Internal Audit in GST - Checklist for GSTR 1, GSTR 3B & GSTR 2B

GST law consists of robust audit mechanism to examine and ensure non-evasion of taxes and due compliance of the provisions. A key aspect of this framework is the internal audit under GST, which involves a systematic review of GST records and returns to identify discrepancies, prevent tax evasion, and ensure adherence to GST regulations. 

One of the primary checkpoints in a GST internal audit is the reconciliation of book records against GST returns, helping to identify any mismatches or potential risks of non-compliance. Additionally, GST authorities have begun issuing show cause notices for non-compliance, underscoring the importance of proactive internal audits.

Internal audit of GST records can help a business to check the operating effectiveness of internal financial controls, identify significant risk areas and take necessary steps to mitigate the risks. This article gives you a comprehensive checklist that can be used for reviewing the GST records internally and identifying any errors or data gaps.

Understanding GST Returns & Their Role in Audit

GST returns are periodic filings that entail details of sales, purchases, GST collected, and input tax credit claimed by a taxpayer. Some crucial returns under GST include GSTR-1 (outward supplies), GSTR-3B (summary return), and GSTR-2B (auto-populated inward supplies based on suppliers’ filings). These provide the data against which auditors verify the accuracy and completeness of tax declarations.

During an internal audit, the auditor scrutinises GST returns to ensure that the turnover declared, taxes paid, and input tax credits claimed are accurate and comply with GST laws. Discrepancies between GSTR-1 and GSTR-3B or between GSTR-3B and GSTR-2B can indicate errors, omissions, or potential tax evasion. Hence, understanding the structure, data requirements, and inter-relationship of these returns is critical for effective GST audits and for minimising risks of penalties and interest.

Checklist for Auditing GSTR-1

• Verify that all sales invoices are accurately declared with correct GSTIN of recipients.
• Check if all the sales attracting reverse charge mechanism (RCM) are recorded correctly.
• Confirm reporting of interstate supplies to unregistered persons.
• Review zero-rated and deemed exports supplies for correct classification.
• Ensure debit notes, credit notes, and refund vouchers issued to registered and unregistered dealers are properly reported.
• Validate advances received and adjusted during the tax period.
• Cross-check HSN-wise summary of outward supplies and ensure if reporting meets turnover-based reporting thresholds.
• Test check sample invoices for mandatory invoice details as per GST invoice rules.
• Verify that place of supply details are correctly mentioned where applicable.
• Confirm that amendments to invoices or returns are timely and accurately reflected.

Checklist for Auditing GSTR-3B

• Confirm that details of sales (taxable, nil rated, exports, exempted) match with underlying invoices and GSTR-1 data.
• Verify reporting of credit and debit notes in the specified format.
• Check details of advances received and adjusted during the period.
• Review purchases including taxable, nil rated, exempted, and imports.
• Validate input tax credit claimed against eligible invoices and GSTR-2B.
• Ensure correct reporting of reverse charge supplies.
• Reconcile tax liabilities (CGST, SGST, IGST) declared with payments made.
• Compare summary figures with accounting records and ERP data.
• Identify and investigate any discrepancies or omissions to avoid interest and penalties.

Reconciliation & Error Rectification

Reconciliation refers to the process of comparing data across GST returns and accounting records to identify mismatches or errors. 

Key reconciliations include:

1. GSTR-1 vs GSTR-3B: Ensuring sales reported invoice-wise in GSTR-1 match the summary figures in GSTR-3B.
2. GSTR-3B vs GSTR-2A: Verifying input tax credit claimed in GSTR-3B aligns with supplier-reported purchases in GSTR-2A.
3. Books of accounts vs GST returns: Confirming all taxable sales and purchases are correctly recorded and reported.

Errors identified during reconciliation, such as omissions, incorrect tax rates, or mismatched invoice details, should be rectified promptly by filing amendments in subsequent returns. This proactive approach helps avoid interest, penalties, and show cause notices from GST authorities. Maintaining detailed documentation of reconciliation and corrections supports audit readiness and compliance.

Benefits of Internal Audit Under GST

• Early Detection of Errors: Internal audits help identify discrepancies and errors in GST returns before attracting scrutiny from tax authorities.
• Compliance Assurance: Ensures adherence to GST laws, rules, and filing requirements, thereby reducing the risk of penalties and interest.
• Improved Financial Controls: Highlights weaknesses in accounting and invoicing processes, enabling corrective action to strengthen internal controls.
• Accurate Input Tax Credit Claims: Helps verify eligibility and correctness of input tax credit claims, thereby preventing excess claims and associated liabilities.
• Risk Mitigation: Identifies potential areas of tax exposure and non-compliance, allowing businesses to take timely remedial measures.
• Enhanced Decision Making: Provides management with reliable data on tax liabilities and credits, aiding strategic financial planning.
• Streamlined GSTR Filing: Facilitates smoother and error-free GST return filing, reducing the likelihood of notices and audits by tax authorities.
• Centralised Monitoring: For businesses with multiple GSTINs, internal audits provide consolidated insights into GST compliance across branches or units.

