WELCOME TO THE CLASS ON

PERFORMING AUDIT UNDER SAP

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TODAYS ITINERARY
What is Standard Audit Programme Salient features of SAP Various Audit Steps Case Study
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STANDARD AUDIT PROGRAMME

SAP
What is SAP  Standard Audit Programme (SAP) is a selfcontained and systematic outline of procedures to be followed to conduct a Central Excise audit.  Standard Audit Programme enumerates steps for conducting audit in a systematic manner  Standard Audit Programme includes the format of the Working Papers for different types of audit.  It is contained in Part II of the Excise Audit Manual

OBJECT
   

To assess the degree of tax compliance by the assessee To identify specific instances of noncompliance Ensures the minimum levels of performance Suggest to improve the internal control system of the assessee for better tax compliance To ensure all relevant areas are examined for compliance

PRE-REQUISITES


 

Gathering information about -the assessee, -goods manufactured and -general trade practices before conducting the audit. Careful scrutiny of the assessee master file and Collecting relevant information available in different sections of the Commissionerate and A sincere desk-review (MOST IMPORTANT)

AUDIT STEPS
Preliminary or Desk Review Gathering Information about Assessee and the Systems followed by him Tour of the Premises / Plant Evaluation of the Internal Controls

AUDIT STEPS
Revenue Risk analysis Trend analysis Developing the Audit Plan
Verification

Reviewing results with the Assessee

AUDIT STEPS
Summarising Audit Findings. Informing the Divisional Deputy/Assistant Commissioner of major audit points Compliance of Audit objections Future Compliance Reporting Audit Follow up

Preliminary or Desk Review



This is the first phase of the audit programme done in the office. Object is to gather as much relevant information about the assessee and its operations as possible before visiting the unit. A good Desk Review means a good Audit Plan

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PRE-REQUISITES
Perusal of  Assessee Profile,  Annual Report,  Trial Balance,  Cost Audit Report and  Income Tax Audit Report

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Documents Required for Desk Review

1.

Assessee Master File 2. Annual report and Directors report 3. Profit and Loss Account 4. Balance Sheet 5. Notes to the Accounts 6. Trial Balance 7. Cost Audit Report 8. Manufacturing process chart 9. ER-4, ER-5 and ER-6 Returns 10. Tax Audit Report

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Records to be verified during Desk Review

1. 2.
3.

4.
5.

In marketing and sales department Purchase Orders Price Circulars Delivery Challans Material transfer note Sales book

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Records to be verified during Desk Review

In the stores department 1. Stores Ledger 2. Job Card/Bill of material 3. Goods Receipt Note (GRN)/Material Receipt Note/Inspection Cum Receipt Report (ICRR) 4. Material Return Note 5. Material Requisition Note and Material Issue Note 6. Bad bin Register 7. Physical Stock Verification Statement 148. Job work/Sub-contract Register

Records to be verified during Desk Review

In Production department 1. Manufacturing Process Chart 2. Machine Log Book 3. Laboratory Test Report 4 Weighment Slips

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Records to be verified during Desk Review

Finance & Accounts related records 1. Ledgers 2. Debit Note, Credit Note 3. Journal Voucher 4. Internal Audit Reports 5. Purchase Book,Purchase Return Book 6. Income Tax Audit Report 7. Income Tax Return 8. Sales Tax/VAT Return 9. Fixed Assets Register 10. Monthly Stock Statement to Bank 16

Assessee Master File



 

It is a comprehensive Data Base about an assessee starting from the details contained in the Registration Certificate The information should be in the form of statistical data as well as in narrative form Also use full as a ready reckoner for the other purposes, such as for reply to the Parliament Questions and generating Management Information System (MIS) reports This file should invariably be created for each assessee.

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Assessee Master File



Assessee Master File should be maintained in two forms i.e. (a) hard copies of certain documents (period of 5 years) and (b) information in electronic format.

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Gathering Information about Assessee and Systems followed by him

Object


To find out how assessee fetches information from his business records/documents to prepare his Central Excise returns What are collected? Information about various activities of the unit like tax accounting, procurement of raw materials, production, marketing, stocks and sales How collected? Information is gathered through discussions with the senior management

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POWER: Auditors Authority under Central Excise Law



 

There is no separate cadre Auditor, all powers vested in Central Excise under the Act & Rules are available for conducting audit, so, Auditor is also a Proper Officer. Most of the Records & documents maintained earlier under C.E.Rules have been dispensed with. So, the Auditor, for audit has to rely on records maintained by the assessee in ordinary course of business. Under Rule 22(2) of C.E.Rules 2002 an assessee is required to furnish a list in duplicate of the following: (i) all records prepared & maintained for accounting of transactions in regard to receipt, purchase, manufacture, storage, sales or delivery of goods including inputs & capital goods. (ii) all the records prepared & maintained for accounting of transactions in regard to the payment for input services & their receipt or procurement (iii) all the financial records & statements including trial balance or its equivalent.

Sub rule (3) of rule 22 of C.E. Rules 2002 further provides that the assessee, on demand shall make available the following documents for scrutiny to the audit parties
 

a) the records maintained or prepared by him in terms of sub rule (2) b) the cost audit reports, if any, under sec 233 B of Co. Act 1956 (1 of 1956), and c) the Income Tax Audit reports, if any, under Sec 44 AB of Income Tax Act 1961 (43 of 1961) Where Assessee maintain or generate their records on Computer, they should provide these records to the auditor in electronically readable format after due authentication. Like any other officer of C.E., Auditor is empowered to access any registered premises for carrying out verifications & checks for conduct of audit when authorised by the Commissioner under rule 22 of C.E. Rules.

Primary Tour of the Premises / Plant

Purpose  To gather information about the systems  To confirm the information gathered during previous steps  To resolve issues noted earlier  To bring out operations and technical details about inputs, products/by-products/wastes manufactured  It provides clues about important aspects of the operations of the unit 22

Tour of the Premises / Plant



Auditor should go through the ground plan of the factory and process charts to get an overview about the layout and the activity of the unit

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Evaluation of the Internal Controls

Object  To determine the scope and extent of audit checks required for the assessee How it is determined?  By Walk through  By interviewing the senior level management to explain various procedures adopted by them in the areas like purchase, sales, stores, tax accounting, job work etc. and various types of records maintained for internal control purpose and reports generated by the units 24

Evaluation of the Internal Controls

What are the areas evaluated  Purchase, sales & removals, sales return, production/process, cenvat, costing, transaction value and important happenings like fire or natural calamity, introduction of new products, overall scenario of industry, new marketing techniques, new discounts, action of competitors etc. can also be found out by the auditors.

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Review of Internal Control System (Purchase)

Following major areas are reviewed 1. Whether all purchases are centralised or decentralised (if yes, detail scrutiny) 2. Whether all purchases of PO? Is there any purchase w/o PO 3. Is there a system of authorised Vendor? Whether any substantial purchase through unauthorised vendor 4. Whether all goods have been entered at the gate and if so details at the gate Register 5. Whether GRN is prepared for each goods 26

Major areas of Purchase-for review

6.

7. 8. 9.

10.

11.

Whether inspection for physical quantity or tech. specification is carried out before the preparation of GRN or afterward What is the system of entering rejected goods/short quantity on the GRN? Is there any debit notes for purchase returns What stage excise and accounts department is informed about goods short received and reject Whether CENVAT is availed before preparing the GRN or after preparing the GRN Is there any free of cost item by customer

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Major areas of Sales- for review

      

What is marketing pattern (depot, stockist, C&F agent related person or direct) Is any bought out item also sold How many series of sales invoices are generated (domestic, export, scrap, job etc) What is the control mechanism to ensure all goods removed under a document. Who authorises despatch of goods from factory. Whether any materials supplied free of cost Any expenses received from customer on invoice or debit notes.

