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Tax Audit u/s 44AB A study on the application of Relevant Accounting Standards

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Title: Tax Audit u/s 44AB A study on the application of Relevant Accounting Standards


1
Tax Audit u/s 44AB A study on the application of
Relevant Accounting Standards
Presentation at National Conference on Direct
Taxes and Allied Laws organised by the Direct
Taxes Committee of ICAI and hosted by Mangalore
Branch of SIRC of ICAI on 21.08.2010
Chinnsamy Ganesan FCA DISA(ICA)
2
Structure of the discussion
  • Peer Review Stage III Vs Tax Audit
  • Tax Audit latest ICAI announcements
  • Accounting Standards issued by CBDT
  • Accounting Standards applicability to Tax Audit
  • AS Vis-à-vis Income Tax Act
  • AS of ICAI Vs AS of Income Tax Act
  • Implication of AS of ICAI on Taxation
  • Common pitfalls in reporting

3
Peer Review stage III
  • Covers tax audit assignments
  • Statement of Peer Review issued by ICAI
  • Quality of audit report
  • Compliance with Technical Standards
  • Compliance with Technical Standards
  • Accounting Standards
  • Compliance of Guidance Notes
  • Auditing and Assurance Standards

4
AS and Tax Audit
Case 1 Statutory Accounts year ended March 31,
2010
Case 2 Statutory Accounts year ended Dec 31, 2009
5
Accounting Standards under IT ACT
  • NAS1 Significant Accounting Policies
  • NAS2 Net Profit or Loss and Changes in
    accounting policies
  • If an enterprise complies with NAS1 and NAS2 but
    does not comply with AS issued by ICAI What to
    do?

6
Accounting Standards not applicable to Tax Audit
A myth or reality?
General purpose financial statements
To be subjected to audit what about
compilation?
Subject to audit but not carrying on any
Business or Industrial or Commercial activity
Concept of Materiality
7
Accounting Standards not applicable to Tax Audit
A myth or reality?
What about Not for Profit Organisations?
Management or Auditors who is responsible for
compliance?
What is the impact of Companies (Accounting
Standards) Rules 2006?
Any impact with the introduction of Roadmap to
IFRS?
8
Companies (Accounting Standards) Rules 2006
Central Government, in consultation with NACAS,
has issued the Companies (Accounting Standards)
Rules, 2006 notifying accounting standards 1-7
and 9-29, effective for COMPANIES for accounting
periods commencing on or after 7 December 2006
  • The Notified standards by and large follow the
    ICAI standards except for certain differences
  • ICAI standards would remain applicable for
    non-corporate entities

9
AS of ICAI Vs AS under CAR 2006
CAR 2006
AS of ICAI
Applicable Only to NCEs
Applicable Only to Companies
Three Levels prescribed
Two Levels prescribed
Relaxation mainly for disclosures and not for
recognition and measurement
10
Applicability an overview (CAR 2006)
Care for applicability of AS 18
Some relaxation on disclosures
11
Applicability an overview (NCEs)
Some relaxation on disclosures
AS 15 relaxation for entities with less than 50
employees
12
Form 3CA 3CB Suggested reporting on Form 3CD
  • Materiality Concept
  • Responsibility and Scope Para

Particulars given in Form No. 3CD and the
Annexures thereto are furnished by the
Companys management. In accordance with the
Guidance Note on Tax Audit under Section 44 AB of
the Income Tax Act, 1961 issued by the Institute
of Chartered Accountants of India our examination
is carried out on a test basis to obtain
reasonable assurance that the particulars as
disclosed in Form No. 3CD and the Annexures
thereto together with the notes thereon are free
of material misstatement.
13
AS 1 vis-à-vis Tax Audit
  • AS 1 Disclosure of Accounting Policies
  • Concept of prudence is not fully considered
  • Certain provisions/ write off not allowed as
    expenditure

14
AS 2 vis-à-vis Tax Audit
  • AS 2 Valuation of Inventories
  • Market value Vs Net realisable value
  • AS 2 does not prescribe valuation method for
    inventory of shares, debenture etc
  • Section 145 A of the IT Act
  • Inclusive method under the IT Act
  • Exclusive method under AS 2

15
AS 7 vis-à-vis Tax Audit
  • AS 7 Accounting for Construction Contracts
  • completion method Vs completed contract method
  • Accounting for foreseeable future loss
  • Presumptive taxation u/s 44AD
  • Present limit Vs limit proposed by DTC

