Accounting and Assurance Services

Implementation of Accounting system and Process

There are three different approaches to systems implementations:

  • Parallel Running – in which the users continue to do their work using the old system, whilst simultaneously setting up and getting used to the new system. This is the safest approach.
    It has the benefit of allowing all the potential problems to be discovered and sorted out before switch over. But it usually requires a significant time commitment from the users since, for example, they are usually inputting the same data twice.
  • Phased Adoption – means that the implementation happens in several phases. So, for example, financial ledgers, payment processing and reporting are typically required on Day One. But functionality such as eProcurement can usually wait until these are bedded in. This approach tends to have higher integration costs.
  • Big Bang Adoption – the switch between systems occurs on a specific date. Everybody starts to use the new system simultaneously and use of the old system (other than for reference and archive purposes) is discontinued from that moment on. If badly implemented, this approach can lead to delays, user frustration and budget overruns. In high pressure situations it is not uncommon for users to abandon the new system temporarily and revert to manual processes; in the belief that they will be able to “catch up when things quieten down”.

Knowledge Process Outsourcing

Knowledge process outsourcing (KPO) is the outsourcing of core, information-related business activities. KPO involves contracting out work to individuals that typically have advanced degrees and expertise in a specialized area.

 

The information-related work can be carried out by workers in a different company or by a subsidiary of the same organization. The subsidiary may be in the same country or in an offshore location to save costs or other resources.

Bookkeeping and Data Entry

What is data entry?

As the name implies, data entry is the process of recording financial transactions – money coming into and going out of the business.

Why does it matter?

If you’re not keeping a close eye on money in, money out, and things like debt, you’ll soon lose sight of how viable and profitable your business is.

How to do data entry

For each sale or purchase, you generally want to:

  • record details such as: the value and date of the transaction; who it was with (though that’s not always necessary for retail sales); what was bought or sold
  • assign that transaction to the right account in your ledger

Purchases and sales data are often lifted from places like point-of-sale systems, business bank statements, invoice records, and receipts. You’ll probably need multiple sources to get all the information you need.

How to do bookkeeping

Bookkeeping includes everything from basic data entry to tax prep. Let’s look at the core jobs and see how they’re done.

Statutory Audit

What is a Statutory Audit?

A statutory audit is a mandatory audit of a company’s financial records by an external entity. This audit is mandated by statute or law that governs an organization’s principles and ethics.

In general, a statutory audit is conducted by examining bank accounts, financial statements, transactions, bookkeeping records, ledgers, and other critical documents that are submitted for tax purposes and Govt requirements.

But it can also include business operations-related documents such as invoices, purchase orders, bills, challans, and more.

Importance of Statutory Audit

As per Companies Act 2013 and Companies (Audit and Auditors) Rules, 2014, all public and private limited companies are mandated by law (or stature) to conduct a statutory audit of the financial documents and filings. In fact, the business turnover and the nature of the business of public and private limited companies don’t matter in the case of the statutory audit.

In the case of LLP (Limited Liability Partnership) firms, only these companies are mandated to perform the statutory audit:

  • Annual turnover crosses Rs 40 lakh or
  • Capital contribution is more than Rs 25 lakh

In the case of non-compliance of statutory audit, Govt can impose a fine between Rs 25,000 to Rs 5,00,000. The defaulting officer can be imprisoned for one year and imposed a penalty between Rs 10,000 to Rs 1,00,000 or both.

Tax Audit

Tax audit refers to the verification of the books of accounts maintained by a taxpayer. The purpose of a tax audit is to validate the income tax computation made by the taxpayer in the income tax return and to ensure compliance with the laws of Income Tax. Auditing of books of accounts must be carried out by a certified Chartered Accountant. In this article, we discuss the concepts of tax audit limit, Section 44AB of the Income Tax Act and the legal provisions governing the appointment of a tax auditor.

