Use PM Analysis file for systematic approach, see download section, see below video also

As explained in video lectures.
Question 1 Simplified — Remember this flow and headings
 
(Reporting Requirement)
Section 44AB of the Income Tax Act, 1961 requires the auditor to submit the audit report in the prescribed form and setting for the prescribed particulars. The statement of particulars as required in Form 3CD are required to be annexed to the main audit report. The audit report is in two parts. The first part requires the auditor to give his opinion as to whether or not the accounts audited by him give a true and fair view and the second part of the report is in the form of an “Annexure” containing statement of particulars in respect of certain specified matters. The tax auditor has to report whether particulars are true and correct.
 
(Report Vs Certificate)
In this context, it is important to appreciate the distinction between the terms “report” and “certificate”. Briefly speaking, the term “certificate” is used where the auditor verifies the accuracy of facts while the term “report” is used in case the auditor is expressing an opinion. Strictly speaking, having regard to the usage of the word true and correct, these particulars require definitive information compiled from the books of account. Hence, it can be said that an auditor conducting tax audit ‘certifies” the information contained in the statement of particulars.
 
However, having regard to the distinction, it is significant to examine whether all 41 clauses included in the statement of particulars are capable of being simply certified on the basis of books of account or there are some clauses in respect of which different auditor(s) may hold different opinion.
 
(Examples of Some clauses in Form 3CD where is judgment is applied and opinion is given)
For instance, Clause 14 dealing with valuation of closing stock would require the auditor to examine and opine on the basis adopted for ascertaining the cost and, thus, to ensure that method followed for valuation of stock results in disclosure of correct profits and gains. Similarly, Clause 18 relating to depreciation would require the auditor to exercise judgement having regard to the facts and circumstances of the case, etc. Thus, there are several matters on which the auditor is required to exercise judgement while giving his report on various amounts included in the statement of particulars. No doubt that the auditor obtains the statement of particulars in FormNo.3CD duly authenticated by the assessee, it does not merely involve checking the corresponding figures with the documents and books of account but requires the auditor to exercise his judgement which may at times lead to different figures by different persons reporting thereon. There can also be situations leading to difference of opinion between the tax auditor and the assessee.
(Conclusion)
Therefore, it can be said that an auditor conducting tax audit “reports” on certain information, apart from certifying certain factual information contained in the statement of particulars annexed to the tax audit
report under section 44AB of the Income-tax Act, 1961.

 
(Requirement of Clause 41 of Form 3CD)
A tax auditor is required to provide details regarding turnover, gross profit, etc., for the previous year as well as for the preceding previous year in Form 3CD.
The ratios which are to be calculated for manufacturing entities are:
♦ Gross profit / Turnover
♦ Net Profit / Turnover
♦ Stock-in-trade/Turnover
♦ Material consumed / Finished goods provided

(Business wise not Product Wise)
These ratios have to be given for the business as a whole and not product wise. While
calculating these ratios, the tax auditor should assign a meaning to the terms used in the
above ratios having due regard to the generally accepted accounting principles. All the ratios
mentioned in the clause are to be calculated in terms of value only.

(How ratio analysis is useful in Audit ?)
(Ratio Analysis is Part of Substantive Analytical Procedures / It helps in checking CAV of Data / Suitable in Large Organisation , as it is not possible to check each and every item / it highlights unusual items / if backed by proper inquiry and other audit procedures, conclusion can be drawn)
Ratio analysis constitutes a substantive auditing procedure designed to obtain evidence as to the completeness, accuracy and validity of the data produced by the accounting system. Such assessment is necessary in organisation having large volumes of transactions and in the organisation following mechanised accounting system where it is not possible to check each and every transaction. It has the merit of bringing to focus the abnormal deviations and unexpected variations which the normal routine checking in auditing may fall to reveal. Ratios highlight only symptoms and that too as of a particular day and the auditor should study these symptoms properly, correlate them and reach definite conclusions or identify areas for further enquiries.
(Use of Sales Based Ratios)
The auditor should by relating sales with the net profit, various items of direct and indirect costs and gross profit gather information about the profitability and operating efficiency of an enterprise; variations in any of these ratios in a particular year should be inquired by the auditor.
GP Ratio & Interpretations
The fall in the gross profit ratio and profitability ratio should alert the auditor who should ask the management for the reasons thereof and which should be carefully examined by him.

Stock Turnover Ratio & Interpretations
The relationship of stock-in-trade to turnover over a period of time would reveal whether the
entity has been accumulating stocks or there is a decline in the same.
The auditor may obtain data for about 7-10 years, compute ratio of stock-in-trade/turnover and plot it on a graph paper over a period of time. This may give rise to several possibilities such as parallel horizontal
lines, vertical rising line or a vertical falling line. A study of this relationship would reveal
whether stocks are being accumulated or they are dwindling over a period. Such information
would provide an input to tax auditor as to whether figures of either stock or turnover are being
manipulated. Sometimes, while studying the relationship, it may show sudden decline or
increase at a point of time which reflect that there is definitely something wrong with the
figures of stock. Therefore, a close examination of such ratios helps the tax auditor to focus on
major deviations and consequently reasons for the same.

You have to convert each answer into key headings and arrange these headings in logical sequence and remember them