Reconciliation of Records

Transcription

1 Reconciliation of Records Institute of Chartered Accountants of India National Academy of Customs, Excise and Narcotics 22 November / 36

2 Preamble Statutory records in most cases are maintained as subsidiary ledgers Periodic returns are populated based on information contained in the subsidiary ledgers Subsidiary ledgers could be decentralised and independent of the financial records Calls for periodic reconciliations 2 / 36

3 Reconciliations Records: Financial records State level Commercial Tax returns Issues: Revenues Procurements Inventory Valuation of goods / services CENVAT Claims Payment of duty / tax Past arrears / demands 3 / 36

4 Certain Factors Comprehensiveness to ensure inclusion of all transactions for the relevant period Reconciliations to be focussed towards deriving information to identify areas for applying further substantive checks All details may not readily be available as part of the financial accounting system / inventory softwares 4 / 36

5 Revenues 5 / 36

6 Revenues Certain factors: Number of streams would generally be limited Multiple tax / duty rates generally inapplicable Seasonality in volumes Number of customers / consignees would typically be quantifiable / finite > Exceptions: Retail Sector, not relevant in our discussions Transaction values could be different Transactions with related parties would typically follow a set pattern 6 / 36

7 Revenues Financial Records Types and volumes in each stream Value of sales turnovers Quantity of sale / non-sale dispatches Commercial Tax Returns Value of total dispatches > Sale & non-sale dispatches Quantity of non-sale dispatches Certain formats based on inclusive method of reconciliations Top down approach 7 / 36

8 Revenues Summary of Sales Turnover Period: Location: Description of Goods / Services A B C D E F Total ED / SE Domestic Exports Deemed N / B / Other DTA SEZs Exports M / C Countries Represents total sales under the respective category during the relevant period Total Represents the total sales of the relevant goods during the period P&L Account Represents the total sales of the enterprise during the relevant period 8 / 36

9 Revenues Summary of Sales Turnover Period: Location: Client / Customer A B C D E F Total Total To match with total product wise sales as per previous statement P&L Account Represents the total sales of the enterprise during the relevant period 9 / 36

10 Revenues Total sales derived to match with the financial statements of the enterprise (Profit & Loss Account) > Ensures comprehensiveness as against details from identified accounts only Would be immaterial as to how the revenues are classified in the financial statements > Typically, based on VAT / CST Rates, Description of goods, Geography of the customer etc. Based on the total sales to identified parties (related parties), the transactions can be identified for further analysis on valuation The product of taxable goods and appropriate duty rate should correlate with the ED Payable Account (CL, indicating collection of ED) Based on the description of goods, the following can be directly identified: > Traded goods > Inputs or CGs removed as such 10 / 36

11 Revenues Summary of Total Dispatches Quantity Period: Location: Description of goods A B C D E F Sales DTA Exp Non-Sales Job Stock Wrnty Free Purchase Samples work trfs Gifts Retns Reps Others Total Represents the total qty of dispatch of the relevant goods during the period Total Represents total qty of dispatch under the respective category during the relevant period CTR Represents the total dispatches of the enterprise during the relevant period 11 / 36

12 Revenues Quantitative information of dispatches to match with details furnished in the NTS / Form 3CD > Additionally, with sum totals in the inventory records Market value for all non-sale dispatches would be available in the delivery challans used under the Commercial Tax laws Free samples and warranty replacements > Appropriate value can be identified from the charge to Profit & Loss Account Dispatches for repairs directly identifiable to ensure return within 180 days Comparison of purchase returns to ensure reversal of CENVAT Credits > Value can be identified from debit notes issued Stock transfers to correlate with Form-F under Commercial Taxes 12 / 36

13 Other Reconciliations Reconciliation of amounts between ER-1 and VAT Returns / Financial Records may also be achieved through Bottom Up Approach or Deductive Method Certain suggested formats 13 / 36

14 ER-1 vs. Financial Statements Particulars Amt Turnover as per ER Add: Excise Duty 1430 Add: Exemptions under CE included in total revenues of the enterprise Goods exempted or chargeable to nil rate of CED 1500 Trading goods 3245 Job work direct removals 500 Deemed Exports 2025 Exports 3000 Others..specify 200 Sub Total Less: Other transactions liable to ED but not includable in revenues of enterprise Samples 560 Warranties 0 Captive consumption 205 Depot / consignment sales 2675 Exports to Nepal / Bhutan 380 Amortisation of Moulds and dies 260 Notional Interest 0 Difference between MRP and sales price 0 Stock transfers under Form-H 985 Others..specify 0 Derived Turnover for financial records Turnover as per financial records / 36

15 ER-1 vs. VAT Particulars Amt Turnover as per ER Add: Excise Duty 1430 Add: Exemptions available under ED but liable VAT / CST Goods exempted or chargeable to nil rate of duty 1500 Traded goods 3245 Job work removals 500 Deemed Exports 2025 Others..specify 200 Sub Total Less: Exemptions available under VAT / CST but chargeable to ED Captive Consumption 205 Samples 560 Warranties 0 Depot / consignment sales 2675 Exports to Nepal / Bhutan 380 Amortisation of Moulds and dies 260 Notional Interest 0 Difference between MRP and sales price 0 Stock transfers under Form-H 985 Others..specify 0 Derived Turnover for VAT Returns Turnover as declared in VAT Returns / 36

16 Procurements 16 / 36

17 Procurements Certain factors: Number of goods and the rate/s of duty can be multiple Seasonality in volumes Number of suppliers could be multiple Transaction values could be different Transactions with related parties would typically follow a set pattern Forex fluctuations in case of imports 17 / 36

18 Procurements Financial Records Total value of purchases of inputs CENVAT Credits claimed CENVAT balance remaining unutilised Quantitative information Commercial Tax Returns Total value of purchases Certain formats based on inclusive method of reconciliations Top down approach 18 / 36

