TAX AUDIT AND INVESTIGATION - CITN EXAMS QUESTIONS AND ANSWERS

 TAX AUDIT AND INVESTIGATION - CITN EXAM QUESTIONS AND ANSWERS 

INTRODUCTION TO AUDIT AND INVESTIGATION 

SUGGESTED QUESTIONS AND ANSWERS

1. It appears from a number of studies in recent years that the role of an auditor in relation to the detection of fraud is widely misunderstood. These studies have found that a high proportion of investors and of company management believe that the detection of fraud is one of the main objectives of an audit required. 

a) Discuss what you consider to be the auditor’s responsibilities in the course of the normal annual audit, in relation to the detection of fraud

Solution:

1a) The legal position is that it is not the auditor’s primary responsibility to detect or prevent frauds and other irregularities. 

The auditor’s duty is to state whether a set of accounts gives a true and fair view and comply with the relevant legislation. However, the auditor has a secondary responsibility in relation to fraud etc. in that he should design and evaluate his work with a view to detecting those errors and irregularities which might impair the truth and fairness of the financial statements. Therefore, in obtaining audit evidence the auditor should satisfy himself that those errors or irregularities which may be material for the financial statement have not occurred or that if they have occurred they are either corrected or properly accounted for in the financial statements. 

In carrying out this responsibility the auditor should exercise reasonable care and skill and apply current auditing standards because it is expected that if the auditor plans his work well and applies current standards he should come across all material errors and irregularities in the normal course of his audit.

b) Explain the way in which the auditor should approach and perform his work in order to meet those responsibilities.

Solution:

1b) The auditor should conduct a normal audit in accordance with the auditor operational standards. This involving the following steps:

i. Plan, control and record the audit.

 ii. Evaluate the test internal controls.

 iii. Design substantive tests which takes into account weakness in internal controls. 

iv. For the major items in the account, obtain relevant, reliable and sufficient audit evidence.

 v. Review the financial statements checking the consistency of related items looking at trends and investigating unusual variations. 

vi. If he comes across anything suspicious he should investigate it thoroughly. That is, he may need to amend his audit programme to enable him to investigate and follow up the errors and irregularities.

c) Briefly outline the action which the auditor should take if, during the audit he suspects that his client has carried out fraudulent trading.

Solution:

1c) In the course of his audit the auditor may discover a fraud or irregularities perpetrated by his demerits client. Normally, his duty of confidentiality prevents him from reporting any matters to third parties without his client’s permission. However, in certain circumstances the auditor may disregard the duty of confidentiality for example; he may be legally bound to disclose the commission of a criminal offence if ordered to do a court or by government officials empowered to request such information. 

Further, an auditor may elect to disclose information voluntarily where there is a public duty involved. A public duty arises if the auditor is aware of an actual or intended criminal offence likely to cause harm to an individual or effect a large number of people where the auditor is not sure of his position he should seek legal advice and if his efforts are frustrated by his client he may consider resigning his appointment under the provisions of the companies and allied matter act.

2. What are the expectations of the users of audited accounts of the external auditor? And explain the steps to be taken to bridge the audit expectation gap. 

Solution:

The expectations of audited account’s users 

i. The shareholders wish that the accounts should be examined by an independent, and competent person who must access and attest on the account on how well management have discharged their functions. 

ii. They believe an auditor is to be blamed in the event of company liquidation which has been audited by the auditor.  

iii. Where adequate supply of needed vital and crucial information/documents is not provided by the management of the company to the auditor, then auditor should sue such management. 

iv. The users of audited accounts believe that external auditor deliberately keep useful secrets of audited companies from them due to over-dependent on auditors opinion.

v. The users of audited account believe auditors opinion on the financial statements of a company for a year, they should be able to rely upon for the subsequent years. 

vi. The users desire that auditors present audited account in such a way that it will be easily understood by users and the issue of misconception on the duties of an auditor or misinterpretation of accounts will not arise. 

vii. The users also believe that auditor should give absolute assurance and not just a reasonable assurance on the audited account. 

viii. The users believe that financial detection should be the main function of an External auditor. 

ix. The users believe that the auditor do not really carry out their work independently since it is the management that hire and fire auditor instead of the shareholders (The users).

x. The users also believe, the law requires the external auditor to express trueness and fairness of the financial statements to the users. 

xi. The users believes there is inadequacy of standards, hence more standard should be made to enhance the performance of auditors.

Steps That Can Be Taken To Bridge The Audit Expectation Gap 

 The audited account users place a significantly greater demand in auditors than what auditors themselves perceive their roles and responsibilities should be. In other word the expectation of the users of audited financial statements and their belief of the duties, rights, roles and responsibilities of auditors are too demanding and at variance with what is actually obtainable in the statutes and laws that regulate the work of an auditor. 

In view of this, therefore, it is necessary to bridge this audit expectation gap as follows: ix. There should be public awareness, enlightenment and education on the duties, roles, power and responsibilities of an auditor. 

i. Lecture should be organized to educate the audited account users on the appointment, dismissal and rights of an auditor as well as, the level of assurance of audit report from independent auditor in the performance of his duties. 

ii. The audited accounts users should familiarize themselves with the relevant laws, statutes, statutory pronouncement, standard or audit guideline as it relates to duties, roles, appointment, independence of an auditor in order to disabuse their wrong perception. 

iii. The audited financial statement should be written in simple, plain language and be well presented at the annual general meeting in order to remove misinformation, misleading, communication gap and misinterpretation of the accounts.

iv. The audited accounts users should know that auditor does not have primary responsibility for the prevention and detection of fraud. The Auditing standard provides an approach that an auditor should follow when conducting an audit.

v. The audited accounts users should note that auditors can only give a reasonable assurance and not an absolute assurance on audited accounts because they are not the one that prepared the account. What the management of company wants the auditor to see and to know is what they will present to him. The auditor only relaying on the information provided to him by management

vi. By law, the main duty of an auditor is not to detect fraud and does not have legal right to sue a company for inadequate supply of needed information.

vii. An understanding of the nature of the expectation gap between audited financial statements users and external auditors will definitely improve the quality of services provided by the accounting profession.

3. What are the likely difficulties an Internal and External Auditors will face while performing their duties? and how can these difficulties be overcomes? 

Challenges Faced By The Auditor 

Even the most effective internal control system can be rendered useless by:- 

➢ Top management itself – by overriding the control ignorantly or on purpose 

➢ The workers – either through fatigue or misunderstanding 

➢ Business Environment – by not being static can reduce a previously effective control system to nothing with the passage of time 

➢ Concealment of their inefficiencies or other irregularities by adopting fraudulent accounting practices ➢ Mechanization – through ever changing innovation on business machines. For example, new controls usually follow introduction of any computer system 

➢ Fraudsters - by capitalizing on loopholes in the system or outright abandonment of established procedures with defalcation in view. 

➢ Not all members of management are well acquainted with the proper duties of the internal auditor. Some tend to rely on it to settle old scores or heal old wounds while some selfishly seek its support in their bid to climb the corporate ladder. 

➢ Policy statements and change in procedures are not communicated to internal Auditor.

 ➢ Unavailability of adequate accounting system i.e. since most of the audit evidence are available from accounting records, and reliable accounting records can only be made available if good accounting system is in place. The non-auditing officers do feel that to hinder the auditor’s work and make him have access to few evidence is by installing and / or operating inadequate accounting system 

➢ Deliberate refusal to supply vital information on the pretence of unavailability or confidentiality. These non-auditing officers are often fond of holding information that they know would be useful for the audit and even where the auditors made requests, they would still deny having such information. By this, the auditor may be forced to device further methods or techniques to obtain the required information which may be more expensive and time consuming

➢ Non-Recognition of the Internal Audit department (i.e. to frustrate a unit is to give little or no recognition to the importance of that unit and this will definitely lead to poor funding and staffing of that unit. 

➢ Creating opportunities to influence auditors opinion through threats and gifts.

 ➢ Ignorance of their responsibilities to auditors i.e The refusal of some non-auditing officers to cooperate has been that because they are held in trust for keeping company’s information which are seen to be too confidential. They are not aware that the auditors have the right by law to obtain all information and explanation he thinks necessary. 

➢ An attempt to cover up frauds and Intentional errors/irregularities Some non-auditing officers are aware of the objects of audit and their responsibilities to auditors but they still put up their uncooperative attitude just to cover up the frauds and intentional errors they have committed or they collaborated to commit.

WAY FORWARD 

We have examined the roles of the non-auditing officers, the ways they have been performing these roles and why they are behaving the way they do but the task would be incomplete if we do not suggest ways of ensuring that the best is obtained by the auditors from the non-auditing officers. The following suggestions should be adopted:- 

❖ Educate them on the objects of audit. It is the duty of External and internal auditors to see that the non-auditing officers are educated as to what constitute the audit objectives. The primary aims of an audit is not to detect or prevent frauds and errors rather to make a report whether the financial statement gives a true and fair view, but an auditor must perform his duties in such a way that if errors and frauds are committed, they can be reasonably and ordinarily discovered. The auditors and the management team are both the “agent” and “or employees” of the owners and they must both aim at protecting and maximizing the interest of the owners and for this to be done, they must work hand in hand. 

❖ Educate them in the advantages of audit. Internal audit provides many advantages to the management. It is a tool for ensuring effective implementation of the internal control system and in fact, it allows such internal control system to be reviewed. With internal control audit, management policies are seen to be complied with and adequate

information is made available to management for review and decision making. If the non-auditing officers are given proper education, they would see reasons to cooperate with the auditor since the exercise will benefit them and this would enable them to give more attention to the internal and external audit reports. 

❖ Create awareness as to their responsibility. It is necessary to make the non-auditing officers realize that it is not a moral obligation for them to make available books, accounts, and vouchers for the auditors use rather it is a legal obligation to do so, since the auditors are entitled to such right and doing that have not made them to contravene the rules that make them to treat the company’s information as confidential 

❖ Establishment of Audit Committee: section 359(3) of the Companies and Allied Matters Decree 1990 as amended made it mandatory for all public companies to have audit committee. Much good would be done to internal audit, if every organization has an audit committee and if the internal auditors can be appointed by this audit committee and made to report to them so as to prevent the unnecessary and direct or indirect intervention of the management in the internal audit. 

❖ Appointment and Qualification of Internal Auditors: The caliber of people to occupy the positions of internal auditor should be well designed to make equitable with those for the positions of Management. This would enable the management to accord much respect to the personality of the internal auditors and to the internal audit. 

❖ Policy statements and change in procedures should be communicated to internal auditor to enable him enforce adherence. 

❖ Do not give the internal auditor an assignment and give him results derivable from it.

4. What do you understand by the term “Auditing and Investigation”? and what are the merits and demerits of each?

Solution:

Auditing is the process of examining a set of the accounting books, records, vouchers, documents [information] etc. with the intent of establishing its reliability. The process is usually performed by someone other than the preparer or user of the information. Regardless of who is performing an audit, an internal or external auditor the audit has the same purpose. To ensure the financial statements as a whole are free from material misstatement

Kwame- Cyasi (An International Guide to Auditing) defined auditing as “the independence examination and investigation of the evidence from which a financial statement has been prepared with a view to enabling the independent examiner to report whether in his opinion and according to the best of the information and explanation obtained by him, the statement is properly drawn up and gives a true and fair view of what is purports to show and if not to report in what respects he is not satisfied”

Merits of Auditing 

• Its helps reduce the risk of fraud and poor accounting.

 • Facilitate the provision of advice that can have real financial benefits for a business. 

• The detection of errors and fraud. 

• The prevention of errors, irregularities and frauds. 

• To art as moral check against making mistakes, errors or frauds. 

• To reveal the weaknesses and inefficiency in the working of the system. 

• It serves as a deterrent to fraudulent staff within an organisation.

 • By performing auditing frauds and errors can be rectified on time.

Demerits of Auditing. 

• It is not the responsibility of auditor to make recommendation, hence Auditor cannot perform the following: 

• They are less concern with the management policies.

 • They cannot guide management for better use of capital.

 • The absence of honesty and independence render an audit useless. 

• The auditing fails to present fair view due to bias of an auditor. 

