Chapter 15

EXCISE AUDIT 2000
1. Introduction

1.1 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.

1.2 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.

1.3 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.

1.4 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.

1.5 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.

2. What is Excise Audit 2000

2.1 Traditional audit will eventually be replaced by Excise Audit 2000 (EA 2000), a new system of audit. This new system was initiated from 1st December 1999 when it was implemented in case of all assessees paying cash duty of over Rs.5 crores per annum. In September 2000, the Central Board of Excise and Customs made this audit applicable in case of all assessees paying cash duty of over Rs. 1 crore per annum. At present, in addition to audit of such units, those units which pay cash duty of Rs. 10 lakhs or more but less than Rs.1 Crore will be audited once in two years. Not more than 20% of the Units paying cash duty less than Rs.10lakhs are to be audited in a year. It is expected that by April 2002, all assessees will be subjected to EA 2000.

2.2 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.

3. Procedure of Excise Audit 2000

3.1 Selection of Assessee

3.1.1 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.

3.2 Desk Review

3.2.1 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.

3.3 Documenting Information

3.3.1 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.

3.4 Touring

3.4.1 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.

3.5 Audit Plan

3.5.1 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.

3.6 Verification

3.6.1 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.

3.7 Audit Objection and Audit Para

3.7.1 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.

3.8 Audit Report

3.8.1 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.

4. Conclusion

4.1 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.

4.2 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.

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