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TAX AUDIT FRAMEWORK Tax Audit Framework  TABLE OF CONTENTS Page No. 1) Introduction 3 2) Tax Audit Concept 5 3) Statement of Additional Information 9 4) Contents of Engagement Letter for Audit under Section 177(8) 12 of the Income Tax Ordinance, 2001, Section 32A of the Sales Tax Act 1990 and Section 46(4) of Federal Excise Act 2005 5) Audit Report 17 6) The Process of Tax Audit 20 7) Exclusions/ Exceptions 23 8) Fees 25 9) Procedures for Tax Audit 27 10) Selection of Auditors and Auditees for Tax Audit 30 11) Annexures A – Independence Declaration by Tax Auditor 34 B - Engagement Letter 35 C - Auditors’ Report to the Commissioner of Income Tax 39 D - Auditors’ Report to the Collector of Sales Tax 40 Model statements of additional information for: E Manufacturing 41 F - Services 59 G Banking 75 H- Oil & Gas Exploration 91 I - Insurance 110 J- Sales Tax & Federal Excise 124 1  Tax Audit Framework TAX AUDIT –DEFINITIONS AND ABBREVIATIONS TAX AUDIT Audit of Tax Statements TAXPAYER Assessee who is required to get his Tax Statements audited by Tax Auditor under Tax Audit Framework TAX LAWS Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise Act 2005 TAX AUDIT REPORT ...

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TAX AUDIT
FRAMEWORK









Tax Audit Framework 
TABLE OF CONTENTS
Page No.
1) Introduction 3
2) Tax Audit Concept 5
3) Statement of Additional Information 9
4) Contents of Engagement Letter for Audit under Section 177(8) 12
of the Income Tax Ordinance, 2001, Section 32A of the Sales
Tax Act 1990 and Section 46(4) of Federal Excise Act 2005
5) Audit Report 17
6) The Process of Tax Audit 20
7) Exclusions/ Exceptions 23
8) Fees 25
9) Procedures for Tax Audit 27
10) Selection of Auditors and Auditees for Tax Audit 30
11) Annexures
A – Independence Declaration by Tax Auditor 34
B - Engagement Letter 35
C - Auditors’ Report to the Commissioner of Income Tax 39
D - Auditors’ Report to the Collector of Sales Tax 40
Model statements of additional information for:
E Manufacturing 41
F - Services 59
G Banking 75
H- Oil & Gas Exploration 91
I - Insurance 110
J- Sales Tax & Federal Excise 124





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 Tax Audit Framework 
TAX AUDIT –DEFINITIONS AND ABBREVIATIONS

TAX AUDIT Audit of Tax Statements

TAXPAYER Assessee who is required to get his Tax Statements audited by Tax
Auditor under Tax Audit Framework

TAX LAWS Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise
Act 2005

TAX AUDIT REPORT Audit Report issued by the Tax Auditor

TAX AUDITOR Firm of Chartered Accountants

TAX STATEMENTS Statement of Additional Information and Tax Returns

TAX RETURNS Income Tax Return and Sales Tax cum Excise Duty Return (in the
Form prescribed under the respective Tax Laws).

STATEMENT OF ADDITIONAL Statement required to be provided by the Taxpayer under the Tax
INFORMATION Audit Framework to the Tax Auditor.

MANAGEMENT Refers to the representatives of Taxpayer having executive authority
for the preparation of Tax Statements

ISAs International Standards on Auditing ( issued by International
Federation of Accountants)

FBR Federal Board of Revenue

ICAP Institute of Chartered Accountants of Pakistan (the Institute)

TAX AUDIT FRAMEWORK Framework notified by FBR vide SRO …… dated …….for the purpose
of tax audit.







 



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1. INTRODUCTION

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 Tax Audit Framework 
1. INTRODUCTION
1. FBR’s main objective of outsourcing the Tax audit through Chartered Accountants is to establish an
objective and effective tax audit system that will create deterrence to mis-declarations in the tax
returns filed by the tax payers. Such a system is expected to contribute in developing a culture of
compliance with tax laws over time that will help in improving the tax collections as well as improve
the tax to GDP ratio.

