THE CHARTERED

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te

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ity

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THE CHARTERED INSTITUTE OF

TAXATION OF NIGERIA

NEW SYLLABUS STUDENT’S STUDY GUIDE ON

TAX AUDIT AND INVESTIGATION

EFFECTIVE DATE: APRIL 2020

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VISION
To be one of the foremost professional association in
Africa and beyond

MISSION
To build an Institute which will be a citadel for the
advancement of taxation in all its ramifications

MOTTO
Integrity and Service

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First edition published by

Chartered Institute of Taxation of Nigeria

© CITN, January 2020

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, scanning
or otherwise, without the prior permission in writing of CITN, or as
expressly permitted by law, or under the terms agreed with the
appropriate reprographics rights organisation.

You must not circulate this book in any other binding or cover and
you must impose the same condition on any acquirer.

Notice

CITN has made every effort to ensure that at the time of writing the
contents of this study text are accurate, but neither CITN nor its
directors or employees shall be under any liability whatsoever for any
inaccurate or misleading information this work could contain.

3
Foreword

The Nigerian tax laws have been undergoing reformations and re-enactments,
most especially as the revenue from oil continues to dwindle and tax revenue is
becoming the major source of government revenue. The impact of these
reformation on tax professionals and the skills set needed by professional tax
administrators and tax practitioners to perform their various roles have been
profound. These developments have made it inevitable for the Institute’s
syllabus and training curriculum to be changed to align its contents with current
and future needs of the tax professionals.

In order to help the candidates sitting for the Institute’s examination, the
Council approved that a new set of learning materials (study packs) be
developed for each of the new subjects.

Therefore, renowned writers and reviewers which comprised eminent scholars

and practitioners with tremendous experiences in their areas of specialisation,
were sourced locally to develop learning materials for the 12 subjects as follows:

Foundation

1. Principles of Taxation
2. Financial Accounting
3. Business Law
4. Economics
Professional Taxation I

5. Financial Reporting
6. Income Tax
7. Indirect Tax
8. Governance, Risk & Ethics
Professional Taxation II

9. Tax Audit and Investigation

10. International Taxation
11. Financial / Tax Analysis
12. Income Tax for Specialised Businesses
Although the study packs were specially produced to assist candidates
preparing for the Institute’s Professional Examinations, we are persuaded that
students of other professional bodies and tertiary institutions will find them very
useful.

Kolawole Ezekiel Babarinde

Chairman, Examination Committee.

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Acknowledgement

The Institute is deeply indebted to the underlisted writers and reviewers for their
scholarship and erudition which led to the successful production of these study
packs. They are:

Principles of Taxation

1. Femi Enigbokan Reviewer

2. Ojuolape Fajuyitan Writer

3. Sanni Dahiru Writer

Financial Accounting

1. Taorid Ramon Reviewer

2. Benjamin Omonayajo Writer

3. Jubril Lawal Writer

Business Law

1. Olayiwola Oladele Reviewer

2. Sylvester Akinbuli Writer

3. Kola Oyekan Writer

Economics

1. Gbemi Onakoya Reviewer

2. Sampson Adebayo Writer

3. Agbor Baro Writer

Financial Reporting

1. Ojo Ajileye Reviewer

2. Samuel Okoye Writer

3. Joseph Ogunwede Writer

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Income Taxation

1. Olugbenga Obatola Reviewer

2. Moniru Adebayo Writer

Indirect Taxation

1. Sunday Kajola Reviewer

2. David Sobande Writer

Governance, Risk & Ethics

1. Olutoyin Adepate Reviewer

2. Tade adegbindin Writer

Tax Audit and Investigation

1. Ojo Peter Reviewer

2. Julius Adesina Writer

3. Femi Aribisala Writer

International Taxation

1. Jonathan Adejuwon Reviewer

2. Sandra Momah Writer

Financial / Tax Analysis

1. Phillip Olowolaju Reviewer

2. Julius Adesina Writer

Income Tax for Specialised Businesses and Processes

1. Anthony Clever Reviewer

2. Folarin Akanni-Alimi Writer

3. Sandra Momah Writer

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CHAPTER ONE

1.0 INTRODUCTION TO AUDIT AND INVESTIGATION

1.1 INTRODUCTION
This study pack covers tax audit and investigation principles, controlling and recording of an
audit, interview techniques, audit evidence and procedures, rights and obligations of taxpayers,
as well as statutory powers of tax auditors.

This basis uses the Nigerian Tax system as basis themes of the aims and underlining tax systems
and procedures vary from one taxpayer to another.
The contents of this study pack is immense benefits to any student, tax auditor, researcher and/or
tax investigator thereby increasing the understanding of the steps involved in conducting a tax
audit and tax investigation of a company.

Knowledge of financial accounting, taxation, Revenue Law, Information technology, costing,

auditing, financial management, psychology, Economics, etc are required to carry out a
successful tax audit and/or tax investigation exercise.

1.2 CLASSIFICATION OF TOPIC

This study material is divided into two parts namely, tax audit exercise and tax investigation.
However, for the purpose of convenience tax audit exercise will be treated first while tax
investigation will be dealt with Later.

1.3 Learning Objectives

• At the end of this chapter, readers should be able to:
• Define audit and investigation.
• Describe the types of Auditing and their merits and demerits.
• Explain the rules and objectives of auditing and Investigation.
• Explain the purpose[s] of audit and Investigation.
• State the qualities of an auditor and investigator.
• Explain the fundamental principles of auditing and Investigation.
• Highlight the concept of expectation gap in auditing.
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• Draw a distinction between tax audit and statutory audit.
• Draw a distinction between the internal auditor, External auditor and Tax auditor.
1.4 AUDITING
1.5 Definition of Audit
WHAT IS AN AUDIT?
Auditing is the process of examining a set of the accounting books, records, vouchers,
documents [information] etc. with the intent of establishing its reliability. The process is usually
performed by someone other than the preparer or user of the information. Regardless of who is
performing an audit, an internal or external auditor the audit has the same purpose. To ensure the
financial statements as a whole are free from material misstatement.
Kwame- Cyasi (An International Guide to Auditing) defined auditing as “the
independence examination and investigation of the evidence from which a financial statement
has been prepared with a view to enabling the independent examiner to report whether in his
opinion and according to the best of the information and explanation obtained by him, the
statement is properly drawn up and gives a true and fair view of what is purports to show and if
not to report in what respects he is not satisfied”.
From this definition, it can be deduced that auditing is the process of accessing the
financial statement of an organization or association to which the person undertaking the task is
not a member with the aim of ensuring that these financial statements were truly prepared from
the actual records of financial events and that the statements truly represent the financial position
of the organization.
The auditing standard, defined auditing as “The independent examination of an
expression of opinion on, the financial statements of an enterprise by an appointed auditor in
pursuance of that appointment in compliance with any relevant statutory obligation.
The Auditor’s responsibility is to report and give his opinion on the trueness and fairness
of the financial statements as presented by management”.
An audit is a process whereby the accounts of business entities, including Limited
companies, professional firm etc are subjected to scrutiny in such detail as will enable the
auditors to form an opinion as to their accuracy, truth and fairness. This opinion is usually
presented in an audit report addressed to those who appoint the auditor, usually the shareholders.

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1.6 Objectives of an audit include:
• To examine the internal controls.
• To ascertain that they:
• Check on and maintain the accuracy of business data.
• Safe guard the company assets against fraud, embezzlement and theft.
• Promote operating efficiency.
• Encourage compliance with existing company policies and procedures
• To ensure all necessary corrections are done.
• To obtain reasonable assurance.
• To express opinion in accordance with auditor’s findings.
• To ensure all acquisitions are properly authorised.
• To ensure that the depreciation policy is appropriate.
• To ensure that all disposals are properly authorised and the proceeds are properly accounted
for.

1.7 Merits of Auditing

• Its helps reduce the risk of fraud and poor accounting.
• Facilitate the provision of advice that can have real financial benefits for a business.
• The detection of errors and fraud.
• The prevention of errors, irregularities and frauds.
• To art as moral check against making mistakes, errors or frauds.
• To reveal the weaknesses and inefficiency in the working of the system.
• It serves as a deterrent to fraudulent staff within an organisation.
• By performing auditing frauds and errors can be rectified on time.

1.8 Demerits of Auditing.

• It is not the responsibility of auditor to make recommendation, hence Auditor cannot
perform the following:
• They are less concern with the management policies.
• They cannot guide management for better use of capital.

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• The absence of honesty and independence render an audit useless.
• The auditing fails to present fair view due to bias of an auditor.
• Auditing is more of checking past activities. It is less concerned with present or future.
• Failure to check planned frauds.
• The management can play tricks to manipulate the financial statements in order to conceal
their inefficiencies and irregularities.
• Failure to disclose correct information by the management can lead to wrong clarification.
• Wrong certification can lead to inaccurate or false decision.
• Due to manipulation of financial statements by the management the end result can never give
true and fair view picture.

1.9 Qualities of an Auditor.

• The Auditor must have the required experience, academically and professionally qualified
• The Auditor must have a mindset that recognizes different business needs.
• Knowledge and Experience: Such an auditor must be knowledgeable and technically sound
on the companies laws [CAMA], accounting, auditing, information technology and other
related subjects.
• Conformity with confidentiality principles: Auditor must not disclose information about his
clients to the third parties except where the permission to do so has been granted.
• Independence and Objectivity:
- Intellectually honest.
- Free from any obligation or interest.
- Ability to make independence decisions.
- Must not be biased.
- Dependable.
• Auditor must be open mindedness, fact and effective communication skills.
• Intelligence, clear thinking, and a capacity for dealing with new problem with energy,
initiative, and imagination so as, to be able to devise workable solutions.
• Personality and equable temperament.

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• Integrity: An auditor must be honest and to be seen honest in the implementation of the audit
assignment.

1.10 Auditing and other services.

Auditing firms are composed of accountants who perform audits and other services for
their clients. An appointed auditor is expected to examine the financial statements of a company
and also express a professional opinion on them.
However, in conducting an audit of a small entity the auditing firms may consume more time on
other services than auditing which may include but not limited to the following;
• Writing up books
• Balancing books
• Preparing final accounts
• Filling returns to government offices
• Tax negotiation
• Investigation
• Tax planning
• Financial advice
• Management and systems advice
• Liquidation and receivership work
• Risk management
• Processing and obtaining tax clearance certificate
• Processing incorporation certificate for their clients

1.11 Fundamental principles of Independent Auditing

The auditors must be in possession of the following attributes;
• Accountability
• Integrity
• Objectivity
• Independence
• Competence

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 • Professionalism
• Professional judgement
• Clear communication
• Providing value

1.12 CONCEPT OF EXPECTATION GAP IN AUDITING

1.12.1 Who are the audited accounts users?

They are:-
− Shareholders
− Creditors
− Government and other authorities
− Investors
− Regulators
− Employees
− Debtors
− General public
Please note that all these bodies listed above have a lot expectations from the external Auditors.

1.12.2 Definition of Audit expectation gap

Audit expectations gap can be defined as the difference between the levels of expected
performance as envisaged by the independent accountant and by the users of financial
statements.
In other words, the audit expectation gap can also be defined as the difference between the actual
nature and objective of an audit and that perceived by the users of audited financial statements.
OR
Expectation gap in auditing can be said to mean the society’s misunderstanding of the
fundamental roles and duties of the external auditor. An auditor is only expected to express
opinion on the financial statements prepared by the management of company. The opinion which

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can either be favourable or unfavourable and the auditor’s obligation is to exercise the duty of
care and skill in discharging his opinion. He owes a duty of care to the shareholders who hired
him.
On this premise, the specific objective of expectation gap in auditing are but not limited to the
following:-
i) To examine the duties and responsibilities of external auditors
ii) To examine the expectation of various audited account users
iii) To examine the steps that can be taken to bridge the audit expectation gap

1.12.3 The Expectations Of Audited Account’s Users

1. The shareholders wish that the accounts should be examined by an independent, and
competent person who must access and attest on the account on how well management
have discharged their functions.
2. They believe an auditor is to be blamed in the event of company liquidation which has
been audited by the auditor.
3. Where adequate supply of needed vital and crucial information/documents is not
provided by the management of the company to the auditor, then auditor should sue such
management.
4. The users of audited accounts believe that external auditor deliberately keep useful
secrets of audited companies from them due to over-dependent on auditors opinion.
5. The users of audited account believe auditors opinion on the financial statements of a
company for a year, they should be able to rely upon for the subsequent years.
6. The users desire that auditors present audited account in such a way that it will be easily
understood by users and the issue of misconception on the duties of an auditor or
misinterpretation of accounts will not arise.
7. The users also believe that auditor should give absolute assurance and not just a
reasonable assurance on the audited account.
8. The users believe that financial detection should be the main function of an External
auditor.

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 9. The users believe that the auditor do not really carry out their work independently since it
is the management that hire and fire auditor instead of the shareholders (The users).
10. The users also believe, the law requires the external auditor to express trueness and
fairness of the financial statements to the users.
11. The users believes there is inadequacy of standards, hence more standard should be made
to enhance the performance of auditors.

1.12.4 STEPS THAT CAN BE TAKEN TO BRIDGE THE AUDIT EXPECTATION

GAP
The audited account users place a significantly greater demand in auditors than what auditors
themselves perceive their roles and responsibilities should be. In other word the expectation of
the users of audited financial statements and their belief of the duties, rights, roles and
responsibilities of auditors are too demanding and at variance with what is actually obtainable in
the statutes and laws that regulate the work of an auditor.

In view of this, therefore, it is necessary to bridge this audit expectation gap as follows:
i. There should be public awareness, enlightenment and education on the duties, roles,
power and responsibilities of an auditor.
ii. Lecture should be organized to educate the audited account users on the appointment,
dismissal and rights of an auditor as well as, the level of assurance of audit report
from independent auditor in the performance of his duties.
iii. The audited accounts users should familiarize themselves with the relevant laws,
statutes, statutory pronouncement, standard or audit guideline as it relates to duties,
roles, appointment, independence of an auditor in order to disabuse their wrong
perception.
iv. The audited financial statement should be written in simple, plain language and be
well presented at the annual general meeting in order to remove misinformation,
misleading, communication gap and misinterpretation of the accounts.
v. The audited accounts users should know that auditor does not have primary
responsibility for the prevention and detection of fraud. The Auditing standard
provides an approach that an auditor should follow when conducting an audit.

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 vi. The audited accounts users should note that auditors can only give a reasonable
assurance and not an absolute assurance on audited accounts because they are not the
one that prepared the account. What the management of company wants the auditor to
see and to know is what they will present to him. The auditor only relaying on the
information provided to him by management.
vii. By law, the main duty of an auditor is not to detect fraud and does not have legal right
to sue a company for inadequate supply of needed information.
viii. An understanding of the nature of the expectation gap between audited financial
statements users and external auditors will definitely improve the quality of services
provided by the accounting profession.

1.13.0 AN AUDITOR
In ordinary sense, an auditor is any person who is charged with the responsibility of
examining the books and accounts of an organization in such detail as would enable him form an
independent opinion as to the trueness and fairness of the financial statements.
There are two types of Auditors namely:-
❖ External Auditors
❖ Internal Auditors
The External Auditor differs from Internal Auditor in the areas of appointment, scope of
work, reporting independence responsibility and approach to work among others.

1.13.1 Qualifications of Auditors

Section 358(1) of the Act allows early those recognized as qualified member of a body of
accountants in Nigeria established by an Act or Decree.
In other words, the auditor must be a member of one of the accountancy bodies recognized to be
appointed under the companies of Allied matters Act.
Besides, none of the following persons can be appointed as auditor:-
❖ An officer or servant of the company
❖ A partner or employee of an officer or servant of the company
❖ A body corporate

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 ❖ A person or firm who offers to the company professional advice in a consultancy
capacity.
The CAMA is framed as far as possible to protect the auditor and therefore, section 364
requires 28 days special Notice at general meeting resolutions:-
❖ Appointing an auditor other than the retiring auditor
❖ Filling a casual vacancy in the office of auditor; or reappointing as auditor.
❖ Re-appointing a retiring auditor originally appointed by directors to fill a casual
vacancy
❖ Removing an auditor before expiring of term of office

1.13.2 APPOINTMENT OF AUDITOR(S)

Under the Companies and Allied Matters Act Cap. C20LFN Section 357(1), 2004,
“Every company shall at each annual general meeting appoint an auditor or auditors to hold
office from the conclusion of the meeting, until the conclusion of the next annual general
meeting”. The reason for the auditor being appointed at the end of the meeting is to ensure that
the auditor is able to present and speak if required about the financial statements which are
presented for approval at the meeting. If the auditor did not hold office until the end of the
meeting, it would be possible for the auditor to be removed before discussion of the financial
statements took place. There is no automatic re-appointment of the auditor without the passing
of a resolution, and the appointment of auditors has to be approved annually by the company in
general meeting. Section 357(3) and (5) of the Act also allows directors to appoint auditors to
hold office until the conclusion of the first general meeting and also to fill a casual vacancy.

1.13.3 THE DUTIES AND RESPONSIBILITIES OF AN AUDITOR

➢ The primary responsibility of an external auditor is to determine that the financial
statements of a firm give a fair and honest picture of the financial position of the
firm.
➢ To properly and adequately verify the transactions recorded in the books of
account
➢ Presentation of financial statements to the shareholders

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 ➢ It is the duty of the auditor to use his/her professional skill and knowledge to
consider, unfold and report whether the view given by the financial statements is
consistent, accurate, true and fair.
However, the external auditor is not primarily involved in the initial design of systems/accounts,
but in examining the accounting systems used to develop the financial statements. The auditor’s
responsibilities towards irregularities and errors is limited to designing and evaluating his work
with a view to detecting those errors and irregularities which might impair the truth and fairness
of the view given by the financial statements. Please note that the Audit guideline did not extend
the Auditors duties and responsibilities beyond those defined by the companies Act.
1.13.4 RIGHTS OF AN AUDITOR
An auditor has the right:-
❖ To receive all notices and communications relating to the meetings
❖ To be heard in all areas of the business that concerns him as auditor
❖ Auditors are bound to know and make themselves acquainted with their duties
❖ Right to request from the company’s office such information and explanations as he
thinks necessary for the performance of his duties. The information may be accounting
and / or non-accounting in nature and may even be explanation on the contents of the
books, accounts, and vouchers.
❖ To examine the company’s books and documents and form an independence opinion as
to whether:-
❖ Proper accounting records have been kept
❖ Proper returns adequate for his audit has been received from branches not visited by him
❖ The company’s balance sheet, profit or loss account are in agreement with the accounting
records and returns
❖ The information given in the directors’ report for the year is consistent with those
accounts.
- To have an unrestricted right of access at all times to the company’s books of accounts,
vouchers and all other documents connected with the accounts.
- To attend such meetings where matters affecting his assignment in the concern are being
discussed in a manner that his absence from such meetings may be pre- judicial to proper
discharge of his duties.

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 - The auditor(s) has a duty of care to third parties (e.g. creditors, government and potential
investors).

The company is the auditor’s client and his duties are laid down by statute and cannot be
limited, either by the directors or the members. Because the auditor depends ultimately on the
company for his fees, it may be seen that true independence is difficult.

1.13.5 Remuneration of Auditors {Section 361 of CAMA}

1. The remuneration of the auditors of a company;
a) In the case of an auditor appointed by the directors, may be fixed by the directors,
or
b) Shall, subject to the foregoing paragraph be fixed by the company
In general meeting or in such manner as the company in general meeting may
determine.
2. For the purposes of sub-section 7 of this section, remuneration includes sums paid by the
company in respect of the auditors expenses.
1.13.6 Removal of Auditors
However, notice of removal of an auditor must be given to the Corporate Affairs
Commission (CAC) within 14 days of passing the resolution – section 362(2). A company may
by ordinary resolution remove an auditor before the expiration of his term of office,
notwithstanding anything in any agreement between it and him section 369(1). This is without
prejudice, however, to his right to sue for compensation or damages payable to him in respect of
the termination section 362(3).
Any member who is invited to accept nomination as the auditor of a company in place of
someone else should request the prospective client’s permission to communicate with the auditor
last appointed and not to accept nomination if he is refused permission to make such
communication. When permission to communicate is obtained, he should request in writing of
the auditor last appointed all information he considers necessary for a decision to be made as to
whether he should accept nomination.

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 The auditor last appointed, on receiving such a request, should ask the permission of the
client to discuss the client’s affairs freely with the proposed auditor. If this is not given, the
auditor should disclose freely matters relevant to the client which might include:
❖ he reason for the proposed change in auditors
❖ explanation of disagreements (if any) on accounting and auditing matters
❖ his views on the reputation and integrity of client and its senior employees.

The (CAMA) is designed to protect the auditor from dismissal. Where the existing auditor faces
removal or replacement:-
❖ Notice of such resolution must be sent to the auditor
❖ He has the right to make representations and may request that these shall be notified to
members
❖ The company should include in any notice all the resolution given to members a
statement of the fact that the auditor has made representations and should also circulate
copies of these representations.
❖ If time does not permit circularization of representations, the auditor may read them at
the meeting
❖ Where representations in the opinion of the court are used to secure needless publicity for
defamatory matter, such representations need not be circulated or read out.

It should be noted that the auditor may not call a special meeting if faced with removal or
replacement. The company must hold the meeting to remove or replace the auditor. The
auditor has no right to compensation for loss of office. The decision to remove the auditor is
taken at the meeting and, in most cases, the meeting will follow the wishes of the directors.

1.13.7 Resignation of Auditors (Section 365 of CAMA)

The auditor may resign his office by depositing a notice at the registered office of the
company. The resignation notice will only be effective if it contains either:-
❖ a statement that there are no circumstances connected with the registration which
the auditor(s) considers should be brought to the notice of members or creditors,
or

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 ❖ a statement of such circumstances .
However, the auditor can call upon the directors forthwith to convene an extraordinary
general meeting to consider the statement of circumstances connected with the resignation. The
directors must, within 21 days, call a meeting not more than 28 days from the date on which
notice is given. The auditor can attend the meeting and speak on matters concerning him as
former auditor of the company.

1.13.8 MANAGEMENT RESPONSIBILITIES

i. To run a company effectively and efficiently thereby safeguarding the assets
entrusted on its care
ii. Preparation of Financial Statements free from material misstatements.
iii. Rendition of audited Accounts to shareholders at regular intervals (usually on annual
basis)
iv. Disclosure of the financial position of the company with reasonable accuracy at all
times.
v. Ensure that established controls are strictly adhered to
vi. Maintenance of proper records of transactions
vii. Ensure that the accounting books and records of the company are kept at the
company’s registered address
viii. Ensure internal control procedures are instituted to safeguard assets, prevent and
detect fraud and other irregularities.
ix. Continuously update existing controls to block any discovered loophole.
x. Study the business environment, and recommend improvements or review of existing
controls
xi. Maintaining internal control and assessing efficiency of business operations
xii. However, effective internal control system assists management in performing this
task well.

