For free circulation

SALIENT FEATURES OF "EXCISE AUDIT 2000"

 

INTRODUCTION

       The economic liberalisation initiated in 1991 by the Government carried a special focus on Tax Reform as it was felt that complexities in levy and collection of tax could fetter economic activity.

       The Tax Reforms Committee headed by Prof. Raja J. Chellaiah examined the Tax System and Administration in the country.

       The Committee concluded that a simple, credible and progressive system was necessary to improve Tax compliance. The need for better relations between the Tax Collectors and Taxpayer was also emphasised. The need to achieve both equity and efficiency in Taxation was thought to be important.

CAPACITY DEVELOPMENT OF CENTRAL EXCISE ADMINISTRATION is an initiative taken by the Central Board of Excise & Customs. Nine projects ( a total package) have been conceived to achieve this objective. These are -

·       Development of Audit Manual: To make central excise audit more professional and result oriented in the wake of introduction of self-assessment (and acceptance of private records) the project plan envisages preparation of an Audit Program and an Audit Manual and a set of working papers.

·       Standard Audit Programme : - do -

·       Risk Assessment: To prepare excise audit teams to undertake audit on the basis of actual ‘risk factors’ to revenue. It means that audit teams will focus their attention and energy only in respect of assessees and sectors where risk to revenue is high. Risk assessment is the driving force of the new Audit system.

·       Computer Assisted Audit Programme (CAAP): The approach of the project is to train audit staff in computer so that they can obtain information on assessee’s records on electronic media, analyse them on a laptop, identify the risk factors and then undertake the audit by visiting the premises of the assessee with the laptop. The benefit the project will provide to auditors is that they can prepare for the audit well in advance by sitting in their office.

·       Training of Excise auditors: The purpose of the project is to train excise auditors in fundamentals of accountancy, accounting and auditing. The project mooted in April, 99 envisages a two-way approach to train officers with background of Commerce and without it. It will also envisages that after a core group of officers is trained in accountancy and auditing and also in training techniques, they, in turn, would train other officers. The underlying idea of the project is that the newly developed Audit Program and Manual cannot be applied without training in accountancy and auditing. Every auditor including AC/DC/ JC/ADC (Audit) will get trained in the new Audit Manual and Programme before the new audit system takes off.

·       National Excise Database: Creating a comprehensive database for excise (and Customs) with a proper system of maintenance and retrieval of data. This would facilitate uniformity in application of central excise (and Customs) laws. The data is basically in respect of judicial decisions, circular letters of Board, etc.

·       Simplification of Returns: Objectives are (a) Acceptance of private records of assessees in lieu of statutory excise records, (b) Simplification of the system of filing of returns, (c) Payment of duty at month-end instead of on each clearance.

·       Audit Programme for Service Tax: The project envisages preparation of document for undertaking Service Tax audit in a more professional and effective manner.

·       Excise Computerisation: Giving the shape of a project to the ongoing Computerisation efforts in Excise Department.

Based on Audit Manual and Standard Audit Programme already prepared new Audit will start selectively from middle of November ‘99. Since 15 days notice will be given actual audit can take place earliest from 1st December’99. Board has decided that initially Audit of only Rs.5 Crores (PLA) and above units will be undertaken under EA-2000. Other units will be audited on the basis of the existing Audit Manual. After the Risk Assessment project and CAAP are complete, the complete new Audit package will be operational sometime early 2000-2001. It is in place of the existing system of audit and not in addition. To start with, Audit under CAAP will be on a very limited scale.

 

 

 

WHY AUDIT PROJECTS NECESSARY

·       There is a need for a change of approach in Excise audit. Efforts should be to have a more effective system of audit to encourage greater compliance rate and more revenue.

·       Self-Assessment has shifted the focus of departmental checks from pre-clearance to post-clearance. The new audit system is to fill the gap created by waiver of assessment by Range staff.

·       A strong and professional audit system based on basic Accounting /Auditing principles is the only way in which the department can balance the twin objectives of safeguarding revenue and transparency.

·       Need for use of information technology in audit when assesses are getting increasingly computerised.

·       Shortage of manpower requires more focused system of audit.

