Topic: Tax Audit Engagements and Investigations

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  • 20 Marks

TAI – Feb 2020 – L1 – Q5 – Tax Audit Engagements and Investigations

Outline audit evidence, substantive tests, and tax implications for payroll audit of Eastwood Engineering Limited.

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.

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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 – Feb 2020 – Q1- Tax Audit Objectives

Explain four objectives of Ghana Revenue Authority's audit of taxpayer returns and records.

(A) The Ghana Revenue Authority is empowered under the tax laws to audit, or review returns, and information submitted by taxpayers.

Required:
i) Explain briefly four (4) objectives why Ghana Revenue Authority may conduct an audit of a taxpayer’s returns and records.

ii) Mention and explain five (5) circumstances that may necessitate Ghana Revenue Authority to audit the returns and records of a taxpayer.

(B) Your firm is the external auditor of Waheed Engineering Services Limited, a listed company, which has turnover of GH 100 million. The head office site includes the manufacturing unit, the accounting functions and main administration. There are a number of sales offices in different parts of the country.

Your client has received the following letter from the Ghana Revenue Authority, Sunyani Medium Taxpayer Office.

The Managing Director,
Waheed Engineering Services Limited
Kenyasi Ahafo.
Dear Sir,
AUDIT OPERATIONS
This letter serves to introduce to you:
Awura Amma Druwaa: and
Haruna Wahab Rashid.
of the Medium Taxpayer Office, Sunyani who have been assigned to conduct audit verification into the operations of your business vis-à-vis your declaration to the Ghana Revenue Authority. We request in accordance with the Income Tax Act, 2015 (Act 896) and Value Added Tax Act 2013 (Act 870) and accompanying Regulations, you provide them with all relevant information, records and other documents to enable them to complete the assignment on time.

Yours faithfully,

Signed
GRA

Upon receipt of the letter, your client has expressed concerns that, the audit cannot proceed properly because the present condition makes it difficult for him to cooperate and as such, he requests that, the audit should be temporarily suspended. Your client has asked you to write to the Ghana Revenue Authority to that effect.

Required:
i. Discuss five (5) situations which a taxpayer can request temporarily suspension of audit.

ii. State any three (3) rights available to the taxpayer under an audit engagement other than the right to postpone audit engagement.

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  • 20 Marks

TAI – Feb 2020 – L1 – Q5 – Tax Audit Engagements and Investigations

Outline audit evidence, substantive tests, and tax implications for payroll audit of Eastwood Engineering Limited.

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.

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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 – Feb 2020 – Q1- Tax Audit Objectives

Explain four objectives of Ghana Revenue Authority's audit of taxpayer returns and records.

(A) The Ghana Revenue Authority is empowered under the tax laws to audit, or review returns, and information submitted by taxpayers.

Required:
i) Explain briefly four (4) objectives why Ghana Revenue Authority may conduct an audit of a taxpayer’s returns and records.

ii) Mention and explain five (5) circumstances that may necessitate Ghana Revenue Authority to audit the returns and records of a taxpayer.

(B) Your firm is the external auditor of Waheed Engineering Services Limited, a listed company, which has turnover of GH 100 million. The head office site includes the manufacturing unit, the accounting functions and main administration. There are a number of sales offices in different parts of the country.

Your client has received the following letter from the Ghana Revenue Authority, Sunyani Medium Taxpayer Office.

The Managing Director,
Waheed Engineering Services Limited
Kenyasi Ahafo.
Dear Sir,
AUDIT OPERATIONS
This letter serves to introduce to you:
Awura Amma Druwaa: and
Haruna Wahab Rashid.
of the Medium Taxpayer Office, Sunyani who have been assigned to conduct audit verification into the operations of your business vis-à-vis your declaration to the Ghana Revenue Authority. We request in accordance with the Income Tax Act, 2015 (Act 896) and Value Added Tax Act 2013 (Act 870) and accompanying Regulations, you provide them with all relevant information, records and other documents to enable them to complete the assignment on time.

Yours faithfully,

Signed
GRA

Upon receipt of the letter, your client has expressed concerns that, the audit cannot proceed properly because the present condition makes it difficult for him to cooperate and as such, he requests that, the audit should be temporarily suspended. Your client has asked you to write to the Ghana Revenue Authority to that effect.

Required:
i. Discuss five (5) situations which a taxpayer can request temporarily suspension of audit.

ii. State any three (3) rights available to the taxpayer under an audit engagement other than the right to postpone audit engagement.

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