1.13.9 Need for proper Accounting Records

- The business activities can be controlled
- Day-to-day records of debtors and creditors can be monitored

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 - Assets can be safeguarded if proper record of them is being kept
- Financial statements can be prepared if adequate primary records exist
- Record-keeping for PAYE, VAT, WHT, is a statutory requirement
- In case of subsequent litigation, such records will be more useful
- Statutes often have specific requirements on record-keeping for specific types of
business e.g insurance act, banking act etc.

1.13.10 DIFFERENTIATION BETWEEN THE INTERNAL AUDITOR,

EXTERNAL/STATUTORY AUDITOR AND TAX AUDITOR
S/N INTERNAL AUDITOR STATUTORY AUDITOR TAX AUDITOR
1. Internal Auditor is an employee Statutory Auditor is an external Tax Auditor is an
of the firm. Body/firm employee of federal
Government/FIRS.
The frequency of tax
audit is determined
By the management
of the relevant Tax
Authority.

2. The management of the Statutory Auditors works Tax Audit is carried

Organization determine the according to the rules and out to enable the
Work undertaken by the Internal regulations of Companies tax auditor to
Auditor. And Allied Matters Act. ascertain whether
the taxable person
has complied with
the provisions of
the relevant Tax
Laws.

3. Internal Auditor will examine issues The external auditor Tax audit is to
Related to company business examines the financial determine the

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 Practices and risks. Records and to produce a
Report expressing his
opinion on the truth and
fairness of the financial
correct amount of
tax payable in
accordance with the
relevant tax Laws,
statement Rule
and regulations.

4. Internal audit are carried out The statutory audit conduct
Throughout the year a single annual audit
to
The Corporate Affairs
Commission (CAC),
FIRS and others
require companies
submit their audited
financial statements
to them on a yearly
basis.

5. Internal Auditors are hired by the The Statutory auditors Tax audit is
conducted
Company. are appointed by the at the instance of the
Shareholders vote. management of the
Relevant tax
authority

6. Internal auditors does not The statutory auditors There is no

provision
necessarily have to be must be qualified in the
tax Laws that
qualified chartered accountants. chartered accountant say a tax auditor
and must have practicing must be a
chartered

22
 License certificate. Accountant.

7. Internal auditors are responsible The statutory auditors are

to the management of the firm responsible to shareholders

8. Internal auditors can issue their Statutory auditors must use

findings in any type of report specific Templates (formats)
format. for their audit opinions and
management letters.

9. Internal audit reports are used Statutory audit report is

by management. addressed to the members Tax audit
report is
of shareholders of the company is addressed
directly
to the management
of the relevant tax
authority.
10. Internal auditors can provide Statutory auditors are legally
Professional advice and other constrained from supplying or
Consulting assistance to employees advising his client.
And management of the firm.

11. Internal auditors are to provide The audit will

necessary materials for the enable the
auditor
preparation of financial statements. to form an
opinion
as to whether the
taxable person has
maintained books

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 of accounts
adequate for tax
purpose.
12. An effective system of Internal To examine the internal Tax
audit is to
Checks to prevent or detect controls and to ascertain determine
the
errors and fraud and necessary that they safeguard the
correct amount of
corrections are put in place. company assets against tax
payable in
fraud, embezzlement accordance with
and theft. the relevant tax
Laws.

13. The duties, rights, powers Tax

Auditors
etc of the statutory auditor responsibilities,
are governed mainly by the powers and
provisions of Companies and authority are
Allied Matters Act, Accounting governed by the
Standard, Auditing guidelines,
provisions of the
Professional regulations etc. relevant tax
Laws, Bank
Prudential
Guidelines, etc.

1.14.0 INTERNAL AUDITING

1.14.1 Introduction

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 The internal auditor is an employee of the organization who is given the responsibility for
seeing that accepted accounting practices are followed and that adequate internal and data
controls are included in the organization’s accounting systems. In fact, the scope of his work,
appointment, promotion are determinable by the management. The reports of the internal
auditors are made to the management and by this, the internal auditor’s is independent as a
necessity for effective audit is not encouraging.
Internal auditors need not be considered as necessarily confined to the verification of
records, they may be extended also to office methods and personnel practices.
For an internal auditor to work amicably and to advantage within the organization, it must be
accepted that the introduction of internal auditor to the organization is designed to lead easier,
quicker, and better work by the staff.
In internal audit, management has at its disposal an instrument which if properly used, becomes
an important and permanent feature in the management control As an instrument of management
control the internal audit should assist the management to ensure that there is co-ordination of
operation between all sections of the firm.
1.14.2 Definition
According to the Institute of Internal Auditors, Internal auditing is defined as “an
independent appraisal activity within the organization for the review of operations as a service to
management. It is a management control which functions by measuring and evaluating the
effectiveness of other controls”.
In the words of Santocki J. (1979) four principal facts emerge clearly from the above
definition:-
❖ Internal audit is an internal function, which means that it is conducted by the employees
of an organization specially assigned for this purpose.
❖ The internal auditor’s function is to review and appraise an organization’s operations and
records.
❖ Internal audit is a service to management, consequently, the scope and objectives depend
upon management’s assessment of what is needed, and its willingness to assign the task
to the internal audit.
❖ Internal audit, being a review and appraisal function to be conducted effectively requires
the status of independence.

25
 This means independence from the administrative and operating departments which the
internal auditor is reviewing, and on which he is reporting”.
Another school of thought said “Internal audit is an independent appraisal activity within
an organization for the review of operations activity as a service to management”. It is a
management control which functions by measuring and evaluating the effectiveness of
other controls.
From the foregoing, it can be seen that the purpose of internal auditing is not to discover fraud
as some people think. A properly conducted internal audit may reveal discrepancies, mistakes,
loopholes, irregularities in the system and sometimes, fraudulent manipulations as a by-product
of the work. This does not mean that any internal auditing job that did not reveal the above by-
product was not properly conducted. These by-products can only be discovered where they
exist.

1.14.3 Objectives and Purposes of Internal Audit

The main objective of an internal audit is to ensure management that the internal check and the
accounting system are effective in design and in operating. According to L.G. Campbell in a
book titled international auditing indentified the three reasons why internal audit is required;
a) The Lending of Credibility – that is to detect errors or prevent frauds and disclose hidden
information.
b) Accountability – the directors are the agents of the shareholders, their performance need
to be evaluated
c) To resolve conflict of interest.
For the above objectivities to be accomplished the internal audit unit or department must
perform certain functions which must be in line with the requirements of the company or
organizational internal control system
Some of the functions are enumerated below;
i. To ensure that management policies are executed and at the right time
ii. To ensure that management are supplied with quality information necessary to
perform their function as required of them
iii. To ensure the safeguard of the organizations assets against fraud, embezzlement
and theft.

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 iv. To ensure that the internal control system for the organization is well designed
and well implemented
v. To carry out investigations and other tasks as may be assigned by the
management and/or audit committee
vi. To provide training for non-auditing officers in ensuring effective implementation
of internal control system
vii. To review the internal control system, to detect any lapses with the aim to
improve
viii. To assist the external auditors as may be required
ix. Check on and maintain the accuracy of business data
x. Promote operating efficient
xi. Encourage compliance with existing company policies and procedures

1.14.4 Functions of Internal Audit

The functions of Internal Auditor are determined by management and vary greatly from
organization to organizations.
The duties of internal auditors are as follows:
- Review of accounting systems and related internal controls
- Examination of financial and operating information for management, including detailed
testing of transactions and balances.
- Special investigation
- Review of the implementation of corporate policies, plans and procedures.
- Review of economy, efficiency and effectiveness of operations.
- Examine the internal control and ascertain that they are;
(a) Check on and maintain the accuracy of business data.
(b) Safeguard the company assets against fraud, embezzlement and theft.
(c) Promote operating efficiency.
(d) Encourage compliance with existing company policies and procedures.

1.15.0 Internal Control System

1.15.1 Introduction

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 The control is essentially a management function that deals with the measurement and
correction of the performance of subordinates with a view to achieving organizational
objectives with maximum efficiency and at minimum cost. Control is a four staged process
(a) setting standards (b) measuring performance against the set standards (c)
feedback of results, and (d) correcting deviations from standards.
For control to be effective, a number of things must be put into consideration. Firstly, the
control must be relevant to the size of the job that is being performed. Secondly, variations
from standards must be reported immediately. Thirdly, distribution/allocation of duties must
be properly set out so as to identify persons responsible for the variations. Fourthly, as much
as possible, exceptions to stated rules/procedures must be avoided and fifthly, there must be a
good control environment. Management must possess and demonstrate good leadership
qualities.

1.15.2 Definition of Internal Control

According to the Chartered Institute of Accountants of Nigeria (ICAN)/Auditing practices
committee The concept has been defined as “the whole system of controls, financial and
otherwise established by the management in order to carry on the business of the enterprise
in an orderly and efficient manner, ensure adherence to management policies, safeguard the
assets and secure as far as possible the completeness and accuracy of records”.
Similarly, the institute of Internal Auditors defines internal control as “all means
designed to promote, govern, and check upon various activities for the purpose of seeing that
enterprise objectives are met”.
This is the type of control exercised by management within an organization. It is very
important where the size of the organization is large and where management is removed from
having direct contacts with the routine operations of the organization. The object of Internal
control is the prevention or early Identification of errors, irregularities and frauds.

1. 1.15.3 Management
Management has the duty of designing an appropriate system of Internal Control for the
organization. The type of internal control system designed and installed depends on the

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 nature, size and volume of transaction, the ability of management to control the organization
etc.
The internal control system consists of an input, processing unit and output. The inputs are
the objectives, standards policies and plans, financial resources etc, which are processed. The
result of the evaluation (output) will enable management know what is happening in the
organization and perhaps what may likely happen in future and thus take corrective
measures.
The internal control system must be reviewed periodically by management to ensure that it is
capable of meeting the current needs of the organization. Such evaluation must start with the
examination of the environment in which the control operates and later the procedures and
techniques of internal control. If the control environment is poor, it may hamper the smooth
operations of controls. For instance, where management can override specific control
procedures without being challenged, where management has objectives that are different to
those of the organization, where leaders are fraudulent, etc the environment is poor.
Management must ensure that a conductive environment prevails at all times. Furthermore,
management must ensure that bad precedents through exceptions are not created. Procedures
and policies must be followed at all times, failure to follow laid down policies may be
exploited by employees to perpetrate fraudulent acts.
Concentration of duties in the hands of a few people because they are trust worthy may give
room for collusion and may hamper the smooth operations of the internal control.

1.15.4 Control Environment

Sometimes referred to as the “tone at the top” of the organization, meaning the integrity,
ethnical values and competence of the entity’s people, management’s philosophy and
operating style, the organizational structure, personnel policies and procedures, the way
management assigns authority and responsibility and organizers and develops its people; and
the attention and direction provided by the board of directors.
It is the foundation for all other components of Internal control, providing discipline and
structure.

Risk assessment

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 This is identification and analysis of relevant risks to achieve the objectives that form the
basis to determine how risks should be managed. This component should address the risks,
both internal and external, that must be assessed. Before conducting a risk assessment,
objectives must be set and linked at different levels.
Control activities
Policies and procedures that help ensure that management directives are carried out. Control
activities occur throughout the organization at all levels in all functions.
These include activities such as approvals, authorizations, verifications, reconciliations
reviews of operating performance, security of assets and segregation of duties.
Information and communication
Addresses the need in the organization to identify, capture, and communicate information to
the right people to enable them carry out their responsibilities. Information systems within
the organization are key to this element of Internal control. Internal information, as well as
external events, activities, and conditions must be communicated to enable management
make informed business decisions and for external reporting purposes.
Monitoring
The internal control system must be monitored by management and others in the
organization. It is important that internal control deficiencies be reported upstream, and that
serious deficiencies be reported to top management and the board of directors. These five
components are linked together, this forming an integrated system that can react dynamically
to changing conditions. The internal control system is intertwined with the organization’s
operating activities, and is most effective when controls are built into the organization’s
infrastructure, becoming part of the very essence of organization.

1.15.5 Control Procedures

It means those policies and procedures in addition to the control environment which
management has established to achieve the organization’s specific objectives. These
objectives include the proper authorization, timely and accurate recording of transactions in
the correct period, However, the control procedures include the following:

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 - Reporting, renewing and approving reconciliation
- Checking the arithmetical accuracy of the records
- Safeguarding of assets and ensuring the existence of asset records
- Limiting direct physical access, to assets and records
- Approving and controlling of documents
- To prevent, detect and correct errors.
- Comparing the result of cash, security and stock counts with accounting records.
- Controlling applications and environment of computer information systems, e.g.
establishing control over:-
- Changes to computer programs
- Access to data files
- Maintaining and reviewing control accounts and trial balance
- Comparing internal data with external sources of information
- Comparing and analyzing the cost of operating individual controls against the benefit
expected to be derived from them.
-
The checks on day-to-day transactions which operates continuously as part of the routine system
whereby the work of one person is proved independently or is complementary to the work of
another, the object being the prevention or early detection of errors or fraud.

The Internal control system to be adopted, and the means by which it is to be communicated and
implemented, vary according to the nature and circumstances of each business, in fact large
companies tend to find it desirable, to define the organization and procedures in writing, while
small companies which are subject to closer proprietoral control may adopt a more informal
approach. However, staff should be clearly aware of the scope and the limitations of their
responsibilities.

1.15.6 Determination of the effectiveness of the Internal Control System

i. Initial Familiarization
The auditor obtains initial familiarization with the clients organization operations,
control environments and accounting information system.

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 Identify data processing applications having audit significance.

ii. Analysis: Stage

Through enquiry, observation and review identify the various types of significant
transactions processed within each application and determine how they are processed
i.e. the documents in use, their flow and flow of information. Document in narratives
note and flow charts the procedures obtain and file copies of documents in use.
Perform a walkthrough test to gain an understanding of the system. This is done either
by examining few processed and filed documents or examining documents under
processing.

Identify the controls needed within each application and determine whether control
procedures have been established to meet the objectives of accounting control. This is
documented in an Internal Control Questionnaire (ICQ).

iii. Preliminary evaluation

Based on the result document in ICQ, preliminary evaluate the potential effectiveness
of the internal control procedures or the likelihood of errors in the data produced by the
system.
This stage evaluation provides basis for tentatively deciding on:
- The degree of reliance to be placed on various control procedures
- The nature, timing and extent of the tests of the control relied upon
- The native, timing and extent of the tests needed on the related account balances.
Where the system is preliminarily evaluated as effective, a compliance test will be
performed on the effective procedures. Where the system is preliminary evaluated as
ineffective, then an extensive substantive test would be required when performing tests
of account balances.

iv. Compliance test:

Design and perform test of effectiveness of the procedures preliminary evaluated to be
effective.

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 v. Final evaluation
Evaluate the results of the compliance tests to confirm whether the preliminary
evaluation is appropriate or not.

1.15.7 Purposes of Internal control system

i. It ensures that all transactions are recorded
ii. It ensures that all recorded transactions are real, correctly value, recorded timely,
correctly classified, correctly summarized and correctly described.
iii. To enable management carry on the business in an orderly and efficient manner.
iv. It prevents error and fraud from occurring
v. It detects errors and fraud that occurred
vi. It limits the extent of work the external auditor will do hence reduction in audit time and
fees and early preparation and signing of audited accounts.
vii. Safe guards assets of the organization.
viii. Ensures compliance with management laid down procedures in all areas especially
transaction processing record keeping and staffing and authorization and
acknowledgment of performance.

1.15.8 Why Internal Control interests the External auditor

It is essential for Auditor to scrutinize the internal controls, which are in existence, in great
detail, and to determine whether or not they are such that the auditor can rely upon them to
perform a large part of the routine verification work for him. The major reasons why internal
control interests the auditors can be deduce from the following:
It is the responsibility of the company’s management to ensure sufficient internal controls are in
place and auditor’s duty is to assess these controls to see if he can rely upon them. The first part
of this assessment is to identify the controls followed by testing these controls. These tests are
called compliance tests.
If the results of the compliance tests are adequate then the auditor can place reliance upon the
internal controls and reduce the amount of substantive testing of transactions, so allowing an
increase in the profit made on the audit and allow a reduction in the audit fee.

33
The object of the auditors examination of the system is to determine the nature and extent of the
audit procedures to be applied in order to establish the reliability of the records as a basis for the
preparation of accounts which will present a true and fair view.

Examination involves ascertaining not only the procedures prescribed but also those actually
used in practice. Unless careful supervision is exercised by responsible officials procedures tend
to be unofficially modified with the passing of time and changes of staff. A theoretically sound
system may prove defective in operation because its rules are not property observed or because
the circumstances of the business have changed. Auditors should therefore seek, by inquiry,
observation and tests, to ascertain that the system is being properly and effectively operated by
competent staff. On the results of these observations auditors base their opinion of the adequacy
of the internal control system.

In exceptional cases, auditors may find that the records and the system of internal control are so
seriously inadequate that no useful purpose could be served by embarking upon extensive
detailed checking, because even the most exhaustive tests would not enable them to form an
opinion on the balance sheet and profits and loss account. In that even their appropriate course
will be to report to that effect to the shareholders and to inform the directors of the respects in
which the records and system are deficient.
It is in the interest of all concerned-shareholders, management, employees and auditors that any
defects in the system of Internal control or respects in which there is scope for improvement
should be reported to the appropriate persons and the facts placed on record. This is particularly
important where the system of internal control is judged inadequate in material respects, since
such circumstances must cast doubts on the basic reliability of the records presented to the
auditors. The possibility of error and omission, whether deliberate or accidental, may be
materially increased in such circumstances.

1.15.9 Why Internal Control interests the Internal Auditor

Internal audit is an integral part of the internal control system. It derives from the use of the
organizations personnel to appraise the activities within the organizations, for the review of the

34
financial and other operations to determine if they accurately and honestly reflect the condition
of the organization it functions by measuring and evaluating the effectiveness of other types of
controls.

1.15.10 Characteristics of Internal Control System

i. Plan of organization:
The plan covers the activities of both management and staff at all levels regarding
responsibilities, duties, authorities and reporting. There can be no effective internal
control without an adequate plan of organization. This involves the separation of a
company’s operations into appropriate divisions/sections, the appointment of
persons to assume responsibility therefore, the establishment of clearly lives of
responsibility between each division and sub-division and the board of directors
and overall co-ordination of the company activities.

ii. Segregation of duties:

No single person should process a transaction from initiation to conclusion. More
than one person should be involved in the processing and recording of transaction.
Areas that should be properly segregated are initiation, authorization, execution,
custody and recording.

iii. Authorization and approval:

Every processed and recorded transactions should be authorized and approved by
an authorized official. Limits, if any, should be specified. The expenditure may be
incurred only after authorization, and is properly accounted for, and that revenue
are properly accounted for and received in due cause.

iv. Physical:
Physical custody of, and access to assets should be properly controlled in respect of
valuable, exchangeable and portable goods. Such controls may include use of locks
or passwords.

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 v. Personnel
Competent and experienced staff should be envolved in the processing of
transactions. Appropriate recruitment procedure be established to identify and
employ the right caliber of staff and be well motivated.

vi. Acknowledgment of Performance:

There should be procedures that ensure that who performs an assignment
acknowledges it by signature, initials or any means possible.

vii. Arithmetical and Accounting:

There should be procedures that ensure that documents are subjected to casting test
and appropriately coded. This will include footing, cross-footing, recomputation,
use of total accounts and sequence tests.

viii. Management:
Management impression and response to internal control matters will be a great
affect staff attitude to it.

Management should (a) make the staff control conscious and (b) create general control
mechanisms which should include supervisory control, budgeting and budgetary controls,
internal audit, preparation and review of management accounts.

1.15.11 Practical aspects of Internal control

The major factors an auditor should consider in his review of a system of internal control
relating to purchases are:
Authorization:
The plan of organization should ensure that appropriate persons are assigned the
responsibility for and authority for:

36
 a. Requisitioning goods and services to be ordered
b. Establishing guidelines to follow in dealing with suppliers a list of suppliers be
maintained and competitive bids be received and considered
c. Determining quantity order limits and quality specification
d. Selecting vendors and arranging payment terms
e. Purchasing from related parties
f. Receipt of goods and services, rejecting goods or services and initiating debit notes for
rejections or shortages.
g. Preparation and authorization of purchase orders
h. Safe-keeping of purchase order form and safeguarding their use
i. Authorization for payments.

Recording of transactions:
a. Appointment of separate person, where practicable, for (i) checking suppliers invoice, (ii)
recording purchases and purchases returns (iii) maintaining suppliers
ledger accounts (iv) checking suppliers statements (iv) authorizing payment
b. Procedures to ensure that before payments are effected:
i. Relevant goods have been received and agreed with the purchases order, delivery
note, properly priced and invoiced.
ii. The expenditure has been properly allocated.
iii. The payment has been properly authorized by a responsible official.

c. Procedures to ensure that purchase returns, specially credits and other one off
transactions are properly treated.

d. Establishments of procedures to ensure that invoices for goods received are recorded or
accrued for in the accounts (i.e. cut-off procedures implemented).

e. Proper arrangements to treat related party transactions.

37
 f. Review of supplier accounts and comparison with current statements.

g. Use of purchases control account and agreement with the total of the suppliers subsidiary
ledgers.

1.16.0 Investigation
1.16.1 Definition of an Investigation

An investigation can be defined as a thorough and in-depth examination of the financial

statements of an organization and their relevant supporting documents for the specific purpose of
obtaining facts or to evaluate a specific situation to be submitted to an interested party.
Investigation differs a lot from Audit, a few of differences which are briefly explained below:-

1.16.2 Objectives of an Investigation

- To determine what occurred in a particular situation so that the employer can take
appropriate action to improve the work environment and financials or accounting
system in order to meet any legal obligations that might exist based on the findings.
- To collect, analyze and evaluate facts in respect of desired field of activity with a
view on some special purpose as determined by the person on whose behalf the
investigation is undertaken.

1.16.3 Reasons that may call for Investigation

Investigations are carried out under various circumstances such as:-
i. It is conducted based on third party information (petition) or whistle blowers.
ii. It is carried out based on suspicious
iii. Mergers and acquisitions, amalgamations etc
iv. To determine whether a fraud or error has taken place
v. To determine whether royalty has been correctly established
vi. It is carried out on the target on behalf of an entity proposing to acquire the target.

