Tax Compliance and Audit Checklist for Private Companies

How to Handle Tax Audits for Private Limited Companies

Private limited companies must maintain compliance with Indian tax laws by utilizing tax audit services. A Tax audit for private limited companies is an essential component of the process by which private limited companies must navigate the intricate tax landscape. 

Effectively conducted tax audits contribute to the preservation of financial transparency and accuracy and the prevention of potential legal complications. The appointment of an auditor is also one of the compliance procedures. The auditor assesses the accounts and generates the audit report. The Registrar of Companies (ROC) of the particular area receives the audited financial statements.

The Auditing process of Private Limited Company is an annual procedure that is part of the company's compliance requirements.

Legal Requirements and Thresholds for Tax Audits

Private limited companies in India are mandated to endure tax audits, which are subject to specific Tax audit regulations in India. Let us look into the Legal requirements for tax audits in Private Limited Companies:

Tax Laws and Regulations:

Tax audits are required for enterprises with a turnover that exceeds a specific threshold under Section 44AB of the Income Tax Act. 

The Companies Act of 2013: 

The Companies Act of 2013 act requires companies to maintain accurate books of accounts and appoint auditors to ensure that financial statements are presented fairly.

Threshold for Tax Audits:

A private limited company is required to undergo a tax audit if its turnover exceeds:

  1. Rs. 10 crore in a single fiscal year if the cash transactions are up to 5%
  2. If the cash transactions account for more than 5% of its total receipts in a given fiscal year, then the limit is 1 crore.

Tax Auditor Appointment Requirements: 

A practiced Chartered Accountant (CA), a CA firm, or a Limited Liability Partnership (LLP) with a plurality of partners practicing in India are the only sources from which tax audit services for private limited companies can be obtained.

The preliminary auditor must be appointed within 30 days of incorporation and authorized by shareholders at the first Annual General Meeting (AGM).

The Registrar of Companies (ROC) must receive Form ADT-1, which confirms the appointment of the statutory auditor, within 15 days of the AGM.

Tax Audit Report Requirements:

Depending on whether the company is subject to a statutory audit mandated by the Companies Act, Form 3CA or Form 3CB must be employed to submit reports for tax audit under the Companies Act. 

The tax audit report should encompass the following:

  1. The verification of the company's income and expenditure
  2. The comparison of financial statements with tax computations
  3. The discovery of any discrepancies or potential tax liabilities
  4. Recommendations for enhancing tax compliance

Key Documents Needed for a Tax Audit

The following Tax audit documentation is necessary for a private limited audit report:

  1. The Notice, Director's report, and Form MGT-9 are the documents that are affixed prior to the auditor's report.
  2. The auditor's report is attached below the MGT-9 form, which comprises all the information obtained during the company audit.
  3. An annexure in Form 3CD accompanies the report.
  4. The attached documents include the Balance Sheet, Profit and Loss Account, and annotations to accounts.
  5. The observations made during a tax audit are also appended if the audit is conducted.
  6. Financial statement notes are also included at the conclusion of the Audit Report.

Types of Audits for a Private Limited Company

Audits of private limited companies are conducted for a variety of purposes. The following are a few fundamental categories of audits that are performed on private companies:

Statutory Audit

The statutory audit is a mandatory audit that is required of all private limited companies, regardless of their turnover or profit. A statutory audit is also needed for a company that experiences a loss. In accordance with the Act and the Companies (Accounts) Rules, 2014, all private limited companies must undergo an annual account audit each financial year. 

The statutory audit aims to ascertain whether a company is accurately representing its financial situation by analyzing the information in the financial statements, bank balance, and books of account.

Internal Auditing

The internal audit of the private limited company is executed in accordance with the recommendations of its internal management. The Act and the Companies (Accounts) Rules, 2014, mandate that the prescribed companies designate an internal auditor to evaluate their operations. The private limited entities that are required to conduct internal audits are as follows: 

  1. Private organizations that generated a revenue of Rs.200 crore or more in the preceding fiscal year
  2. Private companies that have outstanding borrowings or loans from public financial institutions or banks that exceed Rs.100 crore or more

Internal audits are conducted to evaluate the operational efficacy of the company and assess the status of its finances. They assist internal management in conducting financial evaluations and implementing the necessary modifications to enhance the efficiency of its operations.

Cost Audit

The following private limited companies are required to conduct cost audits in accordance with the Companies (Cost Records and Audit) Rules, 2014:

Private limited companies that are involved in the production of goods or the provision of services specified in table 3(A) of the Companies (Cost Records and Audit) Rules and possess the following characteristics:

  1. An annual turnover of Rs.50 crore or more from all of its services or products in the previous financial year
  2. An aggregate turnover of Rs.25 crore or more for the individual service or product

Private limited companies that are involved in the production of goods or the provision of services specified in table 3(B) of the Companies (Cost Records and Audit) Rules and possess the following characteristics:

  1. An annual turnover of Rs.100 crore or more from all of its services or products in the previous financial year
  2. An aggregate turnover of Rs.35 crore or more for the individual service or product

Tax Audit Tips for Private Companies

Steps to handle tax audits of a private limited company that is both efficient and effective involve the following:

  1. Defining the objectives and scope, scheduling the resources, and creating the programs.
  2. Show evidence that the audit area is managed correctly. By employing suitable methodologies, the operations are executed efficiently.
  3. By analyzing audit evidence, evaluating the strengths and weaknesses of audit areas, and reporting their efficiency,
  4. By providing a report that includes the findings, recommendations, and conclusions, the management is informed about the effectiveness of operations and the adequacy of controls.
  5. Evaluation of all management actions in relation to reporting techniques and follow-ups.
  6. Ensuring the quality and consistency of audit work by adhering to professional standards and ethical norms.

 Don’t get too overwhelmed because of the abovementioned steps and processes. JustStart is here to ensure that your private limited company’s tax audit is carried out smoothly and on time!

FAQs 

Would it be necessary to audit a private limited company that has no transactions?

 Indeed, it is necessary to complete the company's annual filing and ITR filing. Statutory audits are mandatory, while tax audits are not. Nevertheless, it is recommended that a tax audit be conducted in order to prevent the imposition of any penalties.

Is it mandatory for a private limited company that is just starting to undergo an audit?

Indeed, private limited companies must conduct an audit. In India, companies are required to adhere to specific conditions, irrespective of the date of their operation. An audit conducted by a private limited company involves the examination or inspection of an organization's records of accounts, documents, and vouchers. 

What are the consequences of missing the tax audit deadline?

If a company or a person is found not to be in compliance with the tax audit regulations or does not carry out a tax audit, then a penalty of 0.5 percent of total sales not greater than INR 150,000 can be levied. Avoiding penalties during tax audits is the best way out.

The due date for concluding the tax audit and filing of the tax inspection report with the income tax department is September 30 of the relevant assessing year.

What happens if your private limited company is selected for tax scrutiny after a tax audit?

In the event that you are chosen for examination, you will be required to submit supplementary information and documentation as specified by the tax authorities.

Is it possible for a private limited company to decline a tax audit if its annual revenue is just below the threshold?

Indeed, a private limited company has the option to forgo a tax audit if its turnover is just below the prescribed threshold. Nevertheless, it is imperative to preserve precise financial records in anticipation of potential future audits or income tax scrutiny.

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