income from other sources-Chargeability - deductions - Amounts not

deductible.

Income from Salary

1. Salary as defined u/s 17(1) of the Income Tax Act, 1961, which includes

wages

any annuity or pension

any gratuity

any fees

commission

perquisites or profits in lieu of or

in addition to any salary or wages

any advance of salary

any payment received by an employee in respect of any period of leave not availed by

him

The portion of the annual accretion in any previous year to the balance of the credit of

an employee participating in a recognized provident fund to the extent it is taxable, and

transferred balance in a recognized provident fund to the extent it is taxable. Basis of

charge of salary income : Basis of charge u/s 15. As per Section 15 salary consists if

any salary due from on employer (or a former employer) to on assessee in the previous

year, whether actually received or not . Any salary paid or allowed to him in the previous

year by or on behalf of an employer (or a former employer), though not due or before it

became due; and Any arrears of salary paid or allowed to him in the previous year by or




on behalf of an employer (or a former employer), if not charged to income tax for an

earlier previous year.

ALLOWANCES:

Allowances is defined as a fixed quantity of money or other substance given regularly in

addition to salary for the purpose of meeting some particular requirement connected

with the services rendered by the employee or as compensation for unusual conditions

of that service. Under the Act, it is taxable under Section 15 on ‘due’ or ‘receipt’ basis,

irrespective of the fact that it is paid in addition to or in lieu of salary.

PERQUISITIES

The word ‘Perquisites’ in the ordinary sense means any casual emolument attached to

an office. Or position in addition to salary or wages. It may take various forms. It is a

gain or profit which incidentally arises from employment in addition to regular salary or

wages.

Taxability of various components of salary

S.

No. Section Particulars Taxability/Exemption

1 17 Basic salary Fully taxable

2 17 Dearness

Allowance Fully taxable

3 17 Bonus, fees or

commission Fully taxable

House rent allowance

10(13A) read

with Rule 2A

Least of the following is exempt:

a) Actual HRA Received




House

rent

allowance

b) 40% of Salary (50%, if house situated in Mumbai,

Calcutta, Delhi or Chennai)

c) Rent paid minus 10% of salary

* Salary = Basic + DA (if part of retirement benefit) +

Turnover based Commission

Section Particulars Taxability/Exemption

10(14) Children education allowance Up to Rs. 100 per month per child up to a maximum of 2 children is

exempt

10(14) Hostel expenditure allowance Up to Rs. 300 per month per child up to a maximum of 2 children is

exempt

10(14) Transport Allowance granted to an employee to meet

expenditure for the purpose of commuting between place

of residence and place of duty

Rs. 3,200 per month granted to an employee, who is blind or deaf and

dumb or orthopedically handicapped with disability of lower extremities

LEAVE SALARY ENCASHMENT As per service contract and discipline, normally, every employee is allowed

certain period of leave (with pay) every year. Such leave may be availed during

the year or accumulated by the employee. The accumulated leave lying to the

credit of an employee may be availed subsequently or encashed. When an

employee receives an amount for waiving leave lying to his credit, such amount is

known as leave salary encashment.

Case A: Leave salary received during continuation of service Leave salary

during continuation of service is fully taxable in the case of the Government

employee as well as other employees [Sec. 17(1)(va)].

Case B: Leave salary received by Government employee on termination of

service At the time of termination of service, leave salary received by the Central

or State Government employee is fully exempted u/s 10(10AA)(i). Taxpoint:




Government employee here does not include employee of local authority or

public sector undertaking or foreign Government employee.

Case C: Leave salary received by non-Government employee on

termination of service At the time of termination of service, leave salary

received by a non-Government employee (including employee of foreign

Government, local authority, public sector undertaking) is exempted to the

minimum of the following u/s10(10AA)(ii):

a) Actual amount received as leave salary

b) ` 3,00,000/-

c) 10 × Average salary p.m.

d) To the maximum of 30 days (normally taken as 1 month) average salary1 for

every completed year of service2, subject to deduction for actual leave availed

during the tenure of service.