2. Under the current provisions of the tax laws (Income Tax Ordinance, 2001, Sales Tax Act, 1990 and
Federal Excise Act 2005), there is a system of self assessment that enables the tax payer to
determine his own tax liability. Under this system, there is major reliance on the tax payer to file
accurate and reliable tax return. The purpose of tax audit is to ensure that declarations made by the
tax payers are accurate and reliable. Main objective of the tax audit is to create deterrence for under
or incorrect declarations of income by the tax payers. In order to ensure tax payer’s confidence on
this system, the selection of tax payers to be audited will be done on a random basis, using an
appropriate system, that ensure objectivity in the selection process. Such a process will also be
adequately publicized and communicated to the tax payers.

3. In Pakistan, the audit of the financial statements is carried out in accordance with the International
Standards on Auditing (ISAs). Although the tax audit is not required to be conducted in accordance
with the ISAs, the auditor would be expected to consider the guidance and requirements contained in
ISAs as a best practice, wherever appropriate. Additionally, the audit should identify the risks of
material misstatements in the tax statements and the underlying financial statements, based on the
input from relevant tax officers, so as to focus his work on such areas.
4. The underlying considerations on the basis of which the concepts and guidance contained in this
framework have been developed include: (i) practices prevalent in other comparative jurisdictions (ii)
specific requirements of the fiscal statutes; and (iii) current practices adopted by the tax authorities for
tax audit. However, it is emphasized that an effective system of tax audit will evolve over time, and
the concepts and practices underlying such audit, will require suitable amendments based on the
experience gained in the conduct of the audit by Chartered Accountant firms.











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2. TAX AUDIT CONCEPTS

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 Tax Audit Framework 
2. TAX AUDIT CONCEPTS
A tax payer files return of income tax annually and an annual sales tax cum federal excise duty
return (which is a consolidation of monthly returns) with the FBR. The following are the concepts
for carrying out the tax audit under this Framework:
a. The audit of tax statements is aimed at providing credible information in the hands of the
assessing officers. The auditors unqualified tax audit report will provide a reasonable
assurance to the tax authorities that the tax statements do not contain any material
misstatement, and therefore, such statements form a valid basis for determination and
payment of relevant taxes by tax payer without any need for modification by the tax
authorities.


b. There will be a set of three documents subject to tax audit namely, the income tax return,
monthly sales tax cum federal excise duty return and statement of additional information
(collectively referred to as tax statements)

c. The statement of additional information to be prepared and submitted by the taxpayer will
include all the information deemed necessary for the purposes of tax audit. This statement
also helps the auditor to perform his audit procedures necessary to check information in the
tax returns filed by the tax payer.

d. Such statement of additional information shall include, but not be limited to, the accounting
policies, break down of the information on different components of the financial statements,
trend and ratio analysis, explanations regarding any significant variations compared to
corresponding figures, information and explanations on any unusual and significant
transactions, information on related parties and transactions, reconciliation between the
financial statements and tax returns and any further information deemed necessary by the tax
auditor.

e. Such statement of additional information would serve to create a bridge between the
accounting income and the taxable income. It will also bridge between production and sales
as reported in accounts and tax returns. Since the statement of additional information would
be audited, a reasonable assurance regarding the fairness of the taxable income would be
obtained.

f. The auditor would give his opinion on the information required to arrive at the taxable income
and sales tax and federal excise duty payable by issuing a signed report thereon. The report
shall explicitly state:

a. whether or not the income tax return and sales tax cum federal excise duty returns are in
agreement with the details provided in the statement of additional information;
b. whether or not the statement of additional information contains information as required by
the Tax Audit Framework applicable to the taxpayer; and
c. whether or not the information contained in the statement of additional information is fairly
stated in all material respects.
g. The tax audit report shall be addressed to the Commissioner of Income tax or Collector of
Sales tax, as the case may be.

h. The auditor’s responsibility shall be to issue a report on the tax statements based on the
results of audit procedures performed by him and using his professional judgment. The
responsibility of final assessment of income and tax payable remains with the relevant tax
officials of the FBR.