• Auditing is more of checking past activities. It is less concerned with present or future.

 • Failure to check planned frauds. 

• The management can play tricks to manipulate the financial statements in order to conceal their inefficiencies and irregularities. 

• Failure to disclose correct information by the management can lead to wrong clarification. 

• Wrong certification can lead to inaccurate or false decision.

• Due to manipulation of financial statements by the management the end result can never give true and fair view picture. 

b) Definition of an Investigation 

An investigation can be defined as a thorough and in-depth examination of the financial statements of an organization and their relevant supporting documents for the specific purpose of obtaining facts or to evaluate a specific situation to be submitted to an interested party.

 5. What are the qualities of an Auditor and Investigator?

Solution: 

Qualities of an Auditor.

 • The Auditor must have the required experience, academically and professionally qualified 

• The Auditor must have a mindset that recognizes different business needs. 

• Knowledge and Experience: Such an auditor must be knowledgeable and technically sound on the companies laws [CAMA], accounting, auditing, information technology and other related subjects. 

• Independence and Objectivity: 

- Intellectually honest. 

- Free from any obligation or interest.

 - Ability to make independence decisions.

 - Must not be biased. 

- Dependable

• Auditor must be open mindedness, fact and effective communication skills. 

• Intelligence, clear thinking, and a capacity for dealing with new problem with energy, initiative, and imagination so as, to be able to devise workable solutions. 

• Personality and equable temperament.

5b) Qualities of a good investigator 

A tax investigator should posses some requisite characteristics such as the following: Professional skepticism -have a mindset that recognizes the possibility of a tax loss due to evasion/avoidance or fraud. 

• Good knowledge of the tax laws, accounting, financial control. 

• Good knowledge of company laws (CAMA, Insurance Act, Banking Act/Prudential guideline)

• Good Knowledge of Information Technology (IT)/computer/IT Compliant e.g. auditing through the computer. 

• Good knowledge of range of Industries. 

• Must have an inquisitive or probing mind always looking for clues. 

• Must be patient 

• Must be courteous 

• Must be intellectually honest, free from any obligations or interest. 

• Must not be biased, that is must be objective must have free mind, open mindedness. 

• Must be analytical. 

• Must exhibit a high level of professionalism at all times. 

• Possess very good communication skills.

TAX AUDIT AND INVESTIGATION PRINCIPLES

Suggested Questions and Answers 

1. Under what reasons are a tax audit and tax investigation conducted. 

Solution:

Reason for Tax Audit Companies / enterprises are usually chosen for tax audit based on any or a combination of the following conditions.

 • Self-assessment filers: Every large tax payers and small and medium tax payer every three (3) years based on available audit resources. 

• Genuine information received from intelligence or other FIRS depts. Or external sources about Tax payers. It could also be referral from other regulatory agencies like the EFCC, ICPC or report/ complain from external sources e.g whistle blowers TV or Newspaper report etc

• Tax payers with refund claims. i.e 

• Returns showing refunds especially arising from excess with-holding tax or VAT. 

• Tax payers making NIL returns or reporting or declaring losses on a continuous basis. 

• Tax payers with three or more years of loss compared to average profit for an industry. (heavy losses) • Tax payer with poor adequacy ratios. 

• Claims under double taxation agreement. 

• Based on routine sectorial / industry audit. 

• Case referrals as a result of desk review/ examinations.

Reason for Investigation 

o Refusal to file returns 

o Refusal to remit Withholding Tax and Value Added Tax deducted at source 

o Refusal to allow access to records and books 

o Refusal to honour tax office invitation or respond to tax quarries 

o Fraudulent conversion of (FIRS) Government Cheques 

o Intelligence report of criminal activity of tax payer bordering on tax default 

o Petition against the company disclosing serious tax evasion 

o Understatement or non-disclosure of income 

o Overstatement of income o Fictitious assets and expenses 

o Non-filing of tax returns or filling incorrect returns 

o Fraudulent procurement of Tax clearance certificate (TCC), revenue receipts and withholding tax credit notes

2. When may a back duty Investigation be required ? 

Solution: 

 Back duty investigation may be instituted by the tax authority into the affairs of the taxpayer where the tax authority discovers or suspects that tax has been lost in the past years due to the taxpayer’s fraud, willful default or neglect. Where the tax authority discovers or suspects that tax has not been assessed or has been under-assessed or under paid in the past years due to tax evasion it may institute a back duty investigation into the affairs of the taxpayer corcerned with a view of recovering the tax lost or under-paid. In other words, a back-duty investigation is conducted by the tax authority in the event of tax evasion.

(b) you have just been promoted to the post of Assistant Director of Taxes by FIRS and you have been chosen to lead a team to conduct back duty audit on companies in Abuja. Briefly itemize ten(10) of the audit requirements you will attach to your notification letters to the companies. 

Solution:

These are the tax audit requirements:- 

- Audited financial statements for the period under review

 - Management Accounts 

- General ledgers 

- Transaction listings 

- Year and Trial balance 

- Audit adjustment journals 

- Board of Directors minutes book 

- Minutes of Board meetings 

- Minutes of Tender Board Meeting (if any) 

- Tax files/correspondences with tax authorites.

 - Journal vouchers 

- Evidence of payment of all taxes e.g. (receipts, bank advices/transfers etc) 

- Income tax computations 

- Self – Assessment forms/Evidence of tax filing 

- Fixed assets register 

- Import documents & local purchases documents

 - Invoices, sales day book, sales ledger

 - Debit/credit notes 

- Schedule of rent paid, rent agreement 

- Bank statements/schedule of Bank statements

3. Outline any five (5) taxpayer’s rights. 

Solution:

Rights and Obligations of Tax payers 

• Both the Nigerian constitution and tax laws preserve the rights tax payers. During tax audit you will be discussing confidential information with the taxpayers. Be sure that you do not put the taxpayer or tax officials in a situation where confidential information could be disclosed to someone other than the taxpayer or their authorised representative. Being aware of these considerations will assist tax officers in maintaining a positive relationship with the taxpayer in order to respect the tax payer’s privacy you should schedule the field audit or meeting at : 

• The tax payer’s place of business. 

• Tax administration’s office or 

• The office of tax payer’s authorized representative, if applicable.

 • when dealing with a taxpayer, you should always strive to: 

o Be courteous and considerate 

o Provide accurate and clear information 

o Behave in a professional manner 

o Ask appropriate and relevant questions 

o Be fair and objective 

o Treat every information with respect and privacy 

However, maintaining a positive attitude and treating the taxpayer with respect will have a significant impact on your ability to conduct a professional audit. it will also help build taxpayer’s level of confidence and respect for the tax system. It is important to know that the objective of an audit is to determine the correct amount of tax due. Therefore, taxes should be calculated on tax law only. The right of the tax payer include but not limited to:

i. Right to raise objection when not pleased with the tax office assessments 

ii. Right to be issued tax clearance certificate where there is no tax outstanding against tax payer 

iii. Right to be given the opportunity to respond to their tax queries 

iv. Right to claim and be granted capital allowances on qualifying assets owned by tax the tax payers and used for the purpose of the taxpayers business at any relevant period 

v. Right to effect change in the accounting date of the tax payers business provided such is brought to the notice of the relevant tax authority 

vi. Right to some approved tax incentives

4. The self-assessment tax system assumes that taxpayers are honest in the process of assessing themselves. Despites this, taxpayers are still subjected to tax audit as tax audit is one of the significant features of a self-assessment tax system

In view of this, you are required to identify and explain ten(10) objectives of a tax audit exercise. 

Solution:

❖ To enable the tax authorities to determine whether or not the taxpayers have complied with the relevant tax laws, rules and regulations. 

 ❖ To confirm whether tax returns have been submitted within the stipulated time. 

❖ To ascertain taxpayer’s proper tax liability. 

❖ To ascertain the taxpayer’s state of record keeping to meet its tax obligations. 

❖ To improve compliance culture so that a taxpayer transits to voluntary compliance. 

❖ To conduct of tax audit exercises on some companies within the same industries encourages more compliance on others. 

❖ To further educate the taxpayers on tax laws and records keeping which are essential for tax compliance by others. 

❖ To review taxpayer tax strategies. 

❖ To detect and penalise act of non-compliance. 

❖ To ensure that declarations made by the taxpayers are accurate and reliable. 

❖ To collect taxes that could have been lost to the government. 

❖ It affords the tax authority and the taxpayer an opportunity to interact (especially during field audit) such that taxpayer may ask questions or seek clarifications on some aspects of the tax laws practice as may be necessary. 

❖ To enable the tax authority to gather as much information as possible about taxpayer (especially information that are of permanent nature) for storage and future use. 

❖ Tax audit can lead to the discovery of the existence of tax fraud or evasion. The tax auditors can then recommend such cases for further investigation. 

❖ In the course of interaction with taxpayer, and examination of their records during field audit, the tax auditors may discover that some provisions of the tax legislation are outdated or ambiguous or capable of various interpretations or have created loopholes for tax avoidance. These should be brought to the attention of the FIRS management with recommendation for amendment or change in the tax laws.

5. What are the qualities and roles of a good tax audit team leader? (3marks)

Apart from the core values of a good tax officer (i.e. integrity, objectivity, and independence, conformity, with technical standard), a tax auditor/team leader must be: 

− Matured, principled, intelligent, tolerant and diplomatic in nature.

 − An experienced tax auditor with good knowledge of tax laws, circulars and regulations.

− A good team player. 

− A motivator and a goal getter.

 − Able to achieve the desired result within the specified time.

 − A good listener and a great communicator. 

− Fair, firm and courageous in nature.

 − A disciplined tax officers.

The Roles of a Tax Audit Team Leader 

During the field audit the team represents the head of audit, Tax controller, the board and the management of the tax authority. Therefore, as the team leader, he must perform the following: 

− To review the tax audit file including work programme. 

− Chair the preliminary and exist meeting. 

− Share the work to the team members. 

− Ensure that all tax audit requirement are available for the member to work with. 

− Monitors the work of the team members from time to time and be able to give direction of the work. 

− Ensure that the team members conduct themselves professionally and peacefully.

 − Liaise with the tax office (Head of audit or tax collector) if there is an urgent need to do so.

 − Be in-charge for all the field audit activities and also have supervisory authority over the other member. 

− Relate closely with the schedule officer for the case 

− Ensure timely collation of the interim field audit report.

PLANING OF TAX AUDIT AND INESTIGATION

Suggested Questions and Answers

1. With respect to ratio analysis, write short notes to illustrate your understanding of each of the following terms:- 

➢ Liquidity ratios 

➢ Efficiency ratios 

➢ Equity position ratios 

➢ Profitability ratios 

➢ Gross profit margin ratios 

Solution:

a) Liquidity ratios These are ratios designed to measure taxpayer’s ability to pay its obligations. Ratios under the category include: 

i. Current (or working capital) ratio 

ii. Acid Test (or quick) ratio

 iii. Working capital turnover Current or working capital ratio

Current Assets (X:1) 

Current liabilities

Where current liabilities exclude secured bank overdraft. The ratio indicates the extent to which assets that will be converted into cash within a year cover claims of short-term creditors. The higher the ratio the greater the margin of safety for short-term creditors. An average of 2:1 is however considered ideal universally. ii. Acid – Test Quick Ratio

= Liquid assets (X:1) 

Current liabilities

Where liquid assets include cash and bank, short term investments and debtors balance but exclude stocks and prepayments and slow paying debtors. Current liabilities exclude secured bank overdraft and other liabilities not due for immediate settlement. The ratio shows the extent to which cash and assets most readily convertible to cash can meet the demand of short-term creditors. A ratio of 1:1 is normally considered appropriate.

b) Efficiency ratios: 

These are ratios that measure effectiveness of tax payer in using of its assets.

 - Account receivable to turnover ratio

 - Age of accounts receivable

 - Inventory turnover

- Working capital turnover

 - Asset turnover

c) Equity position ratios 

These are ratios that measure the balance between the resources provided by the creditors and owners of the company.

