Audit on account of Indirect Taxes
In State, every person pays tax either direct or indirect. Those taxes that are paid directly by the company or sole proprietor is known as direct tax, for example income tax, special tax, wealth tax etc. Taxes that are paid indirectly by consumers are known as indirect tax, for example sales tax. Sales tax is included in the price of the product. Everyone pays this tax. This tax is deposited by resellers, wholesalers and manufacturers to the tax authorities.
Audit is not an official investigation of the documents. It is done by auditor who expresses an opinion on financial statements. Auditor does not provide absolute assurance about the financial statements. Auditor always gives reasonable assurance about the true and fair view of financial statements. Not every defaulter is audited rather it increases the efficiency and effectiveness of the financial statements.
Some of the companies are more prone to audit because they are not registered with sales tax department and dealing in large amount of revenue. In every state law prescribes the amount of revenue of entity which is required to register with tax department.
Auditor usually checks the state system to carry out information about unregistered entity. They also check phone directories and websites to take information about unregistered entities. Auditors usually observe the business of entrepreneur by casually visiting the shops with their family. No one can predict an auditor. Auditor is trained to be unpredictable in every case.Auditor usually selects a candidate for audit who has not charged Input tax on purchases and output tax on sale and the parties from whom tax is not correctly charged are also more likely to an audit. If company has set unrealistic targets and growth rate, it will also be a perfect candidate for an audit. If sale of the company is very high or the entity is engaged in purchasing exempt items then auditor shall choose such entity for an audit.
These are some reasons why auditor selects particular entity for an audit. Besides these reasons there are many more which auditor takes in account by applying professional judgment which is the essential part of the audit.