Auditing BBA VI Sem BBA N 605 Unit 4th Notes

 Unit IV 

Recent trends in Auditing: Nature and Significance of Cost Audit, Tax Audit, Management Audit.

 

Tax Audit

Tax audit is done by an Auditor on behalf of the Government to make sure that every provisions of Income Tax has been compiled by the assesse or not. Practically it is not possible for the Income Tax department to verify each and every detail of the assesse.

Tax audit can be conducted by a Chartered Accountant or any other person who can be appointed as an Auditor u/s 141 of the Companies Act, 2013.

Mandatory Tax Audit

According to Section(44 AB), provisions relating to Compulsory Tax Audit are as follows −

• If the total sales or gross receipts of a business during the previous year exceeds Rupees One Crore.

• If the gross receipt of a profession exceeds Rs. 25 lacs in previous year.

• If the business or profession of a person is covered under section 44AD, 44AE, 44B, 44BB, 44BBA and 44BBB and assesse claims that his income from said business is less than as computed under above said sections.

In all the above cases, audit of accounts is compulsory.

Section 44(AD)

The main features of Section 44AD are as follows −

• This section is applicable to profit from any business whether it is retail trading or civil construction business or any other business.

• The Assesse should be a resident individual of Resident Hindu Undivided Family or Resident Partnership Firm.

• According to Section 44AD income of assesse deemed to be 8% of total turnover or gross receipt.

• If the assesse claims that his income is below 8%, audit of his account is compulsory.

• This section is applicable only in case where gross receipts or turnover of the business is less than one Crore.

• This section does not cover income coming out of any profession.

• Total turnover of all business will be taken into one account where assesse carrying more than one business.

• If the assesse is carrying both business and profession, this section will be applicable to his business income only.

• Turnover of business or gross receipt will cover VAT, Excise duty, Cess and other levy, packing sale and freight if not shown separately in sale invoice.

• Turnover or gross receipt of business will be computed excluding sale of fixed assets, sale of investments and cash or other discounts, packing sale or freight charges if shown separately in invoices.

Section 44(AE)

The main features of Section 44(AE) are as follows −

• This section is applicable to any person engaged in playing, leasing or hiring truck.

• He should not own more than 10 trucks any time during the previous year including taken on hire-purchase or Installment basis.

• This section is not applicable to those who operate trucks on hire without owning them.

• His deemed income will be Rs. 5,000/- per month or part of the month in case of heavy vehicle and Rs. 4,500/- per month or part of the month in case of other than heavy vehicle or income as declared by the assesse whichever is higher.

• If the assesse does not opt for the scheme, he shall get his accounts audited.

Section 44(B)

The main features of Section 44(B) are as follows −

• This section is applicable to profits and gains of a non-resident from shipping business.

• His deemed income will be equal to 7.5% of the aggregate amount receipt in India.

• If the assesse does not opt for this scheme he will have to get his account audited.

Section 44(BB)

The main features of Section 44(BB) are as follows −

• This section is applicable to non-residents whose profits and gains of business of oil-exploration.

• His deemed profit will be equal to 10% of amount payable to him in India or outside India.

• If the assesse does not opt for this scheme he will have to get his account audited.

Section 44(BBA)

The main features of Section 44(BBA) are as follows −

• This section is applicable to non-resident assesse for profit and gains of business of operation of air-craft.

• His deemed profit will be 5% of amount paid or payable to him in India or outside India.

• If the assesse does not opt for this scheme, he will have to get his account audited.

Section 44(BBB)

The main features of Section 44BBB are as follows −

• This section is applicable to profit of foreign company engaged in business of civil construction or erection of plant and machinery or and commission thereof.

• His deemed profit will be equal to 10% of amount payable to him in India or outside India.

• If the assesse does not opt for this scheme, he will have to get his account audited.

Last Date of Filing of Tax Audit Report

Every assesse is bound to file his Tax Audit Report till 30^th September.

Penalty for Non-filling of Tax Audit Report

If any person is required to get his account audited under Section 44AB but fails to do so before the specified date, he is liable to pay a penalty equal to 1/2% of Turnover/Gross receipt subject to maximum Rupees 1,50,000/-.

However, Section 273(B) states that no penalty shall be levied under section 271(B) if there is a reasonable cause for such failure.