Academically: [{(1 × completed year of service) – leave actually taken in terms of

month} × average salary p.m.]

1. Average salary means Basic + DA# + Commission (as a fixed percentage on

turnover) being last 10 months average salary ending on the date of

retirement or superannuation. (e.g. if an employee retires on 18/11/2018 then

10 months average salary shall be a period starting from 19th Jan’ 2018 and

ending on 18th Nov’ 2018).

2. # If DA is not forming a part of retirement benefit then the same shall not be

included in salary for the above purpose. However, DA itself shall be fully

taxable.

While calculating completed year of service, ignore any fraction of the year. E.g.

10 years 9 months shall be taken as 10 years.

Notes

a) Leave encashment received from more than one employer: Where leave

encashment is received from more than one employer in the same previous year,

the aggregate amount exempt from tax shall not exceed the statutory deduction

i.e. ` 3,00,000.

b) Earlier deduction claimed for leave encashment: While claiming the

statutory amount (i.e. ` 3,00,000) any deduction claimed earlier as leave

encashment shall be reduced from ` 3,00,000.




Perquisites


17(2)(i)/(ii) read with Rule 3(1)

Rent free unfurnished accommodation provided to Central and State Government employees

License fees determined in accordance with rules framed by Government for allotment of houses shall be deemed to be the taxable value of perquisites.

17(2)(i)/(ii) read with Rule 3(1)

Unfurnished rent free accommodation provided to other employees

Taxable value of perquisites

i. If house property is owned by the employer, the taxable value of perquisite shall be:

A. 15% of salary, if population of city where accommodation is provided exceeds 25 lakhs

B. 10% of salary, if population of city where accommodation is provided exceeds 10 lakhs but does not exceed 25 lakhs

C. 7.5% of salary, if accommodation is provided in any other city


10(14) City Compensatory Allowance

Fully Taxable

10(14) Fixed Medical Allowance Fully Taxable

10(14) Tiffin, Lunch, Dinner or Refreshment Allowance

Fully Taxable

10(14) Servant Allowance Fully Taxable

10(14) Project Allowance Fully Taxable

10(14) Overtime Allowance Fully Taxable

10(14) Telephone Allowance Fully Taxable

10(14) Holiday Allowance Fully Taxable

10(14) Any Other Cash Allowance Fully Taxable




ii. If house property is taken on

lease or rent by the employer,

the taxable value of perquisite

shall be:

i. Lease rent paid or payable by

the employer or 15% of the

salary, whichever is lower

Deduction from salary

S. No. Section Particulars Taxability/Exemption

1 16(ia) Standard Deduction Rs. 50,000 or the amount of salary,

whichever is lower (Any salaried person &

pensioners)

2 16 (ii) Entertainment

Allowance received by

the Government

employees (Fully

taxable in case of other

employees)

Least of the following is exempt from tax:

a) Rs 5,000

b) 1/5th of salary (excluding any allowance,

benefits or other perquisite)

c) Actual entertainment allowance received

3 16(iii) Employment

Tax/Professional Tax.

Amount actually paid during the year.

However, if professional tax is paid by the

employer on behalf of its employee than it

is first included in the salary of the

employee as a perquisite and then same

amount is allowed as deduction.




Income from House Property

Income chargeable to tax under the head “house property” Rental income from a property being

building or land appurtenant thereto of which the taxpayer is owner is charged to tax under the

head “Income from house property”.

Rental income from sub-letting Rental income in the hands of owner is charged to tax under the

head “Income from house property”.

Rental income from a shop Rental income from a property, being building or land appurtenant

thereto, of which the taxpayer is the owner is charged to tax under the head “Income from house

property”.

Computation of gross annual value of a let out property

Gross annual value of a property which is let-out throughout the year is determined in the

following manner:

Step 1: Compute reasonable expected rent of the property (manner of computation is discussed

in later part)

Step 2: Compute actual rent of the property (manner of computation is discussed in later part).

