Introduction to Value Added Tax Audit

1
Introductionto Value Added Tax Audit
2
Session Overview

• In the previous session we discussed
• the Attributes and the implementation of Value
  Added Tax (VAT), and
• we also discussed in detail the relevant
  provisions of the Himachal Pradesh Value Added
  Tax (Act of 2005) and relevant Rules.

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Session Overview

• In this session and in subsequent session we will
  discuss
• the mandate for auditing State-Level Value Added
  Tax,
• Audit Objective,
• Audit Approach, and all the instruction on audit
  of receipts issued by the Office of the
  Comptroller and Auditor General of India and
  detailed steps for the audit of State-Level Value
  Added Tax.

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Session Overview

• In this session we will cover
• Mandate for audit of receipts
• Indian Audit and Accounts Departments Auditing
  Standards in so far as they are relevant to audit
  of VAT
• Orders issued by the Comptroller and Auditor
  General of India on the audit of receipts.

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Learning Objective

• At the end of the session, the trainee will be
  able to state the mandate for taking up audit of
  State-level VAT, IAADs Auditing Standards
  applicable to audit of receipts and Orders issued
  by the Comptroller and Auditor General of India
  on audit of receipts.

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Audit of Value Added Tax Receipts

• Audit of Value Added Tax Receipts is conducted by
  two agencies, viz.
• Audit by Tax Administration
• Audit by Indian Audit and Accounts Department

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Audit by Tax Administration

• Provided in VAT Acts
• Conducted by Tax Administration in the office,
  branch, warehouse of the dealer
• provided in the various Acts to give statutory
  backing to the audit/inspections conducted by Tax
  Administration to detect any tax avoidance
  practice employed by delinquent dealers.

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Audit by Tax Administration

• Such an audit provides an assurance to the Tax
  Administration that the Tax Laws have been
  followed by taxpayers while filing the
  Self-Assessment Tax Returns under Value Added
  Tax.
• Such an audit by Tax Administration is on the
  accounts, records and stocks of the taxpayers.

9
Audit by Indian Audit and Accounts Department

• Audit of records of the Tax Administration is
  conducted by the IAAD under the mandate granted
  to the CAG in the Constitution, read with the
  CAGs (DPC) Act, 1971, as amended from
  time-to-time. The audit by the IAAD is mainly
  concentrated on the records of the Tax
  Administration to see that they have performed
  their duties and exercised their powers properly
  as prescribed in the relevant VAT Act and Rules
  made there under.

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Audit by Indian Audit and Accounts Department

• The objective of audit by IAAD is to see that
  rules and procedures are designed in a manner and
  also implemented in a manner to secure an
  effective check on the assessment, collection and
  allocation of revenue.

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Audit by Indian Audit and Accounts Department

• Audit by IAAD provides an assurance to the
  legislature and the citizen that the requirements
  of VAT law as enacted by legislature contained in
  the concerned VAT Act has been followed by Tax
  Administration and tax has been collected and
  credited to public revenue properly and correctly.

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Mandate for audit of receipts by CAG

• Section 16 of the Comptroller and Auditor
  Generals (Duties, Powers and Conditions of
  Service)Act,1971authorises the CAG of India,
• To audit all receipts payable into the
  Consolidated fund of Union or of States or of a
  Union Territory having a legislative Assembly.

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Mandate for audit of receipts

• to satisfy himself that rules and the procedures
  to secure an effective check on the assessment,
  collection and proper allocation of revenue have
  been designed and are being duly observed.
• to make for this purpose such examination of the
  accounts as he may think and report upon.

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Mandate for audit of receipts

• State-level Value Added Tax (an indirect tax on
  sale and purchase of goods and commodities and an
  alternative to the State Sales Tax) is an
  important source of State revenues, which is
  credited to the Consolidated Fund of the
  concerned State.

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Mandate for audit of receipts

• By virtue of the statutory duty, the Comptroller
  and Auditor General is duty bound to audit the
  tax collections under the State-level Value Added
  Tax.

