- 20 Marks
Question
(a) You are a tax audit team leader responsible for the audit of Mina Macarthy Limited.
Mina Macarthy Limited owns a block of flats and earns its income through rentals and general dealing. On 1st January 2019, the ledger accounts of the company included the following balances.
Debtors’ account GH¢475,000
Provision for doubtful debts account GH¢ 42,235
The balance on the provision account consisted of the following: GH¢
Specific provision of 100% against the debt of Charles Sulemana, a tenant 31,500
General provision of 1% against remaining debts
12,235
During the year ended 31st December 2019, the following events occurred.
i. Charles Sulemana paid Mina Macarthy GH¢11,150 and then vanished without trace to new world, leaving no assets.
ii. Another tenant, Antonio Banderas, who owed GH¢3,900 fell into a river and was also found to have died penniless.
iii. Azuma Nickson returned from total obscurity and paid an amount of GH¢6,450 which Mina Macarthy Ltd had written off in 2017.
iv. Credit sales for the year amounted to GH¢8,167,400 and cash received from debtors (other than Sulemana and Azuma) totaled GH¢3,150,000
v. On 31st December 2019, Mina Macarthy Ltd decided to provide in full against a disputed debt of GH¢51,200 owed by Kwesi Otoo Pratt, and to maintain the 1% general provision on other debtors.
Additional notes
The company has submitted its returns for 2019 which showed a profit before tax of GH¢375,650.
Required: Comment on the matters to be considered. In addition to your comments, explain the audit evidence expected to be obtained during your review of Mina Macarthy Limited’s audit working papers prepared by the audit team member in respect of each of the issues described above. (bi)
In order to claim a VAT bad debt, a business must show proof of the bad debt.
Required:
i. Explain how a bad debt may arise for VAT.
(bii) In order to claim a VAT bad debt, a business must show proof of the bad debt.
Required:
ii. Explain the circumstances under which a bad debt relief can be claimed.
Answer
(a)
Matters to be considered. For the bad debt relief to be effective, the following matters must be considered; the taxable person must satisfy the Commissioner-General that reasonable efforts have been made to recover the amounts due and payable. b. Evidence of efforts made have been documented. c. Due processes were followed in dealing with the customer such as credit sales agreement exists. d. The debtor has been proved to be insolvency or bankruptcy, and no assets can be recovered. e. The bad debt has become due on the date on which the bad debt was written off in the accounts of the taxable person. (bi)
A bad debt for VAT arises where the taxable person issues or pays for VAT on a credit sale of goods or service but the business does not receive the amount due (both the principal and the VAT element). (bii)
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.
- Tags: Audit evidence, Audit Review, Bad Debts, Debtors, Financial Analysis, Provisions, Tax Audit, Tax Compliance, VAT
- Level: Level 1
- Topic: Audit Review and Reporting, Tax Audits and Investigations
- Series: AUGUST 2020
- Uploader: Salamat Hamid