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 Tax Audit Framework 
i. The relevant officer of tax department shall issue the order either accepting or altering the tax
return submitted by the taxpayer and, the tax auditor, in no way, shall be responsible for the
content of the order issued except to the extent of the audit report issued by him.

j. Any matter of contention regarding taxability or non-taxability of a particular item shall be
contestable in various legal arenas between the taxpayer and the tax department in the same
manner as laid down in Income Tax Ordinance 2001, Sales Tax Act 1990 and Federal Excise
Act 2005.

k. To ensure independence of the tax auditor, the statutory auditor or tax advisor of a company
shall not be appointed as Tax Auditor of that particular company. The decision of selection of
auditor will lie with the FBR having regard to particular circumstances of each case. For this
purpose, the auditor will give declaration before his appointment, format of which has been
specified in Annexure B.

l. The firm of Chartered Accountants who is offered an engagement by FBR to carry out the tax
audit will perform appropriate checks to ensure independence of the firm with regard to the
tax payer, before providing their consent. The procedures performed to check independence
and possible conflict of interests will be appropriately documented.

m. The FBR shall issue an engagement letter to the tax auditor and the taxpayer setting out the
nature, scope and timing of the tax audit engagement.

n. The form of report shall be in the prescribed format attached as Annexure C and/or
Annexue D, as the case may be. The tax statements in the prescribed form prepared by the
tax payer and covered by the audit report shall be annexed to the same.

o. The tax auditor may be appointed at any time after the filing of tax returns.

p. The FBR shall have the sole discretion for selecting the companies for conducting tax audit.
The Institute will provide information available with it relating to the chartered accountant
firms, at the request of the FBR.

q. Statement of additional information shall be prepared and submitted by the tax payer to the
tax auditor, signed by the Chief Executive Officer and Chief Financial Officer of the company.
In the absence of either of them, signed by a director of the company, supporting the return of
income filed. Such statement will effectively provide details relating to the line items in its
balance sheet and profit and loss components.

r. Audit of “Tax Statements” will encompass examination of the return of income, sales tax cum
federal excise duty return and statement of additional information with the audited financial
statement, books of account, related records and documents by performing such audit
procedures as considered appropriate under the circumstances by the tax auditor in
accordance with the Tax Audit Framework. Management of a tax payer is responsible for the
preparation and fair presentation of these “Tax Statements” in accordance with the
requirements of Income Tax Ordinance 2001, Sales Tax Act 1990 and Federal Excise Act
2005.

s. A pre-audit meeting will be undertaken amongst the tax auditor, the taxpayer and the
concerned tax officials, preferably Commissioner of Income Tax / Collector of Sales Tax &
Federal Excise, for the purpose of risk evaluation based on past year(s) records, in order to
finalize the ‘Statement of Additional Information’ to be audited.


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t. A tax auditor appointed under this framework will not express an opinion on the amendments
emanating from difference of opinion between the tax department and taxpayer on the tax
treatment for any item as disclosed in the return of income. However, the auditor will provide
information relating to facts of the matter to the Commissioner of Income Tax / Collector of
Sales Tax & Federal Excise including a schedule explaining the history of the said matter in
the past year(s).

u. The audit of compliance to the withholding tax provisions (except for the transactions verified
by the tax auditor on test basis), shall be outside the scope of this frame work.

v. Audit of the taxpayer will be carried out at the premises of the taxpayer

w. A tax auditor shall obtain representation letter from the management of the tax payer when
the audit is completed. The date of the management representation shall be as near as
practicable to, but not after the date of the auditor's report. The management representation
shall be for tax audit period(s) referred to in the auditor’s report.

x. For the purpose of guidance following documents have been suggested:


• Independence declaration to be issued by tax auditor

• Engagement letter to be issued by the FBR

• Statement of additional information for taxation prepared by the taxpayer

• Audit report to be issued by the tax auditor














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 Tax Audit Framework 










3. STATEMENT OF ADDITIONAL INFORMATION

9