Taxmann's CRACKER | Advanced Auditing & Professional Ethics

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Chapter 1
Quality Control and Engagement Standards 1.1
Chapter 2
Auditing Planning, Strategy and Execution 2.1
Chapter 3
Risk Assessment and Internal Control 3.1
Chapter 4
Audit in an Automated Environment 4.1
Chapter 5
Professional Ethics 5.1
Chapter 6
Company Audit 6.1
Chapter 7
Audit Reports 7.1
Chapter 8
CARO, 2020 8.1
Chapter 9
Audit of Consolidated Financial Statements 9.1
Chapter 10
Audit of Dividends 10.1
Chapter 11
Audit Committee and Corporate Governance 11.1
Chapter 12
Liabilities of Auditor 12.1
Chapter 13
Internal Audit 13.1
Chapter 14
Management and Operational Audit 14.1
PAGE
Chapter-wise Marks Distribution I-7
I-5
Contents

I-6 CONTENTS
Chapter 15
Audit under Fiscal Laws 15.1
Chapter 16
Due Diligence, Investigation and Forensic Audit 16.1
Chapter 17
Peer Review and Quality Review 17.1
Chapter 18
Audit of Banks 18.1
Chapter 19
Audit of Non-Banking Financial Companies 19.1
Chapter 20
Audit of Insurance Companies 20.1
Chapter 21
Audit of Public Sector Undertakings 21.1
Chapter 22
Questions on Ind-AS 22.1
Chapter 23
Questions on Schedule III 23.1
Past Exam Paper (Nov. 2020 - New Syllabus) – Suggested Answers P.1
Past Exam Paper (Jan. 2021 - New Syllabus) – Suggested Answers P.5
PAGE

15.1
Audit under Fiscal Laws
*From May 2019, Marks are given only for subjective questions.
15.1 - Audit of Public Trusts
Q.1 Draft an Audit programme for conducting the audit of a Public Trust registered under section 12A of
the Income Tax Act, 1961. [May 09 (8 Marks)]
Ans.: Audit Programme for conducting audit of a public trust:
1. Preliminary: Obtain the following from the trust:
x A copy of resolution from the trust so as to determine the scope of audit.
x A list of accounting records maintained by the trust.
x A certified true copy of trust deed.
x Trial Balance as at end of accounting period.
x Balance Sheet and Profit & Loss account of the trust authenticated by the trustee.
2. Compliance and Substantive Checking
(i) Examine the system of accounting and internal control.
(ii) Vouch the transactions of the trust so as to ensure the following:
(a) transaction falls within the ambit of the trust;
(b) transaction is properly authorized by the trustees or other delegated authority;
(c) Proper accounting of all incomes and expenses on the basis of the system of accounting
followed by the trust;
(d) Amount applied towards the object of the trust are covered by the objects of trust as
specified in the trust deed.
(iii) Check whether the financial statements agrees with the trial balance.
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 May-21 -
Series1 5 5 4 4 0 8
0
1
2
3
4
5
6
7
8
9
Marks
"Marks Distribution of Past Exams* (New Syllabus)"
15

Audit under Fiscal Laws Chapter 15
15.2
3. Issuing Audit Report
x Audit Report shall be furnished in Form No. 10B.
x Annexure to Form 10B requires certain information to be provided by the auditor, which need
to be obtained from the trustees.
15.2 - Tax Audit u/s 44AB
Q.2 A Co-operative Society having receipts above ₹ 100 lakhs get its accounts audited by a person eligible
to do audit under Co-operative Societies Act, 1912, who is not a C.A. State with reasons whether such
audit report can be furnished as tax audit report u/s 44AB of the Income Tax Act, 1961?
[Nov. 09 (3 Marks)]
Or
A Co-operative society having receipts over ₹ 2 crores have appointed Mr. D as the statutory auditor –
Mr. D is eligible to do the same under the state Co-operative Societies Act. Mr. D is not a chartered
accountant. Mr. D is also appointed to conduct the tax audit of the society u/s 44AB of the Income Tax
Act, 1961. Comment. [Nov. 17 (4 Marks)]
Ans.: Tax Audit Report in case of Co-operative society:
x Proviso to Sec. 44AB of Income Tax Act, 1961 lays down that where the accounts of an assessee are
required to be audited by or under any other law, it shall be sufficient compliance with the
provisions of this section, if such person get the accounts of such organisation audited under such
other law before the specified date and furnishes by that date, the report of the audit as required
under such other law and a further report by an Accountant in the form prescribed under this
section.
x The term “accountant” as defined under section 288 under the Income Tax Act, 1961 means a
chartered accountant within the meaning of the Chartered Accountants Act, 1949, who holds a
valid certificate of practice.
x Accordingly, the person who is not a Chartered Accountant as mentioned in the question, though is
eligible to act as auditor of Cooperative Society under the Cooperative Societies Act, 1912, but is
not eligible to carry out tax audit under Section 44AB of the Income Tax Act, 1961.
Conclusion: Audit report by a person other than Chartered Accountant cannot be furnished as tax audit
report under Section 44AB of the Income-tax Act, 1961.
Q.3 Mr. X deals in a commodity and purchase and sales of that commodity is ultimately settled otherwise
than by the actual delivery. During the financial year 2020-21 he purchased the commodity worth ₹
95 Lacs and sold the same commodity for ₹ 104 Lacs and the contract was settled otherwise than by
the actual delivery. X seeks your advice whether he is liable for tax audit u/s 44AB of the Income Tax
Act.
Ans.: Liability for Tax Audit in case of Speculative Transactions:
x Mr. X deals in commodity as a speculator. A speculative transaction means a transaction in which a
contract for the purchase or sale of any commodity, including stocks and shares, is periodically or
ultimately settled otherwise than by the actual delivery.
“ICAI Examiner Comments”
Even though many examinees have given correct conclusion, few examinees failed to refer Sec. 288(2)
of the Income-tax Act, 1961 and its explanation while some of them mistakenly related with
Professional misconduct under CA Act, 1949.

