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The term audit usually refers to a financial statement audit. A financial audit is an objective examination and evaluation of the financial statements of an organization to make sure that the financial records are a fair and accurate representation of the transactions they claim to represent.

The audit team reports their findings to shareholders and other internal stakeholders of the company in the form of an audit report. Sometimes, audit reports are submitted to external stakeholders, such as banks, creditors, the public, or the government.

A common misconception is that audits are bad – it’s not true. The process can be time-consuming, but businesses can benefit from audits! They can use audit findings to improve finances and internal controls, expose fraud risks, and help stakeholders make more informed decisions.

The term ‘audit’ refers to a check, review, verification or inspection of a record, transaction, account etc. A tax audit is the process of verification and inspection of the accounts of a taxpayer to confirm their adherence to the provisions of the Income Tax law. A tax audit is an examination of your tax return by an outside agency to verify that income and deductions filed are accurate. The income tax law asks the taxpayers to get the audit of accounts of their business or profession done according to provision of income tax law. This, in turn, ensures that the records reflect the actual income of the taxpayer and that the claims for deductions made are accurate.

An audit is nothing but an official inspection. As per the Income Tax Act of 1961, under section 44AB, specific categories of indiviuals and certain businesses, must have their books of accounts audit. A tax audit is necessary for the people and businesses once you do business over and above a specific amount.

Its core purpose is to ensure that you or your business abides by the tax law put in place by the Income Tax Act of India. Once complete, the tax audit makes it easy for you to file tax return. A tax audit catches any errors or discrepancies early on by looking into your books of accounts and ensure that you're disclosing the information you're supposed to. Also once you carry out a tax audit, it is easy for the tax authorities to go through your income tax returns.

Certain people must have an income tax audit, and as per the law, these are the categories that must participate in a tax audit.

Any business where the total sales, turnover, or receipts exceeds Rs. 1 crore in a year should have a tax audit in India. As a professional, receipts over Rs. 50 lakhs makes you eligible for a tax audit. Here a professional includes the likes of an engineer, architect, interior decorator, legal and medical professional. For the complete list of professionals, you must refer to Rule 6F of the Income Tax Rules 1962.

If you have opted for the persumptive taxation scheme as a professional or business person, and your total sales/turnover is more than Rs. 2 Crores, you must carry out a tax audit. Similiarly, if you find that your profits are lesser than what was determined by the persumptive taxation scheme, you have to carry out a tax audit to confirm this.

If it's stipulated that you are to get a tax audit and you don't, you will have to pay a panelty of 0.5% of turnover/gross receipts, up to Rs. 1.5 lakh. However, as per Section 273B, there are certain situations where not filing your tax audit report or doing so late is allowed. Examples of this are natural calamities, strikes or lock-outs, theft of documents.

Audits performed by outside parties can be extremely helpful in removing any bias in reviewing the state of a company's financials. Financial audits seek to identify if there are any material misstatements in the financial statements. An unqualified, or clean, professional's opinion provides financial statement users with confidence that the financials are both accurate and complete. External audits, therefore, allow stakeholders to make better, more informed decisions related to the company being audited.

External auditors follow a set of standards different from that of the company or organization hiring them to do the work. The biggest difference between an internal and external audit is the concept of independence of the external auditor. When audits are performed by third parties, the resulting auditor's opinion expressed on items being audited (a company's financials, internal controls, or a system) can be candid and honest without it affecting daily work relationships within the company.

Consultant auditors, while not employed internally, use the standards of the company they are auditing as opposed to a separate set of standards. These types of professionals are used when an organization doesn’t have the in-house resources to audit certain parts of their own operations.

The results of the internal audit are used to make managerial changes and improvements to internal controls. The purpose of an internal audit is to ensure compliance with laws and regulations and to help maintain accurate and timely financial reporting and data collection. It also provides a benefit to management by identifying flaws in internal control or financial reporting prior to its review by external auditors.

Financial statement audits involve independent auditors who will report on whether a company’s financial statements align with the applicable financial reporting standards. Professionals are required to accomplish three things:
  1. Identify and assess risks of material misstatement, whether due to fraud or error
  2. Obtain sufficient audit evidence about whether material misstatements exist
  3. Form an opinion on the financial statements or determine that an opinion can’t be formed
These audits are “typically appropriate and often required when seeking high levels of financing or outside investors, or when selling a business.” The report can help other businesses, investors, stakeholders, etc., make informed decisions about the company. Example: If a small business holds a loan or line of credit with a bank, the bank may require the business to undergo a financial statement audit.

Performance audits cover a wide variety of assessments. An entity may request or require a performance audit to evaluate any of the following objectives:
  1. Program effectiveness and results
  2. Internal controls
  3. Compliance with certain requirements
  4. Prospective analysis
Performance audits are beneficial because they can help management and those charged with governance and oversight improve program performance and operations, reduce costs, facilitate decision-making, and contribute to public accountability.

Performance audits are typically associated with government agencies because they receive federal funding and need to show they use the funds appropriately. But non-governmental performance audits are common too!

The professional shall make a report to the members of the company on the accounts and financial statements examined by him. The auditor prepares the report after taking into account the provisions of the Companies Act, the accounting standards and auditing standards. Also, he lays the report before the company in the annual general meeting.

The audit report should be based on the best of his information and knowledge. The auditor shall ensure that accounts and financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year. He shall comply with the auditing standards and sign the auditor’s report of the company. The auditor’s report shall also state the following facts –
  1. Whether he has obtained all the information and explanations which to the best of his knowledge were necessary for the purpose of his audit. If he is unable to collect any information, the details thereof and the effect of such information on the financial statements;
  2. Whether, in his opinion, proper books of account as required by law have been kept by the company. All information which is relevant for the purposes of his audit have been received from branches not visited by him;
  3. Whether the reports of all branches of a company which are audited by a person other than the company’s auditor has been sent to him. He should consider all of these reports while preparing his report;
  4. Whether the company’s balance sheet and profit and loss account dealt with in the report are according to the books of account and returns;
  5. Whether, in his opinion, the financial statements comply with the accounting and auditing standards;
  6. The auditor’s report most contains the observations or comments of the auditors on financial transactions or matters which have an adverse effect on the functioning of the company;
  7. Auditors should ensure, whether any director is disqualified from being appointed as a director.
  8. Any qualification, reservation or adverse remark relating to the maintenance of books of accounts of the company.
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