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Major areas of Sales- for review

Whether ST return and excise return reconciled  Who is authorised to fix the sales price  Who is authorised to make supplementary sales invoices or debit note for price variation/additional recoveries  Whether clearance figure of ER 1/ER 2 is tallied with sales register  Whether any goods received for repair etc  Types of discounts and how are they accounted  Is company engaged in trading activity, if so,Where it is stored? Is CENVAT availed on 29 those


Major areas of Stores- for review

     

Stores record are shown after inspection of goods or before inspection Whether all receipt in the stores is entered only on receipt of GRN Who places requisition for issues Is it possible to verify the issues made to section other than production department What is the frequency of physical inventory for high value and frequently used items Whether any register or report is prepared for insurance claims

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Major areas of Stores- for review



What records maintained for inputs sent for job work. Whether scrap is received back or job work price is adjusted What is the frequency of stock taking of all the items Whether any separate account or report is prepared for the defective or damaged store item.

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Major areas of Job work for review

     

Whether I/O ratio has been determined for job work What records are maintained for sending the goods for job work Whether any monthly or periodic statement are prepared for each job work What is the system of treatment of scrap generated at the job work stage Whether the finished goods after job-work are being cleared from job-workers premises What action is taken if the goods not recd. in time

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Revenue Risk Analysis

  1.

2. 3.

Object is to identify potential revenue risk areas by employing modern techniques Achieved through Reconciling various specific financial data, comparing it with different business accounts/documents, Deriving certain data and comparing with the actual figures of the financial document & Comparing the key data figures of the unit with the average all industry figure of similar kind (if available) or part figures of the same assessee

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Major Risk Analysis

Input Cenvat Credit : Total duty payment Utility: To identify wrong availment of Cenvat credit, under valuation of goods (as value-addition should involve adequate difference between the two), removal of goods without payment of duty and claiming of Cenvat credit on inputs used in exempted products. 2. Raw Material Consumption Cost : Sales Value Utility: This ratio should have a bearing on the ratio of Input Cenvat credit: Total Duty payment 34
1.

Major Risk Analysis

Lower or Higher than ratio at Sl.No.1 may be on account of the following: Wrong availment of credit Ex. Availing value of goods as credit or availment of credit of BCD in case of import or double credit Fraudulent availment of credit EX. Availment of credit without receipt/actual use of input. Rejection/return/clearances of input without reversal of credit Receipt of inputs and availment of credit but clearances of goods W/o payment of duty. Under valuation of finished goods.

i.

ii. iii. iv. v.

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Major Risk Analysis

3. Cenvat availed on Capital Goods purchased during the year : Addition to Plant & Machinery Utility:I) Reflect in Fixed Assets Schedule II) If this ratio is significantly higher than the ratio of 50% of the rate of duty on Capital Goods (Presently 16%):100, it may indicate wrong availment of credit. 4. Other Income: Sales Utility: Indicative of under valuation, Non payment of duty on scraps, rejects, job-work etc, S. tax evasion 36

Major Risk Analysis

5. Sales Tax: Sales (including trading Sales). Utility: abatement of Sales Tax claimed by assessee in case of Cum-Sales Tax prices. 6. Scrap Sales: Sales Utility: If ratio is lower than last Yr., It is indicative of Clearance of scrap without payment of duty, Non receipt of scrap from job worker. 7. Power Consumption/Fuel consumption(Qty) : Production Quantity Utility: To identify suppression of production. 37

Major Risk Analysis

8.

Sales Value of Trading Goods : Sales value of manufactured goods Utility: I) Clearances of manufactured goods in the guise of trading goods ii) Under valuation of manufactured goods by overvaluing trading goods 9. CENVAT availed on inputs: Purchase price of Raw material. Utility: I) Wrong availment of credit Ex.availing vaue as credit ii) Non reversal of credit/payment of duty on inputs rejected/short received/cleared to other units/ cleared as spare during warranty period

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Major Risk Analysis

10.

Quantity of actual production (Nos./Kgs./Lt) : installed capacity Utility:To detect suppression of production and clearances

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RATIO ANALYSIS
Payment from Input cenvat credit : Total duty payment

Year

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PLA paym ent(R s. In lac) 14 1998 -99 1999 21 -00 2000 20 -01

Input credit (Rs. In lac) 102 70 92

Capital Goods Credit (Rs. In lac) 5 8 9

Total duty Paid (Rs. In lac) 121 99 121

Ratio
Input cenvat credit : Total duty payment

0.84:1 0.71:1 0.76:1

RATIO ANALYSIS
Payment from PLA : Total duty payment

Year

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PLA paym ent(R s. In lac) 14 1998 -99 1999 21 -00 2000 20 -01

Input credit (Rs. In lac) 102 70 92

Capital Goods Credit (Rs. In lac) 5 8 9

Ratio Total PLA : duty Total Paid (Rs. duty payment In lac) 121 99 121 0.12:1 0.21:1 0.17:1

RATIO ANALYSIS
Payment from CENVAT: Total duty payment

Year

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PLA paym ent(R s. In lac) 14 1998 -99 1999 21 -00 2000 20 -01

Input credit (Rs. In lac) 102 70 92

Capital Goods Credit (Rs. In lac) 5 8 9

Ratio Total CENVAT duty : Total Paid (Rs. duty payment In lac) 121 99 121 0.88:1 0.79:1 0.83:1

Trend Analysis


The object is to analyse historical data to discover pattern or relations and then working out future projections Ex.projecting the future production, clearances and values etc.

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Trend of following data is useful

Gross operating profit vis--vis sales Utility: Cases of under valuation could be unearthed 2. CENVAT as a percentage of either PLA or the total duty paid 3. Trends of production of finished goods as well as scrap 4. Trends of production of dutiable goods vis-vis exempted goods
1.

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Trend of following data is useful

5.

6.

7.

8.

Clearance of excisable goods for home consumption as well as for export Value of sales to related person vis--vis total sales Movement of goods on job work in terms of quantity over a period of time vis--vis total production (in quantity) Input-output ratio as reflected in ER-5 return for last 3 years

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Trend Analysis
Duty payment from input credit as % of Total duty payment

Year

PLA payme nt(Rs. In lac)

Input credit (Rs. In lac)

Capital Goods Credit (Rs. In lac)

Total duty Paid (Rs. In lac)

Input credit as % of Total duty payment

1998-99 1999-00 2000-01

14 21 20

102 70 92

5 8 9

121 99 121

84 % 71 % 76 %

The percentage of input credit availment to the total duty payment has been very high ranges from 84 % to 71 % to 76 %.

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Trend Analysis
Duty payment from PLA as % of Total duty payment

Year

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PLA paym ent(R s. In lac) 14 1998 -99 1999 21 -00 2000 20 -01

Input credit (Rs. In lac) 102 70 92

Capital Goods Credit (Rs. In lac) 5 8 9

Total duty Paid (Rs. In lac) 121 99 121

PLA as % of Total duty paymen t

12 % 21 % 17 %

Trend Analysis
To find out the correctness of CENVAT credit availment by the assessee
Year
Input credit (Rs. In lac) Value of input consumed( Rs. In lac) [X]
Calculated value of input (Assuming credit availed @16 % on all inputs)I.e., [credit/16] X100(Rs. In lac) [Y] RISK [X Y]

102 490 638 1998148 99 380 437 199970 57 00 From the above it appears that the assessee has purchased the inputs and availed 405 575 200092 170 the credit but these inputs may not have been used in the manufacture of the 01 finished goods. 48

Audit Plan


 

Audit Plan is a detailed plan of action, preferably in a standard format. The Audit Plan should be consistent with the complexity of the audit and the reasons for selection of specific issues for audit should be indicated. Most important stage before performing audit. The vulnerable areas, the weak points in the systems, abnormal trends and unusual occurrences that warrant detailed verification are identified from previous steps Unanswered or inadequately answered queries about the affairs of assessee may also be added

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Source Document: documents/information reflecting or having bearing on payment of duty, to be verified. Ex: Invoice showing discount & original invoice under which CENVAT is taken

Audit Plan

Sl. Subje N ct o

Specific Issue

Sourc e Docu ment

Backup Cover Selection Documen age Criteria t Perio d Invoices issued on 5th,10th, 15th,20th,2 5th,30th.

