Audit under GST in detail

Audit under GST in detail

Audit under GST in detail

The GST regime continues to promote the scheme of self-assessment like erstwhile indirect tax laws and Audit of records of tax payers is the basis for the proper functioning of self-assessment based tax system. The GST regime continues to promote the scheme of self-assessment like erstwhile indirect tax laws and Audit of records of tax payers is the basis for the proper functioning of self-assessment based tax system.

As per section 2(13) of CGST Act, 2017. GST Audit means examination of records, returns and documents maintained and furnished by registered person to check the following:-

  • Verify the correctness of turnover declared.
  • Input tax credit availed and utilized.
  • Exemptions and deductions claimed.
  • Rate of tax applied in respect of supply of goods or services etc.

The following three types of GST audit are envisaged under the GST Law:-

  1. GST  Audit u/s 35(5) of Act, if turnover exceeds prescribed limit (i.e  Rs. 2 Crore)
  2. GST Audit by tax authorities u/s 65.
  3. Special GST audit direction from department u/s 66.

Types of Audit in GST Law

1) GST Audit u/s 35(5)
As per section 35(5) with rule 80, in case registered person whose aggregate turnover during the financial year exceeds Rs. 2 crore, he shall get his accounts audited by Chartered Accountant or Cost Accountant.

Here the term used is aggregate turnover and not turnover in state. Aggregate turnover is computed on all India basis having same PAN. Therefore, if a registered person is liable to gets his accounts audited under section 35, then all the registration obtained under same PAN will also be liable to GST audit.

For example, if a company XYZ Ltd has operations in two states Haryana and Rajasthan, and turnover in Haryana is 3.75 crore and in Rajasthan is 25 lakh, then GST audit to be conducted for both the states. GST Audit under this section to be conducted GSTIN wise.The registered person whose accounts are to be audited, he shall submit audited accounts along with his annual return in Form GSTR-9C and a reconciliation statement reconciling turnover in audited financial statement and return furnished for financial year.

2) GST Audit by u/s 65
It is important tool in tax administration to ensure compliance of law and prevent revenue leakage. This section authorizes conduct of GST audit by commissioner or any officer authorized by him of transactions of registered person only. It means GST audit of unregistered person cannot be carried out under this section even if he is liable to register. The commissioner may issue general or specific order to authorize officers to conduct GST audit.
Before commencement of audit, proper officer will issue a notice in form ADT-01 at least 15 days prior to commencement of audit. The audit may be conducted at place of business of registered person or in the office of proper officer. During audit, officer will ensure correctness of turnover declared, input tax credit availed and utilized, deductions and exemptions claimed etc. The GST audit under this section be completed within 3 months (subject to extension by commissioner) from commencement of audit. On completion of audit, officer will inform the discrepancy noticed with registered person and after considering reply of registered person, his findings to be finalize.
The proper officer will inform the final findings of his audit to the registered person in form ADT-02.The finding under GST audit may be used by proper officer to initiate action u/s 73 or 74.

3) Special GST audit direction by department u/s 66
Special GST audit direction under this section is issued to registered person only when any proceeding (being scrutiny, enquiry, investigation or any other proceeding) is pending before him and having regard to nature and complexity of case and interest of revenue , he is of opinion that

  • Value has not been correctly declared    OR
  • Credit availed is not within normal limits

In such a case, proper officer with prior approval of commissioner, issue direction to registered person in form ADT-03 to get his records including accounts audited by Chartered Accountant or cost Accountant as nominated by commissioner (Auditor is not choosed by registered person).

The audit direction under this section may be issued even if accounts/records of such person is already audited under this act or any other act.

On completion of audit, Auditors will submit his report to proper officer within 90 days (subject to extension) and registered person will be informed of finding in form ADT-04. Opportunity of being heard is given to person, if officer intends to use material gathered during GST audit in any proceeding.

The proper officer may initiate proceeding u/s 73 or 74 on the basis of finding of special GST audit.

The content of the articles is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Forensic Audit – A Modern Day Thrust and Thirst

Forensic Audit

Forensic Audit – A Modern Day Thrust and Thirst


In the recent past, more so in the previous decade, accounting and auditing community witnessed and in fact, confronted and gone through scandals emanating from fraudulent and manipulative devious and dubious accounts. These shames outraged not only the auditing community but the public at large.

What is noticed in all these cases is the methods deployed are tailored to suit the deceitful purpose of manipulations in financial statements. Enron episodes and other companies’ incidences made the accounting and audit community to sit erect and ponder over a stratagem to come out of that rut—the result is the birth of forensic accounting.

Part played by CARO

Companies (Auditors’ Report) Order, 2003 was also an attempt to target specific areas to plug the loopholes so as to arrest the untoward in the horizon. CARO clauses call for straight answers to the queries depicting the correct positions prevailing in the setup for the period under audit.