Tax Audit Limit

The provisions relating to tax audit are provided under Section 44AB of the Income Tax Act. According to Section 44AB, a tax audit is required for the following persons:

Business

In case of a business, tax audit would be required if the total sales turnover or gross receipts in the business exceeds Rs.1 crore in any previous year. Under the Income Tax Act, “Business” simply means any economic activity carried on for earning profits. Section 2(3) has defined the business as “any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture”.

Profession

In case of a profession or professional, tax audit would be required if gross receipts in the profession exceed Rs.50 lakhs during the financial year. A profession or professional could be any of the following as per Rule 6F of the Income Tax Rules, 1962:

  1. Architect
  2. Accountant
  3. Authorised representative
  4. Engineer
  5. Film Artist – Actor, Cameraman, Director, Music Director, Editor, and so on
  6. Interior Decorator
  7. Legal Professional – Advocate or Lawyer
  8. Medical Professional – Doctor, Physiotherapist, or Nursing and Paramedical Staff
  9. Technical Consultant

Presumptive Taxation Scheme

If a person is enrolled under the presumptive taxation scheme under section 44AD​ and total sales or turnover is more than Rs. 2 crores, then tax audit would be required. Also, any person enrolled under the presumptive taxation scheme who claims that the profits of the business are lower than the profits calculated in accordance with the presumptive taxation scheme would be required to obtain a tax audit report.

Due Date for Filing Tax Audit Report

The due date for completing and filing tax audit report under section 44AB of Income Tax Act is 30th September of the assessment year. Hence, if a taxpayer is required to obtain a tax audit, then the assessee would be required to file the income tax return on or before 30th September along with the tax audit report. In case the taxpayer is also liable for transfer pricing audit, then the due date for filing tax audit is 30th November of the assessment year.

Form 3CA & 3CD

Any person who is required to get a tax audit would be required to furnish the following for tax audit while filing an income tax return:

Form 3CA – Audit Form
Form 3CD – Statement showing relevant particulars

Tax Audit Limit for Chartered Accountants

A tax audit can be conducted by a Chartered Accountant or a firm of Chartered Accountants. If it is performed by the latter, the name of the signatory who has signed the report on behalf of the firm must be stated in the audit report. The signatory must provide his/her membership number while registering in the e-filing portal.  Tax audits can also be performed by the Statutory Auditor. It is important to note that, Chartered Accountants have a limit on the number of tax audit reports that can be filed. The maximum number of tax audits that can be undertaken by a Chartered Accountant is limited to 60. In case of a firm the restriction on tax audit limit will be applicable for each of the partners.

Penalty for Completing Tax Audit

If a taxpayer who is required to obtain tax audit does not get the accounts audited, then penalty could be levied under Section 271B of the Income Tax Act. The penalty for not completing tax audit is 0.5% of the turnover or gross receipts, subject to a maximum of Rs.1,50,000.

Appointment of Tax Auditor in Company

The responsibility of appointing tax auditors in a company is vested with the Board of Directors. The Board may also delegate this responsibility to any other officer like CEO or CFO. Auditors in a firm or proprietorship can be appointed by a partner, proprietor or a person authorized by the assessee. Moreover, a taxpayer can also appoint two or more chartered accountants as joint auditors for performing the tax audit. In this case, the audit report must be signed by all the joint auditors, if all of them concur with the report. In case of any differences in opinion, the auditors must express their opinion separately through another report.

Letter of Appointment for Tax Audit

The tax auditor must obtain a letter of appointment from the concerned assessee before going forward with the tax audit. The appointment letter must be duly signed by the person competent to sign the return of income. The letter must mention the remuneration offered to the auditor. Further, the appointment letter should specify that no other auditor is entrusted with the task for the particular financial year, and could contain details of the previous auditor. The latter is mentioned to facilitate the communication between the appointed auditor and his predecessor.

Who cannot be tax auditor?