·       Greater reliance on private records (within the existing framework of Excise law) is required: statutory records alone do not serve the objectives of a meaningful audit.

Main thrusts of the projects

·       Improving the present system of excise audit.

·       Training of officers before new audit starts.

·       Adoption of IT in auditing.

·       Optimal use of man power in audit.

·       Preparation of Manuals for Service Tax audit.

·       Procedural relaxations in Excise law.

·       Providing tools for uniform decision making by taking help of IT.

AUDIT MANUAL, STANDARD AUDIT PROGRAMME & WORKING PAPERS: Audit will be done on the basis of these Manuals.

AUDIT MANUAL

       Purpose of this manual is to lay down audit standards, instructions, policies and procedure relating to audit of an assessee and ensure that audits are uniform, comprehensive and efficient and according to the standards laid down.

       According to the Audit Standards laid down in the Manual, the Audit Programme is an outline of all the procedures to be followed by the auditors; these must be capable of being used as an effective audit tool for planing, supervision and control; must enable determination of degree of compliance to Central Excise law and procedures and must be able to cover all significant aspects of the assessee’s operations within its scope. The standards laid down for working papers provide that they should be prepared in the prescribed formats; they should substantiate the audit findings; they should be capable of being understood and used by various departmental personnel; there should be a separate working paper for each item of verification.

Audit planning, prioritisation and selection is in tune with any selective audit system. This is proposed to be achieved by scientific selection of workload, prioritisation of audit in certain types of units and identification of mandatory and discretionary workload. Guidelines are provided for target penetration, audit selection, allocation of audit and rotation of auditors.

Review of audit makes the supervisory officers responsible for quality of audit, training of officers and performance evaluation of auditors.

Scheme of ‘Audit Protocol’, a new concept, between the department and the assessee (where the two have agreed to sign it) with assurance of openness and cooperation in audit from both sides seek to usher in a new era of mutual trust and better compliance.

STANDARD AUDIT PROGRAMME

       Audit Programme is a systematic and comprehensive outline of the procedure for conduct of audit in order to arrive at an opinion concerning the degree of compliance by the assessee to the law and procedure.

       Audit has to be undertaken in accordance with the sequence outlined in the Audit Programme. It will substantially depend on scrutiny of private (only those envisage in Rule 173G) rather than statutory records.

Different steps in auditing are -

·       Preparatory or preliminary review: In this phase the audit party gathers as much relevant information as possible about the assessee and its operations in the office. The details to be gathered are, reason for selection, result of last audit, profile of the assessee giving details of ownership, goods manufactured etc. private records, special procedures, revenue realised, details of anti-evasion action if any, income tax returns, sales tax returns, annual reports, Cost audit reports, changes in law during the audit period, classification and price declaration, etc.

·       Gathering and documenting the systems information: This phase starts as soon as the party reaches the unit. The party gathers and documents systems information by interviewing key personnel and tries to understand the organisational pattern, obtains annual reports and reports submitted to other departments/institutions, studies tax accounting systems. The auditors also find out about trading activity, captive consumption, exports, purchase procedure and policy, imports, jobwork, ISO reports and other revenues.

·       Tour of the premises/plant: This is a very important element of the audit programme. The audit party gets an opportunity to physically verify many facts as understood during the first two phases and clarify doubts in this phase. The tour should cover all areas and should be thorough.

·       Evaluation of internal controls: An understanding of the organisational chart of the unit, review of accounts and general ledger and a general systems review enables the auditor to understand and study the impact of various subsystems that have an impact on indirect tax revenue. The evaluation of internal controls involves study of tax accounting, revenue accounting and expenditure accounting. ‘Walkthrough’ method can be a very effective tool in evaluation of internal control.

·       Risk loss analysis (Reasonableness test): Based on the studies made in the earlier steps, the audit party has to analyse and work out what would be the risk to revenue because of deficiencies of accounting system and what would be reasonable. The analysis will be used for development of Audit plan.

·       Trends analysis: Study of trends in revenue, modvat availment, profit, prices and quantum of the items manufactured over a period will help the audit party in identifying areas which are to be looked into.