19 Procurements Summary of Purchase Turnover Period: Location: Description of Goods / Services P Q R S T U Total I / IS Domestic Imports Regular Concessional SEZs Regular Concessional Represents total purchases under the respective category during the period Total Represents the total purchases of the relevant goods during the period P&L Account Represents the total purchases of the enterprise during the relevant period 19 / 36

20 Procurements Total purchases to match with the financial statements > Domestic purchases (both, regular and concessional) to match with Commercial Tax Returns High level checks to ensure CENVAT Credits claimed do not exceed the product of value of eligible purchases and ED > Further substantive checks to be applied where differences appear Directly identified based on the description of goods > Goods manufactured through job worker > Where only partly manufactured, further breakup may be furnished in the format Total of goods procured at concessional rates (typically, exemption notifns or CT-3s) should match with the usage of declarations Where certain inputs are directly accounted as expenditure and no inventory is maintained, suitable changes to the formats would be required 20 / 36

21 Procurements Summary of Total Procurements / Receipts Quantity Period: Location: Description of goods P Q R S T V Total Purchases Other Receipts DTA Imp Job Stock Sales Wrnty Samples work trfs Retns Reparis Others Represents total qty of category wise receipts during the relevant period Total Represents the total qty of receipts of the relevant goods during the period CTR Represents the total dispatches of the enterprise during the relevant period 21 / 36

22 Procurements Quantitative information of receipts to match with details furnished in the CARO / Form 3CD > Additionally, with sum totals in the inventory records Stock transfers to match with the summary of Form-F issued under Commercial Taxes Receipts for job work would be readily identifiable to check for duty credits availed, if any > Filing of declarations and related compliances Other non-purchase receipts including direct consignee deliveries under Excise documents identified separately Comparison of sales returns with CENVAT Credits availed > Value to be identified from credit notes issued 22 / 36

23 Inventory 23 / 36

24 Inventory Certain factors: Physical verification of inventory is mandatory > CARO to report on the activity undertaken and material discrepancies, if any > Quantitative information obtained can be compared with the details furnished in the financial statements / Form 3CD Derived consumption of inputs to match with financial statements (Profit & Loss Account) 24 / 36

25 Inventory Deriving Quantity Manufactured Quantity / Value Period: Location: Particulars A B C D E F Remarks Closing Inventory Physical Verifn / FS Add: Sales during the period Earlier formats Free Samples Earlier formats Stock Transfers Earlier formats Warranty Earlier formats Less: Opening Inventory Physical Verifn / FS Derived Qty Manufactured To match with ER-4 Job workers Earlier formats Additionally, to match with the details furnished in Financial Statements / Form 3CD 25 / 36

26 Inventory Deriving Consumption of Significant Inputs Quantity / Value Period: Location: Particulars L M N O Remarks Opening Inventory Physical Verifn / FS Add: Purchases / Receipts Earlier formats Less: Dispatches Purchase Returns Earlier formats Job work Earlier formats Removal as such Earlier formats (Sales) Stock transfers Earlier formats Less: Closing Inventory Physical Verifn / FS Derived Consumption To match with ER-6 26 / 36

27 Inventory Typical review results: Is the consumption ratio comparable to: > Information furnished in ER-5 > Industry reports > Previous years ratios > SION prescribed under the Foreign Trade Policy Does the total consumption correlate with the goods manufactured > Not to include goods manufactured under job work Possible mis-use of SSI Scheme could be identified > Capacity utilisation vs. total production Excess consumption could be an indicative for incorrect CENVAT claims 27 / 36

28 Valuation 28 / 36

29 Valuation Certain receipts accounted on net basis > When such services are inturn procured from third parties > Includable for levy of central excise / service tax > Accounting entry to be verified to confirm method of accounting Earlier formats relate to income / revenue streams 29 / 36

30 Valuation Warranty charges Advertisement / Marketing expenditure Handling charges Packing and forwarding charges Pre delivery inspection charges Designs and drawings Transportation charges > Inward & outward Erection, installation and commissioning charges Technical engineering and consulting Commission on sales 30 / 36

31 Valuation Could result in double benefits > CENVAT Credits on such services from third parties > Not included in valuation for CE Correlation with purchase statement discussed earlier could identify the same > Value at which the service purchases are declared Gross / Net basis 31 / 36

32 CENVAT Credits 32 / 36

33 CENVAT Description of inputs and the value of purchases directly identified > Based on purchase formats discussed earlier Total CENVAT claim not to exceed the product of value of purchases and the appropriate rate of duty Differences could be due to: > Different rates charged by different suppliers > Inadequacy / non availability of documents > Inadvertently missed credits during the earlier period/s > Retrospective change in law Review of daily balances to check for intermittent negatives, if any 33 / 36

34 Reconciliation Particulars Amt CENVAT Credit in terms of ER Add: Opening Balance as per financial statements 450 Job work reversals in CE records (> 180 days) 75 Credits availed in financial statements only 200 CENVAT on CGs (50%) 100 Credit on Input Service not availed 90 Sub Total Less: Credits availed in CE records only 520 Reversals yet to be recorded in financial statements 375 Derived balance per financial records CENVAT Credits in financial records / 36

35 To Conclude: Ensure comprehensiveness > Top down vs. Bottom up approach > Nature of business, level of automation and nature of accounting systems to determine appropriateness List of all CE / SE Accounts to be considered Review of Profit and Loss Account > Specifically, select expenditure accounts to identify net basis of accounting Comparison of trends in consumption Capacity utilisation by the unit to correlate with manufacture > Could identify possible mis-use of SSI Scheme 35 / 36

36 Thank you Badrinath NR / 36