The tax audit under Section 44AB of the Income-tax Act, 1961, is not merely a statutory compliance — it is a vital opportunity for a Chartered Accountant to ensure accuracy, transparency, and compliance in a trader assessee’s financial records. For Assessment Year 2025–26, the audit process calls for a methodical approach that blends technical expertise with professional diligence. The following practical roadmap, rooted in hands-on experience, can help ensure a smooth and effective audit.
1. Laying the Groundwork
Every successful audit begins with formalities:
- Appointment Letter – Obtain a signed appointment letter from the client, confirming your engagement.
- Previous Auditor Communication – Where applicable, communicate with the previous auditor before taking up the assignment.
- Engagement Letter – Send a detailed audit engagement letter covering scope, timelines, professional fees, and specific points such as the new ICAI financial statement format for non-corporate entities.
2. Securing the Data
The accuracy of your audit hinges on the quality of information:
- Obtain the Tally backup and ensure it is locked for the audit period. Instruct the client not to pass any further entries without your concurrence.
- Take a Trial Balance in the format: Opening Balance – Debit Total – Credit Total – Closing Balance.
- Verify opening balances with the previous year’s audited financials.
3. Leveraging Technology
Excel is an auditor’s best ally. Use it extensively for:
- Sorting, filtering, and analysing large data sets.
- Pivot tables for identifying unusual transactions.
- Cross-referencing with AIS, GST, and other external data.
4. Scrutiny of Key Ledgers
Debtors (Sales-related)
- Identify, from the trial balance referred to above, customers with annual transactions exceeding ₹50 lakhs.
- Check compliance with TCS under Section 206C(1H).
Creditors (Purchase-related)
- Flag, from the trial balance referred to above, suppliers with transactions exceeding ₹50 lakhs for TDS compliance under Section 194Q.
- Cross-check purchase figures with GST returns and AIS data. (test check)
- Identify MSME creditors and ensure payment timelines under the MSME Act.
- Apply Section 43B(h) for non-trade MSME creditors.
5. Cash Transactions
Cash dealings attract stringent scrutiny:
- Use Excel to check violations of Section 40A(3) (cash payments above ₹10,000 per day to a person).
- Verify compliance with Sections 269SS/269T (cash loans) and Section 269ST (cash receipts).
6. Compliance in P&L and Balance Sheet
Ensure financial statements conform to ICAI’s Guidance Note on Financial Statements of Non-Corporate Entities. Make suitable disclosure in audit report if the format is not followed. Qualify the report if material deviations exist.
From the Profit & Loss Account:
- Check each expense head based on materiality.
- Verify TDS compliance under relevant sections:
- 192 – Salary
- 194C – Contracts
- 194A – Interest
- 194J – Professional fees
- 194H – Commission
- 194I – Rent
- 194R – Perquisites
- 195 – Foreign remittances
- Verify depreciation as per books, and under the Companies Act (if applicable) and reconcile with Income-tax depreciation under Section 32.
- If capital expenditure deductions or investment allowances are claimed, check relevant provisions.
7. GST Reconciliation
Match turnover, output tax, and input tax in books with GST returns. Differences must be analysed and documented.
8. Other Income
Interest, commission, or miscellaneous income must reconcile with Form 26AS. TDS credits must match accounting records.
9. Related Party and Statutory Disallowances
- Group expenses paid to related parties under Section 40A(2).
- Apply Section 43B for statutory dues like PF, ESI, GST, and interest to MSMEs.
- Check Section 40(b) compliance for working partner remuneration.
10. Capital & Current Accounts
Analyse capital transactions:
- Ensure adequate drawings to meet personal expenses.
- Match AIS entries with capital account activity, especially investments, property transactions, and share dealings.
11. Loans, Creditors, and Old Liabilities
- Obtain loan confirmations and bank statements.
- Report non-compliance with Sections 269SS/269T as per latest Form 3CD requirements.
- Identify old, non-moving creditor balances for possible deemed income under Section 41.
12. Fixed Assets
- Record dates of addition/deletion.
- Exclude GST input credit from cost capitalisation.
- Vouch significant capital additions and deletions for authenticity.
13. Deposits, Investments, and Stock
- Verify deposit receipts, investment proofs, and corresponding income.
- For stock valuation, ensure Sections 145 & 145A and ICDS II are complied with, and disclosures match the ITR format.
14. Sundry Debtors and Bank Balances
- Confirm that all debtors are recoverable; justify bad debts written off.
- Obtain bank confirmations and reconciliations. Ensure interest income is accounted for.
15. Cash Handling
Ensure no negative cash balance exists on any day in the cash book.
16. Closing the Audit
- Collate working papers in an organised manner.
- Make necessary qualifications/disclaimers in the report.
- Ensure accounting policies and notes comply with ICAI Standards and ICDS.
- Obtain a Management Representation Letter.
- Generate UDIN.
- Upload the tax audit report within the statutory deadline.
- Raise and collect professional fees promptly.
- File all working papers within 60 days as per the ICAI’s requirements.
Conclusion
A tax audit under Section 44AB is more than ticking compliance boxes. It is a responsibility to uphold the integrity of financial reporting, ensure adherence to statutory provisions, and provide the client with value-added insights. By following a structured, technology-assisted, and law-compliant approach, the auditor not only fulfils statutory obligations but also reinforces the trust that clients and the tax authorities place in the profession.
Compiled by – CA. Prasanth Srinivas
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