Chapter 15 Audit under Fiscal Laws
15.3
x As such, in such transaction the difference amount is ‘turnover’. In the given case the difference of ₹
104 lacs and ₹ 95 lakhs i.e., ₹ 9 Lakhs is the turnover.
x In such transactions though the contract notes are issued for full value of the purchases or sales,
but the entries in the books of account are made only for the differences.
Conclusion: Mr. X is not liable for Tax audit u/s 44AB of the Income Tax Act, 1961.
Q.4 Concession Ltd. is engaged in the business of manufacturing of threads. The company recorded the
turnover of ₹ 1.13 crore during the financial year 2020-21 before adjusting the following:
Discount allowed in the Sales Invoice ₹ 8,20,000
Cash discount (other than allowed in Cash memo/ sales invoice) ₹ 9,20,000
Trade discount ₹ 2,90,000
Commission on Sales ₹ 6,00,000
Sales Return (F.Y. 2019-20) ₹ 1,60,000
Sale of Investment ₹ 6,60,000
You are required to ascertain the effective turnover to be considered for the prescribed limit of tax
audit and guide the company whether the provisions relating to tax audit applies.
Ans.: Computation of Turnover for the purpose of determining requirement of Tax Audit:
As per section 44AB of the Income Tax Act, 1961, audit is required in case of every person carrying on
business, if his total sales, turnover or gross receipts in business exceed ₹ 1 crore and in case of every
person carrying on a profession, if his gross receipts from profession exceed ₹ 50 lakhs in any
previous year.
As per Guidance Note on Tax Audit issued by the ICAI, the following points merit consideration for the
purpose of computing turnover:
(i) Discount allowed in the sales being in the nature of trade discount will be deducted from the
turnover.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a
financing charge and hence should not be deducted from the turnover.
(iii) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade
discount. If it is in the nature of commission on sales, the same cannot be deducted from the
figure of turnover.
(iv) Price of goods returned should be deducted from the turnover even if the returns are from the
sales made in the earlier year/s.
(v) Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part of
turnover. However, if the shares, securities, debentures etc., are held as stock-in-trade, the sale
proceeds thereof will form part of turnover.
Accordingly, the turnover of concession limited may be computed as under:
Recorded turnover during the year ₹ 1,13,00,000
Less: Discount allowed in the Sales Invoice (8,20,000)
Trade discount (2,90,000)
Sales Return (1,60,000)
Effective turnover ₹. 1,00,30,000
Conclusion: As the effective turnover of Concession Ltd. is more than ₹ 1 Crore, the provisions related
to tax audit are applicable to the company.

15.4
Q.5 Mr. A engaged in business as a sole proprietor presented the following information to you for the FY
2020-21. Turnover made during the year ₹ 124 lacs. Goods returned in respect of sales made during
FY 2019-20 is ₹ 20 lacs not included in the above. Cash discount allowed to his customers ₹ 1 lac for
prompt payment. Special rebate allowed to customer in the nature of trade discount ₹ 5 lacs. Kindly
advise him whether he has to get his accounts audited u/s 44AB of the Income Tax Act, 1961.
[Nov. 13 (4 Marks)]
Ans.: Computation of Turnover for the purpose of determining requirement of Tax Audit:
As per section 44AB of the Income Tax Act, 1961, audit is required in case of every person carrying on
business, if his total sales, turnover or gross receipts in business exceed ₹ 1 crore and in case of every
person carrying on a profession, if his gross receipts from profession exceed ₹ 50 lakhs in any previous
year.
As per Guidance Note on Tax Audit issued by the ICAI, the following points merit consideration for the
purpose of computing turnover:
(i) Discount allowed in the sales being in the nature of trade discount will be deducted from the
turnover.
financing charge and hence should not be deducted from the turnover.
discount.
(iv) Price of goods returned should be deducted from the turnover even if the returns are from the
sales made in the earlier year/s.
Accordingly, the turnover of Mr. A may be computed as under:
Recorded turnover during the year ₹ 1,24,00,000
Less: Trade discount (5,00,000)
Sales Return (20,00,000)
Effective turnover ₹ 99,00,000
Conclusion: As the effective turnover of Mr. A is less than ₹ 1 Crore, the provisions related to tax audit
are not applicable to Mr. A.
Q.6 Comment with respect to computation of total sales, turnover or gross receipts in business exceeding
the prescribed limit under section 44AB of Income Tax Act, 1961.
(i) Discount allowed in the sales invoice
(ii) Cash discount
(iii) Price of goods returned related to earlier year
(iv) Sale proceeds of fixed assets. [May 15 (4 Marks)]
Ans.: Computation of Total Sales:
(i) Discount allowed in the sales invoice: Deducted from turnover as it reduces the sale price.
(ii) Cash discount: Not to be deducted being in the nature of financing charge.
(iii) Price of goods returned related to earlier year: Deducted from turnover.
(iv) Sale proceeds of fixed assets: Will not form part of turnover as these are not held for resale.
Q.7 Write short note on: Circumstances in which Chartered Accountant in practice or firm of Chartered
Accountants cannot conduct tax audit u/s 44AB of the Income Tax Act, 1961 of the concern.

15.5
Ans.: Circumstances in which CA in Practice cannot conduct tax audit:
As per Explanation to Sec. 288, the following persons cannot conduct tax audit:
x In case of a company, the person who is not eligible for appointment as an auditor of as per
provisions of Sec. 141(3) the Companies Act, 2013 cannot conduct tax audit.
x In case of assessee other than company, following persons cannot conduct tax audit:
1. the assessee himself or in case of the firm or AOP or HUF, any partner of the firm, or member
of the AOP or the HUF;
2. in case of the assessee, being a trust or institution, any person referred to in Sec. 13(3);
3. the person who is competent to verify the return in accordance with the provisions of section
140;
4. any relative of any of the persons referred above;
5. an officer or employee of the assessee;
6. an individual who is a partner, or who is in the employment, of an officer or employee of the
assessee;
7. an individual who, or his relative or partner
(a) is holding any security of, or interest in, the assessee: Provided that the relative may
hold security or interest in the assessee of the face value not exceeding ₹ 1,00,000;
(b) is indebted to the assessee: Provided that the relative may be indebted to the assessee
for an amount not exceeding ₹ 1,00,000;
(c) has given a guarantee or provided any security in connection with the indebtedness of
any third person to the assessee: Provided that the relative may give guarantee or
provide any security in connection with the indebtedness of any third person to the
assessee for an amount not exceeding ₹ 1,00,000;
8. a person who, whether directly or indirectly, has business relationship with the assessee of
such nature as may be prescribed;
9. a person who has been convicted by a court of an offence involving fraud and a period of ten
years has not elapsed from the date of such conviction.
Q.8 M/s. SB & Co. has been appointed as tax auditor under section 44AB of Income Tax Act, 1961 by
Woodcraft Interior Consultants, a professional partnership firm, having turnover ₹1.25 Crores. M/s
RS & Co. are the statutory auditors of the firm but they are unable to give their report on the financial
statements of the firm. M/s. SB & Co., have, however, completed their tax audit and want to issue
their reports. Comment. [May 17 (4 Marks)]
Ans.: Tax Audit Report in case of Partnership firm assessee:
x Proviso to Sec. 44AB of Income Tax Act, 1961 lays down that where the accounts of an assessee are
required to be audited by or under any other law, it shall be sufficient compliance with the
provisions of this section, if such person get the accounts of such organisation audited under such
other law before the specified date and furnishes by that date, the report of the audit as required
under such other law and a further report by an Accountant in the form prescribed under this
section.
x There is no statutory requirement of audit of a firm under the provisions of Partnership Act, 1932.
So, appointment of two auditors one as tax auditor and another as statutory auditor does not
appears to be correct.