 - Debt equity ratio 

- Debt to total assets ratio 

- Book value per ordinary share

d) Profitability ratios 

These are ratios that measure the profitability of the taxpayer. Profitability is the ability to sell goods and services above cost and earn reasonable returns on capital. Ratios under this category include:- 

- Profit margins on sales 

- Return on investment

 i. Return on Total asset 

ii. Return on Owners equity 

iii. Adequacy of Tax assessed. 

- Ratio of Tax already assessed to Net Profits 

- Ratio of cost of sales to Turnover

e) Gross Profit Margin ratios

 Gross profit x 100 

Sales

It measures gross profit earned on every Naira sale. The excess of sales over cost of sales is referred to as gross profit. If the cost of sales exceeds the sales revenue, the difference would be gross loss. This ratio of gross profit to sales is also referred to as the gross profit margin. The gross profit margin shows the proportion of sales that returns out to be gross profit. Marking judgment based on the absolute figure of gross profit can be misleading. 

The FIRS can make a better comparison by comparing the gross profit margin of the company with other companies which are in the same industry or the gross profit margin of the same company over a period of years. 

The analysis of these ratios is to be performed at tax offices at FIRS with the following tax evasion tendencies in mind.

 

- Understatement of Income 

- Over statement of Expenses 

- Undervaluation of stocks 

- Creation and maintenance of secret reserves 

- Post dating of sales (what happens to the related cost when income is post dated. 

- Omission of income. 

Proper interpretation of these ratios will lead to determination of the risk areas for tax audit focus.

2. What is audit programme and state five (5) benefit of the audit programme? 

Solution:

What is Audit Programme? and benefits of the tax audit programme

a) Audit Programme 

This is a schedule of audit works expected to be performed on each item of the accounts such as income/turnover, expenditures, assets and liabilities. 

b) Benefits of the Audit programme 

The audit programme would be useful in the following areas:- 

- It will provide details of the work which the team leader requires individual members of the team leader requires individual members of the team to perform. 

- It will provide information as to how much of the audit work has been completed as at a particular date, and how much is outstanding. 

- Provides a record of audit responsibility by providing a record of the audit staff members responsible for each of part of the completed work. 

- Facilitates audit supervisions and control, giving senior members of the audit team information and knowledge regarding the progress of the work done to date. 

- Continuity in this audit work should there be a change in the personnel constituting the audit team, with new members being able to see at a glance the outstanding work to date and provides a basis for planning and staffing the audit.

- Provides an avenue for the team leader to allocate his available staff in the most productive and efficient manner possible. 

- To aid planning and execution.

3. Explain to show your understanding of the following terms a) Risk profiling b) Purpose of Audit planning c) Features of audit planning memorandum

Solution:

(i) Risk Profiling 

This is aimed at preparing both the audit department and audit team that will be involved in the audit exercise for the audit task ahead.

 - It involves obtaining basic information about the taxpayer, analytical review of taxpayer’s performances using ratio analysis and highlighting audit risk areas for the audit exercise. This is the beginning of the risk your audit will be conducted in an efficient manner.

(ii) Purpose of Audit planning 

Audit planning helps the auditor to:- 

- Accomplish his audit objectives 

- Focus on audit risk areas 

- Determine the cost of resources that will complete the audit exercise 

- Determine the number of staff require to carry out the job

 - Know how long the work will take

 - Know the extent to which controls will be relied upon 

- Controlling and directing the audit staff as regard to the audit assignments.

(iii) Features of audit planning memorandum. 

The content of audit planning memorandum can be outlined under the following categories: 

a) Background information of the client, which covers the following:

 - A brief historical background of the entity 

- The Nature and trend of the enterprises business

 - The organizational and management structure of the business 

- The terms of reference of the audit assignment 

- The accounting and internal control procedures of the entity etc.

b) Audit strategy memorandum which contain the following:- 

- The audit objectives

 - The overall audit approach 

- Audit risk analysis for the various section of the financial statements and approaches to be adopted in respect of each section 

- Areas requiring special audit attention and procedures to be applied. 

c) Jobs/assignment administration memorandum, which include:- 

- The partner in charge of the audit assignment 

- The manager in charge of the audit 

- The seniors and other staff in charge of the audit

 - Dates of audit visits including any interim visits and final audit visit. 

- Dates and details of such events as:-

a. Stocks, cash count 

b. Management representation letter 

c. Manager’s filed review, manager’s final review, circularization of debtors and creditors, confirmation of the bank. 

d. Audit programme This section of audit planning memorandum usually contains programme for the various sections of the audit work specified e.g. compliance and substantive audit procedures

 e. Summary of review memorandum This section relates to standard formats of job requirements or scope of work carried out and standard information to be supplied as evidence of work done, to guide the review of audit performance.

4. What is audit quality control? Identify any five 

Solution:

(a) What is Audit quality control? 

Audit quality control is a means of ensuring that an audit is carry out in accordance with approved standards and relevant legislations/regulations and a good quality report is produced at the end of the audit.

(b) Ensuring effective quality control of a tax audit engagement

 - An audit plan should be drawn up which includes an outline of the audit work to be alone, the staff to do the Job (in terms of number, qualifications and experience) the timing of the work to be done, the budget of time and cost etc. 

- Proper briefing of staff on the audit objective, audit plan, timing requirements, audit test/procedures to be carried out etc. 

- The audit checklist prepared at the planning stage should be used to ensure that no work is duplicated or overlooked. As the audit checklist contains a list of work to be done during the audit, each work should be ticked off when performed. 

- Contentious matters must be brought to the attention of the team leader. Such problems could be discussed with members of the audit team and, if necessary, consultations should be made outside the team for more knowledgeable advice. 

- All audit work done and the working papers must be fully reviewed by superiors (who are more experienced professionals). 

- The team leader should ensure close supervision of his audit team members, proper coordination of their functions, adherence to time schedule, proper documentation of working papers, acknowledgement of audit work and review action by the performers etc. 

- All work done during the audit and conclusions reached must be carefully and completely recorded in the working papers. The tax auditors must obtain relevant and reliable audit evidence sufficient to enable them draw reasonable and independent conclusion.

(5) ways of ensuring effective quality control of a tax audit engagement 5. Identify ten (10) sources of taxpayers’ financial and business information.

Solution:

SOURCES OF TAXPAYERS’ FINANCIAL AND BUSINESS INFORMATION

 - The financial and business information about the taxpayer are taken from the following 

- Audited accounts and/or management accounts for the last six (6) accounting years including the current year.

- General ledger, cost ledger (if any) cash and bank books and charts of accounts for each of the financial years mentioned in (1) above. 

- Rent schedule for each of the accounting years in (1) above plus accounting year in (1) above. 

- Interest/Discount paid for each accounting year in (1) above (banks and other financial institutions).

 - Schedule of Directors fees and other emoluments. 

Schedules of all bank and payment vouchers. 

Pays – As – You – Earn (PAYE) (Salaries, allowance, gratuities and benefits in kind) etc.

CONTROLLING AND RECORDING AN AUDIT/INVESTIGATION

Suggested Questions and Answers

1 Documentation of tax audit work carried out is very important to the whole tax audit exercise. In view of this, you are required to write short note to illustrate your understanding of each of the following terms: 

i. Tax audit working papers (3marks) 

ii. Define permanent note jacket (PNJ) and list ten (10) of its contents (6marks) 

iii. What are the options available to an aggrieved taxpayer that was given arbitrary assessment? 

Solution: 

1a) Tax audit working papers Working papers are records of the tax auditors planning, the nature, timing and extent of the audit procedures performed and the conclusion drawn from the audit evidence obtained. Tax audit working papers should be sufficiently complete and detailed to enable an experienced tax auditor with no previous connection with the audit to subsequently ascertain from them what work was performed and to support the conclusion reached. The audit team must ensure that all working papers relating to the audit are safeguarded from loss, destruction or exposure to unauthorised persons. They should be properly be preserved for future reference or use.

1b) Permanent Note Jacket file (PNJ) is a file that contained items of permanent nature. The following are basic information to be extracted from the taxpayer’s permanent note jacket file (PNJ)

A background information Questionnaire form containing the following questions could be used for this purpose: 

− Name of company 

− Registered address 

− Date of incorporation 

− Incorporation number

 − Taxpayer Identification Number (TIN) 

− Date of commencement of business

 − Nature of business 

− Accounting year end 

− External auditor/tax consultant addresses

 − Bankers/address 

− Solicitors/and secretaries 

− Litigation details (if any)

 − Shareholding structure 

− Share capital (authorised and issued

− Name of directors and number of shares held

 − Associated company/and address 

− Period covered during the last audit or investigation exercise (if any)

c) Options available to an aggrieved taxpayer. 

Procedure for Objection The FIRS has the power to raise Best of Judgement (BOJ) or additional assessments as often as it may desire, the taxpayer, has the right to raise an objection. Where a taxpayer disagrees with the assessment made on him, he may give a notice of objection to the relevant tax authority to review, revise or discharge the assessment. For the notice of objection to be valid, it must: 

− Be in writing 

− State precisely the ground for objection to the assessment 

− Be made within thirty (30) days from the date of service of the notice of assessment. 

− Under CITA in particular, the grounds of objection must include the figures which the company claims should be stated on the assessment notice in respect of: 

− Assessable and total profit of the company for the relevant year of assessment and,

 − Tax payable for the year of assessment. Upon the receipt of a letter of objection against its assessment, the FIRS may request the company to furnish such details and information as the FIRS may deem necessary. The FIRS may also request for the production of books of accounts and other documents relating to the profits of the company and may summon any person who may be able to give evidence pertaining to the assessment to attend for examination/interview with an officer of the FIRS. Following the production of additional documents and/or information, the FIRS and the taxpayer may reach an agreement, whereby the FIRS may review, revise or even discharge the assessment. If an agreement is reached with the taxpayer, then FIRS can go ahead and act accordingly. Where necessary, a revised notice of assessment will be served on the taxpayer for payment as agreed with the tax authorities. Where the tax authorities and taxpayer are not able to agree, the tax authorities shall proceed to give a “Notice of refusal to amend” its assessment to the taxpayer. The taxpayer may file an appeal against the assessment within thirty (30) days of the service on him of the Notice of refusal to amend. This is where the taxpayer wishes to pursue the matter further. The taxpayer will give notice in writing to the secretary to Tax Appeal Tribunal (TAT). 

A notice of an appeal shall specify the following:- 

− The official number of the assessment and the year of assessment for which it was made. 

− The amount of the tax charged by such assessment 

− The amount of the total profits upon which the tax was charged as appearing on the notice of assessment.

 − The date on which the appellant was served with the notice of refusal by the Board to amend the assessment as desired. 

− The precise grounds of appeal against the assessment, such grounds shall be limited to the grounds stated by the appellant in its notice of objection. 

− Address for service of any notices, precepts or other documents to be given to the appellant by the secretary to the Tax Appeal Tribunal. Once the matter goes on appeal, the two parties in the appeal, the appellant (the taxpayer) and the respondent (FIRS) may be represented by solicitors. A company may discontinue an appeal it has filed with the TAT by giving a notice in writing to that effect to the secretary to TAT before the hearing of such appeal. Similarly FIRS may revise the assessment which is the subject of the appeal after agreeing same with the company. TAT after receiving notice of such an agreement any time before hearing of the appeal, the appeal shall be treated as being discontinued. Where an appeal has to be heard, the hearing before the TAT shall be made public. The onus of proving that the assessment complained of its excessive shall be on the appellant. After hearing of the Appeal, the TAT may confirm, reduce, increase, annul or discharge the assessment or make such order thereon as they deem fit. Where either FIRS or the taxpayer is aggrieved by the decision of the Tax Appeal Tribunal, then any of the parties can further appeal to the Federal High Court but only on point of Law. The appeal must be filed with the Federal High Court within 30 days of the judgment of the TAT. Where a company appeals against the judgment of the TAT, the tax decided upon by the TAT shall be paid within one month of the notification of the amount payable by the Board on the company. Further appeals, on point of Law only can be made by a party aggrieved by the decision of the Federal High Court to the court of Appeal and thereafter to the Supreme Court.