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Mandate for audit of receipts

• Section 18 of the Act, authorizes the Comptroller
  and Auditor General, in connection with the
  performance of his duties
• to inspect any office of accounts , including
  treasuries and such offices responsible for the
  keeping of initial and subsidiary accounts as
  submit accounts to him

17
Mandate for audit of receipts

• to require that any accounts, books, paper and
  other documents which deal with or form the basis
  of or otherwise are relevant to the transactions
  to which his duties in respect of audit extend,
  shall be sent to such place as he may appoint for
  his inspection and

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Mandate for audit of receipts

• to pose such questions or make such observations
  as he may consider necessary to the person in
  charge of the office and to call for such
  information as he may require for the preparation
  of any accounts or report which it is his duty to
  prepare.

19
Mandate for audit of receipts

• Section 21 of the Act authorizes the Comptroller
  and Auditor General to delegate any power
  exercisable by him to any other officer of his
  department by general or special order.
• Section 23 of the Act authorize him to make
  regulations for carrying into effect the
  provisions of the Act, in so far as they relate
  to the scope and extent of audit, and the broad
  principles in regard to audit of receipts and
  expenditure.

20
Audit Reports

• Article 151 of the Constitution requires the
  Comptroller and Auditor General to submit reports
  relating to the accounts of the Union / State/
  Union territory having a legislative Assembly to
  the President or the Governor of the State or the
  Administrator of the U.T. as the case may be, for
  being placed before Parliament / Legislature of a
  State/ U.T.

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Audit Reports

• The Constitutional provisions are thus clear and
  state in unambiguous terms that the Comptroller
  and Auditor General is authorized to audit all
  receipts (including State-level VAT), report on
  them, lay down detailed regulations for such
  audit, determine the scope and extent of such
  audit and also decide on the quantum of audit.

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Audit Reports

• He is as such authorized to inspect any office
  keeping the accounts and records relating to VAT,
  or to direct that the accounts, records or
  documents be sent to such place as may be
  determined by him.

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Auditing Standards

• Comptroller and Auditor General issued the
  Auditing Standards' applicable to the Indian
  Audit and Accounts Department in the year 1994 .
• These standards prescribe the norms of basic
  principles and practices which government
  auditors are expected to follow.

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Auditing Standards

• The standards have to be supplemented by
  guidelines contained in the Manuals of Standing
  Orders and other Manuals governing the work in
  the Indian Audit and Accounts Department.

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The standards applicable to audit of receipts

• Audit Objective
• The broad aim of audit is to safeguard the
  financial interests of the State and to uphold
  and promote public accountability and sound and
  economical financial management principles.

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Audit Objective

• Audit assists the legislature in the exercise of
  financial control over the executive Government
• The executive Government is responsible for
  enforcing economy and efficiency in expenditure
  of public money
• It is the duty of Audit to bring to light
  wastefulness, failures, system weaknesses,
  deficiencies and the circumstances leading to
  infructuous expenditure (or system failures in
  collection of tax revenues).

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Scope of Audit

• The term audit includes both Financial Audit and
  Performance Audit.
• The Comptroller and Auditor General is empowered
  to decide the nature, scope, extent and quantum,
  including the form and content of audit reports
  in respect of audit to be conducted by him or on
  his behalf.

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Basic postulates

• Auditing Standards prescribe the norms of
  principles and practices which the Auditor is
  expected to follow in his conduct of audit.
• The Auditor must exercise due care and concern
  in complying with the Auditing

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Basic postulates

• Auditor must exercise his judgment in determining
  the auditing procedure necessary, in the
  circumstances, to afford a reasonable basis for
  his opinion and the content of his report. The
  Auditor should exercise due professional care and
  caution in

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Basic postulates

• Auditor should exercise due professional care and
  caution in extending the audit steps and the
  enquiries related to illegal acts so as not to
  interfere with the potential future
  investigations or legal proceedings.

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Basic postulates

• The Auditor should maintain independent attitude
  which ensures that audit findings are impartial
  and viewed as such.
• Auditors should not allow any situation that
  might lead to questioning of their independence.
• The right of independent evaluation is inherent
  in the audit function.

