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Tax Audit

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Overview of Tax Audit

Tax Audit refers to the verification and inspection of the accounts of the taxpayer to ensure that the accounts are in accordance with the provisions of the Income Tax Act 1961. The Government of India has made tax audits mandatory compliance for every taxpayer.

Income Tax Act 1961has made tax audit compulsory on the annual gross turnover/receipts if the amount exceeds a specified limit. Chartered Accountant conducts the tax audit defined in Section 44AB of the Income Tax Act, 1961

Applicability of Tax Audit 

Section 44AB has made tax audit mandatory for the following persons:

  • Annual Gross Turnover in Business > 10 Crore 

If the annual gross turnover of an assessee exceeds one crore, then he shall be liable to undergo a  the audit as per Section 44AB of the Income Tax Act.

  • Annual Gross Income in Profession > 50 Laces 

When the Annual Gross Income in a profession exceeds Rs. 50 Lacs, then the Assessee is eligible for this procedure  

Objectives of Tax Audit

The key objectives of the Tax audit are given below-

  • It ensures that the books of accounts are maintained properly and correctly, and certified by the tax auditor.
  • Once methodical verification of books of accounts is done, it is necessary to report observations or discrepancies observed by the tax auditor.
  • The primary purpose of this  audit is to extract a report according to the requirements of form no. 3CA/3CB and 3CD. Apart from reporting needs of the above forms proper tax audit is also required, which would ensure that the book of accounts and records are properly maintained and accurately show the taxpayer’s income and appropriate claim for deductions.
  • An annual audit is both time and money-consuming process. Tax audit is necessary for every eligible Assessee,Income Tax Act has made it mandatory In India, and a tax consultant (Chartered Accountant) conducts Tax Audit.
  • It  can prove financially beneficial for a business.
  • An audit gives credibility to a piece of information published for employees, customers, suppliers, investors, and tax authorities.
  • The Audit gives assurance to shareholders that the figures in the accounts show an accurate and fair view.
Types of Tax Audit

The types of Tax Audit are given below

  • Field Audit – 

It is the type of Audit that takes place at the taxpayer’s office. The taxpayer needs to provide the Documents to the auditor.

  • Office Audit 

This Audit takes place at the office of the IRS. The taxpayer needs to carry the required Documents. The taxpayer will be informed about the Documents through a letter from the IRS Office.

  • Correspondence Audit 

Here the IRS sends a letter requesting the taxpayer to provide the missing Documents or any other Documents which can provide clarity pertaining to the taxpayer’s tax returns. The taxpayer is only required to mail the required Documents.

Type of Accounts Come Under Tax Audit

  • Individual/Proprietorship
  • Hindu Undivided Family
  • Company
  • Partnership Firm
  • Association of Person
  • Local Authority
 
Essential Documents Required for Tax audit 

The following Documents are necessary for Tax Audit – 

  • Documents Required for Preparation of Tax Audit Report 
  • Name of the Assessee
  • Address Proof of Assessee
  • PAN / Aadhar Card of the Assessee
  • GST Registration Number or any other Document which proves the payment of indirect taxes 
  • Status of the Assessee as a person under section 2 ( 31 ) of the Income-tax act 1961
  • Previous Year and Assessment Year 
  • Relevant Clause of section 44AB
  • Nature of Business and Change in Nature of business, if any 
  • If the Assessee has opted for taxation and taxation regime under 115BA/115BAA/115BAB and submitted form 10-IB / 10-IC /10-ID
  • Details of Partnership Firm or AOP 
  • Books of Accounts as per Section 44AA
  • Whether the P&L have and profit or gain under the presumptive scheme 44AD, 44ADA, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, Chapter XII-G, First Schedule or any other relevant section).
  • Method of accounting in the previous year and change in the method, if any 
  • Whether there is a need for adjustment in the P&L account to comply with ICDs U/s 145 (2)
  • Method of valuation of closing stock on the previous year 
  • Details regarding the capital asset converted to stock, if any 
  • Capital receipt 
  • Particulars of Depreciation 
  • Amount admissible under sections 32,33 and 35 on the ITA 1961
  • The amount received or paid to employees. 
  • Amount debited in Profit and Loss Account. 
  • Amount of interest under Section 23 of MSME Act 2006
  • Any payment made to persons u/s 40A 2 (b)
  • Profit chargeable on tax 
  • Deemed to be profit 
  • Profit Chargeable to tax 
  • Sum referred under section 43 B
  • Details of Loan/amount deposited along with a certificate from Assessee declaring the same
  • Sum referred u/s 43B
  • Depreciation or loss brought forward.
  • Tax distributed on profit
  • Tax summary
  • TDS
  • Ratio of Turnover
  • Documents Required for Tax Audit
  • Management Representation Letter
  • Appointment Letter for Defining Scope 
  • List of related parties and Transactions 
  • Trail balance
  • Financial Statements duly signed by Owners 
  • Statutory Compliances
  • Liabilities including Contingent liability Estimation 
  • Notes on nature of business 
  • Depreciation Calculation Statement 
  • Proof of revenue expenditure capitalised and assets purchased  
  • Extraordinary items nature and Disclosure
  • Bank balance confirmation 
  • Bank balance Statements 
  • Major sundry debtors and creditor balance confirmation 
  • Valuation of Inventories and for the total year quantitative inflow, outflow statement
  • Notes on accounts and Disclosure of accounting policies
  • Sample Purchase and sales bills
  • Analytical Ratio analysis
The procedure of Tax Audit