15.6
x It is also provided under Section 44AB that the tax auditor should report whether in his opinion the
particulars in respect of Form 3CD are true and correct. The audit report is in the form of 3CA if
accounts are being examined under the requirements of provisions of any other Act, otherwise
report should be in Form 3CB.
x In the present case, assessee is a partnership firm and appoints separate persons as tax auditor and
statutory auditor. Statutory auditor is not able to give their report on financial statements of firm.
Conclusion: Form No. 3CA requires the tax auditor to enclose a copy of the audit report conducted by
the statutory auditor. Where the report of the statutory auditor is not available for whatever reasons, it
will be possible for the tax auditor to give his report in Form No. 3CB and to certify the relevant
particulars in Form No. 3CD.
Note: There is no requirement of statutory audit under Partnership Act, 1932. Hence while
answering the question, this fact also needs to be stated.
Q.9 Mr. PK is conducting the Tax audit u/s 44AB of the Income Tax Act, 1961 of MG Ltd. for the year
ended 31st March, 2021. There is a difference of opinion between Mr. PK and the Management in
respect of certain information to be furnished in Form No. 3CD. As a tax auditor, Mr. PK has to report
whether the statement of particulars in Form 3CD are true and correct and the same is to be annexed
to the report in Form No. 3CA. Advise on the matters to be considered by Mr. PK while furnishing the
particulars in Form No. 3CD. [Nov. 19 – New Syllabus (4 Marks)]
Ans.: Form 3CD - Considerations for auditor while furnishing particulars in Form 3CD:
While furnishing the particulars in Form No. 3CD it would be advisable for the tax auditor to consider
the following:
1. If a particular item of income/expenditure is covered in more than one of the specified clauses,
care should be taken to make a suitable cross reference to such items at the appropriate places.
2. If there is any difference in the opinion of the tax auditor and that of the assessee in respect of any
information furnished in Form No. 3CD, the tax auditor should state both the view points and also
the relevant information in order to enable the tax authority to take a decision in the matter.
3. If any particular clause in Form No. 3CD is not applicable, he should state that the same is not
applicable.
4. In computing the allowance or disallowance, he should keep in view the law applicable in the
relevant year, even though the form of audit report may not have been amended to bring it in
conformity with the amended law.
5. In case the prescribed particulars are given in part to the tax auditor or relevant form is
incomplete and the assessee does not give the information against all or any of the clauses, the
auditor should not withhold the entire audit report. In such a case, he can qualify his report on
matters in respect of which information is not furnished to him.
6. The information in Form No. 3CD should be based on the books of account, records, documents,
information and explanations made available to the tax auditor for his examination.
7. In case the auditor relies on a judicial pronouncement, he may mention the fact as his
observations in Form No. 3CA or Form No. 3CB, as the case may be.
Majority of candidates failed to discuss the circumstances in which Form 3CA and Form 3CB are
furnished by a Tax auditor. Some candidates wrongly discussed the relationship between the
statutory auditor and tax auditor and concluded wrongly that Tax auditor has to wait till statutory
audit is completed. It seems that Candidates failed to understand the requirement of the question.

15.7
Q.10 Mr. Abhinandan engaged in business as a sole proprietor presented the following information to you
for the FY 2020-21. Turnover expected to be made during the year ₹ 524 lacs. Goods returned in
respect of sales made during FY 2019-20 is ₹ 20 lacs not included in the above. Cash discount allowed
to his customers ₹ 1 lac for prompt payment. Special rebate allowed to customer in the nature of
trade discount ₹ 5 lacs. Further, the aggregate of all amounts received including amount received for
sales, turnover or gross receipts during the previous year, in cash, does not exceed five per cent of
the said amount and aggregate of all payments made including amount incurred for expenditure, in
cash, during the previous year does not exceed five per cent of the said payment. Kindly advise him
whether he has to get his accounts audited u/s 44AB of the Income Tax Act, 1961. [MTP – March 21]
Ans.: Turnover limit for the purpose of Tax Audit:
The following points merit consideration as stated in the Guidance note on Tax Audit issued by the
Institute of Chartered Accountants of India-
(i) Price of goods returned should be deducted from the figure of turnover even if the return are
from the sales made in the earlier years.
financing charge and is not related to turnover. The same should not be deducted from the
figure of turnover.
discount.
Applying the above stated points to the given problem,
1. Total Turnover 524 Lac
2. Less – Goods Returned 20 Lac
Special rebate allowed to customer in the nature of trade discount
would be deducted
5 Lac
Balance 499 Lac
Since the aggregate of all amounts received including amount received for sales, turnover or gross
receipts during the previous year, in cash, does not exceed 5% of the said amount and aggregate of all
payments made including amount incurred for expenditure, in cash, during the previous year does not
exceed 5% of the said payment, limit for tax audit is ₹ 5 crore.
Conclusion: Abhinandan would not be required to get his accounts audited u/s 44AB of the Income
Tax Act, 1961 as ₹ 499 lac is below prescribed tax audit limit i.e. ₹ 5 crore.
15.3 - Methods of Accounting & ICDSs (Sec. 145)
Q.11 As the tax auditor of a non-corporate entity u/s 44AB of the Income Tax Act, 1961, how would you
ensure compliance of section 145 of the Income Tax Act, 1961? [May 09 (8 Marks)]
Ans.: Compliance of Section 145:
x Sec. 145(1) of Income Tax Act, 1961 requires that the income chargeable under the head ‘PGBP’
or ‘Other sources’ shall, be computed in accordance with either cash or mercantile system of
accounting regularly employed by the assessee.
x Sec. 145(2) provides that the C.G. may notify in the Official Gazette from time to time Income
Computation and Disclosure Standards to be followed by any class of assessee or in respect of
any class of income.

15.8
x Sec. 145(3) provides that where the A.O. is not satisfied about the correctness or completeness of
the accounts of the assessee, or where method of accounting provided u/s 145(1) have not been
regularly followed by the assessee or income has not been computed in accordance with the
Standards notified u/s 145(2), the A.O. may make an assessment in a manner provided in Sec.
144 of the Income Tax Act.
x Auditor has to therefore ensure the following:
(a) That the entity follows either the cash or accrual method of accounting and same is to be
reported in clause 13(a) of form 3CD.
(b) Accounting policies has been disclosed separately.
(c) Provisions as stated in Income Computation and Disclosure Standards (ICDS) notified by
Central Government u/s 145(2) has been complied with.
Q.12 Discuss briefly Income Computation and Disclosure Standards to be followed by assessee under the
Income-tax Law.
Ans.: Income Computation and Disclosure standards to be followed by assessee under Income Tax
Law:
The Central Government has prescribed the following Income Computation and Disclosure Standard:
I Accounting Policies
II Valuation of Inventories
III Construction Contracts
IV Revenue Recognition
V Tangible Fixed Assets
VI Effects of Changes in Foreign Exchange Rates
VII Government Grants
VIII Securities
IX Borrowing Costs
X Provisions, Contingent Liabilities and Contingent Assets
The above Standards are to be followed by all assessee following mercantile system of accounting for
computation of income under the head “PGBP” and “Other Sources”. Therefore, it is clear that those
assessee who are following cash system of accounting need not follow the ICDSs notified above.
15.4 - Form 3CD
Q.13 Mr. A, is a renowned lawyer. During the previous year, he collected GST of ₹ 25 lakhs but utilized it
for his personal use. The department issued a show cause notice to him as to why the tax, collected
by him, is not deposited to the government account. He appeared before the department and stated
his inability to pay the sum due to financial crisis. The proceedings are still pending.
Mr. A instructed his tax auditor not to disclose his GST registration details, while filling particulars
to be furnished in Form No. 3CD, believing that the income tax department might trace his scrutiny
proceedings details pending before department which would bring disrepute to his profession.
Or
You are appointed as tax auditor of Mr. X a practicing advocate in Agra. During the previous year he

