GST Checklist Before Finalisation of Books of Accounts W.R.T Profit and Loss Items (PART-II)
INTRODUCTION: A lot of legal considerations have to be kept in kind before finalizing books of accounts for the auditor to give a reasonable assurance that the financial statements of the client give a true and fair view. One of such legal considerations involve compliance with GST Act. In previous article on GST CHECKLIST BEFORE FINALISATION OF BOOKS OF ACCOUNTS we had discussed the GST considerations in balance sheet items. In this article we shall learn the GST considerations with respect to profit and loss items w.r.t what all needs to be ensured and verified by the auditor.
1) Reconciliation of Turnover as per Returns and Books:
Auditor needs to reconcile the differences between turnover in returns and books on a periodic basis and particularly at the end of financial year and watch out for the reasons in differences. There are bound to be certain differences between the turnover in books and returns. Some of the cases where there would be invariable differences are as follows:
A) Stock transfers as per GST are included in turnover. However, in case of financial statements the stock transfer transaction gets nullified. The auditor needs to check that the same has been accounted for in turnover and GST liability has been discharged in respect of the same.
B) Revenue Recognition might be affected due to Accounting standards because of risk and control being transferred later on but GST liability may arise earlier.
C) Differences arising due to exchange rates. For e.g. In books of accounts the sales will be recorded at average transaction rate. However, for GST sales, the exchange rate is to be adopted is the rate notified under section 14 of the Customs Act. This will lead to difference between books and GST returns.
2) Discount allowed: Year-end supply discounts might affect turnover and reduce GST liability. The auditor needs to confirm and verify the existence of such an agreement before or at the time of supply and linkage of discount to specific invoices keeping in mind the implications of Section-15(3) of CGST Act, 2017.
3)Correct Classification of goods: The auditor should verify that HSN classification and GST rates are correct and if not, then the GST differential liability has been paid.
4) Samples towards sales promotion: Business promotion may involve distribution of free samples and gifts to customers. These free samples or gifts, which are supplied free of cost are not treated as supply under GST. However, the ITC availed on the inward supply of these items must be reversed. The auditor needs to review the nature of such transactions and check that the necessary action in terms of reversal of ITC has been properly reflected in books.
5) Valuation rules as relevant are considered if transaction is between related parties or through an agent.
6) The auditor needs to ensure that the additional places of business have been added to registration for which turnover has been considered.
7) Adjustments in relation to credit notes which are accounted for in the audited financial statement but not permissible under GST.
NOTE: This is not an exhaustive list of checking. The auditor needs to apply his judgement and professional skepticism and remain alert to all the statutory compliances including GST.