Topic: Revenue Inquiry and Financial Analysis

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  • 20 Marks

TAI – Feb 2020 – L1 – Q4 – Cash Transaction Problems

Explain three problems faced by tax authorities when assessing income of businesses with high cash transactions.

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.

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  • 20 Marks

TAI – Feb 2020 – Q2- Audit Planning

Outline a plan for a tax audit of Timpani Ltd for 2015-2018, to be completed within 30 days.

(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.

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  • 20 Marks

TAI – Aug 2020 – L1 – Q5 – Customs and Excise Duties Valuation

Explain calculation of "value for duty purposes" for imports, locally manufactured goods, and exports.

A) In relation to customs and excise duties, explain how the “value for duty purposes” is calculated on the following:

i. Imports

ii. Locally manufactured goods and services

iii. Export

(B) As part of the revenue mobilization campaign of the Ghana Revenue Authority, your firm, Messrs. Skin Pain & Co. has been contracted to carry out tax audit on the 2018 published accounts of a member of a group companies engaged in the importation of used spare parts. One of the audit teams has just returned to the office and submitted their audit file on Tom and Jerry Company Limited to you for review. The team has made the following findings:

  1. The total IDF value of imports was $5,330,844.56, Import Duty and VAT paid were GH¢7,475,654.23 and GH¢6,546,689.04 respectively.
  2. Total amount transferred to Okamoto Trading Corporation of Japan; the main suppliers was $9,182,250.00. This transfer included $1,237,500 allegedly transferred from the Managing Director’s own resources. The company has a ninety-day credit facility with Okamoto Trading Corporation.
  3. Statement of account for the year ended 31/12/18 from Okamoto Trading Corporation indicated opening and closing balances as $540,690.60 and $708,732.02 respectively.
  4. The account audited which had been filed with Ghana Revenue Authority indicated purchases of GH¢509,552.03 is local purchases from other importers.
  5. Amount of Import Duty and VAT charged in the published accounts amounted to GH¢710,068.11 and GH¢461,544.51 respectively.
  6. Note that import duty rate is 20%; VAT rate is 17½%; and $1.00=GH¢4.20.

You are required to:
i. Analyze the findings of the Audit Team and present a report to your Audit Manager indicating any tax implications of their findings.
ii. What further audit work would you advise the audit team to undertake on the transfer by the managing director to assure yourself that is not business income of funds belonging to the company or from a taxable source.

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  • 20 Marks

TAI – Aug 2020 – L1 – Q4 – Audit Review and Reporting

Recommend examination procedures for reviewing God’s Time Ltd.’s profit forecast for COVID-19 financial assistance.

In order to assist businesses during the COVID-19 period, the Government of Ghana has announced various packages including financial assistance to various companies and other Small and Medium Enterprises. Your firm, Prosper & Co has been approached to perform an assurance engagement for God’s Time Ltd; the engagement will be a review of prospective financial information which is needed to support the company’s application for financial assistance provided under COVID-19 facilities. God’s Time Ltd had its financial year ended 31st December each year.

The operating profit forecast for the two years to 31st December 2020 prepared by a member of the accounting team of God’s Time Ltd is shown below, along with some accompanying notes.

Six months to 30th June 2019 Six months to 31st Dec. 2019 Six months to 30 June. 2020 Six months to 31st Dec. 2020
GH¢ GH¢ GH¢ GH¢
Earnings 2,801,597 3,088,680 4,210,265 4,429,728
Direct costs 2,135,938 2,315,746 3,413,711 3,618,584
Gross Profit 665,659 772,934 796,554 811,144
Operating Exp.
Wages & Salaries 168,452 184,864 209,546 218,762
Advertising 13,840 20,542 28,548 31,540
Design costs 21,580 32,456 50,452 43,546
Marketing 10,896 12,458 16,520 34,450
Interest on Loan 45,543 48,620 51,654 60,542
Other Operating Exp 266,264 309,173 318,622 324,458
Net Profit 139,084 164,821 121,212 97,846

Additional Notes: i. God’s Time Ltd is a producer of greetings cards and giftware; the demand for which is seasonal in nature.

ii. Design costs are mostly payroll costs of the staff working in the company’s design team, and the costs relate to the design and development of new product ranges.

iii. The total ‘Other expenses’ is calculated based on 40% of the projected revenue for the six-month period.

iv. In 2019, the company was granted a loan facility to complete the ongoing factory project.

Required:

Recommend the examination procedures which should be used in the review of the profit forecast.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      (B)

You are the supervisor in-charge of the audit of Titi bidi Construction Company Limited. The audit of the company is near completion, and you are finalizing the audit report. As part of your final review, you want a confirmation that, the tax liability as reported is accurate and as such there is no liability that has not been captured.

Required:

Outline the audit steps to verify that, all tax payments and tax credits has been captured and the liability as reported is accurate.

