Part IV

ANNEXURES

ANNEXURE ‘C’
(Please see Chapter 10)
Indicative list of items to be examined in the Trial Balance / Profit and Loss Account / Balance Sheet / Tax Audit Report / Cost Audit Report during Desk Review.
The perusal of the Trial Balance could achieve the following:

• Familiarization with chart of accounts/account code and understand as to what extent the information is detailed and integrated with other subsystems; few sample Journal Vouchers may also be seen to understand the information mentioned therein.
• Understand the grouping of sub accounts under main accounts for the purposes of summarization into Profit and Loss account and the Balance Sheet.
• Identification of accounts, which have a prima facie relevance for excise duty payment (may be direct or indirect). These accounts may have to be seen in detail at later stage of audit depending upon the result of subsequent audit processes;
• Understand the tax accounting system in so far as it pertains to Excise Duty payment and treatment of CENVAT;

The perusal of the Trial Balance/ Profit and Loss Account could help in identifying the following vulnerable areas,-

• (a)  Sales of finished goods & scraps

(b)  Receipt of job-work charges
(c)  Receipt of service charges
(d)  Misc. Income/receipts
(e)  Purchase of plant and machinery and their Spares – imported and indigenous
(f)   Excise duty paid
(g)  CENVAT on purchase of raw materials, fuel and & packing materials.

• CENVAT on purchase of Plant & machinery and their spares
• Freight outward and inward/transit insurance paid and recovered
• Hire charges & lease rent
• Discount on sales
• Opening and closing balances of raw materials, finished goods & work in process
• Payment of royalty or consultancy fee attracting service tax
• Depreciation
• Written off amount

Similarly, the perusal of the Balance Sheet could achieve the following:

• Auditors reports, accounting principles/policy and notes on accounts.
• Fixed Assets – Depreciation & Capital work in process.
• Current liabilities-such as advances from the buyers or related persons.
• Quantity statements – installed capacity, Consumption of raw materials, production, clearances & excise duty payment etc.

Tax Audit Report should be examined to verify and compare the following facts declared by the assessee,

• Raw Material consumption
• Yield of finished goods & generation of scraps
• Accounting of CENVAT credit
• Analysis of financial  ratios
• Auditors notes
• Schedule of Depreciation.
• Reconciliation of excise duty related accounts as shown in financial accounts with that in excise returns

Relevant items can be examined in the Cost Audit Report if the unit taken up for audit is covered by Cost Audit as per Sec 233 (b) of the Indian Companies Act, 1956. The cost audit report inter-alia contains the details of the following, which can be profitably used for verification:

• location of other factories of the assessee.
• particulars of foreign technical collaboration / agreement.
• Royalty/Technical and fee particulars.
• Terms of agreement.
• Licensed installed and utilised  capacities of the factory.
• Study the Cost Accounting Systems and its relevance regarding cost of production of the product and its utility in respect of valuation of goods resorted to based on the cost construction method internally by assessee.
• The particulars about financial position given and the various ratios furnished can be made use of for study of trends.
• The particulars of expenses for three years given/studied by the cost auditor may be analysed for vide variations in figures and unusual, non-recurring items taken for further scrutiny.
• Particulars of commodity-wise production figures furnished may be correlated with figures furnished in Daily Stock Account and in the other records maintained by the unit. Further, the comparison of figures with the installed capacity reasons for shortfall may be gainfully linked up for conduct of trend study. The particulars of addition to production may be studied from Central Excise point of view.
• The particulars of raw material (major item only) consumed, comparison with standard requirement as well as with previous two years and explanation for variation provided in the cost audit report may be profitably used for the study of the input output ratio.; possible suppression and clandestine removal of production angle may be taken up for in depth study.
• Actual consumption of power and fuel per unit of production and its comparison with standards along with reasons for variation may be taken up for linking with production particulars.
• Comments in incentive schemes and its impact on increasing productivity furnished by the cost auditor may be linked up to see its impact in production figures.
• Direct and indirect labour cost allocation; apportionment and absorption may be studied to see its impact on the cost of the product.
• Details of stores and spare parts utilised per unit of output may be studied to ascertain production figures. The system of stores accounting narrated may be gainfully utilised for evaluating internal control in the unit from CENVAT point of view.
• The method of depreciation adopted and its implication with reference to CENVAT on capital goods can be correlated. Further, to ascertain the cost of production, the apportionment of depreciation may be studied from under valuation point of view.
• Particulars of overhead allocation, apportionment and absorption may be correlated to the cost of production declared by the units in respect of inter unit transfer, job work cost, etc.
• Reasons for major variation in expenditure may also be studied and its implication may be seen from Central Excise point of view.
• Particulars of sales / clearances effected, exports made, details may be correlated with the private records of the assessee and clearances declared to the department.
• Particulars of abnormal, non-recurring costs commented upon and its implication from Excise point of view may be studied.
Auditors’ observations and conclusions about the units working with specific reference to certain aspects of its working may be studied keenly to see its impact from Central Excise revenue point of view.