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1.16.4 Difference between Investigation and Auditing
Investigation
1 The investigation’s objective is to establish
a fact, analyse and evaluate a specific
situation on examination of specific records
and documents
2 In investigation, the scope and objective are
specific and narrow
3 In investigation substantive and conclusive
evidence is required to establish a fact
4 Investigation exercise is based on suspicion
or special requirements
5 Investigation is not carried out on the basis
of accounting conventions or rules I . e No
standards of professional guidance on an
investigation.
6 Conduct of investigation is specific and
deep in nature
7 Investigation is more usually applied to all
work of an interrogatory nature
8 Investigation is performed to prove a certain
fact or disprove/dispel a suspicion
9 The examination conducted under
Auditing
The auditing’s objective is to ensure that the
financial statements are not misleading or
unreliable (b) an auditor is to express his
opinion on the financial statement on the basis
of sufficient evidence collected by examining
the documents and records
In audit, the scope and objectives are general
and broad
In audit, a persuasive evidence is sufficient for
an auditor to form an opinion
Audit exercise is an annual statutory
requirement carried out on the company’s
transactions
Auditing and assurance standard available
The conduct of auditing is wide and general in
nature
Auditing is not an interrogatory nature
Audit is conducted to verify the extent of
truthfulness and fairness of the financial
records of an entity
Auditing is a periodic and routine exercise
39
 investigation is intensive as well as
exhaustive
10 Investigation requires a much more Auditing, because of its larger purpose, cannot
concentrated focus on the subject matter of be in-depth except in some specific areas
inquiry selected for the depth checking

11 Investigation has no set frequency. Audit is not carried out with a view to
Investigation may be spread over a period detecting frauds or errors
longer than one year and its scope may
extend to inquiry beyond the books of
account if the circumstances so require.
Investigation has no statute bar
12 Investigations are carried out to ascertain Audit reports is made to the shareholders
whether there was a fraud or error
13 To look for specific, definite and conclusive
evidence
14 Investigation reports goes to the board or
initiator of investigation

1.16.4 Qualities of an Investigator

i. It is important that an investigator conducts himself with for greater care and
diligence.
ii. Integrity/self-discipline: An investigator must be honest and be seen to be honest in
the implementation of the investigation assignment.
iii. An investigation must not be biased or prejudice
iv. Communication and Interview skills
v. Investigators must be able to control their emotions
vi. Technical skills and knowledge

40
 vii. Investigator must be ethical
viii. Investigator must have ability to win confidence of people
ix. An investigator must be very good at documentation
x. An investigator must be computer literate
xi. Free from any obligation or interest
xii. The investigation must have the required experience, academically and
professionally qualified
xiii. Ability to make independent opinion
xiv. Conformity with confidentially principles
- Investigator must not disclose information about the subject of investigation to third
parties except where the permission to do so have been granted.

CHAPTER ONE
REVISION QUESTIONS
1. It appears from a number of studies in recent years that the role of an auditor in relation to the
detection of fraud is widely misunderstood. These studies have found that a high proportion of
investors and of company management believe that the detection of fraud is one of the main
objectives of an audit required.

a) Discuss what you consider to be the auditor’s responsibilities in the course of the normal
annual audit, in relation to the detection of fraud.

41
 (7marks)

b) Explain the way in which the auditor should approach and perform his work in order to
meet those responsibilities.

(6marks)

c) Briefly outline the action which the auditor should take if, during the audit he suspects
that his client has carried out fraudulent trading.
(7marks)
TOTAL (20marks)
2. What are the expectations of the users of audited accounts of the external auditor? And
explain the steps to be taken to bridge the audit expectation gap.
3. What are the likely difficulties an Internal and External Auditors will face while
performing their duties? and how can these difficulties be overcomes?
4. What do you understand by the term “Auditing and Investigation”? and what are the
merits and demerits of each?
5. What are the qualities of an Auditor and Investigator?

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 SUGGESTED SOLUTIONS FOR CHAPTER ONE

1a) The legal position is that it is not the auditor’s primary responsibility to detect or prevent
frauds and other irregularities.

The auditor’s duty is to state whether a set of accounts gives a true and fair view and comply
with the relevant legislation. However, the auditor has a secondary responsibility in relation
to fraud etc. in that he should design and evaluate his work with a view to detecting those
errors and irregularities which might impair the truth and fairness of the financial statements.
Therefore, in obtaining audit evidence the auditor should satisfy himself that those errors or
irregularities which may be material for the financial statement have not occurred or that if
they have occurred they are either corrected or properly accounted for in the financial
statements.
In carrying out this responsibility the auditor should exercise reasonable care and skill and
apply current auditing standards because it is expected that if the auditor plans his work well
and applies current standards he should come across all material errors and irregularities in
the normal course of his audit.

1b) The auditor should conduct a normal audit in accordance with the auditor operational
standards. This involving the following steps:

43
 i. Plan, control and record the audit.
ii. Evaluate the test internal controls.
iii. Design substantive tests which takes into account weakness in internal controls.
iv. For the major items in the account, obtain relevant, reliable and sufficient audit
evidence.
v. Review the financial statements checking the consistency of related items looking at
trends and investigating unusual variations.
vi. If he comes across anything suspicious he should investigate it thoroughly. That is, he
may need to amend his audit programme to enable him to investigate and follow up
the errors and irregularities.

1c) In the course of his audit the auditor may discover a fraud or irregularities
perpetrated by his demerits client. Normally, his duty of confidentiality prevents him from
reporting any matters to third parties without his client’s permission. However, in certain
circumstances the auditor may disregard the duty of confidentiality for example; he may be
legally bound to disclose the commission of a criminal offence if ordered to do a court or by
government officials empowered to request such information.

Further, an auditor may elect to disclose information voluntarily where there is a public duty
involved. A public duty arises if the auditor is aware of an actual or intended criminal
offence likely to cause harm to an individual or effect a large number of people where the
auditor is not sure of his position he should seek legal advice and if his efforts are frustrated
by his client he may consider resigning his appointment under the provisions of the
companies and allied matter act.

44
( 2a) The expectations of audited account’s users

12. The shareholders wish that the accounts should be examined by an independent, and
competent person who must access and attest on the account on how well management
have discharged their functions.
13. They believe an auditor is to be blamed in the event of company liquidation which has
been audited by the auditor.
14. Where adequate supply of needed vital and crucial information/documents is not
provided by the management of the company to the auditor, then auditor should sue such
management.
15. The users of audited accounts believe that external auditor deliberately keep useful
secrets of audited companies from them due to over-dependent on auditors opinion.
16. The users of audited account believe auditors opinion on the financial statements of a
company for a year, they should be able to rely upon for the subsequent years.
17. The users desire that auditors present audited account in such a way that it will be easily
understood by users and the issue of misconception on the duties of an auditor or
misinterpretation of accounts will not arise.
18. The users also believe that auditor should give absolute assurance and not just a
reasonable assurance on the audited account.
19. The users believe that financial detection should be the main function of an External
auditor.
20. The users believe that the auditor do not really carry out their work independently since it
is the management that hire and fire auditor instead of the shareholders (The users).
21. The users also believe, the law requires the external auditor to express trueness and
fairness of the financial statements to the users.
22. The users believes there is inadequacy of standards, hence more standard should be made
to enhance the performance of auditors.

b) STEPS THAT CAN BE TAKEN TO BRIDGE THE AUDIT EXPECTATION

GAP

45
The audited account users place a significantly greater demand in auditors than what auditors
themselves perceive their roles and responsibilities should be. In other word the expectation of
the users of audited financial statements and their belief of the duties, rights, roles and
responsibilities of auditors are too demanding and at variance with what is actually obtainable in
the statutes and laws that regulate the work of an auditor.

In view of this, therefore, it is necessary to bridge this audit expectation gap as follows:
ix. There should be public awareness, enlightenment and education on the duties, roles,
power and responsibilities of an auditor.
x. Lecture should be organized to educate the audited account users on the appointment,
dismissal and rights of an auditor as well as, the level of assurance of audit report
from independent auditor in the performance of his duties.
xi. The audited accounts users should familiarize themselves with the relevant laws,
statutes, statutory pronouncement, standard or audit guideline as it relates to duties,
roles, appointment, independence of an auditor in order to disabuse their wrong
perception.
xii. The audited financial statement should be written in simple, plain language and be
well presented at the annual general meeting in order to remove misinformation,
misleading, communication gap and misinterpretation of the accounts.
xiii. The audited accounts users should know that auditor does not have primary
responsibility for the prevention and detection of fraud. The Auditing standard
provides an approach that an auditor should follow when conducting an audit.
xiv. The audited accounts users should note that auditors can only give a reasonable
assurance and not an absolute assurance on audited accounts because they are not the
one that prepared the account. What the management of company wants the auditor to
see and to know is what they will present to him. The auditor only relaying on the
information provided to him by management.
xv. By law, the main duty of an auditor is not to detect fraud and does not have legal right
to sue a company for inadequate supply of needed information.

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 xvi. An understanding of the nature of the expectation gap between audited financial
statements users and external auditors will definitely improve the quality of services
provided by the accounting profession.

3) CHALLENGES FACED BY THE AUDITOR

Even the most effective internal control system can be rendered useless by:-
➢ Top management itself – by overriding the control ignorantly or on purpose
➢ The workers – either through fatigue or misunderstanding
➢ Business Environment – by not being static can reduce a previously effective control
system to nothing with the passage of time
➢ Concealment of their inefficiencies or other irregularities by adopting fraudulent
accounting practices
➢ Mechanization – through ever changing innovation on business machines. For example,
new controls usually follow introduction of any computer system
➢ Fraudsters - by capitalizing on loopholes in the system or outright abandonment of
established procedures with defalcation in view.
➢ Not all members of management are well acquainted with the proper duties of the internal
auditor. Some tend to rely on it to settle old scores or heal old wounds while some
selfishly seek its support in their bid to climb the corporate ladder.
➢ Policy statements and change in procedures are not communicated to internal Auditor.
➢ Unavailability of adequate accounting system i.e. since most of the audit evidence are
available from accounting records, and reliable accounting records can only be made
available if good accounting system is in place. The non-auditing officers do feel that to
hinder the auditor’s work and make him have access to few evidence is by installing and /
or operating inadequate accounting system
➢ Deliberate refusal to supply vital information on the pretence of unavailability or
confidentiality. These non-auditing officers are often fond of holding information that
they know would be useful for the audit and even where the auditors made requests, they
would still deny having such information. By this, the auditor may be forced to device
further methods or techniques to obtain the required information which may be more
expensive and time consuming.

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 ➢ Non-Recognition of the Internal Audit department (i.e. to frustrate a unit is to give little
or no recognition to the importance of that unit and this will definitely lead to poor
funding and staffing of that unit.
➢ Creating opportunities to influence auditors opinion through threats and gifts.
➢ Ignorance of their responsibilities to auditors i.e The refusal of some non-auditing
officers to cooperate has been that because they are held in trust for keeping company’s
information which are seen to be too confidential. They are not aware that the auditors
have the right by law to obtain all information and explanation he thinks necessary.
➢ An attempt to cover up frauds and Intentional errors/irregularities
Some non-auditing officers are aware of the objects of audit and their responsibilities to
auditors but they still put up their uncooperative attitude just to cover up the frauds and
intentional errors they have committed or they collaborated to commit.

1.16 WAY FORWARD

We have examined the roles of the non-auditing officers, the ways they have been performing
these roles and why they are behaving the way they do but the task would be incomplete if we do
not suggest ways of ensuring that the best is obtained by the auditors from the non-auditing
officers. The following suggestions should be adopted:-
❖ Educate them on the objects of audit. It is the duty of External and internal auditors to
see that the non-auditing officers are educated as to what constitute the audit objectives.
The primary aims of an audit is not to detect or prevent frauds and errors rather to make a
report whether the financial statement gives a true and fair view, but an auditor must
perform his duties in such a way that if errors and frauds are committed, they can be
reasonably and ordinarily discovered. The auditors and the management team are both
the “agent” and “or employees” of the owners and they must both aim at protecting and
maximizing the interest of the owners and for this to be done, they must work hand in
hand.
❖ Educate them in the advantages of audit. Internal audit provides many advantages to the
management. It is a tool for ensuring effective implementation of the internal control
system and in fact, it allows such internal control system to be reviewed. With internal
control audit, management policies are seen to be complied with and adequate

48
 information is made available to management for review and decision making. If the
non-auditing officers are given proper education, they would see reasons to cooperate
with the auditor since the exercise will benefit them and this would enable them to give
more attention to the internal and external audit reports.
❖ Create awareness as to their responsibility. It is necessary to make the non-auditing
officers realize that it is not a moral obligation for them to make available books,
accounts, and vouchers for the auditors use rather it is a legal obligation to do so, since
the auditors are entitled to such right and doing that have not made them to contravene
the rules that make them to treat the company’s information as confidential
❖ Establishment of Audit Committee: section 359(3) of the Companies and Allied Matters
Decree 1990 as amended made it mandatory for all public companies to have audit
committee. Much good would be done to internal audit, if every organization has an
audit committee and if the internal auditors can be appointed by this audit committee and
made to report to them so as to prevent the unnecessary and direct or indirect intervention
of the management in the internal audit.
❖ Appointment and Qualification of Internal Auditors:
The caliber of people to occupy the positions of internal auditor should be well designed
to make equitable with those for the positions of Management. This would enable the
management to accord much respect to the personality of the internal auditors and to the
internal audit.
❖ Policy statements and change in procedures should be communicated to internal
auditor to enable him enforce adherence.
❖ Do not give the internal auditor an assignment and give him results derivable from it.

4a) WHAT IS AN AUDIT?

Auditing is the process of examining a set of the accounting books, records, vouchers,
documents [information] etc. with the intent of establishing its reliability. The process is usually
performed by someone other than the preparer or user of the information. Regardless of who is
performing an audit, an internal or external auditor the audit has the same purpose. To ensure the
financial statements as a whole are free from material misstatement.

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 Kwame- Cyasi (An International Guide to Auditing) defined auditing as “the
independence examination and investigation of the evidence from which a financial statement
has been prepared with a view to enabling the independent examiner to report whether in his
opinion and according to the best of the information and explanation obtained by him, the
statement is properly drawn up and gives a true and fair view of what is purports to show and if
not to report in what respects he is not satisfied”.
Merits of Auditing
• Its helps reduce the risk of fraud and poor accounting.
• Facilitate the provision of advice that can have real financial benefits for a business.
• The detection of errors and fraud.
• The prevention of errors, irregularities and frauds.
• To art as moral check against making mistakes, errors or frauds.
• To reveal the weaknesses and inefficiency in the working of the system.
• It serves as a deterrent to fraudulent staff within an organisation.
• By performing auditing frauds and errors can be rectified on time.

Demerits of Auditing.
• It is not the responsibility of auditor to make recommendation, hence Auditor cannot
perform the following:
• They are less concern with the management policies.
• They cannot guide management for better use of capital.
• The absence of honesty and independence render an audit useless.
• The auditing fails to present fair view due to bias of an auditor.
• Auditing is more of checking past activities. It is less concerned with present or future.
• Failure to check planned frauds.
• The management can play tricks to manipulate the financial statements in order to conceal
their inefficiencies and irregularities.
• Failure to disclose correct information by the management can lead to wrong clarification.
• Wrong certification can lead to inaccurate or false decision.

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• Due to manipulation of financial statements by the management the end result can never give
true and fair view picture.
b) Definition of an Investigation
An investigation can be defined as a thorough and in-depth examination of the financial
statements of an organization and their relevant supporting documents for the specific purpose of
obtaining facts or to evaluate a specific situation to be submitted to an interested party.

5) Qualities of an Auditor.
• The Auditor must have the required experience, academically and professionally qualified
• The Auditor must have a mindset that recognizes different business needs.
• Knowledge and Experience: Such an auditor must be knowledgeable and technically sound
on the companies laws [CAMA], accounting, auditing, information technology and other
related subjects.
• Independence and Objectivity:
- Intellectually honest.
- Free from any obligation or interest.
- Ability to make independence decisions.
- Must not be biased.
- Dependable.
• Auditor must be open mindedness, fact and effective communication skills.
• Intelligence, clear thinking, and a capacity for dealing with new problem with energy,
initiative, and imagination so as, to be able to devise workable solutions.
• Personality and equable temperament.
5b) Qualities of a good investigator
A tax investigator should posses some requisite characteristics such as the following:
Professional skepticism -have a mindset that recognizes the possibility of a tax loss due to
evasion/avoidance or fraud.
• Good knowledge of the tax laws, accounting, financial control.
• Good knowledge of company laws (CAMA, Insurance Act, Banking Act/Prudential
guideline)

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• Good Knowledge of Information Technology (IT)/computer/IT Compliant e.g. auditing
through the computer.
• Good knowledge of range of Industries.
• Must have an inquisitive or probing mind always looking for clues.
• Must be patient
• Must be courteous
• Must be intellectually honest, free from any obligations or interest.
• Must not be biased, that is must be objective must have free mind, open mindedness.
• Must be analytical.
• Must exhibit a high level of professionalism at all times.
• Possess very good communication skills.

CHAPTER TWO
2.0 TAX AUDIT AND INVESTIGATION PRINCIPLES
2.1 Learning Objectives
At the end of this chapter, readers should be able to:
• Understand the meaning of Tax Audit and Tax Investigation.
• Explain the rules and objectives of Tax Audit and Tax Investigation.
• Know the different types of Tax Audit and Tax Investigation.
• Differentiate between Desk Audit and Field Audit, criminal investigation and civil
investigation.

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• Explain the characteristics of Tax Auditor.
• State the legal frame work for tax audit.
• State the factors that should be taken into consideration when selecting Tax payer for Tax
audit.
• Explain the Rights and obligations of Tax payers.
• Discuss the role of Forensic Accounting Investigation.

2.2 Purpose of Tax Audit

The purpose of Tax Audit are as follows:
• To collect unpaid taxes
• Ensure compliance with the Tax Laws
• Find inconsistencies in the Tax returns and provide corrections
• Educate the Tax payers
• To determine the completeness and accuracy of the taxes payable by the tax payer to the
relevant Tax authority
2.3 An Overview of Tax Audit
2.4 Definition of Tax Audit
Tax Audit can be defined as a routine examination of the financial statements, Tax returns, as
well as other books and records of accounts of a tax payer in order to ascertain the tax payer’s
level of compliance with the relevant tax laws.

In conducting the Tax audit, various types of information will be reviewed.

These may include:
• Tax returns
• Financial statements
• Accounting and non-accounting but relevant records
• Source documents
• Minutes of Board meetings
• Bank statements
• Other documents or records that may be required in the course of the audit exercise

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2.5 Rules and Objectives of Tax Audit
• To determine whether or not the Tax payers have complied with the relevant tax laws and if
not, to take necessary actions in line with the tax laws.
• Discovery of existence of tax fraud and therefore recommend for tax investigation.
• To discourage tax evasion thereby enhancing higher tax compliance rate
• To provide ways of educating tax payers on various aspects of the tax laws
• Encourage voluntary compliance with the tax laws and regulations
• The tax audit plays an important role in achieving the objectives of Nigeria’s tax
administration by providing a tool to ensure that taxes are calculated based on the Nigeria tax
laws and provisions.
• Creates tax payers’ awareness of their rights and responsibilities under the provision of the
tax laws and regulations.
• To determine whether or not the tax computations filed with the tax office are in agreement
with the underlying records of the tax payers.
• Determine whether or not adequate accounting books and records are maintained for the
purpose of determining the tax payable by the tax payer or whether there is no tax liability.
• All applicable tax legislations have been complied with
• Enables tax authority to gather information on the tax payer especially information of a
permanent nature.
• To discover accounting and arithmetical errors in the tax returns and make necessary
correction in line with the tax laws
• To ascertain tax payers’ proper tax liability
• To ascertain the tax payers’ state of record keeping to meet its tax obligation
• To review a tax payer ‘s tax strategy
• To monitor or watch the tax payer’s action to identify deviation from the laws
• To search for a test case to set a precedent or example
• To improve compliance culture so that a tax payer transit to voluntary compliance and thus
promote exercise of tax rights. (Self-assessment).

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2.6 Classification of Tax Audit
There are basically two types of tax audit namely:
• Desk tax audit/ Desk examination and
• Field audit

(A) Desk Tax Audit

Desk tax audit is the examination of financial statements and tax returns submitted by the tax
payer. It involves carrying out analytical review procedures using accounting tools of
interpretation like ratio analysis, trend analysis etc. the examination is carried out in the tax
office by highly trained inspector of taxes without visiting the business premises of the tax payer.
The exercise is carried out on routine basis ensuring that most, if not all, of the returns submitted
to the tax offices are subjected to this audit.

The focus of desk tax audit is to ensure completeness and accuracy of the information and
documents submitted to the tax office.

Where necessary the tax inspector may issue tax queries on the returns field by the tax payer
requesting him to forward additional information and documents to the tax office or even appear
in person to clarify some issues in the returns.

The exercise is routine in nature. The outcome of a desk tax audit may lead to the conduct of a
field tax audit whenever additional information or documentary evidence is required to satisfy
the inspector of taxes carrying out the desk tax audit.
(B) Field Tax Audit
The examination and vouching of tax payer’s books and records carried out in the Business
premises of tax payers to authenticate the tax returns and accounts filed with the tax office by the
tax payer. The need to carry out the exercise in the tax payer’s premises is to enable the tax
auditor confirm the existence and adequacy of the books and records of the tax payer assess and
examine as well as obtain appropriate information directly from the officials of the tax payer.

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2.7 Distinction between Desk Tax Audit and Field Audit
Desk tax audit exercise is carried out on the tax returns and financial statements of tax payer in
the tax office without visiting the business premises of the tax payer while field tax audit
exercise is the examination of tax payer’s books and records is the premises of tax payer’s to
authenticate the tax returns and accounts filed by the tax payer with the relevant tax authority.
2.8 Nature of Audit
Full Audit
This is a comprehensive examination to ensure substantial compliance. This is used if audit risk
is high.

Specific issue Audit.

This audit is focused on a number of specifically identified issues about a tax payer or wider
industry issues. It should be noted that the scope of an audit is not cast in stone and the issue
under audit may change as further information emerges.

Roll–over Audit
This audit serves as a follow up on issues that emerged during a previous audit exercise.