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  • 20 Marks

TAI – Feb 2020 – L1 – Q4 – Cash Transaction Problems

Explain three problems faced by tax authorities when assessing income of businesses with high cash transactions.

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.

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  • 20 Marks

TAI – Feb 2020 – Q2- Audit Planning

Outline a plan for a tax audit of Timpani Ltd for 2015-2018, to be completed within 30 days.

(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.

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  • 20 Marks

TAI – Aug 2020 – L1 – Q5 – Customs and Excise Duties Valuation

Explain calculation of "value for duty purposes" for imports, locally manufactured goods, and exports.

A) In relation to customs and excise duties, explain how the “value for duty purposes” is calculated on the following:

i. Imports

ii. Locally manufactured goods and services

iii. Export

(B) As part of the revenue mobilization campaign of the Ghana Revenue Authority, your firm, Messrs. Skin Pain & Co. has been contracted to carry out tax audit on the 2018 published accounts of a member of a group companies engaged in the importation of used spare parts. One of the audit teams has just returned to the office and submitted their audit file on Tom and Jerry Company Limited to you for review. The team has made the following findings:

  1. The total IDF value of imports was $5,330,844.56, Import Duty and VAT paid were GH¢7,475,654.23 and GH¢6,546,689.04 respectively.
  2. Total amount transferred to Okamoto Trading Corporation of Japan; the main suppliers was $9,182,250.00. This transfer included $1,237,500 allegedly transferred from the Managing Director’s own resources. The company has a ninety-day credit facility with Okamoto Trading Corporation.
  3. Statement of account for the year ended 31/12/18 from Okamoto Trading Corporation indicated opening and closing balances as $540,690.60 and $708,732.02 respectively.
  4. The account audited which had been filed with Ghana Revenue Authority indicated purchases of GH¢509,552.03 is local purchases from other importers.
  5. Amount of Import Duty and VAT charged in the published accounts amounted to GH¢710,068.11 and GH¢461,544.51 respectively.
  6. Note that import duty rate is 20%; VAT rate is 17½%; and $1.00=GH¢4.20.

You are required to:
i. Analyze the findings of the Audit Team and present a report to your Audit Manager indicating any tax implications of their findings.
ii. What further audit work would you advise the audit team to undertake on the transfer by the managing director to assure yourself that is not business income of funds belonging to the company or from a taxable source.

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  • 20 Marks

TAI – Aug 2020 – L1 – Q4 – Audit Review and Reporting

Recommend examination procedures for reviewing God’s Time Ltd.’s profit forecast for COVID-19 financial assistance.

In order to assist businesses during the COVID-19 period, the Government of Ghana has announced various packages including financial assistance to various companies and other Small and Medium Enterprises. Your firm, Prosper & Co has been approached to perform an assurance engagement for God’s Time Ltd; the engagement will be a review of prospective financial information which is needed to support the company’s application for financial assistance provided under COVID-19 facilities. God’s Time Ltd had its financial year ended 31st December each year.

The operating profit forecast for the two years to 31st December 2020 prepared by a member of the accounting team of God’s Time Ltd is shown below, along with some accompanying notes.

Six months to 30th June 2019 Six months to 31st Dec. 2019 Six months to 30 June. 2020 Six months to 31st Dec. 2020
GH¢ GH¢ GH¢ GH¢
Earnings 2,801,597 3,088,680 4,210,265 4,429,728
Direct costs 2,135,938 2,315,746 3,413,711 3,618,584
Gross Profit 665,659 772,934 796,554 811,144
Operating Exp.
Wages & Salaries 168,452 184,864 209,546 218,762
Advertising 13,840 20,542 28,548 31,540
Design costs 21,580 32,456 50,452 43,546
Marketing 10,896 12,458 16,520 34,450
Interest on Loan 45,543 48,620 51,654 60,542
Other Operating Exp 266,264 309,173 318,622 324,458
Net Profit 139,084 164,821 121,212 97,846

Additional Notes: i. God’s Time Ltd is a producer of greetings cards and giftware; the demand for which is seasonal in nature.

ii. Design costs are mostly payroll costs of the staff working in the company’s design team, and the costs relate to the design and development of new product ranges.

iii. The total ‘Other expenses’ is calculated based on 40% of the projected revenue for the six-month period.

iv. In 2019, the company was granted a loan facility to complete the ongoing factory project.

Required:

Recommend the examination procedures which should be used in the review of the profit forecast.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      (B)

You are the supervisor in-charge of the audit of Titi bidi Construction Company Limited. The audit of the company is near completion, and you are finalizing the audit report. As part of your final review, you want a confirmation that, the tax liability as reported is accurate and as such there is no liability that has not been captured.

Required:

Outline the audit steps to verify that, all tax payments and tax credits has been captured and the liability as reported is accurate.

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