Appointment of Tax Auditor

Any practicing Chartered Accountant or firm of Chartered Accountants can conduct Tax Audit. The Board of Directors in case of Company, Partner of a firm and proprietor of the business can appoint Tax Auditor.

Removal Tax Auditor

Assesse can remove Tax Auditor on some valid ground only. In normal case, an Auditor cannot be removed during specified period.

Ceiling of Tax Audit Assignments

Under Section 44(AB), an Auditor cannot accept more than 60 Tax audit assignment; otherwise, he will be guilty of professional misconduct. In case of firm of chartered accountants, the limit of 60 will be applicable for each individual.

Audit Report

An Auditor gives his opinions through Audit Reports; opinions such as the following −

• whether financial statements give true and fair view of profit or loss and state of affairs.

• whether the prescribed particular of statement submitted with the report are true and correct.

According to Rule 64 of Income Tax Rule −

• If accounts of the business are required to be audited under any law, then the Auditor has to submit his report in form 3(CA) first, but for the statement, it has to be in a particular form 3(CD).

• If accounts of business are not required to be audited under any law, then the Auditor has to submit his report in form 3(CB) first, but for the statement, it has to be in a particular form 3(CD).

• If person is occupied in some profession, form 3(CC) is to be used for audit report and form 3(CE) for statement of particulars.

  Management Audit

   

  Management Audit – 

  Management Audit is of recent origin as compared to statutory audit. Management Audit is otherwise called Operational Audit. When the functions of the statutory auditor expanded, the need arose for the review of the management process. Initially, the statutory auditor was required to state whether the Balance Sheet and Profit and Loss account were prepared according to the Companies Act and furnish a correct and unbiased picture of the state of affairs of the company.

   Management audit means the examination, review of various policies and action of the management on the basis of certain specified objectives.

  The management audit is conducted to critically evaluate the activities and efficiency of the management. It is an independent appraisal activity.

• A careful analysis of the above definitions of experts enables to ascertain that management audit covers the following areas:

  1. Examination of organisation structure in full or part thereof.

• 2. Checking the operations of management and its effectiveness.

  3. A critical appraisal of activities of management executives.

  4. Examination is to be carried on independently by experts.

  5. Evaluation of the functioning of the management board.

  6. Analysing goals, plans, policies and activities of the management.

  7. Evaluation of the earning capacity of the management

 

Management Audit – Scope 

1. Studying the prescribed organisation:

Renew­ing formal organisation structure, personal inter­relationships, policies, procedures, information sys­tems and flows, and decision centers in order to determine what management has established as op­timum arrangements for running an entity.

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2. Evaluating the ‘live-entity’:

Determining such problems as what operating people are really try­ing to accomplish, the schedules and routines they have established to attain objectives, and a mea­sure of the results achieved in the light of predeter­mined goals and standards of performance.

3. Searching for profit inhibitors:

Uncovering poor organisational structuring and responsibility assignment, break-downs in operations, program­ming and work flow inadequate and ineffective communication, evaluation and measurement, and disclosing results that fall significantly below es­tablished standards. Since the concept of management audit requires the appraisal and assessment of total organisation or management processes and examines in depth the functioning of the system and its performance, its scope is synonymous with the appraisal areas identified by the American Institute of Manage­ment.

These are as follows:

1. Economic function vis-a-vis social responsibility:

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This involves appraising the public esteem value of the company in relation to differ­ent interests like shareholders, employees, credi­tors, distributors, consumers, and the community in which it operates.

2. Corporate structure:

The appraisal is made through testing measures like flow of information, span of supervision, authority relations, and cen­tralisation/decentralisation of authority.

3. Health of earnings:

This requires apprais­ing the extent to which the resources have realised the profit in real and tangible terms.

4. Service to shareholders:

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The assessment is made mainly on three basic criteria:

(a) Risk mini­misation to investment,

(b) Reasonable return on investment, and

(c) Reasonable appreciation of capital over a period of time.

5. Research and development:

The extent to which these activities carried on in the past was successful in the company’s past progress and was contributory to the future development.

6. Analysis of the board of directors:

The as­sessment on three fundamental elements, viz.:

(a) Quality of each Director and his contribution,

(b) Team work, and

(c) Trusteeship role.

7. Fiscal and financial policies:

The evolu­tion of capital management system, dividend policy, fiscal policy and controls and their application in different areas of corporate activity.

8. Production efficiency:

The evaluation of the management sub-systems relating to materials, la­bour, waste control, machinery, production policy and the achievements in terms of quantity and qua­lity.