15.9
collected GST of ₹ 7 lakhs but utilized for personal use. The department issued a show cause notice
to him why the tax collected by him in not deposited to the Government account. He appeared
before the department and stated his inability to pay the sum due to financial crisis. The
proceedings are still pending. Mr. X requests you not to disclose his GST registration details while
filling particulars to be furnished in From No. 3CD. As a tax auditor how would you deal with this?
[May 16 (4 Marks)]
Ans.: Reporting Requirement of Form 3CD:
x Clause (4) of Form 3CD, requires tax auditor to mention the registration number or any other
identification number, if any, allotted, in case the assessee is liable to pay indirect taxes like
excise duty, service tax, sales tax, GST, customs duty, GST etc. Auditor is required to furnish the
details of registration numbers as provided to him by the assessee.
x The reporting is however, to be done in the manner or format specified by the e-filing utility in
this context. The information may be obtained and maintained in the following format:
S.
No.
Relevant Indirect Tax
Law which requires
registration
Place of Business/profession/
service unit for which registration
is in place/ or has been applied for
Registration/
Identification
number
x In the present case Mr. X has defaulted in payment of GST for the previous year. Consequently,
the department issued a show cause notice for such non-payment of tax. The arguments are still
going on between the department and assessee. He also restrained his tax auditor from
disclosing GST registration details in tax audit report.
Conclusion: Instruction of Mr. X is not acceptable as clause 4 of Form 3CD requires tax auditor to
furnish the details of registration number or other identification number of assessee, if assessee is
required to pay indirect taxes like excise duty, service tax, GST etc.
Q.14 Arihant Pvt. Ltd. is engaged in the business of providing corporate/professional training programs.
It has an annual turnover of ₹ 74 crore. The Company is subject to tax audit for which the work has
been started by the tax auditor. For the financial year ending 31 March 2021, the Company applied
for GST registration for 5 new locations for which registration certificates have not yet been
received by the Company. However, the registration number is available on the portal of relevant
authority which can be verified by checking the details of the Company. In this case what should be
the audit procedures to verify this registration number? [RTP – May 21]
Ans.: Reporting of Registration Number under Indirect Taxes in Form 3CD:
Clause 4 of Form No. 3CD requires the tax auditor to ensure whether the assessee is liable to pay
indirect tax like excise duty, service tax, sales tax, GST tax, custom duty, etc. If yes, the registration
number or GST number or any other identification number allotted for the same need to be
furnished.
Therefore, the auditor is primarily required to furnish the details of registration numbers as
provided to him by the assessee. The reporting is required to be done in the manner or format
specified by the e-filing utility in this context.
Most of the candidates failed to visualize the requirement of the question and answered about
reporting requirement due to non-payment of GST under clause 41 instead of GST registration
number under clause 4.

15.10
In the given case, Arihant Pvt. Ltd. is engaged in the business of providing corporate/professional
training programs. The Company is subject to tax audit. For the financial year ending 31 March 2021,
the Company applied for GST registration for 5 new locations for which registration certificates have
not yet been received by the Company. However, the registration number is available on the portal of
relevant authority.
Tax auditor should verify the registration number for the locations for which registration certificates
have not been received from online portal of the relevant authority.
The auditor should also ensure that the details furnished while checking the registration number
pertains to the company only. If the company has filed any returns for these locations, the auditor
should enquire for the same from the management and should check those returns to verify the
correctness of the registration numbers. In addition, the auditor should also obtain specific
representation in respect of this point from the management.
Q.15 BB Ltd., a non-resident company, is engaged in the business of extraction of mineral oils, having
turnover of ₹ 20 lakhs during the financial year 2020-21. The company claims that its profits and
gains chargeable to tax under the head "Profits and gains of business or profession" is lower than
the deemed income chargeable under section 44BB of the Income Tax Act, 1961. Therefore, it
decided to get its accounts audited under section 44AB of the Income Tax Act, 1961. Discuss
reporting requirement of Form 3CD in this behalf.
Ans.: Reporting Requirement of Form 3CD:
x BB Ltd., is a non-resident company which is engaged in the business of extraction of mineral oils,
hence, its income is chargeable in accordance with the provisions of section 44BB of the Income
Tax Act, 1961. But as the company is claiming lower income in comparison to deemed income
u/s 44BB, provisions of Section 44AB in relation to audit has to be complied with.
x Clause (8) of Form 3CD, requires tax auditor to mention the relevant clause of section 44AB
under which the audit has been conducted. Accordingly, auditor is required to mention clause
(c) of Section 44AB which requires tax audit.
x Further, as per Clause (12) of Form 3CD, if the profit and loss account of the assessee includes
any profits and gains assessable on presumptive basis, the tax auditor has to indicate the amount
and the relevant sections.
Conclusion: Under Clause 8, auditor is required to indicate the relevant clause of Section 44AB
under which audit is to be conducted and in addition under clause 12, auditor is required to indicate
the amount of profits of business covered u/s 44BB and the relevant section.
Q.16 State the reporting requirement regarding books of account (prescribed, maintained and
examined) in Form No. 3CD of Tax Audit under Section 44AB of the Income Tax Act, 1961.
Ans.: Reporting Requirement regarding books of account in Form 3CD:
Clause 11 of Form 3CD requires the following reporting requirements in Form 3CD w.r.t. books of
account:
(a) Whether books of account are prescribed under section 44AA, if yes, list of books so prescribed.
(b) List of books of account maintained and the address at which the books of account are kept.
(In case books of account are maintained in a computer system, mention the books of account
generated by such computer system. If the books of account are not kept at one location, please
furnish the addresses of locations along with the details of books of accounts maintained at each
location.)
(c) List of books of account and nature of relevant documents examined.

15.11
Q.17 Write a short note on: Method of Accounting in Form No. 3CD of Tax Audit.
Ans.: Method of Accounting in Form No. 3CD:
Clause 13 of Form 3CD requires the following reporting requirements w.r.t. Methods of accounting:
(a) Method of accounting employed in the previous year
(b) Whether there had been any change in the method of accounting employed vis-a-vis the method
employed in the immediately preceding previous year.
(c) If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on
the profit or loss.
Serial number Particulars Increase in profit (₹) Decrease in profit (₹)
(d) Details of deviation, if any, in the method of accounting employed in the previous year from
accounting standards prescribed under section 145 and the effect thereof on the profit or loss.
Q.18 A leading manufacturing concern valued its inventory following a method not in line with the
provisions of Income Computation and Disclosure Standard (ICDS)- 2 ‘Valuation of Inventories’.
In such a situation, discuss the relevant clause of Form No. 3CD under which the tax auditor is
required to report?
Or
ABC Ltd., is consistently following accounting standards as required u/s 133 of the Companies Act,
2013. During your tax audit u/s 44AB of the Income-tax Act, 1961, the board of directors informed
you that profits of the company is properly arrived at and the ASs applicable to it have been
followed consistently and as such, there need not be any adjustments to be made as per ICDS
notified u/s 145 of Income Tax Act, 1961. Based on the requirement of Law in this regard, examine
the validity of the stand of management in this regard. [May 18–New Syllabus (5 Marks)]
Ans.: Reporting for Adjustment to be made to the Profits or Loss for complying with ICDSs:
x Central Government has, in exercise of the powers conferred u/s 145(2) of Income-tax Act, 1961,
notified 10 income computation and disclosure standards (ICDSs) to be followed by all assessees
(other than an individual or a HUF who is not required to get his accounts of one previous year
audited in accordance with the provisions of section 44AB), following the mercantile system of
accounting, for the purposes of computation of income chargeable to income-tax under the head
“Profit and gains of business or profession” or “Income from other sources”.
x Clause 13(d) of Form No. 3CD of the tax audit report requires the tax auditor to state whether
any adjustment is required to be made to the profits or loss for complying with the provisions of
income computation and disclosure standards notified under section 145(2) of the Income Tax
Act, 1961.
x Further, the tax auditor is also required to report under Clause 13(e), if answer to Clause 13(d)
above is in the affirmative i.e. the auditor is required to give details of such adjustments as
follows:
Increase in
Profit (₹)
Decrease in
Profit (₹)
Net Effect
(₹)
ICDS I Accounting Policies
ICDS II Valuation of Inventories