The following steps are involved in a Tax Audit:

  • Selection of a Tax Auditor 

The first step is the selection of a Tax auditor. The auditor can be the Chartered Accountant of the business or any official of the IRS office.

  • Filing the Form and Submission of Necessary Documents to the Auditor 

The next step is to file the required form and submit the essential Documents to the tax auditor.

  • Verification of Documents by the Auditor 

After submitting the Documents, the auditor verifies all the essential details and verifies every Document submitted by the taxpayer. The auditor can also ask for additional Documents to get clarity about the transaction of the taxpayer.

  • Preparation of Audit Report 

After verifying all the Documents, the auditor finally prepares an audit report. The audit report act as proof of adherence to tax laws by the taxpayer.

Presumptive Taxation Scheme Under Section 44AD
  • Businesses whose annual turnover is within the limit of Rs 2 crore are suitable for this scheme.
  • It is not necessary to maintain books of Accounts U/s 44AD
  • Net income is estimated to be @8% of your gross turnover
  • A Digital mode of payment is used to receive gross receipts.
  • Net income is calculated as @6% and @8% of gross receipts
  • If the Assessee goes for Presumptive taxation u/s 44AD, then he requires following the same audit section for the next 5 financial years.
  • You need to file ITR 4 to avail these schemes.
Presumptive Taxation Scheme- Section 44ADA
  • Professions whose annual gross income does not exceed Rs 50lakhs are suitable for this scheme.
  • It is not necessary to maintain books of Accounts under Section 44ADA.
  • Net income is evaluated to be at 50% of the gross receipt. of the taxpayer 
  • If the taxpayer opts for Presumptive taxation under Section 44ADA, then he is required to follow the same audit section for the next five financial years.
Tips to be safe from a Tax Audit

The motive behind indulging in any business or professional activity is to earn financial profit. And it is crucial to remember that profit should be earned legally and appropriately. Perform the following activities that will result in a healthy Tax Audit:

  •  It is obligatory to maintain books of accounts as per the Income Tax Act 1961
  • It is necessary to compute profit or gain under Chapter IV
  • Income is taxable or loss allowable
  • In tax return file mention taxable income and allowable loss
What is included in Turnover for Tax Audit?
  • Duty drawbacks received after export sales are considered a part of Turnover in a fiscal year.
  • Income earned out of interests from income by money lenders or through foreign fluctuation income by an exporter is regarded as a part of turnover in a financial year or Advance received and forfeited from customers, and if excise duty is included in turnover, it should be debited in the profit and loss account.
What is excluded in Turnover for Tax Audit?
  • Sale or Purchase of Fixed Assets
  • Income raised from selling the assets held as an investment
  • Rental Income
  • Residential or Commercial Property
  • Interest income and reimbursement of expenses as a receipt.
  • It helps in building a healthy reputation of the company.
Constituents of a Tax Audit Report

The tax auditor presents his report in the specified form, which could be either Form 3CA or Form 3CB, where:

  • Form No. 3CA is presented when a person involved in business or profession is already mandated to get his accounts audited under any other law.
  • Form No. 3CB is presented when a person is involved in business or profession and does not need to get his accounts audited under any other law.
The Due date for Tax Audit 

It is necessary for any person/persons who is/are covered under section 44AB to get their accounts audited and also obtain the audit reports on or before 30th September of that particular year, i.e., the due date of filing the return of the income.

Penalty of non-filing or delay in filing Tax Audit report

If any taxpayer fails to get the tax audit done is punished with the following penalty:

  • 0.5% of the total sales, turnover or gross receipts
  • Rs 1,50,000
How does Canjain help its client in Tax Audits?

Canjain has a team of experts and experienced business advisors who will assist and execute the entire Tax Audit. Canjain helps its client in conducting the Tax Audit by providing services like-

  • Proper analysis of laws & accounts and addresses all queries about Tax Audit.
  • Preparation of proper Documents & analysis of reports & statements.
  • Ensuring that the company follows the applicable Tax Standards & analysis of Business and Working procedure.
  • Ensures that the audit services should be viewed as an investment with medium to long term profits.

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Why Canjain ?

We at Canjain have trained professionals to help you throughout the Tax Audit procedure. Our Experts will guide and assist you in the whole process of Audit and related services & also ensures the timely and effective completion of your work. For any queries related to Tax Audit and related services, feel free to contact our experienced and trained professionals at Canjain .

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