Step 3: Compute gross annual value.

Profits and Gains of Business and Professions

Business is an activity of purchase and sell of goods with the intention of making profit.

Profession is an occupation requiring intellectual skill. E.g. Doctor, Lawyer etc. Vocation is an

activity, which requires a special skill, which is used to earn income. e.g. Painter, Singer etc. For

income tax purpose there is no difference between business income, profession income and

vocation income.

Section 2(13): Business includes any trade, commerce or manufacture or any adventure or

concern in the nature of trade, commerce or manufacture. Explanation: ‐ Thus business is any

activity carried out with the intention to earn profit, whether such an activity is continuous or

temporary is immaterial. In determining whether a particular transaction is an adventure in the

nature of trade or not, total impression and effect of all relevant facts and circumstances of the

transaction have to be seen. To bring a transaction within the term “business”, the transaction

must be a “trade” or in the nature of “trade”. Hence everything depends upon the facts and

circumstances of the case. E.g. A person making investment of surplus funds in shares or

debentures cannot be deemed to be carrying on the business of trading in shares although

occasionally he may be selling “some” shares or debentures and making gains thereon.




METHODS OF COMPUTING TAXABLE INCOME

1. Gross Sales or Gross fees as the case may be are to be taken as the base if Receipt

and Payment A/c or cash Book is given. From this Gross income expenses which are

specifically allowed by the income tax act are deducted to arrive at taxable income.

2. If profit & loss a/c or income & expenditure a/c is given Net Profit or (Surplus) is taken

as the base and then following adjustments are made: ‐

1) Expenses, which are debited, to profit & loss a/c, but disallowed by the Income Tax

Act and either fully or partially are added back.

2) Expenses, which are not debited, to profit & loss a/c but which are allowed by the

Income Tax Act are deducted.

3) Income that is credited to profit & loss a/c but not taxable at all or taxable under some

different head is to be deducted.

4) Income that is not credited to profit & loss a/c, but which is chargeable to tax as

business income is to be added.

Under Section 28 following are the income chargeable to tax under the head Profits or

Gains from Business or profession: ‐

1) Profits and Gains of any business or profession that is carried on by the assessee at

any time during the previous year.

2) Any compensation or other payment due to or received by an assessee for loss of

agency due to termination or modification of terms.

3) Income derived by a trade, professional or a similar association for specific services

performed for its members.

4) Any profit on sale of a license granted under Imports (controls) Order 1955 made

under Imports & Exports (control) Act of 1947.

5) Any cash assistance (by whatever name called) received or receivable against

exports under any scheme of Government of India.

6) Any duty of customs or excise repaid or repayable as drawback to any person against

exports under the Customs and Central Excise Duty’s Drawback Rules 1971.




7) Any profit on the transfer of the Duty entitlement pass book scheme under export

import policy.

8) Any profit on the transfer of the Duty free replenishment certificate under export

import policy.

9) The value of any benefit or perquisite whether convertible into money or not arising

from business or exercise of a profession e.g. A gift received by the lawyer from his

client.

10) Any interest, salary, bonus, commission or remuneration due to or received by

partner of a firm from such firm.

11) Sum received or receivable in cash or in kind under an agreement for not carrying

out any activity in relation to any business or not sharing any know how, patent,

copyright, trade mark, license franchise or any other business or commercial right of

similar nature or information or technique likely to assist the manufacture or processing

of goods or provision of services.

12) Any sum received including bonus under Keyman Insurance Policy.

13) Any sum received (or receivable) in cash or kind, on account of any capital asset

(other than land or goodwill or financial instrument) being demolished, destroyed,

discarded or transferred, if the whole of the expenditure on such capital asset has been

allowed as a deduction under section 35AD.

14) Income from a speculative business.