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General Audit Standards

• The audit personnel assigned to conduct an audit
  should collectively possess adequate proficiency
  and competence for the task.
• The audit organization should have appropriate
  manuals and other written guidance and
  instructions concerning the conduct of audit
  which should be periodically updated.

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General Audit Standards

• an appropriate internal control system, and
• should adopt policies and procedures to review
  the efficiency and effectiveness of its own
  internal control system and procedures.

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Operational Audit Standards

• The audit organization and the Auditor should
  plan the audit work to ensure high quality audit
  in a timely and economic, efficient and effective
  way.
• Audit should be properly guided, directed and
  supervised.
• Sufficient understanding of the internal control
  system should be obtained to express an opinion
  on the reliability, fidelity and integrity of the
  systems and procedures of the entity to determine
  the extent of audit tests to be performed.

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Operational Audit Standards

• In the audit of Government revenue receipts such
  as taxes, duties and other levies including the
  VAT the Auditor should satisfy himself that the
  rules and procedures are designed to secure an
  effective check on the assessment, collection and
  proper allocation of revenue and are being duly
  observed

36
Operational Audit Standards

• Interpretation of law is a judicial function the
  Auditor does not review a judicial decision.
  Audit may, however, point out cases where there
  is an apparent lacuna or loophole in law
• The Auditor should see that the internal
  procedures adequately secure correct and regular
  accounting of demands, collection and refunds,
  that no amounts due to the Government are left
  outstanding.

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Operational Audit Standards

• Due professional care should be exercised during
  audit. in specifying, gathering and evaluating
  sufficient, competent and relevant evidence to
  support the audit conclusions regarding the
  organization

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Reporting Standards

• On the completion of each audit assignment, the
  Auditor should prepare a written report setting
  out the observations and conclusions in an
  appropriate form its content should be easy to
  understand and free from vagueness or ambiguity

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Reporting Standards

• The report should be independent , objective,
  fair, complete and concise as the subject matter
  permits, and should include only information
  which is relevant and supported by sufficient and
  competent audit evidence

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Instruction from Headquarters Office on audit of
receipts

• Audit Approach
• Audit of major tax receipts is taken up
  separately.
• Audit approach should be to see that effective
  systems for assessment, collection and proper
  allocation are in place and are being followed.

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Instruction from Headquarters Office on audit of
receipts

• Audit of regulations and procedures for
  assessment, collection and refunds
• Audit should make such examination as it thinks
  fit with respect to correctness of sums brought
  to account.

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Instruction from Headquarters Office on audit of
receipts

• Audit should ascertain that adequate
  arrangements for detection or prevention of
  frauds exist.
• Audit of effectiveness of rules and orders
  governing collection of receipts requires
  detection of any defects, lacuna or loopholes in
  the provisions, rules or orders, and drawing
  departments attention to it for suitable
  amendment.

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Examination of outstanding dues

• Audit has to ensure that, there are adequate
  internal procedures providing for,
• collection and utilization of data necessary for
  the computation of the demands or refunds under
  law
• the prompt raising of demands on tax payers in
  the manner required by law

44
Examination of outstanding dues

• the regular accounting of demands, collection and
  refunds
• that the relevant and requisite records are being
  maintained properly
• that adequate control and monitoring mechanism
  have been devised to prevent loss or leakage of
  revenue

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Examination of outstanding dues

• that double refunds, fraudulent or forged refund
  orders or other losses of revenue through fraud,
  default or errors are properly brought to light
  and investigated
• that the estimates of revenue have been realized
  at the end of the financial year.

46
Cross verification

• Returns themselves may not always reveal under
  declaration of sale or income, in such cases , a
  unit based approach may not suffice instead an
  interdisciplinary approach may be called for
  ,e.g. VAT assessments of dealers who are also
  manufacturers, the data furnished in their
  returns should be verified with the corresponding
  data furnished by them in their Central
  Excise/Income tax returns