What is tax?

Tax is the amount which is paid to the government by the tax payer person or an entity. Every person has
to pay tax as per the tax laws of the nation which one is resident of. Tax is a major source of revenue for
government.
“Tax” is the compulsory contribution from a person or an entity to the government to meet expenses
incurred in the common interest. So, tax is the compulsory levy and those who are taxed have to pay it
without any direct benefit. Due to this compulsory nature some economist says, “Nothing is certain
except death and tax”. Tax is defined as a financial obligation, it is a fee levied by the government of the
respective country on income, goods, and activity. The main reason for imposing taxes is that they are the
main source of revenue to the government.

Features of tax:
- It is the compulsory payment, not a voluntary payment or donation.
- Tax is the payment to the government as per the prevailing law.
- Aim of tax collection is for public welfare.
- Failing to pay taxes is subject to punishment by law.

Objective of Tax:
1. To reduce employment: Government uses tax revenue in employment generation.
2. To regulate Economy: Government frames policies and regulates economy. Taxation is one of the mode
for government for such regulation.
3. To Re-distribute wealth: High income group are taxed high. Proper tax system helps in redistribution of
wealth.
4. To uplift the economy: Government uses taxes in different development sectors.
5. To remove regional imbalance.

Differences between direct tax and indirect tax:

Taxes are broadly classified as a direct tax and indirect tax, wherein the former is charged directly on the
income or wealth of the person, while the latter is imposed on the price of goods and services.
Direct Tax Indirect Tax
- Direct tax is paid directly by an individual or - An indirect tax is a tax that is shifted from one
organization to an imposing entity like taxpayer to another i.e. collected by one person
government. but actually born by another person.
- Direct Taxes are based on the ability-to-pay - An indirect tax is levied on goods or services,
principle, which means that if you earn more, which increases the price of a good or services
your rate of tax is also more. - Indirect taxes can be passed on or shifted to
- Direct taxes cannot be passed on to a another person. The tax is actually paid by the
different person or entity. It’s burden cannot be end consumer.
shifted to another person. - It is considered to be a regressive tax since all
- It is considered to be progressive tax since taxpayers whether rich of poor have to bear the
you taxed depending upon the ability of the same burden.
taxpayer to pay. (Pay as you earn) - VAT, Sales tax, Customs duty, Excise duty are
- Income tax, Corporate tax, Wealth tax are some examples of indirect tax.
some examples of direct tax.

Cannon of Equality:
Any tax levied should be on the basis of level of income. If Income level increases, tax amount also
increases and vice-versa.
 Cannon of Economy:
Tax collection procedure should be less costly than the Tax amount collected.

Cannon of neutrality:
Tax should be imposed without any bias to any community and society. Any industry, production, service
should not get affected due to taxation.

Cannon of Diversity:
The burden of tax should be scattered among different kinds of people.

Concept of Capital and Revenue

Capital Expenditure:
Capital expenditure means the expenditure, the benefit of which is not exhausted within the current year
but is enjoyed over a long time period (more than 12 months). Such expenditure is of non-recurring nature
and results in acquisition of permanent assets.
Property acquired with the help of capital expenditure is utilized by the business for a long time and
thereby it earns revenue. For example purchase of Land, Building, Plant and Machinery, Furniture etc.

Revenue Expenditure:
Revenue expenditure means expenditure the benefit of which is exhausted within the current year. Such
expenditure is of recurring nature and does not result in acquisition of permanent assets. The revenue
expenditure is incurred for meeting day-to-day requirements of business.
Revenue expenditure does not add to the earning capacity of the business but only helps in maintaining
the existing earning capacity. For example Rent, Salaries, Depreciation, Loss from sale of Fixed Assets.

Deductions Not Allowed

Generally taxable income (profit) is determined by deducting Expenses from Sales/Income. However,
some expenses are not deductible as per Income Tax Act, 2058.
Personal and Domestic expenses: Interest incurred on an amount borrowed to the extent to which it is
used for personal purpose.
 Expenses of personal nature such as residence rent, meals, refreshment, entertainment etc.
 Conveyance and travel expenses for going at work place.
 Clothing expenses (except business attire)
 Educational expenses (except trainings)
Income Tax Expenses: Income Tax (including interest, fees, fines etc.) paid as per Income Tax Act,
2058 or Foreign tax law (as recognized by Nepal tax law as credit) is not allowed as deduction.
Penalty on breach of law: Penalties or fines paid to any government on breach of law is not allowed as
deduction.
Expenses incurred for Tax Exempted or Final Withholding Taxed Income.
Distribution of profits by an entity (e.g. dividend, reserves etc.)
Expenses of Capital Nature: It means the expenses incurred in respect of natural resource prospecting,
exploration and development in the acquisition of an asset with a useful life exceeding 12 months and on
the disposal of a liability.
Payment if cash for more than NPR 50,000 (except mentioned circumstances)by an individual or an
entity having annual turnover more than 2,000,000 (Two Million).