One of the clauses requires auditors to report, amongst other things, “whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the amount involved are to be indicated”.

The CARO 2016 in clause 3 (x) has further enlarged the scope of the clause to spell out and extract as to “whether any fraud by the company or officers or employees has been noticed the nature and the amount involved is any fraud on the Company by its or reported during the year; If yes, to be indicated”.

Nonetheless, even in the present avatar of CARO, auditors’ responsibility is limited to report under this clause when these frauds are noticed during audit, either in internal reporting of the management or otherwise.

Auditors added Responsibility under the provisions of the Companies Act 2013:

The responsibility of the auditors has been well enlarged as clearly spelt out in Section 143, especially with reference to Internal Financial Controls– “Whether the company has adequate internal financial controls in place and operating effectiveness of such controls?”(143(3)(i) of the Act).

Thanks to this heightened responsibility in the main audit report, CARO, 2016 has dispensed with the clause on Financial controls in three vital areas, that is, for the purchase of inventory and fixed assets and for the sale of goods? Whether there is a continuing failure to correct major weaknesses in internal control”.

The responsibility of an auditor(s) is to express an opinion on the financial statements based on his or their audit after taking into account the provisions of the Companies Act, 2013 (the Act) and the Rules made there under and also the provisions of other applicable Acts, the accounting and auditing standards (Refer Section 143(10) of the Act) and matters which are necessary .

Those Standards require that the auditors comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. SA 240 on THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS.

In other words, an audit involves performing procedures to obtain audit evidence about the amounts and the disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.

In making those risk assessments, the auditor considers internal financial control relevant to the Company’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of the accounting estimates made by the Company’s Directors, as well as evaluating the overall presentation of the financial statements

As per Section 143(12) if the auditors of a company have reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.

In other words, the audit report gives an opinion as to the best of their information and according to the explanations given to them, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as on a date .

From this it is clear, a financial statement audit does not scrutinize or investigate every transaction or look for fraud particularly. While a properly planned financial statement audit may uncover fraud, the focus is not on uncovering likely fraudulent acts.

Forensic Audit

Forensic Audit, on the other hand, is a different ball game altogether. No doubt, forensic auditors start on the basis of audited accounts and the auditors’ Report. But, their ball game is different based on the specific domain.

In cricket, the ball that is hit over the ground beyond the boundary line is “six’ that is ‘sexy’ for the audience. If it is hit through the ground to periphery, it is four that never bores. But, in tennis it is out, whence it crosses border. But, in football, if it crosses into the goal space, it is a ‘goal’ for any player in the team to esteem.

What does it covey? As different rules are played out in different games for assessing the boundaries, different procedures have to be deployed for different forensic assignments as they warrant. Why?

Each forensic project is unique by itself and calls for different approach to unravel the mystery behind.

Therefore, a standard approach cannot decipher the issue on hand. How to go about is ingenuity – an initiative that tries to unknot the unknown hidden.

Consequently, the forensic/accountants and auditors may have to necessarily develop an audit program for the specific objective of the individual engagement with necessary backup of Legal team including criminal lawyer &police without sticks so as to testify as an expert in a court of law.

“Accountants look at the numbers. Forensic accountants look behind the numbers” Therefore, it will be appreciated it is more of investigative work of talking with involved officials for extracting the correct position that may involve cross examinations with the each other as a valve to decipher the issue on hand.

More extensive corroboration:

Naturally, keeping the above back drop, it may call for working with a legal team, under distinctive and instinctive assumption that he or she will have to testify as an expert in a court proceeding.

The qualifications and expertise of the engagement team is paramount as the documents created during the forensic audit may be needed in civil and criminal proceedings, by law enforcement, government agencies, or confidential investigations. Therefore, besides performing all that are required of financial statement auditors, a forensic accountant will often require more extensive corroboration, since it demands of expertise with practical tinge that focus on a dedicated line of attack designed to spot out financial fraud.

Skills expected:

Forensic accountants/fraud auditors are generally accountants or auditors who by virtue of their aptitudes and attitudes, talents and abilities, skills and dexterities, knowledge and practical experience are bona fide authentic experts and specialists in sensing and detecting frauds in accounting and financial transactions so as to document fraud losses for criminal and civil purposes.

They should have developed the art of interviewing third party witnesses so as to testify as an expert witness. “Investigative mentality” and “professional scepticism” is the core and chore of forensic audit. A forensic accountant may have to focus more on seemingly immaterial transactions to look for indications of fraud that are not subject to the scope of a financial statement audit.

  1. Theft and Squandering of money:

It relates to any fraud by the company (management) or officers or employees of the company. Under CARO, it is whence noticed. But, under forensic audit, it is to be examined in detail, in deep and mostly through well-defined investigative process. Auditors may have to give goodbye to ‘sample checks’ in forensic audit but should be in ‘ample ‘as warranted by the situation and projects under investigation.