2. Highlight and discuss the various activities that would take place before embarking on field audit. 

Solution:

Various activities that would take place before embarking on field audit are: The activities that a will be carried out on the financial statements are comparative financial statement analysis and ratio analysis. Comparative financial statement analysis. This involves the comparison of the amount of each item on the financial statements of a taxpayer with similar item on the financial statements of another year or other years. Comparative financial statement analysis is also referred to as horizontal anaylsis.

Ration Analysis 

Ration analysis is a popular and widely used tool of financial ratio as the basis or yardstick for analyzing and interpreting the financial condition and performance of a firm financial or accounting ratio are calculated by expressing one accounting figure in terms of another accounting figure. A ratio will be meaningful only if there is a relationship between the two figures, (The numerator and the denumerator) used in the computation e.g there is an important relationship between profit and sales. Secondly the ratios calculated must be skillfully and properly interpreted for them to be useful. A good assessment about a firm’s performance cannot be made by merely considering the firm’s ratios for a single period. The analysis will be enhanced if a comparison can be made between the stick for a given period with some yard stick or standard such as ratios of previous accounting periods, projected future ratios, ratios of similar firms or industry averages

3. State and explain the issues a tax auditor should look out for in the following:

- (a) Turnover 

(b) Purchases

 (c) Fixed Assets 

Solution:

What tax auditor should look out for in the following:- 

(a) Turnover 

(b) Purchases 

(c) Fixed assets 

Turnover 

- Cash sales register shall be fully checked with the carbon copies of the cash sales bill. 

- Summary of daily cash should be checked. 

- Sales man’s summary, gateman’s summary, and cashier summary should be compared. 

- Dates of cash sales bills and the date on which the receipts are recorded in the cash book must be the same. If the dates differ, the same should be inquired into. 

- Where cash sales bill are cancelled, all copies including original copy dully cancelled should be kept in record. 

- Where it is a policy of the company to allow a discount, it should be verified and reconciliation should be made with record of cash received. 

- Compare the amounts of sales disclosed in the financial statements with the amounts stated in the management accounts, year end trial balances, sales ledger, sales day book, and sales figures stated in the minutes of the Board meeting. Note the difference (if any). 

- Extraction of credit lodgements in all the company’s bank statement. - Excluding loans & overdrafts etc.

PURCHASES

 - Compare the purchases stated in the financial statements with amounts in Trial balances, management accounts and general ledger. Note the difference (if any). 

- Also review the purchase daybooks as well as cash books and compare the disclosed in the ledger with the amount disclosed in the financial statements. 

- Note some entries in the general ledger preferably material amounts and round figures and call for their third party purchase invoices. 

- Obtain information on debit notes, creditors’ balance (opening and closing) as well as discount received.

- If there are no purchase ledger and purchase day books, then extract the purchase receipts/invoices to determine purchases for the year.

 - Ensure that VAT is not written to P & L Account. 

- Note that provisions and proforma invoices are not allowed for tax purposes because they do not represent actual purchases.

FIXED ASSETS 

The objective of fixed asset tax audit is to ensure that capital allowances are not claimed on assets which are neither purchased nor brought into use during the relevant basis period as well as confirming correctness of rate of capital allowances used. Disposal giving rise to capital gains taxes are also detected through the process of reconciling movement of fixed assets. 

The following audit procedures should be carried out

 - Obtain the schedule of fixed assets and note addition for each year

. - Agree the schedules to the financial statements and other tax returns. 

- Insist on third party documents evidencing ownership and acquisitions like purchase invoices, import documents for imported assets. 

- Disallow capital allowances earlier claimed on all assets that ownership and usage could not be proved. - Ensure that appropriate rate is used for the computation of capital allowances. 

- Existence: The tax auditor should confirm that all the assets of the company are physically existing on the date of balance sheet etc.

4. What are the techniques for gathering Audit evidence in the context of tax audit? 

Solution:

Techniques for gathering Audit evidence are:- 

- Physical inspection of tangible assets 

- Inspection of records and documents 

- Observation 

- Inquiry 

- Confirmation

 - Re-computation

- Retracing book-keeping procedures, that is checking postings 

- Analytical procedures. 

- Physical inspection tangible assets.

 This can provide reliable audit evidence about the existence of the assts. It may not be a good technique for confirming ownership or value of the assets. 

- Inspection of records and documents. These could be documents prepared outside the company e.g. receipts, invoices, etc or documents prepared inside the company e.g receipt, invoices, minutes of directors meetings etc.

 - Observation: It is often said that “seeing is believing” so that auditor can see things for himself by watching how others are performing certain procedure or process e.g. stock taking. 

- Inquiry: Asking question said seeking information from knowledgeable persons within and without the organization can enable the auditor to obtain information not previously possessed or to corroborate information previously made available to him. 

- Re - computation The auditor can confirm independent calculations, additions, subtractions, etc to check the arithmetical accuracy of source documents and records. 

- Analytical procedures. The auditor can analyse and compare related figures, trends, ratios and other statistics such analytical review may reveal unusual or unexpected variations or trends which could call for further investigations.

5. Define Internal Control and list five (5) essential features of Internal Control.

Solution:

Internal control can be defined as the whole system of controls, financial and otherwise, established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the liabilities.

Features of Internal Control

 The guideline on internal control puts forward eight essential features of systems on which an auditor may place reliance. 

i. Plan of organization The plan covers the activities of both management and staff at all levels regarding responsibilities, duties, authorities and reporting. 

ii. Segregation of duties No single person should process a transaction from initiation to conclusion. More than one person should be involved in the processing and recording of transactions. Areas that should be properly segregated are initiation, authorization, execution, custody and recording.

 iii. Authorization and approval Every processed and recorded transactions should be authorized and approved by an authorized officer. Limits, if any, should be specified.

 iv. Physical Physical custody of, and access to assets should be properly controlled in respect of valuable, exchangeable and portable goods. Such controls may include use of locks or passwords. 

v. Personnel Competent and experienced staff should be involved in the processing of transactions. Appropriate recruitment procedure be established to identify and employ the right caliber of staff and be well motivated. 

vi. Acknowledgement of performance There should be procedure that ensures that who performs an assignment acknowledges it by signature, initials or any means possible. 

vii. Arithmetical and accounting There should be procedures that ensure that documents are subjected to casting test and appropriately coded. This will include footings, cross-footing, recomputation, use of total accounts and sequence tests. 

viii. Management Management impression and response to internal control matters will be a great extent affect staff attitude to it. Management should (a) make the staff control conscious and (b)  create general control mechanisms which should include supervisory controls, budgeting and budgetary controls, internal audit, preparation and review of management accounts.

INTERVIEW TECHNIQUES

Suggested Questions and Answers  

1) You have been chosen by the management of FIRS to lead a team to conduct tax audit into three large tax companies. 

a) You are required to state the areas/matters that you will discuss with the company’s management or its representatives during the initial meeting before the commencement of the field audit. 

Solution:

1. Pre-audit meeting. 

The team Leader will use the opportunity to:

i. Introduce the audit team members. 

ii. Brief the taxpayer on the purpose the audit. 

iii. Obtain background information about the company or confirm background information earlier obtained from the company’s file in the tax office or other sources of information. Such information may include: nature of the business, corporate structure, branch network, auditors or tax consultants, bankers, solicitors, secretaries, directors, related companies, shareholding structure, date of incorporation, date of commencement of business, registered address, Taxpayer’s Identification Number (TIN) etc.

 iv. Solicit the co-operation of the taxpayer in terms of providing necessary information, books, records etc promptly. 

v. Inquiry about the accounting and operational systems of the company.

 vi. Respond to questions from the company’s representatives on matters that they need clarification, e.g. the purpose of audit, period covered, duration of the field audit exercise, books/documents/information required for the audit etc. 

vii. The team leader should chair the meeting. 

viii. Ensure that the minutes are reviewed and signed by all parties present.

 ix. Update the relevant taxpayers file and tax audit database as appropriate. 

x. Where the form is partly completed agree on a date the taxpayer will provide the missing information

b) State the possible venue of the initial meeting in order to respect the taxpayer’s privacy. 

Solution:

The possible venue of the initial meeting: 

i. The taxpayer’s office or business premises 

ii. Office of the taxpayer’s authorised representatives ie tax consultant office.

2) Explain the main objectives of holding the exit meeting after the completion of the field audit exercise

Solution:

Post audit meeting 

The objectives of holding the exist meeting. The team leader will use the opportunity to: 

− Thank the company for providing the necessary information, documents, records etc

 − Bring to the attention of the company management any outstanding information or document that should be provided or outstanding matters/issues that need to be resolved.

 − Brief the company management on the result of the audit exercise. 

− Determine whether the company agrees with the result of the audit work.

3) What are the objectives of performing a tour of the company’s premises? 

Solution:

You should conduct a tour of the taxpayer’s premises as the final step on your initial meeting.

 − This tour will allow you to see the taxpayer’s business in operation. 

− The tour provide a visual picture of the business and gives an opportunity to validate information received during the initial interview. 

− If fixed assets reported on the tax return are not found on the tour, inquire as to their location or disposal. 

− Are there as many time cards in the factor as people working? 

− Observe equipment used for post production process such as packaging, haulage etc. ask if any of these service are performed elsewhere if not seen on the premises. 

During the tour, the auditor should ask relevant questions and been a keen observer of that which is specific to taxpayer’s business. 

An effective tour will allow you to observe: 

▪ The size and scales of taxpayer’s operation. 

▪ The way the taxpayer’s conduct their business. 

▪ The manner in which the taxpayer processes work. 

The tour will also: 

▪ Show the taxpayer that the tax auditors are interested in conducting a professional audit. 

▪ Enable the tax auditors to confirm and clarify information received during the interview. 

▪ Assist the tax auditor in risk assessment of the tax file. 

▪ The auditors should work for indications of the business success e.g. if it is observed that the taxpayer or his place of business has luxurious assets, this may suggest that the business is very profitable. This could have a direct relationship to the amount of taxes that should be paid and the types of audit tests that should be conducted.

4a) State and explain the two types of tax audit report 

Solution:

The two types of tax audit report are:

 i. Interim tax audit report 

ii. Final tax audit report 

i. Interim tax audit report

 On completion of the field audit, an audit report has to be written. The initial tax audit is the interim audit report. There may be need to produce an interim audit report for the management before the final audit report. The team members will submit their individual reports (Sub-reports) to the team leader. The team Leader will review the sub reports, discuss with the team members, make necessary amendments and write interim audit report. The interim audit report should highlight details of all the findings that may result in additional tax assessment as well as areas of possible dispute with the taxpayer and suggestion on how to resolve them. The report will be sent to Headquarters of the audit Department, as appropriate, for review and directive on the matters reported therein. Thereafter a reconciliation meeting may be held between the tax auditors and the tax payer and/or his/its representatives

 ii. Final tax audit report. 

The final tax audit report is written by the team leader after the reconciliation meeting with the tax payer. The report will contain, among other things, the additional assessment agreed at the reconciliation meeting as well as the assessment disputed by the taxpayer and how they were arrived at. The report must make recommendations etc

 (b) What are the qualities of a good tax audit report

Solution: 

. (b) Qualities of a good tax audit report

 - The report must be accurate 

- The report must be clear

 - The report must be timely prepared 

- The report must avoid overstatement. 

- The report should be devoid of subjective comments. It should contain factual information. Assumptions should be avoided as much as possible. 

- The report should be disclose relevant computations 

- The report should be professionally written. 

- It should be avoid the use of offensive Language.

- The report must be presented in a logical and concise manner

 - Conclusions and recommendations stated that could be substantiated. 

- Conclusions and recommendations stated in the report should be based on facts that could be substantiated. The report must be duly signed etc. 

Post Audit Meeting. 

The team leader will use the opportunity to: 

- Thank the company for providing the necessary information, records etc. 

- Bring to the attention of the company’s management any outstanding information or documents that should be provided or outstanding matters/issues that need to be resolved. 

- Brief the company’s management on the result of the audit exercise the result of the audit work.

5(a) What is an indirect testing? 

Solution: 

An indirect testing is a tax audit procedure that focuses on transactions that are not included in the tax payer’s books and records. In indirect audit testing, an auditor makes use of externally generated audit evidence to establish those items that were not recorded in the books of the company that is being audited. 

(b) State and explain briefly three (3) indirect audit tests you will carry out on the taxpayers income assigned to you.

