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Materiality concept in income tax?

Mohit (CA) (755 Points)

24 April 2012

Guys,

We all know that in Audits we have the concept of Materiality i.e we fix a total materiality amount and perform the audit. But what about Tax Audit? Do we have some concept of Materiality in Income Tax?

Mohit

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Giridhar S Karandikar (Team Lead) (7548 Points)
Replied 24 April 2012

materiality should be considered in auditing generally, however the concept may differ according to the statue regards the audit that takes place.

for e.g. under tax audit, the concept of materiality is important while considering the Method of accounting & valuation of closing stock. in I-t the closing stock is valued at cost or market price whichever is lower, so in such cases the tax auditor has to verify if this has been taken care of or the profits would get inflated considerably of the current ear as well as of teh subsequent year.

similarly the tax auditor is also requried to verify the method of accounting followed by the assesse from year to eyar consistent. the assesse cannot follow one method in oine year other in another year and so on. If thtere is change in the method of accounting, then the profists would inflate considerably & this would materially distort the true & fair view of the financial accounts.

there may also be other cases involved such as cash. the auditor has to verify that during the year, the cash balance on each day has not gone in negative. this is also material to the tax auditor.

In this way you will have to judge the items that are material & audit them accordingly.

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Mohit (CA) (755 Points)
Replied 24 April 2012

Thanks Giridhar. What I feel is there cant be a concept of Materiality when doing a Tax Audit becasuse one cannot play with the Income Tax laws and if done so, governmen may lose a lot of revenue in the form of Taxes.

Giridhar S Karandikar (Team Lead) (7548 Points)
Replied 24 April 2012

But still people present their accounts the wrong way & one day their case is taken up for scrutiny by the dept. Hence the tax auditor should be cautious enough while performing the audit, & should consider what is material for the purpose of his audit.