Valuai Discount on passed on to all buyers

Commerci C.E.In al Invoices, Aug. discount voice 07 & pol. Price 08 list, customer ledger

Cenvat Indent Cenvat Inputs Entire All cenvat memo, reject table utilised for audit invoices, register, invoice repair/ reject Input register correctness of the Back-up Document: Documents to be examined to check the perio reconditionin s d information contained in the source document.etc. Method of examination register be may also specified under this g column. Ex. commercial invoice, customer ledger, discount

policy. documents, price circulars, etc.

etc

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ABC Analysis


 

ABC Analysis is a data management technique to filter out the irrelevant or relatively insignificant data Whole data population is classified into three categories based on the importance Population is classified into three categories based on the importance. -A, B and C type

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ABC Analysis
A-category data is most important from the point of view of managing and controlling the same. B-category is the class of data, which should invariably be controlled, but the degree of control is not as intense as for A-category. C-category is the class of data, which has much less revenue-implications and can be controlled by suitable test checks

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Application of ABC Analysis

 

ABC Analysis applied where the quantum of data/information to be analysed is voluminous According to utility towards potential risk, they are classified into A, B & C categories. Ex: On input CENVAT issue- inputs involving lesser documents but higher CENVAT credit, classified in category A and subjected to 100% detailed scrutiny. Invoices involving moderate number also less credit amount can be classified as category B and subjected to 100% standard checks.

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Application of ABC Analysis

-The balance documents pertaining to CENVAT, classified as C category can be subjected to sample test checks.

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Audit Verification
 

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Audit verification is a structured process Audit verification done on the lines of Audit Plan for checking correctness of tax payment Auditor should conduct verification following sequence of steps, envisaged in the Audit Plan Physical tour of plant/premises, walk through and evaluation of internal control is integral part of verification Auditor should determine, whether apparent weaknesses in the internal control system of the assessee has led to any loss of revenue.

Audit Verification
 

Auditor should identify the procedural infractions (recurrent) on part of assessee All cases involving discrepancies or unexplained variations in trend-ratios, should be enquired in detail to find their cause & revenue implication On completion of each step, auditor must indicate objections and findings on verification paper Audit objections raised must be fully supported by documentary and legal evidence

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Reviewing results with the Assessee



In order to make the audit process transparent, auditor informs the assessee of all the objections before preparing Draft Audit Report. The assessees right - to know the objections and to offer clarifications with supporting documents - has been recognised This process resolves potential disputes early and avoid unnecessary disputes.

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Summarizing audit findings



This step involves putting together all of the audit findings in one place Important objections and findings must be reviewed with the immediate supervisor before discussing them with the assessee

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Informing the Divisional Deputy/Assistant Commissioner of major audit points



In case of major audit points (including time-bound proceedings), which requires immediate attention of the jurisdictional officers, the head of the audit party personally discuss the issue with the Divisional Dy./Assistant Commissioner This may be done immediately after completion of the audit of the unit

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Compliance of Audit objections



Where the assessee is in agreement with the audit findings, in part or in full, the auditor must request that payments be made promptly to stop accrual of interest. Voluntary compliance should be encouraged in view of sub sec (2B) of Sec 11 A of CEA, 1944 to avoid protracted legal wrangles. Wherever the assessee agrees to make a payment under section 11A (2B), he may be requested to furnish a letter in the precribed format

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Future Compliance
 

This is the final step before the auditor leaves the assessees premises. The auditor discusses with the assessee, steps to improve compliance including systemic improvement and modifications in the legal arrangements. The brief summary of the discussions and the views of the assessee is recorded in Working Papers

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Reporting


   

The draft Audit Report is completed at this stage within 20-25 days from the commencement of audit All the Working Papers must be included as attachments to the final Audit Report. Initial views of assessee must be recorded in the verification document. Audit report is submitted to the Audit Cell Following documents should be enclosed: -Completed Working Papers, Copy of Audit Plan, verification papers, documents/evidences in support of objections

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Audit Follow up
The Superintendent in-charge of the audit team discusses on the major audit points with Assistant/Deputy Commissioner to identify the action points  Audit Cell evaluates the Audit Report and score each report as per the instructions of the Board  Monthly monitoring meetings review the Audit Reports for final acceptance (or nonacceptance) of the audit points.  Thereafter the draft Audit Report would be finalised by the Audit Cell within 15 days from 63 meeting


Audit Follow up


 

The minutes of the meeting clearly state the required action to be taken in respect of each of the audit points The Audit cell should update the Assessee Master file based on the information available in the Audit Report Registers of Audit Planning and Audit Followup are maintained in the Audit Cell Register is monitored until the closure of the audit point either by issue of SCN and recovery of dues or by non-acceptance of the audit point by the Audit cell.

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AUDIT MANAGEMENT

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AUDIT MANAGEMENT


Audit management means -planning, -organising, -directing, -executing the audit process and -providing of necessary resources

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Management at Apex Level

  

Management is undertaken at two levelsDG Audit at Apex level and IAD of Commte at Local level At the apex level- Directorate general Audit that acts as a Nodal agency It has seven Zonal units at Ahmedabad, Mumbai, Delhi, Bangalore, Kolkata, Chennai and Hyderabad Both Directorate General and its 7 zonal office act as a linkage between the Board office, who decides the policy and Commissionerates, who executes the audit programme

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Role of Nodal Agency

 

It aids and advises the Board in policy framing It guides and provides functional direction in planning, co-ordination, supervision and conduct of audits at the local level It is responsible for the codification of the audit process in the form of Manuals and their regular updation It runs a centralised Risk Management programme so as to enable Commissionerates to select non-mandatory units for audit on the basis of their respective rupee risk

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Role of Nodal Agency



Risk management involves -identification of risk parameters, -amalgamation those into a risk matrix, -the calculation of rupee risk of individual assessees or taxpayers, -the timely circulation of these risk calculations to the Commissionerates and -the periodic evaluation of the efficacy of risk parameters.

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Role of Nodal Agency



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It collects and compiles data on audit results achieved by the Commissionerates, It analyses the results and provides suitable feedback to the Commissionerates It runs the Quality Assurance Programme for eliminating the deficiencies and improving the performance

Role of Nodal Agency



It examines the various types of irregularities detected during the audits every month and circulate the major detections on all India basis for immediate corrective or preventive actions. It identifies the training needs of auditors and officers handling audit related work and coordinates with the Directorate General of Training for the fulfilment. It nurture, monitor and grow the Computer Assisted Audit Programme (CAAP) to enhance the ability of the audit system
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Role of Nodal Agency



It suggest measures to improve tax compliance to the Board It acts as co-ordinating and supervising agency, in the audit of MLUs, Related or inter connected units, and companies formed due to merger or amalgamation.

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Management at local level



Audit Section in the Commissionerate handles at local level Audit Cell within the Audit Section entrusted with functions viz., Planning, allocation, co-ordination of Monitoring and Evaluation of Audits.