INPUT TAX CREDIT

The person who is registered in VAT can claim credit of VAT paid while purchasing the Goods or
Services through imports or from any other person registered on VAT. This credit is called Input Tax
Credit (ITC).
Input Tax Credit (ITC) is deducted from the VAT Liability which arises on Sales of Goods or Services
(Output Tax). The balance amount is only paid to the government.

Definition of Auditing:
Once we complete preparing the final statements and accounts for the year the accounting process is
over. However, we still cannot be completely certain of the accuracy of these accounts. This is when the concept
of auditing comes in. Auditing, therefore, is an examination of the books of accounts and vouchers of the
business by an independent person in order to ascertain their accuracy.

The audit is an intelligent and critical examination of the books of accounts of the business. Audit is
performed to ascertain the validity and reliability of information. Examination of books and accounts with
supporting vouchers and documents to detect and prevent error, fraud is the primary function of auditing.

Features of an Audit
Auditing is a systematic process.
The audit is always done by an independent authority or a body of persons with the necessary
qualifications. They have to be independent so their views and opinions can be totally unbiased.
An audit is the examination of all the books of accounts and financial information of the company.
Auditing is not only the review of the books of accounts but also the internal systems and internal control
of the organization.
The auditor must completely satisfy himself with the accuracy and authenticity of the financial statements.
Only then can he give the opinion that they are true and fair statements.

Objectives of Auditing:
The basic objective with which auditing is done are:
1. Verification of accounts and statements.
2. Detection of errors or frauds.
3. Prevention of errors or frauds

Advantages of Auditing:
Auditing has several advantages which are given as follows:
1. It detects errors and frauds with suggestions for their prevention.
2. To avoid such mistakes being committed the accounts are kept up-to-date.
3. The parties feel confident of the audit report because it was done by an independent person or body.
4. Accounts as audited stand authentic.
5. The auditors are competent persons in the fields of accounts and financial laws so can render advice to
management.

Differences between Auditing and Investigation:

In general, Auditing is conducted to verify the extent of truthfulness and fairness of the financial records
of an entity, but Investigation is performed to prove a certain fact.
The following are the major differences between auditing and investigation:
1. The process of inspecting the financial statement of an entity and then giving an independent opinion
on it is known as Auditing. A careful and detailed study of the books of accounts to discover truth is
known as Investigation.
2. Auditing is a general examination while Investigation is critical in nature.
3. Auditing is conducted every year, but Investigation is conducted as per the needs of the organization.
4. Auditing is performed by the auditor whereas an expert team does the performance of an investigation.
5. Auditing is compulsory for every company. On the other hand, the investigation is discretionary.
6. Auditing verifies the true and fair view of the financial statement while Investigation is performed to
establish a fact.
7. The appointment of an auditor is made by the shareholders of the company. As against this, an
investigator is appointed by the owners/management .
8. The scope of auditing is general, which attempts to give an opinion on the financial statement of the
company. On the contrary, the scope of the investigation is limited as it attempts to answer only those
questions for which investment process are done.

Differences between Auditing and Accounting:

When accounting process ends, auditing begins, for the purpose of determining the true and fair picture
of books of accounts. It is an activity of record keeping and preparation & presentation of the financial
statement. Accounting is used by the firms for keeping a track of their monetary transactions.

Conversely, Auditing is an activity of verification and evaluation of financial statement. It aims at

checking and confirming the authenticity of financial books prepared by the accounting staff of the
enterprise. Thus, it determines the validity and reliability of accounting information.

Key Difference between Accounting and Auditing are:

- Accounting is keeping records of the financial transactions and preparing financial statements; but
auditing is critical examination of the financial statements to give an opinion on their fairness.
- Accounting is carried out on continuous basis with daily recording of financial transactions; while
auditing is basically a periodic process and carried out after the preparation of final accounts and financial
statements, usually on yearly basis.
- Accounting starts usually where book-keeping ends; while auditing always starts where accounting
ends.
- Accounting mainly concentrates on the current financial transactions and activities; while auditing
concentrates on the past financial statements.
- Accounting is very detailed and captures all details related to financial transactions, records and
statements; while auditing generally uses financial statements and records on sample basis.
- Objective of accounting is to determine the financial position, profitability and performance; while
objective of auditing is to add credibility to the financial statements and reports of the company.
- Accounting is governed by Accounting Standards with some degree of discretion; but auditing is
governed by Standards on Auditing and does not provide much flexibility.
- Accounting is performed by accountants; while auditing is performed generally by qualified auditors.
- Accounting is usually carried out by an internal employee of the company; but auditing is carried out by
an external person or independent agency.
- Accountant is appointed by the management of the company; while the auditor is appointed by the
shareholders of the company, or a regulator.
- Accounting prepares financial statements e.g. Income Statement or P/L, Balance Sheet, Cash Flow
Statement, etc.; while auditing provides Audit Report.
- Accounts are submitted to the management of the organization; while audit report is submitted to the
shareholders.

