Pre Audit for payments – What is Pre-Audit, Why is Pre Audit
Pre-Audit for payments is a new sort of audit many big MNCs are opting now days for their payments. Handling payments of vendors is not an easy task as they have to comply with policies of the company and Statutory compliances Like TDS, GTA, Reverse charge mechanism etc. In this article we goanna explain you about pre-Audit for payments.
What is Pre Audit for payments?
Generally we do audit for the transactions happened and report to the management about transactions which haven’t complied with policies of the company and laws of the land. In pre-Audit a transaction is audited first, if it complies required compliances then such transaction is approved. In simple words a payment to vendor can be done only after getting approval from Pre-Auditor.
Why is Pre Audit for payments is required?
While dong Tax Audit auditor disallow many expenses for violating provisions like not deducting TDS, for not making Reverse charge mechanism for services received, for not making GTA. As all these expenses are disallowed and added back, the income of the company goes up and tax liability also increases. Say Tax auditors disallowed 1,00,00,000 (1 Crore) rupees of expenses tax liability of the company increases by 30,00,000 (30 Lakhs) plus other taxes. By incorporating Pre-Audit system all these disallowances can be avoided or pulled down saving company millions of rupees. It also gives a healthy tax audit report which poses a good impression in investors and market.
Organizations will have their own set of policies, Terms and conditions to release payments. It’s quite common that respective department people will have an overlook on them ending at millions of rupees loss to company. Say company has issued a Purchase order to a vendor to procure 100 units of material for 200 each. And its companies policy to deduct liquidated damages (In simple words penalties) from the vendor if he fails to supply the product on time. Many times department people forget to check these, but these kind of flaws can be avoided with the help of pre-audit.
How is Pre-Audit for payments is done?
- An document called PRA (Payment release advice) is prepared by the person who initiates the payment, it contains details like name of the vendor, amount to be paid, TDS deducted Purchase order number etc.
- Along with PRA related documents like invoice given by vendor, Purchase order, Lorry receipt, MDCC (Material dispatch clearance certificate) etc are attached for the reference of Pre-Auditor.
- After cross checking the entry passed and terms and conditions mentioned in purchase order pre auditor will approve the payment.
- Lorry receipt is attached to know the date on which the materials were dispatched and received at factory.