Solution: 

Indirect audit test to be carried out on the tax player’s income. 

- Analysis of bank deposits, provided that all or most of the company’s sales proceed were paid into banks, an analysis of deposits as reflected in the statements of accounts of the company obtained from its bank can reveal to a great extent the undisclosed revenue.

 - Analysis of cash inflows and outflows. A comparison of the company’s cash inflows (receipts) with cash outflows (payments) within the same period might indicate that the amount of cash out flows was greater than cash inflows. That excess of cash outflows over cash inflows could be assumed to be undisclosed income or turnover. 

- Computation of the taxpayer’s net worth at the end of each year. This will reveal changes in the taxpayer’s net worth year by year for comparison

with the income declared by the taxpayer. E.g, if the net worth at the end of the current year is higher than that of the previous year, the change in the net worth could be assumed to be the taxpayer’s income in the current year. - Confirmation. The tax auditor can obtain or confirm certain information about the company’s revenue from knowledgeable independent third parties e.g customers, debtors.

AUDIT EVIDENCE: OBTAINING, EVALUATING AND RECOREDING

Suggested Questions and Answers 

Q1. As a tax auditor, your objective is to gather evidence from your audit of a taxpayer’s financial records. However, such evidence must be sufficient and appropriate.

a. What do you understand by sufficient and appropriate audit evidence?

Solution:

a. Sufficiency and appropriateness of audit evidence are interrelated and both apply to tests of controls and substantive procedures. Sufficiency is the measure of the quantity of audit evidence while appropriateness refers to the measure of the quality or reliability of the audit evidence. 

b. Discuss the factors that will affect your decision on what you think is a sufficient and appropriate audit evidence.

Solution:

b. Factors that may influence the sufficiency of audit evidence are: 

▪ Materiality of the item being tested; ▪ Level of audit risk involved; 

▪ Persuasiveness of the audit evidence obtained; 

▪ Population of the item –how large the item is;

 ▪ Client’s accounting and internal control system; and 

▪ Client’s financial condition. 

c. You are expected to exercise judgement on what you will consider to be a sufficient relevant and reliable audit evidence. What are the factors that will influence your judgement?

Solution:

c. The auditor’s judgement will be influenced by factors such as: 

▪ The auditor’s knowledge of the business and its environment; 

▪ The risk of misstatement the auditor has identified; 

▪ The persuasiveness of the evidence;

 ▪ The nature of the accounting and internal control system; 

▪ The materiality of the item being examined; 

▪ The experience the auditor gained during previous audit;

 ▪ The results of audit procedures; and 

▪ The source and reliability of information available.

Q2. Modern auditing assumes that, in preparing a taxpayer’s financial statements, the management of the entity made some assertions about the reports contained in the financial statements to the auditor. These assertions are divided into two categories.

Required: Discuss these assertions under the two categories as set out in ISA 315. 

Solution:

The assertions as set out in ISA 315 are in two categories, viz:

 ▪ Assertions about classes of transactions and events, and related disclosures for the period under audit (income statement); and 

▪ Assertions about account balances and related disclosures at the period (statement of financial position assertions). Assertions about classes of transactions and events, and related disclosures These assertions are

▪ Occurrence: This is the assertion that transactions and events that occurred and recorded or disclosed relate to the entity; 

▪ Completeness: This is the assertion that all transactions and events that should have been recorded have been recorded, and that all related disclosures that should have been included in the financial statements have been included; 

▪ Accuracy: This assertion is that amounts and data relating tom recorded transactions and events have been recorded appropriately with related disclosures appropriately measured and described; 

▪ Cut – off: This is the assertion that all transactions and events have been recorded in the appropriate financial year or accounting period; 

▪ Classification: This is the assertion that all transactions and events have been correctly recorded in the appropriate accounts; and 

▪ Presentation: This is the assertion that all transactions and events are appropriately aggregated or disaggregated and clearly described and that related disclosures are relevant and could be understood in the context of the requirements of the appropriate financial reporting framework. Assertions about account balances and related disclosures

These are: 

▪ Existence: This is the assertion that all assets, liabilities and equity interests exist; 

▪ Rights and obligations: This is assertion that the entity owns or controls the rights to the assets and liabilities are those of the entity; 

▪ Completeness: This is assertion that all the assets, liabilities and equity interests that ought to have been recorded have been recorded and all related disclosures that ought to have been included in the financial statements have been included; 

▪ Accuracy, valuation and allocation: This is the assertion that assets, liabilities and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments disclosures have been appropriately measured and described; 

▪ Classification: This is the assertion that assets, liabilities and equity interests have been recorded in the proper accounts; and

▪ Presentation: This is the assertion that assets, liabilities and equity interests are appropriately aggregated or disaggregated and clearly described and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Q3. The auditor uses a combination of audit procedures to obtain an assurance on management assertions about the reports in the financial statements. 

Required: Discuss briefly eight of these procedures.

Solution:

The auditor uses a combination of audit procedures to obtain audit evidence to be able to obtain an assurance about the management assertions discussed above. These procedures are: Inspection of assets: The inspection of assets in the accounting records which form the basis of the financial statements provide confirmation for the existence of the assets, gives evidence of valuation but does not confirm rights and obligations of ownership. Also, confirmation that assets seen during inspection are recorded in the accounting records provide evidence of completeness; Inspection of documents:

Inspection of documentation provides the following confirmation:

 • Confirmation to documentation of items entered into the accounting records provides evidence that the assets exist or the transaction occurred; 

• Confirmation that items recorded in supporting documentation are entered into the accounting records gives proof of completeness; 

• Confirmation as to evidence of valuation, measurement, rights and obligations, presentation and disclosure; and 

• It can also be used to test consistency of audit evidence and to confirm authorization. 

Observation: This is the auditor watching a procedure being performed, for example, the audit watching the inventory counts or payment of wages to workers. However, its limitations is that it is limited as to the point of time the auditor is watching. The person performing the procedure may act in a different way when not being observed; 

Enquiries: These involves seeking information from knowledgeable person insider or external to the entity under audit. The auditor, however, is to evaluate responses to the inquiries and corroborate them with other audit evidence. The auditor should be aware that responses to enquiries may provide the auditor with information not previously possessed or with corroborative audit evidence. It may also provide information that differs significantly from other information that the auditor has obtained. Therefore, responses to enquiries may necessitates the auditor to modify or perform additional audit procedures. The auditor may obtain written responses to enquiries, if necessary. Enquiries involves the following processes: 

• Considering the knowledge, objectivity, experience, responsibility and qualifications of the individual to be questioned; 

• Asking clear, concise and relevant questions; 

• Using open or closed questions appropriately; 

• Listening actively and effectively; 

• Considering the reactions and responses and asking follow-up questions; and 

• Evaluating the responses; 

External confirmation: This is seeking confirmation from another source, external to the entity, of details in the client’s accounting records such as confirmation of bank balances from the bank directly or confirmation of receivable balances from the client’s customers directly. This procedure is specifically covered by ISA 505, external confirmations. However, ISA 305 identifies the following situations where external confirmations are relevant: 

• Bank balances and other information from bankers; 

• Accounts receivable balances; 

• Inventories held by third parties; 

• Property deeds held by lawyers;

 • Investments held by third parties or purchased from stockbrokers but not delivered at the end of the reporting period; 

• Loans from lenders; and 

• Accounts payable balances. 

Recalculation: This is checking the arithmetical accuracy of the client’s accounting records, an example is adding up the client’s year – end trade receivables or recalculating the age analysis of the client’s year end receivables;

Reperformance: This is the auditor’s independent execution of procedures or controls originally performed by the client, for example, performing the age analysis of client’s year end receivable balances. 

Analytical procedures: These consist of evaluation of financial information or comparison of financial and/or non – financial data for plausible relationships and investigating unexpected fluctuation. 

Examples of analytical procedures include: 

• comparison of previous year’s financial statements with the current year, using ratio analysis and ensure that any change is in line with expectations; 

• A comparison of payroll costs on a monthly basis taking account of wage rises, starters and leavers; 

• A comparison of sales with expenses, on a monthly basis and as a comparison with previous years; and 

• A comparison of the ageing inventories or receivables on a monthly or quarterly basis and calculation of receivable days or inventory turnover

Q4. It is not possible for the tax auditor to examine a taxpayer’s financial records 100 %, therefore, he has to rely on a carefully selected samples, chosen by him for examination. 

Required: a. Discuss briefly the three methods of sample selection. (6 marks) 

Solution:

The three methods of selecting sample from a population are:

 i. Random sampling: This is a sample selection method which gives each of the sampling units an equal chance of being selected. This is usually achieved by using random numbers to select items for testing.

 ii. Systematic sampling: In systematic sampling, a random starting point is selected from the population, then subsequent selection of items will be based on equal interval or gap, say every 10th item. For example, it a sample is to be drawn from sales invoices, the invoice will be arranged serially or in date order. The first invoice will be selected from the entire population to form the sample.

 iii. Haphazard sampling: This is not a scientific method of sample selection. It involves the auditor, having decides on the total item he wants to use as sample, goes on to select arbitrarily the sample from the population. This system of sample selection is subject to bias.

b. List the three factors the auditor has to consider when selecting his sample Size. (3 marks)

Solution:

The three factors the auditor must consider when determining a sample size are: 

i. Consider the purpose of the audit procedure and the population from which the sample will be drawn; ii. Determine a sample size sufficient to reduce sampling risk to an acceptable low level; and 

iii. Select items for the sample in such a way that each sampling unit in the population has an equal chance of selection.

c. The factors in (b) above require the auditor to make six key decisions. What are these key decisions?

Solution:

c. The above factors require the auditor to make a number of key decisions which include:

 i. The sampling approach to be used (statistical or non-statistical); 

ii. The characteristics of the population from which the sample is to be drawn; 

iii. The sample selection method; 

iv. What constitute a misstatement or deviation; 

v. The tolerable misstatement or rate of deviation; and 

vi. The expected misstatement or rate of deviation.

Q5. The tax auditor, most of the time, will have to depend on the work of taxpayer’s statutory auditor and work of other experts. 

Required: a. List the factors the tax auditor will consider in determining whether or not the work done by an expert is sufficient and appropriate. (9 marks) 

Solution:

The auditor, in determining whether the work done by an expert is sufficient and appropriate, should consider the following factors: 

• The nature and the complexity of the matter which requires the service of an expert; 

• The experience and reputation of the expert in the area in which the auditor requires audit evidence; 

• The independency and objectivity of the expert – is the expert employed by the client? 

• The professional qualification of the expert; 

• Whether there is any other sources of audit evidence;

 • Whether management have control over the performance of the work by the expert or whether the management wholly rely on the expert; and 

• The auditor’s own previous experience with the work of the expert. However, if the auditor considers that the audit evidence from the expert is insufficient and there are no satisfactory alternative sources of evidence, the auditor should consider the implications for the audit report. 

The following factors would guide the auditor in concluding whether the expert’s work is sufficient and appropriate:

 • Whether the findings and conclusions reached by the expert are consistent with other sources of audit evidence; 

• Where judgements and assumptions are used, whether these judgements and assumptions are reasonable, based on other audit evidence obtained; and 

• Where source data is used, the relevance and completeness of that source.

b. What are the factors the tax auditor will consider in assessing and evaluating the work of the taxpayer’s statutory auditor?

Solution:

 The following factors are to be considered by the external auditor in evaluating and assessing the work of the internal auditor: 

i. The status of the statutory auditor. This will comprise the objectivity and independency of the statutory auditor. This will also include the scope of the work of the statutory auditor; 

ii. The technical competence and professional due care of the statutory auditor. The tax auditor must satisfy that the statutory auditor is technically competent and uses a professional approach in his work; and

 iii. There is a need for regular communication between the tax auditor and the statutory auditor about significant matters that affect the tax liability of the entity.

RISK-BASED AUDIT APPROACH

Suggested Questions and Answers 

Q1. The total risks of material misstatements in the taxpayer’s financial statements can be grouped under two categories. Required: 

a. Discuss briefly each of these two categories. (6 marks) 

Solution: 

The total risk of material misstatement can be divided into two categories, business risks and audit risks. 

