CHAPTER 15
EXCISE AUDIT 20001. Introduction1.1 In conventional sense, Audit means scrutiny and verification of documents,events and processes in order to verify facts and, draw conclusions regarding thecorrectness of recording of facts and the efficiency of a system under study. For CentralExcise purposes Audit means scrutiny of the records of assessee and the verification ofthe actual process of receipt, storage, production and clearance of goods with a viewto check whether the assessee is paying the central excise duty correctly and followingthe central excise procedures.
1.2 Under the conventional /traditional system of central excise audit, audit partiesvisit 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 andalso leakage of revenue, if any. Experiences show that such audits do not result indetection of major aberrations. Most of the audit objections pertain to either minorprocedural irregularity or duty short payment of small amounts mostly due to humanerror. Further, this method of auditing does not envisage checking of the internal recordsof the assessee as well as those records which are maintained by the assessee under theother laws like Income Tax Act, Sales Tax Act, Companies Act etc.
1.3 One of the announcements made during Budget 2000 as a measure ofsimplification of procedures, was the dispensation of all statutory records under thecentral excise law. No longer was the assessee required to record the receipt of rawmaterial, production and clearance/sale of finished goods etc. in registers/documentsprescribed by the central excise department. As a result, the assesses are now allowedto maintain all their records in whichever form they like (including maintenance of theentire records in electronic form) provided the essential information required forcalculation of central excise duty liability can be obtained from such records. Underthese 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 correctlyand following the laid down procedures.
1.4 Another change brought in recent years is doing away the system of assessmentof the returns by the departmental officers. Now the assessee is required to self assess hismonthly 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 mistakemade 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 selfassessment of central excise duty by the assessee has led to the conventional/traditionalsystem 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 newsystem of audit. This new system was initiated from 1 st December 1999 when it wasimplemented in case of all assessees paying cash duty of over Rs.5 crores per annum. InSeptember 2000, the Central Board of Excise and Customs made this audit applicable incase of all assessees paying cash duty of over Rs. 1 crore per annum. At present, inaddition to audit of such units, those units which pay cash duty of Rs. 10 lakhs or more butless than Rs.1 Crore will be audited once in two years. Not more than 20% of the Unitspaying cash duty less than Rs.10lakhs are to be audited in a year. It is expected that byApril 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 ofbusiness records of the assessee. This is a more systematic form of audit wherein theauditors are required to gather basic information about the assesee and analyze them tofind out vulnerable areas before conducting the actual audit. The audit is therefore morefocused and in-depth as compared to the traditional audit. Further, at every stage ofaudit, 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 ExciseCommissionerate. It is not possible for the audit staff to conduct audits of all the unitsevery year. Therefore, depending upon the manpower availability, about 300 to 400 unitsare selected for conducting audit during a financial year. Under the conventional systemof 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 evasioncases, major audit objections, past duty dues etc.) are given priority for conducting auditover 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 thefinancial year. The auditors are required to gather as much information about theassessee as possible. They can gather information from the departmental records,published documents like balance sheets annual statements etc., and throughmarket Enquirer. Since this can be done without interacting with the assessee, thisstep called as desk-review.
3.3 Documenting Information
3.4.1 At the stage of ‘Desk Review’ the auditors may have already identifiedcertain areas, which warrant closer examination. The auditor may also requirecertain documents or information from the assessee to complete his preliminaryinvestigation. For this he may write letter to the assessee or send him a questionnaireto obtain this information. This step is called gathering and documenting assesseeinformation.
3.4 Touring
3.4.1 The auditor then visits the unit of the assessee to see the actual running of theunit, the systems that are followed for maintaining records in various sections and thesystem of movement of goods and the related documents within the unit. This step iscalled touring of the premises. This gives the auditors a general overview about theprocedure adopted by the assessee and the possible loopholes through whichrevenue leakage can take place.
3.5 Audit Plan
3.5.1 Based on his experiences and the information gathered so far about theassessee, the auditor now makes a audit plan. The idea of developing audit plan isto list the areas which, as per the auditor are the vulnerable areas from the revenuepoint of view. Since number of documents/records maintained by assessee is huge innumber, it also necessary that the auditor should select only some of them for theactual verification. The preparation of audit plan helps him to do that. It must beremembered that audit plan is not rigid but a dynamic concept. During the courseof audit if the auditor notices certain new facts or new aspects of the planned areaof audit, he can always alter the audit plan accordingly, with the approval of hissupervisor. Similarly, in case during the actual audit, if the auditor is convinced thatany area which was earlier planned for verification does not require in-depthscrutiny, he may alter the plan midway after obtaining approval of the superiorofficers. Preparation of audit plan is one of the most important steps of EA 2000. Awell 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 intechnical parlance is called Verification. The auditors visit the unit of the assessee ona scheduled date (informed to the assessee in advance) and carry out the scrutinyof the records of the assessee as per the audit plan. The auditor is required tocompare the documentation of a fact from different documents. For example, theauditor may check the figures of clearance of finished goods showed by theassessee in central excise return with the sales figures of the said goods in BalanceSheet, Sales Tax Returns, Bank statements etc. The auditor may also enquire aboutthe entries which appear vague (say an entry like Misc. Income) in various recordsand documents. The idea behind conduct of verification is to reasonably ensure thatno amount, which as per the Central Excise law is chargeable to duty, escapestaxation. The process of verification is always carried out in presence of the assesseeso 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 ofCentral excise procedures, he is required to discuss the issue with the assessee. Afterexplanation provided by the assessee, if the auditor is satisfied that such non-taxcompliance has occurred, he records the same as an Audit Objection or Audit Para ofthe 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 donot have bearing upon the duty payment. In such cases the auditor is required to discussthe 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 shortpaid by the assessee at the spot and incorporate it in the para itself. However, if this is notpossible for the paucity of time or for the want of some information not available at thattime, 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 AuditReport which incorporates all the audit objections/audit paras. An audit reportprovides (issue or para wise) the issue in brief, the reply or the explanation of theassessee, the reason for the auditor not being satisfied with the reply, the amount ofshort payment (if tabulated) and the recoveries of the same (if could be made atthe 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 suchreview, the audit report becomes final and in cases where the disputed amountshave not already been paid by the assessee at the spot, demand notices are issuedby the department for their recoveries.
4. Conclusion4.1 EA 2000 is a modern, transparent and interactive method of audit whereinthe 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 particularmatter so that matters are resolved in full appreciation of legal position. EA 2000 isthus a participative audit.
4.2 A requirement of EA 2000 is that the auditors must be thorough in theirknowledge of Central Excise law and procedures, notifications, instructions andcirculars issued by the Finance Ministry and the judicial decisions on issues relating tocentral excise laws. To be successful auditor, knowledge about financialbookkeeping, accountancy and proficiency in understanding commonly usedcommercial books and documents is of great help. Further, being computer literateis an added requirement while auditing an assessee who maintains his accounts inelectronic format.
Presented by eximkey.com