INTRODUCTION

Economic decisions in every society must be based upon the information available at
the time the decision is made. For example, the decision of a bank to make a loan to a business is based
upon previous financial relationships with that business, the financial condition of the company as
reflected by its financial statements and other factors.
If decisions are to be consistent with the intention of the decision makers, the
information used in the decision process must be reliable. Unreliable information can cause inefficient
use of resources to the detriment of the society and to the decision makers themselves. In the lending
decision example, assume that the barfly makes the loan on the basis of misleading financial statements
and the borrower Company is ultimately unable to repay. As a result the bank has lost both the principal
and the interest. In addition, another company that could have used the funds effectively was deprived
of the money.
As society become more complex, there is an increased likelihood that unreliable
information will be provided to decision makers. There are several reasons for this: remoteness of
information, voluminous data and the existence of complex exchange transactions 3.
As a means of overcoming the problem of unreliable information, the decision-maker
must develop a method of assuring him that the information is sufficiently reliable for these decisions. In
doing this he must weigh the cost of obtaining more reliable information against the expected benefits.
A common way to obtain such reliable information is to have some type of verification
(audit) performed by independent persons. The audited information is then used in the decision making
process on the assumption that it is reasonably complete, accurate and unbiased. The term audit is
derived from the Latin term audire, which means to hear. In early days an auditor used to listen to the
accounts read over by an accountant in order to check them









Origin and evolution
Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia,
Greece, Egypt. Rome, U.K. and India. The Vedas contain reference to accounts and auditing.
Arthasashthra by Kautilya detailed rules for accounting and auditing of public finances.
The original objective of auditing was to detect and prevent errors and frauds
Auditing evolved and grew rapidly after the industrial revolution in the 18th century With the
growth of the joint stock companies the ownership and management became separate. The
shareholders who were the owners needed a report from an independent expert on the accounts of the
company managed by the board of directors who were the employees.
The objective of audit shifted and audit was expected to ascertain whether the accounts
were true and fair rather than detection of errors and frauds

Audit Report : Form No. 3CA
Second part:
statement of particulars required to be furnished under section 44AB is annexed with the
particulars in Form No. 3CD.
Third part:
To express further that, in his opinion and to the best of his information and according to the
explanations given to him, the particulars given in the said Form No.3CD and the annexure thereto true
and correct.
Fourth part:
Item No. 4 of the notes to Form No. 3CA requires that the person, who signs this audit report,
shall indicate reference of his membership no. authority under which he is entitled to sign this report.
Clause 4. Status
Status refers to the different class of assessees included in the definition of person under section 2(31)
namely :
individual,
hindu undivided family,
company,
firm,
an association of persons or a body of individuals,
a local authority, or
artificial juridical person
Status should be as per the return of income tax. residential status is not required.
Clause 5. Previous year ended
It is 31
st
March (relevant financial year).
Clause 6. Assessment year
If the financial year is 31
st
March 2009, the assessment year is 2009-2010.
Clause 7a. If firm or association of persons, indicate names of partners/members and their profit sharing
ratio
- should be as per the Partnership deed / Constitution deed.
- profit sharing ratio also includes loss sharing ratio, because loss is nothing but negative profits.
Clause 7b. If there is any change in the partners or members or in their profit sharing ratio since the last
date of the preceding year, the particulars of such change
The tax auditor should verify the certified copy of the latest / amended partnership deed.
Clause 8a. Nature of business or profession (if more than one business or profession is carried on during
the previous year, nature of every business or profession)
For this, reference can be made to the directors report and / or abstract under Part IV of Schedule VI.
Clause 8b. If there is any change in the nature of business or profession, particulars of such change
Some examples of change in nature:
1) from manufacturer to trader or vice versa
2) change in principal line of business
In case of amalgamation / demerger, if similar line of activity, it would not amount to change
in the nature.
The tax auditor should make proper enquiries, review the minutes of meeting (if made available),
directors report, etc.