DEDUCTIONS FOR EXPENSES SPECIFICALLY ALLOWED SECTION 30 TO

SECTION 43D

1. Rent, rates, taxes, repairs and insurance of building (Section 30):

1) If assessee has occupied the premises as a tenant, rent of the premises and if he has

agreed to bear cost of repairs, such cost is allowed as deduction, provided it is not of

capital nature.

2) If assessee has occupied premises as the owner; repairs, land revenue, local taxes,

insurance premium etc. are allowed as deduction. However, no expenditure in form of

capital expenditure is allowed.




2. Repairs & Insurance of machinery, Plant & Furniture (Sec.31): Amount paid on

account of repairs and insurance premium against risk of damage in respect of

machinery, plant & furniture are allowed as deduction provided they are not of capital

nature.

3. Depreciation u/s 32: Under Section 32 depreciation on assets is allowed as

deduction while computing income from business or profession. To claim this deduction

following conditions should be satisfied:

1) Assessee should be owner of the asset.

2) Asset must be used for the business.

3) Such use must be in the previous year. Depreciation is allowed not on individual

asset items, but on block of assets under following categories: ‐

1) Buildings

2) Plant & Machinery

3) Furniture

4) Intangible Assets acquired after March 31, 1998 such as know‐ how, Patents,

Trademarks, licenses, franchises or any other business or commercial rights of similar

nature. The term plant includes ships, vehicles, books, scientific apparatus and surgical

equipment used for the business but excludes tea bushes or live stock. If any asset

falling in block of assets is acquired during the year and put to use during the previous

year for less than 180 days depreciation on such asset shall be restricted to 50% of the

normal depreciation. No depreciation is allowed on motor car which is manufactured

outside India and acquired on or after 1st March 1975 but before 1st April 2001




Unit3: Computation of Total Taxable Income of an Individual

Synopsis

Gross total Income

Deductions u/s- 80C, 80ccc to 80 U

Income Tax calculation

Rates applicable for respective Assessment year

Education cess.

Gross total Income

During a specified period. According to Section 14 of the Income Tax Act 1961,

the income of a person or an assessee can be categorised under these five heads.

Gross income for an individual consists of income from wages and salary plus other

forms of income, including pensions, alimony, interest, dividends, and rental income.

Gross income for a business, also known as gross profit or gross margin, includes the

gross revenue of the firm less cost of goods sold, but it does not include all of the other

costs involved in running the business.

Individual gross income is part of an income tax return and—after certain deductions

and exemptions—becomes adjusted gross income and then taxable income.

DEDUCTIONS/EXEMPTIONS

Deductions available to senior citizens in respect of health insurance premium and

medical treatment [80D & 80DDB]

Section 80D, inter-alia, provides that a deduction upto Rs 30,000/- shall be allowed to

an assessee, being an individual or a Hindu undivided family, in respect of payments

towards annual premium on health insurance policy, or preventive health check-up, of a

senior citizen, or medical expenditure in respect of very senior citizen. It is proposed to

amend section 80D so as to raise this monetary limit of deduction from Rs 30,000/- to

Rs 50,000/.

Section 80DDB of the Act, inter-alia, provide that a deduction is available to an individual and Hindu

undivided family with regard to amount paid for medical treatment of specified diseases in respect of

very senior citizen up to Rs 80,000/- and in case of senior citizens up to Rs 60,000/- subject to




specified conditions. It is proposed to amend the provisions of section 80DDB of the Act

so as to raise this monetary limit of deduction to Rs 1,00,000/- for both senior citizens

and very senior citizens. Further, it is proposed to omit the word very senior citizen.

Further, u/s 80D, in case of single premium health insurance policies having cover of

more than one year, it is proposed that the deduction shall be allowed on proportionate

basis for the number of years for which health insurance cover is provided, subject to

the specified monetary limit.

These amendments will take effect, from 1st April, 2019.

Deduction u/s 80TTB for interest income

is proposed to insert a new section 80TTB so as to allow a deduction upto Rs. 50,000/-

in respect of interest come from deposits held by senior citizens. However, no deduction

under section 80TTA shall be allowed in these cases.