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Management at local level

Planning of Audit
It includes: (i) To maintain a database of available manpower resources for effective deployment. (ii) To maintain data of units to be audited mandatorily and others to be audited on the basis of risk analysis i. (iii) Selection of unit on the basis of: Risk parameter, b. Boards guidelines, and c. Available manpower. i. (iv) Maintenance of assessee master file

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Management at local level

(v) Planning the audit schedule in such a way so as to make optimum use of available resources (vi) Ensuring proper desk review before commencement of audit (vii) Ensuring audit follow-up

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Management at local level

Co-ordination of Monitoring of Audits
 

Commissioner call a monthly meeting for monitoring of audits It is attended by the Audit Cell, Supervisory Officers of the Audit Teams, the concerned Divisional Deputy/Assistant Commissioner where required Examines the sustainability of each audit objection and set out the future action points in the circulated minutes It also examines the overall working of the audit system and identify the areas requiring special attention including training requirement.

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Management at local level

Performance appraisal and Quality Assurance


Working Papers on each audit are taken up for evaluation and scoring. Scoring system focuses on -conducting audit as per norms - Working Papers, and - the results achieved

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Management at local level

Performance appraisal and Quality Assurance


For Scoring the entire process of audit is divided into five parts: (i) preparation of the Audit Plan; (ii) conduct of audit; (iii) major revenue points raised and their quality; (iv) realisation of revenue; and (v) issues for future compliance by the company.
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Management at local level

Performance appraisal and Quality Assurance


Quarterly review of scores of each team in different areas of audit When quarterly average in a specific field is below 60 marks, concerned auditor for the subject is immediate re-trained comprehensive report highlighting the areas needing training and quality improvement is prepared

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Role of Commissioner
Infrastructure

Audit Process

Co-ordination between Audit & AE

Follow up, Performance Appraisal & Feedback

Trg. Posting Infrastructure Vehicle Data Capture

Selection
Profiles & Registers

Co-ordinate Audit/AE Timely intervention

Interact with sr mgmt. Review Performance Obtain feedback Take remedial measures

Monitoring Committee

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Co-ordination between RO/DO/Audit

Role of Additional/ Joint Commissioner (Audit)

Co-ordination, plg & overall mgmt.

Formation of Audit team & Audit Cell Approving

Review of Interacting Scoring & Follow up with sr mgmt Action & during evaluation Pre & post Submission maintenance of AR of records Interacting Audit Of Quartly with officers audit reports of DG

Final selection of nonmandatory units

Organizing training programme Audit Plan

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Role of Deputy/Assistant Commissioner (Audit)

Co-ordination, plg. & day to day mgmt Formation of Audit Parties&Audit Cell. Supervision & Approval of steps to Audit Plan Scrutinising the Verification Report & DAR Discussion with assessee on objections & duty Payment Prepn./updating of assessee master file Preparing list of nonmandatory units Interviewing the officers of assessee Maintenance & upkeep of all records and registers Follow up action on final audit reports Organising training programmes Preparation of audit schedule participating in the conduct of audit of sensitive units
submission of Quartly

audit reports & Other reports Interacting & Assisting officers of DG (A) in QAR

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Role of Divisional Officers

Provide data to audit branch to build up data base Discussions with Auditors prior to Preparation of Audit Report Suggestions regarding selection of units for audit

Timely submission of copies of ER4, ER5 & ER6 to the audit branch Taking follow-up Actions on audit objections Timely submission of results of scrutinisation of returns filed in the range/division to audit

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Role of Computer Cell (Head Quarter)

Making available Assessee profile in SERMON package

Make the ER-1/ ER-2 data available on monthly basis

Generate trend analysis reports of all units

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TAX COMPLIANCE

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Tax Compliance (EA-2000 as a Tool)

   

EA-2000 audit is a tool for tax compliance Transparency in EA-2000 scheme enhances tax compliance Audit is incomplete if no effort to recovery of tax or no tax is recovered on short levy. Audit objections should be intimated in writing to the assessee -towards acknowledgement of his right to know -to ascertain his view on the audit objections -towards a part of participative and fact-finding audit scheme -to make the audit process transparent

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Auditors Responsibility


  

To detect non-compliance, procedural irregularities and leakage of revenue due to deliberate action or ignorance on the part of assessee To explain all audit objections to the assessee To make all attempts to resolve any disagreements before they are finalised. To make sure that his senior is aware of potential disagreement and the position taken by the assessee. To advise the assessee of his rights and obligations with respect to items in dispute

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Auditors Responsibility
  

To persuade assessee to pay the duty promptly, where he is in agreement with the objections To inform the benefit of Section 11 A (2B) of CEA, 1944, on making spot payment To collect any information like bank information, ownership of the assets and receivables, financial liquidity, cash flow situation or any other factor, which may help recovery of duty, in future, where a substantial amount remains unpaid, because of assessees disagreement.

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Auditors Responsibility
 

  

To discuss future compliance issues with the senior management of the unit. To discuss the steps the unit management can take to reduce specific errors detected in` the audit To record all written or verbal assurances as given by assessee To offer departmental assistance to reduce errors and improve compliance To promote voluntary compliance amongst the assessees

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Auditors Responsibility


Auditor should establish and maintain a good professional relationship with the assessee Confidentiality should be maintained in respect of sensitive and confidential information furnished to him

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Assessees Responsibility


 

To assist the auditors by way of providing documents / records, clarification as desired of them To participate in the fact-finding audit scheme To provide explanation or evidence in reply to the audit objections submitted by the auditor To pay the duty promptly, if he is in agreement with the audit objections To rectify the recurrent errors pointed out of the auditor

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Assessees Responsibility


All assurances made of the assessee should be given in writing or verbally to improve the tax compliance

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Benefit of the Assessee from EA-200

 

Better equipped to comply with the Central Excise Law and Procedures Preparation of prescribed returns and selfassessment of Central Excise duties will be better focussed, correct and complete Business accounts and returns submitted to various agencies, will have less error/defects/ deficiencies The disputes and proceedings against them would be substantially reduced or even eliminated

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CASE STUDY
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I - Multi-location or Inter-connected Units

Definition Following are the examples of multi-location or inter-connected units: It would cover only:

i. A single manufacturer having more than

one manufacturing unit for similar goods; or

ii.Two or more manufacturing units, which are related persons in terms of section 4 of the Central Excise Act, 1944. 95

Exclusions
Following are exclusions (a) Registered depots/ dealers bearing the same PAN number. (b) Any group of such units located entirely within the jurisdiction of the same Commissionerate (i.e. having the same location code), they would not be treated as MLUs.
96

Selection Criteria(Category-i)
Preliminary: (i) Units manufacturing sensitive or evasion prone commodities or commodities showing an adverse revenue trend; (ii) Groups having one or more units in Commissionerates where the area-based exemption is available; or (iii) At random

97

Final selection (Essentiality Test)



Nature of relationship between Units or between Units vis--vis the Head Office is such that stand-alone audits is not possible. Ex: Some critical business function is centralized in Head Office. Some critical business records are maintained in the Head-Office or Financial statements such as the Balance Sheet or Profit and Loss Statement are not available unit-wise but for the company as a whole.

98

Selection Criteria(Category-ii)
Preliminary
(i) Non-availability of all records relevant for Central Excise audit in the registered/ factory premises; (ii) Centralization of some important business function such as purchases, booking of business or sales in the Head Office; or (iii) Any other, as communicated by the Commissioner.

