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GRADUATE INSTITUTION OF LAW

SUBJECT: LAW OF TAX

PROFESSOR: HUMZA HAMAYUN

LLM 2th SEMESTER 2019

TOPIC: Audit

SUBMITTED YASIR MAHMOOD


BY:
Audit Introduction
The audit is an intelligent and critical examination of the books of accounts of the
business.

Auditing is done by the independent person or body of persons qualified for the job with
the help of statements, papers, information and comments received from the authorities
so that the examiner can confirm the authenticity of financial accounts prepared for a
fixed term and report that:

 The balance sheet exhibits an accurate and fair view of the state of affairs of
concern;

 The profit and loss accounts reveal the right and balanced view of the profit and
loss for the financial period;

 The accounts have been prepared in conformity with the law.

Thus, it will be seen that the duty of an auditor is much more than a mere comparison of
the balance sheet and accounts with the books.

But, apart from doing this, he has to satisfy himself according to his information and the
explanations given to him.
Audit:

“The term audit has neither been defined within the tax Ordinance 2001 nor within the General. Clauses
Act. The term "audit" is one that conjures up fear within the minds of the many taxpayers. An audit
generally refers to the method employed by the interior Revenue Service to verify the knowledge
.submitted by taxpayers on a yearly basis. Audits are also utilized in a spread of various industries to
.verify inventory and financial data. Random audits can provide how to stay those responsible of record
-keeping on their toes.

Meaning

The term audit is derived from a Latin word “audire” which means to check the authenticity of
accounts and assured it with the help of the independent review.so audit mean inspection oof the
book of account of an organisation. Auditor has to check the effectiveness of internal control
systems for determining the extent of checking out the audit.Initially its meaning and use were
confined merely to cash audit, and the auditor has to ascertain whether the persons are
responsible for the maintenance of accounts had adequately accounted for all the cash receipts
and the payment on behalf of this principle

Definition of Audit:
“An audit denotes the examination of balance sheet and profit and loss accounts prepared by
others together with the books of accounts and vouchers relating thereto such in such a manner
that the auditor may be able to satisfy himself and honestly report that in his opinion such
balance sheet is properly drawn up so as to exhibit a true and correct view of the state of affairs
of a particular concern according to the information and explanations given to him and as
shown by the books.” -F.R.M De Paula
“Audit such an examination of the books of accounts and vouchers of a business as will
enable the auditor to satisfy himself that the balance sheet is properly drawn up so as to
give a fair and true view of the state of affairs of the business and the whether the profit
and loss of accounts gives a true and fair view of profit and loss for the financial period
according to the best of his information and explanations given to him and as shown by
the books and if not in what respect he is not satisfied.” –Spicer & Pegler
“Audit may be said to be verification of the accuracy and correctness of the books of
accounts by an independent person qualified for the job and not in any way connected
with the preparation of such accounts.” -J.B. Bose
“Audit is not an inquisition and its mission is not one of fault finding. Its purpose is to
bring to the notice of the administration lacunae in his rules, regulations and lapses, and
to suggest possible ways and means for the execution of plans and projects with
greater expedition, efficiency and economy.” –A.K. Chandra
How audit is conducted
177. Audit.-  

(1)    The Central Board of Revenue, may lay down criteria for selection of any person for an audit of
person’s income tax affairs, by the Commissioner.

(2)    The Commissioner shall select a person for audit in accordance with the criteria laid down by the
Central Board of Revenue under sub-section (1).

(3)     The Central Board of Revenue shall keep the criteria confidential.

(4)    In addition to the selection referred to in sub-section (2), the Commissioner may also select a
person for an audit of the person’s income tax affairs having regard to -

         (a)  the person’s history of compliance or non-compliance with this Ordinance;

       (b) the amount of tax payable by the person;

       (c) the class of business conducted by the person; and

                 (d) any other matter which in the opinion of Commissioner is material for determination of
correct income.

(5)    After selection of a person for audit under sub-section (2) or (4), the Commissioner shall conduct an
audit of the income tax affairs (including examination of accounts and records, enquiry into expenditure,
assets and liabilities) of that person.

           
(6)    After completion of the audit under sub-section (5) or sub-section (8), the Commissioner may, if
considered necessary, after obtaining taxpayer’s explanation on all the issues raised in the audit, amend
the assessment under sub-section (1) or sub-section (4) of section 122, as the case may be.

(7)   The fact that a person has been audited in a year shall not preclude the person from being audited
again in the next and following years where there are reasonable grounds for such audits, particularly
having regard to the factors in sub-section (4).

(8)   The Central Board of Revenue may appoint a firm of Chartered Accountants as defined under the
Chartered Accountants Ordinance, 1961 (X of 1961), to conduct an audit of the income tax affairs of any
person and the scope of such audit shall be as determined by the Central Board of Revenue on a case to
case basis.

(9)    Any person employed by a firm referred to in sub-section (8) may be authorized by the
Commissioner, in writing, to exercise the powers in sections 175 and 176 for the purposes of conducting
an audit under that sub-section.

Automatic Audit Selection:


Section 214D provides for automatic selection of case for audit when taxpayer files return after due
date. This provision created capacity issues for workforce of FBR. Meanwhile the late filers were entitled
to enjoy all benefits of ATL being filer Through F.A 2018 section 214D deleted, And new section 182A
restricts entitlement of ATL to filers within due date ONLY.

Automatic Audit Closure:


Through section 214E a taxpayer may opt for closure of automatic selection of audit u/s 214D in
following manner By 31Dec 2018 pay 25% more tax of tax paid with return or pay 2% of turnover tax,

If both options do not apply, pay penalty for late filing of return › CIR may select for audit on the basis
of definite information or otherwise.

Special audit panel.


Section 177(11) provide mechanism for the formation of special audit panel.according to that:

The Board may appoint as many special audit panels as may be necessary, comprising two or
more members from the following:
(a) an officer or officers of Inland Revenue.

(b) a firm of chartered accountants .

(c) a firm of cost and management accountants.

(d) any other person including a foreign expert or specialist as directed by the Board, to conduct
an audit.

(e) a tax audit expert deployed under an audit assistance programme of an international tax
organization or a tax authority outside Pakistan:

Head of special audit panel.

Section 177(12) Special audit panel under sub-section (1) shall be headed by a Chairman who
shall be an officer of Inland Revenue.

IN case member of panel is absent.

 If any one member of the special audit panel, other than the Chairman, is absent from
conducting an audit, the proceedings of the audit may continue, and the audit conducted
by the special audit panel shall not be invalid or be called in question merely on the
ground of such absence

Function performed by special audit panel.

Functions performed by an officer or officers of Inland Revenue as members of the special audit
panel, for conducting audit, shall be treated to have been performed by special audit
panel.Sub-Section (17): The Board may prescribe the mode and manner of constitution,
procedure and working of the special audit panel.

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