Tax Head’s Guide to Tax Audit AY 2022-23

Tax Audit under Section 44AB of the Income Tax Act (ITA) is the examination of the books of accounts of enterprises carrying business or profession. The tax heads of enterprises must ensure that books of accounts are correctly maintained and that the calculation of taxable income is as per the provisions of the ITA. The tax audit should not be taken lightly as any adverse audit opinion may damage the enterprises’ reputation. It is because the investors are particularly interested in the audit opinion.

How to Start if Tax Audit Applies to an Enterprise?

Enterprises to whom the tax audit applies must file an income tax return in any applicable ITR Form ITR-3 to ITR-7 and should appoint a practicing Chartered Accountant (CA) to audit the accounts book. The observations during the audit are reported by the appointed CA in the tax audit report. 
 

The applicability of tax audits depends upon the turnover/sales/gross receipts of the business or profession. 
 

If the tax audit applies to an enterprise, below are the steps to follow:

• Appoint a CA in practice to audit the books of accounts.
• Address Audit findings 
• File an income tax return in applicable ITR Form ITR-3 to ITR-7).
• CA will file the audit report in a specified format (Form 3CB-3CD or Form 3CA-3CD) about the compliance of the person under audit.

Due Date to Upload Tax Audit Report

The due date to file the tax audit report for accounts related to FY 2021-22 (AY 2022-23) is 30th September 2022. When tax audit is applicable, the due date to file ITR for the FY 2021-22 (AY 2022-23) is 31st October 2022.
 

Essential Things to do Before the Commencement of Tax Audit 

Firstly, the top executives and internal audit team must ensure that ethics, moral behaviour, and an operational control system are in order before the audit ensues. Key points the finance department of the entity needs to ensure during tax audit are-

• The opening balances are taken from the previous year’s audited Balance Sheet.
• Maintain a list of indirect taxes and other laws applicable to the enterprise (including its various manufacturing units, service units, branches, godowns etc.) along with the registration details/certificate under that relevant law. 
• Vouchers related to all the expenses incurred are properly maintained. 
• All the bank statements of the relevant financial period are provided to the auditor/audit team after reconciling with the balance in the books of accounts.
• Cross-verify details with the compliances made in various laws. For example, purchase and sales details from GSTR-1, GSTR-2A, GSTR-3B and other applicable forms or returns. 
• Reconcile other parts of income reported in the profit and loss account with the Form 26AS/Annual Information Statement (AIS), bank statement, etc.
• Adequate documentation, especially management approval letters, for the transactions like the sale/purchase of capital assets and the receipt of loans and advances must be made available.
• Ensure availability of the proof of direct and indirect taxes paid (challans), proof of statutory law compliances (ESI Fund, PF deduction, Professional tax, Gratuity, etc.), and depreciation schedule as per the income tax law.
• Proofs of the deductions and allowances claimed should be available.

How to Address Audit Findings?

At the completion of the audit, the management must plan to address each audit finding included in the current year’s auditor’s reports. 

The management must respond directly to the findings and provide specific actions that management commits to take to correct the finding. The response must be clear, concise, recorded,  and must indicate the eagerness, ownership and responsibility to comply with the recommendations as clear action items.

The opinion expressed by the tax auditor/audit team is not binding on the taxpayer. If the management does not agree with the audit findings or believes corrective action is not required, then it must provide sufficient explanation to the auditor/audit team with specific reasons. The management may take a different view while preparing his ITR. It is advisable to state a viewpoint and support the same by any judicial pronouncements on which the management relies.

Failure to address the audit findings may result in disruption in business operations and delay the issuance of the audited financial statements. Further, delay in compliance with the requirements of the income tax law may lead to penalties and other severe consequences.

Hence, efficient handling of the audit process, coupled with a progressive approach, will help your organisation to stay ahead of emerging risks. The enterprises should make proper use of technology to ensure tax compliance.  For example, digitisation of documents for easy access and retrieval during audits, automating departmental reporting procedures to eliminate human errors, setting up pre-checked validations for cash or bank transactions, etc. Automation saves time and empowers the management to make informed decisions and help manage the audit insights with ease. 
 

What is the process of uploading and filing the tax audit report?

• Step 1: Log in to the income tax e-filing account.
• Step 2: Adds appointed CA to your income tax account.
• Step 3: Upload P&L and Balance Sheet. The P&L and Balance Sheet will be sent for authorisation to CA (added to the income tax account).
• Step 4: The CA approves the P&L and Balance Sheet.
• Step 5: The CA will upload the tax audit report. The report will then reflect in your e-filing account for authorisation.
• Step 6: Review and approve the tax audit report. 
• Step 7: File your ITR using Digital Signature Certificate.

Removal of the Tax Auditor

A question may arise about whether you can remove a tax auditor. The answer would depend upon the facts and circumstances of the case. The management can remove the tax auditor on valid grounds for instances like a delay in submission of the audit report for an unreasonable time, and there is no possibility of getting the audit report before the specified date. However, the removal of the tax auditor cannot be on the grounds because he has given an adverse audit report or is likely to give an adverse report. 

Conclusion

This is all about how CFOs and CEOs can manage and handle tax audits. They can refer to the tax audit report format to understand the scope of the tax audit. One should also refer to the observations or information given in the previous tax audit report to understand the auditor’s approach to the audit of books of accounts.