This amendment will take effect from 1st April, 2019.

Deduction in respect of income of Farm Producer Companies [Sec.80P]

100% deduction u/s 80Pis proposed to be extended to Farm Producer Companies

(FPC), having a total turnover upto Rs 100 Crore, whose gross total income includes

any income from-

i. the marketing of agricultural produce grown by its members, or

ii. the purchase of agricultural implements, seeds, livestock or other articles intended for

agriculture for the purpose of supplying them to its members, or

iii. the processing of the agricultural produce of its members

The benefit shall be available for a period of five years from the financial year 2018-19.

This amendment will take effect from 1st April, 2019.

Measures to promote start-ups [Sec.80-IAC]

i. The benefit of deduction u/s 80-IAC would also be available to start ups incorporated

on or after the 1stday of April 2019 but before the1stday of April, 2021;

ii. The requirement of the turnover not exceeding Rs 25 Crore would apply to seven

previous years commencing from the date of incorporation;




iii. The definition of eligible business has been expanded to provide that the benefit

would be available if it is engaged in innovation, development or improvement of

products or processes or services, or a scalable business model with a high potential of

employment generation or wealth creation.

The amendment will take effect from 1st April, 2018.

Incentive for employment generation [Sec. 80-JJAA]

- At present, a deduction of 30% is allowed u/s 80-JJAA in addition to normal deduction

of 100% in respect of emoluments paid to eligible new employees who have been

employed for a minimum period of 240 days during the year. However, the minimum

period of employment is relaxed to 150 days in the case of apparel industry. In order to

encourage creation of new employment, it is proposed to extend this relaxation to

footwear and leather industry.

Further, it is also proposed to rationalize this deduction of 30% by allowing the benefit

for a new employee who is employed for less than the minimum period during the first

year but continues to remain employed for the minimum period in subsequent year.

This amendment will take effect, from 1st April, 2019.

Extending the benefit of tax-free withdrawal from NPS to non-employee

subscribers [Sec.10(12A)]

Under Sec 10(12A), an employee contributing to the NPS is allowed an exemption in

respect of 40% of the total amount payable to him on closure of his account or on his

opting out. However, this option is not available to non-employee subscribers. In order

to provide a level playing field, it is proposed to amend Sec 10(12A) to extend the said

benefit to all subscribers w.e.f. AY 2019-20.

Deductions in respect of certain incomes not to be allowed unless return is filed

by the due date [Sec.80AC]

- Sec 80AC currently provides that no deduction would be admissible u/s 80IA, 80IB,

80IC, 80ID or 80IE unless the return of income by the assessee is furnished on or

before the due date specified u/s 139(1). This burden is not cast upon assesses

claiming deductions under several other similar provisions.

- Accordingly, it is proposed to extend scope of Sec 80AC to provide that the benefit of

deduction under the entire class of deductions under the heading “C.—Deductions in

respect of certain incomes” in Chapter VIA like Sec 80P [Deduction in respect of income




of Co-operative Societies], Sec 80RRB [Deduction in respect of royalty on patents]etc.

shall not be allowed unless the return of income is filed by the due date.

Amendment to take effect from AY 2018-19

Income Tax Slab Rate for AY 2020-21 for Individuals

Individual (resident or non-resident), who is of the age of less than 60 years on the last

day of the relevant previous year:

Net income range Income-Tax rate

Up to Rs. 2,50,000 Nil

Rs. 2,50,000- Rs. 5,00,000 5%

Rs. 5,00,000- Rs. 10,00,000 20%

Above Rs. 10,00,000 30%

Resident senior citizen, i.e., every individual, being a resident in India, who is of the age

of 60 years or more but less than 80 years at any time during the previous year:



Rs. 3,00,000 – Rs. 5,00,000 5%

Rs. 5,00,000- Rs. 10,00,000 20%

Above Rs. 10,00,000 30%

Resident super senior citizen, i.e., every individual, being a resident in India, who is of

the age of 80 years or more at any time during the previous year:






Rs. 5,00,000- Rs. 10,00,000 20%

Above Rs. 10,00,000 30%

Surcharge: - 10% of income tax where total income exceeds Rs. 50,00,000.

