Illustrative list of Observations/Comments/Remarks in Tax Audit Report Form 3CA/3CB

Illustrative list of Observations/Comments/Remarks in Tax Audit Report Form 3CA/3CB

PREFACE

The stakeholders like government, bankers etc has high expectations from Tax Audit. The Quality of Tax Audit report is very important documentation that evidences the work carried out by Tax Auditor in discharge of duty.

Form 3CA/3CB is the Only and Most Important report by Tax Auditor. The comments/observations provided therein evidences the quality of audit work. With the objective to provide, the draft or illustrative list of Observations or Comments, I have compiled some of the comments that may be included in Tax Audit Report.

Section 44AB requires the tax auditor to submit the audit report in the prescribed form 3CA/3CB as applicable. It may be noted that the audit report in Form No.3CB is in two parts. The first part requires the tax auditor to give his opinion as to whether or not the accounts audited by him give a true and fair view. The second part of the report states that the statement of particulars required to be furnished under section 44AB is annexed to the audit report in Form No. 3CD.

The assessee is responsible for the preparation of financial statements and statement of particulars in Form 3CD. The tax auditor’s responsibility is to express an opinion on the financial statements and information furnished in Form 3CD. Therefore, the observations/comments/remarks by Tax Auditor in Form 3CA or Form 3CB is the core responsibility and visible measure of quality Tax Audit.

In this blog, I have compiled and presented important information:

  1. Where to cover the comments/observations relating to Financial Statements and Form 3CD in Form 3CA/3CB?
  2. List of illustrative / draft comments/observations that may be covered in Form 3CA/ 3CB.

1. PLACING OF OBSERVATIONS/ COMMENTS TO BE COVERED IN FORM 3CA/3CB

Observation/Comments on

Reporting in
Form 3CA

Form 3CB
Financial Statements

No specific para/requirements to give comments/ observations on financial statements, as the same would have already covered in audit report conducted under other laws/regulations

Para 3(a)
Form 3CD

Para 3

Para 5

Extract of relevant Clauses of Form 3CA and 3CB for providing observations/comments is reproduced in Annexure – 1 at the end of the blog for reference.

ICAI Guidance with respect to Comments in Clause 3(a) of FORM 3CB

Paragraph 15.5 of Guidance Note on Tax Audit u/s.44AB of Income Tax Act, 1961:

Under clause (a) of paragraph 3 of Form No.3CB, the tax auditor has to report his “observations/comments/ discrepancies/inconsistencies,” if any. The expression “Subject to above” appearing in clause (b) makes it clear that such observations/comments/ discrepancies/ inconsistencies which are of qualificatory nature relate to necessary information and explanations for the purposes of the audit or the keeping of proper books of accounts or the true and fair view of the financial statements, respectively to be reported on in paragraphs (A), (B) and (C) under clause (b) of paragraph 3.

While reporting on clause (a) of paragraph 3 of Form No. 3CB the tax auditor should report only such of those observations/comments/ discrepancies/ inconsistencies which are of qualificatory nature which affect his reporting about obtaining all the information and explanations which were necessary for the purposes of the audit, about the keeping of proper books of account by the head office and branches of the assessee and about the true and fair view of the financial statements. Further, only such observations/comments/ discrepancies/inconsistencies which are of a qualificatory nature should be mentioned under clause (a). Any other observations/comments/ discrepancies/inconsistencies, which do not affect the reporting on the matters specified above may form part of the notes to accounts forming part of the accounts.

In case the tax auditor has no observations/comments/ discrepancies/ inconsistencies to report which are of qualificatory nature, “NIL” should be reported in this part of paragraph 3. The tax auditor may then give his report as required by subparagraphs (A), (B), and (C) of paragraph 3 and paragraph 4.

2. ILLUSTRATIVE/DRAFT COMMENTS/REMARKS/OBSERVATIONS

S. N. Type of Information Draft matters to be included Reference to Para of Tax Audit Report
1. Assessee’s responsibility for Financial Statements Assessee’s Responsibility for the Financial Statements:

The assessee is responsible for the preparation of the aforesaid financial statements that give a true and fair view of the balance sheet and profit and loss account in accordance with the applicable Accounting Standards issued by the Institute of Chartered Accountants of India. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

 Para 3(a) of Form 3CB
2. Assessee’s responsibility for Form 3CD Assessee’s Responsibility for the Statement of Particulars in Form 3CD:

The assessee is also responsible for the preparation of the statement of particulars required to be furnished under section 44AB of the Income-tax Act, 1961 annexed herewith in Form No. 3CD read with Rule 6G(1)(b) of Income Tax Rules, 1962 that give true and correct particulars as per the provisions of the Income-tax Act, 1961 read with Rules, Notifications , circulars etc that are to be included in the Statement.