Business risks 

ISA 315.2 defines business risk as ‘a risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies. 

Audit risk 

Audit risk is the risk that the financial statements contain a material misstatement that have not been discovered by the auditor which will results in the auditor giving an inappropriate opinion. According to ISA 200, the auditor should plan and perform the audit in such a way as to reduce audit risk to an acceptably low level. Audit risk is defined by ISA 200, “as the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated”. Audit risk is a function of the risks of material misstatement and detection risk. Audit risk is fundamental to the audit process because auditors cannot and do not attempt to check all transactions. This is because it would not be practicable for the auditor to check all transactions as no one would be prepared to pay the auditor to do so, given the volume of transactions that make up the financial statements. And besides, it would be a waste of time and money for auditor to attempt to check all the transactions, hence the importance of the risk based approach toward auditing.

b. List and discuss briefly the component risks under each category. (9 marks)

Solution: 

Business risks can be grouped into three as follows:

 Operational risk – this arises as a result of operational errors, e. g. bad quality products, etc.; 

Financial risk – this is as a result of the company being high geared, i. e., high borrowing and a rise in interest rate which can put the company into pressure which increases possibilities of material misstatement; 

Compliance risk – this arises as a result of failure to comply with regulations; The auditor is not concerned with business risks as it is not the auditor’s responsibility to run the business for the benefit of shareholders. The auditor, however, must consider business risk because business risk often results into audit risk as it can cause a material misstatement in the financial statements. 

While audit risk comprises of three components which must be considered together, these are:

Inherent risk: This is “the susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls” (IAASB Handbook – Glossary of terms). Inherent risk is the risk that items may be misstated as a result of their inherent characteristics, which may be from:

• The nature of the items themselves, for example, estimated items because they are not based on specific measure; and 

• The nature of the entity and the industry in which it operates. It should be noted that inherent risk exists despite the controls in place as it is independent of controls. When inherent risk is assessed to be high, then there is a high risk of misstatement of an item in the financial statements. 

Control risk: This is defined as, “the risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material either individually or when aggregated with other misstatements, will not be prevented or detected and corrected, on a timely basis by the entity’s internal control” (IAASB Handbook – Glossary of terms). This risk is based on the effectiveness of the design and operation of internal control in achieving the entity’s objective relevant to preparation of the entity’s financial statements. However, some control risk will always exist because of the inherent limitations of internal controls which include: 

• Management override; 

• Possibility of human error; and 

• Effect of system change. When the auditor is preparing the audit plan, the auditor needs to make an assessment of control risk for different areas of the audit. The auditor’s test of control will provide evidence about control risk. 

Detection risk: Detection risk is defined as, “the risk that procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements” (IAASB Handbook – Glossary of terms). It is the risk that the auditor’s procedures will fail to detect a misstatement in a transaction or in an account balance. Detection risk therefore, is a function of the effectiveness of an audit procedure and of its application by the auditor. It is borne out of the consequence of the inability of the auditor to examine all available evidence or what is referred to as “sampling risk”.

Q2. a. Auditor’s risk assessment procedures involve understanding the entity and its environment. Required: What are the matters the auditor would consider when seeking to understand the entity’s business environment? (5 marks)

Solution: 

Matters to be considered by the auditing when seeking understanding of the entity and its environment are: 

• Industry, regulatory and other external factors, including the applicable financial reporting framework. Specifically, these are the market and competition, product technology, accounting principles, tax, legislation, etc.;

 • Nature of the entity, this includes, revenue sources, products or service, locations, key customers and suppliers, financing sources, e-commerce, etc.; 

• Objectives and strategies and related business risks. These include new products and services, expansion opportunities, deployment of information technology, etc.; 

• Measurement and review of the entity’s financial performance, by carrying out performance trend analysis, ratios analysis, and comparison with key performance indicators (KPI) and budgets and forecasts; and 

• Assessment of internal control systems.

 b. Discuss briefly the three risks assessment procedures required under ISA 315. (10 marks)

Solution: 

b. The following procedures are required under ISA 315 for the auditor to obtain an understanding of the entity and its environment, including its internal control systems: 

• Enquiries of management and other within the entity: Auditors must have discussions with the client’s management about its objectives and expectations, and its plans for achieving those goals;

 • Analytical procedures: Analytical procedures performed as risk assessment procedures should help the auditor in identifying unusual transactions or positions. They may identify aspects of the entity of which the auditor was unaware, and may assist in assessing the risks of material misstatement in order to provide a basis for designing and implementing responses to the assessed risks. It is the analysis of relationships to identify inconsistencies and unusual relationships. The auditor is required to apply analytical procedures in his risk assessment procedures and in the final overall review of the financial statements at the end of the audit. It can also be used as a source of audit evidence when it is more appropriate than tests of details in reducing detection risk In carrying out analytical procedures, the auditor may compare the entity’s financial statement being audited with:

 ▪ Prior periods;

 ▪ Budget and forecasts; 

▪ Industry averages; and 

▪ Predictive estimates. Also, analytical procedures involve analysis of:

 ▪ Ratios analysis which involves relationship between elements of financial statements; 

▪ Relationships between financial and non- financial data, for example, total salaries and wages with the average number of employees over many periods. Results of the analytical procedures may reveal to the auditor aspects of the entity which the auditor may not be aware initially and will assist the auditor in assessing risks of material misstatement; and 

• Observation and inspection: Observation and inspection may also provide information about the entity and its environment. Observation and inspection as audit procedures can potentially cover a very broad area, including observation or inspection of the entity’s operations, documents, and reports prepared by management, and also of the entity’s premises and production facilities.

Q3.

a. List seven benefits of audit risk assessment. (7 marks) 

Solution: 

 The benefits of audit risk assessment are: 

i. It saves audit cost and fees; 

ii. It ensures that the audit work is completed expeditiously and economically;

 iii. It removes all avoidable pitfalls in the audit procedure; 

iv. It reduces the possibility of under or over auditing; 

v. It results in a more effective and efficient audit work; 

vi. It focuses the auditor’s attention on factors which are more likely to result in misstatement; and vii. It facilitates the use of sampling and the attendant benefits derived there from.

b. List four limitations of audit risk assessment. (4 marks) 

Solution: 

b. The limitations of audit assessment include the following:

 i. Subjective values have to be placed on inherent and control risk;

ii. It may result in a mechanical approach which leads to a loss of auditor’s judgment;

 iii. The auditor may spend more time on the mechanic of the process and assessment at the expense of time spent obtaining audit evidence; and 

iv. The assignments of risk levels are often not suitably specific

 v. which puts into question the validity of any conclusions reached.

c. List four positive factors that can minimize audit risks. (4 marks)

Solution: 

Audit risk may be reduced if some of the following “positive” factors are identified: 

i. The enterprise is financially stable without excessive debts, and is likely to remain so in the foreseeable future; 

ii. The enterprise is profitable, if its objective is to make profit; 

iii. The proprietor, in the case of a private company plays active role in the business; 

iv. The internal controls are strong and the company’s accounting personnel are competent;

 v. The past audit experience has provided evidence of good accounting controls with no major audit problems; and

 vi. The enterprise’s relationship with the regulatory authorities has been good.

Q4. Discuss briefly the concept of taxpayer’s and industry profiling in tax audit. (15 marks) 

Solution: 

Taxpayer and industry profiling are risk assessment techniques in risk-based tax audit. It involves an understanding of the taxpayer and its industry environment. Taxpayer profiling is defined as “the development of a thorough understanding of the taxpayer’s compliance behaviour and their business. It involves carrying out of the following tasks by the tax auditor: e. Review of basic tax information which includes determination whether: 

• The return was filed by due date; 

• Required schedules are were completed; 

• Taxes are were overdue; and 

• Financial statements have been filed with other statutory authorities. f. Review the taxable income and tax payable calculated by the taxpayer, which include determination whether: 

• Carry over loss, exempted income and deducted income were properly applied; 

• Accumulated income tax is properly calculated; and 

• The tax payable and tax credit are properly calculated.

 g. Review financial statements, which should include:

• Trend analysis on major accounts; and 

• Calculation of important ratios

 h. Review changes in paid-in capital and major shareholders 

e. Review inventories movements between affiliated companies 

f. Review of transfer pricing issues if the taxpayer is a member of multinational, which involves: 

• Review transfer pricing 

• Review the flow of funds to or through tax havens 

• Examine arm’s length dealings; • Research any Advance Pricing Arrangements.

 g. Review the taxpayer, which includes examination of the taxpayer’s 

• Organisation chart 

• Major products 

• Functions of each department of enterprise 

• Documentation relating to tax planning strategies 

• Taxpayer’s use of e-commerce 

j. Review third party information, which includes, quarterly returns from banks, returns from Customs, etc. 

j. Review of the current industry environment of the taxpayer, which includes: 

• The current market trend of the products; 

• The position of the taxpayer in the market place; and 

• The average industry indices. The level of other pre-contact work will largely depend on the complexity of the affairs of the customer concerned, and the tax risks identified during risk assessment. 

However, these can be categorised into four general headings: 

• Reviews of unreported income 

• Intelligence gathering 

• Reviews of prior compliance history. 

• Returns preparer performance, i.e. the tax consultant of the taxpayer that filed the returns.

Q5. Discuss briefly the concept of materiality and explain how materiality for an audit can be decided.

Solution: 

The objective of a tax audit is to enable the tax auditor to have a reasonable assurance that the financial statements upon which the tax payer’s tax liability is based are true and fair in all material respect. Materiality is defined as any information that its omission or misstatement could influence the decisions of users taken on the basis of the financial statements. Therefore, the auditor is expected to identify material errors, omissions and misstatements, as regards to amount (quantity) and nature (quality). To assist the auditor in this regard, the auditor has to set a level for what he considered to be material. This is based, however, on the auditor’s judgement. The level of materiality set by the auditor will have impact on the audit in two ways: 

• The type, timing and extent of audit procedures; and 

• The evaluation of effect of misstatements which may be to seek adjustments of the materiality levels or to determine the degree of any auditor’s report. 

Calculation of materiality 

This is purely a matter of professional judgement of the auditor. However, the following levels of materiality are usually followed: 

• Between 1/2 and 1% of revenue; 

• Between 1 and 2% of total assets; or 

• Between 5 and 10% of profit before tax; or 

• Between 5 and 10% of tax payable. However, the figure chosen by the auditor will depend on the confidence the auditor has in the entity’s figures and other factors that may affect the auditor’s professional judgement.

STATUTORY POWERS OF TAX AUDITORS AND INVESTIGATORS

Suggested Questions and Answers 

Q1. Discuss fully the provisions of the FIRS establishment Act 2007 on tax audit and investigation. (15 marks. 

Solution: 

the Federal Inland Revenue Establishment Act 2007 gives the power of investigation to the Federal Inland Revenue Service in section 35 which states in sub sections 1 and 2 that 

‘the Service shall employ Special Purpose Tax Officers to assist any relevant law enforcement agency in the investigation of any offence under this act. Notwithstanding anything to the contrary in any other enactment or law, the Service shall have the power to investigate or cause investigation to be conducted to ascertain any violation of any tax law whether or not such violation has been reported to the Service.’ 

Subsection (3) further provides that: 

‘in conducting any investigation under subsection (2) of this section, the service may cause investigation to be conducted into the properties of any person if it appears to the Service that the lifestyle of the person and the extent of the properties are not justified by his source of income’.

 In section 25, sub section 1, the act provides that: 

“the Service shall have power to administer all the enactment listed in the First Schedule to this Act and any other enactment or law on taxation in respect of which the National Assembly may confer power on the Service.” And section 68 states that “Notwithstanding the provisions of this Act, the relevant provisions of all existing enactments including but not limited to, the laws in the First Schedule shall be read with such modifications as to bring them into conformity with the provisions of this Act. 

Sub section 2 states further 

“If the provisions of any other law, including the enactments in the First Schedule are inconsistent with the provisions of this Act, the provisions of this Act shall prevail and the provisions of that other law shall to the extent of the inconsistency void”. 