15.12
ICDS III Construction Contracts
ICDS IV Revenue Recognition
ICDS V Tangible Fixed Assets
ICDS VI Changes in Foreign Exchange Rates
ICDS VII Governments Grants
ICDS VIII Securities
ICDS IX Borrowing Costs
ICDS X Provisions, Contingent Liabilities &
Contingent Assets
Total
Conclusion: Contention of the management that they are following Accounting Standards and
need not to make any adjustments as per ICDS, is not correct. Thus, ABC Ltd. is required to adjust
the profits in compliance with ICDS.
Q.19 A leading jewellery merchant used to value his inventory at cost on LIFO basis. However, for the
current year, in view of requirements of AS-2, he changed over to FIFO method of valuation. The
difference in value of stock amounted to ₹ 55 lakhs which is higher than that under the previous
method. In such a situation, what are the reporting responsibilities of a Tax Audit u/s 44AB of
Income Tax Act, 1961.
Ans.: Reporting of Changes in Valuation of Inventory:
x As per the provisions of Income Tax Act, 1961, if the change in method of valuation is bona fide,
and is regularly and consistently adopted in the subsequent years as well, such change would be
permitted to be made for tax purposes.
x In the instant case, the change in the valuation of stock is pursuant to mandatory requirements of
the AS-2 ‘Valuation of Inventories’ and therefore should be viewed as bona fide change and
allowed.
x Clause 14 of Form 3CD also requires in this regard reporting over the following:
1. Method of valuation of closing stock employed in the previous year.
2. In case of deviation from the method of valuation prescribed under section 145A, and the
effect thereof on the profit or loss.
x In reference to Section 145A, auditor is not required to report change in the method of valuation
of purchases, sales and inventories which is regularly employed by the assessee. Auditor is
required to adjust the valuation for any tax, duty, cess or fee actually paid or incurred by the
assessee, if the same had not already been adjusted.
Q.20 T Ltd. previous year ended on 31st March 2021. During that period, it made a claim for refund of
customs duty which was admitted as due by the customs authorities during April 2021. T Ltd.
neither credited the claim in the profit and loss account nor reported the same in clause 16(b) of
Form 3CD for the reason that this has been admitted as due by the authorities only in the next
financial year. Further T Ltd had changed the method of determination of cost formula for the
purpose of stock valuation from FIFO basis to Weighted Average Cost basis, but that was also not
reflected in clause 13(b) of Form 3CD which requires reporting on change in accounting method
employed. Comment. [May 12 (6 Marks)]

15.13
Ans.: Reporting requirement of Claim of Custom Duty Refund and change in Accounting policy:
x As per Clause 16(b) of form 3CD, the details of custom duty refund, if admitted as due but not
reported in Profit and Loss account, are to be stated. But the claim which have been admitted as
due after the relevant previous year need not be reported.
x Hence non-reporting of claim of refund of custom duty in Form 3CD is in order.
x Clause 13(b) of Form 3CD required reporting in case of change in method of accounting
employed. But in the present case there is a change in accounting policy. Change in Accounting
policy cannot be treated as change in method of accounting, hence does not require any
reporting under clause 13(b) in Form 3CD.
x Hence non-reporting of method of valuation in Form 3CD is in order.
Q.21 While conducting the tax audit of A & Co. you observed that it made an escalation claim to one of its
customers but which was not accounted as income. What is your reporting responsibility?
[May 11 (4 Marks)]
Ans.: Clause 16(c) of Form 3CD:
x A tax auditor has to report under clause 16(c) of Form 3CD on any escalation claim accepted
during the previous year and not credited to the profit and loss account under clause 16(c) of
Form 3CD.
x The escalation claim accepted during the year would normally mean “accepted during the
relevant previous year.” If such amount is not credited to Profit and Loss Account the fact should
be reported. The system of accounting followed in respect of this particular item may also be
brought out in appropriate cases. If the assessee is following cash basis of accounting with
reference to this item, it should be clearly brought out since acceptance of claims during the
relevant previous year without actual receipt has no significance in cases where cash method of
accounting is followed.
x Escalation claims should normally arise pursuant to a contract (including contracts entered into
in earlier years), if so permitted by the contract. Only those claims to which the other party has
signified unconditional acceptance could constitute accepted claims. Mere making claims by the
assessee or claims under negotiations cannot constitute accepted claims. After ascertaining the
relevant factors as outlined above, a decision whether to report or not, can be taken.
Q.22 While writing the audit program for tax audit in respect of A Ltd you wish to include possible
instances of capital receipt if not credited to Profit & Loss Account which needs to be reported
under clause 16(e) of Form 3CD. Please elucidate possible instance. [May 13 (4 Marks)]
or
What can be the possible instance of capital receipt which, if not credited to the profit and loss
account, needs to be reported in form 3CD? [Nov. 15 (4 Marks)]
Or
In the course of your tax audit assignment u/s 44AB of the Income Tax Act, 1961 of Dream Bank Ltd.
You have instructed your assistant to find out receipt of capital nature which might not have been
credited to Profit & Loss Account and needs to be reported in Para 16(e) of 3CD. Your audit
assistant seeks your guidance in reporting the same. Specify any four illustrative examples of such
receipt. [May 19 – New Syllabus (4 Marks)]
Ans.: Instances of Capital receipt:
(a) Capital subsidy received in the form of Government grants, which are in the nature of promoters’