15% of income tax where total income exceeds Rs. 1,00,00,000.

Health and Education cess : - 4% of income tax and surcharge.

Note: - A resident individual is entitled for rebate under section 87A if his total income

does not exceed Rs. 5,00,000. The amount of rebate shall be 100% of income-tax or

Rs. 12,500, whichever is less.




Unit4: Miscellaneous

Synopsis

Tax deducted at source

Return of Income

Advance payment of Tax

Methods of payment of tax

Forms of Return

Refund of Tax (Theory)

Tax deducted at source

Deduction in respect of interest income to senior citizen [Sec.194A]

It is proposed to amend section 194A so as to raise the threshold for deduction of tax at

source on interest income for senior citizens from Rs 10,000/- to Rs 50,000/-. This

amendment will take effect, from 1st April, 2018.

TDS on 7.75% GOI Savings (Taxable) Bonds, 2018 [Sec.193]

Government has decided to discontinue the existing 8% Savings (Taxable) Bonds,

2003 with a new 7.75% GOI Savings (Taxable) Bonds, 2018.The interest received

under the new bonds will continue to be taxable like in the case of the 2003 bonds.

Return of Income

ITR are forms that are mandatorily filled by individuals whose annual income greater

than a pre-set threshold limit set by the Finance Department.

These forms provides the details of individual’s gross income from various sources and

the tax paid by the individual taxpayer on the gross income. It also provides the details

of refund claims by the assesses as per the rules set by the Finance and IT Department.

In simple terms, ITR forms are taxpayers statement detailing his/her earnings Salary ,

interest, dividends, capital gains, or other profits, the total tax paid on earnings and the

appropriate refunds to be repaid to him/her by the Government.




Form ITR-1

Also known as the Sahaj Form, ITR-1 has to be filed by individual taxpayers alone. ITR-

1 is filed by taxpayer’s having income up to Rs 50,00,000 from below mentioned

sources:-

If the source of Income is Salary or Pension .

If the source of income is from one housing property(the case where losses of previous

years are carried forward are not included in this ITR).

Individuals with income sources like fixed Deposits, Investments, Shares etc

ITR-1 can not be filed if taxpayer is a joint owner in House Property.

Individuals whose net agriculture income is less than Rs 5,000.

Income from other sources (excluding winning from lottery and income from race

horses, income tax under section 115BBDA or Income of nature referred to in section

115BBE)

If the clubbed income of minor or wife is shown, then ITR-1 can be filed only in case

their source of income as mentioned in the above points.

ITR-1 is not valid for assessee who has deposited more than Rs 1 Crore in Bank

Account or has incurred Rs 2 Lakh/ Rs 1 Lakh in foreign travel/ electricity expenses.

Form ITR-2

This form was introduced during the assessment year 2015-16 for use by Hindu

Undivided Family (HUF) or any individual. The following individuals/taxpayers can file

ITR-2 Form.

Those individuals who is not eligible to file ITR-1 and

Those taxpayer having no income under the head “profits or gains of business or

profession”.

Form ITR-3

ITR 3 Form is for use by a Hindu Undivided Family or an individual

Who claims income under the head “profits or gains of business or profession”

https://blog.saginfotech.com/file-itr-2-online

https://blog.saginfotech.com/file-itr-2-online




Who work as a partner in a firm.

claims income under the head “profits or gains of business or profession”.

Who has presumptive income of greater than Rs 50,00,000

Form ITR-4

Also known as Sugam, ITR 4 Form is for use by HUF/ individual / Partnership Firm

whose total income consist of :-

Business income evaluated in reference with special provisions mentioned in section

44AD and section 44AE of the Act for computation of business income; or

Professional income evaluated in reference to special provisions of sections 44ADA; or

ITR-4 can not be filed if taxpayer is a joint owner in House Property.