99

Final selection (Essentiality Test)



Nature of relationship between Units or between Units vis--vis the Head Office is such that stand-alone audits is not possible. Ex: Some critical business function is centralized in Head Office. Some critical business records are maintained in the Head-Office or Financial statements such as the Balance Sheet or Profit and Loss Statement are not available unit-wise but for the company as a whole.

10 0

II- Ratios
1.Payment from Input cenvat credit : Total duty
payment Year Input credit (Rs. In lac) 240 352 448 239 Total duty Paid (Rs. In lac) 840 1110 950 511 Ratio

2005-06 2006-07 2007-08 10 1 2008-09 (Upto 9/08)

0.28:1 0.32:1 0.47:1 0.47:1

Ratios
2.Duty payment from PLA:Total duty payment

Year

2005-06 2006-07 2007-08 10 20082 09(Upto 9/08)

PLA payment Total duty (Rs. In lac) payment (Rs. In lac) 600 840 750 500 270 1110 950 511

Ratio

0.72:1 0.68:1 0.53:1 0.53:1

Ratios
3.Duty payment from Cenvat:Total duty payment

Year 2005-06 2006-07 2007-08 200810 09(Upto 3 9/08)

Total Cenvat Payment (Rs. In lac) 240 360 450 240

Total duty payment (Rs. In lac) 840 1110 950 511

Ratio

0.29:1 0.32:1 0.47:1 0.47:1

III- Trend Analysis

Duty payment from input credit as % of Total duty payment

Year 2005-06 2006-07 2007-08 2008-09 (Upto 9/08)

Total duty Input credit payment payment (Rs. In (Rs. In lac) lac) 240 840 352 448 239 1110 950 511

Input credit payment as % of Total duty payment 28 % 32 % 47 % 47 %

10 4

Trend Analysis
Duty payment from PLA as % of Total duty payment

Year

PLA payment (Rs. In lac) 600 750 500 270

2005-06 2006-07 2007-08 10 5 2008-09 (Upto 9/08)

Total duty payment (Rs. In lac) 840 1110 950 511

PLA payment as % of Total duty payment 72 % 68 % 53 % 53 %

Trend Analysis
Duty payment from Cenvat as % of Total duty payment

Year

2005-06 2006-07 2007-08 10 6 2008-09 (Upto

Total Cenvat Payment (Rs. In lac) 240 360 450 240

Total duty Cenvat payment payment as % (Rs. In lac) of Total duty payment 840 1110 950 511 29 % 32 % 47 % 47 %

Trend Analysis
Domestic sales as % of Total sales

Year

2005-06 2006-07 2007-08 10 7 2008-09 (Upto

Domestic sales (in no,) 147500 175000 137000 93000

Total sales Domestic sales (in no.) as % of Total sales 187500 79 % 245000 212000 130000 71 % 65 % 72 %

Trend Analysis
Export sales as % of Total sales

Year

2005-06 2006-07 2007-08 10 2008-09 8 (Upto 9/08)

Export sales Total (in no.) sales (in no.) 40000 187500 70000 75000 37000 245000 212000 130000

Export sales as % of Total sales 21 % 29 % 35 % 28 %

Trend Analysis
Trend in non duty paid clearances

Year 2005-06 2006-07 2007-08

10 9

Non duty paid clearances(in no.) 0 2500 1200

Copyright(c)2009 byAjitKumarHait

IV- Probable Areas Identified For Audit (From Desk Review)

1. A) Wrong availment of cenvat credit B) Under valuation of finished goods C) Diversion of inputs D) Clandestine clearance of Finished goods Indicators:
Duty paid from PLA during 2007-08 & 08-09 whereas Cenvat payment during same period 11 0

Contd..
2.Why the sales figure ??? 140000 shown in sales tax return and 217200 reflected in Annual Accounts during 2007-08. 3. Compare the value of goods at factory gate and Depot Basis: I) Case on under valuation booked of Enforcement Branch ii)Interest free deposit of Rs 5cr. taken from Marketing Company iii)Media reported about adopting various strategies of the branded suitcase 11 manufactures to overcome 1 slump market condition.

Contd..
4. Value of suitcases at depot that cleared under exchange scheme from factory to be verified to ensure correct payment of duty.[Normal value Rs.400/ =Transaction value under exchange Scheme] Basis: In view of the disposal of such suitcases as scrap @ Rs. 100/-

11 2

Contd.. 5.Why difference.??

Year Clearances Clearances Differenc shown in C.Ex. shown in Annual e (in no.) Record (in no.) Account ?? (in no.) 2005-06 187500 189000 -1500 2006-07 245000 11 3 2007-08 212000 249500 217200 -4500 -5200

Contd..
6. Verify Income other than sales (if any)

shown in the Annual Report (Missing) and their source (from Ledgers) to identify any additional flow back received or any undisclosed sales of any goods/services 7. Compare the production data between C.Ex. Records and statement furnished to the BIS 8. Compare the stock of inputs and finished goods between Central Excise Records and Statement furnished to the bank.
11 4

V- Major Missing Information.!!!!!



    

Reasons for selection for audit (Other than mandatory) Last audit report Annual Report Trial Balance Reports of internal auditor (Very imp.) Tax Audit Report under Section 44 AB of Income Tax Act, 1961 (43 of 1961)

11 5

Contd.
Cost audit reports, if any, under Section 233 B of the Companies Act, 1956 (1 of 1956)  Sales Tax Return  Stock Statements furnished to the Bank  Statements filed with the BIS


11 6

VI- Areas Identified For Audit



Reconciliation of Year wise value of clearances and duty payment submitted in the ER1 with the Annual Report, Tax audit report, Sales tax return and Sales ledger Reconciliation of job work challans with the job register, input stock register, daily stock account and duty payment particulars (in particular valuation of Handles at job workers end)

11 7

Contd
Value at which goods are cleared from factory and the value at which those are sold from the depot are to be verified to ensure correct payment of duty (in view of the past record of case registered against them).  Compare the purchase ledger with input register with focus on purchase from dealers  Check the Cenvat credit Vis- a Vis insurance claim of Rs. 10 lac during 11 Dec,07


Contd


Check payment of duty on suitcases supplied free of cost to the employees on the occasion of Silver Jubilee celebration of the Company in April, 2008 Check the issue of repairing of suitcases returned to the factory (whether cenvat credit is reversed on the inputs used for repair or duty is leviable on the value addition)

11 9

Contd


Check the issue of written off of components/ spares took place during ISO certification (whether Cenvat credit is reversed on those items) Check as to the payment of duty on the suitcases cleared as replacements for irreparable defective sets under 1 year Guarantee policy

12 0

Contd


Check whether Cenvat credit is reversed against the inputs rejected of the In house Quality Control Deptt. Check the valuation of the suitcases sold in particular through their subsidiary company in view of the receipt of interest free deposit of Rs. 5cr. from them

12 1

Contd


In view of less amount of duty paid from PLA and more Cenvat payment during 2007-08 & 0809 the following issues are to be checked to find out

A) Wrong availment of cenvat credit B) Under valuation of finished goods C) Diversion of inputs D) Clandestine clearance of Finished goods
12 2

Contd
 1.

2. 3.