15.14
contribution i.e., they are given with reference to the total investment of the undertaking or by
way of contribution to its total capital outlay. For e.g., Capital Investment Subsidy Scheme.
(b) Government grant in relation to a specific fixed asset where such grant is shown as a deduction
from the gross value of the asset by the concern in arriving at its book value.
(c) Compensation for surrendering certain rights.
(d) Profit on sale of fixed assets/investments to the extent not credited to the profit and loss
account.
Audit procedures:
Capital receipts are not generally credited to profit and loss account hence the auditor should take
enough care to check out any transaction generating the capital receipts by –
• Enquiring whether the assessee is in receipt of any amount of capital nature during the previous
year.
• Going through the financial statements, in particular reserve account, to ascertain whether the
assessee has received any such receipts and credited them directly to reserve account.
• Enquiring whether the assessee has credited such receipts to profit and loss account.
• Checking that any such receipts is accounted for in terms of method of accounting followed by
the assessee.
Q.23 ABC Ltd., a manufacturing concern, sold a house property in Mumbai for a consideration of ₹ 48
lakh, to Mr. X on 1.8.2020. ABC Ltd. had purchased the house property in the year 2014 for ₹ 30
lakh. The stamp duty value on the date of transfer, i.e., 01.08.2020, is ₹ 65 lakh for the house
property. How would you deal this matter in tax audit report?
Ans.: Reporting of Sale of property at a price lower than value adopted for the purpose of stamp
duty:
x Clause 17 of Form 3CD requires tax auditor to furnish certain information if land or building or
both is transferred during the previous year for a consideration less than value adopted by any
authority of a State Government as under:
Details of Property Consideration Received or
Accrued
Value adopted or assesses or
assessable
x For this purpose, auditor should obtain a list of all properties transferred by the assessee during
the previous year and furnish the amount of consideration received or accrued, as disclosed in
the books of account of the assessee.
x For reporting the value adopted or assessed or assessable, the auditor should obtain from the
assessee a copy of the registered sale deed. In case the property is not registered, the auditor
may verify relevant documents from relevant authorities or obtain third party expert like lawyer,
solicitor representation to satisfy the compliance of section 43CA / section 50C of the Act.
Conclusion: ABC Ltd. has sold the house property to Mr. X at a price lower than value adopted for
stamp duty purpose, tax auditor is required to report on the same under Clause 17 of Form 3CD.
Some examinees wrote about Form No. 3CD. Also, few examinees discussed about the items of
profit and loss account which was not required.

15.15
Q.24 A is proprietor of a firm M/s ABC & Co. The firm has a turnover of ₹ 500 lakhs during the financial
year ended 31.03.2021. The firm sold land and building during the year for a consideration of ₹ 15
lakhs, whose value for stamp duty purposes was ₹ 16 lakhs. As the Tax Auditor of the said firm, is
the above to be reported? If yes, how will you report the same? [Nov. 19 – Old Syllabus (4 Marks)]
Ans.: Reporting of Sale of property at a price lower than value adopted for the purpose of stamp
duty:
x Clause 17 of Form 3CD requires tax auditor to furnish certain information if land or building or
both is transferred during the previous year for a consideration less than value adopted by any
authority of a State Government as under:
Details of Property Consideration Received or
Accrued
Value adopted or assesses or
assessable
x For this purpose, auditor should obtain a list of all properties transferred by the assessee during
the previous year and furnish the amount of consideration received or accrued, as disclosed in
the books of account of the assessee.
x For reporting the value adopted or assessed or assessable, the auditor should obtain from the
assessee a copy of the registered sale deed. In case the property is not registered, the auditor
may verify relevant documents from relevant authorities or obtain third party expert like lawyer,
solicitor representation to satisfy the compliance of section 43CA / section 50C of the Act.
Conclusion: ABC Ltd. has sold the house property to Mr. X at a price lower than value adopted for
stamp duty purpose, tax auditor is required to report on the same under Clause 17 of Form 3CD.
Note: Suggested answer of ICAI also requires reporting under Clause 29B. Reporting under
clause 29B is required when the assessee receives any property. But in this case the assessee, i.e.
firm ABC and Co. sold its property, hence no reporting required under Clause 29B.
Q.25 As an auditor of a partnership firm under section 44AB of the Income Tax Act, 1961, how would you
report on the following: Capital Expenditure incurred for scientific research assets.
[Nov. 12 (2 Marks)]
Ans.: Reporting of Capital Expenditure incurred on Scientific Research Assets in form 3CD:
Clause 19 of Form 3CD requires the auditor to report the following:
(i) Amount debited to profit and loss account.
(ii) Amounts admissible as per the provisions of the Income Tax Act, 1961 and also fulfils the
conditions, if any specified under the relevant provisions of Income Tax Act, 1961 or Income
Tax Rules, 1962 or any other guidelines, circular, etc., issued in this behalf.
Q.26 As a tax auditor how would you deal and report the following: An assessee has incurred payments
to clubs. [Nov. 11 (2 Marks)]
Or
As an auditor of a partnership firm under section 44AB of the Income Tax Act, 1961, how would you
report on the following: Expenditure incurred at Clubs. [Nov. 12 (2 Marks)]
Ans.: Reporting of Payment to Club in Form 3CD:
x Clause 21(a) of Form 3CD requires the tax auditor is required to furnish the details of amounts
debited to the profit and loss account, being in the nature of capital, personal, advertisement
expenditure etc.

15.16
x Such reporting requires the tax auditor to report on the
(a) Expenditure incurred at clubs being entrance fees and subscriptions; and
(b) Expenditure incurred at clubs being cost for club services and facilities used.
x The payments made may be in respect of directors and other employees in case of companies,
and for partners or proprietors in other cases
x The fact whether such expenses are incurred in the course of business or whether they are of
personal nature should be ascertained.
Q.27 M/s PQRS & Associates is appointed for conducting tax audit as per Income Tax Act, 1961 of QW
Ltd., a cotton textile company. The Company had incurred ₹ 6 lac towards advertisement
expenditure on a brochure/ pamphlet published by a political party in Pune. Advise the auditor
whether such expenditure should be included in the tax audit report or not. [RTP-Nov. 20]
Ans.: Expenses on Advertisement in the Media of a Political Party:
x Clause 21(a) of Form 3CD requires the tax auditor to furnish the details of amounts debited to
the Profit and Loss Account, being in the nature of advertisement expenditure in any souvenir,
brochure, tract, pamphlet or the like published by a political party in his tax audit report.
x In the given situation, M/s PQRS & Associates is appointed for conducting tax audit as per
Income Tax Act, 1961 of QW Ltd., a cotton textile company. The Company had incurred ₹ 6 lac
towards advertisement expenditure on a brochure/ pamphlet published by a political party.
Conclusion: Advertisement expenditure of ₹ 6 lac on brochure/pamphlet published by a political
party shall be reported in the tax audit report as per Clause 21(a) of Form 3CD.
Q.28 ABC Ltd., engaged in the manufacturing of goods carriage, appointed you as the tax auditor for the
financial year 2020-21. How would you deal with the following matters in your tax audit report:
(i) Payments of 6 invoices of ₹ 5,000 each made in cash to Mr. X, engaged in leasing of goods
carriages on 4th July, 2020.
(ii) Payments of 2 invoices of ₹ 18,000 each made in cash to Mr. Y, engaged in leasing of goods
carriages on 5th July, 2020 and 6th July, 2020 respectively.
(iii) Payment of ₹ 40,000 made in cash to Mr. Z, engaged in leasing of goods carriages on 7th July,
2020 against an invoice for expenses booked in 2019-20.
Ans.: Reporting of Payments Exceeding ₹ 35,000 in Cash:
x Clauses 21(d)(A) and 21(d)(B) of Form 3CD, requires tax auditor to scrutinize on the basis of the
examination of books of account and other relevant documents/evidence, whether the
expenditure covered under sections 40A(3) and 40A(3A) respectively read with rule 6DD were
made by account payee cheque drawn on a bank or account payee bank draft. If not, the same has
to be reported under abovementioned clauses.
x As per section 40A(3) of the Income Tax Act, 1961, an expenditure is disallowed if the assessee
incurs any expenses in respect of which payment or aggregate of payments made to a person in a
day, otherwise than by an account payee cheque drawn on bank or account payee draft, exceeds
₹ 10,000. However, in case of payment made for plying, hiring or leasing of goods carriage, limit
is ₹ 35,000 instead of ₹ 10,000.
x As per section 40A(3A) of the Income Tax Act, 1961, where an allowance has been made in the
assessment for any year in respect of any liability incurred by the assessee for any expenditure
and subsequently during any previous year the assessee makes payment in respect thereof,
otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the
payment so made shall be deemed to be the profits and gains of business or profession and