·       Development of Audit plan: After completing all the steps detailed above, the auditors develop an audit plan in a narrative or list format which will be consistent with the complexity of the audit.

·       Verification in accordance with the plan: The Audit Programme has detailed guidelines for verification of each and every aspect of the audit work and auditors are expected to use the guidelines and other techniques effectively to achieve best results.

·       Preparation of audit findings: After completion of the audit, audit findings are to be prepared. Every finding should be substantiated with adequate evidence in the relevant Working Papers.

·       Review of results with the assessee: Findings with Working Papers to substantiate the findings especially relating to short levies are to be handed over to the assessee and reviewed. Wherever the assessee agrees with the findings, he may be persuaded to pay the amount and pay the correct duty in future. Where the findings relate to procedural deficiencies, an undertaking will be sought from the assessee about future compliance.

·       Review with the Range officer/Divisional Asstt. Commissioner: The audit party should also have a discussion with the concerned RO/AC before preparing the final Audit report. This will ensure greater accuracy in the report.

·       Finanlisation of Report: The final report will contain the details of findings of the audit party alongwith results of review with the assessee and the Range Officer/Divisional Asstt. Commissioner.

WORKING PAPERS

Working Papers are to be filled up by the Supervisor in the Audit team. He will detail documentation of work done by the audit party in a given format. The papers will be used -

·       For substantiation of audit findings

·       For evaluation of the performance of the auditors

·       For use by succeeding auditors as a part of preliminary review

There will be a set of Working Papers for each item of work/verification done by the auditors.

WHAT IS NEW IN THE NEW AUDIT MANUAL AND THE STANDARD AUDIT PROGRAMME

·       New way of selection of units for audit through ‘Risk Assessment’ concept.

·       Before commencement of audit, Audit Plan will be approved by Addl.Commissioner/Joint Commissioner (Audit).

·       Emphasis on private records.

·       System of discussion with key personnel from assessee’s side.

·       Tour of factory.

·       Concept of Working papers being filled up by Auditors. This will provide transparency in the work done.

·       Review of audit report with the assessee before it is filed. Objective is to measure degree of compliance to law and procedure by the assessee.

·       System of formal review of audit and auditors’ work. by the ‘Audit Board’ headed by Commissioner.

·       Greater transparency norms followed during conduct of audit.

·       Audit report to be prepared in prescribed format.

·       Codification of verification work to facilitate Computerisation.

·       Audit will be done by only trained officers. Senior officers will also get trained. Professionally qualified Asstt. Directors (Cost) will also participate in audit in major units.

·       Training of Auditors will be done with the help of Instructor Guide and Participant Manual.

·       Clear signal that Audit should hand over to Anti-evasion where summon, search, seizure, interrogation is called for.

NEW TECHNIQUES ADOPTED IN AUDIT

o      Selection of units based on Risk assessment (separate project).

o      Adoption of concepts of ‘mandatory’ and ‘discretionary’ workload and ‘target penetration’ in audit selection.

o      Risk loss analysis (reasonableness test).

o      Trends analysis.

o      ‘Walkthrough’ system.

o      Evaluation of Internal control system.

o      ABC analysis.

SELECTION OF UNITS FOR AUDIT

·       The existing guidelines for audit of units paying revenue of Rs. 1 crore or more in the PLA will continue (once a year). Some units may have only ‘Test audit’ in a year depending on ‘Risk’ parameters.

·       In respect of non-mandatory units, the number of units and the nature of units selected will depend on the administrative resources available with each Commissionerate and on evaluation of ‘Risk’ parameters for each unit.

·       Selection of units for audit will be done in a scientific manner and the emphasis will be on quality of scrutiny rather than coverage of units.

·       New system of audit will not apply to SSI units.

SOME IMPORTANT STEPS IN THE AUDIT PROCESS

o      Creation of database in respect of the unit.

o      Applying Risk assessment concept.

o      Preliminary or ‘Desk’ Review.

o      Gathering of information pertaining to the unit from returns submitted to other Departments and agencies.

o      Interview of key personnel of unit by Supervisor of Audit team to obtain broad information.

o      Tour of the plant.

o      Evaluation of Internal control (study of organisation and review of accounting system).

o      Risk loss analysis.

o      Trends analysis.

o      Preparation of Audit plan.

o      Performance of Audit.

o      Discussions with management and finalisation of audit objections.

o      Recovery of dues where assessee voluntarily agrees to pay.

o      Points for future compliance by assessee.