16
AS 10 vis-à-vis Tax Audit
  • AS 10 (Revised) Property, Plant and Equipment
  • Ready for the intended use Vs put to use
  • Whether depreciation claim is optional?
  • Idle machinery under AS 10
  • Recognition criteria for Subsequent expenditure

17
AS 11 vis-à-vis Tax Audit
  • AS 11 The effect of changes in foreign exchange
    rates
  • AS 11 controversy still continues even after the
    introduction of Companies Accounting Standards
    Rule 2006
  • Treatment of unrealised forex loss adjusted in
    the carrying value for Income Tax Depreciation

18
AS 12 vis-à-vis Tax Audit
  • AS 12 Accounting for Government Grants
  • If condition attached subsidy can not be fully
    reduced from the cost as per AS 12
  • To be reduced from Cost of asset for IT
    depreciation computation

19
AS 13 vis-à-vis Tax Audit
  • AS 13 Accounting for Investments
  • Current Investments to be written down to market
    value if it is lower
  • Permanent diminution in value of Long-Term
    Investments to be provided for
  • If so provided not allowable under IT Act
  • Only on disposal

20
AS 15 vis-à-vis Tax Audit
  • AS 15 Accounting for Retirement Benefits
  • Provision for Gratuity Sec 40 A (7)/ 43B
  • Provision for Compensated Absence 43B
  • Bonus Vs performance incentives

21
AS 16 vis-à-vis Tax Audit
  • AS 16 Borrowing Costs
  • Concept of Qualifying Assets
  • Suspension of borrowing cost whether admissible
    under the Income Tax Act
  • Capitalisation of borrowing Costs Vs 36 (1) (iii)

22
AS 18 vis-à-vis Tax Audit
  • AS 18 Related Party Transactions
  • Divided position of definition of related party
  • Reconciling and considering the impact of
    disclosures
  • AS 18 Vs 40 (A) (2)(b)
  • Loans to Directors and their relatives

23
AS 19 vis-à-vis Tax Audit
  • AS 19 Accounting for Leases
  • Depreciation allowability on finance leases
  • Lessor under the Income Tax Act
  • Lessee under AS 19

24
AS 22 vis-à-vis Tax Audit
  • AS 22 Taxes on Income
  • No concept of deferred tax under the IT Act
  • Reversal of DTA for MAT computation recent
    judicial pronouncement

25
AS 26 vis-à-vis Tax Audit
  • AS 26 Intangible Assets
  • Amortisation over useful economic life
  • Retirement of intangibles to be fully charged off
  • Depreciation rate specifically mentioned under IT
    Act
  • Distinction between Intangible Asset and Computer
    Software

26
AS 28 vis-à-vis Tax Audit
  • AS 28 Impairment of Assets
  • Impairment to be tested at every balance sheet
    date and loss to be accounted as an expense
  • Not allowable till the asset is disposed
  • Reversal of Impairment Loss will not have any
    impact in IT Computation
  • Impact on MAT Computation a grey area

27
AS 29 vis-à-vis Tax Audit
  • AS 29 Provisions, Contingent Liabilities and
    Contingent Assets
  • Legal Vs Constructive obligation
  • Provision towards Asset Retirement Obligation

28
AS 30,31 and 32 vis-à-vis Tax Audit
  • Financial Instruments Standards
  • Fair valuation
  • Mark to Market Losses

29
Common pitfalls in reporting
  • Changes in Accounting Policy
  • Whether necessary to be mentioned in the
    Auditors Report even if not material
  • Forex differences adjusted in carrying value of
    fixed assets not removed for IT depreciation, if
    unrealised
  • Related party transactions not reconciled with
    40A (2) (b) disclosures
  • 43B opening and closing unpaid position Vs
    Current Liabilities

30
Common pitfalls in reporting
  • Interest accrued on Loans Vs disclosure under 43B
  • Funded interest of term loans Vs 43B
  • Reconciling the excise duty records with
    financial statement figures (CENVAT/ VAT
    Disclosures)
  • Reconciliation of movement in loan accounts with
    disclosure under 269 SS and 269 T
  • Share Application money Vs Loan
  • IFST whether to be disclosed
  • Security Deposits received

31
Common pitfalls in reporting
  • TDS payable account analysis Vs Chapter XVII-B
    disclosures
  • Year end provisions Vs during the year payments
  • Non-deduction of TDS on outstanding expenses
  • Liabilities outstanding under current liabilities
  • Year end provisions on estimated basis
  • Reconciliation of quantitative details
  • Raw Materials
  • Finished goods

32
Thank you
ganesanca_at_yahoo.com 99401 30403
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