15.17
accordingly chargeable to income-tax as income of the subsequent year if the payments made to
a person in a day, exceeds ₹ 10,000 (₹ 35,000 in case of plying, hiring or leasing of goods
carriages).
x Based on the abovementioned provisions, following conclusion may be drawn:
(i) Payments of 6 invoices of ₹ 5,000 each aggregating ₹ 30,000 made in cash on 4th July,
2020 need not be reported as the aggregate of payments do not exceed ₹ 35,000.
(ii) Payments of 2 invoices of ₹ 18,000 each made in cash on 5th July, 2020 and 6th July, 2020
respectively aggregating ₹ 36,000 need not be reported as the payment do not exceed ₹
35,000 in a day.
(iii) Payment of ₹ 40,000 made in cash against an invoice for expenses booked in 2019-20 is
likely to be deemed to be the profits and gains of business or profession under section
40A(3A) of the Income Tax Act, 1961. Thus, the details of such amount need to be
furnished under clause 21(d)(B) of Form 3CD.
Q.29 Mr. R, the Tax Auditor finds that some payments inadmissible under Section 40A(3) were made, and
advised the client to report the same in form 3CD. The client contends that cash payments were
made since the other parties insisted upon the same and did not have Bank Accounts. Comment.
[Nov. 10 (5 Marks)]
Ans.: Reporting for Cash payments above ₹ 10,000:
x Clause 21(d) of Form 3CD requires tax auditor to report on disallowance under section 40A(3).
Disallowance u/s 40A(3) of the Income Tax Act, 1961 is attracted if the assessee incurs any
expenses in respect of which payment or aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on bank or account payee draft, exceeds ₹
10,000.
x However, there are certain cases as specified in Rule 6DD, in which, disallowance under section
40A(3) would not be attracted. Cash payment made on insistence of other parties on the
contention that they do not have bank accounts is not covered under the list of exceptions
provided under Rule 6DD.
x In the present case, tax auditor is required to scrutinize on the basis of the examination of books
of account and other relevant documents/evidence, whether the expenditure covered under
section 40A(3) read with rule 6DD were made by account payee cheque drawn on a bank or
account payee bank draft. If not, the same has to be reported under abovementioned clause.
Conclusion:Payments made by the XYZ Ltd. are inadmissible u/s 40A(3) of the Income Tax Act, 1961
and hence, needs to be reported under clause 21(d) of Form 3CD.
Q.30 XYZ Ltd. pays ₹ 90,000 for its 10 employees to a Hotel as boarding and lodging expenses of such
employees for a conference. The Company pays the amount in cash to the Hotel. The Hotel gives 10
bills each amounting to ₹ 9,000. The Company contends that each bill is within the limit, so there is
no violation of the provisions of the Income Tax Act, 1961. As the tax auditor, how would you deal
with the matter in your tax audit report for the Assessment Year 2021-22? [Nov. 14 (4 Marks)]
Ans.: Reporting for Cash payments above ₹ 10,000:
x Clause 21(d) of Form 3CD requires tax auditor to report on disallowance under section 40A(3).
Disallowance u/s 40A(3) of the Income Tax Act, 1961 is attracted if the assessee incurs any
expenses in respect of which payment or aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on bank or account payee draft, exceeds ₹
10,000.

15.18
x In the given case, the tax auditor found that a hotel issued 6 bills to XYZ Ltd. Each amounting to ₹
9,000 for boarding & lodging expenses of 6 employees. XYZ Ltd. in aggregate has paid ₹ 90,000 to
the hotel in cash. Consequently, no expenditure shall be allowed for deduction as per the
provisions of section 40A(3).
x Contention of the company that each bill is within the limit is not tenable since aggregate of
payments need to be considered.
Conclusion: Payments made by the XYZ Ltd. are inadmissible u/s 40A(3) of the Income Tax Act,
1961 and hence, needs to be reported under clause 21(d) of Form 3CD.
Q.31 Answer the following: As the tax auditor of a Company, how would you report on payments
exceeding ₹ 10,000 made in cash to a supplier against an invoice for expenses booked in an earlier
year?
Ans.: Reporting of payments exceeding ₹ 10,000 in cash:
x Reporting is required under clause 21(d) of Form 3CD for the payments exceeding ₹ 10,000
made in cash against an invoice for expenses booked in an earlier year.
x Section 40A(3A) disallowed an expense payment exceeding ₹ 10,000 made in cash against an
invoice booked in an earlier year.
x Claude 21(d) of Form 3CD requires furnishing of the amount inadmissible u/s 40A(3) read with
rule 6DD along with computation.
x The entire amount paid, is likely to be disallowed u/s 40A(3A) of the Income Tax Act, 1961.
Q.32 You are the Tax auditor of BL & Co., a partnership firm engaged in the business of plying of Goods
Carriages for the financial year 2020-21 having a turnover of ₹ 20 crores. How would you deal and
report on the following:
(i) Payment of ₹ 50,000 in cash to Mr. R on 10th September, 2020 towards settlement of invoice for
expenses accounted in financial year 2019-20.
(ii) Payments of 3 invoices of ₹ 15,000 each made in cash to Mr. Y on 8th, 9th, 10th, July, 2020
respectively. [Nov. 18-Old Syllabus (4 Marks)]
Ans.: Reporting of Payments Exceeding ₹ 10,000 in Cash:
x Clauses 21(d)(A) and 21(d)(B) of Form 3CD, requires tax auditor to scrutinize on the basis of the
examination of books of account and other relevant documents/evidence, whether the
expenditure covered under sections 40A(3) and 40A(3A) respectively read with rule 6DD were
made by account payee cheque drawn on a bank or account payee bank draft. If not, the same has
to be reported under abovementioned clauses.
x As per section 40A(3) of the Income Tax Act, 1961, an expenditure is disallowed if the assessee
incurs any expenses in respect of which payment or aggregate of payments made to a person in a
day, otherwise than by an account payee cheque drawn on bank or account payee draft, exceeds
₹ 10,000. However, in case of payment made for plying, hiring or leasing of goods carriage, limit
is ₹ 35,000 instead of ₹ 10,000.
x As per section 40A(3A) of the Income Tax Act, 1961, where an allowance has been made in the
assessment for any year in respect of any liability incurred by the assessee for any expenditure
and subsequently during any previous year the assessee makes payment in respect thereof,
otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the
payment so made shall be deemed to be the profits and gains of business or profession and

