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Total Number of Subscribers: 422 |
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Date: 11 March 2008 |
Compiled by : M. Sathya Kumar |
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EXCISE AUDIT 2000 Introduction In
conventional sense, Audit means scrutiny and verification of documents,
events and processes in order to verify facts and, draw conclusions regarding
the correctness of recording of facts and the efficiency of a system under
study. For Central Excise purposes Audit means scrutiny of the records of
assessee and the verification of the actual process of receipt, storage,
production and clearance of goods with a view to check whether the assessee
is paying the central excise duty correctly and following the central excise
procedures. Under
the conventional /traditional system of central excise audit, audit parties
visit assessees unit without much preparation and verify all the statutory
records (i.e. those prescribed under the Central Excise law) to check
compliance of procedures and also leakage of revenue, if any. Experiences
show that such audits do not result in detection of major aberrations. Most
of the audit objections pertain to either minor procedural irregularity or
duty short payment of small amounts mostly due to human error. Further, this
method of auditing does not envisage checking of the internal records of the
assessee as well as those records which are maintained by the assessee under
the other laws like Income Tax Act, Sales Tax Act, Companies Act etc. One
of the announcements made during Budget 2000 as a measure of simplification
of procedures, was the dispensation of all statutory records under the central
excise law. No longer was the assessee required to record the receipt of raw
material, production and clearance/sale of finished goods etc. in
registers/documents prescribed by the central excise department. As a result,
the assesses are now allowed to maintain all their records in whichever form
they like (including maintenance of the entire records in electronic form)
provided the essential information required for calculation of central excise
duty liability can be obtained from such records. Under these circumstances
it becomes necessary for the auditors to look into the assessees own
(private) records to verify whether the assessee is paying central excise
duty correctly and following the laid down procedures. Another
change brought in recent years is doing away the system of assessment of the
returns by the departmental officers. Now the assessee is required to self
assess his monthly tax returns (called the E.R.1/E.R.2) before filing the
same with the department. The departmental officers only scrutinise this
return to check for any apparent mistake made by the assessee. They are not
required to carry out detailed verification. Therefore, the entire burden of
checking whether the assessee actually paying his taxes correctly, now lies
with audit. The
statutory changes resulting in dispensation of statutory records as well as
self assessment of central excise duty by the assessee has led to the
conventional/traditional system of audit becoming irrelevant. What is Excise Audit 2000 Traditional
audit will eventually be replaced by Excise Audit 2000 (EA 2000), a new
system of audit. This new system was initiated from The
essential philosophy of EA 2000 is that this audit is based on the scrutiny
of business records of the assessee. This is a more systematic form of audit
wherein the auditors are required to gather basic information about the
assesee and analyze them to find out vulnerable areas before conducting the
actual audit. The audit is therefore more focused and in-depth as compared to
the traditional audit. Further, at every stage of audit, the assessee is
consulted. This makes EA2000 audit user friendly. Procedure of Excise Audit 2000 Selection of Assessee The
process of EA 2000 begins with identification of a unit to be audited.
Normally, there are about 1000 to 1500 assessees under the jurisdiction of a
Central Excise Commissionerate. It is not possible for the audit staff to
conduct audits of all the units every year. Therefore, depending upon the
manpower availability, about 300 to 400 units are selected for conducting
audit during a financial year. Under the conventional system of audit the
units were picked up randomly without any scientific basis of selection.
Under EA 2000, the selection of the unit is based taking into account in the
'risk-factors'. This means that the assessees who have a bad track record
(having past duty evasion cases, major audit objections, past duty dues etc.)
are given priority for conducting audit over those having clean track record.
