Internal Audit under GST and CGST law

Internal audit under GST refers to the examination of records by a certified accountant for a business/individual registered under GST law.

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Internal Audit under GST and CGST law

Internal audit under GST refers to the examination of records by a certified accountant for a business/individual registered under GST law. Internal audit under CGST (Central Goods and Services Tax) Act, 2017 is the examination of books and records maintained by a GST registered business/individual, to verify their accuracy. This is done by analyzing business turnover, taxes paid, benefits claimed (including input tax credit) as well as analyzing the business’ adherence to GST rules and provisions. Under section 35 of the CGST (Central Goods and Services Tax) Act, 2017 an individual or organization registered under GST with a yearly turnover of Rs. 2 crores or more is required to get their accounts audited.

Internal audit can help enhance business management, by improving leadership, decreasing losses and risks, and obtain insights. Hence, it is important to maintain an efficient internal audit team.

An internal audit is carried out on the decision of the senior management team or the CEO/CFO. It is done to measure the financial efficiency of the business. The company can hire a third party accountant for the purpose of internal audit, or someone from within the organization.

All You Need to Know

Internal Audit Applicability

Internal audit applicability is for three types of organizations, as mentioned below, who are required to appoint an Internal auditor/auditing team for a company.

1. Every organization, whose shares are listed on the stock exchange.

2. Every organization with unlisted shares on the stock exchange, but meet the following criteria:

  • An organization with a yearly turnover of Rs. 200 crores or more.
  • An organization with a paid-up equity of Rs. 50 crores for a financial year.
  • An organization with a borrowed loan more than Rs. 100 crores or more during the earlier financial year.
  • An organization with unpaid deposits over Rs. 250 crores or more during the earlier financial year.

3. Private organizations which have:

  • An yearly turnover of Rs. 200 crores or more.
  • Borrowed a loan, in one go, of Rs. 100 crores or more during the earlier financial year.

Internal audit certification :

The internal audit certification pertains to the qualification of the auditor who carries out the auditing process. The internal audit certification pertains to a chartered accountant (CA) or a certified management accountant (CMA).

Under section 35 of the CGST (Central Goods and Services Tax) Act, 2017 an individual or organization registered under GST with a yearly turnover of Rs. 2 crores or more is required to get their accounts audited by a CA or a CMA.

Internal audit report

An internal audit report is prepared in accordance with the accounts audited in an organization. An internal audit report is prepared by an auditor who scrutinizes the company accounts for discrepancies that aid in tax evasion.

An internal audit report is prepared and submitted to the senior management at the end of the audit process. It summarizes the findings made by the auditor, in terms of the financial health of the organization. The auditor who prepares the report also shares his/her recommendations and suggested course of action as well.

Each finding with the audit report may contain the 5C’s

  • Condition : The identified problem.
  • Criteria : The unattained company benchmark
  • Cause : The reason behind the problem.
  • Consequence : The lost opportunity because of the problem.
  • Corrective action : Suggestions or opinions to mitigate the problem

The auditor while preparing the internal audit report will look for the following facts:

  • Has GST been paid?
  • Has Input Tax Credit has been availed?
  • Have the company documents/records been maintained properly?
  • Have the GST annual/monthly/quarterly returns filed on time and properly?
  • Have the purchases and supplies statements been reconciled?

Internal audit procedure

The internal audit procedure involves a checklist that needs to be adhered to. According to this checklist, the internal audit procedure begins by checking:

1. GSTR 3B with GSTR 2A & GSTR 1 :

The GSTR 3B is a GST monthly return form for July and August, as created by the Central Board of Excise and Customs (CBEC). While GSTR 1 is a quarterly returns form, and GSTR 2A is a purchase-related tax return form.

a) GSTR 2A : The auditor compares form GSTR 3B with GSTR 2A, to reconcile information on both forms. This allows the auditor to ensure that the organization does not claim extra input tax credit. If it is claimed, the organization has to pay an interest of 24% per annum on GST, along with the tax, as a penalty.

b) GSTR 1 : On comparison of GSTR 3B with GSTR 2A, the auditor sees the difference and recommends changes to be made in purchase invoices, and accordingly in the GSTR 1 form as well.

2. GST compliant Invoices :

The next part of the internal audit procedure is verifying the details or particulars on an invoice. This is done to ensure that the invoices used are GST compliant, as per the rules stated under GST law. The auditor makes the check, if the format of the invoice varies, management is asked to amend it and make changes as per the GST requirements.

3. Input tax credit vs output tax liability :

At this stage the internal audit procedure the GST auditor has to checks:

  • Date of issuance of invoice and date of payment of invoice, if payment date does not exceed 180 days.
  • If it exceeds 180 days, the recipient organization’s input tax credit is reversed and becomes an output tax liability.

4. E-way bill with invoices :

E-way bills are issued to individuals/organizations transferring taxable goods (under GST) of worth Rs. 50,000/- or more, via the E-way portal. The auditor checks invoices against E-way bills, to ensure all goods worth Rs. 50,000/- or more have been transferred with the requisite E-way bill. However, if not, the auditor can inform the GST commissioner who can impose fines or penalties on the respective individuals/organization.

5. Goods stored with job-workers before 30th June 2017 :

GST was implemented after 30th June 2017. The auditor checks for goods or capital goods or stock stored with job workers before 30th June 2017. While ordinary good needs to be returned within the year (30th June 2018), capital goods are required to be returned within two years (30th June 2019).

In case the goods were returned after the due date, they will be treated as goods purchased from unregistered vendors.

In case, some of these goods have still not been returned, the auditor will inform management to collect them before the stipulated time, to avoid further penalties.

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