Audit on Audit – CAG finds Central Excise Internal Audit in Shambles
THE CAG conducted a study of the Internal Audit Process in Central Excise and Service Tax Commissionerates.
Internal Audit is empowered, under Central Excise and Service Tax Rules, to access the records of the assessees at their registered premises. Every Commissionerate has an Audit cell, manned by an Assistant/Deputy Commissioner and auditors and headed by an Additional/Joint Commissioner and this cell prepares coordinates and monitors the audit plan. The audit is done by a set of internal audit parties (IAP) consisting of Superintendents and Inspectors. The Board has laid down detailed guidelines in the form of Audit manuals for audit of central excise and service tax units, which prescribe detailed processes for conduct of audit. CAG evaluated five main processes prescribed in the manuals.
Maintenance of Assessee Master File: As per chapter 9 of Central Excise Audit Manual, 2008 and para 6.1 of the Service Tax Manual, 2003, the Assessee Master File is to be prepared and updated by the Audit cell in the Commissionerate. A list of documents (Registration application, copies of past three years returns, copy of past three years audits, cost audit/tax audit report and financial statements of past three years) & (Details of goods manufactured and exempted, production details, duty payment and issue of SCN of past three years and details of litigation) of the manual is to be kept in each assessee master file.
CAG found that this work had not been completed by most of the Commissionerates and the information related to Assessee Master Files was not reflected in the monthly reports submitted by the Audit Cell to the Commissioner.
Selection of units for audit: As per para 10.1.1 and 10.1.2 of Central Excise Audit Manual, 2008 and as per para 5.1.4 of Service Tax Audit Manual, 2003, the audit cell of each Commissionerate is to maintain an updated list of all registered assessees. The list is segregated into two categories - mandatory units and non-mandatory units. The units in the non-mandatory category are to be selected for audit on the basis of risk assessment using prescribed criteria.
While an elaborate selection procedure was prescribed in the manual, CAG found that in actual practice, the non-mandatory units were selected, by and large, only on the basis of revenue collected.
No list from DG, Audit: As per para 10.1.2 of Central Excise Audit Manual, 2008, DG (Audit) is to compute the risk for all the non- mandatory units in a centralised manner, called rupee risk, every year and circulate the list of assessees in each slab of non-mandatory category by 15th April. On the basis of this list, the Audit Cell is to prepare an annual list of assessees to be audited during the year.
It was reported by 39 Commissionerates of central excise audited by AG, that none of them received the list of assessees from DG (Audit).
Audit Plan Registers: As per para 12.3.1 of Central Excise Manual, 2008, and para 9.5.1 of Service Tax Audit Manual, 2003, a register of units planned for audit in the prescribed format is to be maintained to monitor the different stages of execution of the audit and ensure that all units allotted to an Audit Group have been audited and wherever audit has been completed, the Audit Reports have been issued on time.
CAG observed that the Audit Plan Registers were not maintained according to manual and did not reflect whether all planned units had been audited and whether audit reports had been issued timely.
CAG Recommends :
++ that the preparation of Assessee Master Files for each assessee may be completed in a time bound manner. The timelines may be monitored by Commissioners through monthly reports submitted by the Audit Cells.
++ the ACES module for internal audit, which is operational, may be implemented in a time bound manner so that multiple parameters can be used for the risk based selection of non-mandatory units.
++ MIS reports may be designed in ACES in the format of the Audit Plan Registers to monitor whether all planned units had been audited and whether audit reports had been issued timely.
++ the reduction in audit coverage due to staff shortages may be distributed evenly across mandatory and non-mandatory units. The practice of auditing larger number of non-mandatory units at the cost of mandatory units may be curtailed.
It seems that the DG, Audit has addressed a letter dated 22 November 2011 to Chief Commissioners drawing their attention to the prescribed norms for audit of mandatory and non-mandatory units as well as to the observations of the Audit.
DDT Recommends: The above paras (pointed out by CAG) in the audit manuals may be deleted with retrospective effect and next time you draft your manuals, do keep in mind that the procedures prescribed in the manuals should be practical and implementable. Otherwise, after 10 years CAG will use your own manual against you.