Rights and duties of an Auditor:

Rights:
1. Right of Access to Books of Accounts
2. Right to obtain Information and Explanations
3. Right to Correct any Wrong Statement
4. Right to receive Notice and other Communications relating to General Meeting and attend them
5. Right to Signature on Audit Report
6. Right to have Legal and Technical Advice

Duties:
1. To Certify The statutory Report
2. To Certify The Performance Of The Company
3. Submission Of Report
4. Signature's Duty
5. Helps Inspectors
12. Honesty

Audit Program:
An audit program is a set of directions which the auditor and its team members need to follow for proper
execution of audit. An audit program provides a basic plan for the audit team regarding entity’s business,
its size, how to conduct the audit, allocation of work among team members and the estimation of time
within which it should complete the work.
Audit program may be defined as the auditor’s plan of action indicating the work to be accomplished,
the audit tests and procedures to be followed, the persons responsible for the accomplishment of the work,
and the time within which the work is to be accomplished. It is a written scheme of the exact details of the
work done by the auditor and his staff in connection with the particular work. All the work which is
assigned to each member of the audit team is written in the audit program . Audit program guides the
audit personal in work to audit be done.

Advantages of Audit Program:

- An audit program helps in ensuring that all important areas are considered while conducting the audit.
- An audit program helps an auditor in the allocation of work among its team members according to their
skills and competency.
- It enhances the accountability of audit team members towards work performed by them
- An audit program also reduces the scope for misunderstanding among team members regarding the
performance of audit work.
- It helps the auditor in checking the status of audit work, its progress, how much it is left for performance
while conducting the audit.
- Auditor prepares audit working papers which contains a record of various audit procedure applied which
serves as evidence against the charge of negligence.
- Audit program enables the auditor to keep a record of useful information specifically for future audit and
references.

Audit Notebook:
A note book which is prepared by the audit staff to note down all the uncleared queries which s/he may
find in the course of audit and requires further clarification and explanation is known as audit note book.
Audit note book contains information regarding day-to-day work performed by the audit staff on any
particular date. Notes about all types of errors, difficulties and uncleared queries or points to be discussed
with the auditor or clients and the points which are to be incorporate in the report are noted down.
Audit notebook is a diary on which auditor scribble down all important inquiries to avoid the possibility
of unquestioned material facts.

Objectives of Audit Note Book:

1. To know about the nature of business.
Detection and prevention of frauds and errors effectively.
2. To make the future audit work easier.
3. To know the facts where clarification and explanation are essential.
4. To check the list of debtors and creditors.
5. To present as a proof by the auditor to clearance over the cases.

Contents of Audit Note Book:

1. A copy of audit program.
2. The nature of business and important documents relating to the business.
3. The name of the clients and audit year.
4. A list of books of accounts.
5. Name of principal officers, their duties and responsibilities.
6. Accounting and financial policies followed by the business.

Advantages of Audit Note Book

1. Audit Report
The audit notebook is helpful to prepare audit report. The auditor can record the weakness of accounting
records. The queries not properly answered are started in the audit report when the auditor is satisfied he
can submit a clear report.
2. Staff Honesty
The audit notebook is used to determine the integrity and honesty of audit clerks. The moral and ethical
value can be examined through audit work. When a person completes his work in time. Time period
auditor can appreciate him. If there is pending work after the expiry of time period, he can be held
responsible for it. The audit staff must be honest in his work.
3. Helpful For Memory
The audit notebook is help to keep things fresh in memory. The auditor can read the book on daily basis.
He can note the weakness on fingertips. The auditor can retain the data in his memory for a longer period
of time. He can ask the management to clear the doubtful points before preparing audit report.
4. Reference
The audit notebook is useful for reference. In future it can provide information to the audit staff. The past
data gives an insight into business matters. The auditor can note the changes. He can form an opinion
about the changes in the nature and size of the business.
5. New Auditor
The audit notebook is useful for new auditor. They can see the weakness of previous years. The old weak
points may not be repeated this year.
6. Court Cases
 The audit notebook is helpful to defend an auditor in court cases. The people can go to court of law in
order to fix liability for negligence of duty. The audit notebook is a written proof of work performed by
an auditor.