Salary/ Pension; or

Income from One House Property (excluding cases where a loss is brought forward

from previous years); or

Income from other sources (excluding windfalls like lotteries or horse racing)

Form ITR-5

ITR-5 is for firms, LLPs, AOPs (Association of persons) and BOIs (Body of Individuals).

Further, it is also meant for an artificial juridical person referred to in section 2(31)(vii),

cooperative society and local authority.

Advance payment of Tax

What is Advance Tax?

Advance tax means income tax should be paid in advance instead of lump sum

payment at year end. It is also known as pay as you earn tax. These payments have to

be made in instalments as per due dates provided by the income tax department.

Who should pay Advance Tax?

Salaried, freelancers and businesses– If your total tax liability is Rs 10,000 or more in

a financial year you have to pay advance tax. Advance tax applies to all taxpayers,

https://cleartax.in/s/income-tax




salaried, freelancers, and businesses. Senior citizens, who are 60 years or older, and do not

run a business, are exempt from paying advance tax.

Presumptive income for Businesses–The taxpayers who have opted for presumptive taxation

scheme under section 44AD have to pay the whole amount of their advance tax in one

instalment on or before 15 March. They also have an option to pay all of their tax dues by 31

March.

Presumptive income for Professionals– Independent professionals such as doctors, lawyers,

architects etc. come under the presumptive scheme under section 44ADA. They have to pay the

whole of their advance tax liability in one instalment on or before 15 March. They can also pay

the entire amount by 31 March.

Due Dates for payment of Advance Tax

For taxpayers who have opted for Presumptive Taxation Scheme under section 44AD &

44ADA – Business Income

Due Date Advance Tax Payable

On or before 15th March 100% of advance tax

Refund of Tax

A tax refund is a reimbursement to a taxpayer of any excess amount paid to the federal

government or a state government. Taxpayers tend to look at a refund as a bonus or a stroke of

luck, but it really represents an interest-free loan that a taxpayer makes to the government.

Due Date Advance Tax Payable

On or before 15th June 15% of advance tax

On or before 15th September 45% of advance tax less advance tax already paid

On or before 15th December 75% of advance tax less advance tax already paid

On or before 15th March 100% of advance tax less advance tax already paid

https://cleartax.in/s/section-44ada




Unit5: Income Tax Authorities

Synopsis

Income Tax Authorities.

Organization structure of Income Tax Authorities

Administrative and Judicial Originations.

Central board of direct tax.

Functions and powers various Income Tax Authorities

Income Tax Authorities

There are seven income tax authorities, namely,

(1) Central Board of Direct Tax

(2) Directors of Inspection

(3) Commissioners and Additional Commissioners

(4) Appellate Assistant Commissioners

(5) Inspecting Assistant Commissioners

(6) Income-tax Officers

(7) Income-tax Inspectors

Organization structure of Income Tax Authorities

Administrative [ Income Tax Authorities] [ Sec. 116]

The Central Board of Direct Taxes constituted under the Central Boards of Revenue

Act, 1963 (54 of 1963),

Directors-General of Income-tax or Chief Commissioners of Income-tax,

Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-

tax (Appeals),




(cc) Additional Directors of Income-tax or Additional Commissioners of Income-tax or

Additional Commissioners of Income-tax (Appeals),

(cca) Joint Directors of Income-tax or Joint Commissioners of Income-tax.

Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy

Commissioners of Income-tax (Appeals),

Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,

Income-tax Officers,

Tax Recovery Officers,

Inspectors of Income-tax.