2.9 Characteristics of Tax Auditors

A tax auditor should possess some requisite characteristics such as the following:
• Good knowledge of the tax laws
• Good knowledge of companies laws (CAMA, Insurance Act, Prudential Act/banking Act etc)
• Must have an inquisitive / enquiring or probing mind
• Must be patient
• Must be courteous
• Must be honest
• Must not be biased, that is must be objectives
• Must be analytical
• Must exhibit a high level of professionalism at all times
• Possess very good communication skills

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• IT compliant e.g auditing through the computer
• Good interpersonal relationship

2.10 Legal Frame work for Tax Audit

The relevant legislations that regulate the imposition, assessment and collection of revenue in
Nigeria includes:
• 1999 constitution of the Federal Republic of Nigeria
• Companies Income Tax Act (CITA) CAP C21 LFN 2007
• Value Added Tax (VAT) Act
• Petroleum Profits Tax Act (PPTA)
• Capital Gain Tax (CGT) Act
• Tertiary Education Trust Fund (Establishment Act etc) 2011 (TETFUND ACT)
• Personal Income Tax Act (PITA)
• National Information Technology Development Levy (NITDL)
• Stamp Duties Act (SDA)
• FIRS (Establishment) Act 2007

2.11 Audit Triggers / Reasons for Tax Audit

Companies / enterprises are usually chosen for tax audit based on any or a combination of the
following conditions.
• Self-assessment filers: Every large tax payers and small and medium tax payer every three
(3) years based on available audit resources.
• Genuine information received from intelligence or other FIRS depts. Or external sources
about Tax payers. It could also be referral from other regulatory agencies like the EFCC,
ICPC or report/ complain from external sources e.g whistle blowers TV or Newspaper report
etc.
• Tax payers with refund claims. i.e
• Returns showing refunds especially arising from excess with-holding tax or VAT.
• Tax payers making NIL returns or reporting or declaring losses on a continuous basis.

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• Tax payers with three or more years of loss compared to average profit for an industry.
(heavy losses)
• Tax payer with poor adequacy ratios.
• Claims under double taxation agreement.
• Based on routine sectorial / industry audit.
• Case referrals as a result of desk review/ examinations.
• Secondary files related party transactions. Connection with other tax payer by way of
holding, subsidiary, associated or related companies could be a criteria for selecting
companies for audit.
• Analytical review of tax returns.
• Transfer pricing / thin capitalization arrangements.
• Deviation from inter-firm comparison.
• Returns that are randomly selected.
• Confirmation/ verification of poor or extraordinary performance.
• Based on risk profiling report.
• Conspicuous operating expenditure (unusual costs in relation to an industry).
• Heavy liabilities: in this case it is possible that there are fictitious in payments or that the tax
claims are in jeopardy.
• Other tax audit triggers: industry compliance review.
• Non-filing / stop fliers.
• Exceptions (continuous losses, high capital allowances).
• Whistle blowers
• Poor tax ratios
• Media reports
• Mergers or Acquisitions
• Final Tax returns (Liquidation/ receivership).
• With-holding tax credits on non-fliers (non-live cases)
• Change in accounting package/system / method.
• Low or no tax
• High Losses

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• Reported figures inconsistent with previous years
• Figures in income tax returns differ from that reported for VAT
• Business with low paid up Capital/asset backing but substantial liabilities
• Severely qualified accounts
• Use of tax havens.
• Nature of the occupation or industry.
• Filing and paying behavior/irregularities.
• Business with substantial transactions among related parties.

2.12 An Overview of Tax Investigation

What is Tax Investigation?
Tax investigation is a comprehensive and in depth examinations of the books, records,
documents, information and all activities of a tax payer in order to determine the truth of a
matter.
It is carried out by tax authority in order to recover tax under charged or unpaid in the previous
years where the tax authority has credible evidence or reasonable suspicion that the tax payer has
committed tax fraud or evasion.

While tax audit has a limited time frame of six years, tax investigation exercise has no time
limitation and therefore can extend over the number of years during which the tax fraud or
evasion were committed.
• It is therefore logical to assume that some taxes should be recovered in the process.
• An investigator should have an open mind in gathering the facts, assembling and analysing
them before reaching a conclusion.
• This is because every case should be prepared as if it is going to court or Tax Appeal
Tribunal (TAT).
• An investigation is usually a reactive process. It may however be pro-active occasioned by
past experience or knowledge of the industry or a particular tax payer to engender suspicion.

2.13 Rules and Objectives of Tax Investigation

• To detect and deter tax evasion and other breaches of the tax laws.

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• To determine and recover the tax loss resulting from the breach.
• To identify and apply the penalties / sanctions imposed by law for the breach.
• To trace and locate the offender.
• To provide sufficient evidence of the breach.
• To identify avoidance and recommend changes to processes, systems and tax law.
• To serve as a veritable resource for tax information and monitoring.
• To determine / establish the truth of a matter.
• Identify cases involving tax fraud and obtain evidence for possible prosecution of the
culprits.
• To reduce fiscal crime and its harmful effects within the community.
• Identifying those engaged in criminal activities.
• To determine the truth of a matter
• To collect/recover unpaid taxes
• Ensure compliance with the tax Laws and regulations.
• Find inconsistences in the tax returns and provide corrections.
• Educate the taxpayers.
•
2.14 Classification of Tax Investigations
Type of investigations
There are broadly two types of investigations, namely; Criminal investigation and Civil
Investigation.

(A) Criminal Investigation

Companies, enterprises or group of individual are investigated if any of the following issues
occurs:
• Criminal violation of tax laws,
• Where there is suspicion of a tax fraud, willful default or neglect to pay tax (evidence of
willful default).
Triggered by such aberrations as:
o Refusal to file returns

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 o Refusal to remit Withholding Tax and Value Added Tax deducted at source
o Refusal to allow access to records and books
o Refusal to honour tax office invitation or respond to tax quarries
o Fraudulent conversion of (FIRS) Government Cheques
o Intelligence report of criminal activity of tax payer bordering on tax default
o Petition against the company disclosing serious tax evasion
o Understatement or non-disclosure of income
o Overstatement of income
o Fictitious assets and expenses
o Non-filing of tax returns or filling incorrect returns
o Fraudulent procurement of Tax clearance certificate (TCC), revenue receipts and
withholding tax credit notes

(B) Civil Investigation

• Focuses on abusive tax avoidance schemes
• Emphasis is on evidence of artificial transactions
• Triggers includes:
o Operation of suspicious tax shelters schemes i.e. methods of reducing tax payables
o It is conducted based on third party information (petition) or whistle blowers.
o Violation of tax laws
o Mergers and acquisitions
o Complex group structure with lot of intra-group-transactions
o Late filing of tax returns
o It is usually conducted when a taxpayer is suspected of tax evasion

2.15 Tax Investigation Triggers

• Referral from Law Enforcement Agencies
• Media reports
• Poor tax ratios
• Incorporation in tax heavens
• Non filers

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• Sanctions by securities and exchange commission (SEC), Central Bank of Nigeria (CBN)
and other financial regulators
• Cheques conversion/diversion
• Abusive tax schemes
• Discovery of tax fraud
• Suspicion of tax fraud with credible evidence
• Suspicion of tax fraud
• Whistle blowers
• Petition for tax evasion
• Refusal to honour FIRS invitation
• Denial Access to Audit
• Withholding tax and value added tax non-remittance

2.16 Distinction between Tax Audit and Tax Investigation

Tax Investigation
S/N Tax Audit

Tax investigation is usually triggered by

suspicion of fraud and other forms of
1 Tax Audit is a routine exercise
evasion. (it is requires under certain
circumstances)

Tax investigation is more intensive because

Tax audit is not hundred percent (100%)
2 of the need to gather sufficient evidence or
vouching
facts to prove an offence

Tax investigation has tax recovery asthe

Tax audit has essentially tax recovery as
3 outcome. Tax investigation
the outcome
hasprosecutionas an expected outcome .

4 There is materiality concept in tax audit There is no materiality concept in tax

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 exercise investigation exercise

Tax investigation has no statute bar i.e. no

time limitation

5 Tax audit has statute bar Tax investigation may becarried out beyond
statutory period of six (6) years (it is wider
in scope).

2.17 Investigation Tools

Investigators generally deploy the following tools individually or in combination. They are:
• Record examination,
• Surveillance,
• Search, raids and seizures; and
• Interviewing and Interrogation

Interviewing
Interviewing is gentle way of questioning a tax payer with a view to:
• Confirming known information.
• Clarifying presumed Information
• Collecting known information

Guides to Successful Interviewing

• Adequate planning
• Establish rapport with interviewee
• Good listening skills
• Be in control
• Alertness
• Let the interviewee understand clearly his/her duties at the interview

Interrogation

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• It is a more aggressive way of interviewing
• Usually used by the police, EFCC, NFIU and ICPC
• Not usually used in tax investigation.

2.18 Tax Investigation Report (Standard Format)

• Detailed background including the known issues of corporate governance
• Intelligence work on case
• File review and analysis
• Expert advice obtained-legal and technical
• Pre-investigation meetings held
• Field work
• Documents, books and accounts reviewed
• Major tax findings
• Risk classification of company – High, Medium and Low.
• Tax yields
• Offences and sanctions including penalties
• Recommendations
• Conclusions

2.19 Tax Investigation Process

• Case Registration and allocation
• Information gathering – Internal and External
• Processing/analysing of information
• Review allegation/suspicion against:
o Outcome of information analysed
o Background information such as its business history, compliance history and tax
ratios as extracted from the tax files obtained from the relevant department of FIRS
o Tax Laws and extant regulation relevant to case
• Decide whether or not to proceed with investigation
• Prepare an investigation plan

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• Gather additional information from relevant sister agencies (where available)
• Invite company for pre-investigation meetings
• Carry out field examination of records, books and documents of the tax payer and associated
businesses where necessary

Interviewing to gather information through verbal prompting and interrogation where serious
fraud is involved and arrest by the police has been made.
• Prepare report
• Impose sanctions including prosecution where considered expedient
• Testify as expert witness

2.20 Rights and Obligations of Tax payers

• Both the Nigerian constitution and tax laws preserve the rights tax payers. During tax audit
you will be discussing confidential information with the taxpayers. Be sure that you do not
put the taxpayer or tax officials in a situation where confidential information could be
disclosed to someone other than the taxpayer or their authorised representative. Being aware
of these considerations will assist tax officers in maintaining a positive relationship with the
taxpayer in order to respect the tax payer’s privacy you should schedule the field audit or
meeting at :
• The tax payer’s place of business.
• Tax administration’s office or
• The office of tax payer’s authorized representative, if applicable.
• when dealing with a taxpayer, you should always strive to:
o Be courteous and considerate
o Provide accurate and clear information
o Behave in a professional manner
o Ask appropriate and relevant questions
o Be fair and objective
o Treat every information with respect and privacy
However, maintaining a positive attitude and treating the taxpayer with respect will have a
significant impact on your ability to conduct a professional audit. it will also help build

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taxpayer’s level of confidence and respect for the tax system. It is important to know that the
objective of an audit is to determine the correct amount of tax due. Therefore, taxes should be
calculated on tax law only. The right of the tax payer include but not limited to:
1. Right to raise objection when not pleased with the tax office assessments
2. Right to be issued tax clearance certificate where there is no tax outstanding against tax payer
3. Right to be given the opportunity to respond to their tax queries
4. Right to claim and be granted capital allowances on qualifying assets owned by tax the tax
payers and used for the purpose of the taxpayers business at any relevant period
5. Right to effect change in the accounting date of the tax payers business provided such is
brought to the notice of the relevant tax authority
6. Right to some approved tax incentives

Characteristics of a good investigator

A tax investigator should posses some requisite characteristics such as the following:
Professional skepticism -have a mindset that recognizes the possibility of a tax loss due to
evasion/avoidance or fraud.
• Good knowledge of the tax laws, accounting, financial control.
• Good knowledge of company laws (CAMA, Insurance Act, Banking Act/Prudential
guideline)
• Good Knowledge of Information Technology (IT)/computer/IT Compliant e.g. auditing
through the computer.
• Good knowledge of range of Industries.
• Must have an inquisitive or probing mind always looking for clues.
• Must be patient
• Must be courteous
• Must be intellectually honest, free from any obligations or interest.
• Must not be biased, that is must be objective must have free mind, open mindedness.
• Must be analytical.
• Must exhibit a high level of professionalism at all times.
• Possess very good communication skills.

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2.21 The issues of Forensic Audit.
• The Role of forensic accounting investigator
The role of forensic accounting investigator is that of fraud
o Detection
o Investigation
o Deterrence
In respect of tax, it is to detect, investigate and deter tax fraud. Simply put, he is to find answers
to the following questions regarding a suspected or known tax fraud.
o Who?
o What?
o When?
o Where?
o How?
o Why?

2.22 Forensic Accounting Investigation.

In carrying out his assignment the task of the forensic investigator is to seek for evidence linked
to the crime via: -
• Documentary Evidence
• Testimonial Evidence

From the evidence gathered the forensic investigator develops detailed factual information to
establish a case.

From the facts established through the evidence gathered through the investigation the forensic
investigator is able to
• Recommend and implement corrective action
• Document his evidence to serve as a basis of testimony in litigation proceedings or criminal
charges against the offenders.
• Sampling and materiality concepts are largely irrelevant to forensic investigators. It is strictly
evidence, hard evidence and

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• In determining the scope of the investigation and the necessary evidence to be gathered and
their documentation, the forensic investigator must be absolutely conscious of the fact that
they may be challenged by those adversity affected or litigants or regulators who are
skeptical about using the investigator’s report.
2.23 Qualities of a forensic Investigator
• He is an investigator, therefore the generally well known qualities of the investigator also
applied to forensic investigators

These general qualities are:

• Sound knowledge of the industry including its business practices and processes
• Sound knowledge of generally accepted accounting principles, tax laws, principles and
practices
• Good skill in the interpretation of business documents and records as well as financial control
• Interviewing skills
• Good analytical skills
• Good communication skills-written, verbal and listening
• Must be independent and objective
• Must have eyes and ears for details and facts.

2.24 CHAPTER TWO

REVISION QUESTIONS
1. Under what reasons are a tax audit and tax investigation conducted.
2. When may a back duty Investigation be required ?
(b) you have just been promoted to the post of Assistant Director of Taxes by FIRS and
you have been chosen to lead a team to conduct back duty audit on companies in Abuja.
Briefly itemize ten(10) of the audit requirements you will attach to your notification
letters to the companies.
3. Outline any five (5) taxpayer’s rights.
4. The self-assessment tax system assumes that taxpayers are honest in the process of
assessing themselves. Despites this, taxpayers are still subjected to tax audit as tax audit
is one of the significant features of a self-assessment tax system.

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 In view of this, you are required to identify and explain ten(10) objectives of a tax audit
exercise.
5. What are the qualities and roles of a good tax audit team leader? (3marks)

SUGGESTED SOLUTIONS FOR CHAPTER TWO

1. Reason for Tax Audit

Companies / enterprises are usually chosen for tax audit based on any or a combination of the
following conditions.
• Self-assessment filers: Every large tax payers and small and medium tax payer every three
(3) years based on available audit resources.
• Genuine information received from intelligence or other FIRS depts. Or external sources
about Tax payers. It could also be referral from other regulatory agencies like the EFCC,
ICPC or report/ complain from external sources e.g whistle blowers TV or Newspaper report
etc.

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• Tax payers with refund claims. i.e
• Returns showing refunds especially arising from excess with-holding tax or VAT.
• Tax payers making NIL returns or reporting or declaring losses on a continuous basis.
• Tax payers with three or more years of loss compared to average profit for an industry.
(heavy losses)
• Tax payer with poor adequacy ratios.
• Claims under double taxation agreement.
• Based on routine sectorial / industry audit.
• Case referrals as a result of desk review/ examinations.

Reason for Investigation

o Refusal to file returns
o Refusal to remit Withholding Tax and Value Added Tax deducted at source
o Refusal to allow access to records and books
o Refusal to honour tax office invitation or respond to tax quarries
o Fraudulent conversion of (FIRS) Government Cheques
o Intelligence report of criminal activity of tax payer bordering on tax default
o Petition against the company disclosing serious tax evasion
o Understatement or non-disclosure of income
o Overstatement of income
o Fictitious assets and expenses
o Non-filing of tax returns or filling incorrect returns
o Fraudulent procurement of Tax clearance certificate (TCC), revenue receipts and
withholding tax credit notes

2) Back duty investigation may be instituted by the tax authority into the affairs of the taxpayer
where the tax authority discovers or suspects that tax has been lost in the past years due to the
taxpayer’s fraud, willful default or neglect. Where the tax authority discovers or suspects that tax
has not been assessed or has been under-assessed or under paid in the past years due to tax
evasion it may institute a back duty investigation into the affairs of the taxpayer corcerned with a

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view of recovering the tax lost or under-paid. In other words, a back-duty investigation is
conducted by the tax authority in the event of tax evasion.

b) These are the tax audit requirements:-

- Audited financial statements for the period under review
- Management Accounts
- General ledgers
- Transaction listings
- Year and Trial balance
- Audit adjustment journals
- Board of Directors minutes book
- Minutes of Board meetings
- Minutes of Tender Board Meeting (if any)
- Tax files/correspondences with tax authorites.
- Journal vouchers
- Evidence of payment of all taxes e.g. (receipts, bank advices/transfers etc)
- Income tax computations
- Self – Assessment forms/Evidence of tax filing
- Fixed assets register
- Import documents & local purchases documents
- Invoices, sales day book, sales ledger
- Debit/credit notes
- Schedule of rent paid, rent agreement
- Bank statements/schedule of Bank statements

3) Rights and Obligations of Tax payers

• Both the Nigerian constitution and tax laws preserve the rights tax payers. During tax audit
you will be discussing confidential information with the taxpayers. Be sure that you do not
put the taxpayer or tax officials in a situation where confidential information could be

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 disclosed to someone other than the taxpayer or their authorised representative. Being aware
of these considerations will assist tax officers in maintaining a positive relationship with the
taxpayer in order to respect the tax payer’s privacy you should schedule the field audit or
meeting at :
• The tax payer’s place of business.
• Tax administration’s office or
• The office of tax payer’s authorized representative, if applicable.
• when dealing with a taxpayer, you should always strive to:
o Be courteous and considerate
o Provide accurate and clear information
o Behave in a professional manner
o Ask appropriate and relevant questions
o Be fair and objective
o Treat every information with respect and privacy
However, maintaining a positive attitude and treating the taxpayer with respect will have a
significant impact on your ability to conduct a professional audit. it will also help build
taxpayer’s level of confidence and respect for the tax system. It is important to know that the
objective of an audit is to determine the correct amount of tax due. Therefore, taxes should be
calculated on tax law only. The right of the tax payer include but not limited to:
7. Right to raise objection when not pleased with the tax office assessments
8. Right to be issued tax clearance certificate where there is no tax outstanding against tax payer
9. Right to be given the opportunity to respond to their tax queries
10. Right to claim and be granted capital allowances on qualifying assets owned by tax the tax
payers and used for the purpose of the taxpayers business at any relevant period
11. Right to effect change in the accounting date of the tax payers business provided such is
brought to the notice of the relevant tax authority
12. Right to some approved tax incentives
4. Objectives of Tax Audit

❖ To enable the tax authorities to determine whether or not the taxpayers have complied
with the relevant tax laws, rules and regulations.

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 ❖ To confirm whether tax returns have been submitted within the stipulated time.
❖ To ascertain taxpayer’s proper tax liability.
❖ To ascertain the taxpayer’s state of record keeping to meet its tax obligations.
❖ To improve compliance culture so that a taxpayer transits to voluntary compliance.
❖ To conduct of tax audit exercises on some companies within the same industries
encourages more compliance on others.
❖ To further educate the taxpayers on tax laws and records keeping which are essential for
tax compliance by others.
❖ To review taxpayer tax strategies.
❖ To detect and penalise act of non-compliance.
❖ To ensure that declarations made by the taxpayers are accurate and reliable.
❖ To collect taxes that could have been lost to the government.
❖ It affords the tax authority and the taxpayer an opportunity to interact (especially during
field audit) such that taxpayer may ask questions or seek clarifications on some aspects of
the tax laws practice as may be necessary.
❖ To enable the tax authority to gather as much information as possible about taxpayer
(especially information that are of permanent nature) for storage and future use.
❖ Tax audit can lead to the discovery of the existence of tax fraud or evasion. The tax
auditors can then recommend such cases for further investigation.
❖ In the course of interaction with taxpayer, and examination of their records during field
audit, the tax auditors may discover that some provisions of the tax legislation are
outdated or ambiguous or capable of various interpretations or have created loopholes for
tax avoidance. These should be brought to the attention of the FIRS management with
recommendation for amendment or change in the tax laws.

5. (b) Qualities of a tax audit team leader.

Apart from the core values of a good tax officer (i.e. integrity, objectivity, and independence,
conformity, with technical standard), a tax auditor/team leader must be:

− Matured, principled, intelligent, tolerant and diplomatic in nature.

− An experienced tax auditor with good knowledge of tax laws, circulars and regulations.

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 − A good team player.
− A motivator and a goal getter.
− Able to achieve the desired result within the specified time.
− A good listener and a great communicator.
− Fair, firm and courageous in nature.
− A disciplined tax officers.

The Roles of a Tax Audit Team Leader

During the field audit the team represents the head of audit, Tax controller, the board and the
management of the tax authority. Therefore, as the team leader, he must perform the following:

− To review the tax audit file including work programme.

− Chair the preliminary and exist meeting.
− Share the work to the team members.
− Ensure that all tax audit requirement are available for the member to work with.
− Monitors the work of the team members from time to time and be able to give direction
of the work.
− Ensure that the team members conduct themselves professionally and peacefully.
− Liaise with the tax office (Head of audit or tax collector) if there is an urgent need to do
so.
− Be in-charge for all the field audit activities and also have supervisory authority over the
other member.
− Relate closely with the schedule officer for the case
− Ensure timely collation of the interim field audit report.

CHAPTER THREE

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3.0 PLANING OF TAX AUDIT AND INESTIGATION
3.1 Learning objectives

At the end of this chapter, readers should be able to:

➢ Know the sources of tax payers’ financial and business information
➢ Know the various standard books and records required for tax audit exercise
➢ Understand the characteristics of effective audit plan
➢ Know the purposes of planning tax audit
➢ Understand the advantages and disadvantages derivable from a well prepared plan.
➢ Know the meaning of tax payer profiling and the basic contents
➢ Explain, analyze and interpret various ratios, as well as limitations in the use of ration
analysis.
➢ Understand what is tax audit process
➢ Know the basis for selecting cases to be audited for tax audit purposes.
➢ Explain the procedure before and during the initial interview.
➢ Know the process of gathering information.

3.2 Sources of Taxpayers’ Financial and Business Information

➢ The financial and business information about the taxpayer are taken from the following:-
1. Audited Accounts and/or management accounts for the last six (6) accounting years
including the current year
2. General leader, cost ledger(if any ) cash and bank books and charts of accounts for
each of the financial years mentioned in (1) above
3. Rent schedule for each of the accounting yeas in (1) above plus photocopies of
withholding tax receipts
4. Dividends paid and received and bonus shares schedule for each of the accounting year
in (1) above,
5. Interest/Discount paid for each accounting year in (1) above , ( banks and other
financial institutions )
6. Schedule of Directors fees and other emoluments.
7. Schedules of all bank and payment vouchers.