Checking GSTR 3B vis-à-vis GSTR 1 & GSTR 2B

Every month, businesses have to file a summary return GSTR 3B and report consolidated figures for sales and purchases. They are also required to compute and pay the taxes based on self-declaration Also, they are required to file GSTR-1 monthly/ quarterly based on the turnover limit and report invoice wise detail of outward supplies. 

Based on the GSTR-1 filed by suppliers, GST portal will auto-populate GSTR 2B return for a particular recipient. Problem arises where there exists a difference between the figures declared in the GSTR-1 by a supplier and the corresponding summary figure declared in the GSTR-3B by him. Auditor should include the following checkpoints to ensure nil data gap and avoid the notices from GST authorities –

• Reconciling the total summary figures as per GSTR 3B with the total of the Outward Invoices as per GSTR 1 for a particular month
• Outward supplies (other than zero-rated, nil rated and exempted),
• Zero-rated outward supplies,
• Nil rated and exempted outward supplies,
• Inward supplies on which GST has to be paid by the recipient under reverse charge mechanism
• Checking the amount of input tax credit as per GSTR 3B vis-à-vis details mentioned in GSTR 2B. Businesses are eligible for the final input tax credit on the basis of GSTR 2B.
• Ensuring that the credit notes & debit notes have been mentioned in GSTR 1 at the correct places.

Interest & Penalties in GST Act

If the recipient claims excess input tax credit, he is liable to pay interest @24% p.a on the excess tax amount. Auditor should reconcile the GSTR 3B with GSTR 2B to ensure that the company shouldn’t claim excess input tax credit, and where it has been claimed in excess, company should pay interest and tax amount on due date.  If the GST authorities identify data gaps between GSTR 3B and GSTR 1 returns, taxpayer may have to pay interest and penalty. Read more about the penalties and offenses here.

Amendment in GSTR 1

If the auditor finds any data gaps , he should recommend the management to amend the invoices and details at summary level in GSTR 1. To know more about the amendments in GSTR 1, you can read them here.

Checking Particulars of Invoice

There are specific rules related to the details to be mentioned in the invoices. If invoice is not issued according to the rules, a penalty of Rs.25,000 may be imposed. The auditor must test check few sample invoices to ensure that all the details are mentioned in the invoices. If the auditor finds any variance in the format of the invoice, he should advise the management to amend the invoice and incorporate the requirements of GST invoice rules.

Reversal of Input Tax Credit Due to Non-Payment in 180 Days

A recipient has to pay the invoice amount and GST to the supplier within 180 days from issuance of the invoice. If he fails to make the payment, the input tax credit will be reversed and added to the output tax liabilityInternal Auditor should check the invoice payment date against the invoice issue date to figure out the transactions where the recipient has made the payment to the supplier after 180 days.

Points to check

• Difference between invoice date and payment date – It shouldn’t be more than 180 days
• Payment amount should be equal to invoice amount plus GST. If the payment amount is less than invoice amount plus GST, then input tax credit to the extent of short payment has to be reversed.

If the auditor finds any discrepancies on a regular basis, he should recommend the management to revise the invoice payment process and pay all the dues before 180 days to ensure that entire input tax credit can be claimed.

Reviewing e-Way Bill vis-à-vis Invoices

In respect of the movement of goods worth more than Rs.50,000, the transporter has to carry e-way bill along with the invoice. In few cases, the e-way bill has to be issued even if the value of goods is less than Rs.50,000. You can read about the e-way bill in detail here. The auditor must incorporate the checkpoints in audit checklist to ensure that the business is complying with the e-way bill provisions.

Consequences of mismatch in e-way bill vis-a-vis invoice

An e-way bill, once generated, cannot be deleted or edited. It can only be canceled within 24 hours of its generation if the movement of goods doesn’t happen or the actual movement is different from the details mentioned in e-way bill. If the goods are moved without issuance of e-way bill, the proper officer has the power to impose the penalty and/or detain the goods till the owner of the goods doesn’t pay appropriate tax and penalty. For more detailed reading on penalties, click here. The auditor must incorporate the checkpoints in audit checklist to ensure that the business is complying with the e-way bill provisions. He should recommend the management to apply effective controls before issuing an e-way bill to avoid any financial or legal implications.

Points to check

• Business is issuing e-way bill wherever necessary,
• Details mentioned in the e-way bill match with the details of sales or purchase invoice as the case may be.

Moving Goods in Non-Motor Vehicles

If the goods are transported in non-motor vehicles, there is no requirement to issue an e-way bill. Some businesses are resorting to the medieval method of transporting the goods in bullock or horse carts  to step aside the e-way bill rules.Internal auditor should closely check the transactions worth more than Rs. 50,000 where the e-way bill is not issued due to transportation of goods in non-motor vehicles.  He should identify whether non-motor vehicles were used genuinely or for bypassing the e-way bill system. If any anomalies are detected, he should report them to help the business avoid massive penalties.