ICAI  Releases Revised Guidance Note On Tax Audit: Know More

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ICAI Releases Revised Guidance Note On Tax Audit: Know More

Audits involve an auditor examining various books of accounts, followed by a physical examination of inventory to ensure that all departments follow a documented method of recording transactions.

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ICAI's Direct Taxes Committee issued its "Guideline Note on Tax Audit u/s 44AB of the Income-tax Act, 1961" in response to this requirement. Members are advised in the guidance note on conducting a tax audit, making a report, and dealing with related matters. Audits involve an auditor examining various books of accounts, followed by a physical examination of inventory to ensure that all departments follow a documented method of recording transactions. This is done to ensure that the financial statements provided by the organisation are accurate.

Employees or heads of a particular department can audit internally, while an outside firm or independent auditor can audit externally. Checking and confirming the accounts by an independent authority ensures that all books of accounts are done fairly and that there is no misrepresentation or fraud taking place.

Under the Income-tax Law, the taxpayer is required to have the accounts of his business/profession audited. Section 44AB specifies the class of taxpayers who must have their accounts audited by a chartered accountant. The audit under section 44AB aims to determine whether various provisions of the Income Tax Law have been complied with, as well as whether other requirements of the Income Tax Law have been met. Tax audits are audits conducted by chartered accountants in accordance with section 44AB.

What Is the New Tax Audit Framework?

The New Tax Audit Framework (New TF) introduced by the Indian Accounting Standards Board (The IASB) in its International Financial Reporting Standards (IFRS) 9 and IFRS 16 has brought about a fundamental change in the way tax audit is performed for accounting for deferred taxes. These changes are being implemented from AY 2023 onwards. A lot of guidance was provided by ICAI on the impact of these standards on Indian GAAP and their implementation and compliance. There were significant differences in the treatment of accounting standards under IFRS 9 and IFRS 16. The Institute has released a revised guidance note on tax audit u/s 44AB to help auditors understand the nuances of tax audit under New TF and help them comply with the new standard.

New Tax Audit Standard 44AB

Tax Audit Standard 44AB requires that an auditor should perform a 'retrospective' analysis of the components of the current deferred tax asset or deferred tax liability that arose in the current year and the preceding years, starting with the earliest year. The auditor would compute the amount of deferred tax asset and deferred tax liability based on the New TF for the current year. The amount computed for the preceding years would be the cumulative effect of the New TF for all the preceding years. The standard also prescribes certain disclosures that should be provided in the Income Tax Return and the financial statements.

The Revised Guidance Note aims to help auditors understand the nuances of tax audits under New TF and help them comply with the new standard. The standard provides certain flexibilities in its implementation to help ease the compliance burden in the initial years of its adoption. The standard provides that a company can opt to account for its current year's deferred tax as per the New TF or account for the cumulative effect of the New TF for all the preceding years or a combination of both. The Revised Guidance Note guides on selecting the approach to be followed by the auditor.

Pre-IMF Adjustment for Tax Asset and Tax Liability

The difference in the current year's adjustment for the deferred tax asset and deferred tax liability under the New TF and the adjustment computed under the old GAAP. This will be divided into two parts – pre-IMF adjustment and post-IMF adjustment. The pre-IMF adjustment is the difference between the current year's adjustment under the old GAAP and the current year's adjustment under the New TF. The post-IMF adjustment is the difference between the current year's adjustment under the New TF and the current year's adjustment under the old GAAP. The auditor will account for the current year's adjustment as per the New TF but with the pre-IMF adjustment and the post-IMF adjustment accounted for as per the old GAAP.

Recognition of Deferred Tax Asset on the Balance Sheet

The auditor would recognise the Deferred Tax Asset on the Balance Sheet only if it is more than 50% of the Pre-IMF adjustment for tax assets.

The Institute has clarified that TDA/TDBA accounts maintained per the old GAAP can be carried forward to the New TF. The auditor would account for the TDA/TDBA accounts as per the New TF, but the TDA/TDBA accounts as per the old GAAP. The standard also provides that TDA/TDBA accounts can be written off only as per the New TF. However, the Institute has clarified that TDA/TDBA accounts written off as per the old GAAP can be carried forward to the New TF. The auditor would account for the TDA/TDBA accounts as per the New TF but with the TDA/TDBA accounts written off as per the old GAAP.

The revised guidance note provides insight into the tax audit under the New TF. With this, the auditor will be better equipped to comply with the new standard and provide reliable assurance on the company's financial statements.

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