The implication of the above is that the Service has power of audit, verification and investigation in respect of all the enactments in the First Schedule. The enactments in the first schedule are:

1. Companies Income Tax Act 

2. Petroleum Profits Tax Act 

3. Personal Income Tax Act 

4. Capital Gains Tax Act 

5. Value Added Tax Act 

6. Stamp Duty Act 

7. Taxes and Levies (Approved List for Collection) Act

8. All regulations, proclamation, government notices or rules issued in terms of these legislation

9. Any other law for the assessment, collection and accounting of revenue accruable to the Government of the Federation as may be made by the National Assembly from time to time or regulation incidental to those laws, conferring any power, duty and obligation on the Service. 

10. Enactment or Laws imposing Taxes and Levies within the Federal Capital Territory. 

11. Enactment or Laws imposing collection of taxes, fees and levies collected by other government agencies and companies including signature bonus, pipeline fees, penalty for gas flared, depot levies and Licences, fees for Oil Exploration Licence (OEL), Oil Mining Licence (OML), Oil Production Licence (OPL), royalties, rents (productive and non-productive), fees for licences to operate drilling rigs, fees for oil pipeline licences, haulage fees and all such fees prevalent in the oil industry but not limited to the above list.

Q2.  Discuss the provisions of section 36 FIRS Establishment Act 2007 on the power of FIRS to coopt law enforcement officers in carrying out tax audit and investigation. (15 marks) 

Solution: 

Section 36, sub-sections 1 to 3 of the Federal Inland Revenue Service (Establishment) Act empowers Federal Inland Revenue Service (FIRS) to co-opt into the service in its discharge of enforcement duties, as follows:

 “(1) The Service 'may co-opt the assistance and co-operation of any of the law enforcement agencies in the discharge of its duties under this Act. 

(2) The law enforcement officers shall aid and assist an authorized officer in the execution of any warrant of distraint and the levying of distraint. 

(3) Any tax officer armed with the warrant issued by a judicial officer and accompanied by a number of law enforcement officers as may be determined by the Executive Chairman shall- 

(a) enter any premises covered by such warrant and search for seize and take possession of any book, document or other article used or suspected, to have been used in the commission of an offence; 

(b) inspect, make copies of, or take extracts including digital copies from any book, record, document or computer, regardless of the medium used for their storage or maintenance; 

(c) search any person who is in or on such premises; 

(d) open, examine and search any article, container or receptacle;

(e) open any outer or inner door or window of any premises and enter or otherwise forcibly enter the premises and every part thereof; or 

(f) remove by reasonable force any obstruction, to such entry, search, seizure or removal as he is empowered to effect.”

Q3. List and discuss the powers of the tax authorities under the tax laws for audit and investigation. (15 marks) 

Solution:

The various power of the tax authorities concerning audit and investigation are: 

Power to obtain information 

The various tax laws contain provisions that empowered the relevant tax authorities to call for returns, books, documents and information from the taxpayers or other parties who are in custody of such records, books, documents, etc., that can assist the tax authority assess the taxpayer’s tax liability. The sections on this power in the various tax laws are: 

• Companies Income Tax Act, Cap LFN 2007,Section 60; and 

• Personal Income Tax Act 2007, as amended, Section 47. 

Power to enter premises 

The tax laws also permit the relevant tax authorities to enter premises of tax payers as at when necessary in relation to the tax payer’s tax affairs. Some of these provisions are: 

• Casino Taxation Act Cap C3, Section 2; 

• Personal Income tax Act 2004, as amended, Section 103; 

• Companies Income Tax Act 2004, as amended, Section 64; and 

• Value Added Tax Act Cap Vi, LFN 2004, Section 39. 

Power to obtain third party confirmation from banks, etc 

Some of the tax laws also give power to the tax authority to demand third parties, especially banks, to summit quarterly reports on the activities of the accounts maintained by taxpayers with the bank. These provisions are: 

• Companies Income Tax Act Cap LFN 2007,Section 61; 

• Personal Income Tax Act 2007, as amended, Section 49; and

 • Federal Inland Revenue (Establishment) Act, 2007, Section 28.

 Power of search and seizure under investigation

The tax laws further give power to the relevant tax authorities to enter taxpayers’ business premises, search and if necessary, seize some documents, chattels, records, etc. The various provisions are: 

• Federal inland Revenue (Establishment) Act, 2007, Section 29; 

• Companies Income Tax Act Cap LFN 2007, Section 64; and 

• Personal Income Tax Act 2007, as amended, Section 53. A4. 

The powers of tax authorities to recover outstanding tax liability are: 

Q4. What are the powers open to tax authorities to recover outstanding tax liabilities? (15 marks)

Solution:

Power of distraint 

Distraint means a process whereby force is applied to collect the tax due by seizing the movable properties of the debtor taxpayer and sealing the office premises thus forcing him to pay the owed tax. She further opined that it is a legal process which allows the Inland Revenue to seize a taxpayer’s possessions and, if necessary, sell them to settle a debt owed to the Inland Revenue. She said further that Distraint is an effective method of enforcement which is usually carried out where all administrative procedures have failed. The provisions of power of distraint are contained in the 

• Federal Inland Revenue Establishment Act, LFN 2007, section 33 and the fourth schedule, 

• Companies Income Tax Act cap LFN 2007, section 86, subsections 1 to 2 and the fourth schedule;

 • Personal Income tax Act LFN 2007 as amended by The Amendment act 2011, section 104; and 

• Casino Taxation Act Cap C3, Section 16. 

Power to prosecute tax defaulters for recovery of tax 

Tax may be sued for and recovered in a court of competent jurisdiction with full cost of action from the taxpayer as a debt due to the government. Section 87(2) Companies Income Tax Act provides that a court of competent jurisdiction shall include a magistrate’s court, which court is hereby vested with the necessary jurisdiction provided that the amount claimed in any action does not exceed the amount of the jurisdiction of the magistrate concerned with respect to action for debt.

However, The Federal InlandRevenue Service (Establishment) Act, 2007 establishes the Tax Appeal Tribunal under section 59 to settledisputes arising from the operations of the Act as well as the administration of the legislations listed in the First Schedule to the Act. The Tribunal has power to adjudicate on disputes and controversies arising from the following legislation:

 (a) The Companies Income Tax Act; 

(b) Personal Income Tax Act; 

(c) Petroleum Profits Tax Act; 

(d) Capital Gains Tax Act; 

(e) Stamp Duties Tax Act; and 

(f) Value Added Tax Act.

 (g) Any other law contained in or specified in the First Schedule to this Act or other laws made or to be made from time to time by the National Assembly. 

Either the Tax Authorities or the taxpayers may appeal to the tribunal. The tax authority can appeal to the tribunal for the non-compliance of the taxpayer with the provisions of the tax laws, while the taxpayer can appeal on the assessment, demand notice or any action made against him by the tax authority with respect to payment of tax.

 Q5. What are the contents of the form of Warrant of distraint? (15 marks) 8.4 Suggested answers to end of chapter question

Solution:

The contents of the form of Warrant of distraint are:

 i. The name of the officer of the Revenue Board who is authorised to execute the warrant of distress; 

ii. Name of the company/taxpayer and place of business; 

iii. Amount of tax to be levied by distress;

 iv. Details about arrears of tax due for the relevant assessment years; 

v. Year of assessment 

vi. Amount of tax due 

vii. Signature of Execute Chairman of FIRS/SIRS

 viii. Date of signing 

ix. Amount of tax outstanding against the company and which amount is to be levied by distress

TAX AUDIT PROCEDURES AND RISK ASSESSMENT

Suggested Questions and Answers 

Q1. In ascertaining the revenue of a taxpayer for a particular year, what are the procedures to be followed by a tax auditor? (15 marks)

Solution: 

The purpose of tax audit procedures on income ascertainment is to ensure that revenue in the financial statement has not been understated and thus leading to understatement of profit for tax purposes. Therefore, the tax auditor should device audit procedures that will give him an assurance that revenue figure in the financial statements has not been understated. The tax auditor should follow the following procedures: 

• Summarisethe sales day book for the year and obtain the total credit sales for the year;

 • Check monthly postings of the sales day book to the general ledger and the receivable ledger and note any discrepancies;

 • Summarise the total cash sales from cash book to get the total cash sales for the year; 

• Check monthly postings to the general ledger and note any discrepancies; 

• Check the returns inward day book and summarise the total sales return for the year; 

• Determine the total sales revenue for the year by adding both the credit and cash sales and removing the total sales return for the year; 

• Compare your calculated total sales revenue with the revenue figure reported in the financial statement and note any variation; 

• Reconcile the receivable balance at the year end as follows: 

▪ From the cash book or bank account, determine the payments by customers during the year; 

▪ Add the receivable balance at the beginning of the year with the total credit sales for the year, which will give amount collectible from customers; 

▪ From the amount collectible from customers, deduct the total amount collected from customers during the year, which will give expected receivable balance at the year end; and 

▪ Compare the expected receivable balance with the figure of receivable on the financial statement and note any variation. 

An alternative procedure is:

 • Collect the bank statements from all the taxpayer’s banks; 

• Summarise the receipts paid into the bank month by month for all the banks; 

• Calculate the total payment into all the banks during the year;

 • Summarise the unusual payments into bank, such as proceeds from loans, sales of assets, etc. during the year and remove the total from total payments into bank during the year. The balance should represent the taxpayer’s revenue for the year. 

• Compare the figure above with the revenue figure in the financial statements and note any difference for reconciliation with the tax payer.

Q2. How can a tax auditor ascertain the total purchases of a taxpayer when carrying out a tax audit? (15 marks) 

Solution: 

The tax auditor will follow the following procedures to ascertain purchases of the tax payer for the relevant year: 

• Summarise the monthly purchases day book total to determine the total credit purchase during the year; 

• Compare the summary with the monthly posting into the general ledger and the payable ledger and note any discrepancies; 

• Summarise monthly cash purchases from the cash book or bank accounts to determine total cash purchases during the year; 

• Add the credit purchases and cash purchases together to determine the total purchases for the year; 

• Compare your total purchases as above with the figure used in calculating cost of sales reported in the income statement and note the difference; 

• Ask for explanations for the difference from the taxpayer’s management. 

• Reconcile the receivable balance at the year end as follows: 

▪ From the cash book or bank account, determine the payments to suppliers during the year; 

▪ Add the payable balance at the beginning of the year with the total credit purchases for the year, which will give amount payable to suppliers; 

▪ From the amount payable to suppliers, deduct the total amount paid tosuppliers during the year, which will give expected payable balance at the year end; and 

▪ Compare the expected payable balance with the figure of trade payable on the financial statements and note any variation.

Q3. a. List five objectives of VAT audit. (5 marks) b. What are the documents a VAT auditor should collect from a vatable person when carrying out a VAT audit? (10 marks) 

Solution: 

a. The objective of VAT audit is to ensure that a vatable person pays the amount of VAT legally payable. To achieve this objective, VAT auditors are required to: 

▪ Confirm the taxable person is correctly registered; 

▪ Understand the business activities of the vatable person; 

▪ Note the accounting records used by the vatable person;

 ▪ Ensure records correctly reflect the business activities; 

▪ Assess the level of risk posed by the vatable person and determine the appropriate audit procedures to reduce the identified risks; 

▪ Educate the vatable person and give him the opportunity to ask questions which the auditor either answers on the visit or seeks guidance at the office; and 

▪ Ensure that unsatisfactory details discovered on a previous visit have been corrected and that return and other statutory filings are timely done.

b. The VAT auditor would have to ask for and collect the following documents for a VAT audit and investigation: 

i. Relevant documents to verify input and output VAT for local purchases and sales to customers:

 • The copy of the taxpayer’s VAT ledger, both for the input and output VAT; 

• The suppliers’ ledger (payable ledger) and invoices file; 

• The cash book or bank accounts’ ledgers; 

• The customers’ ledger (receivable ledger) and copies of customers’ invoices file; 

• The suppliers’ ledger (payable ledger) and suppliers’ invoice files; 

• The VAT returns file; 

• The sales day book and sales ledger; 

• The purchases day book; 

• Returns inward and outward books or registers; and 

• The taxpayer’s financial statements and management accounts. 

k. Relevant documents to verify input VAT on imports are: 

• The bill of entry;

• The treasury receipt issued by the Nigerian Customs Service; together with the bank payment tellers;

 • The approved “Form M” used in importing the goods, this will give the rate of exchange used; and

 • The attested invoice issued by the manufacturer or the supplier or exporter of the goods as the case may be -the commercial invoice

Q4. What are the tax audit procedures in respect of imported goods by a taxpayer? (15 marks) 

Solution: 

Tax audit procedures in relation to imported goods are: 

• Ask for and collect the following documents: 

▪ The bill of entry file for all imports in the year; 

▪ The treasury receipt issued by the Nigerian Customs Service; together with the bank payment tellers;

 ▪ The approved “Form M” used in importing the goods, this will give the rate of exchange used; and

 ▪ The attested invoice issued by the manufacturer or the supplier or exporter of the goods as the case may be -the commercial invoice. 

