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ABC CLASSIFICATION APPROACH IN AUDIT

The ABC classification method, traditionally used for inventory valuation, is effectively applied in audit methodologies. This approach allows auditors to concentrate their efforts on a limited number of high-risk cases, ensuring that resources are allocated efficiently. Auditee units are categorized into three risk levels: high risk, medium risk, and low risk. In direct tax audits, the classification is applied by selecting cases based on scrutiny assessments, summary assessments, and refunds over Rs. 25,000, with varying percentages for audits. This targeted method enhances the overall effectiveness of the audit process.

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ABC CLASSIFICATION APPROACH IN AUDIT

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  1. ABC CLASSIFICATION APPROACH IN AUDIT Day 1 Session 4 slide 1.4

  2. ABC CLASSIFICATION APPROACH IN AUDIT • The ABC classification has been traditionally applied in the area of valuation of inventories. The classification can also be applied to audit. Basically it is applied in designing the methodology of audit. The ABC classification implies concentration of maximum audit effort small number of high-risk cases. This requires classification of auditee units and assessee under three categories i.e. • 1.      High risk units/assessees • 2.      Medium risk units/assessees • 3.      Low risk units/assessees slide 1.4

  3. ABC CLASSIFICATION APPROACH IN AUDIT • In the field of direct taxes audit too the ABC classification is being applied in the following manner: -

  4. ABC CLASSIFICATION APPROACH IN AUDIT • As far as selection of cases for audit is concerned, the extant practice is as under: - • Scrutiny assessments 100% • Summary assessments • Cases of refund above Rs.25000/- 100% • Others 5-35% slide 1.4

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