A deferred tax reconciliation working paper should let the auditor independently rebuild the deferred tax asset or liability from the tax base of each individual asset and liability, not just review a summary schedule management has prepared — the mechanics are: compute the carrying amount per the books, compute the tax base per the applicable tax law for the same item, multiply the difference by the enacted or substantively enacted tax rate expected to apply when the difference reverses, and separately reconcile the tax expense in the profit and loss account to accounting profit multiplied by the applicable tax rate, explaining every reconciling item.
Building the temporary difference schedule
- 01List every asset and liability with a book-tax basis difference, not only the obvious onesDepreciation on fixed assets and provisions are the usual suspects, but unabsorbed depreciation, carried-forward business losses, MAT credit, unrealised intra-group profit, and fair value gains not yet taxed are frequently missed lines.
- 02Recompute the tax base for each line independentlyFor a fixed asset, the tax base is cost less tax depreciation allowed to date under the applicable tax law (which can differ materially from book depreciation under Ind AS 16) — recompute this from the tax depreciation schedule, not from the books.
- 03Apply the rate expected to apply on reversal, not necessarily the current year's rateWhere a rate change has been enacted or substantively enacted but is not yet effective, the future rate should be used for the deferred tax computation, even though the current year's tax expense still uses the current rate.
- 04Test recognition of deferred tax assets against the recoverability testA deferred tax asset on an unused tax loss or unabsorbed depreciation is recognised only to the extent it is probable that future taxable profit will be available against which it can be utilised — recompute management's taxable profit projection used to support this, the same way an estimate under SA 540 would be tested.
The effective tax rate reconciliation — what it should tie out to
| Reconciling item | What to verify |
|---|---|
| Accounting profit × applicable tax rate (notional tax) | Starting point — recompute from the audited profit before tax figure, not a draft. |
| Permanent differences (disallowed expenses, exempt income) | Each item should trace to a specific tax law provision, not a plug to make the reconciliation balance. |
| MAT credit entitlement / utilisation | Should tie to the MAT credit entitlement computation and its own recoverability assessment, separate from the general DTA recoverability test. |
| Prior period tax adjustments | Should trace to an actual revised assessment, return filed, or appellate order — not an unexplained true-up. |
| Closing: actual tax expense per the P&L | The reconciliation should land exactly on the reported current plus deferred tax charge — any unreconciled balancing figure is a finding, not a footnote. |
A deferred tax working paper that computes the closing DTA/DTL balance directly from the prior year closing balance plus a plug, rather than rebuilding the temporary difference schedule asset by asset for the current year, will not surface items that reversed, originated, or changed tax base during the year — recompute from the schedule, not from a roll-forward of last year's number.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Audit documentationInd AS 12: income taxes, and how a deferred tax balance actually gets builtDeferred tax isn't computed from the profit and loss difference between book and tax. It's computed balance sheet item by balance sheet item, and that distinction changes the whole calculation.
- Audit data & extractsTrial balance mapping for audit softwareMapping a client's idiosyncratic ledgers to a standard chart of accounts is the step that decides whether analytics and disclosures work at all, and the one most firms rush.
- Payroll & employee costTDS on salary: audit testing approachRecomputing TDS for a sample against the declared regime, matching to Form 24Q, and reconciling TDS deducted to deposited and to the payroll register.
- Audit workflow & automationSA 540: auditing accounting estimates, where judgment replaces a verifiable numberAn estimate can't be vouched to a source document the way an invoice can. SA 540 is about what replaces vouching when there's no single right answer to check against.
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