Audit Queries and Observations: Meaning and How to Reply

An audit query is a written question raised by an auditor during an audit, asking the company to explain a transaction, produce a document or confirm a fact. A query is not yet a finding. If it is answered properly, it is usually closed. If it is not answered, or the answer does not satisfy the auditor, it can become an observation, a qualification in the audit report, or, in a GST departmental audit, a demand for tax.

This article explains how audit queries arise in the three audits a company in Kerala most commonly faces, the statutory audit, the secretarial audit and the GST departmental audit, and how replies are usually prepared so that queries are closed at the earliest stage.

Query, observation and qualification: the difference

Term	What it means	What follows
Query	A request for an explanation, document or confirmation during the audit	Closed if the reply and supporting documents are adequate
Observation	A point the auditor considers unresolved or non-compliant after considering the reply	Reported to management; may be carried into the audit report
Qualification or adverse remark	A formal reservation in the audit report itself	Must be explained by the Board in the Board’s report; may attract regulatory attention

The practical lesson is simple: most of the work is done at the query stage. A qualification is far harder to remove than a query is to answer.

Queries in a statutory audit

Every company’s financial statements are audited by a chartered accountant appointed under the Companies Act, 2013. Under Section 143, the auditor has a right of access to the books and vouchers at all times and is entitled to the information and explanations needed for the audit. Common query areas are:

• Unexplained balances in suspense, director loan or advance accounts
• Related party transactions without board or shareholder approval, or not disclosed
• Loans and deposits accepted from persons other than directors, and whether they fall within the deposit rules
• Statutory dues such as TDS, GST, PF and ESI not paid on time
• Fixed assets without title documents, and stock not physically verified
• Points reportable under CARO 2020, where that order applies to the company

Where the auditor qualifies the report, Section 134(3)(f) requires the Board to give an explanation or comment on every qualification, reservation or adverse remark in the Board’s report. A well-documented reply at the query stage often avoids the qualification altogether.

Observations in a secretarial audit

A secretarial audit under Section 204 is carried out by a Practising Company Secretary and reported in Form MR-3. It applies to listed companies and to public companies above the thresholds in Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. Many private companies also commission a voluntary secretarial or compliance audit before investment or due diligence.

Typical observations relate to delayed or missed ROC filings, board and general meetings not held or minuted as required, statutory registers not maintained, related party approvals, and appointment of key managerial personnel. As with the statutory audit, the Board must explain any qualification in its report. See common non-compliances observed in secretarial audits.

Queries in a GST departmental audit

A GST audit under Section 65 of the CGST Act is conducted by the department, not by the company’s own auditor, so queries here carry direct tax consequences.

• The taxpayer is informed in Form GST ADT-01, at least fifteen working days before the audit.
• The audit is to be completed within three months from its commencement, extendable by the Commissioner by up to six months.
• During the audit, officers raise queries on input tax credit, reconciliation of returns with books, classification, rates and reverse charge.
• Findings are communicated in Form GST ADT-02 within thirty days of conclusion of the audit.
• The taxpayer may accept a finding and pay through Form DRC-03; findings that are not accepted may lead to proceedings for determination of tax.

Because each reply can become part of a later demand, replies in a GST audit should be written with that in mind: accurate, supported by documents and consistent with the returns. See handling GST notices and departmental scrutiny.

How to reply to an audit query

1. Read the query precisely. Identify exactly what is asked: a document, a reason, a reconciliation, or a confirmation. Answer that, and not more.
2. Collect the evidence first. Invoices, agreements, bank statements, board resolutions and filings answer most queries better than explanations do.
3. Give the legal or factual basis. Where a treatment depends on a provision, cite it. Where it depends on facts, state them with dates and amounts.
4. Admit and correct where the point is valid. A genuine error that is acknowledged and rectified, for example by a revised return or a delayed filing with additional fee, is usually treated far better than a defended mistake.
5. Reply in writing, within the time given. Keep a copy of each reply with its enclosures and the date of submission.
6. Have the reply approved. Replies on significant points should be approved by a director or the person responsible, since the company is bound by them.

A simple structure for a written reply

• Reference: audit name, period and the query number or date
• The query, quoted briefly
• The company’s response: facts, figures and the basis for the treatment
• Documents enclosed, listed and numbered
• Corrective action taken or proposed, if any, with dates
• Name and designation of the person signing

Preventing queries in the next audit

Most recurring queries come from the same few gaps: books that are not reconciled with returns, approvals that were never documented, and registers and minutes that are not kept up to date. A short internal review before the audit, covering reconciliations, statutory registers and filings, removes much of this. See the annual secretarial compliance checklist and maintaining statutory registers and records.

Frequently asked questions

What is the meaning of an audit query?

It is a written question from an auditor seeking an explanation, a document or a confirmation about an item in the accounts or records. It is a request, not a finding.

Is there a fixed time limit to reply?

The auditor or the department usually specifies a date. In a GST audit, the time given in the request should be followed strictly. Where more time is genuinely needed, it should be asked for in writing before the date passes.

What if the company disagrees with an observation?

It should say so in writing, with reasons and documents. In a statutory or secretarial audit, any remaining qualification must be explained by the Board in the Board’s report. In a GST audit, a finding that is not accepted can be contested in the proceedings that follow.

Can an audit qualification be removed later?

A qualification relates to the year audited and stays in that report. What can be done is to correct the underlying issue, so that it does not recur in the next year’s report.

ചുരുക്കം (Summary in Malayalam)

ഓഡിറ്റിനിടെ ഓഡിറ്റർ വിശദീകരണമോ രേഖയോ ആവശ്യപ്പെട്ട് എഴുതി ചോദിക്കുന്നതാണ് ഓഡിറ്റ് ക്വറി. ശരിയായ മറുപടിയും രേഖകളും നൽകിയാൽ സാധാരണ അത് അവസാനിക്കും; ഇല്ലെങ്കിൽ ഒബ്സർവേഷനോ ഓഡിറ്റ് റിപ്പോർട്ടിലെ ക്വാളിഫിക്കേഷനോ ആകാം. സ്റ്റാറ്റ്യൂട്ടറി ഓഡിറ്റ്, സെക്രട്ടേറിയൽ ഓഡിറ്റ്, GST ഡിപ്പാർട്ട്മെന്റൽ ഓഡിറ്റ് (ADT-01, ADT-02) എന്നിവയിലാണ് കമ്പനികൾക്ക് സാധാരണ ക്വറികൾ വരുന്നത്. ചോദ്യം കൃത്യമായി മനസ്സിലാക്കി, രേഖകൾ സഹിതം, നിശ്ചിത സമയത്തിനകം എഴുതി മറുപടി നൽകണം. ഓഡിറ്റ് റിപ്പോർട്ടിലെ ക്വാളിഫിക്കേഷനുകൾക്ക് ബോർഡ് റിപ്പോർട്ടിൽ വിശദീകരണം നൽകണം.

This article gives a general overview of audit queries in company and GST audits. Laws, rules and procedures are revised from time to time; for accurate and current requirements, refer to the Companies Act, 2013, the CGST Act and the rules as amended. The article is not advice on any particular case.