2. Manipulation of Accounts and Financial Statements:

Fraudulent financial reporting means deliberate misstatements so as to trick others by unfair means to unjust gains. This is normally attempted where management is ostensibly under pressure, to achieve a target that is seemingly unrealistic, where consequences of failure are significant.

More often than not, it is attempted to maintain or increase the earning trends to float well in the share market especially in a year when it is going for public subscription.

Accounts are also at times scripted to take some tax advantage. This can be attempted through various dubious means- by intentional falsification or alteration of records; by applying wrong estimates with intent to window dress; calculated omission in financial stamens and on the top misapplication of the principles of accounts as to recognition, measurement, presentation and disclosure requirements of various mandated standards.

3. Non-compliance of Statutory and other regulatory Requirements:

The world has been reduced to a global village. What is happening right in the morning in Japan affects the rest of the world as time zone advances!

Today, shareholders and other stakeholders are spread across the globe. When there is cold in America, we sneeze it here. As a result, laws and regulatory requirements are periodically updated to suit the dictates of times.

There are various international agreements that warrant compliances from the signatory countries. Accounting and auditing standards are becoming monolithic so as to understand in the same wave length.

Therefore, very often, it is possible, different agencies may call for compliance certificate that may warrant forensic audit in specific circumstances where investigation is sine quo non.

The court, various tax departments and various regulatory authorities may also ask for and rely for substantive evidence.

4. Computer Forensics –

Assisting and helping in electronic data recovery and enforcement of IP rights etc. This may call for specialist service with high computer background.

5. Others:

Besides, forensic may cover and include within its scope conducting due-diligence that is also unique for ease assignment; Business valuation; specific management auditing; and Evaluating loss before settling insurance claims.
These may further include plethora of cases like calculating and quantifying losses and economic damages,

whether suffered through wrongdoing or breach of contract; disagreements relating to company acquisitions, breaches of warranties and what not. These may be engagements relating to civil disputes/settlements.


Though forensic auditors start their assignments on the basis of audited accounts and the auditors’ Report as pointed out earlier, each forensic project is unique by itself and calls for different approach to unravel the unknown behind.

Therefore, a standard approach cannot decipher the issue on hand. How to go about is already dealt with earlier in the article. When the size of business has enlarged by leaps and bounds over the periods and audit is necessarily to be completed within the appointed time, opinion expressed on audit report is basically to give an opinion as to the best of their information and according to the explanations given to them, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as on a date except where it is qualified .

From this, it is crystal clear, a financial statement audit does not scrutinize or investigate every transaction or look for fraud particularly. While a properly planned financial statement audit may uncover fraud, the focus is not on unearthing fraud that could be a hard nut to crack under statutory audit not only because of the time constrain but also because of the scope of the audit.

Besides, forensic audit demand different skills and wherewithal’s, time and energy to uncover the fraud hidden in the transactions, it is a different ball game altogether as explained earlier copiously.

As on date, there is no articulated Guidance Note nor any dependable check lists for reason that each assignment is unique and distinctive; and as a result, different routes to be used to go to the roots; – as seas can be used for navigation, roads for road traffic, planes by air- again different types of vehicles are used on the same routes depending of the size and level of passengers and quantum, size and quality of the materials.

Therefore, most important in forensic audit is to decide the effective modus- operandi -technique, style procedure, approach, course of action and articulated methodology so as to successfully handle and deliver the correct result of the assignment so as to fix the fraud

The content of the articles is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Section 29A of Insolvency and Bankruptcy 2016: Harsh on Promoters?

Section 29A of Insolvency and Bankruptcy 2016

Section 29A of Insolvency and Bankruptcy 2016

The Government amended Insolvency and Bankruptcy Code, 2016 (IBC) by promulgating an ordinance which brought sweeping changes to both substantive as well as procedural aspects relating to the insolvency process.

Changes were introduced by way of ordinance dated 23rd November 2017 and later on ratified through Amendment Act, 2018.

Section 29A emanated from the above-mentioned amendment. Sec 29A is a restrictive provision which impedes any person falling into the negative list from submission of a resolution plan.

The rationale of Sec 29A

Before the inception of section 29A, every individual or body corporate could be involved in a bidding process. Even the promoters who were party to fraudulent motives and contributed to the default of the Corporate Debtor were able to regain the control of their company again by bidding in hefty discounts while banks and other financial institutes taking haircuts.

Section 29A was introduced to disqualify those people who had contributed to the downfall of the corporate debtor.

In short, the plan of lawmakers is to end the practice of phoenixing i.e. where the management of a company puts it into resolution or liquidation solely to buy the same business back and set up a new ‘phoenix’ company in the same or similar business, shorn of the debts of the old company.