(ii) Assessing Officer [ Sec. 2(7A)]

"Assessing Officer" means the Assistant Commissioner or Deputy Commissioner or

Assistant Director or Deputy Director or the Income-tax Officer who is vested with the

relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or sub-

section (2) of section 120 or any other provision of this Act, and the Joint Commissioner

or Joint Director who is directed under clause (b) of sub-section (4) of that section to

exercise or perform all or any of the powers and functions conferred on, or assigned to,

an Assessing Officer under this Act;

(iii) Appointment of Income-Tax Authorities [ Sec. 117]

Power of Central Government: The Central Government may appoint such persons as

it thinks fit to be income-tax authorities. It kept with itself the powers to appoint

authorities upto and above rank of an Assistant Commissioner of Income-Tax [ Sec. 117

(1)]

Power of the Board and Other Higher Authorities : Subject to the rules and orders of

the Central Government regulating the conditions of service of persons in public

services and posts, the Central Government may authorize the Board, or a Director-

General, a Chief Commissioner or a Director or a Commissioner to appoint income-tax

authorities below the rank of an Assistant Commissioner or Deputy Commissioner. [

Sec. 117 (2)]

Power to appoint Executive and Ministerial Staff : Subject to the rules and orders of

the Central Government regulating the conditions of service of persons in public

services and posts, an income-tax authority authorized in this behalf by the Board may

appoint such executive or ministerial staff as may be necessary to assist it in the

execution of its functions.




(iv) Control of Income-Tax Authorities [ Sec. 118]

The Board may, by notification in the Official Gazette, direct that any income-tax

authority or authorities specified in the notification shall be subordinate to such other

income-tax authority or authorities as may be specified in such notification.

Central board of direct tax.

The Central Board of Direct Taxes is a statutory authority functioning under the Central

Board of Revenue Act, 1963. The officials of the Board in their ex-officio capacity also

function as a Division of the Ministry dealing with matters relating to levy and collection

of direct taxes.

Functions and Organisation

The Central Board of Direct Taxes is a statutory authority functioning under the Central

Board of Revenue Act, 1963. The officials of the Board in their ex-officio capacity also

function as a Division of the Ministry dealing with matters relating to levy and collection

of direct taxes.

Historical Background of C.B.D.T.

The Central Board of Revenue as the apex body of the Department, charged with the

administration of taxes, came into existence as a result of the Central Board of Revenue

Act, 1924. Initially the Board was in charge of both direct and indirect taxes. However,

when the administration of taxes became too unwieldy for one Board to handle, the

Board was split up into two, namely the Central Board of Direct Taxes and Central

Board of Excise and Customs with effect from 1.1.1964. This bifurcation was brought

about by constitution of two Boards u/s 3 of the Central Board of Revenue Act, 1963.

Composition and Functions of CBDT

The Central Board of Direct Taxes consists of a Chairman and following six Members:

Chairman

Member (Income-tax)

Member (Legislation & Computerisation)

Member (Personnel & Vigilance)

Member (Investigation)

Member (Revenue)

Member (Audit & Judicial)




Functions and powers various Income Tax Authorities

An Assessing Officer is a person who has the jurisdiction (rights) to make assessment of

an Assessee, who is liable under the Income-tax Act. An Assessing Officer is an

individual person appointed by the Income-tax department. He performs all powers

and functions as assigned to him under the Income-tax Act.

Collection of information.

Power of survey.

Power to call for information.

Power to possess book of accounts.

Power of search and seizure.

Power related to discover and produce evidences.

Reference’s

1. http://www.mastermindsindia.com/

2. www.caclubindia.com

3. https://taxguru.in/

4. http://newhorizonindia.edu/

5. http://www.svtuition.org/

6. https://accountlearning.com/

7. . Indian Income Tax -: Dr. Vinod Singhania.

8. Income Tax -: Manoharem.

9. Practical Auditing -: Spicer and Peglar.

http://www.mastermindsindia.com/

http://www.caclubindia.com/

https://taxguru.in/

http://newhorizonindia.edu/

http://www.svtuition.org/

https://accountlearning.com/

synopsis - dacc.edu.in

Documents