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 8. Pay As You Earn (PAYE) (Salaries, allowances, gratuities and benefits in kinds).
The following schedules/records are required:-
a. Monthly payroll (or in the alternative, copy of individual pay slips) for each
month of the years in item (1) above and the monthly summary.
b. The monthly Journal voucher or debit/credit advice
9. Development levy deducted in respect of the company’s employees with photocopies of
receipts from the state Internal Revenue Service.
10. List of the company branches in the state.
11. Photocopies of the Directors’ Tax clearance certificates. (TCC)
12. Photocopy of the company’s certificate of incorporation
13. Circularization
14. Minutes of meeting of the Board of Directors.

3.3 Standard Books/ Records Required.

(i). Audited financial statements

(ii). Management Accounts
(iii). End of the year Trial Balances (Monthly Trial Balances could be called for where
necessary.
(iv). Chart of Accounts.
(v). General Ledgers/Transaction Listings
(vi). Sales and purchases Day books
(vii). Cash Books (Petty and main cash books)
(viii). Sales Invoices
(ix). Purchases Invoices/ Receipts
(x). Forex/Importation Documents
(xi). Company’s Adjustment Journal Vouchers’ file
(xii). Auditors Adjustment Journals
(xiii). Payment vouchers for bank petty cash
(xiv). Company’s Bank Statements for all its banks
(xv). Subsidiary books and records
(xvi). Fixed assets register

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(xvii). Minutes of Board Meetings
(xviii). Stock counts records

3.4 Audit Plan

According to Wikipedia, “an Audit plan is the specific guideline to be followed when conducting
an audit.
➢ It sets out direction for the audit.
➢ Describes the expected scope and conduct of the audit, also facilitate the development of
the audit program
➢ It enables the auditor keep time at a reasonable level and avoid disruptions of the
taxpayers business.
➢ It enables the auditor to establish any critical areas which particular attention should be
focused.
➢ It is done at the beginning of the audit once necessary information needed to prepare it
have been obtained from the review risk assessment and intelligent work carried out.
➢ It is a strategic document for the audit.
➢ It covers audit risk areas/personnel requirements, financial budgets, commencement and
conclusion dates and other logistic requirement.
➢ Its preparation is usually supervised by senior audit staff and endorsed by the leader of
the audit team.

The Audit Plan will form part of the working papers and serve to guide the progress through the
audit. A good audit plan will:-
➢ List the items you intend to audit
➢ Summarize why you intend to audit the items
➢ Outline the steps you will undertake to audit the items

While your audit plan will vary in length and complexity based on the unique circumstances of
the contents of the file or records of the tax payer, there are a number of characteristics that
should apply to every audit plan. Audit plan should:-
➢ Relate directly to the results of the risk assessment that you have undertaken;

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 ➢ Include target for the hours and days to complete the audit;
➢ Focus on items that are deemed material
➢ Cross reference to your working papers
➢ Be reviewed and approved by a supervisor when possible.

TAX AUDIT WORKING PAPERS

These are the records kept by the auditor of the work planned, the tests performed, the
information obtained as well as the procedure followed in carrying out his audit assignment.
The audit working papers must be sufficiently detailed and arranged in a way that will
facilitate reviews by non-member of the audit team, such that any experienced auditor without
prior connection with the audit would subsequently be able to comprehend the work performed
and agree with the expression of opinion on conclusion reached. Being credible evidence of
work done and findings and conclusion reached the audit work papers should be properly
documented. Therefore every member of the audit team must ensure the safeguard of all working
papers from getting loss or exposure to unauthorized persons and preserve them properly for
future reference or use.

3.5 Audit Planning

➢ An audit plan is critical in ensuring that an audit is conducted in an efficient and orderly
manner.
➢ It is done at the beginning of the audit once necessary information to prepare it have
been obtained from the review and intelligence gathered.
➢ It is a strategic document for the audit
➢ It covers audit risk areas/personnel requirements, financial budgets, commencement and
conclusion dates and other logistic requirements.
➢ Its preparation is usually supervised by senior audit staff and endorsed by Head of audit
team.

Every tax audit must be properly planned. In this regard, the following steps should be
taken:-
3.6 Documentation Checklist

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Set up Tax Audit Folders/Files Index/Tax Audit File
Set up an index for the folders as follows:
a) Audit completion checklist
b) Final Audit Report
c) Planning
- Summary of Taxpayers background information
- Background information extracted from Taxpayer’s file in FIRS Office
- Audit Team
- Time and Expenditure Budget
- Tax Audit memorandum
d) Job Administration
- Audit commencement checklist
- Instructions and FIRS reviews
- Time control, Time reporting sheets
- Actual expenses incurred
- Notices and correspondences with taxpayer
- Correspondences with other agencies
- Correspondences with taxpayers bankers etc.

e) Tax Audit work programme

f) Job review points
g) Tax computations and taxpayers returns
h) Review of Auditors work papers
i) Audited and other accounts
j) Tax status report & tax computations
k) Balance sheets and profit & loss accounts
l) Working Trial balance
m) Revenues
n) Expenditures
o) Payroll
p) Treasury activities

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 q) Inventories
Please note that hard copy documents received can be scanned and converted to word
documents and filed in the appropriate folders in the system. Accordingly, the electronic
copies of the audit work papers can contain all papers generated during the audit. The
hard copies are to be held in manual files set up along the same lines as the electronic
folders in the computer server.

(a) TAX AUDIT COMPLETION CHECKLIST

Tax audit completion/checklist is a list of all the work which the tax auditor intends to do
during the tax audit exercise in order to ensure a systematic completion of the assignment
without leaving any area uncovered also to avoid duplication of work already done. It is
usually prepared at the planning stage of the audit and each work performed is ticked on the
checklist until all the work on the list is completed. See example below.

NAME OF THE COMPANY: ……………………………………………….

TIN: ……………………………………………………………………………

S/N ITEM REMARK

1. Risk Profiling Report
2. Audit Work/Schedule Plan
3. Proof of Tax Audit Authorization
4. Tax Audit Letter
5. Proof of Service
6. File(s) Review Report
7. Audit Work Plan/Work Schedule for Officers
8. Proof of Pre-Audit Meeting
9. Minutes of Pre-Audit Meeting
10. Proof of Exit Meeting Attendance

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11. Minutes of Exit Meeting
12. Interim Audit Report (Consolidated)
13. Letter of Audit Findings/Reconciliation Notification
14. Proof of Service of Minutes of Reconciliation
15. Proof of Attendance of Reconciliation Meeting
16. Minutes of Reconciliation Meeting(s) (Duly Signed)
17. Proof of Service of Reconciliation Meetings
18. Additional Documents Review Report
19. Letter of Intent
20. Proof of Service of Letter of Intent
21. Notices of Additional Assessment (Signed & Served)
22. Evidence of Service of Assessment Notices
23. Proof of Objection Notice (if any)
24. Review of Basis of Objection Report
25. Evidence of Post Objection Reconciliation Meeting(s)
26. Memo on Objection Matters to HOA/TC
27. Proof of Post Objection Letter (FIRS Position)
28. Notice of Refusal to Amend Assessment(s)
29. Evidence of Discharge of Disputed Assessment(s)
30. Final Audit Report/Case Closing Report
31. Evidence of Payment/Web Portal Search Report
32. Other Note(s)

(b) TAX AUDIT EVIDENCE.

Audit evidence consists of information and data that can be verified, relevant to the matter
under consideration and which can influence the auditor in arriving at the conclusions on
which the audit opinion is based. Audit Evidence has three main qualities which are:
-Reliability
-Relevance and
-Sufficiency.

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Satisfying these three qualities will enable an auditor draw reasonable conclusions from the
evidence.
The evidence includes all the information contained in the accounting and other records forming
the basis of the financial statements. It is important that the auditor obtains credible and
sufficient evidence to substantiate the results of the tax audit exercise through Inspection, by
making Enquiries, Direct Observation, Analytical review and Computations.
Audit evidence could be obtained in any of the following ways:
- Examination of the financial statements and the underlying records,
- Examination of the minutes of Board meetings
- Physical verification of assets,
- Examination of the tax returns and schedules,
- Interviewing key staff who have sound knowledge of the transaction of the company,
- Gathering information from external sources e.g. bankers, suppliers, subsidiary
companies, external auditors etc
Some of the documentary evidence relied on by auditors include:
- Confirmation received directly by the auditor from third parties
- Documents produced by the taxpayer which have been prepared by outsiders
- Documents produced by the taxpayer which have been prepared by the personnel of the
taxpayers.
- Documentary evidence calculated by the auditor from the company’s records.

3.7 Advantages of Audit Planning

A permanent record of the work is constantly available.
This facilitate:
− The allocation of work between staff
− The chance of work being overlooked is avoided
− Unnecessary enquires on each attendance as to routine work are avoided in view of this
saving time of both taxpayers an tax auditors’ staff
− In the event of any subsequent enquiry the actual audit staff engaged on the work may be
ascertained.
− A definite instructions are laid down, junior staff may need less supervision.
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3.8 Disadvantages of Audit Planning
− Work may tend to become mechanical. Variations in the working system of the
organization being overlooked.
− Work may be hurried in order to complete a required schedule.
− If work is carried out according to a pre-determined plan, fraud may be facilitated.

3.9 Tax Audit Planning Memorandum

Pool all the information so far gathered into a tax audit planning memorandum. The
memorandum should contain the following information:
− Background information on the taxpayer
− Taxpayer identification Number (TIN)
− Type of audit
− Taxpayers history of tax compliance
− The audit team – Name and ranks
− Approach to the audit and areas of special focus. In particulars, note major issues so far
identified and how they would be addressed
− Synopsis of information and records to be requested from taxpayers, his bankers and
other third parties. This should also include a list of all schedules required for the audit
− List of places to be visited, who to interview and arrangements being made in this
regard.
− List of applicable taxes and the year involved.
− List of items to be provided by the tax payer
− The tax audit memorandum must be reviewed along with all necessary planning
documentations by the head of audit unit or the team leader both of whom must sign off
on the document.

3.10 Purpose of Audit Planning

Audit planning helps the auditor to:
− Accomplish his audit objectives

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 − Focus on audit risk areas
− Determine the cost of resources that will complete the audit exercise
− Determine the number of staff require to carry out the Job
− Know how long the work will take (timing of doing the job)
− Know the extent to which controls will be relied upon
− Know the audit test to perform during the audit exercise
− Paid attention to all aspect of the audit exercise to be carried out
− Controlling and directing the audit staff as regard to their audit assignments.
3.11 RISK PROFILING
This is aimed at preparing both the audit department and audit team that will be involved in the
audit exercise for the audit task ahead.
− It involves obtaining basic information about the tax payer, analytical review of
taxpayer’s performances using ratio analysis and highlighting audit risk areas for the
audit exercise. This is the beginning of the risk assessment process. The creation of an
audit plan is critical in ensuring that your audit will be conducted in an efficient manner.

Before audit staff set out for the field audit work, certain preliminary review/activities
must take place to ensure effective control of the audit exercise. These are:-
− An audit plan should be drawn up to include an outline of the audit work to be done, the
number of staff required to carry out the audit, and the timing of doing the job, etc.
− Gathering the files and grouping them into the number of audit teams to be established.
− Proper briefing of the audit team on the objective of the exercise and to acquaint
themselves with background information about their cases
− Prepare audit checklist to be used in respect of each taxpayer to ensure that all necessary
areas of audit activities are covered.
− Design interview format (if necessary) for each tax payer depending on the problems so
as to ensure that all grounds are covered
− Use of the audit checklist to ensure no work is overlooked or duplicated by ticking off
work already done.

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 − Bring contentious matters to the attention of the audit team leader for possible resolution.
Where necessary seek superior advice from outside the team in the office.
− Ensure all work done during the audit exercise which make up sufficient audit evidence
and which enabled the team draw reasonable and independent conclusions are carefully
and accurately documented in the working papers.
− Ensure each and every aspect of the job done by each member of the team us properly
reviewed by supervisors.
− Close supervision of the team members should be done by the team leader and the
assignment completed within the time limit set at the beginning of the exercise.
− Assign specific duties among audit team members.

3.12 OTHER RELEVANT INFORMATION

The following records will be reviewed with a view to evaluating the taxpayer’s performances
and areas of audit focus:-
➢ Last tax audit report or investigation report (if any)
➢ Financial statements
➢ Balance Sheet and Profit or Loss Account
➢ Cash flow Statements
➢ Notes to Accounts
➢ Chairman, Director’s and Auditor’s reports
➢ Analysis of age of accounts receivables
A spreadsheet of the statements of financial position, statement of comprehensive income
and notes to the accounts of the years to be covered is prepared.

3.13 RISK ASSESSMENT

Risk assessment involves adjusting your audit plan to focus on those items that have a high
likelihood of affecting the accuracy of the taxes that are required to be paid.
The concept of risk assessment is essential to the completion of your audit because it will
determine:-
− Which items you include in your audit plan
− Which types of audit tests you will perform

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 − Whether your time is utilized in an efficient manner
− Whether your audit addressed the proper risk areas.
3.14 NOTIFICATION OF TAXPAYER
After the completion and approval of the preliminary review and before the pre-audit meeting,
the taxpayer and/or its tax consultants are formally notified in writing of the audit exercise
usually to be carried out in the company’s premises.
In the letter, the following information will be stated:-
− Period (years) that the audit exercise will cover
− List of records and documents to be arranged and made available on yearly basis, with
the clause that the list is not exhaustive.
− Date and time of commencement of audit exercise

3.15 PREPARATION FOR FIELD AUDIT WORK

As the audit team prepares for audit work, they will take the following steps:-
− Hold an audit team meeting
This should cover a briefing on the audit to be performed, key issues of focus,
organization of the work, allocation of tasks and responsibilities, time control, and other
administrative matters etc.
− Arrange for equipment such as vehicle, laptops, printers, network tools, stationery and
other consumables. It is important to arrange for these items well ahead of
commencement of field work to avoid delays on the part of the tax office.
− Ensure that all appropriate folders have been set up in the team leader’s computer/laptop,
the network group passwords has been set up, and that all member of the audit team are
informed accordingly.

3.16 BASIC TAX AUDIT TOOLS AND TECHNIQUES.

RATIO ANALYSIS

It is often necessary to interpret a set of financial statements in order to identify the strengths and
weakness of a company and highlight any underlying trends in its operations. For instance,

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shareholders and Investments analysis require this information to make investment decisions and
bank managers need to decide whether to make loans to a company. One method of interpreting
company financial statements is the use of ratio analysis. Ratio analysis is a widely used tool of
financial analysis. It involves comparing one figure with another to produce a ratio, and
assessing whether the ratio indicates a weakness or strength in the company’s affairs. It is used in
analyzing and interpreting the financial performance of an entity. The key to obtaining
meaningful information fromratio analysis is comparison. This may involve comparing ratios
over time within the same business to establish whether things are improving or declining, and
comparing ratios between similar businesses to see whether the company you are analyzing is
better or worse than average within its specific business sector.

However, ratio analysis on its own is not sufficient for interpreting company accounts and that
there are other items of information which should be looked at. A tax auditor should be able to
use the ratio analysis to make qualitative assessment of the company’s operating results and the
financial position to identify areas that may require detailed analysis or probing during the field
tax audit exercise

What is a ratio?

A ratio is the arithmetic relationship between two figures in a set of financial statements. It can
be presented in a number of forms. Firstly, as a percentage, where one figure is divided by
another and multiplied by 100. Secondly, as a fraction where one figure is divided by another.
Thirdly, as a period of time where one figures is divided by another and Multiplied by a time a
period (usually a month). Finally, as a proportion by setting one figure to 1showing the other
figures as its relative value to 1. The particular form of presentation chosen for any relationship
examined is the one which the analyst can best interpret.

It is mathematically possible to calculate a very large number of ratios from any given set of
financial statements.

The ratios are classified according to the particular aspect of the business to which they are
addressed.

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Tax auditor should be able to use the ratio analysis to make qualitative assessment of the
company’s operating results and financial position to identify areas that may require detailed
analysis or probing during the field tax audit exercise.

The relevant ratios to be employed in the analysis include:

(1)Liquidity/solvency Ratio

The ratios which measure how liquid or financially stable a company is are considered,
these ratios are concerned with the short term problem of predicting whether a company
can pay its debts in the next few months. In other words these ratios are designed to
measure tax payer’s ability to pay its obligations.
They include:-
(i). Current Ratio = CurrentAssetsX 100
Current Liabilities
(ii). Working capital Ratio= Working CapitalX 100
Total Assets
(iii). Acid test or Quick Ratio = Current Assets – Stock and similar items X 100
Current Liabilities

Net asset turn over = Turn overX 100

Total Assets

This indicates the adequacy of working capital in relation to total resources. Empirical
evidence suggests this ratio to be a good indicator of approaching problems. Traditional
ratio for measuring the ability of a company to meet its debts as they fall due

2. Efficiency (Activity) Ratio:

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 These are ratios that measure effectiveness of taxpayer in using its assets. They include:
(i). Account receivable to turnover ratio (Debtors) = Trade DebtorsX 12
Average Sales per month
Relates changes in the level of debtors to changes in the size of the business.
(ii). Account payable to turnover Ratio (Creditors Ratio) =
Trade CreditorsX 12
Average sales per month

Relates changes in the level of creditors to changes in size of the business. (where
the purchase is known ratio should be calculated there upon)

(iii). Stock Turnover ratio = Stock X 12

Cost of sales

This indicates the rate at which assets are turned over. Adequate sales are necessary to
general profit, but too high a level may indicate over – trading

3. Equity position and coverage

These are ratios that measure the balance between the resources provided by creditors
and owners of the company.
(i). Debit equity ratio
(ii). Debit total asset ratio

4. Profitability Ratio:
These are ratios that measure the profitability of the tax payer business
They include
(i). Net Profit margins on sales = Net ProfitX 100
Turn over

(ii) Gross profit Margin =Gross profit X 100

Sales

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 The percentage profit derived from sales before crediting other income and taking
account of tax and Interest.

The Net asset turnover ratio measures the efficiency with which the Net assets are used
within the business. The net profit margin expresses how much profit to being made on sales, the
higher the Net profit margin the better, subject to the long term aim of satisfying customer needs
with quality products, while a large net profit margin in the short term may not be advisable if
equality is being sacrificed and will lead to falling sales in the future

(ii). Return on shareholders’ Funds Ratio. = Profit Before tax X 100

Capital& Reserves plus minority
Interests (Group Account only) Less
called up share capital not paid and
intangible assets.

The rate of profit before tax achieved by the company (group) on its shareholder’s funds.
Capital not paid is deducted and intangible assets are excluded in order to ensure comparability
between companies.

(iii). Gearing Ratio = Total Borrowings

Total Capital Employed

Measures the company’s dependence upon borrowed funds.

(iv). Liabilities Ratio = Total External Liabilities

Shareholders’ funds

Indicates the total dependence of the business on external finance compared with
shareholders’ funds.

(v). Interest Cover Ratio = Operating Profit

Interest payable

Indicates the ability of the company to meet its external financing costs

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 (vi). Borrowing/cash flow Ratio= Total Borrowings
Operating Cash flow

Indicates the ability of the company to repay its borrowings from the cash flow which it
generates.

(vii). Ratio of tax already assessed to Net profit = Tax Assessed

Net Profit
(viii). Ratio of cost of sales to turnover = Cost of sales
Turnover

(iv). (a) Return on capital Employed Ratio = Operating Profit

Total Capital Employed

(b) Return on Capital employed = Net profit + Loan interestX 100

Overall ROCE Share capital + Reserves + Loan

(c) Shareholders ROCE = Net Profit X 100

Share capital + Reserves

The rate of profit achieved before financing borrowings, divided by the total capital
resources utilized by the business.

However, in order to explain a company’s capital employed it is useful to split it into two
components, the net profit margin and the net asset turnover ratio. When multiplied together they
equate to the overall capital employed ratio. i.e.

Sales X Net Profit = Net Profit

Capital Employed Sales Capital Employed

The net asset turnover ratio measures the efficiency with which the net assets are used
within the business

The profitability ratio is the gross profit margin which is similar to the net profit margin but
overheads are excluded as they do not vary with sales. It shows how much extra profit could be

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earned if sales were expanded from their current level or it measures the return earned by using
the resources invested in the business.

(ix). Earnings Ratio: Price

Earnings

To measure a company’s long term growth prospects is the price/earnings ratio (The P/E ratio), it
takes as its input data the earnings per share figure from the company’s last available set of
financial statements and its current share price. Since only companies who have their share
traded on a stock market will have a share price, its applicability is so restricted.

The P/E ratio tells how many times the companies current earnings an investor is willing to pay
for the share.

P/E Ratio Current share price

Earnings per share

The dividend yield measures the dividend per share as a percentage of its share price and is a
useful predictor of incoming cash flows from holding the company’s shares, if the company
pursues a constituent dividend policy. This ratio does not attempt to measure any change in the
value of the company due to retaining rather than distributing its earnings. Finally, the dividends
corer is included since it shows the percentage of profits paid out as dividends. It provides a
useful indication of how much profit is being retained for future growth. However, one particular
ratio on its own does not tell us very much about a company, two or more ratios are needed to
form any significant opinion.

These ratios are analyzed with the following tax evasion tendencies of the taxpayers in mind.

▪ Understatement of turnover/income
▪ Overstatement of expenses
▪ Under valuation of stocks
▪ Creation and maintenance of secret reserves
▪ Undisclosed/Omission of income
▪ Fictitious expenses

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 ▪ Artificial Transactions

(c) Limitations in the use of ratio analysis

Ratio analysis is not without its challenges/limitations. Some of these challenges are listed
below:-

1. Non- monetary factors like:

(a) comments in the chairman’s report and the director’s report’
(b) age and nature of the company’s assets,
(c) current and future developments in the company’s market at home and abroad, recent
acquisition or disposals of a subsidiary by the company
(d) extraordinary items in the financial statements
(e) other noticeable feature in the report and accounts i.e post balance sheet events,
contingents liabilities, company’s tax position etc

2. Effect of inflation:
Since financial statements are prepare based on historical cost, accounting ratio which
are based on such figures may give misleading pictures of the company’s performance
over the due to price level change.

3. Effect of different accounting policies:

Due to the use of different accounting policies and practices by different companies,
comparison of the ratios of one company with another may lead to misleading
conclusions. Different stock valuation methods (LIFO&FIFO are some of the examples

4. Different definitions of terms and parameters:

Where there is no uniformity in the basis of computation, different interpretations will
arise. For example where there is no consensus as to what and what constitute the

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 numerator and the dominator used in the computation of ratios, interpretation will be
difficult.