Ineligible person

A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person –

  • Is an undischarged insolvent;
  • Is a wilful defaulter in accordance with the guidelines of the RBI issued under the Banking Regulation Act, 1949;
  • Has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as a non-performing asset in by the RBI and at least a period of 1 year has elapsed from the date of such classification;
  • Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan;
  • Has been convicted for any offence punishable with imprisonment for 2 years or more;
  • Is disqualified to act as a director under the Companies Act, 2013;
  • Is prohibited by the SEBI from accessing the securities markets;
  • Has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code;
  • Has executed an enforceable guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code;
  • Has been subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or
  • Has a connected person not eligible under clauses (a) to (i).

Acting in Concert

The term ‘Acting in concert’ has not been defined under Code. However, Code provides that words/expressions not defined under the Code shall have the meaning assigned to them under other acts identified under the Code including the SEBI Act, 1992.

Therefore, the definition of person acting in concert (“PAC”) will have to be borrowed from the SEBI (SAST) Regulations, 2011 that defines PAC as persons who have the common objective/purpose of acquisition of shares/ voting rights in/exercising control over a company pursuant to an agreement or understanding, formal or informal, directly or indirectly co-operate for acquisition of shares/voting rights in/ exercise of control of the company.

“Connected person” means –

Any person who is the promoter or in the management or control of the resolution applicant;

Any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or

Holding company, Subsidiary company, Associate company or a related party of a person referred to above

Layers of Ineligibility

An assiduous analysis of Section 29A reveals that the section imposes four layers of ineligibility, as mentioned below-

First layer ineligibility, where the person itself is ineligible;

Second layer ineligibility, i.e. where a “connected person” is ineligible;

Third layer ineligibility, i.e. being a “related party” of connected persons; and

Fourth layer ineligibility, where a person acting jointly/in concert with a person suffering from a first layer/second layer/third layer ineligibility.


The order passed by Judicial Member MK Shrawat, in an order dated June 4, 2018, related to the insolvency case of Wig Associates, –

Comes as a relief for the promoters of big defaulting companies such as Essar Steel, Bhushan Steel and Alok Industries as the existing promoters of the companies get an opportunity to join hands with other financial institutions to bid to buy it back.

It has been clearly stated in the Amendment Act, 2018 that it is to apply from 23.11.2017. Hence, pending cases before this date cannot be governed by section 29A. It is a settled legal principle that old rights are to be governed by old law and new rights by new law.

Exemption for ‘MSMEs’

The Amendment Act, 2018 has made dispensation from the Disqualification Criteria under paragraphs (c) to (h) of Section 29A to ‘micro’, ‘small’ and ‘medium’ enterprises (MSMEs). Therefore, the applicability of section 29A is restricted only to disqualify wilful defaulters from bidding for MSMEs.

Promoter suffering

The Section 29A does not recognise a genuine business failure or an inadvertent corporate action of a limited liability company. Let’s evaluate the following three cases: –

A company takes a loan and then fails to repay it because of genuine financial or economic distress.
Promoters give a personal guarantee to creditors for loans.
An innocuous commercial arrangement without any mala fide intent to defraud creditors could still qualify as a preferential or undervalued transaction under the IBC.

In all three above mentioned arrangements, the promoter can be debarred from the submission of a resolution plan.

Section 29A has excessively enlarged the scope of disqualification to the extent of drastically reducing the prospective resolution applicants on the basis of what could be labelled as generalized criteria for disqualification wherein it does not differentiate between a genuine applicant and one with antecedents.

A similar view was expressed by the National Company Law Tribunal (“NCLT”) in the matter of RBL Bank Ltd v. MBL Infrastructure Ltd wherein it was expressed that it cannot be the intention of the legislature to disqualify the promoters as a class but to rather exclude those class of persons who may affect the credibility of the resolution process given their antecedents.

Addressing promoter’s concern

English law provides a useful template wherein connected parties interested in purchasing assets of an insolvent company has an option to approach the Pre-Pack Pool and disclose details of the deal.

The Pool comprises of experienced business people who conduct independent scrutiny of such deals and opinion on their commercial bona fide. A positive statement gives confidence to the creditors to approve a deal whose bona fide has been independently verified.

A similar concept can be introduced in India where a promoter who is interested to buy back his business during insolvency resolution can place his resolution plan before Committee of Independent Experts. If the committee approves such an arrangement, then the deal could still proceed.

The fact that the promoter’s resolution plan is supported by an independent committee would give greater confidence to a creditors’ committee in considering whether to accept the plan.

Moreover, it shall be unfair to outrightly reject the application even though downfall may be on the account of bona fide and innocuous commercial arrangements.

The content of the articles is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.