Tax Audit Framework clean copy -merged

Asif Iqbal

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• Publié par: Irda
• Nombre de lectures: 29
• Langue: English

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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 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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 Tax Audit Framework 











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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 Tax Audit Framework 














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
resul