5. Manipulation of accounting records:

Where audited financial statements are fraudulently manipulated to reflect a favorable
position that will match the intention of the company, any ratio analysis based on such
figures will definitely be misleading

6. Ratio can be distorted or window dressed, for instance, the quick ratio can be improved
by selling stock at large discounts for cash, just before the year ends.

7. A linear and proportional relationship is assumed between the two figures used to
calculate the ratio, there is little evidence to support this assumption

8. When comprising two companies with different year ends the underlying trends in the
economy may have changed in the period between the end of one company’s yearend
and the other one company’s yearend , so it can appear that one company is doing better
than the other when this may well not be the case.

9. Low profits or even losses can result in very large, very small or even negative ratios
which have profit as an input figure

10. Many financial statements are the consolidated in a group. Therefore, any ratio only
shows the Net position of the group, the results of individual Industries within the group
are hidden.

3.17 TAX AUDIT PROGRAM

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 What is Tax Audit Program?
This is a schedule of audit work expected to be performed, during the audit exercise, on
each item of the accounts such as income or turnover/sales, expenditures, purchases, stocks,
salaries and wages, fixed assets, and liabilities etc. It is usually prepared before the
commencement of the tax audit exercise.
This audit work program summarizes all the steps required to be taken in carrying out the
audit exercise, to ascertaining the taxpayer’s compliance with all subsisting legislations. There
are usually two aspects of tax audit which must be addressed, in order to respect the taxpayer’s
privacy. You should schedule the audit or meeting at:-
❖ The taxpayer’s place of business
❖ Tax administration’s office or
❖ The office of taxpayer’s authorized representative, if applicable.

3.18 ADVANTAGES OF TAX AUDIT PROGRAM

The program would be useful in the following areas:-
− It is a time management tool
− It will provide details of work, which the team leader requires individual member’s of the
team to perform
− It will provide information as to how much of the audit work has been completed as at a
particular date and how much is outstanding
− Provides a record of each audit staff member’s responsibility and the stage of work done
− Provides a basis for planning and staffing the audit
− It makes for effective coordination and control of the audit work
− It enables senior members of the audit team focus more on the review of evidence
gathered as against paying attention to the procedure followed in obtaining the evidence.
− Provides continuity in the audit work, should there be a change in the personnel
constituting the audit team, with new member being able to see at a glance the level of
work done and outstanding work to date.
− Provides an avenue for the team leader to allocate his available staff in the most
productive and efficient manner
− It focuses the audit efforts on the core elements of the assignment

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 − It serves as a guide to members of the audit team during the audit exercise.
− It enables him to know the audit test to perform during audit exercise
− It enables the auditor to determine whether the nature of the audit will require the service
of professional experts
− It enables the team members ensure the audit assignment is carried out as planned.
− It’s a means of training the audit staff

Generally, audit program is designed for transactions that are common to different lines
of business e.g. income, expenditures, fixed assets etc. This approach aids the avoidance of
duplicating the audit procedures for common transactions.

3.19 DISADVANTAGES OF TAX AUDIT PROGRAM

Caution needs to be exercised in the use of audit programmes in order to avoid making
the auditor become mechanical when using standard audit programme. Strict adherence to the
use of standard audit programme may invariably kill the initiative of the auditors.
− Inadequate preparation of audit programme may mislead members of the audit term not
to carry out some important procedures.

3.20 REVISION QUESTIONS FOR CHAPTER THREE

1. With respect to ratio analysis, write short notes to illustrate your understanding of each of
the following terms:-
➢ Liquidity ratios
➢ Efficiency ratios
➢ Equity position ratios
➢ Profitability ratios
➢ Gross profit margin ratios
2. What is audit programme and state five (5) benefit of the audit programme?
3. Explain to show your understanding of the following terms
a) Risk profiling
b) Purpose of Audit planning
c) Features of audit planning memorandum

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4. What is audit quality control? Identify any five (5) ways of ensuring
effective quality control of a tax audit engagement
5. Identify ten (10) sources of taxpayers’ financial and business information.

SUGGESTED SOLUTIONS FOR CHAPTER THREE

a) Liquidity ratios
These are ratios designed to measure taxpayer’s ability to pay its obligations. Ratios
under the category include:
i. Current (or working capital) ratio
ii. Acid Test (or quick) ratio
iii. Working capital turnover
Current or working capital ratio
Current Assets (X:1)
Current liabilities
Where current liabilities exclude secured bank overdraft.
The ratio indicates the extent to which assets that will be converted into cash within a
year cover claims of short-term creditors. The higher the ratio the greater the margin of
safety for short-term creditors. An average of 2:1 is however considered ideal universally.
ii. Acid – Test Quick Ratio = Liquid assets (X:1)
Current liabilities
Where liquid assets include cash and bank, short term investments and debtors balance
but exclude stocks and prepayments and slow paying debtors. Current liabilities exclude
secured bank overdraft and other liabilities not due for immediate settlement. The ratio
shows the extent to which cash and assets most readily convertible to cash can meet the
demand of short-term creditors. A ratio of 1:1 is normally considered appropriate.

b) Efficiency ratios:
These are ratios that measure effectiveness of tax payer in using of its assets.
- Account receivable to turnover ratio
- Age of accounts receivable
- Inventory turnover

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 - Working capital turnover
- Asset turnover
c) Equity position ratios
These are ratios that measure the balance between the resources provided by the creditors
and owners of the company.
- Debt equity ratio
- Debt to total assets ratio
- Book value per ordinary share

d) Profitability ratios
These are ratios that measure the profitability of the taxpayer. Profitability is the ability to
sell goods and services above cost and earn reasonable returns on capital.
Ratios under this category include:-
- Profit margins on sales
- Return on investment
i. Return on Total asset
ii. Return on Owners equity
iii. Adequacy of Tax assessed.
- Ratio of Tax already assessed to Net Profits
- Ratio of cost of sales to Turnover

e) Gross Profit Margin ratios

Gross profit x 100
Sales
It measures gross profit earned on every Naira sale. The excess of sales over cost of sales
is referred to as gross profit. If the cost of sales exceeds the sales revenue, the difference
would be gross loss. This ratio of gross profit to sales is also referred to as the gross profit
margin. The gross profit margin shows the proportion of sales that returns out to be gross
profit. Marking judgment based on the absolute figure of gross profit can be misleading.
The FIRS can make a better comparison by comparing the gross profit margin of the

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 company with other companies which are in the same industry or the gross profit margin
of the same company over a period of years.
The analysis of these ratios is to be performed at tax offices at FIRS with the following
tax evasion tendencies in mind.
- Understatement of Income
- Over statement of Expenses
- Undervaluation of stocks
- Creation and maintenance of secret reserves
- Post dating of sales (what happens to the related cost when income is post dated.
- Omission of income.
Proper interpretation of these ratios will lead to determination of the risk areas for tax
audit focus.

2. What is Audit Programme? and benefits of the tax audit programme

a) Audit Programme
This is a schedule of audit works expected to be performed on each item of the
accounts such as income/turnover, expenditures, assets and liabilities.

b) Benefits of the Audit programme

The audit programme would be useful in the following areas:-
- It will provide details of the work which the team leader requires individual members
of the team leader requires individual members of the team to perform.
- It will provide information as to how much of the audit work has been completed as
at a particular date, and how much is outstanding.
- Provides a record of audit responsibility by providing a record of the audit staff
members responsible for each of part of the completed work.
- Facilitates audit supervisions and control, giving senior members of the audit team
information and knowledge regarding the progress of the work done to date.
- Continuity in this audit work should there be a change in the personnel constituting
the audit team, with new members being able to see at a glance the outstanding work
to date and provides a basis for planning and staffing the audit.

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 - Provides an avenue for the team leader to allocate his available staff in the most
productive and efficient manner possible.
- To aid planning and execution.

3. (i) Risk Profiling

This is aimed at preparing both the audit department and audit team that will be
involved in the audit exercise for the audit task ahead.
- It involves obtaining basic information about the taxpayer, analytical review of
taxpayer’s performances using ratio analysis and highlighting audit risk areas for the
audit exercise. This is the beginning of the risk your audit will be conducted in an
efficient manner.

(ii) Purpose of Audit planning

Audit planning helps the auditor to:-
- Accomplish his audit objectives
- Focus on audit risk areas
- Determine the cost of resources that will complete the audit exercise
- Determine the number of staff require to carry out the job
- Know how long the work will take
- Know the extent to which controls will be relied upon
- Controlling and directing the audit staff as regard to the audit assignments.

(iii) Features of audit planning memorandum.

The content of audit planning memorandum can be outlined under the following
categories:
a) Background information of the client, which covers the following:
- A brief historical background of the entity
- The Nature and trend of the enterprises business
- The organizational and management structure of the business
- The terms of reference of the audit assignment
- The accounting and internal control procedures of the entity etc.

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 b) Audit strategy memorandum which contain the following:-
- The audit objectives
- The overall audit approach
- Audit risk analysis for the various section of the financial statements and
approaches to be adopted in respect of each section
- Areas requiring special audit attention and procedures to be applied.

c) Jobs/assignment administration memorandum, which include:-

- The partner in charge of the audit assignment
- The manager in charge of the audit
- The seniors and other staff in charge of the audit
- Dates of audit visits including any interim visits and final audit visit.
- Dates and details of such events as:-
a. Stocks, cash count
b. Management representation letter
c. Manager’s filed review, manager’s final review, circularization of
debtors and creditors, confirmation of the bank.
d. Audit programme
This section of audit planning memorandum usually contains
programme for the various sections of the audit work specified e.g.
compliance and substantive audit procedures
e. Summary of review memorandum
This section relates to standard formats of job requirements or scope of
work carried out and standard information to be supplied as evidence
of work done, to guide the review of audit performance.

4. (a) What is Audit quality control?

Audit quality control is a means of ensuring that an audit is carry out in accordance with
approved standards and relevant legislations/regulations and a good quality report is
produced at the end of the audit.

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 (b) Ensuring effective quality control of a tax audit engagement
- An audit plan should be drawn up which includes an outline of the audit work to
be alone, the staff to do the Job (in terms of number, qualifications and
experience) the timing of the work to be done, the budget of time and cost etc.
- Proper briefing of staff on the audit objective, audit plan, timing requirements,
audit test/procedures to be carried out etc.
- The audit checklist prepared at the planning stage should be used to ensure that
no work is duplicated or overlooked. As the audit checklist contains a list of
work to be done during the audit, each work should be ticked off when
performed.
- Contentious matters must be brought to the attention of the team leader. Such
problems could be discussed with members of the audit team and, if necessary,
consultations should be made outside the team for more knowledgeable advice.
- All audit work done and the working papers must be fully reviewed by superiors
(who are more experienced professionals).
- The team leader should ensure close supervision of his audit team members,
proper coordination of their functions, adherence to time schedule, proper
documentation of working papers, acknowledgement of audit work and review
action by the performers etc.
- All work done during the audit and conclusions reached must be carefully and
completely recorded in the working papers. The tax auditors must obtain relevant
and reliable audit evidence sufficient to enable them draw reasonable and
independent conclusion.

5. SOURCES OF TAXPAYERS’ FINANCIAL AND BUSINESS INFORMATION

- The financial and business information about the taxpayer are taken from the
following
- Audited accounts and/or management accounts for the last six (6) accounting
years including the current year.

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 - General ledger, cost ledger (if any) cash and bank books and charts of accounts
for each of the financial years mentioned in (1) above.
- Rent schedule for each of the accounting years in (1) above plus accounting year
in (1) above.
- Interest/Discount paid for each accounting year in (1) above (banks and other
financial institutions).
- Schedule of Directors fees and other emoluments.
Schedules of all bank and payment vouchers.
Pays – As – You – Earn (PAYE) (Salaries, allowance, gratuities and benefits in kind)
etc.

CHAPTER FOUR
4.0 CONTROLLING AND RECORDING AN AUDIT/INVESTIGATION
4.1 Learning objective
At the end of this chapter, readers should be able to:

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 ➢ Know the purpose of preparing audit programme
➢ Know the merits derivable from well prepared tax audit programme
➢ Know the specific information to be extracted from the taxpayer’s file.
➢ Know the audit techniques required in verifying sales, costs of sales etc.
➢ Understand the basis of allocation and supervision of work
➢ State and explain the documentation of work done, management of working papers, etc
➢ Know the preparation of Audit reports, & decision made after tax audit exercise
➢ Describe the process a aggrieved taxpayer can follow to object to an income tax
assessment.
Describe the procedures for making an appeal against a tax assessment.

4.2 The Field Audit Procedure and Techniques.

Audit focuses on business transactions.
Each business transaction must be recorded to show who gives “what” and “who receives what”.
In carrying out tax audit exercise, it is not possible for the tax authority to carry out the audit of
all the companies in Nigeria or every transaction of a taxpayer’s business hence the need to focus
on some companies or areas of a business concern that would produce high tax yield to the
government. This therefore calls for the need to employ the concept of materiality and risk
assessment in selecting taxpayers to be audited and also in the allocation of resources for the
audit of any taxpayer or transaction.
Materiality could be said to apply where an item or transaction carries a higher amount or
percentage relative to other items/transaction in the accounts or records of a taxpayer. Basically
there are no hard and fast rules as to whether or not an item is material, rather it is a matter of
professional judgment. Additionally, the nature and or circumstance of an item or transaction or
even the main objective of a particular tax audit exercise may form the basis of regarding an item
or transaction as being material. By and large the audit team should focus their attention on the
areas that has the potential of high tax yield.

4.3 SOURCES OF AUDIT GUIDE

These are sources of the audit guide.
- Obtain the background information

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 - Know the relationship that exist between the company and the related parties, e.g.
whether it is a dependent or an independent agent.
This is just to confirm whether or not the transactions are carried out at arm’s length.
- Call for relevant agreements most especially for the intangible assets. It is important to
know which party developed the intangibles and who holds the legal ownership.
- Loans: request for certificate of capital importation.
- Interest on foreign loan, section 9 sub section 2 of companies income tax act cap
C.21FN2007 as amended refers
- Review the import documents – buying commission and interest.
- Request for the related parties counts
- Dividend – read the Chairman and Director’s report.

4.4 VOUCHING
The Learning Objectives
At the end of this topic ,readers will be able to:
- Understand the meaning of vouching
- Know the objectives of vouching
- Explain the importance of vouching
- Know how to audit the various items of income and expenditures.
What is Vouching?
Vouching is an act of examining documentary evidence in order to ascertain the accuracy and
authenticity of the entries in the books of accounts. When the tax auditor checks the entries with
some documents it is called vouching.

Voucher - Any document which supports the entries in the book of accounts and establishes the
arithmetical accuracy is called a voucher, e.g. A bill, A receipt, an invoice, salaries & wages
sheets, pay-in-ship book, bank statement, bank pass book, copy of purchase order, minutes book,
memorandum and articles of association, partnership deed, counterfoil of a cheque book, goods
inward and outward register, agreements, form ‘M’ etc.

Importance of Vouching

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 - Enables you know transactions.
- Ensures genuineness of the transactions.
- Detects frauds and errors.
- Ensures authenticity of transactions
- Ensures proper disclosure
- Helps to know relevance of the transaction
- Compliance with laws.
- Identify whether it is capital, revenue or expenditure.

The special consideration to be borne in mind by the tax auditor in the course of vouching are: -
- Date of the voucher
- The name of the party
- Authorization of the transaction.
- Transaction relates to business.
- Revenue and capital.
- Amounts in words and figure.
- Missing vouchers
- Nature of payment etc.

Objectives of Vouching
The basic objectives of vouching are as stated below:
- To ensure that all the transactions are properly and correctly recorded in the books of
accounts
- To confirm the proper evidence supports all the entries of the transactions.
- To ascertain that fraudulent transactions are not recorded in the financial books.
- To ascertain that all transactions relating to business are recorded in the books of
accounts.

4.5 Tax Audit Techniques.

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To a tax auditor, auditing techniques are the working tools used and applied for identification
and examination of those evidences which have been traced by tax audit procedures.

(a) Techniques and Procedures Compared:

The dictionary meaning of the word ‘techniques’ is the ‘method of performance or
execution’ and that of ‘procedure is method of conducting an affair’ or ‘course of action
taken or an act performed.’ In other words, we can state that an all inclusive list of
techniques can be outlined even with an addition of improved techniques, whereas an all-
inclusive list of procedures is difficult to be prepared as these are keyed to the objectives
to which they relate. Techniques are more or less rigid and limited but procedures can be
many and varied depending on the objective considerations for the acts to be performed
or actions to be taken. However, we can draw distinctions between tax auditing
procedures and tax auditing techniques as follows: -
a. Verification as to the evidences relating to the ownership of assets and existence of assets
and liabilities, as a part of tax audit practices and procedures, is the principal duty of the
tax auditor before he certifies that capital allowances granted are correct.
b. Comparing and confirming sales invoices may be reconciled with the total summary of
extractions or trial balance. The bank reconciliation statement provides a good measure
of confirmation.

Sales
▪ Cash sales register shall be fully checked with the carbon copies of the cash sales bill.
▪ Summary of daily cash should be checked.
▪ Sales man’s summary, gateman’s summary, and cashier summary should be compared.
▪ Dates of cash sales bills and the date on which the receipt are recorded in the cash book
must be the same. If the dates differ, the same should be inquired into.
▪ Where cash sales bills are cancelled, all copies including original copy dully cancelled
should be kept in record.
▪ Where it is a policy of the company to allow a discount, it should be verified and
reconciliation should be made with record of cash received.

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▪ Verify the entries in the cash book and the corresponding effect in sales account in the
ledger.
▪ Compare the amounts of sales disclosed in the Financial Statements with the amounts
stated in the Management Accounts, Year End Trial Balances, Sales Ledger, sales day
book and sales figures stated in the minutes of the board meetings. Note the difference (if
any). Examine daily cash reconciliation and related books entries and bank deposit to see
if all receipts are included in the income. Note any undeposited cash receipt or hand at
the end of the year
▪ Review the sales ledger and note unusual debit entries for further verifications and
explanations. Test entries of the general journal and sales journal.
▪ Check all credit notes for commissions, discounts, returns etc and agree them to amounts
disclosed in the sales ledger noting any differences.
▪ Check for sales commissions allowed. Only commissions disclosed in the invoices are
allowed.
▪ Call for invoice files and randomly trace some of the invoices to the sales ledger and or
invoice listings.
▪ Confirm that invoices are raised for all sales made during the accounting year by
checking the seriality of invoice postings in the ledger. Note missing ones and call for
explanations on them.
▪ Where no sales ledger and invoice listings are in place or reliance could not be placed on
sales records, the tax auditor could fall back to one or more of the- following approaches:
▪ Extraction of all sales invoices
▪ Extraction of credit lodgments in all the company’s bank statements excluding loans and
overdrafts
▪ Amounts disclosed in the VAT returns for the accounting year (if higher than
figures in the audited accounts)
▪ Ensure that an appropriate VAT rate was charged and that the VAT was accounted for.
▪ Check journal entries including audit journals for reversals of sales to valid documentary
evidence and trace to the sales ledger to ensure correct treatment. Any differences that
reduce sales should be added back thereto.

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 ▪ If there are large and consistent debit entries to the sales accounts, the finance controller
may explain that the entries were returns and allowances, but they can be debit entries for
customer checks that could not be processed because of insufficient funds.

Assets
The objective of Fixed Asset tax audit is to ensure that capital allowances are not claimed on
assets which are neither purchased nor brought into use during the relevant basis period as well
as confirming correctness of rate of capital allowances used. Disposals giving rise to Capital
Gains taxes are also detected through the process of reconciling movements of fixed assets.

The following audit procedures should be carried out:

▪ Obtain the schedule of fixed assets and note addition for each year
▪ Agree the schedules to the Financial Statements and other tax returns.
▪ Insist on third party documents evidencing ownership and acquisitions like purchase
invoices, import documents for imported assets
▪ Disallow capital allowances earlier claimed on all assets that ownership and usage could
not be proved.
▪ Ensure that appropriate rate is used for the computation of capital allowances.
▪ Existence: - The tax auditor should confirm that all the assets of the coy are physically
existing on the date of balance sheet.
▪ Possession: - The tax auditor has to verify that the assets are in the possession of the
company on the business.
▪ Ownership: - The tax auditor should confirm that the assets are legally owned by the
company.
▪ Charge of Lien: - The tax auditor has to verify whether the assets is subject to any charge
or lien.
▪ Record: - The tax auditor should confirm that all the assets and liabilities are reported in
the books of account and there is no omission of assets or liability.
▪ Tax auditor should confirm that the assets had been acquired for the purpose of business
only.

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Purchases
i. Compare the Purchases stated in the Financial Statements with amounts in Trial
Balances, Management Accounts and general ledger. Note the differences for further
verification and explanations.
ii. Also review the purchase daybooks as well as cashbooks and compare the amounts
disclosed in the ledger with the amount disclosed in the Financial Statements.
iii. Note some entries in the general ledger preferably material amounts and round figures
and call for their third party purchase invoices.
iv. Confirm that receipts and invoices were issued and addressed to the company for all
purchases.
v. Obtain information on debit notes, creditors’ balances {opening and closing} as well as
discount received.
vi. If there are no purchase ledger and purchase daybooks, then extract the purchase
receipts/invoices to determine purchases for the year.
vii. Prepare Creditors Control Account if there is need for it as alternative way of identifying
correct purchases figure.
viii. Ensure that VAT is not written to P& L Account.
ix. Check journal entries including audit journals for items affecting purchases to
documentary evidence and trace to purchase ledger to ensure that they are correctly
posted. Otherwise disallow the amounts involved for tax purposes.
x. Note that provisions and proforma invoices are not allowed for tax purposes because they
do not represent actual purchases.
xi. If the company is into importation, analyze the import documents i.e. Approved Form M,
Clean Report of Inspection actual invoices, custom bill of entries payment schedules etc
and compare the result with the foreign purchases disclosed and seek for explanations on
the differences noted. Also ensure that forex rates applied agree with Central Bank of
Nigeria approved rates.

Auditors’ Report and Notes

These should be reviewed as they:

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 i. Indicate extent of record keeping by the company
ii. Indicate reservations by the company’s auditors
iii. Guide the tax auditor in reaching judgments on the reliability of accounts
Share Capital
i. Obtain information on initial share capital from Memorandum / Article of Association
/ Certificate of Incorporation of company
ii. Ensure that subsequent increases in capital are authorized by company resolution and
approved by the Registrar of Companies and a certificate to that effect issued.
iii. Call for photocopies of such certificates and enclose it in the Permanent Note Jacket
(PNJ).
iv. Disallow share issue expenses such as stamp duties, CAC expenses and related filing
(Lawyer’s) fees on the increase in share capital as the expenses are capital as the
expenses are capital in nature. Capital allowances should be claimed instead.
v. Obtain details of shareholdings and the method of payment for the shares.