Clause 9a. Whether books of account are prescribed under section 44AA, if yes, list of books so
prescribed
The books of accounts prescribed in Rule 6F are:
i) a cash book,
ii) a journal, if accounts are mercantile system of accounting is followed,
iii) a ledger,
iv) carbon copies of bills issued by the assessee, and
v) original bills and receipts issued to the assessee.
The tax auditor is required to give list of books so prescribed. This applies to specified profession (like
legal, medical, engineering).


Clause 9b. Books of account maintained
(In case books of account are maintained in a computer system, mention the books of account
generated by such computer system)
The tax auditor is required to obtain list of books both financial/non financial records from the assessee.
The general list is as follows:
1) Cash/Bank Book
2) Petty Cash book
3) Journal register
4) Purchase/Sales Register
5) Debtors/Creditors Ledger
6) General Ledger
7) Inventory Records
8) Fixed Asset Register
9) Excise records
Clause 10. Whether the profit and loss account includes any profits and gains assessable on presumptive
basis, if yes, indicate the amount and the relevant sections (Sec 44AD, 44AE, 44AF, 44B, 44BB, 44BBA,
44BBB or any other relevant section)
This relates to civil construction, business of plying, hiring or leasing goods carriages, retail business,
shipping business, business of exploration of mineral oils, operation of aircraft by non-resident, foreign
companies engaged in civil construction.
Clause 11a. Method of accounting employed in the previous year
Assessee can follow either cash or mercantile system of
accounting, hybrid system is not permitted.
However, assessee can adopt cash system for one business and
and mercantile for other business. But the assessee has to
consistently follow the method of accounting.
As per Section 209 of the Companies Act 1956, every Company
is required to keep books of account under accrual basis. The tax
auditor should refer the notes to the accounts.
Normally mercantile system of accounting is followed with certain
exceptions e.g. export incentives (duty drawback), interest (e.g.
on MSEB deposit) which may be accounted for on cash basis. Tax
auditor has to also keep in mind the materiality for certain
transactions.
Clause 12b. Details of deviation, if any, from the method of
valuation prescribed under section 145A, and the effect
thereof on the profit or loss
Example :
Inventories are stated exclusive of Central Value Added Tax (CENVAT) / State Value Added Tax
(VAT). The assessee follows the exclusive method in respect of accounting of CENVAT/VAT
credits. However, there is no effect on the profit for the year as supported by the illustration
given in Guidance Note on Tax Audit under section 44AB of the Income-tax Act issued by the
Institute of Chartered Accountants of India.
Sales are exclusive of sales tax/state value added tax and octroi (where separately recovered),
which has not been debited to the profit and loss account. However there is no effect thereof on
the profit for the year.
Clause 13. Amounts not credited to the profit and loss account,
being:
a. the items falling within the scope of section 28
Section 28 prescribes certain items to be treated as income for e.g.
sum received under Keyman insurance policy including the sum
allocated by way of bonus on such policy, etc.
Under this clause various amounts falling within the scope of
section 28 which are not credited to the profit and loss account are
to be stated.
The information is to be given with reference to the entries in the
books of accounts and records made available to the tax auditor.
thClause 14.Particulars of depreciation allowable as per the Income
tax Act, 1961 in respect of each asset or block of assets, as the
case may be in the following form:
a) Description of asset/block of assets
b) Rate of depreciation
c) Actual cost or the WDV as the case may be.
d) Additions/deductions during the year with dates; in case of any
addition of an asset, date put to use; including adjustments on
account of Modvat, change in rate of exchange of currency,
subsidy or grant or reimbursement, by whatever name called.
