- 20 Marks
Question
(A) You have been asked to lead a team of tax auditors to audit Timpani Ltd covering the period January 2015 to December 2018. The company has its financial year end 31st December each year. The agreed date for the commencement of the audit is 3rd January 2020. You have been told that in view of the urgency required of the work, the audit report should be produced not later than 30 days after the date of commencement of the audit for the report to be sent to Commissioner-General.
Required:
As the audit supervisor, draw up an outline plan of how the audit assignment will be arranged. This will form the basis of your detailed audit work to be carried out. (B)
In the course of auditing the Tax Returns and records of Timpani Limited, the following observations have been made by the team and your audit manager has invited you to discuss its tax implication from both the Value Added Tax (VAT) and Direct tax point of view.
The company has multiple ‘strategic business units (SBU) located throughout the country and other West Africa countries. As part of your review of the records of (SBUs)’ you noticed the following:
i. Same components of material are purchased by different units at different prices.
ii. Marketing personnel have been offering discount/price reductions on catalogue/quoted prices beyond the authorized quantum/range, some of which were ratified subsequently.
iii. The company has written off all debts which have been outstanding for more than three years in its books. The total amount was GH¢680,000 and has also made provision for 5% on the outstanding debt of GH¢3.5 million.
iv. The company normally sends goods on sale or return basis. At the end of the year 2019, goods valued at GH¢10 millions were still in the custody of the agent and another goods worth GH¢1.5million had been returned by customers for defects. It is the policy of the company to issue VAT invoice to accompany all goods sent out to both customers and agents.
Required:
Draft a report to your audit manager covering the above observations and discuss the tax implications of these observations vis-a-vis the returns submitted by the taxpayer. Make assumptions, if necessary.
Answer
(A) Your approach is to identify the key tasks and decide how much time will be needed to carry out each one. You know that the report has to be sent to the Commissioner General in a months’ time and so your real deadline is 20th Feb. The duration of each task is based on your estimate of how much work there is to be done and how long you think it will take based on your experience.
You draw up a basic plan which is shown on the next page. This plan depends upon Timpani’s accounts staff having the accounts and supporting schedules ready on time. This is why preliminary discussions with their staff are important so that everybody knows what they have to do, and by what date.
Audit Plan of Timpani Limited
| Task | Duration | Date |
|---|---|---|
| Review of tax file and prepare the risk profile and discuss risk identified with audit supervisor or manager | One day | Immediate |
| Obtain letter of introduction and submit to the taxpayer. | One day | 21st January |
| Planning visit by audit team to hold entrance meeting and document Timpani’s accounting system. Tour of premises | 2 days | 24th–25th January |
| Plan a programmed of audit work and with audit team and meet with Timpani’s staff to agree timings | 1 day | |
| Review financial statements and records by auditors and discussion with management | ||
| Examination of books and records. special attention to the following: (a) sales account; (b) purchases account; (c) director’s or proprietor’s current account with the company; (d) any account with an abnormal balance; (e) any temporary account; and (f) any account with a long outstanding balance. | 10 days | |
| Documentation in support of audit findings and conclusions | ||
| Exit conference | ||
| Issuance of draft report and schedule time for discussion | ||
| Final report |
(B)
Sir
Sub: Special Report Audit Observations
In the course of conducting the audit of Timpani Limited, I have made certain observations, which relate to major policies and procedures followed by various units of the company. I submit this Report to highlight these findings and discuss the effect of these procedures and its tax implication so as to enable the Ghana Revenue Authority to counteract these procedures to avoid tax payments.
My findings relate to major aspects as discussed below:
- Purchases of components of materials by the different units:
- Offering of discounts or price reductions by Marketing personnel:
- Written off all debts.
- Goods sent on sale or return basis
Now, I will deal with these subjects in detail:
i. Purchases of components of materials by the different units.
Several cases have been observed where same components of material have been procured either from same or different sources by different units of the company at different prices. List of the specific cases found during the audit, is given in the Annexure attached. It is clear that the Company is incurring heavy expenditure in maintaining purchase departments or sections separately in all the Strategic Business Units (SBUs) of the Company.
It is clear that, because of these policies, it is possible that the cost of sales figure in the return submitted is very high which tends to reduce the assessable income hence the chargeable income and tax payable. As a matter of facts, the team has re-characterized these transactions in line with section Of the ACT 892.
Again, the input claims in the VAT returns would also be high since some units would be purchasing same components at a high price which we have also disallowed part of the input which we consider above the average price of the company.
ii. Offer of discounts/price reductions by Marketing Personnel.
Several cases have been observed where different area personnel of marketing department have offered discounts and/or price reductions over and above the catalogue prices or specific prices quoted by company’s units during negotiations. A detailed list of such cases is given for your ready reference in Annexure 2 attached.
The above finding clearly shows that the marketing personnel in this regard are not following the tax laws. Section 45 of the Act 870 deals with how discounts and other adjustments are dealt with. It seems the company in offering the discounts did not follow the laid down procedure. First the discount should be applied to all categories of customers and should not be discriminately. It seems these procedures were not followed and any discount or reductions over and above catalogue prices would be disregarded.
iii. The company has written off all debts which have been outstanding for more than three years in the books. The total amount was GHS680,000 and has also made provision of 5% on the outstanding debt of GHS3.5million.
Section 46 of Act 870 clearly states how bad debts are to be treated. It states that, where a taxable person issues a tax invoice for the supply of taxable goods or services and the whole or part of the consideration for the supply was not received by the taxable person, the taxable person may deduct input tax under section 48 for tax paid in respect of the taxable supply that is subsequently treated as a bad debt. It however gives conditions under which such debt is dealt with.
- First, the debt should be specific.
- The Commissioner-General must be satisfied that reasonable efforts have been made to recover the amounts due and payable.
From the look of things, these conditions are not satisfied since the company wrote off all debts outstanding for more than three years in the books without making effort to recover them.
In the case of direct tax similar conditions must be satisfied.
iv. The company normally sends goods on sale or return basis. At the end of the year 2019, goods valued at GHS10 millions were still in the custody of the agent and other goods worth GHS1.5million has been returned by customers for defects. It is the policy of the company to issue VAT invoice to accompany all goods sent out to both customers and agents.
Again, the vat law
Section 45 of Act 870 states that, where a taxable person making the supply has given a tax invoice in relation to the supply and the amount shown on the invoice as the tax charged on the supply is incorrect because of the occurrence of any one or more of the events mentioned in subsection (1), the taxable person making the supply shall make an adjustment. It further states that, Where the output tax properly chargeable in respect of the supply exceeds the output tax actually accounted for by the taxable person making the supply, the amount of the excess shall be regarded as tax charged by the person in relation to a taxable supply made in the tax period in which the events referred to in subsection (1) occurred. For purposes of subsection (3), the taxable person making the supply shall issue to the recipient of the supply a tax debit notes containing the particulars specified in the Fourth Schedule and in the form specified by the Commissioner-General.
I shall be glad to discuss these issues in greater detail with you and look forward to meeting you in person as per your convenience.
Yours faithfully
ABC
- Tags: Audit Planning, Audit Procedures, Audit Schedule, Tax Audit, Taxpayer Compliance
- Level: Level 1
- Uploader: Salamat Hamid