Drawings
Drawings should ideally be made out of profit. It is therefore necessary to adjust the profit
figures in order to get the position prior to drawings.
Drawings could come in various forms including:
i. Cash to pay school fees.
ii. Conversion / diversion of stock for domestic uses.
iii. Partial sharing of expenses e.g. rent paid on building used for both private residence and
business purposes.

Directors’ Accounts
i. Peculiar to private companies
ii. Scrutinize the accounts and entries to confirm that separate entity principle between the
Directors and the company are in place.
iii. If not, determine the tax implications.
iv. A substantial debit implies that the Director owes the company. Check overdraft and
implication on interest charged.

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 (b) Conducting the Audit
The field audit is conducted according to audit methods based on the relevant tax laws,
after which a post audit meeting is conducted.

Reconcile Account Books to Tax Returns

- The financial statements are prepared with an objective of maximizing income and thus
increasing the net worth of the shareholders, while maintaining conformity with GAAP
The tax return is prepared with the objective of minimizing taxable income and thus
reducing taxes paid. While maintaining compliance with the tax laws.
- The result of these differing objectives is a large disparity between book income and
taxable income.

Reconciling
Look out for:
- Income subject to tax but not recorded on the books this year.
- Expenses recorded on the books this year but not deducted in this return.
- Income recorded in the books this year but not included in this return, and
- Deductions in the tax return but not charged against book income this year.
(c) Balance Sheet (Statement of Financial Position)
Compare with prior year figures and note change or no fluctuation at all between the
years. Either of these situations could warrant further questioning and/or audit work.
- The following balance sheet accounts are discussed.

CASH
- Review year–and–bank reconciliation and trace any deposits in transit to the books to
determine whether they have been included in the book balance.
- Trace any bank credit to the books for proper inclusion (that is, interest income).
- Investigate cancelled/outstanding cheques as they may have been written with the
intention of voiding them the next year thereby lowering taxable income for this year.

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 - Inspect the next month’s bank statement to determine whether any deposits were
excluded in the year end bank reconciliation.

Account Receivable / Account Payable

- Obtain and review schedules of debtors/creditors to determine the type of customers that
make up accounts receivables/payables differentiating between Trade and Sundry
Creditors and Debtors and obtain explanations as to the relationship to the business of the
sundry creditor/debtor.
- If credit balance exists, raise questions as to the age of the balances and the reason for the
balances. If the balances are old and no activity has occurred on the account in many
months or years, consider an income adjustment.
- Obtain individual ledger card of the customers and do a transaction test of some entries in
the ledger to confirm genuiness.
- Check the bad debts written off and obtain explanations for the action.
- Disallow general bad debts provisions after tracing it to profit and loss accounts.
- Call for third party evidences and trace some of the transactions to purchases and sales
ledger.
- Substantial balances should be given special attention and used to determine the
followings:
- Taxable payments to third parties
- Existence of other companies which were hitherto unknown or treated as NCR cases
- Information on hire purchase of assets by taxpayer giving rise to creditors as this will
affect the capital allowances claimable.
- Fictitious creditors and loans could be discovered as the company may be hiding
accumulated profits in these fictitious credits and loans from none existing persons.
- Review the age analysis and the company policy regarding write – off. The tax payer may
be premature in their write-off policy if:
• Sales still being made to their client after the write-off.
• Many accounts written off in prior year are being brought back into income in the
subsequent year.
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 • Sales are made to their client up to the end of the tax year.
• Inspect subsequent year’s invoices. Many tax payers avoid billing their clients until
the following tax year, but will not include the goods in finished goods inventory for
current year.

Reserves
These are created by the accumulation of un-appropriated and undistributed profits.
i. Nature of reserves and method of creation should be ascertained
ii. Check that it is not treated above the line (i.e. not deducted before taxation)
iii. Disallow all reserves that are not specific and deducted above the line.

Inter-company Transactions
Transactions between close/related companies should be properly scrutinized to eliminate
artificial transactions and dealings. Watch out for bogus credit and debit notes, which will not be
correspondingly treated by the other company.

Specifically confirm the eventual beneficiaries of expenses incurred and ensure that the costs are
borne only by the company that is benefiting from the services paid for.

Watch out for income shifting based on year end transactions between related parties with
different accounting year ends and add back any understatement of income resulting there from.
Provisions
Peruse payments and journal vouchers and such other documents that are available for
authenticity.
Watch out for general provisions and disallow them as appropriate.

Bank Statements
Where there is no ledger in place or reliance could not be placed on records provided and or
invoices are grossly inadequate, the bank lodgments may be- collated from the bank statements
of all company's bankers to obtain all monies that come into the business. There may be other
information such as cash sales expended that would be needed for overall reconciliation.

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Note however that it would be absurd to regard all lodgments as income. There may be receipt of
loans, settlement of previous period’s sales, cheque exchanges etc. The onus of proof of such
transactions lies with the company. Necessary adjustments should be made if the Tax Auditor is
satisfied.

In addition, for interest expenses in the bank account from Commission on turnover, Interest on
Loans, the VAT element of the interest should be computed and compared with the amount
claimed in the returns filed.

Building and Equipment

- The note made during the initial interview and the tour of the tax payer’s premises will
help determine what should or should not be in the account.
- Reconcile the depreciation schedule to the book balance for the original cost of the
equipment.
- Check for changes in the depreciation method or the life of the assets, and any possible
equipment dispositions not reported in the return.
- If capital allowance deduction is being claimed, verify if the original basis of the asset(s)
has been adjusted to reflect the proper deduction in subsequent years.
- Review the allocation between building and Land as it can make large differences in the
amount of depreciation allowed.
- Check for direct write–offs of expense associated with the construction of the assets.
- While conducting fixed assets verification the following points should be considered by
the tax auditor.
- Existence: The tax auditor should confirm that all the assets of the company are
physically existing at the balance sheet date.
- Possession: The tax auditor has to verify that the assets are in the possession of the
company at the balance sheet date.
- Ownership: The tax auditor should confirm that the asset is legally owned by the
company.
- Charge or Lien: The Tax auditor has to verify whether the asset is subject to any charge
or lien.

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 - Record: The tax auditor should confirm that all the assets & liabilities are reported in the
books of account and there is no omission of asset or liability
- Tax auditor should confirm that the assets had been acquired for the purpose of business
only.

Inventory
- Manufacturers traditionally use three categories of inventory:
• Raw materials (RM)
• Work-in-process (WIP), and
• Finished goods awaiting sales (FG).
- As raw materials are purchased, their costs (including delivery charges) are debited to the
raw materials account.
- As raw materials are taken from storage and used in the manufacturing process, their
costs are moved from (credited to) raw materials and added (debited) to the WIP account.
The WIP account also collects the costs of direct and indirect labour and factory over
head.
- When the goods are finished, their costs are transferred (credited) out of WIP and added
(debited) to finished goods awaiting (FG) inventory.
- Inventory issues generally fall into two primary categories:
• Incorrect inventory counts/omissions
• Improper valuations.
- Identification and development of these issues directly depend on the existence and
quality of the inventory records.
- Determine all possible locations of inventory.

(d) Conducting Tax Audit of Revenues/Sales and Expenditures (Purchases

etc).
The learning objectives
In this section, readers will learn about auditing specific components of the taxpayer’s books and
records. Readers will also learn about specific audit techniques that can be used when conducting
your audit.
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Auditing the books and records of taxpayers is the principal activity undertaken in your audit in
order to determine whether or not they have paid the correct amount of tax on the income that
they have earned.

The following chart illustrates the relationship between the taxpayer’s business, the business’
reporting methods and the taxpayer’s income taxes. Since all of the steps are interrelated, you
need to have good knowledge of each one in order to conduct an effective audit.

Chart
Source document related
to the business operations
are generated.

Information from the source

Documents is entered into
the taxpayer’s accounting records.

Data from the taxpayer’s accounting

records is used to compute the
taxpayer’s income.

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 Income taxes are calculated on
the taxpayer’s income and
specific income tax Laws.

The key activity of auditing a taxpayer’s books and records is reconciling the taxpayer’s
accounting and income tax data to their books, records and source documents. Once you
determine the taxpayer’s method of reporting, you can establish if the information was recorded
properly. You will then be in a position to determine if the taxpayer’s income and subsequently
their income taxes have been calculated in an accurate manner.

In performing this step, you must remember to consider the accounting policies and tax Laws
that are applicable in Nigeria. After proper reconciliation of taxpayer’s books and record you
must have successfully established an audit trail. An audit trail means that you have the ability to
trace and follow data from one point in a process to another. An audit trail will:
- Reduce the amount of time required to complete an audit.
- Assist you in assessing risk and materiality, and
- Prevent you from making errors related to incorrect assumptions.

However, if auditing becomes difficult or impossible because of the taxpayer’s poor record
keeping or you are unable to establish one, your audit will take much time to complete, because
of this, you need to create a record of the taxpayer’s transactions so as to calculate their income
and income taxes.

Sampling
Because it is not feasible to verify all the data contained in a taxpayer’s books and records, you
will have to limit your audit to a sample of the taxpayer’s information. Limiting your audit to
reasonable samples available will ensure you conduct your audit in an efficient manner.

Sampling is a reliable method because of the relationship that exists between the sample and all
of the information available.

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If errors are found within the sample, it is logical to conclude that similar errors will be found in
the entire population data. Consequently, if no errors are found within the samples worked on, it
may be reasonable to conclude that the larger population of data is also error free. By
understanding this relationship, you can use sampling techniques to determine the amount of
audit testing that you feel is required in a particular area.

Revenue Testing
Auditing the taxpayer’s revenue will be a significant component of your audit. Your primary
objective in auditing the taxpayer’s revenue is to determine if the amounts reported on the
taxpayer’s tax returns are accurate and complete. To do so, you will have to use revenue testing.

Revenue testing is the process of auditing the taxpayer’s revenue related transactions. This type
of testing is required to verify the correctness of the revenue reported.

Direct Testing
When you conduct direct testing, you will be auditing the revenue transactions that have been
included in the taxpayer’s books and records.

Direct testing requires you to review the:

- Taxpayer’s source documents,
- Processes that the taxpayer used to summarize the data from their source documents, and
- Taxpayer’s accounting data.

However, the primary objective of direct testing is to determine if the data from the taxpayer’s
source documents has been correctly recorded into the taxpayer’s accounting systems. You will
accomplish this objective by tracing the information from the source documents through to the
accounting systems. Once you have confirmed the validity of the data in the taxpayer’s
accounting systems, you will be able to determine if the amounts reported on their tax returns are
correct.

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Source Documents
The taxpayer’s source documents are the primary pieces of information that will be reviewed
when you perform direct testing on the taxpayer’s revenue accounts. This is because the
taxpayer’s source documents provide a record that a revenue transaction has occurred. When you
review the taxpayer’s sources documents, you will be able to determine:
- What the taxpayer’s sold
- When the taxpayer sold their goods or services, and
- How much the taxpayer sold their goods or services for.

When this information is used in conjunction with your knowledge of the taxpayer’s method of
reporting you will be able to determine if the taxpayer’s sales were correctly recorded in their
accounting systems, sales invoices may also have a unique invoice number. Invoice numbers can
assist you in analyzing the sequence of sales transactions. This analysis may provide you with
clues as to whether the taxpayer’s records reflect all of the transactions that have occurred. Take
a look at the following example:
While reviewing the taxpayer’s sales invoices you Notice that the invoices Number’s are in a
specific sequence. You have located invoices 14, 15, 16, 19, 20, 21, 23 and 24. You have
determined that these invoices were correctly recorded into the taxpayer’s accounting data. You
would now have to determine the audit risk associated with the fact that invoices 17, 18 and 22
appear to be missing from the taxpayer’s records and accounting data.

When reviewing the taxpayer’s sales invoices, you should pay special attention to invoices that
appear to have missing information. You should also take note of any sales invoices that have
been altered or cancelled. There may be a risk that these types of sales invoices do not document
the actual transaction that occurred. This could mean that those specific sales invoices should not
be relied upon as an accurate record of that particular sale. If you encounter a number of these
sales invoices, it may be an indication that the taxpayer’s records are unreliable. Indirect testing
may be required in these circumstances.
Sales Invoices

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These are documents issued by the taxpayer in order to create a written record of specific sales
transactions. Both the taxpayer and customer would normally receive a copy of the sales invoice
after it has been prepared. Sales invoices normally contained the following information:
- The customer’s name, address, TIN and telephone number
- The date of the sales transaction
- A description of the goods sold
- The total amount of the sale, and
- A record of how the goods were paid for.
Deposit Slips and Deposit Books
Deposit slips provide a detailed record of the amounts that were deposited into the taxpayer’s
bank account.
The deposit slip would normally show:
- The date of the deposit
- The amount of the deposit
- The amount of cash included in the deposit,
- A listing of cheques included in the deposit.

A deposit book is simply a number of deposit slips that are organized into a book format.

Deposit slips will provide you valuable information relating to the amount of money that the
taxpayer has received while conducting their business. Since the taxpayer’s revenue is normally
connected to an inflow of money, these records will help you analyse whether the calculated
revenue amounts are correct.

When reviewing deposit information, you have to remember that it is possible for the taxpayer to
receive money for items that do not relate to sales. For example, the taxpayer may have
deposited money into their bank account that they received as a personal gift from a family
member. As an auditor, you need to carefully review all such transactions to ensure they have
been correctly identified as revenue.

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When performing indirect testing, you must account for the money received by the taxpayer that
does not relate to revenue. These amounts may help to explain a discrepancy between the
taxpayer’s lifestyle and their reported income.

Indirect Testing
Definition
Indirect testing relates to audit procedures that focus on transactions that have not been included
in the taxpayer’s books and records.

Indirect testing is used when the taxpayer:

- Has unreliable internal controls or accounting systems
- Does not have any source documents
- Appears to have a lifestyle that requires more income than what they are reporting.

Indirect testing can rely on complex audit techniques. You should always refer to your tax
administration’s policies when determining how to deal with unrecorded revenues that have been
identified with indirect testing.

The underlying assumption when conducting indirect testing is that the taxpayer used the
unrecorded revenue for a specific purpose. In many cases, unrecorded revenue is used to support
the lifestyle of the taxpayer and their family. This may include:
- Paying for personal food, housing and other living costs.
- Spending on travel and entertainment
- Purchasing personal assets
- Paying off personal debts.
Since a specific amount of income is generally required to pay for these types of items, you can
indirectly calculate what the taxpayer’s income is by determining how much money they spent in
these areas. This amount is then compared to the taxpayer’s reported income to determine if
there is a material discrepancy between the taxpayer’s calculated income and their reported
income. This discrepancy provides you with a reasonable estimate as to whether the taxpayer has
any unrecorded sales.

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Type of Indirect Tests
There are quiet numbers of indirect test that can be used to identify unreported taxpayer revenue.
The following information is intended to provide you with a basic understanding of the various
tests and their application.
- Preliminary meeting
- Field tax audit work

4.6 TAX AUDIT REPORT

• Covers
• Meaning of audit report
• Type of reports
• Assurance of a good report
• Qualities of a good report
• Summary of findings
• What to include in report
(a) What is Tax Audit Report?
Essentially, a tax audit report gives an account of the totality of the audit exercise in a concise
manner. It is a documentation of the facts and comments on a tax audit exercise.

Every tax audit engagement must generate a comprehensive report on the results of the work
done, conclusion reached and additional assessment raised.
- Reports are guided by the provisions of relevant tax Laws and accounting standards
- Reports are drawn from evidence gathered in the course of the audit
- The report generated, depending on the type of audit, should be properly prepared and
well structured.

(b) Type of Audit Reports

They are;
- Interim audit report
- Final audit report

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Interim tax audit report
Sometimes referred to as initial report.
It is not final report
Awaiting further information, documents, discussions and comments.

Generally, the interim Audit Report should contain synopsis of work done, findings, conclusions,
etc. The Head of Audit Unit and/or the team leader must review the file, meet the taxpayer’s and
discuss the findings and conclusions reached before leaving the taxpayer’s premises. The
meeting shall be chaired by the Head of Audit Unit or the team leader. The taxpayer’s
representatives such as the Managing Director and the Director of Finance or the Head of the
finance function should be at the meeting. It is important to note the taxpayer’s response to the
issues discussed. In this regard, issues agreed with the taxpayer, those in dispute and those for
which further information is required should be clearly stated. An interim audit report should be
produced by the audit team at the end of the field audit exercise .This would form the basis of a
post audit {close out} meeting with the taxpayer.

Post-tax-audit review
The interim audit report will be reviewed as soon as it is concluded and due consideration given
to all the technical issues involved based on the prevailing tax laws as well as the Generally
Accepted Accounting Principles (GAAP). The team leader will thereafter formally communicate
to the taxpayer all the detailed audit findings and the underlying justifications for the written
response of the taxpayer. This will set the tone for the reconciliation meetings.

Final Audit Report

Based on the minutes and outcome of the reconciliation meetings, the final audit report will be
written by the audit team leader. The report which should be addressed to the audit department
headquarter will state in details (i.e final position of the audit exercise) the additional
assessments agreed at the reconciliation meetings as well as those disputed.
The additional assessments agreed should be separated from those disputed. Those should be
analyzed in tabular form into various taxes (CIT, WHT, CGT, EDT, VAT, PAYE, etc.) for each

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year of assessment concerned. The report should indicate details of how each additional
assessment were at.
The final audit report should contain the following summary;
- Background information of the company
- Company taxation history
- Work done
- Findings
- Details of all the tax liabilities
- Recommendation
Audit report tend to expose taxpayer’s weaknesses.
This brings the tax audit to a conclusion and the case closing document completed and sent to the
management. The audit department headquarter will consider the report within a reasonable time
of its receipt and issue clear directives for issuance of notice of additional assessments, amended
assessments and notice of refusal to amend assessment as appropriate.

(c) Assurance of a Good Audit Report

- Quality evidence
- Proper documentation of evidence
- Technical know how of audit
- Well performed audit-planning and management
(d) QUALITIES OF A GOOD TAX AUDIT REPORT
− It must be prepared timely
− it must be clear and accurate
− it must be reasonable detailed and devoid of any over or understatement
− It must be presented in a logical and concise manner
− The language of the report must be professional and not offensive
− All conclusions and recommendation stated in the report must be based on verifiable
facts and figures
− The making of subjective comments must be avoided and let all the information
contained be factual
− Relevant computations must be disclosed

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 − The report must be dully signed.
− It must be relevance

4.7 Documentations of Work Done

What is Tax Audit Documentation?
Tax audit documentation is about ensuring that all information, correspondence, and other
items generated in the course of an audit are properly documented to serve as reference
materials. Proper filing with correct indexing are referencing.
Essential documentation should be relevant to the audit and should have legal, professional and
administrative basis.
Two principal files are maintained namely;
- Tax Audit file
- Working paper file.
Tax audit files

All audit work paper generated during the conducted of a tax audit must be properly organized
and filed.

Tax audit file contains among others the followings;

- Synopsis of audit instructions

- Source of audit trigger
- Case allocation memo/minutes
- Extraction of relevant tax information about the company including its background
information.
- Analytical review of the taxpayers returns
- Audit plan including the audit planning memorandum
- Scope and extent of audit coverage, including the audit programmes
- Correspondences with other FIRS tax offices and state tax offices
- Correspondences with tax payers
- Correspondence with third parties
- Minutes of meeting, pre-audit meetings, audit-meetings, reconciliation meetings

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 - Interim and final reports
- Tax status report, including the related tax computations and financial statements
- Letter of intent
- Assessment notices
- Settlement of liabilities
- Recommendation with regard to the tax administration processes which were forwarded
to headquarters
- Case closure reports and documents.

MANAGEMENT OF TAX AUDIT WORKING PAPERS (TAWP)

These are the records kept by the auditor of the work planned, the tests performed, the
information obtained as well as the procedures followed in carrying out his audit assignments.
The audit working papers must be so sufficiently detailed and arranged in a way that will
facilitate reviews by non-member of the audit team, such that any experienced auditor without
prior connection with the audit would subsequently be able to comprehend the work performed
and agree with the conclusion reached.
Being credible evidence of work done and findings and conclusion reached the audit work papers
should be properly documented therefore every member of the audit team must ensure the
safeguard of all the working papers from loss or exposure to unauthorized persons and preserve
them properly for future reference or use.

Work performed must be properly documented in acceptable standard formats. Each schedule
must be properly headed with the name of the taxpayer, Taxpayer Identification Number (TIN),
the subject matter of the schedule, the date when audit work was carried out. Each schedule must
also contain the names of the staff that did the work. Findings and conclusions must be properly
documented and signed off by those who did the work. Figures should be cross referenced to all

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other related schedules and agreed with the source documentation. They must also be reconcile
or tiled to other relevant areas or source documents.

Background information, financial statements details, tax computations, compliance status, etc.
must be well documented. All the adjustment and re-classification proposed must be noted on the
work paper where the exceptions were initially noted. All such adjustments and re-classifications
are to be posted to the adjustment schedule from where they can be reviewed by the team leader
and head of audit unit.

All unit steps executed, facts, and issues addressed, applicable laws and conclusions reached
their related tax implications are to be carefully documented. Minutes of meetings are to be
signed by representatives of all parties who attended the meetings in order to avoid unnecessary
controversies and delay in resolving issues. All additional assessments proposed or raised must
be supported by in controvertible evidence in the work papers. This is to ensure that where the
taxpayer decides to challenge the additional assessments in the court, FIRS has sufficient
documentary evidence to win the challenge.

Every conclusion and recommendation reached must be signed by the auditor who did the work.

4.8 Review of Accounting System, Books and Procedures

The purpose of reviewing the accounting system, records and related internal control
processes in force is to ensure that the accounting and administrative processes that produced the
financial statements were reasonably robust and accurately summarised the financial activities of
taxpayer’s business. It is important to see evidence that the internal control processes were
properly brought to bear throughout the financial period under consideration. Sometimes,
relevant tax authority may conduct an audit of the financial records of a taxpayer in order to
ensure that its financial statements were produced from financial records that have been properly
kept. This is an internal control audit.

An audit of the internal control environment is also required as part of a comprehensive

tax audit. Irrespective of the type of audit the following steps can be applied:

- Interview all relevant taxpayer’s staff involved in processing financial transactions.

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 - Establish the system of accounting in place, whether manual or computerized and if
computerized, find out the accounting package in use.
- Establish the procedure for the recognition of income and expense. Ensure that proper
distinction has been made between revenue and capital expenditures in the taxpayer’s
accounting for purchases.
- At the end of interview use your note or transcript to summarize in a memorandum
a comprehensive but brief description of the accounting system including policies and
procedures, software package in use, books kept, documents in use, reports generated,
flow of transaction processes, internal control system in place, and level of authorisation
including the specimen signatures of those involved.

