- 20 Marks
Question
a) The accurate reporting of income and expenses by cash intensive businesses has been a biggest challenge to various Revenue Authorities.
Required i. Explain briefly three potential problems encountered when assessing the income of a business with high cash transactions. (b)
The Income Tax Officer, on assessing the income of Ben J for the financial years 2018-2019 feels that Ben J has not disclosed the full income. He gives you the following particulars of assets and liabilities of Ben J as of 1st January 2018 and 1st January 2019
| 1-1-2018:: | Assets: | Cash in hand | 25,500 | | | | Inventory | 56,000 | | | | Sundry debtors | 41,500 | | | | Land and Building | 190,000 | | | | Wife’s Jewlery | 75,000 | | | Liabilities: | Owing to Ben J’s Brother | 40,000 | | | | Sundry creditors | 35,000 | | 1-1-2019 | Assets | Cash in hand | 16,000 | | | | Inventory | 91,500 | | | | Sundry debtors | 52,500 | | | | Land and Building | 190,000 | | | | Motor Car | 125,000 | | | | Wife’s Jeweler | 105,000 | | | | Loan to Ben J’s Brother | 20,000 | | | Liabilities: | Sundry creditors | 55,000 |
During the two years the domestic expenditure was GHS 4,000 per month. The declared income of the financial years was GHS105,000 for 2018 and GHS123,000 for 2019 respectively.
Required: I) State whether the Income-tax Officer’s contention is correct. Explain by giving your workings. (3 marks) ii) Outline the audit steps to verify the information submitted.
Answer
(a)
The most significant indicator that income has been underreported is a consistent pattern of losses or low profit percentages that seem insufficient to sustain the business or its owners. A business that continues to operate despite losses year after year, with no apparent solution to correct the situation. Accumulated assets increase even though the reported net profits are low or a loss. A significant difference between the taxpayer’s gross profit margin and that of their industry. Bank balances, debit card balances and liquid investments increase annually despite reporting of low net profits or losses. (b)
i) State whether the Income-tax Officer’s contention is correct. Explain by giving your workings.
Statement of Affairs as of 31 December 2019
| Items at 1 Jan 2018 | GHS | GHS |
|---|---|---|
| Assets: Cash in hand | 25,500 | |
| Inventory | 56,000 | |
| Sundry debtors | 41,500 | |
| Land and Building | 190,000 | |
| Wife’s Jewlery | 75,000 | |
| Total Assets as at 1 Jan 2018 | 388,000 | |
| Deduct Liabilities as at 1 Jan 2018 | ||
| Liabilities: Owing to Ben J’s Brother | 40,000 | |
| Sundry creditors | 35,000 | |
| Total Liabilities as at 1 Jan 2018 | 75,000 | |
| Net worth of the business as at 1 Jan 2018 (a) | 313,000 | |
| Items at 1 Jan 2019 | ||
| Assets: Cash in hand | 16,000 | |
| Inventory | 91,500 | |
| Sundry debtors | 52,500 | |
| Land and Building | 190,000 | |
| Motor Car | 125,000 | |
| Wife’s Jewlery | 105,000 | |
| Loan to Ben J’s Brother | 20,000 | |
| Total Assets as at 1 Jan 2019 | 600,000 | |
| Deduct Liabilities as at 1 Jan 2019 | 55,000 | |
| Net worth of the business as at 1 Jan 2019 (b) | 545,000 | |
| Net Increase in Profit for the year (b) – (a) | 232,000 |
ii) Outline the audit steps to verify the information submitted.
- Tags: Cash Transactions, Income Assessment, Revenue Inquiry, Tax Audit, Tax Compliance
- Level: Level 1
- Uploader: Salamat Hamid