Accounts Notes: AUDITING UNDER VAT

Friday, 25 March 2011

AUDITING UNDER VAT

1. VAT is a tax on the value added to the commodity at each stage in production and distribution chain.
2. VAT is an indirect tax on consumption.
3. The total amount of tax, which is to be collected at the final, or retail point of sale, is collected in instalments.
4. Major states who have introduced VAT have generally incorporated audit provisions in their VAT legislation.
5. Section 61(1) of the Maharashtra Value Added Tax (Levy and Amendment) Act, 2005, requires the dealers, having sales or purchases exceeding Rs.40 lacs, to get their accounts audited by a Chartered Accountant.
6. The following steps required to be taken by the auditor while auditing under VAT.
(a) Knowledge of Business : The auditor should refer AAS – 20 ‘Knowledge of the Business’ issued by ICAI. The auditor to obtain preliminary knowledge of the industry and of the nature of ownership, management and operation of the entity to be audited. The knowledge of business is important not only to the auditor but also to his staff engaged in the audit.
(b) Knowledge about the VAT Law and Allied Laws : The auditor and his staff should obtain a detailed knowledge of the State VAT law under which the audit is to be conducted. The auditor should study the VAT law starting from the definition of various terms, the procedure to be adopted.
(c) Ascertaining the Major Accounting Policies Adopted by the Auditor : The auditor should know the major accounting policies based in which, books of accounts have been recorded.
(d) Evaluation of Internal Control : Before determining the extent of audit checks to be applied, i.e. whether to go in-depth or to do only test check, the auditor should ascertain whether there is an internal check system in operation in the entity.
(e) Obtaining the list of all the Accounting Record Maintained by the Auditor: The auditor should obtain a complete list of all the accounting records relating to sales/purchase of goods.

AUDIT PROGRAM
i. The turnover of sales/purchases of goods has been properly determined. The sales turnover arrived at by applying the generally accepted accounting policies may not be the same as required under the VAT law.
ii. The turnover of purchases should be tested to enable the auditor to get the purchases eligible for grant of input tax credit segregated from other purchases.
iii. The auditor is expected to list out the due dates of filing of returns and find out the reasons for delay in filing the returns, if any.
iv. The auditor should apply tests as will enable him to ascertain whether the auditee is eligible for composition.
v. The auditor may also be expected to check the consolidation of the returns filed for all the periods covered in the year under audit.
vi. The auditor should check whether all the transactions relating to sale and purchase are entered in the books of account and have been taken into consideration while filing the returns.

AUDIT REPORT UNDER THE VAT LAW

At the end of the audit the auditor has to arrive at his conclusion on the mattes to be reported in the audit report. The format of the audit report is generally prescribed under the relevant VAT law and the auditor has to fill in all the columns of the audit report that are applicable. His opinion is on the adequacy of accounting records, correctness and completeness and arithmetical consistency of returns filed.