124. 3

Following issues on Service tax matters to be checked: Services rendered in construction and maintenance of township (If s.tax paid whether input service tax credit availed and if availed to be reversed) Services rendered by labour contractor, M/s, Abdul Rehman & Bros. Services rendered by overseas marketing agents in East European, African and West Asian Countries Technical know how (Services) received from M/s, HIJ , Germany

VII- AUDIT PLAN

Sl. Subject N o Specific Issue Sourc Backup Document e Docu ment Cove Selection rage Criteria Perio d Invoices issued on 5th,10th, 15th,20th,2 5th,30th. All invoices, delivery challans, commerci al invoices, depot sales

Are Classif goods Regn Invoices, Aug. 07 & ication classified Certif ER1 08 properly icate Return Reven ue Recon ciliatio n Whether ER1 on all Retu clearance rns s duty is paid
Balance sheet, sales tax return, dispatch advice,deliver y challan, depot sales report,invoice s, commercial invoices and statement to

Entir e audit perio d

12 4

AUDIT PLAN
Sl. Subject Specific N Issue o Source Docum ent Backup Docume nt Cover Selection Criteria age Perio d

3 Cenva t credit input

Whethe r credit availed all inputs are received

Input invoic es & Credit Regist er

Entire All Bank GRN & Register, audit stock period statements, Stores All input ledger, invoices Bank recd. On stock 5th,10th,15th, statemen & 25th day ts of month Entire All invoices audit raised from Challans period depot and

12 5

4 valuati Goods sold at on

higher price

Invoic GRNs, Delivery es

AUDIT PLAN
Sl Subject Specific Source Issue Docum . N ent o Backup Coverag Selection Docume e Period Criteria nt Materials issue note in 9/07, 12/07 and 03/08,06/0 8,09/08 &12/08 Return and stores receipt register

5 Cenvat Material Cenvat

credit on inputs, CG & S.tax

Entire Cenvat audit Invoices credit s& Register period service & s used Material in issue townshi note p Months r credit d/ Register in which availed rejected maxm. on invoices goods returne are d goods received

6 Cenvat Whethe Returne Return

12 6

AUDIT PLAN
Sl Subjec Specifi . t c Issue N o Source Docum ent Invoice s Backup Coverag Selection Docume e Period Criteria nt Sales ledger Entire audit period All sales to subsidiary and documents of inter unit transfer, CAS-4
Contract, Royalty account, Foreign currency out flow

7 Valuati Cleara
on nce to sister concer n and inter unit transfer Technic al know how service

8 Servic
e tax

12 7

Invoice, Expens es account

Contract Royalty account, Foreign currency out flow

Entire audit period

AUDIT PLAN
Sl Subject Specifi Source c Issue Docum . N ent o Backup Coverag Selection Docume e Period Criteria nt Contract Entire , audit Commis period sion All export invoices, Commission payment Register Contract,

9 Service Commi Export

tax ssion to invoice Agents s

1 Service Design Invoice, Contract Entire Studio Expens audit 0 tax

es account

period

12 8

Verification paper-1
1. 2. 3. 4. 5. 6. 7. 8. 9. Date of verification Name of auditor Issue involved Ref. No.of Audit Plan Documents verified Brief account-extent of verification Auditors observation & Conclusion Quantification of revenue involved, if any 23.11.2009 Shri PQR Whether goods manufactured are classified appropriately 1 Regn. Certificate, Invoices,ER-1 Return The Regn. Certificate & ER-1 was verified with description of goods in Invoices The goods were found to be correctly classified NIL

Documents relied upon to support the Regn. Certificate Conclusion

Verification paper-2
1. 2. 3. Date of verification Name of auditor Issue involved 23.11.2009 Shri XYZ Whether sale is accounted & duty paid appropriately on all clearances including suitcases given to employees

4. 5.

Ref. No.of Audit Plan Documents verified

2
Er-1,Balance sheet, VAT Returns,Despatch Advice, Delivery Challans, Sales eports furnished by Depots, Invoices, Commercial Invoices, Statement to BIS All documents having relation with clearance value were verified. It is noticed that duty was not discharged on suitcases given to employees during silver jubili Rs.9,35,000/ER-1 Returns, VAT Returns, Despatch Advice

6. 7. 8. 9.

Brief account-extent of verification Auditors observation & Conclusion Quantification of revenue involved, if any Documents relied upon to support the Conclusion

Verification paper-3
1. 2. 3. 4. 5. Date of verification Name of auditor Issue involved Ref. No.of Audit Plan Documents verified 16.01.2009 Shri XYZ, Shri PQR, Smt. LMN & Shri EFG Whether quantity on which credit is taken is received actually 3 Input invoices, Cenvat Credit Register, Material Receipt Note/ Register, Stores Ledger, Stock Statements to Bank. All input invoices received on 5th, 10th, 15th & 25th, day of every month were Material Receipt Note. Stock Statements filed before the Banks were also verified. No discrepancies were noticed NIL Material Receipt Note bank Stock Statements & Cenvat Credit register.

6.

Brief account-extent of verification

7. 8. 9.

Auditors observation & Conclusion Quantification of revenue involved, if any Documents relied upon to support the Conclusion

Verification paper-4
1. 2. 3. 4. 5. 6. 7. Date of verification Name of auditor Issue involved Ref. No.of Audit Plan Documents verified Brief account-extent of verification Auditors observation & Conclusion 16.01.2009 Shri XYZ, Shri PQR, Smt. LMN & Shri EFG Whether Goods sold at higher price from depot than that of factory Gate 4 Invoices, Goods Receipt Note, Delivery Challans, Sales Ledger All invoices issued by the Depot were scrutinized with focus on North India Territory Scrutiny & comparison of the Invoices raised from the factory & Depot revealed that they had sold the goods at higher price from its depot during August 2007 to February - 2008 Rs. 2,18,000/Invoices issued by the factory and depot.

8. 9.

Quantification of revenue involved, if any Documents relied upon to support the Conclusion

Verification paper-5
1. 2. 3. Date of verification Name of auditor Issue involved 16.01.2009 Shri XYZ, Shri PQR, Smt. LMN & Shri EFG Whether material & services used in Township built has any bearing on availment of Cenvat Credit on input/ capital goods/ service tax 5 Invoices, Cenvat Credit Register, Material Issued Note Material issued Notes in Sep, Dec., 2007 & Mar., June, Sept., Dec.-2008 were examined Scrutiny of Input Service Register, it was seen that the assessee had availed credit of Service Tax paid by the labour contractor. On further inquiry, it was given to understand that the said contractor had supplied labour for repair and maintenance of flats, gardens, etc. Rs. 17,000/Input service register

4. 5. 6. 7.

Ref. No.of Audit Plan Documents verified Brief account-extent of verification Auditors observation & Conclusion

8. 9.

Quantification of revenue involved, if any Documents relied upon to support the Conclusion

Verification paper-6
1. 2. 3. 4. 5. 6. 7. Date of verification Name of auditor Issue involved Ref. No.of Audit Plan Documents verified Brief account-extent of verification Auditors observation & Conclusion 16.01.2009 Shri XYZ, Shri PQR, Smt. LMN & Shri EFG Whether service tax was paid on technical know-how services received from foreign based service provider? 6 Expenses account, Contract, Royalty account, Foreign currency outflow. Contract, Royalty account & Foreign currency outflow statements were verified for the audit period The assessee paid an amount of Rs 20 lakh for the service on tech know how but no Service Tax was paid on these services. In terms of Rule 2(1) (d)(iv) where overseas service provider who has no office in India provides any service is liable to pay Service Tax. The assessee agreed with the same. Rs.2,40,000/Input Service Register

8. 9.

