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FEATURES OF "EXCISE AUDIT 2000"
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
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
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
Preparation of Manuals for
Service Tax audit.
Procedural relaxations in
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
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
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
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
Different steps in auditing are -
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.
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
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.
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
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 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
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
Emphasis on private
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
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
Greater transparency norms
followed during conduct of audit.
Audit report to be prepared
in prescribed format.
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
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
Selection of units based on
Risk assessment (separate project).
Adoption of concepts of
‘mandatory’ and ‘discretionary’ workload and ‘target
penetration’ in audit selection.
Risk loss analysis
Evaluation of Internal
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
Creation of database in
respect of the unit.
Applying Risk assessment
Preliminary or ‘Desk’
Gathering of information
pertaining to the unit from returns submitted to other Departments and
Interview of key personnel
of unit by Supervisor of Audit team to obtain broad information.
Tour of the plant.
Evaluation of Internal
control (study of organisation and review of accounting system).
Risk loss analysis.
Preparation of Audit plan.
Performance of Audit.
Discussions with management
and finalisation of audit objections.
Recovery of dues where
assessee voluntarily agrees to pay.
Points for future
compliance by assessee.
Advantages to be derived from
the new Audit System
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
Training manuals will help
in achieving minimum levels of uniform training in techniques of
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.
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
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
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
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
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.
Government’s economic, tariff and trade policies with a practical and
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 -
Courtesy and understanding.
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
/R N Yadav/
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