Internal and Tax Audit

Internal Audit:

Internal audit refers to an independent service to evaluate an organisation’s internal controls, its corporate practices, processes, and methods. An internal audit helps in securing compliance with the various laws applicable to an organisation. An organisation can prepare its accounts and records as per the applicable legal requirements and reporting.

The purpose of an internal audit is to check the effectiveness and operational standards framed by an organisation. An organisation may have a set of rules for operations, such as placing orders, accepting deliveries, and making payments. An internal audit also helps in knowing whether the employees follow the internal operational standards.

An internal audit helps in identifying problems or inefficiencies and taking necessary corrective steps. Internal audits can identify any frauds by employees, such as embezzlement of funds. The audit can also identify whether there are deliberate cost overruns, whether a particular vendor is getting preference over other low-cost suppliers.

There may be a need to identify employee rotation between different roles and functions. An internal audit can check any potential threats or financial losses. An organisation can plug in financial leakage. The process enables the identification and correction of a lapse in procedures before the statutory audit. An internal audit can be on an annual basis or monthly or quarterly. The choice depends on the need of the organisation. In certain cases, a company should mandatorily appoint an internal auditor, such as under the Companies Act, 2013. There are different types of assessment or analysis techniques an internal auditor may adopt for performing an internal audit. An

internal audit can ensure that an organisation can secure timely compliance with law and regulations. The audit provides a degree of safety and helps manage risk emerging from fraud, abuse of power, or any other scenarios. An internal auditor provides the management with their objective assessment of the processes and accounts. The management can improve their operational and financial performance using the services of an internal auditor.

Tax Audit:

There are various kinds of audit being conducted under different laws such as company audit/ statutory audit conducted under company law provisions, cost audit, stock audit etc. Similarly, income tax law also mandates an audit called 'Tax Audit'[. As the name itself suggests, tax audit is an examination or review of accounts of any business or profession carried out by taxpayers from an income tax viewpoint. It makes the process of income computation for filing of return of income easier.

Tax audit is conducted to achieve the following objectives:

• Ensure proper maintenance and correctness of books of accounts and certification of the same by a tax auditor
• Reporting observations/discrepancies noted by tax auditor after a methodical examination of the books of account
• To report prescribed information such as tax depreciation, compliance of various provisions of income tax law etc.

All these enable tax authorities in verifying the correctness of income tax returns filed by the taxpayer. Calculation and verification of total income claim for deductions etc. also becomes easier.

A taxpayer is required to have a tax audit carried out if the sales, turnover or gross receipts of business exceed Rs 1 crore in the financial year. However, a taxpayer may be required to get their accounts audited in certain other circumstances. We have categorised the various circumstances in the tables mentioned below:

NOTE: The threshold limit of Rs 1 crore for a tax audit is proposed to be increased to Rs 5 crore with effect from AY 2020-21 (FY 2019-20) if the taxpayer’s cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer’s cash payments are limited to 5% of the aggregate payments.