Quantification of revenue involved, if any Documents relied upon to support the Conclusion

Verification paper-7
1. 2. 3. 4. 5. 6. 7. 8. 9. Date of verification Name of auditor Issue involved Ref. No.of Audit Plan Documents verified Brief account-extent of verification Auditors observation & Conclusion Quantification of revenue involved, if any Documents relied upon to support the Conclusion 17.01.2009 Shri XYZ, Shri PQR, Smt. LMN & Shri EFG Whether service tax was paid on services of commission agents? 7 Expenses account, Contract, Roualty account, Foreign currency outflow, Commission Payment register Documents like Contract, Commission Payment Register for the audit period were verified. The Service Tax was found to be discharged in commission paid to Commission Agents NIL Commission Payment Register & expense ledger

Verification paper-8
1. 2. 3. 4. 5. 6. 7. 8. 9. Date of verification Name of auditor Issue involved Ref. No.of Audit Plan Documents verified Brief account-extent of verification Auditors observation & Conclusion Quantification of revenue involved, if any Documents relied upon to support the Conclusion 17.01.2009 Shri XYZ, Shri PQR, Smt. LMN & Shri EFG Whether Cenvat credit was availed on returned/ rejected goods? 8 Return/ Reject, Invoice, Return Register, Stores Receipt, Register Document for the month during which maximum return had been received were verified No discrepancy was noticed NIL Returned Goods register & Cenvat Credit account

Verification paper-9
1. 2. 3. Date of verification Name of auditor Issue involved 17.01.2009 Shri XYZ, Shri PQR, Smt. LMN & Shri EFG Whether correct valuation practice was adopted for the goods cleared to a sister concern or in case of inter-unit transfers 9 Invoice, Sales Ledger Invoice to sister concern were verified No discrepancy was noticed. For inter-unit transfer of goods menat for captive consumption, costing method of CAS-4 was found to be adopted NIL Invoices, sales ledger, CAS-4

4. 5. 6. 7.

Ref. No.of Audit Plan Documents verified Brief account-extent of verification Auditors observation & Conclusion Quantification of revenue involved, if any Documents relied upon to support the Conclusion

8. 9.

Verification paper-10
1. 2. 3. 4. 5. 6. 7. 8. 9. Date of verification Name of auditor Issue involved Ref. No.of Audit Plan Documents verified Brief account-extent of verification Auditors observation & Conclusion Quantification of revenue involved, if any Documents relied upon to support the Conclusion 17.01.2009 Shri XYZ, Shri PQR, Smt. LMN & Shri EFG Whether service tax is being discharged for the service taken in designed studio 10 Invoice, Expenses account, Contract All documents in connection with service provider in the Design Studio were examined. No discrepancy was noticed NIL Invoices received and expenses account.

Final Audit Report No.1/2009

Part-1 1. 2.
Name of the Unit Commiddionerate/Division/Range in which it is located Products Manufactured Chapter sub-heading Main Exemption Notification Date of last visit Period for which current audit undertaken Dates on which audit undertaken M/s ABC XYS Commissionerate Division-OPQ Range-LMP Plastic Moulded Suitcases 420212.20 --August 2007 August 2007 to December 2008 15-17 August,2009

3. 4. 5. 6. 7. 8.

Part-II
Summery of major audit objections from the working Papers
Sl. No 1. Gist of Objection Revenue implication Rs.935000+Rs. 28050 Ed cess+Interest Rs.2,18,000+Rs .6540 Ed cess Rs.17,000+Rs.5 10 Ed cess Assessees agreement Agreed paid Rs.9,60,005 Departments conclusion accepted

Non-payment of duty on Suitcases distributed amongst employees Goods sold at higher price from Depot Wrong availment of Input Service Tax Credit on labour supply Non-payment of Service Tax on Tech Know how Service

2.

Agreed paid Rs.2,24,540 Agreed paid Rs.17,,510

accepted

3.

accepted

4.

Rs.2,40,000/+Rs.7,200/- Ed cess

Agreed paid Rs.2,47,200

accepted

RP-1 Non-payment of duty on Suitcases distributed amongst employees

During the course of audit it was noticed that the assessee had distributed Suitcases to its employees on the occasion of Silver Jubilee celebration. These Suitcases valued at Rs. 66,78,571 were removed from their Store Room during the month of April, 2008. Scrutiny revealed that no duty amounting to Rs. 9.35 lakh was paid on these suitcases. On inquiry, the management explained that since these were not to be sold, no duty was chargeable on these suitcases. In terms of Rule 4 of the central Excise Rules, 2002, duty is leviable on removal of goods from the factory. The assessee has agreed with the audit objection and paid duty of Rs. 9.35 lakh together with Rs. 28.050 being the education cess. The AC concerned is required to recover the interest leviable in terms of Section 11AB of the Central Excise Act, 1944.

RP-2 Goods sold at higher priice4 from the Depot

On scrutiny and comparison of the Invoices raised from the factory and the Depot revealed that thy had sold the goods at higher price from its depot during August 2007to February 2008. The differential duty liability on differential value [Rs. 13,62,5000] amounted to Rs. 2,18,000. Clause [c] of Section 4(2) of the Central Excise Act, 1944, specifies depot as the place of removal. In the instant case, the assessee was requited to pay differential duty on the clearances from its depot. On being asked, the assessee agreed and has paid duty amounting to Rs. 2,18,000+ Rs. 6540 [education cess] on the spot.

The AC concerned is required to recover the interest leviable in terms of Section 11AB of the Central Excise Act, 1944

RP3- Wrong availment of Input Service credit on labour supply

On scrutiny of Input Service Register, it was seen that the assessee had availed credit of Service Tax Paid by the labour contractor. On further inquiry, it was given to understand that the said contractor had supplied labour for repair and maintenance of flats, gardens, etc. It is submitted that credit of service Tax paid on any output service is available in terms of Rule 2 (1) of the Cenvat credit Rules, 2004, provided the input service is utilized in or in relation to the manufacture of final product or for providing output service. In the instant case, since the services were not utilized in the manufacture of excisable goods or for providing output service but were utilized in its colony, the input service credit amounting to Rs. 17,000 is not admissible to them. On being asked, the assessee agreed and has paid duty amounting to Rs. 17,510 [Rs. 17,000 + Rs. 510 education cess on the spot. The AC concerned is required to recover the interest leviable in terms of section 11AB of the central excise act, 1944

RP-4 Non-payment of Service Tax on Technical know0 how service

On scrutiny of records, it was noticed that the assessee had an arrangement with the foreign based service provider for technical know how. The assessee had paid an amount of Rs. 20 lakh for this service. Since the provider of the service was foreign based having no office in India, no Service Tax was paid on these services. It may be stated that in terms of rule 2 (1) (d) (iv) of the Service Tax Rules, where overseas service is liable to pay Service Tax. Therefore, in the instant case, the assessee being the recipient of service is liable to pay ServiceTax amounting to Rs. 2,40,000 + Rs. 7,200 being the Education Cess. On being pointed, the assessee paid the an amount of Rs. 2,47,200 on the spot. The AC concerned is required to recover the interest leviable in terms of Section 11AB of the Central Excise Act, 1944

Suggestions for better compliance including systematic improvements and modifications in the accounts and internal controls. During the course of evaluation of internal controls of the company it was noticed that the linkage between Depot and Dispatch Section is very weak which makes task of consolidation of sales amount very tough. This weak link needs to be examined and efforts should be made to correct the lacunas, Similarly, decision on disposal of waste and scrap is taken at a very junior level which leads to very uneven trend of clearance value. The task needs to be handled at a senior level for uniformity in price.