• There are some companies that maintain separate files for all import, it that is the case, ask for all the files for imports during the year. The file will contain documents in respect of each import, therefore, check that the following are complete for each import: 

▪ The approved Form M together with the proforma invoice, duly signed by the bank; 

▪ The Good in transit insurance certificate for the goods covered by the Form M; 

▪ The Customs Bill of Entry for the import, showing duty, surcharge and VAT payable on the goods; 

▪ The bank tellers for the payment of the amount payable to the Customs together with the treasury receipt issued by the Customs; 

▪ The attested invoice or commercial invoice, issued by the overseas’ supplier of the goods; 

• Summarise the imports during the year on the basis of the following: ▪ The cost, and freight based on the amount on the commercial invoice multiplied by the exchange rate on the approved Form M;

▪ The customs duty paid on the goods; 

▪ The goods in transit insurance premium paid for the goods; 

▪ Port charges on the goods; 

▪ Clearance charges and transport expenses for bringing the goods into the company’s warehouse; and 

▪ Total of all the above, which represents the total cost of all imported goods during the year. 

• Vouch the above with the import ledger maintained by the taxpayer and trace each import to the taxpayer’s inventory records and note any discrepancy; 

• Discuss the discrepancy with the taxpayer’s management; 

• Trace each import into the purchases used in determining cost of sales or cost of manufactured goods during year.

Q5. Discuss the tax audit procedures a tax auditor will follow when carrying out PAYE audit. (15 marks)

Solution: 

The tax audit procedures for PAYE audit are: 

• Collect the organisation’s nominal roll (list of staff) with the payroll for the year; 

• Collect evidence of payment of salaries to staff, such as, letter of authority to the bank to credit the accounts of the staff for their salaries, for the whole year; 

• Compare the above with the net pay on the payroll for selected staff so as to ensure this agrees with the payroll; 

• Summarise the total salaries month by month for the year; 

• Compare the summary above with the payroll journal monthly; 

• Compare the total wages and salaries, as summarized above with theorganisation’s trial balance and financial statements and note any difference;

 • The difference, as calculated above should represents off payroll payment of allowances/salaries to staff;

 • Vouch the organisation’s payment vouchers, both cash and cheque payment vouchers (100% of the population) to identify and list out the following: 

▪ Rent and or payment in lieu of accommodation; 

▪ Leave/vacation allowances; 

▪ Medical allowances;

▪ Dressing allowances; 

▪ Telephone allowances; 

▪ Lunch allowances; etc. 

• Summarise the individual total salaries for the year, either paid through the payroll or through payment vouchers; 

• Ask for the company rent schedule and the occupier of each house to enable you determine benefit in kind on accommodation; 

• Ask for schedule of motor vehicles and the name and designation of users to enable you calculate benefit in kind on the use of vehicles; 

• Verify pension deductions and their remittance to the appropriate Pension Fund Administrators. Determine total pension deducted from each staff salary;

 • Reconcile the total salaries and wages paid to all staff, based on your calculation, with the total personnel emolument on the financial statements and note the difference; 

• The difference, as calculated above, will be used to increase each staff’s total salaries based on the ratio of their basic pay; 

• Calculate the tax payable by each staff and for the whole staff, using an excel tax calculation template; • Summarise the internal revenue receipts for remittances by the organization during the year;

 • Deduct the total remittances, summarised above, from the total tax payable calculated above. The difference represents the organisation’s outstanding PAYE liability, unremitted/under deducted tax;

THE RESPONSIBILITIES OF TAX CONSULTANTS IN TAX AUDIT AND INVESTIGATION

Suggested Questions and Answers

Q1. You are the tax consultant of Adelab Nigeria Limited. The company’s chief accountant has just informed you that he has received a letter from one of the state’s internal revenue service for a tax audit. 

Required: Discuss your role as the company’s tax consultant, before, during and after the audit. (15 marks) 

Solution: 

Usually, when the company receives a letter from the state internal revenue service intimating the company of its intention to carry out a tax audit or investigation exercise in the company, the company will send the letter to its tax consultant. 

The roles of the tax consultant are: Before the tax audit On receipt of the letter, the tax consultants will carry out the following activities: 

1. The tax consultants will visit the company, discuss with the management and agree on the date the company would be ready for the audit; 

2. The tax consultants will get in touch immediately with the team coming for the audit, always listed on the letter of audit, to discuss and agree the date for the audit;

 3. If need be, the tax consultant will write a letter to the revenue service seeking for an extension of time, if the company has a genuine reason why the audit could not take place within the time stipulated on the letter of audit; 

4. The tax consultant and his staff will visit the company before the date agreed with the tax auditor to:

 ▪ Carry out a tax audit of the company’s books and generate the outstanding liability, based on the audit; 

▪ Discuss the liability with the company’s management; and 

▪ Arrange the documents required for the audit, a list of this is usually attached to the letter of audit. These documents have been discussed earlier.

During the audit

2. On the first day of the audit, the tax consultants, with his staff, will arrive earlier, before the tax audit team, at the company to: 

▪ Secure and arrange the place the audit will take place; 

▪ Arrange all the documents required for the audit; 

▪ Receive the audit team on arrival; 

▪ Arrange a meeting with the company’s management, himself and the audit team; and 

▪ Arrange for entertainment of the audit team. 

3. The tax consultants or his staff must be on ground throughout the duration of the audit, to answer any question from the audit team and or provide further information the audit team may ask for; 

4. On completion of the audit, the tax consultant will hold an exit meeting with the tax audit team and the company’s management, where further clarifications could be sought by the audit team from the management regarding their findings, to clear any doubt that may arise;

After the audit

1. On receipt of the notice of additional tax liability, based on the audit, from the state internal revenue service, the company will send this to the tax consultant for advice; 

2. If the liability is within the expectation of the tax consultant, in the light of the pre-audit exercise he has earlier carried out, he may advise the company to pay the additional liability, which will bring the audit exercise to a close; 

3. However, it the liability is more than the expectation of the tax consultant, he will write a letter of objection to the liability to the state internal revenue service, within the stipulated time frame, attaching: 

▪ His own computation of the additional liability; and 

▪ A cheque for the tax liability, undisputed liability, as computed by the tax consultant;

4. The tax consultant will liaise with the state internal revenue to fix a date for the reconciliation of the two liabilities, the revenue’s liability and the one computed by the tax consultant. This meeting is called, tax reconciliation committee (TARC); 

5. If the disagreement is resolved during the meeting, the tax consultant and the representative of the state revenue service will sign the agreement, which will now form a basis of revised liability from the revenue service to the company; 

6. On receipt of the notice of revised liability, the consultant will advise the company to pay the balance liability, I’ e., the difference between the new liability and the one paid with the notice of objection. This will bring the audit exercise to a close and the tax consultant will liaise with the state internal revenue service to write a letter of clearance to the company. This letter will indicate that the company has settled its tax liability to the state up to the date the audit covered; 

7. If the company and the tax consultants are still not in agreement with the revised liability, the tax consultant will write a new letter of objection to the state revenue service, enclosing additional evidence to help the revenue service to revise the liability; 

8. There will be another TARC meeting to resolve the dispute and for the revenue service to revise the liability;

 9. If the disagreement could not be resolved, either party can refer the dispute to the Tax appeal Tribunal for adjudication; 

10. If the company is still not satisfied with the ruling of the Tax Appeal Tribunal, the case will be referred to the High Courts for settlement; 

11. If the company or revenue service is not satisfied with the ruling of the High Court, the party will appeal to the Court of Appeal; and 

12. If either party is still not satisfied with the decision of the Court of Appeal, the party could appeal to the Supreme Court. The decision of the Supreme Court is final on the dispute.

Q2. Your firm, Safade, Chukwu & Co, is the tax consultant to Adrec Nigeria Limited. The company has sent to your firm a letter from FIRS, requesting for a tax audit in the company 

Required: Discuss the role of your firm before, during and after the audit. (15 marks)

Solution: 

Usually, when the company receives a letter from FIRS intimating the company of its intention to carry out a tax audit or investigation exercise in the company, the company will send the letter to its tax consultant. On receipt of the letter, the tax consultants will carry out the following activities: 

Before the audit 

1. The tax consultants will visit the company, discuss with the management and agree on the modalities for the audit; 

2. The tax consultants will get in touch immediately with the team coming for the audit, always listed on the letter of audit, for familiarisation; 

3. If need be, the tax consultant will write a letter to FIRS seeking for an extension of time, if the company has a genuine reason why the audit could not take place within the time stipulated on the letter of audit; 

4. The tax consultant and his staff will visit the company before the date agreed with the tax auditor to:

 ▪ Ensure the companies accounting records are up to date; and 

▪ Arrange the documents required for the audit, a list of this is usually attached to the letter of audit. These documents have been discussed earlier. 

During the audit 

1. On the first day of the audit, the tax consultants, with his staff, will arrive earlier, before the tax audit team, at the company to: 

▪ Secure and arrange the place the audit will take place; 

▪ Arrange all the documents required for the audit; 

▪ Receive the audit team on arrival; 

▪ Arrange a pre-audit meeting with the company’s management, himself and the audit team; and 

▪ Arrange for entertainment of the audit team. 

2. The tax consultants or his staff must be on ground throughout the duration of the audit, to answer any question from the audit team and or provide further information the audit team may ask for; 

3. On completion of the audit, the tax consultant will hold an exit meeting with the tax audit team and the company’s management, where further clarifications could be sought by the audit team from the management regarding their findings, to clear any doubt that may arise; 

After the audit 

1. On receipt of the notice of additional tax liability, based on the audit, from FIRS, the company will send this to the tax consultant for advice; 

2. If the liability is within the expectation of the tax consultant, he may advise the company to pay the additional liability, which will bring the audit exercise to a close; 

3. However, if the liability is more than the expectation of the tax consultant, he will write a letter of objection to the liability to FIRS, within the stipulated time frame, stating the grounds of objection; 

4. The tax consultant will liaise with FIRS to fix a date for a reconciliation meeting; 

5. If the disagreement is resolved during the meeting, FIRS will send a revised liability, based on the agreement during the reconciliation meeting, to the company; 

6. On receipt of the notice of revised liability, the consultant will advise the company to pay the liability. This will bring the audit exercise to a close and the tax consultant will liaise with the FIRS to obtain a letter of clearance for the company. This letter will indicate that the company has settled its tax liability to FIRS up to the date the audit covered; 

7. If an agreement could not be reached during the reconciliation meeting, FIRS will send a letter of refusal to amend the liability to the company or a reduced liability, based on further evidence produced by the company during the reconciliation meeting; 

8. If the company is not satisfied with the position of FIRS, the tax consultant will write a letter of objection to FIRS, attaching further evidence;

 9. FIRS may agree or disagree to amend the liability; 

10. If the disagreement could not be resolved, either party can refer the dispute to the Tax appeal Tribunal for adjudication; 

11. If the company is still not satisfied with the ruling of the Tax Appeal Tribunal, on point of law only, the case will be referred to the High Courts for settlement; 

12. If the company or revenue service is not satisfied with the ruling of the High Court, the party will appeal to the Court of Appeal; and

13. If either party is still not satisfied with the decision of the Court of Appeal, the party could appeal to the Supreme Court. The decision of the Supreme Court is final on the dispute

Contact us for any assistance at israelugbo@gmail.com or WhatsApp +2347069373637