Audit under threshold limits – ease of doing business with compliance of law”
Dear Professional friends,
Business entities in India have been fighting with several multiple business laws, rules, regulations, policies, procedures, formats and authorities for running their business and statutory compliance has become a nightmare for most of them, especially the small business entities. These small business entities particularly the private companies & partnership firms are worst affected by different laws related to audit of its books of accounts and filing of many statutory returns even if the business is on small scale or is covered by MSMED Act to claim various financial & tax incentives.
Let’s take an example of a private company engaged in manufacturing & servicing activities having annual turnover of Rs 10-100 crore. This company shall have to face following audits of its books of accounts and records and different financial reports generated there from by professional community or auditor nominated by regulatory authorities.
1. STATUTORY AUDIT by practicing CA covering true & fair view of financial reports with prescribed disclosures under Companies Act, CARO, Schedule-II & III and applicable Accounting Standards. It is mandatory even if there are no financial transactions undertaken in any year.
2. TAX AUDIT under Income Tax Act on the basis of prescribed annual turnover limit for each financial year covering only specific transactions specified in Form 3CB or 3CD to ensure correct tax revenue payment despite the fact of financial loss reported in statutory audit report.
3. GST AUDIT under GST Act (17 different tax laws have been subsumed in it) on the basis of prescribed annual turnover limit by CA or CMA for each financial year. Reconciliation of ITC available to the client taxpayer due to multiple faults of suppliers is the core problem.
4. COST AUDIT of cost records in case of manufacturing / servicing undertaking owned by the company by CMA in practice or employment. Cost records are integral part of books of accounts of the company audited by another professional and reconciliation of financial profit & costing profit is to be given by cost auditor.
5. SECRETARIAL AUDIT by company secretary in practice while uploading Annual Return of the company. Generally private companies have lesser & stagnant secretarial records but practitioner is supposed to verify them before attaching his DSC.
Besides the above SPECIAL AUDIT under specific industrial laws like cement, textiles, paper, sugar, alcohol etc are also applicable to business entities and concerned authorities require formatted reports from the professionals including CA/CMA/CS or departmental officers. These reports form part n parcel of statutory audit report.
Bank, NBFC and financial institutions extending financial assistance & secured loans to business entities also require certified financial statements, debtors, stocks & fixed assets etc for securing compliance of their loan terms. Therefore STATUTORY AUDIT has been clamped on non corporate business entities also which are not statutorily required to get their books of accounts audited otherwise.
TAX AUDIT and GST AUDIT are applicable to all registered tax payers on the basis of turnover of business irrespective of their form of business. Moreover all non-profit organizations like trusts, charitable institutions and cooperative societies etc are required to get books of accounts audited by CA or CMA to claim tax exemptions and special privileges rather than completeness or correctness of books of accounts maintained by them in absence of prescribed forms of financial reports under the respective law governing them like companies, banks, insurance & electricity supply or govt. institutions.
Therefore the professional community must address the problems faced by small business organizations regarding audit of its books of accounts by suggesting suitable amendment of corporate laws to provide for threshold limit based single audit covering all aspects of general nature.
For example if company law is amended to provide for STATUTORY AUDIT by CA/CMA/CS as per choice of management if the prescribed turnover or financial threshold limits are not crossed, the multiple audits shall be removed and one consolidated audit report will serve the purpose of all regulatory authorities.
The auditor will become responsible for all statutory compliances as well as true n fair view of the financial statements signed by him and in case of small entities it can be feasible and cost effective both due to ERP based accounting systems and software used by businessmen and professional both.
I have written this article on the basis of my 35 years of working in manufacturing industries where I had to face the internal as well as external auditors for Statutory Audit, Tax Audit, Cost Audit, Central Excise, Service Tax & VAT Audits, EPF/ESI/Bonus Inspection & Stock Audit by banks etc. All verifying the books of accounts of employers and matching the same with audited statements.