INVESTIGATION FOR TAX EVASION Auditing Help

Tax authorities may engage an auditor to carry out investigation with the objective of ascertaining whether or not the assessee has properly disclosed his taxable income.
The auditor should examine the financial statements with a primary objective of ascertaining that the revenues have not been understated and expenses have not been overstated.
Certain significant procedures involved in investigation for tax assessment are:
a) Compare interrelationship of following data, (month-to- moth basis, and with previous years), and investigate into reasons for unusual items and significant variations.
• Gross profit to sales
• Material consumed to sales

• Material price variance
• Material quantity variance
• Labour hours to production quantities
• Capacity variance
• Other overhead variances

b) Ensure that following charges have been added back in reporting
taxable profits.
• Depreciation charged in the accounts in excess of deprecation allowance admissible for tax purposes.
• Excessive amount of bonus or commission paid to employees. Such expenses may not be legitimate charge against income in case it is concluded that they do not bear any relationship with:

– The pay ofthe employee and conditions of his service;
– The profits of the business for the year; and
– The general practice in similar business.

• Provision for bad debts
• Amounts paid to non-residents on account of fees and interest, brokerage or commission or any other sums if the tax has not been deducted from such payments.
• Salaries paid without deduction of tax at source
• In case of firm, any sum paid, on account of interest, brokerage, commission, salary, or other remuneration to any partner of the firm.
• Payment for expenses in excess of Rs. 50,000, otherwise than by a crossed cheque or crossed banks draft.
• Payments made to unrecognized provident fund.
• Allowances and benefits incurred for employees in excess of 50% of their of their salaries.

c) Check that capital expenditure has not been charged to profit and
loss account.
d) Prepare a quantitative reconciliation of opening inventory, purchases and production, sales and consumption, and closing inventories.
• Compute unit average cost of:
• Inventories, beginning and at the end,
• Purchases and production, It Cost of sales,
• Investigate into causes of unusually high/low averages ..
(e) Determine that personal expenses of the owners have not been charged to business.
(f) Collect sufficient evidence for expenses charged to profit and loss account.
(g) Carry out year end cut off tests.
(h) Ensure that liabilities have not been set for goods not purchased. Scan payments made after year end.
(i) Investigate into long outstanding liabilities.
G) Check subsequent payments against amounts accrued at year end, to determine that excessive provisions have not been made.
(k) Check sales mix of various products and evaluate impact on gross profit percentages.
(1) Check inventory valuation at year-end to ensure that the cost has not been understated.

4. INVESTIGATION . UNDER THE COMPANIES, ORD 1984.

Section 263 of the Companies Ordinance, 1984 provides that, on the application of members holding not less than one-tenth of the total voting power, the Corporate Law Authority may appoint one or more competent persons as inspectors to investigate the affair of any company thereon in such manner as the Corporate Law Authority may direct.

Posted on November 3, 2015 in Investigation

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