There are certain prohibitions on the appointment of tax auditors, which are enumerated below:

  • Any member in part-time practice is not eligible to perform tax audit.
  • A chartered account cannot audit the accounts of a person to whom he is indebted for more than Rs.10,000.
  • A statutory auditor will be deemed to be guilty of professional misconduct if he/she accepts the appointment of Public Sector Undertaking/Government Company/Listed Company and other Public Company having turnover of Rs 50 crores or more in a year and accepts any other work, assignment or service in regard to the same undertaking/company on a remuneration which in total exceeds the fee payable for carrying out the statutory audit of the same undertaking/company.
  • The Chartered Accountant who is assigned with the task of writing and maintaining the books of account of the assessee should not audit such accounts.
  • The audit of accounts of a professional firm of Chartered Accountants cannot be performed by any partner or employee belonging to such firm.
  • An internal auditor of the assessee cannot be appointed as a tax auditor.
  • An auditor cannot accept more than 45 tax audit assignments in a particular financial year.

Removal of Tax Auditor

The management is entitled to remove a tax auditor if the auditor has delayed the submission of the report to such an extent that it is not anymore possible to get the audit report uploaded before the specified due date. A tax auditor cannot be removed because he has submitted an adverse audit report or on the assesee’s apprehension that the tax auditor is likely to provide an adverse audit report. If a Chartered Accountant is removed on unfair grounds, the Ethical Standards Board, which was established by the Institute of Chartered Accountants of India (ICAI) is entitled to intervene. Moreover, if a Chartered Accountant is removed on invalid grounds, no other Chartered Accountant would be allowed to act as a replacement to the predecessor.

Internal Audit

Internal audit refers to an independent service to evaluate an organisation’s internal controls, its corporate practices, processes, and methods. An internal audit helps in securing compliance with the various laws applicable to an organisation. An organisation can prepare its accounts and records as per the applicable legal requirements and reporting.

Understanding Internal Audit

The purpose of an internal audit is to check the effectiveness and operational standards framed by an organisation. An organisation may have a set of rules for operations, such as placing orders, accepting deliveries, and making payments. An internal audit also helps in knowing whether the employees follow the internal operational standards.

An internal audit helps in identifying problems or inefficiencies and taking necessary corrective steps. Internal audits can identify any frauds by employees, such as embezzlement of funds. The audit can also identify whether there are deliberate cost overruns, whether a particular vendor is getting preference over other low-cost suppliers.

There may be a need to identify employee rotation between different roles and functions. An internal audit can check any potential threats or financial losses. An organisation can plug in financial leakage. The process enables the identification and correction of a lapse in procedures before the statutory audit.

An internal audit can be on an annual basis or monthly or quarterly. The choice depends on the need of the organisation. In certain cases, a company should mandatorily appoint an internal auditor, such as under the Companies Act, 2013. There are different types of assessment or analysis techniques an internal auditor may adopt for performing an internal audit.

Stock Audit

Stock audit or inventory audit is a term that refers to physical verification of a company or institution’s inventory assets. There are types of stock audits depending on the purpose and every stock audit will require a different approach.

Every business institution at least needs to perform a stock audit once a year to update and ensure that the physical stock and the computed stock match. A stock audit helps correct discrepancies between the physical stock and book stock can be corrected.

Why is a stock audit important?

There are several key reasons why an institution needs to perform a stock audit, including:

  • Identify the slow-moving stock, deadstock, obsolete stock, and scrap
  • Find out discrepancies between book stocks and physical stock
  • Update the physical stock that matches book stock
  • Make sure the proper preservation and handling of stocks

Stock audits is also an important factor in determining the benefits that should be offered to institutions. These are the key benefits of stock audits:

  • To reduce cost and bottom-line
  • To prevent pilferage and fraud
  • As information of the accurate inventory value
  • to reduce gaps in the inventory management process
  • As special arrangements for third party opinion, including for agent warehouses
  • As a good control mechanism in running the business