1.11 Query
Audit u/s 44AB where books of account and vouchers have been seized by income-tax authorities.
1.A partnership firm (manufacturing unit), is having calendar year as its accounting year. On 20th September, 1987, the books of account and the relevant vouchers were seized by the Income-tax Department during a search and seizure conducted by them. An application for the release of books u/s 132 (8) of the Income-tax Act, 1961, was moved but the concerned authority refused to release the books u/s 132(9). The assessee was allowed to take photo-copies of the relevant books and vouchers which were not certified to be true copies by the Income-tax Department. The accounts of the firm are required to be audited u/s 44AB and the Return of Income was required to be submitted by 30th June, 1988.
2.The Expert Advisory Committee has been requested to give its opinion whether the auditors can carry out the audit and submit their report u/s 44AB, in the above mentioned circumstances, on the basis of photo-copies of the relevant account books and vouchers.
Opinion March 27, 1989
1.The Committee notes that in the conduct of an audit, obtaining audit evidence through examination of records and documents is of crucial importance. The auditor therefore strives to obtain such evidence which is appropriate in terms of its relevance and reliability. In this regard, the Committee notes that para 12 of the Statement on Standard Auditing Practices (SAP) 5 on ‘Audit Evidence’, issued by the Institute of Chartered Accountants of India, states as below:
“Inspection consists of examining records, documents, or tangible assets. Inspection of records and documents provides evidence of varying degrees of reliability depending on their nature and source and the effectiveness of internal controls over their processing. Four major categories of documentary evidence, which provide different degrees of reliability to the auditor, are:
-documentary evidence originating from and held by third parties;
-documentary evidence originating from third parties and held by the entity;
- documentary evidence originating from the entity and held by third parties; and
-documentary evidence originating from and held by the entity.”
2.The Committee notes that in the present query, only photo-copies of all types of above documentary evidence are available to the auditor. Moreover, these are not attested to be true copies of the original documents by an authoritative third party. At best, these can be so certified by the partners of the firm. In this situation, the degree of reliance which can be placed by the auditor on such audit evidence would be considerably less. Though, through other audit procedures, e.g., confirmation of balances from third parties, inspection of tangible assets, observation of various processes or procedures being performed by the client’s personnel, e.g., counting of inventory items, analytical review procedures, making inquiries form personnel within the entity and outside it, compliance procedures with regard to internal control, etc., an auditor can gather some evidence which corroborates or refutes the documentary evidence available, yet the absence of original vouchers greatly reduces the quality of the evidence available to the auditor. The auditor should, therefore, clearly state in his report, the fact that the original vouchers and books of account were not available and that he has merely audited photo-copies of books of account and has examined the photo-copies of various vouchers authenticated by the partners. Subject to this clear qualification, the Committee is of the opinion, he can carry out the tax audit as discussed herein and give his opinion on the financial statements of the entity as well as in respect of the particulars disclosed in the relevant Form. |