VIII- Probable Revenue Objections

1.Non payment of duties on suitcases distributed amongst employees
During the course of verification of records it was noticed that the assessee had distributed suitcases (Model No. XXX) free of cost to all the employees on the occasion of Silver Jubilee Celebration. These suitcases were removed from the store room during the month of April, 2008. On further scrutiny it was found that the suitcases have not suffered any duty. On enquiry, the management explained that since these were not sold, no duty has been paid. These suitcases valued at Rs. 66,78,571/- and duty (@14%) and Ed. Cess works out to Rs. 9.35 lac and Rs. 28050/- respectively. Besides above, interest under Section 11AB of CEA,1944 is also chargeable

14 6

Copyright(c)2009 byAjitKumarHait

Probable Revenue Objections

2. Goods sold at higher price from the Depot On comparison of the invoices raised from the factory and that at Depot revealed that the suitcases had been sold at higher prices from their depot during 08/2007 to 02/2008. Clause ( c ) of Sec. 4(2) of CEA, 1944 specifies Depot as place of removal. Therefore, assessee was required to pay the differential duty on all the clearances made at higher values. The differential duty @ 16% on differential value of Rs. 13,62,500/- works out to Rs. 2,18,000/-. The education cess on the said duty amounts to Rs.6540/-. 14 7

Probable Revenue Objections

3. Wrong availment of input service credit on labour
supply On scrutiny of the service register, it was seen that the assessee had availed credit of service tax paid by the labour contractor. On further inquiry about the use of labour it was revealed that the said labour was used for repair & maintenance of flats, gardens etc.In terms of Rule2(1) of CC Rules,2004 credit is available when the input service is utilized in or in relation to manufacture of final product or for providing output service. In the instant case, since the services were utilized in the repair & maintenance of flats, gardens etc. the input service credit is not admissible. The wrongly availed input service credit on the said issue works out to Rs. 17510/( Rs. 17,000/- duty + Rs. 510/- Edn. Cess).

14 8

Probable Revenue Objections

4.Non-payment of S.Ton the service - technical know how On scrutiny of records , it was noticed that the assessee had tied up with the Foreign service provider, M/s, HIJ, Germany for technical know how. The assessee had paid Rs 20 lac for this service. Since the Service provider is a foreign company no service tax was paid. In terms of Rule 2(1)(d)(iv) of the Service Tax Rules, where overseas service provider who has no office in India provides any service, the recipient of such service is liable to pay service tax. The assessee being the recipient of service of technical know how is liable to pay service tax on the said service received by them. The service tax @ 12 % on Rs 20 lac works out to Rs. 2,40,000/- and Edn Cess is Rs. 7200/-

14 9

ANNEXURE I Proforma of a verification paper

1. 2. 3. 4. 5. 6. 7. 8. 9.

15 0

Date of verification Name of the auditor verifying the issue Issue involved in brief Ref. No. of the Audit Plan Documents verified Brief account of the process and extent of verification Auditors observation and conclusion in brief Quantification of revenue involved, if any (also give the calculation sheet) Documents relied upon to support the conclusion

Signature of the auditor Supervising officers remarks and signature

Walk Through
Walk-through is a process by which the auditor selects any transaction by sampling method and traces its movement from the beginning through various sub systems.  The auditor verifies this transaction in the same sequence as it had moved.  Auditor can understand various processes and their inter linkages.  It is also useful method to evaluate the internal control system.  Walk through process of sales, purchase, 15 excise, etc may be undertaken 1


WALK THROUGH Flow chart showing movement of transactions; same route can be followed for walk through process.

I. Sales / Removal of goods

Tender files
Dealers agreement Distributor, consignment Agents C & F Agents agreement Weighment slip Bin Card - Stores Ledger Non moving stock register (For finished goods)

Sales order Book- Sales Performance ChartScrap Register

Price lists
Delivery note Invoices

Marketing files Despatch advice Gate pass Invoices register

15 2

Gate register Copyright(c)2009 byAjitKumarHait

II. Sales return

Sales return book Bank Reconciliation Statement
Credit notes Job card / work order

Material return/receipt noteNon moving stock register

Material transfer note-Inspection notes, latest reportsInter office Memo (Finished goods/ Intermediate products)

Debit notes

Bill of Material

Material requisition slip

15 3

III.
Vendor Development/ Supplier identification Credit notes Vouchers Cheque book Bills payable

Purchases
Quantification of requirements Technical literature

Tender Document

Purchase Order

Hire purchase Leasing agreements Project reports Purchase Return Book Gate Register

Debit notes
(for purchase return

Purchase book - Gate register

15 4

Material receipt noteLatest reportMaterial rejection slipBad bin Register

IV- Production - Process Chart

Material Requisition NoteBill of material Hire purchase agreements, Lease agreement, Cost Audit reportCost Register Bin card

Material transfer note/ issue slip

Job card /work order Time Card - incentive card / register/Power generation/ Consumption card

Machine logbookFixed Asset RegisEnergy Audit Rep Production Slip/ Production register
Material transfer note (Final product)

15 5

Costing.

Bill of material -cost audit report cost register Process chart

Machine logbook

Trial balance

Job card (Work order) - Bill of material

15 6

Balance sheet and P & L account /Annual report

V - Price determination ( Transaction Value)

Price lists
Register of advances

Invoices
Register for inter Corporate Loan

Debit notes

Other income in Annual Report

Cost Audit Debtors Ledger/ Creditors Ledger Report BOE Register

Bank statement

Dealers/Consignment RBI approval for agents/C& F payment of Royalty Agents agreement

15 7

Purchase order Fixed assets in custody of finance placed by buyers/ given by buyer sale contract

Debit notes

Marketing files/ Sales performance

charts

VI CENVAT
Gate register
Material receipt note Cenvat Account Loss in Transit Rejects (Cenvat account

Weighment register/slips

Lab tests Rejects/ Return/ debit note

CG-fixed Asset reg. Material transfer Input/CG Inputs/CG Depreciation rejected/ returned Plant register/ written off soldLeased /debit note I.T. return
Annual reportFixed Asset Schedules/ Depreciation schedules

15 8

Credit notes from suppliers

Bill of MaterialTo verify the utility of material/Input in the Manufacture of final Product

Invoices-Input sale /transfer assets Documents relating to Input/ IP transfer to job workers/ Bin cards/ stores led

Study of Debit Note



It is a statement prepared of a Business Organisation informing an other person that his A/c has been debited for the reasons given in the statement. Implication: Addressee is liable to pay the amount mentioned in the note to the issuing Organisation. Issuing orgn. is receiver of the amount.

15 9

Reasons for issuing debit note



In case of purchase -Return of goods to supplier -Short receipt of goods -Price reduction claimed due to defect etc -Claim of discount

16 0

Reasons for issuing debit note



In case of Sale -Increase in rate/ quantity -Increase in Excise duty, sales tax -Recovery of Pkg charges, transportation charges, warranty charges, handling charges, after sales service charges etc.

16 1

Reasons for issuing debit note



Other reasons -Extra charges billed of service provider like Transporter -Debiting insurance Company while lodging insurance claim -Recovery of charges like Advt. Chg,sales promotion Chg, - Value of own materials used of a Job worker -Value of scrap generated during job work and retained of job worker

16 2

Accounting of Debit notes



Purchase- By entering in Purchase return register or By journal entry Sales- Of journal entry or entering in the sales register

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How Important to a Auditor?

     

Return / rejection of purchased goods- Cenvat credit Reduction in rate of purchased goods- Cenvat Increase in the rate due to sales price variationValuation Recovery of amounts like advt. Chg, warranty chg etc.- valuation Use of inputs for job work- Cenvat credit Value of scrap retained by Job worker- Excise duty liability

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Credit note


It is a statement prepared of a Business Organisation informing an other person that his A/c has been Credited for the reasons given in the statement Supplier of goods prepare on receipt of the goods returned of customer Customer sends Debit note and on receipt Supplier issue credit note Addressee is eligible to receive the amount

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Situations Where Credit note issued

 

When buyer return goods When an allowance for damaged, defective or short quantity is given When buyer returns empty container

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QUESTIONS !!!!!!

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THANK YOU
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