Internal Control and Check:

Internal check can be defined as the checks on day to day transactions which is a part of routine system
whereby the work of one person is proved or complementary work to another. The object being the
prevention or earlier detection of error or fraud.

Internal Audit:
Internal Audit - by words- do the audit internally. (within the organization). An internal audit is the
evaluation of all aspects of an organization by an internal auditor, i.e. one who works as an employee of the
organization. He keeps tabs on the financial reporting, accounting, operations, risk management, internal
controls and all other such aspects of an organization. An internal audit may happen daily, weekly, monthly,
quarterly etc. It is, in fact, a continuous process.

Internal auditing is the internal checklist and analysis of an organization. It is very useful one, but not
mandatory.

Internal audit can help to reduce manipulations in accounts, because it is a continuous process, but
external auditing is just a random selected auditing.

Advantages of Internal Audit:

1] More Effective Management
2] On going Review
3] Performances of Staff Improve
4] Ensures Optimum Use of Resources
5] Division of Work

Difference between Internal Audit and Internal Control:

Internal control is a system that comprises of control environment and procedure, which help the
organization in achieving business objectives. On the other hand, internal audit is an activity performed
by professionals to ensure that internal control system implemented in the organization is effective.
BASIS FOR
INTERNAL CONTROL INTERNAL AUDIT
COMPARISON

Meaning Internal Control refers to the methods and procedures Internal Audit alludes to the auditing program
implemented by the management to control the adopted by the firm, to review its financial and
operations, so as to assist in achieving the business operating activities by the professional.
objective.

What is it? System Activity

 BASIS FOR
INTERNAL CONTROL INTERNAL AUDIT
COMPARISON

Verification One person's work is verified by another. Each and every component of work is verified.

Time of checking As soon as the transaction is recorded checking is Checking is done after the work is performed.
performed.

Objective To ensure compliance with management policies. To detect fraud and error.

Differences Between Internal Audit And Statutory Audit

An internal audit is conducted by the permanent staff of the same office to detect weakness in
system, procedures and for the improvement. But statutory audit is the act of checking books of
accounts as per the provision of company act. Both of them check books of account, detect errors
and frauds even though they have certain differences which are as follows:

1. Appointment
An internal auditor is generally appointed by the management but statutory auditor is appointed
by the shareholders or Annual General Meeting.

2. Legal Requirement
Internal audit is the need of management but it is not legal obligation but statutory audit is the
legal requirement.

3. Qualification
An internal auditor does not required specific qualification as per the provision of law but
qualification of statutory auditor is specified.

4. Conducting Of Audit
Internal audit is of regular nature but final audit is conducted after the preparation of final
account.

5. Status
An internal auditor is a staff who is appointed by the management but statutory auditor is an
independent person appointed by the shareholders.

6. Scope Of Work
Internal audit is related to the examination of books of accounts and other activities of an
organization but statutory audit checks the books of accounts and related evidential documents.
So, scope of internal audit is vague but scope of statutory audit is limited.

7. Removal
Internal auditor can be removed by the management but statutory auditor can be removed by the
annual general meeting only.

8. Remuneration
Internal auditor is appointed by the management; so remuneration is fixed by the management
but remuneration of statutory auditor is fixed by the shareholders.

9.Report
Internal auditor needs to give suggestions to improve weakness but no need to present report but
statutory auditor requires to prepare report after the completion of work on the basis of facts
found during the course of audit and present such report to the appointing authority.

Test Checking:
Big business houses have a lot of transactions. So, it is very difficult to check all the transactions in detail.
An auditor needs to prepare and present report in short period of time. So, an auditor checks the sample
transactions and prepares and presents report to the concern authority which is known as 'Test Check'. An
auditor checks the books of accounts of a particular time or area if there is no any doubt, s/he proves the
account as true and fair, otherwise auditor checks in detail where s/he has doubts.

Routine Checking:
Routine checking is the regular monitoring of business accounts, books and ledgers to determine how the
business is functioning and to detect any errors that may have occurred, either accidentally or
fraudulently. Routine checking is conducted by closely examining books, ledgers, accounts and other
financial documents for arithmetic errors. The auditor checks the balances, subtotals and totals on these
documents and calculates the differences, transferring them from page to page.

Differences Between Verification And Vouching

Verification is made on the basis of vouching. So, verification is a part of vouching. Even though they
have some differences which are as follows:
1. Meaning
Verification is the act of checking title, possession and valuation of assets but vouching is the act of
checking the records with the help of evidential documents.
2. Nature
Verification is specially related to the assets and liabilities but vouching is related to all the accounting
documents.
3. Person
Generally, assistant staff or auditor performs the work of vouching but auditor himself performs the work
of verification.
4. Time
Vouching is made at the beginning of auditing but verification is made at the end of auditing or at the
time of checking balance sheet.