In a common parlance the audit procedure of a Company and an Individual is same. But there are lots of other factors that needs to be considered while doing the same. What basically is the difference is that a Company is govern though different Statutory and Legal obligations and powers. Whereas for an Individual/ Proprioters only some of the statutory compliance are applicable, so the duties and obligations are not a big deal in this case. So what basically needs to be check during the audit of an individual are some how similar to the Statutory Audit of a Company. But, there are lots of exemptions to an individuals while complying a Audit.
Check List for an Audit of an Individual
- Receipt of Income Sources
- Cash Vouchers
- Journal Vouchers
- Bank Statement File with
- Payment Vouchers (if any)
- Cheque Book counterfoils (if any)
- Receipts File(if any)
- Mutual Fund
- Shares & Debentures
- Land Property
- Jewelry or any other ornaments
- Any other Investments
- Insurance Policy Taken (if any)
- Drawing File
- Creditor/ Debtors Frequency period i.e. Debtors/ Creditors Ageing Period
- Fixed Assets Purchased during the period, others valuation as per market is also required
- Deposits in Bank or any other Financial Institutions
- Any Gift Taken or given should be scrutinized properly
- Loans/ Advances Taken from Any Financial Institutions for any respective purpose
- Credit Card Bills/ Statements
- Foreign Exchange / Foreign Trip bills (if any)
- Net Worth Calculation
- 80IA Certificate
- Computation of Income Tax
- Computation Service Tax (if any)
- Computation of Wealth Tax
Huddles during the Audit
Many complications will come side by side when one will started audit of the individuals as:
- Clients, itself are the personnel who decides whether he have to show all the incomes that he have generated. Unless, he revels the truth we can’t judge the taxable amount and so can’t do the audit in an independent way.
- Many files and bills regarding Drawings, which the client have done for the sake of entertainment are not found and are escaped during the audit.
- Proper Documentations are not found.
- Mostly the Bills & Vouchers are missing and complications increases.
Finalization of Accounts
At the finalization steps what are the major things that must be kept is really a big deal. So, I am just pointing out some of those issues which I felt while I was experiencing some of those:
- All the personal expenses and indirect income should be capitalized i.e. should be transferred to Capital Account.
- If there is a huge Net profit then for the Finalization of Tax amount it must be reviewed again.
- There should not be a huge cash balance and any cash negative during the year should be reviewed after the adjustment of accounts.
- Cash Drawings must be there so that it will show that income has not only deposited in bank and the personal expense has been incurred through cash & bank.
- After the vouching is done, the major issue is to clear the doubts, and there’s a place where I faced a lots of problem. As there stands lots of Suspense Accounts. And even the client himself doesn’t remember the actual incidence. So, what I just do is that I move those transactions to a separate ledgers i.e. Miscellaneous Income/Expense for small amount and for higher amount I just tried to force the client to allow me to check his some personal documents so that any reference could be gathered.
- Along with that I also faced some problems regarding the documentation of the queries that you have generated through out your audit, the bills of fixed assets, advance tax paid challans, Form-16 given by parties, any new Investments done this year, all those documents which are admissible to claim deduction under the head 80- IV of Income Tax Act-1961, any other documents which you seems fruitful to you for your future evidence.
- The discuss queries should be remarked properly, as the final pending points should be no longer pending anymore.
- After the discussion, the accounts balance should be check once more so that the expenses are shown in proper head or not.
- It should be observed that the expenses done / recorded shall only be those expense which are done for his personal interest or related to him. If the person has made a huge expense in behalf of his family members then if they have their income, then they have to pay a huge amount of tax. So for this sake the expense should be shown separately.
Finalization of Tax Amount
Now, when the audit is completed there is a matter of finalization of tax provisions and wealth tax provisions. So, as far as my experience is concern while finalizes the accounts & report a huge matter attract to it. Its about the Tax Amount, how much tax is to be paid, how much income to be shown, how can we decrease our Net Profit are some of the FAQ in the clients mind. So, when this situation comes then none of the workings will be applicable, rather you have to change the mindset about the tax liability.
What actually affects is that no person wants to pay the income tax at a par of his Income amount. Everyone wants a loop hole and any evasion techniques that could makes their Taxable Income lesser to the actual amount.
So, its just like the reverse calculation as : In actual figures- first the taxable income is calculated then the tax amount will get generated but when they saw that the income tax is of increasing they just command us to do the reverse calculation as first decides the tax amount and then generates the taxable income and so the Income is decided.
This technique is ethically wrong in every aspects but this is a matter of fact that almost 80-90% does the same technique. So, it makes me think a lot that what shall be done either : I reduce this problem or just find some more ways to reduce the tax amount.
File Income Tax Return
After the finalization of Tax amount now its time to inform the same to the Government i.e. to File the Income Tax Return. Its not a big deal as it must be accustomed to every individual with separate type of ITR Form. Basically, ITR-1, ITR-2 and ITR-4 are filed for an individuals as per their income Source. It should be filed till 31st July of the relevant Assessment Year.
File Tax Audit Report
As per the provision of Income Tax Act- 1961, every individual has to file Form 3CD/CB (if professional receipts is exceeding Rs. 25 Lacs and business receipts is exceeding 1 crore). So, a tax audit is compulsory and should be filed within 30th september of the relevant year.
Preparation of Balance Sheet/ Statement of Affairs
Steps for preparation of Balance Sheet & Tax Audit
Ensure that all document as per list has been collected and procedure for checking the audit have been completed. Then start the following procedure to complete the Balance Sheet and Tax Audit report:
- Collect the final Trial Balance
- Check Corresponding Previous Year figures incorporated in current year balance sheet.
- Link of Trial Balance with schedule
- Prepare the list of Sundry Debtor, Sundry Creditors, Creditor Against Expenses, Advances, Secured & Unsecured Loans and other liabilities
- Prepare the list of Group Expenses.
- Computation of Income Tax.
- Preparation of filing Return to ROC (Annual Return, Balance Sheet & Profit & Loss A/c and compliance certificates)
At last, the report must be signed by a Chartered Accountant and duly by the person whose accounts is maintained.
Thank you, Happy reading.