e) Depreciation allowable
f) Written down value at the end of e year
Clause 15. Amounts admissible under sections 33AB, 33ABA, 33AC, 35, 35ABB, 35AC, 35CCA, 35CCB,
35D, 35DD, 35DDA, 35E
a) debited to the profit and loss account (showing the amount debited and deduction allowable under
each section separately;
b) not debited to the profit and loss account
Section 33AB: Tea / Coffee / Rubber Development Account
Section 33ABA: Site Restoration Fund
Section 35: Expenditure on Scientific Research
Section 35ABB: Expenditure for obtaining license to operate telecom services
Section 35AC: Expenditure on eligible projects/schemes
Section 35CCA: Expenditure by way of payments to associations and
institutions for carrying out rural development programmes
Section 35D: Amortisation of certain preliminary expenses
Section 35E: Deduction for expenditure on prospecting etc. for certain
minerals
Clause 16a. Any sum paid to an employee as bonus or commission for services rendered, where such
sum was otherwise payable to him as profits or dividend
If any such sum is paid, this would not be normally allowed as deduction
The requirement is only in respect of disclosure, the tax auditor is not expected to express an
opinion about the allowability or otherwise
The tax auditor should verify the contract with the employees so as to ascertain the nature of
payments
Clause 16b. Any sum received from employees towards contributions to any provident fund or
superannuation fund or any other fund mentioned in section 2(24)(x); and due date for payment and
the actual date of payment to the concerned authorities under section 36(1)(va)
Deduction of such sums received from the employees is allowed, if it is credited by assessee to
the account of employees on or before the due date as per the applicable law.
Otherwise, the same is treated as his income under Section 2(24)(x)
Tax auditor should get a list of various contributions recovered from the employees and verify
the actual payments from the evidence available.
Clause 17b. Expenditure of personal nature
Tax auditor needs to scrutinize the ledger to verify whether any expenses of personal nature
have been incurred by the assessee.
Section 227(1A) requires the auditor to inquire whether personal expenses have been charged
to the revenue account.
Clause 17d. Expenditure incurred at clubs-
(i) As entrance fees and subscriptions
(ii) As cost for club services and facilities used
The expenditure may be incurred for directors, employees, partner, proprietors.
The fact that whether they are of personal nature or incurred in the course of business should
be ascertained. If they are of personal nature, they should be shown under clause 17b.
The tax auditor should make a close scrutiny of the ledger in such cases
Clause 17j. Any sum paid by the assessee as an employer not allowable under section 40A(9)
Under section 40 A(9), any payments made by an employer towards the setting up or formation
of or as contribution to any fund, trust, company, or other institutions (other than contributions
to recognised provident fund or approved superannuation fund or approved gratuity fund )is
not allowable.
Tax auditor should furnish the details of payments which are not allowable under this section
Clause 17k. Particulars of any liability of a contingent nature
Detailed scrutiny of account heads like outstanding liabilities, provision etc to be made to
ascertain any such particulars of contingent nature debited to profit and loss account.
Clause 20 :- Any amount of profit chargeable to tax under section 41 and computation thereof
Section 41 mainly includes
a.) Recovery of any loss, expenditure or trading liability, earlier allowed as deduction.
b.) In case of undertaking engaged in generation/ distribution of power, if building, machinery,
plant or furniture is sold/discarded/demolished or destroyed.
c.) When an asset used for scientific research is sold.
d.) Subsequent recovery of bad debt, earlier allowed as deduction.
e.) Amount withdrawn from special reserve created under section 36(1)(viii).
(B) was incurred in the previous year and was
a) paid on or before the due date for furnishing the return of income of the previous year under section
139(1);
(b) not paid on or before the aforesaid date
(c) In respect of the specified sums incurred during the previous year, the deduction for liability is
available for payments actually made till the due date of filing the tax return for the said year
(d) The deduction for payments made against liability that pre-existed on the first day of the
relevant previous year is restricted to only those payments made up to the close of the relevant
previous year.
(e) Above particulars are required irrespective of the fact whether they have been debited to profit
and loss account or not and such a fact should be stated under this clause
(f) Tax auditor is not require to determine any admissible or inadmissible amounts
(g) In respect of the expenditure covered by clauses (a) to (f) of section