Advantages to be derived from the new Audit System

1.    By the Department

·       The manuals give a message that audit is not a routine and mechanical exercise of review of statutory records and documents.

·       The new manuals shift the focus to preparatory work and verification of private records (envisage under Rule 173G).

·       Due importance has been given to returns and reports submitted to other law enforcing agencies. This will increase the information base for audit.

·       The new technique of selection of units for audit by Risk assessment will bring in optimal use of limited manpower.

·       Concept of evaluation of Internal Control system will help in determination of the department of scrutiny required. This will save time of assessees and auditors.

·       The manuals propose a regular system of review of the work of auditors. This will make audit more result oriented.

·       The Standard Audit Programme would be the companion of auditors and it would help them to ensure that they have not missed out any aspect.

·       Concepts like ABC analysis and ‘Walkthrough’ will help auditors to perform their functions much better.

·       Training manuals will help in achieving minimum levels of uniform training in techniques of auditing.

·       The concept of Working papers would ensure that auditors record their work in detail.

·       The provision of evaluation of audits undertaken through the Monitoring Cell headed by Commissioner will ensure the quality of audit.

·       The new system of audit will bring ‘Audit wing’ to the forefront of Excise administration.

·       It will create a more compelling environment of voluntary compliance.

1.    By assessees :

·       Preparatory work done by audit parties in the office in advance would reduce the time required to be spent in the unit.

·       Department will be moving towards ‘Real Time Audit’ which will benefit assessees as there will be less demand for old records.

·       Audit will be done in a far more transparent manner.

·       Evaluation of Internal control systems by the audit parties will help the assessee to strengthen their system to ensure that the legal requirements are fulfilled.

·       Before end of the audit assessee will come to know the objections.

·       The assessee will get an opportunity to explain his views on the objections to be raised and as a result some of these will get settled. They will get a copy of the objection.

·       The stress in the new Manual is on ensuring that the audit does not cause inconvenience to the assessee. There will be adequate notice of the audit to the assessee (atleast 15 days).

·       Department’s attempt will not be to reopen old assessments, which are settled without concurrence of senior officers from the department.

·       There will not be more than one audit by the Excise department in a year.

·       Since audit of more than Rs. 1 crore/5 crores units will be supervised by AC/DC/JC/ADC (Audit), and the report signed by them, there will be less scope for frivolous audit.

·       ‘Audit Protocol’ is an innovation from which assessees (who volunteer for this scheme) can benefit immensely (eight Corporates have opted for this scheme; total number of units to be covered under this scheme is only 31, as of now).

·       There may not be any increase in the number of days taken for conducting the new audit. For very large units more number of auditors may be engaged to finish the work within a reasonable time.

·       There will be no formal audit of units operating under Section 3A (capacity based assessment).

GOVERNMENT’S MISSION AND COMMITMENT

       The government has laid down its MISSION and COMMITMENT in the document "OUR VISION AND STRATEGY".

      

       According to this Mission statement government’s mission is to achieve excellence in the formulation and implementation of Customs and Excise initiatives aimed at:

·       Realising the revenues in a fair, equitable and efficient manner.

·       Administering the Government’s economic, tariff and trade policies with a practical and pragmatic approach.

·       Facilitating trade and industry by streamlining and simplifying Customs and Excise processes and helping Indian business to enhance its competitiveness.

·       Creating a climate for voluntary compliance by providing guidance and building mutual trust.

·       Combating revenue evasion, commercial frauds and social menace in an effective manner.

GOVERNMENT’S COMMITMENT is that it will administer the tax system with -

o      Integrity and judiciousness.

o      Courtesy and understanding.

o      Objectivity and transparency.

o      Promptness and efficiency.

Development of a professional IT based Excise audit utilising modern techniques of auditing is a step in that direction. It will encourage ‘Quality’ audit and assist voluntary tax compliance by assessees.

/R N Yadav/

 

Back to Home Page