Step #1: Tax returns: What the auditor will look for
• Adjustments you've made, and allowances you've claimed. He'll check these to make sure you've made the adjustments and allowances correctly.
• Any information you've included in the tax return that's not reflected in the income statements.
• Payments of dividends and royalties to non-residents.
Step #2: Five income statement traps to avoid
The auditor will review your income statement and any notes you've made. In particular, he's going to check:
• That the expenses you've claimed are allowed i.e. you're not trying to claim deductions on expenses not made in the production of your income. He'll check that the expenses and deductions are in line with those of Section 23
of the Income Tax Act.
• Inter-company transfers, and charges. Some companies use these to try and lower their tax burdens illegally, so he's going to scrutinise this.
• Abnormal items and extraordinary items. Make sure you can substantiate these, and make sure you have the supporting paper trail.
• Adjustments for prior years, to correct the financial statements.
• Large deposits into your bank accounts after year-end, to see if the income was supposed to be accrued in the previous tax year.
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Step #3: Nine balance sheet risk areas
The auditor will analyse your balance sheet and any attached notes or documents. He's going to keep an eye out for:
• Reserves/provisions, to check that you've treated increases and decreases correctly.
• Large increases to shareholders' credit loans accounts. He'll want to know how the credit loan was financed.
• Loans to associates and investments in shares. He'll want to know how these are financed. Plus, if you're deducting the interest on these, he's going to check that you've done it right.
• The shareholders' debit loan accounts. He'll check if these are taxable and consider the implications of DWT and unproductive interest.
• Capitalised leased assets. He'll add back the depreciation and finance costs, to make sure you've calculated these correctly.
• Unproductive assets e.g. vacant property. If you're declaring non-allowable expenditures from these assets, he wants to know about it.
• All bank accounts have been accounted for correctly.
• Any borrowings for the year. You must have declared these correctly. If interest paid is deductible, he'll check that you're deducting fairly.
Step #4: Spot any inconsistencies in your tax returns
The auditor will go back to your tax returns to scrutinise the General Parts. He'll check the information here against the information in your financial statements, tax returns (including any IT14SD
submitted) and calculation of taxable income to make sure you've done everything right.
The auditor is on the lookout for dodgy answers from you. So if you haven't completed this
section of the tax returns, he'll want to know why. He knows that this is where the tax-dodgers try to pull the wool over his eyes. Make sure you've completed this section as accurately as possible and that you've got a paper-trail to back you up.
Step #5: Five signs that your statement of assets and liabilities doesn't tally up
The auditor checks your statement of assets and liabilities (ITR12). He's going to check that:
• Amounts are stated at the historical cost price i.e. no revaluations, for purchased assets
• There are no possible undisclosed income listed for income generating assets listed.
• Any significant changes in net worth are compared to that of previous year.
• Tax clearance was obtained for any amounts taken offshore.
The statement makes sense when compared to your business if you're a member of a CC or a shareholder of a company.
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Step #6: Four maths checks you must make
The auditor will go through how you calculated your taxable income very carefully. He's checking that you're not trying to avoid taxes or trying to score with tax deductions and allowances that you're actually not eligible for.
He'll make sure that:
• All items have been correctly transposed from the financial statements
• Calculations of allowances and claims are correct and are allowed.
• That the treatment of allowances granted in previous years has been consistent and accurate.
• That the wear and tear allowances claimed are correct (i.e. correct percentage) and are apportioned correctly.