15.19
accordingly chargeable to income-tax as income of the subsequent year if the payments made to
a person in a day, exceeds ₹ 10,000 (₹ 35,000 in case of plying, hiring or leasing of goods
carriages).
x Based on the abovementioned provisions, following conclusion may be drawn:
(i) Reporting required under Clause 21(d)(B) w.r.t. payment of ₹ 50,000.
(ii) Reporting required under Clause 21(d)(A) w.r.t. each payment as individual payment made
on a day exceeds ₹10,000.
Note: Limit of ₹ 35,000 is not applicable as this limit is applicable when the payee is engaged
in the business of plying of goods carriages. In this case, payer is engaged in the business of
plying of goods carriages hence, limit of ₹ 10,000 will be applicable assuming that payee is not
engaged in business of plying of goods carriages.
Q.33 Mr. Sharma carries on the business of dealing and export of diamonds. For the year ended 31st
March 2021, you as the tax auditor find that the entire exports are to another firm in U.S.A. which is
owned by Mr. Sharma’s brother. Comment.
Ans.: Export Payments to a Relative:
x Clause 23 of Form 3CD, requires the tax auditor to specify particulars of payments made to
persons specified u/s 40(A)(2)(b) of the Income Tax Act, 1961. Persons specified in the said
section are relatives of an assessee and sister concerns, etc.
x In the instant case, however, Mr. Sharma has not made any payments to his brother. On the
contrary, he must have received payments from him against exports made and, thus, this clause
would not be applicable to him.
Auditor will nonetheless be still as a part of his normal audit planning would be required to verify
whether the exports are genuine, i.e., whether the diamonds have been delivered by verifying the
necessary delivery documents, relevant invoices, etc., the reasonableness of the price and whether the
export realisations have been received.
Q.34 As a tax auditor how would you deal and report the following: An assessee has paid rent to his
brother ₹ 2,50,000 and paid interest to his sister ₹ 4,00,000. [Nov. 11 (2 Marks)]
Or
As an auditor appointed under section 44AB of the Income Tax Act, 1961, how would you verify and
report on the following: The assessee has paid rent of ₹ 5 lakhs for premises to his brother.
[Nov. 17 (3 Marks)]
Ans.: Reporting of payment of rent and interest to relative:
Clause 23 of Form 3CD requires the tax auditor to furnish the particulars of payments made to
persons specified under Section 40A(2)(b) of the Income Tax Act, 1961. In relation to an individual,
the specified persons include any relative of the assessee (i.e. Husband, Wife, Brother, Sister or any
other Lineal Ascendant or Descendant).
In the present case, an assessee has paid rent to his brother and interest to his sister which may be
disallowed if, in the opinion of the Assessing Officer, such expenditure is excessive or unreasonable
having regard to:
1. the fair market value of the goods, services or facilities for which the payment is made; or
2. for the legitimate needs of business or profession of the assessee; or
3. the benefit derived by or accruing to the assessee from such expenditure.
Conclusion: Auditor is required to report the payments made to specified persons.

15.20
Q.35 You are doing Tax Audit of Private Limited Company for the financial year ending 31st March, 2021.
During audit, you notice that the company is not regular in deposit of VAT/GST and there remains
pendency every year. The details of VAT/GST payable are:
(i) GST payable as on 31/03/2020 of FY 2019-20 was ₹ 200 Lakh and out of which ₹ 100 Lakh was
paid on 15/09/2020 and ₹ 50 Lakh on 30/03/2021 and balance of ₹ 50 Lakh is outstanding.
(ii) GST payable of current financial year 2020-21 was ₹100 lakh and out of this, ₹ 40 Lakh was
paid on 25/05/2020 and balance of ₹ 60 Lakh remained unpaid till the due date of return.
The date of Tax Audit report and due date of return was 30th September.
Now as a Tax Auditor, how/where the said transaction will be reflected in Tax Audit Report under
Section 43B(a)? [MTP-Oct. 19, RTP-Nov. 19]
Ans. Reporting in Tax Audit Report:
x Any amount of GST/Tax payable on the last day of previous year (opening balance) as well as on
the last day of current year has to be reported in Tax Audit Report under clauses 26(A) and 26(B)
in reference of section 43B.
x Clause 26(A) dealt GST/VAT payable on the pre-existed of the first day of the previous year but
was not allowed in the assessment of any preceding previous year and was either paid {clause
26(A)(a)}/ or/ and/ not paid during the previous year {clause 26(A)(b)}
x The details will be as under in regard to opening balances:
Liability Pre-existed on the previous year.
Sr. No. Sec. Nature of
Liability
Outstanding
Opening
balance not
allowed in
previous year
Amount
paid /
set-off
during
the year
Amount
written
back to
P&L
Account
Amount
unpaid at
the end of
the year
01 43B(a) VAT / GST 100 lakh 50 lakh 0 50 lakh
It has been assumed that 100 lakh was allowed in last year as it was paid before the due date of
return.
Liability incurred during the previous year
Sr. No. Sec. Nature of
Liability
Amount
incurred in
previous year
but remaining
outstanding on
last day of
previous year.
Amount paid/set-off
before the due date
of filing return/date
upto which reported
in the tax audit
report, whichever is
earlier
Amount unpaid on
the due of filing of
return/date upto
which reported in
the tax audit report,
whichever is earlier
01 43B(a) VAT / GST 100 lakh 40 lakh 60 lakh
Examinees have discussed generally on vouching and verification aspects instead of mentioning
the reporting requirements of Tax auditor. Some examinees failed to explain with reference to
Clause 23 of Form 3CD for reporting the particulars of payments made to persons specified under
section 40A(2)(b) of the Income Tax Act, 1961. Instead of explaining Tax audit requirements few
examinees wrongly discussed AS 18 and SA 550 on “Related parties”.

CRACKER -
Advanced Auditing &
Professional Ethics
Author : Pankaj Garg
Edition : 8th Edition
ISBN No : 9789390831142
Date of Publication : June 2021
Weight (Kgs) : 0.95
No. of papers : 588
Rs. 745 USD 43
Description
Taxmann’s CRACKER for Advanced Auditing & Professional Ethics is prepared
exclusively for the requirement of the Final Level of Chartered Accountancy Examination.
It covers the entire revised, new syllabus as per ICAI.
The Present Publication is the 8th Edition & Updated till 30th April 2021 for CA-Final |
New Syllabus, with the following noteworthy features:
 Strictly as per the New Syllabus of ICAI
 [1,000+ Questions and Case Studies] with complete answers
 [ICAI Examiner Comments] along with Past Exam Questions are included
 Coverage of this book includes:
n All Past Exam Questions
l CA Final November 2020 (New Syllabus) – Suggested Answers
l CA Final January 2021 (New Syllabus) – Suggested Answers
n Questions from RTPs and MTPs of ICAI
 [Point wise] answers for easy learning
 [Chapter-wise] marks distribution for Past Exams
 [Most Updated & Amended] This book is updated & amended as per the following:
n Companies (Audit and Auditor’s) Amendment Rules, 2021
n Companies (Amendment) Act 2020
n Companies (Auditor’s Report) Order 2020
n SEBI (LODR) Regulation 2015
n Form 3CD and Form GSTR 9C (Revised)
n Finance Act 2021
n Revised Code of Ethics
n Revised Statement of Peer Review 2020
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Taxmann's CRACKER | Advanced Auditing & Professional Ethics

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