- 20 Marks
Question
You have been assigned by the audit manager of your firm to conduct a payroll audit of Eastwood Engineering Limited, a plastic manufacturing company with a turnover of GH¢25 million. The head office sited in Abokobi includes the manufacturing unit, the accounting department and the main administration. There are a number of sales officers in different parts of the country.
The wages records are computerized, and all the wages information are processed at the head office. Some of the employees in the manufacturing unit are paid cash and all the other employees are paid directly into their bank accounts. Manufacturing employees are paid their wages a week in arrears. All other employees are paid at the end of the week.
There is also a personnel department, which is independent of the wages department. The personnel department maintains the records of the employees including the starting date, grade, current salary and date of separation.
Previous tax audit reports by Ghana Revenue Authority in accordance with Section 36 of Revenue Administration Act, 2016 (Act 915) have revealed that:
i) The company failed to deduct appropriate taxes on wages and salaries of staff especially the casual employees.
ii) Paying fictitious employees and failing to account for the payment on the payroll.
iii) Paying employees after they have left.
Due to these abnormalities detected in the earlier audits by the Ghana Revenue Authority, the audit manager has asked you do consider audit procedures you would carry out to obtain sufficient appropriate evidence of the existence of employees and to ensure that appropriate taxes have been deducted and paid to the Commissioner General of Ghana Revenue Authority.
You are required to prepare a briefing paper which should guide the audit team you are required to lead in the field in the form of a memorandum for the consideration of your audit manager outlining:
i) The audit evidence you would obtain to verify the existence of employees whose wages are paid both in cash and directly into their bank accounts.
ii) The substantive test you would carry out to verify that appropriate taxes are deducted and paid to the Commissioner General of Ghana Revenue Authority.
iii) The tax implications both now and in the future of the company’s infractions as indicated in the tax audit report.
Answer
MEMORANDUM
TO Audit Manager
FROM: Audit Clerk
SUBJECT: EASTWOOD ENGINEERING LIMITED PAYROLL
As instructed by you, I wish to submit this memorandum to you outlining the following issues.
i) Audit Evidence on the Existence of Wages Earning Employee:
The following evidence will be obtained with respects to employees paid in cash to verify their existence.
a) There should be written authorization to employ or dismiss any employee and should be in accordance with the Collective Bargaining Agreement between the company and its employees, company procedure and legal requirements (Labour Act).
b) Employees should sign for their wages or issues receipts for wages collected.
c) Obtain evidence that employees do not collect wages on behalf of other employees.
d) Late claim should be authorized and should be signed for by the employee.
e) Examine unclaimed wages register (where available) to ensure that all unclaimed wages are entered in the register and paid back to chest after a predefined period. Investigate to determine the genuineness of the employee. (1 mark each)
ii) Substantive Test on the Deduction and Payment of PAYE Taxes:
The substantive test that should be conducted are as follows:
a) Select a sample of employees who are paid through cash and those paid through bank.
b) The personal records of sample selected should be tested for their rates of pay, authorization of changes in rates of pay and leavers and joiners personal details.
c) Check time or attendance records to ensure employees are only paid for work done.
d) Text check personal records to ensure employees exist and are being paid at the correct rate.
e) Test casts and calculations of gross salary and deductions.
f) Check to ensure that PAYE deductions are paid on due dates and that the correct amounts are paid.
g) Agree total of salary control account to the nominal ledger.
h) Test totals of cheques drawn to net pay and tax authorities and other deductions.
i) Test postings of payrolls to nominal ledger.
j) Carry out a test of all payments in the cash book to staff outside the payroll to ensure that the payments are re-imbursements of expenses incurred on behalf of the company and not salary or allowances.
k) Obtain income declaration from the management staff of the company indicating incomes from all sources for re-computation.
l) Carry out re-computation of PAYE liabilities taking into account all payments from the outside the payroll. (1 mark each for any five correct answers)
iii) Tax Implications of Reported Infractions of ACT 896 and Revenue Administration Act 2016, Act 915:
The following tax implications may result from the company’s infractions:
a) Act 592 (88) (i) Failure to withhold tax
A withholding agent who fails to withhold tax in accordance with the Act is personally liable to pay to the Commissioner the amount of tax which has not been withheld but the withholding agent is entitled to recover this amount from the payee. (1 mark)
b) Section 72 of RA Act 915 – Failure to Maintain Records
A person who deliberately fails to maintain records for a year of assessment in accordance with Section 22 is liable to pay a penalty equal to seventy-five percent of the tax attributable to that period where the failure is deliberate or the lesser of the amount and two hundred and fifty currency point.
c) Section 73 of Act 915 – Failure to Furnish Return
A person who fails to furnish a return within the time required under Act 592 is liable to pay a penalty of five hundred currency points and a further penalty of ten currency points for each day that the failure continues.
d) Section 80 of Act 915 – Failure to Pay Tax.
- A person who fails to pay a tax by the date on which the tax is payable commits an offence and is liable on summary conviction
- Where the failure relates to an amount exceeding two thousand currency points, to a fine of not less than two hundred penalty units and not more than one thousand penalty units or to a term of imprisonment of not less than three months and not more than one year or both.
- In any other case to a fine of not less than fifty penalty units and not more than two hundred penalty units.
- Interest charged in respect of a failure to comply with Section 78 of Act 915.
A person who fails to comply with a provision of a tax law commits an offence and where a specific penalty is not provided, is liable on summary conviction to a fine of not less than one thousand penalty units and not more than two thousand and five hundred penalty units or to a term of imprisonment.
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