 Para 3(a) or 5 of Form 3CB
3. Tax Auditor Responsibility for financial statements Tax Auditor’s Responsibility

• My/ Our responsibility is to express an opinion on these financial statements based on my/our audit. I/We have conducted this audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

• An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances but not for the purposes of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

• I/We believe that the audit evidence I/we have obtained is sufficient and appropriate to provide a basis for my/our audit opinion.

 Para 3(a) of Form 3CB
4. Tax Auditor Responsibility for Form 3CD Tax Auditor’s Responsibility for Form 3CD

I/We are also responsible for verifying the statement of particulars required to be furnished under section 44AB of the Income-tax Act, 1961 annexed herewith in Form No. 3CD read with Rule 6G (1) (b) of Income-tax Rules, 1962. I/ We have conducted my/our verification of the statement in accordance with Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961, issued by the Institute of Chartered Accountants of India.

 Para 3 of Form 3CA or Para 5 of Form 3CB
5. Previous Year not under Audit In case, financial statements of previous year were not under audit –

The opening balances have been taken and relied upon by us from the unaudited financial statements of previous year provided to us by the assesse.

 Para 3 of Form 3CA or Para 5 of Form 3CB
6. Accounting Standards Non-compliance • In case financial statements do not comply with Accounting Standards –

The financial statements do not comply with AS (specify the standard) issued by the Institute of Chartered Accountants of India, which would have resulted in reducing / increasing the profits by Rs. ___ OR the impact of which is not ascertainable.

 Para 3(a) of Form 3CB
The financial statements do not comply with following Accounting Standards issued by the Institute of Chartered Accountants of India, the impact of which is not ascertainable.
AS-22 Accounting for Taxes on Income with regard to recognition, measurement and disclosure of Deferred Tax.
AS-10 Property, Plant and Equipment with regard to depreciation as provided in books of accounts may not be in accordance with useful life of the asset as required by AS-10.
AS-7 Construction Contracts or Guidance Note on Real estate developers, (as applicable) with regard to presentation and disclosure requirements.
AS-15 Employee Benefits with regard to recognition, measurement and disclosure of defined benefit plan or other long term benefits in accordance with projected unit credit method.
AS-13 Investments with regard to disclosure of quoted, unquoted investments.
7. Clause 21(a)

Amounts debited to the profit and loss account, being in the nature of capital, personal, advertisement expenditure etc

 1. As observed by us and as explained to us, there was no personal expenditure incurred by the assesse apart from any contractual obligation. OR

2. Expenses incurred for employees as per the terms of employment or the company’s business policies have not been regarded as ‘personal expenses’. OR

3. It is not possible to us to support the conclusion that the expenditure like vehicle running, telephone, conveyance expenses was wholly and exclusively laid out for the business purpose.

 Para 3 of Form 3CA or Para 5 of Form 3CB
8. Clause 21(d)

Disallowance/deemed income under section 40A(3)

 Though we have not noticed any payment in excess of Rs.10000/- or Rs. 35000/- (in case of plying, hiring or leasing goods carriages) have been made in contravention of section 40A (3) / 40A (3A) read with rule 6DD, however the assesse did not possess necessary evidence to verify the same. Para 3 of Form 3CA or Para 5 of Form 3CB
9. Clause 22

Amount of interest inadmissible under section 23 of MSMED Act

 As informed by the assesse, he / it does not have relevant information regarding any micro or small enterprise which is registered under the provisions of the Micro, Small and Medium Enterprises Development Act, 2006, hence amount due and interest payable is not ascertainable. Para 3 of Form 3CA or Para 5 of Form 3CB
10. Clause 23

payments made to persons specified under section 40A(2)(b)

 For ascertaining the persons covered under section 40A (2)(b), we have relied on the list provided and certified by the assesse Para 3 of Form 3CA or Para 5 of Form 3CB
11. Clause 29B

Any amount is to be included as income chargeable under the head ‘income from other sources’

