Understanding Financial Statement

1. Understanding Financial Statement
Audit Commissionerate I, Delhi I
February 22, 2016
Presented by:
CA Gaurav Gupta
FCA, LLB, DISA
Partner
MGS & Co.

2. • Period of Review
Every audit should invariably cover the retrospective period up to the previous audit by the
Departmental Audit Party or the last 5 years (limited to the commencement of levy on a
particular service) whichever is less and should extend up to the last completed Financial
Year preceding the date of Commencement of audit.
All Company Balance sheet contain figures for two years.
Understanding period
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3. • Focus of review
o Money Measurement Concept
o Cost Concept
o Going Concern Concept
o Accrual / Cash concept
o Consistency
o Disclosure
o Substance over form
Financial Statements
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4. • Account codes with balances
• Classification of assets and Liabilities
• Movement included in summary
• Opening and closing balances
• Detailed codes – understanding of recording of ledgers
• Monthly movement – provides review of pattern of income and expense
• Taxation accounts and their balances
• Debit and credit movements in sales / Services accounts
• Minor heads also displayed
• Discounts
• Bad debts
Trial Balance
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5. • List of all Ledger Accounts wherein entries have taken place.
• List of Ledger Accounts relevant from Service Tax point of view.
• Balance of Service Tax payable / Cenvat Credit
Trial Balance
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6. • Main heads
o Assets
o Liabilities
o Capital
o Subsidiary Books
o Cash Book
o Purchases / Purchase return
o Sales / Sales return
o Bills receivable / payable
o journal
Balance sheet
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7. • Consolidation of Subsidiary financials
• Fixed assets statement – loss of assets / relinquishment
• Revenue from operations
• Cash flow – receipts from debtors
• Major heads to be examined
• Advances / Outstanding debtors
• Unearned incomes / Deferred incomes
• Capital Advances
• Security deposits
• Unpaid creditors
• Detail of other income
Balance sheet
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8. • Reverse charge mechanism- under this mechanism, the recipient of services is liable to
pay service tax (e.g. GTA Services, services received from abroad, etc.). It is to be
ensured that assessee must have paid his liability on such items.
• Reimbursement- unless the concept of pure agent is applicable, reimbursement are
includible in the value of taxable services. Reconciliation should cover all receivables
including reimbursement, sale of goods etc,
• Netting of expenses/ Income- Netting of Income with amount payable should also be
checked as liability of Service Tax does not absolve on netting. The same can be verified
from ledger/ credit notes/ debit notes.
• VAT payment on certain transaction- VAT put in case of certain transaction should be
as to arrive at then taxable value, nature and classification such transaction include-
• Commercial or Industrial Construction Services
• Complex Construction Services
• Works Contract Services
• Annual Maintenance Services
Items requiring special
mention
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9. Major Points for examination
• 3CD
– Point 4 - Indirect tax Liability under various laws
– Point 18 – information about amount of depreciation under Section 32 of the
Income Tax Act, 1961 and that of CENVAT credit availed by the service providers
on capital goods.
– Point 21 – Penalties paid
– Point 26 – Payment under Section 43B
– Point 27 – Details of credit available and carried forward to the next year. Hence,
the Auditor can authenticate the amount of credit carried forward in the service
tax returns with the information provided in terms of this clause.
– Clause 28 - Information regarding prior period incomes and expenses booked in
the year under Tax Audit. The Auditor shall ensure that service tax is paid on
these amount in case they are subject to service tax.
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10. • Applicable Net gain / Loss on foreign transaction
• Bargain agreements
• Free of cost services to group companies and employees
• Corporate Guarantee
• Form 26AS
• Change in ratios
• Form 3CEB – Arms length value with sister concerns
• Any demands under other laws – unearthed revenue
Other important Points
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11. Disclaimer
This presentation has been prepared for internal use of ICAI and its members. The contents of this document are
solely for informational purpose. It does not constitute professional advice or a formal recommendation. The
presentation is made with utmost professional caution but in no manner guarantees the content for use by any
person. It is suggested to go through original statute / notification / circular / pronouncements before relying on the
matter given. The presentation is meant for general guidance and no responsibility for loss arising to any person
acting or refraining from acting as a result of any material contained in this presentation will be accepted by us.
Professional advice recommended to be sought before any action or refrainment.
CA Gaurav Gupta
Partner
MGS & Co.
507 B, D-Mall, Netaji Subhash Palace, Delhi - 110034
+91 11 32962487
+91 11 2735 2487
+91 98110 13940
cagauravmgs@gmail.com
Thank you