Audit means examination of books of account for the purpose of providing opinion on true and fairness of fact and records. Audits are of different types, but most commonly used term in private sectors are statutory audit and tax audit. Statutory audit is made mandatory by law namely Company Act, Income Tax Act, specific acts etc. It is conducted independently by the professionals to verify the financial statements with accounting records. The purpose of statutory audit is to ensure credibility, transparency and accountability of financial statement. The statutory auditor expresses opinion on true and fairness of final accounts as well as compliance with relevant laws. However, tax audit has two fold. It is defined as an audit of the accounts of the taxpayer, by a professional auditor to fulfill the requirement of Income Tax Act while filling tax return. The examination of tax return by the tax authority to verify the accurateness of income and deductions is also called tax audit. However, this article focuses on the tax audit conducted by professional auditor.
 
Obligation of the Tax Auditor 

As per Income Tax Act, 2058 and Directives issued by Inland Revenue Department (IRD), the auditor should certified balance sheet, income and expenditure account, cash flow and tax return of the tax payer whose turnover is more than Rs. 10 million from fiscal year 2073/74. It is mentioned in the Directives that the person who certifies the tax return is the tax auditor. Such auditor should be responsible to certify that accounts and records are kept in line with tax law and represent true and fair view of income, expenditure, profit, loss, assets and liability of the tax payer. They should ensure that all formats, checklists, documents and statements required by law have been submitted with tax return. The role of tax auditor as specified in Income Tax Act and Directive is to assure right taxation, whether the audit is carried out by professional auditor.
Currently, Nepal has adopted self- assessment system of tax administration. This system has entrusted crucial responsibility to the professional tax auditor. Therefore, the tax auditors have become an integral part of the tax system working as intermediaries assisting taxpayers to deal with their tax matters.

These auditors can promote the good governance by assessing right taxation on behalf of their client. However, the sole responsibility of submitting tax return remains to the tax payer and tax auditors who are professional responsible to provide tax advice or assess tax liability of the tax payer. The Income Tax Act also states that professional accountant if they provide suggestion or assess tax, which is not in spirit of tax laws that may cause revenue leakage. Such activity must be taken as financial crime. Thus, government has recently introduced provision of penalizing auditor, if they support in evading tax by providing and certifying false documents knowingly. It is also a matter of ethical issue and professional auditors are required to comply with the Code of Ethics issued by Institute of Chartered Accountant of Nepal (ICAN).

It may be argued that fair presentation is the responsibility of tax payer and tax payer obliged to present actual income and expenditure of their business. If tax payers fail to comply with such requirement, penalty might be enforced on them. It is unfair to penalize the tax auditor. However, it is special purpose engagement for auditor required by law to fulfill the obligation of the regulator. Nepal Standards on Auditing also suggests about discharging legislative requirement. In this context, the professional auditors need to consider acceptance and continuance of such engagement considering the ethical requirement, competence, independence and their limitation.

The main focus of the tax auditor has to ensure compliance with statutory provisions regarding computation, calculation, application of correct tax rates, assessment procedure etc. by the taxpayers while determining the tax liability. Similarly, the obligation of tax auditor as an advisor of the tax payer is to certify and submit the following documents with tax return. In addition, if they are not satisfied with the documents submitted or materially misstated, as per Income Tax Act, they should certify by qualifying their dissatisfaction. Some of the key documents that need to be submitted with the tax returns are stated below:

• Financial statements- Balance Sheet, Profit and Loss Account, Cash Flow Statement and other related annexure,
• Statements of purchase, sales, debtor, creditor over than 100 thousand rupee,
• Tax assessment and tax adjustment forms,
• Statements of tax deduction and deposit,
• Amount deposited to retirement fund on behalf of their staff,
• Date-wise assets purchased, disposed statements,
• Calculation of category-wise depreciation base of assets, yearly depreciation and repair and maintenance expenditure,
• Statement of allowable and capitalized interest, research and development expenditure ,
• Tax deducted at source and deposited,
• In case of stock, opening and closing stock with quantity and value indicating valuation,
• Calculation of cost of goods sold,
• Insurance expenses and claim received during the year,
• Statement of receivable, payable written off,
• Contingent liability and change in capital structure,
• Justification of income or expenditure included in income and expenditure account but not in income return,
• Non-taxable income and related expenditure,
• Exchange gain loss statement,
• Detail of import/export including payment through letter of credit,
• In case of industry, details of finished product and byproduct and their cost, raw materials, packing materials, import, local purchase, production, sales, stock of raw materials and finished product, wastage, recovery rate, selling price and valuation of closing stock,
• In case of contractor, contract agreement, cost estimate, contract wise income and expenditure, price variation, work addition deletion, payment certification letter, Ø In case of commission based taxpayer, contract agreement and term of payment, commission rate.

It is worth to note that in course of detail audit of tax returns by Internal Revenue Offices, if the Tax Officers is not satisfied that the returns filed by taxpayers are incomplete, incorrect, etc. then the officer may raise questions and assess additional tax. So the taxpayers and tax consultants need to be very careful in submitting the tax returns.

Considerations for Tax Audit 

Generally, taxpayers submit their tax return with the help of professional auditors. Presently, there are more than 1.2 million taxpayers and professional auditors review all tax returns of those which has turnover more than 10 million. However, tax authority carry out tax audit of less than 2 percent tax returns filed considering the risk factor and volume of transaction. It is apparent that Nepalese tax system completely rely on professional accountant. At present, tax authority assesses substantial amount of additional tax liability to each and every selected tax payer on the ground of true and fairness of statements. Thus, tax related risk in audit profession is increasing day by day in developing countries like Nepal. In the view of this situation, the Professional accountant rendering tax consultancy are required to consider several risk factors, which are given below as some examples.
 

 
Conclusion 

In case of tax audit, the Standards on Auditing suggest that, professionals who are engaged for audit of special purpose financial statements which are prepared in accordance with a financial reporting framework designed to meet the financial information needs of specific users. Those financial reporting provisions are established by regulator that need to be fulfilled by the taxpayers as regulatory requirements specified by Regulation. Practically, IRD is the regulator which has prescribed the required documents to be submitted along with tax return is the special purpose financial statements or requirements. The auditor needs to fulfill requirement of relevant legislation in case of special purpose engagement. Normally, many tax auditors are unaware of such legal requirement. Thus, non-compliance of tax provision is wide spread in Nepal and government is bound to introduce mechanism of penalizing the tax auditor. The significance of tax auditor under self-assessment tax system has increased due to reasons that include rapid expansion of the scope and complexity of tax law, growth in complexity of business operations of economy, increased investment activities of individual taxpayers etc. In this context, the tax auditor should be more responsible in certifying tax return. However, there are several common risk factors relating to not submitting required true and fair documents, submission of incomplete documents, reconciliation of figures relating to different statements, making disclosure, compliance to the provision of tax laws described in earlier section of this article, which required special attention on behalf of professional auditor.

- Mr. Ramu Prasad Dotel, Assistant Auditor General of Office of Auditor General, Nepal

[This article is reproduced from the June 2016, Vol. 18, No. 4 edition of journal published by The Institute of Chartered Accountants of Nepal. The writer can be reached at ramu_dotel@hotmail.com]