 Where Stamp duty value is different than the consideration paid for acquisition of immovable property: o Stamp duty Value of immovable property was Rs. _____ o Consideration (transaction value) for acquisition of property was Rs. ____ o The assesse is of the view that FMV does not exceed the consideration and he intends to contest the same before the assessing officer, hence as per assesse there would be no income chargeable to tax u/s 56(2)(x) on this account. Para 3 of Form 3CA or Para 5 of Form 3CB
12. Clause 31(a)(v)

Sec. 269SS

 It is not possible for me/us to verify whether loans or deposits have been taken or accepted otherwise than by an account payee cheque or account payee bank draft, as the necessary evidence is not in the possession of the assesse Para 3 of Form 3CA or Para 5 of Form 3CB
13. Clause 31(b)(iv)

Sec. 269SS

 It is not possible for me/us to verify whether specified sum have been taken or accepted otherwise than by an account payee cheque or account payee bank draft, as the necessary evidence is not in the possession of the assesse Para 3 of Form 3CA or Para 5 of Form 3CB
14. Clause 31(bb)

Sec. 269ST

 It is not possible for me/us to verify whether the assesse received an amount exceeding the limit specified in section 269ST in aggregate from a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasions from a person, by an account payee cheque or an account payee bank draft, during the previous year as the necessary evidence is not in the possession of the assesse. Para 3 of Form 3CA or Para 5 of Form 3CB
15. Clause 31(bd)

Sec. 269ST

 It is not possible for me/us to verify whether the assesse paid an amount exceeding the limit specified in section 269ST in aggregate to a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasions to a person, by an account payee cheque or an account payee bank draft, during the previous year as the necessary evidence is not in the possession of the assesse. Para 3 of Form 3CA or Para 5 of Form 3CB
16. Clause 31(c)(v)

Sec. 269T

  It is not possible for me/us to verify whether loans or deposits or specified advance have been paid otherwise than by an account payee cheque or account payee bank draft, as the necessary evidence is not in the possession of the assesse.

Rs. _________ being unsecured loans have been converted into equity vide members resolution in EGM dated ____ and have not been reported as repayment otherwise than by an account payee bank cheque or account payee bank draft or use of electronic clearing system.

 Para 3 of Form 3CA or Para 5 of Form 3CB
17. Clause 31(d)(ii)

Sec. 269T

 The repayment of the loan instalment by employees received during the year includes Rs. ______ adjusted with their salary dues by way of regular adjustment entries and has not been reported as repayment received otherwise than by an account payee bank cheque or account payee bank draft or use of electronic clearing system. Para 3 of Form 3CA or Para 5 of Form 3CB
18. Clause 31(e)(ii)

Sec. 269T

 It is not possible for me/us to verify whether the assesse received the repayment of loan or deposit or specified advance of an amount exceeding the limit specified in section 269T by an account payee cheque or an account payee bank draft, during the previous year as the necessary evidence is not in the possession of the assesse Para 3 of Form 3CA or Para 5 of Form 3CB
19. Clause 31

Sec. 269SS / T

(combined)

 It is not possible for me/us to verify whether loans or deposits have been taken or accepted or repaid otherwise than by an account payee cheque or account payee bank draft, as the necessary evidence is not in the possession of the assesse Para 3 of Form 3CA or Para 5 of Form 3CB
20. Clause 34

TDS/ TCS Details

 We have verified the compliance with the provisions of Chapter XVII-B / XVII-BB regarding deduction of tax at source and regarding the payment thereof to the credit of the Central Government in accordance with the Auditing Standards generally accepted in India which includes test checks and the concept of materiality. Such audit procedures did not reveal any significant non-compliance with the provisions of Chapter XVII-B / XVII-BB. Para 3 of Form 3CA or Para 5 of Form 3CB
21. Clause 35(b)

Quantitative Details

 o The assessee has not provided / maintained adequate records for our verification regarding the principal items of raw materials, finished products and by-products as required to be reported in this clause. OR

o As explained by the assessee, keeping in view the nature, volume of the business and due to numerous items, it is not practically possible for the assessee to maintain any stock book to record quantities of each and every inward and outward of such goods on day to day basis, hence information under this clause is not feasible.