Desk Review The
auditors are assigned the assessees to be audited at the beginning of the
financial year. The auditors are required to gather as much information about
the assessee as possible. They can gather information from the departmental
records, published documents like balance sheets annual statements etc., and
through market Enquirer. Since this can be done without interacting with the
assessee, this step called as 'desk-review'. Documenting Information At
the stage of ‘Desk Review’ the auditors may have already
identified certain areas, which warrant closer examination. The auditor may also
require certain documents or information from the assessee to complete his
preliminary investigation. For this he may write letter to the assessee or
send him a questionnaire to obtain this information. This step is called
'gathering and documenting assessee information'. Touring The
auditor then visits the unit of the assessee to see the actual running of the
unit, the systems that are followed for maintaining records in various
sections and the system of movement of goods and the related documents within
the unit. This step is called 'touring of the premises'. This gives the
auditors a general overview about the procedure adopted by the assessee and
the possible loopholes through which revenue leakage can take place. Audit Plan Based
on his experiences and the information gathered so far about the assessee,
the auditor now makes a 'audit plan'. The idea of developing audit plan is to
list the areas which, as per the auditor are the vulnerable areas from the
revenue point of view. Since number of documents/records maintained by
assessee is huge in number, it also necessary that the auditor should select
only some of them for the actual verification. The
preparation of audit plan helps him to do that. It must be remembered that
audit plan is not rigid but a dynamic concept. During the course of audit if
the auditor notices certain new facts or new aspects of the planned area of
audit, he can always alter the audit plan accordingly, with the approval of
his supervisor. Similarly, in case during the actual audit, if the auditor is
convinced that any area which was earlier planned for verification does not
require in-depth scrutiny, he may alter the plan midway after obtaining
approval of the superior officers. Preparation of audit plan is one of the
most important steps of EA 2000. A well thought audit plan generally
increases the success of audit result manifolds. Verification The
most important step of audit is the conduct of actual audit, which in
technical parlance is called 'Verification'. The auditors visit the unit of
the assessee on a scheduled date (informed to the assessee in advance) and
carry out the scrutiny of the records of the assessee as per the audit plan.
The auditor is required to compare the documentation of a fact from different
documents. For
example, the auditor may check the figures of clearance of finished goods showed
by the assessee in central excise return with the sales figures of the said
goods in Balance Sheet, Sales Tax Returns, Bank statements etc. The auditor
may also enquire about the entries which appear vague (say an entry like
'Misc. Income') in various records and documents. The idea behind conduct of
verification is to reasonably ensure that no amount, which as per the Central
Excise law is chargeable to duty, escapes taxation. The process of
verification is always carried out in presence of the assessee so that he can
clarify the doubts and provide required information to the auditor. Audit Objection and Audit Where
the auditor finds instances of short payment of duty or non-observance of
Central excise procedures, he is required to discuss the issue with the
assessee. After explanation provided by the assessee, if the auditor is
satisfied that such non-tax compliance has occurred, he records the same as
an 'Audit Objection' or 'Audit Para' of the 'draft audit report' that he
would be preparing at the end of the verification process. Auditor
is advised not to take formal objections to mere procedural lapses/
infractions/ adoption of wrong procedures, which do not result in any short
payment of duty or do not have bearing upon the duty payment. In such cases
the auditor is required to discuss the matter with the assessee and advise
him to follow the correct procedure in future. Further, while making an audit
para, attempt should be made to tabulate the duty short paid by the assessee
at the spot and incorporate it in the para itself. However, if this is not
possible for the paucity of time or for the want of some information not
available at that time, the auditor should make a note of the same in his
report. Audit Report At
the end of the process of verification the auditor prepares an 'Draft Audit
Report' which incorporates all the audit objections/audit paras. An audit
report provides (issue or para wise) the issue in brief, the reply or the
explanation of the assessee, the reason for the auditor not being satisfied
with the reply, the amount of short payment (if tabulated) and the recoveries
of the same (if could be made at the spot). The draft audit report is then
submitted to the superior officers for review, who examine the sustainability
of the objections raised by the auditors. After such review, the audit report
becomes final and in cases where the disputed amounts have not already been
paid by the assessee at the spot, demand notices are issued by the department
for their recoveries. Conclusion EA
2000 is a modern, transparent and interactive method of audit wherein the
auditor proceeds with audit fully conversant with the business of the
assessee. On his part, the assessee is given full opportunity to explain his
stand on any particular matter so that matters are resolved in full
appreciation of legal position. EA 2000 is thus a participative audit. A requirement of EA 2000 is that the auditors must be thorough in their knowledge of Central Excise law and procedures, notifications, instructions and circulars issued by the Finance Ministry and the judicial decisions on issues relating to central excise laws. To be successful auditor, knowledge about financial bookkeeping, accountancy and proficiency in understanding commonly used commercial books and documents is of great help. Further, being computer literate is an added requirement while auditing an assessee who maintains his accounts in electronic format. Courtesy : Central Excise Manual - Kanpur |
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