9. Sales vigour:

The measurement and evalu­ation of the criteria, such as:

(a) Development of sales personnel,

(b) Attainment of past sales potentials, and

(c) Current sales policies to realise further sales potential.

10. Executive evaluation:

The assessment of personnel qualities as being elements for business leaders, e.g., ability, industry and integrity.

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Management Audit – 

The basic objectives of management audit are given below:

1. To identify the level of achievement of the main objectives of the organisation.

2. To identify the defects or irregularities of management executives.

3. To ensure that the management is going to achieve the objectives.

4. To help the management to do efficient administration of the operations.

5. To help the management executives in the effective discharge of their responsibilities.

6. To suggest to the management the ways and means available to achieve the objectives.

7. To improve the profitability of the organisation.

8. To obtain or utilise the full efficiency of the management.

9. To help the management executives in the effective discharge of their duties.

Some other objectives of management audit include:

1. To find the level of achievement of strategies, goals and objectives

2. To find the suitability of the organisation structure to the organisational strategies

3. To observe the degree and direction of utilisation of various resources in tune with the organisational strategies

4. To identify the deviations against the set standards or the benchmarks of the industry

5. To suggest the measures to correct the deviations, if any and to improve the management system

6. To help the management in improving the execution aspect of policies, objectives etc.

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Management Audit – 

Management Audit has become necessary on account of the following main reasons:

1. Management audit examines whether the policies laid down by the company are carried out properly or not.

2. It helps in the improvement of the performance of the various managers including the general manager.

3. Management audit offers suggestion to eliminate wastage or reduce the cost of production.

4. It helps the general manager or the managing director to analyse the performance independently.

5. Management Audit points out the ways available to maximise profit and for optimum utilization of all resources.

6. It finds out the weaknesses or shortcomings which are responsible for inefficient performance and brings improvement in performance.

7. Management Audit can ascertain the financial soundness of the company.

8. It helps the management to sort out financial and non-financial incentive schemes and link them with the performance.

9. Banks and financial institutions may require management audit to find out whether the loan amounts have been properly utilised or not.

10. Management Audit assists the foreign collaborators to assess the progress and performance of the management of the concern with which collaboration has been undertaken.

11. In India, public enterprises follow the rules and procedures but do not evince interest in their achievement and results. Management Audit suggests to the public enterprises that they should change their outlook and insist on improving their efficiency.

Importance of Management Audit:

Management audit play pivotal role in making the company efficient due to the following reasons:

1. Management Audit sets the policies and objectives right in view of changing environment, competitors’ strategies, changes in technology, consumers’ preferences etc.

2. It helps the management in improving its systems in view of developments or creations in management principles, techniques and approaches.

3. It helps the management in improving its performance in execution of policies and in utilising resources.

4. It sets the direction of objectives policies and business definition.

5. It provides scope to the business to interact openly with the environment and maximises the benefit of the environmental opportunities and controlling the effects of environmental threats.

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Management Audit – 

Generally, the following process is adopted for the implementation of management audit:

(1) Objectives for Introducing Management Audit System:

Firstly of all the objectives for introducing management audit system are determined by the directors. At the same time the management auditor is also appointed.

(2) Collection of Facts:

After the appointment of the auditor, the work of inquiry begins. During the course of the inquiry he inspects the record, interviews the managers, and looks into the policies of the enterprise, organisational structure, motivation and the systems of communication. Apart from this he judges the quality of the managerial decisions taken during a particular period of time.

(3) Critical Appraisal:

After having collected all the necessary facts he analyses them and tries to find out the activities which were unnecessary and useless and what decisions proved unsuccessful and why.

(4) Suggestions for Improvement:

The job of a management auditor is not only to point out the weaknesses but also to make suggestions for improvement. Thus, in the end he sends his report to the Board of Directors along with his suggestions.

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Management Audit Approaches:

A management auditor should frame an audit programme before starting management audit. If the management auditor follows the under mentioned approaches, he can perform his duties efficiently with the help of a good audit programme –

1. He should evaluate the formal organisation structure and organisation charts.

2. He should appraise the management information system in operation.

3. He should study the various policies followed by the management.

4. He should review the extent of authority assigned to the management executives and the responsibilities fixed on them.

5. He should study leave rules and procedures.

6. He should observe the inter-relationship of various management executives.