 Para 3 of Form 3CA or Para 5 of Form 3CB
22. Clause 36A

Deemed Dividend

 The assesse could not provide appropriate information / details to determine accumulated profits to enable us to report that the loan / advance received by the assesse is deemed dividend or not u/s 2(22)(e). Para 3 of Form 3CA or Para 5 of Form 3CB
23. Clause 44

 

 Situation- 1: Not providing information in Clause 44:

As informed by the assessee, the information required under clause 44 of Form 3CD has not been maintained in absence of any disclosure requirement thereof under the goods and service tax statute. Further the standard accounting software used by Assessee is not configured to generate report as required under this clause in absence of any prevailing statutory requirement. Therefore, it is not possible to determine break-up of total expenditure of entities registered or not registered under the GST. In view of above we are unable to verify and report the desired information in this clause.

 

Situation 2: Assesse not registered under GST and Not providing information:

The assessee is not registered under GST and as informed by the assessee, the information required under clause 44 of Form 3CD has not been maintained in absence of any disclosure requirement thereof. Further the standard accounting software used by Assessee is not configured to generate report as required under this clause in absence of any prevailing statutory requirement. Therefore, it is not possible to determine break-up of total expenditure of entities registered or not registered under the GST. In view of above we are unable to verify and report the desired information in this clause.

 

Situation 3: Providing information – however limitation on obtaining some information

As informed by the assessee, the information reported under clause 44 of Form 3CD is based on the information extracted from accounting software / relevant GST report. However this may not be accurate as the accounting software used by Assessee is not configured to generate report as required under this clause in absence of any prevailing statutory requirement. In addition, the software/system does not capture information relating to the entities falling under composition scheme or supply with ineligible credit. Therefore, it is not possible for us to verify the break-up of total expenditure of entities registered or not registered under the GST and unable to comment on accuracy of information provided therein. Total expenditure reported under the clause includes capital expenditure however does not include depreciation, bad debt and expenditure which is not a supply as per GST.

 

 Para 3 of Form 3CA or Para 5 of Form 3CB


Disclaimer:

The compilation included here is only for reference and guidance purpose. Kindly modify, add, delete as per your requirement. If you have any suggestions for inclusion/exclusion of comments, kindly email me at cnpatel@gmail.com.

This blog/article/write up is meant purely for education and understanding purpose. While the information is believed to be accurate to the best of my knowledge, I do not make any representations or warranties, express or implied, as to the accuracy or completeness of this information. Reader should conduct and rely upon their own examination and analysis. This note is not an offer, invitation, advice or solicitation of any kind. I accept no responsibility for any errors it may contain, whether caused by negligence or otherwise or for any loss, howsoever caused or sustained, by the person who relies upon it. This information provided is for intended recipient for knowledge and guidance purpose only.

 

ANNEXURE: 1 Extract of relevant Clauses of Form 3CA and 3CB for providing observations/comments

RELEVANT CLAUSES OF FORM 3CA

  1. In *my/our opinion and to the best of *my/our information and according to examination of books of account including other relevant documents and explanations given to *me/us, the particulars given in the said Form No.3 CD are true and correct subject to the following observations/qualifications, if any:

RELEVANT CLAUSES OF FORM 3CB

  1. (a) *I/we report the following observations/comments/discrepancies/inconsistencies; if any

(b) Subject to above,

(A) *I/we have obtained all the information and explanations which, to the best of *my/our knowledge and belief, were necessary for the purpose of the audit. (B) In *my/our opinion, proper books of account have been kept by the head office and branches of the assessee so far as appears from*my/ our examination of the books. (C) In *my/our opinion and to the best of *my/our information and according to the explanations given to *me/us, the said accounts, read with notes thereon, if any, give a true and fair view :- (i) in the case of the balance sheet, of the state of the affairs of the assessee as at 31st March; and (ii) in the case of the *profit and loss account/income and expenditure account of the *profit/loss or *surplus/deficit of the assessee for the year ended on that date.

  1. In *my/our opinion and to the best of *my/our information and according to explanations given to *me/us, the particulars given in the said Form No.3 CD are true and correct subject to following observations/qualifications, if any:
Post Views: 1,850

Chintan Patel is CA, CPA(USA), CISA(USA), DISA, DIRM(ICAI) and certified Ind AS and FAFD by ICAI. He is Regional Council Member of WIRC of ICAI. He is partner of Naresh J. Patel & Co. having more than 18 years of post-qualification experience in Ind AS, IFRS, Companies Act, GST. He is an author of books Quick Guide to Ind AS, ICDS published by Taxmann and Speaker at more than 500 presentations.

1 Comment

  1. Sir,

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