Tag: Obligations

NFRA Circular Warns Auditors on Group Audit Obligations

NFRA Circular Warns Auditors on Group Audit Obligations

The National Financial Reporting Authority (NFRA) issued a warning on Thursday regarding the misinterpretation of statutory auditor obligations by some auditors. The authority emphasized that principal auditors cannot claim insufficient procedures were performed in the audits of group financial statements.

In the circular released on Thursday, the NFRA noted instances of gross negligence and audit failures linked to group audits involving multiple entities. This circular is particularly pertinent as the NFRA and the apex body of chartered accountants, the ICAI, are in disagreement over the recent updates to the Standard of Auditing (SA) 600, which governs audits involving firms with subsidiaries and associates.

The NFRA stated that audits of standalone financial statements, where the company has branches, as well as audits of consolidated financial statements of companies with subsidiaries, necessitate special consideration by both the principal and component auditors.

SA 600 pertains to utilizing the work of another auditor when auditing group financial statements. The NFRA claims it has uncovered significant negligence and failures in auditing group financial statements. Noteworthy cases cited include:

In these cited instances, the NFRA discovered that funds were misappropriated through subsidiaries and partners. The circular reports that principal auditors failed to raise alarms timely, despite evident indicators of fraud, going concern issues, and fund diversions. Instead, they relied on misleading interpretations of SA 600 and the clean audit reports from component auditors.

While SA 600 does not explicitly require principal auditors to review the audit work documents of component or other auditors, the NFRA indicated that such evaluations may be necessary in certain cases. The regulator stated, “A principal auditor and a component/other auditor have the same overall objectives while auditing financial statements. Thus, major auditors cannot claim that they did not execute adequate procedures in audits of Group Financial Statements (GFS) if they believe a specific SA did not require them to do so.”

The NFRA has identified that some auditors of Public Interest Entities (PIEs) under its jurisdiction have misunderstood their obligations as statutory auditors. This circular will be applicable to all auditors of entities covered under Rule 3 of NFRA rules 2018 with immediate effect, aiming to prevent future audit failures and restore confidence in the audit of Public Interest Entities (PIEs).

For the official circular, download the PDF here.

Deceased’s Tax Obligations: How to File Income Tax Returns on Behalf of Legal Heir

Deceased’s Tax Obligations: Limit on Heir’s Liability to Inherited Assets

Even in death, taxpayers are obligated to settle their tax dues. If the total taxable income of a deceased individual exceeds the basic exemption limit, filing an income tax return (ITR) on their behalf becomes mandatory under Section 139(1) of the Income-Tax (I-T) Act.

The I-T Act outlines the procedure for filing returns on behalf of a deceased person. According to the Act, the legal heirs of a deceased person with taxable income must file the ITR on their behalf for earnings up to the date of demise, as explained by Alay Razvi, partner at Accord Juris.

Read more: I-Tax Return 2023: Check ITR Filling Last Date, How to e-File Income Tax Returns Online – all you need to know detail process

Registration Process

To register, the representative must visit the I-T Department e-filing portal and provide essential details and documents, including the deceased’s and legal heir’s PAN cards, a certificate of heirship, and the deceased’s pension certificate (if available).

Once these documents are submitted, the tax authorities review them to ensure compliance with legal requirements. Kunal Savani, partner at Cyril Amarchand Mangaldas, states that the registration process is typically swift. Upon updating the details as a legal heir, the portal immediately reflects the changes. Once registered, the legal heir can proceed to file the ITR for the income earned by the deceased.

If the registration request is rejected, the tax expert Manikandan S. from Cleartax advises rectifying any issues leading to the rejection. Both the PAN of the deceased person and the legal heir should be registered in the e-filing portal. If the deceased person’s PAN is not registered, the legal heir can undertake the registration on behalf of the deceased, according to Manikandan.

The legal heir is held accountable for settling the deceased’s tax dues. Pallav Pradyumn Narang, partner at CNK, explains that the liability of the legal heir is limited to the extent of the assets inherited, capable of meeting the liability. For example, if A inherits Rs 1 lakh from Z with an outstanding tax liability of Rs 1.25 lakh, A’s liability is limited to paying Rs 1 lakh to the tax department.

Failure to file an ITR or pay the tax dues on behalf of the deceased can lead to penal consequences. If the tax dues remain unpaid, the I-T Department can levy interest under sections 234A, 234B, and 234C. Razvi emphasizes that continued failure may result in the I-T Department attaching the property of the legal heir. The legal heir is also responsible for any errors in the deceased’s ITR.

It is crucial for the legal heir to inform the I-T Department of the deceased person’s passing. Failure to do so amounts to concealing facts, which can lead to heavy penalties, according to Razvi.

Read more: Tax Query: How to calculate tax on inherited property?

Paying the outstanding tax dues on time is essential. Amit Bansal, partner-direct tax at Singhania & Co., stresses the importance of timely filing, accurate documentation, correct income reporting, and seeking advice from a tax professional to address complexities. He also highlights the significance of clear and prompt communication with the I-T Department to handle any notices or queries. It’s advisable to keep all necessary documents, such as the death certificate and legal heir certificate, readily available in case they are needed for verification. Narang advises staying updated with the latest guidelines on the e-filing portal and ensuring accurate calculation and reporting of all income until the date of death.

Registering as a Legal Heir

  • Go to the income tax department e-filing portal and log in using your user ID and password.
  • Navigate to ‘Authorised Partners’, then ‘Register as Representative’, and click on ‘Let’s Get Started’.
  • Click on ‘Create New Request’.
  • Select the category, enter the PAN details, date of death, and reason for registration.
  • Upload the required documents.
  • Click on ‘Proceed’ and ‘Verify the Request’.
  • Click on ‘Submit Request’ to receive acknowledgment from the department.

Note: The legal heir must provide the ‘Reason for Registration’ as a representative assessee.

Source: Cleartax

Read more: How to file Income Tax Return of a Deceased Person