For the purpose of understanding, use flow chart techniques to describe the accounting system,
noting key internal control points and the techniques in place. The review should at least cover
the following activities:

- Revenue including credit and cash sales, cash receipts, output VAT, other income,
receivables deposits received for products, commissions earned, interest income, bad
debts provisions, invoice processing procedures, adjustments etc.
- Purchases, accounts payable, provisions and control suppliers’ invoices, payments,
prepayments, withholding and input VAT, Deposits made for goods in-transit (to be
delivered later) expenses incurred etc.
- Manufacturing and conversion activities, direct and indirect overheads, cost build up and
transfer to stocks
- Payroll including engagement of personnel, salaries and wages, PAYE administration,
pension contributions.
- Stocks, good in transit and work etc in progress.
- Fixed assets acquisition, usage control and disposal operating leases etc.
- Treasuring activities including cash account, raising capital and investment activities,
dividends, borrowings, royalties and interest payments finance leases and off balance
sheet transactions
- Month and year end financial statements, management reviews, and adjustments

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Internal Control (if any)

Based on the results of the interviews as documented in the appropriate accounting system
memos or flow charts above, access the strength and weakness of the accounting system in place
and the internal control environment.

- Summarise the list of weaknesses identified and the audit test required to mitigate
their possible negative impacts on the financial figures generated in order to ensure
that all transactions and only those transactions that relate to the tax payer’s business
have been captured and reported in the financial statements. Add these tests to those
in the audit work programme and see that they are executed.

4.9 BACKGROUND INFORMATION

The following are basic information to be extracted from the taxpayer’s permanent note jacket
file (PNJ). A background information questionnaire form containing the following questions
could be used for this purpose
❖ Name of the company
❖ Registered address
❖ Date of commencement of business
❖ Date of registration
❖ Taxpayer identification number {TIN}
❖ Nature of business
❖ Accounting year end
❖ Particulars of the Directors
❖ External auditors/tax consultants and their addresses
❖ Bankers/address
❖ Solicitors and secretaries
❖ Litigation details (if any)
❖ Associated companies and their addresses
❖ Period covered during the last audit or investigation exercise (where applicable).

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4.10 Decision making after Tax Audit/ Investigation
Audit Closure
On conclusion of the tax audit and after raising additional assessment, commence case closure
procedures. Use Form A8 which comes with its instructions on how the closure documents are
to be completed for each year.

The team Leader is responsible for completing the closure document. Time applied to the audit
of the taxpayer by each team member will be added together and noted in item 23 in the closure
document.

An audit is considered completed when the assessment has been finalized. This is normally after
all reconciliation meetings have been held and the only outstanding issue is payment or
collection of the assessment. Although the taxpayer may appeal the assessment through the
administrative or judicial review process. This should not delay the commencement of the
closure procedure. Two copies of the case closing document will be prepared. One copy will be
sent to the management within seven (7) days of the audit completion. The other copy will be
kept in the audit case file. Heads of audit are responsible to ensure the accurate completion of
the document and timely submission of the document to Headquarter Abuja.

4.11 SUPERVISION AND CONTROL OF AUDIT ASSIGNMENT

All administrative steps required to supervise and control an audit assignment are summarized in
this lecture and must be strictly executed and documented appropriately.
Copies of Notices, instructions and correspondences, minutes of meetings with the taxpayer and
others; support documentation for audit findings, conclusions, internal administrative tools
required to control time and staffing on the assignment must be completed and filed in the
relevant sections of the audit work papers. Furthermore, reports and documents required to be
sent to other FIRS departments must also be dispatched promptly. Every audit assignment must
be reviewed by Head of Audit unit. This is to ensure that the field audit work is reviewed by an
independent person. This will enhance the quality control of the tax audit process.

4.12 TAX AUDIT PROCESS

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 1. What is Tax Audit Process?
These are the sequence of activities that are to be carried out during an audit exercise
starting from the selection of a particular tax payer to be audited and up to the conclusion
of the tax audit exercise. The tax audit process is itemized below:-

2. STAGES IN THE TAX AUDIT PROCESS

The stages in the tax audit process are as follows:-
❖ Selection of taxpayer to be audited
❖ Preliminary review of tax files (i.e. Assessment, collection, Value Added Tax and
others) of the taxpayer.
❖ Drawing of the audit plan
❖ Sending notification of the intended tax audit to the taxpayer
❖ Holding of pre-audit meeting with the taxpayer in the taxpayer’s office or its
authorized representatives.
❖ Conducting the actual audit
❖ Holding of post-audit meeting with the taxpayer’s office
❖ Interim audit report
❖ Post-audit review by Regional/Headquarter audit
❖ Reconciliation meetings
❖ Sending letter of intent and raising of assessment Notice
❖ Writing of final report
Selection of Taxpayers to be audited
The guideline and criteria for the selection of taxpayer’s files for tax audit are to be determined
by the Audit Headquarters. The selection of cases for audit is a management function. The
criteria which would vary from one type of business to the other include but not limited to the
one mentioned in chapter ………page…….

Preliminary review of tax files

(a) Open tax audit files (Folders)
Once the decision to audit a taxpayer is taken, the first step is to set up the appropriate tax
audit folders or files. This is because every step taken in the audit process must be properly

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 documented and the resulting work paper has to be referenced, reviewed as appropriate and
filed. Note that, setting up of the work papers and folders must be done electronically, if
physical/hard copy is required, print from the electronic version. In this regards, the cover
page should consist of:
➢ Name of Taxpayer
➢ Taxpayer Identification Number (TIN)
➢ Registered Address
➢ Telephone Number (s)
➢ E-mail address(es)
➢ Name of the Managing Director
➢ Years of assessment to be covered by the exercise.

Preliminary Activities and Review

− Gathering of the files and grouping them into the number of audit teams to be established
− Audit team to acquaint themselves with background information of the taxpayer to be
audited.
− Preparation of risk profiling of the taxpayer
− Preparation of audit checklist to be used in respect of each tax payer to ensure that all
necessary areas of audit activities are covered
− Design interview format for each taxpayer
− Assign specific duties to audit team members

Taxpayer’s History
− Establish the reason for the audit and review the team leader’s note with respect to issues
to be addressed.
− Review the taxpayers file for information with respect to its tax compliance history
− Obtain from all the tax office departments/units the existing information on the taxpayer
to be audited.
Previous year Audit File

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 − Review previous years audit files where the taxpayer had previously been audited. Know
the type of audit done, the purpose and scope of work done, findings and conclusions and
outstanding issues yet to be resolved.
− Prepare a brief summary of the highlights of the audit. All unresolved/disputed issues are
addressed during the current audit.
− Call the taxpayer on phone to obtain an update on the schedules he is supposed to provide
during the audit if possible, ask the taxpayer to send them to the tax office before the date
of commencement of field audit. The schedules must be available not later than the date
of the pre-audit meeting.

4.13 CONFLICTS RESOLUTION AND SETTLEMENT OF TAX DISPUTES

1) Objections and Appeals
As the Federal Inland Revenue Service (FIRS) has the power to raise Best of Judgment
(BOJ) or Additional assessments as often as it may desire, the taxpayer has the right to
raise an objection.
Where a taxpayer disagrees with the assessment made on him, it may formally raise an
objection to the relevant tax authority to review, revise or cancel the assessment which
has been made on it.
However, for the notice of objection to be valid, it must:-
i) Be in writing
ii) State precisely the ground(s) of objection to the assessment and,
iii) Be made within thirty (30) days from the date of service of the Notice of
assessment.
Under CITA in particular, the grounds of objection must include the figures which the
taxpayer claims should be stated on the assessment notice in respect of:
i) Assessable and total profits of the company for the relevant year of assessment;
and
ii) Tax payable for the year of assessment. Upon the receipt of a letter of objection
against its assessment, the FIRS may request the taxpayer to furnish such details
and information as the FIRS may deem necessary. The FIRS may also request for
the production of books of account and other documents relating to the profits of

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 the taxpayer and may summon any person who may be able to give evidence
pertaining to the assessment to attend for examination/interview with an officer of
the FIRS. Based on the persuasive of the production of additional
documents/information, the FIRS and the taxpayer may reach an agreement is
reached with the taxpayer, then the FIRS can go ahead and act accordingly.
Where necessary, a revise amended notice of assessment will be served on the
taxpayer for payment as agreed with the tax authorities. Where the tax authorities
and the taxpayer are not able to agree, the relevant tax authorities shall proceed to
give a “notice of refusal to amend” its assessment to the taxpayer.

Time Limit for Appeal

A taxpayer who is aggrieved with a tax assessment or demand notice made upon it by FIRS or
aggrieved by an action or decision of the FIRS under the provision of tax laws may file an appeal
against the assessment demand notice or decision of FIRS within 30 days of the service on him
of the notice of refusal to amend, although the Tribunal can still entertain an appeal after the
statutory period of thirty (30) days if there is sufficient and convincing reasons/evidences for the
delay.
Where a notice of appeal is not given by the taxpayer within the time specified by tax laws, the
assessment or demand notice shall become final and conclusive.

Contents of Notice of Appeal

Where the taxpayer wishes to pursue the matter further, the taxpayer will give Notice in writing
through the secretary to the appropriate zone of the Tax Appeal Tribunal. A notice of an appeal
shall specify the following:-
i) The name and address of the taxpayer
ii) The official number of the assessment and the year of assessment for which it was
made
iii) The amount of the tax charged by such assessment

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iv) The amount of the total profits upon which the tax was charged as appearing on the
notice of assessment
v) The date on which the appellant was served with the notice of refusal by the Board to
amend the assessment as desired
vi) The precise grounds of appeal against the assessment, such grounds shall be limited
to the grounds stated by the appellant in its notice of objection.
vii) Address for serve of any notices, or other documents to be given, to the appellant, by
the Tax Appeal Tribunal. Once the matter goes to Appeal, two parties in the appeal,
the appellant (the taxpayer) and the respondent (The relevant Tax Authority) may be
represented by Solicitors/Accountants. The company may discontinue an appeal
already filed with the Tax Appeal Tribunal (TAT) by giving a notice in writing to that
effect through the secretary to the TAT before the hearing of such appeal. Similarly,
the relevant tax authority may revise the assessment which is the subject of the appeal
after agreeing same with the taxpayer. After due notification to the TAT such appeal
may be treated as being discontinued.
Where an appeal has to be heard, the hearings before the Tax Appeal Tribunal shall
be held in public. The onus of proving that the assessment complained of is excessive
shall be on the appellant. After hearing of the appeal, the Tax Appeal Tribunal may
confirm, reduce, increase or annul the assessment or make such order thereon as they
deem fit. Where either the FIRS or the taxpayer is aggrieved by the decision of the
Tax Appeal Tribunal, then any of the parties can further appeal to the Federal High
Court, but only on point of law.
The appeal must be filed with the Federal High Court within thirty (30) days of the
judgment of the TAT. Where a company appeals against the judgment of the Tax
Appeal Tribunal, the tax decided upon by the Tax Appeal Tribunal shall be paid
within one month of the notification of the amount payable by the Board on the
company.

Further appeals, on point of Law only, can be made by a party aggrieved by the
decision of the Federal High Court to the court of Appeal and thereafter to the highest
court of the Land, the supreme court.

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4.14 Materiality
In carrying out tax audit exercise, it is not possible for the tax authority to carry out the
audit of all the business out fits in the state or every transaction of a taxpayer’s business hence,
the need to focus on some taxpayers or areas of a business concern that would produce high tax
yield to the government.
The above, has called for the need to employ the concept of materiality and risk
assessment in selecting taxpayers to be audited and also in the allocation of resources for the
audit of any taxpayer or transaction.
Materiality could be said to apply where an item or transaction carries a higher amount or
percentage relative to other items/transactions in the accounts or records of a taxpayers.
Basically, there are no hard and fast rules as to whether or not an item material, rather it is matter
of professional judgment and policy of taxpayer/revenue authority.
Additionally, the nature and or circumstances of an item or transaction or even the main
objective of a particular tax audit exercise may form the basis of regarding an item or transaction
as been material. By and large, the audit team should focus their attention on the areas that has
the potential of high tax yield.

4.15 Audit Checklist

The complexity of some businesses and /or the need for comprehensiveness make the
preparation of audit checklist necessary at the planning stage of a Tax audit .The
checklist is used during the audit performance to ensure that a thorough job is done. It
also ensures that the exercise is undertaken systematically and not in a haphazard manner.
Thus it makes audit work quicker orderly and more completely done. The activity items
listed in the checklist are ticked of as performed one after the other as the work
progresses until the audit is completed.

4.16 Audit Trail

If the auditor is able to reconcile the taxpayer’s data to his books and records, then an audit
trail has been successfully established. An audit trail means that the auditor has the ability to
trace and follow data from one point in a process to another. An audit trail will:

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 • reduce the amount of time required to complete your audit;
• assist you in assessing risk and materiality; and
• prevent the auditor from making errors related to incorrect assumptions.
If the auditor is unable to establish an audit trail, or if one does not exist because of the
taxpayer’s poor record keeping, the audit will take much longer to complete. The auditor may
also have to create a record of the taxpayer’s transactions so that the auditor can calculate his
income and income taxes.

4.17 REVISION QUESTIONS FOR CHAPTER FOUR

1 Documentation of tax audit work carried out is very important to the whole tax audit
exercise. In view of this, you are required to write short note to illustrate your understanding of
each of the following terms:

(iii). Tax audit working papers (3marks)

(iv). Define permanent note jacket (PNJ) and list ten (10) of its contents (6marks)
(v). What are the options available to an aggrieved taxpayer that was given arbitrary
assessment? (8marks
2. Highlight and discuss the various activities that would take place before embarking on
field audit.
3. State and explain the issues a tax auditor should look out for in the following:-
(a) Turnover
(b) Purchases
(c) Fixed Assets
4. What are the techniques for gathering Audit evidence in the context of tax audit?

5. Define Internal Control and list five (5) essential features of Internal Control.

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 SUGGESTED SOLUTIONS FOR CHAPTER FOUR

1a) Tax audit working papers

Working papers are records of the tax auditors planning, the nature, timing and extent of the
audit procedures performed and the conclusion drawn from the audit evidence obtained.

Tax audit working papers should be sufficiently complete and detailed to enable an experienced
tax auditor with no previous connection with the audit to subsequently ascertain from them what
work was performed and to support the conclusion reached. The audit team must ensure that all
working papers relating to the audit are safeguarded from loss, destruction or exposure to
unauthorised persons. They should be properly be preserved for future reference or use.

1b) Permanent Note Jacket file (PNJ) is a file that contained items of permanent nature.
The following are basic information to be extracted from the taxpayer’s permanent note jacket
file (PNJ)
A background information

Questionnaire form containing the following questions could be used for this purpose:
− Name of company
− Registered address
− Date of incorporation
− Incorporation number
− Taxpayer Identification Number (TIN)
− Date of commencement of business
− Nature of business
− Accounting year end
− External auditor/tax consultant addresses
− Bankers/address
− Solicitors/and secretaries
− Litigation details (if any)
− Shareholding structure
− Share capital (authorised and issued)

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 − Name of directors and number of shares held
− Associated company/and address
− Period covered during the last audit or investigation exercise (if any)

[C] Options available to an aggrieved taxpayer.

Procedure for Objection

The FIRS has the power to raise Best of Judgement (BOJ) or additional assessments as often as it
may desire, the taxpayer, has the right to raise an objection. Where a taxpayer disagrees with the
assessment made on him, he may give a notice of objection to the relevant tax authority to
review, revise or discharge the assessment.

For the notice of objection to be valid, it must:

− Be in writing
− State precisely the ground for objection to the assessment
− Be made within thirty (30) days from the date of service of the notice of assessment.
− Under CITA in particular, the grounds of objection must include the figures which the
company claims should be stated on the assessment notice in respect of:
− Assessable and total profit of the company for the relevant year of assessment and,
− Tax payable for the year of assessment.
Upon the receipt of a letter of objection against its assessment, the FIRS may request the
company to furnish such details and information as the FIRS may deem necessary. The
FIRS may also request for the production of books of accounts and other documents
relating to the profits of the company and may summon any person who may be able to
give evidence pertaining to the assessment to attend for examination/interview with an
officer of the FIRS. Following the production of additional documents and/or
information, the FIRS and the taxpayer may reach an agreement, whereby the FIRS may
review, revise or even discharge the assessment. If an agreement is reached with the
taxpayer, then FIRS can go ahead and act accordingly. Where necessary, a revised notice

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of assessment will be served on the taxpayer for payment as agreed with the tax
authorities.
Where the tax authorities and taxpayer are not able to agree, the tax authorities
shall proceed to give a “Notice of refusal to amend” its assessment to the taxpayer.
The taxpayer may file an appeal against the assessment within thirty (30) days of the
service on him of the Notice of refusal to amend. This is where the taxpayer wishes to
pursue the matter further. The taxpayer will give notice in writing to the secretary to Tax
Appeal Tribunal (TAT).
A notice of an appeal shall specify the following:-
− The official number of the assessment and the year of assessment for which it was
made.
− The amount of the tax charged by such assessment
− The amount of the total profits upon which the tax was charged as appearing on
the notice of assessment.
− The date on which the appellant was served with the notice of refusal by the
Board to amend the assessment as desired.
− The precise grounds of appeal against the assessment, such grounds shall be
limited to the grounds stated by the appellant in its notice of objection.
− Address for service of any notices, precepts or other documents to be given to the
appellant by the secretary to the Tax Appeal Tribunal.

Once the matter goes on appeal, the two parties in the appeal, the appellant (the
taxpayer) and the respondent (FIRS) may be represented by solicitors.

A company may discontinue an appeal it has filed with the TAT by giving a notice in
writing to that effect to the secretary to TAT before the hearing of such appeal.
Similarly FIRS may revise the assessment which is the subject of the appeal after
agreeing same with the company. TAT after receiving notice of such an agreement
any time before hearing of the appeal, the appeal shall be treated as being
discontinued. Where an appeal has to be heard, the hearing before the TAT shall be
made public. The onus of proving that the assessment complained of its excessive
shall be on the appellant. After hearing of the Appeal, the TAT may confirm, reduce,

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 increase, annul or discharge the assessment or make such order thereon as they deem
fit. Where either FIRS or the taxpayer is aggrieved by the decision of the Tax Appeal
Tribunal, then any of the parties can further appeal to the Federal High Court but only
on point of Law. The appeal must be filed with the Federal High Court within 30 days
of the judgment of the TAT. Where a company appeals against the judgment of the
TAT, the tax decided upon by the TAT shall be paid within one month of the
notification of the amount payable by the Board on the company. Further appeals, on
point of Law only can be made by a party aggrieved by the decision of the Federal
High Court to the court of Appeal and thereafter to the Supreme Court.

2. Various activities that would take place before embarking on field audit are:
The activities that a will be carried out on the financial statements are comparative financial
statement analysis and ratio analysis.
Comparative financial statement analysis. This involves the comparison of the amount of each
item on the financial statements of a taxpayer with similar item on the financial statements of
another year or other years. Comparative financial statement analysis is also referred to as
horizontal anaylsis.

Ration Analysis
Ration analysis is a popular and widely used tool of financial ratio as the basis or yardstick for
analyzing and interpreting the financial condition and performance of a firm financial or
accounting ratio are calculated by expressing one accounting figure in terms of another
accounting figure. A ratio will be meaningful only if there is a relationship between the two
figures,
(The numerator and the denumerator) used in the computation e.g there is an important
relationship between profit and sales. Secondly the ratios calculated must be skillfully and
properly interpreted for them to be useful. A good assessment about a firm’s performance cannot
be made by merely considering the firm’s ratios for a single period. The analysis will be
enhanced if a comparison can be made between the stick for a given period with some yard stick
or standard such as ratios of previous accounting periods, projected future ratios, ratios of similar
firms or industry averages.

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3. What tax auditor should look out for in the following:-
(a) Turnover
(b) Purchases
(c) Fixed assets

Turnover
- Cash sales register shall be fully checked with the carbon copies of the cash sales bill.
- Summary of daily cash should be checked.
- Sales man’s summary, gateman’s summary, and cashier summary should be compared.
- Dates of cash sales bills and the date on which the receipts are recorded in the cash book
must be the same. If the dates differ, the same should be inquired into.
- Where cash sales bill are cancelled, all copies including original copy dully cancelled
should be kept in record.
- Where it is a policy of the company to allow a discount, it should be verified and
reconciliation should be made with record of cash received.
- Compare the amounts of sales disclosed in the financial statements with the amounts
stated in the management accounts, year end trial balances, sales ledger, sales day book,
and sales figures stated in the minutes of the Board meeting. Note the difference (if any).
- Extraction of credit lodgements in all the company’s bank statement.
- Excluding loans & overdrafts etc.

PURCHASES
- Compare the purchases stated in the financial statements with amounts in Trial balances,
management accounts and general ledger. Note the difference (if any).
- Also review the purchase daybooks as well as cash books and compare the disclosed in
the ledger with the amount disclosed in the financial statements.
- Note some entries in the general ledger preferably material amounts and round figures
and call for their third party purchase invoices.
- Obtain information on debit notes, creditors’ balance (opening and closing) as well as
discount received.

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 - If there are no purchase ledger and purchase day books, then extract the purchase
receipts/invoices to determine purchases for the year.
- Ensure that VAT is not written to P & L Account.
- Note that provisions and proforma invoices are not allowed for tax purposes because they
do not represent actual purchases.

FIXED ASSETS
The objective of fixed asset tax audit is to ensure that capital allowances are not claimed on
assets which are neither purchased nor brought into use during the relevant basis period as well
as confirming correctness of rate of capital allowances used.
Disposal giving rise to capital gains taxes are also detected through the process of reconciling
movement of fixed assets.

The following audit procedures should be carried out

- Obtain the schedule of fixed assets and note addition for each year.
- Agree the schedules to the financial statements and other tax returns.
- Insist on third party documents evidencing ownership and acquisitions like purchase
invoices, import documents for imported assets.
- Disallow capital allowances earlier claimed on all assets that ownership and usage could
not be proved.
- Ensure that appropriate rate is used for the computation of capital allowances.
- Existence: The tax auditor should confirm that all the assets of the company are
physically existing on the date of balance sheet etc.

4. Techniques for gathering Audit evidence are:-

- Physical inspection of tangible assets
- Inspection of records and documents
- Observation
- Inquiry
- Confirmation
- Re-computation

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 - Retracing book-keeping procedures, that is checking postings
- Analytical procedures.

- Physical inspection tangible assets.

This can provide reliable audit evidence about the existence of the assts. It may not be a
good technique for confirming ownership or value of the assets.
- Inspection of records and documents. These could be documents prepared outside the
company e.g. receipts, invoices, etc or documents prepared inside the company e.g
receipt, invoices, minutes of directors meetings etc.

- Observation: It is often said that “seeing is believing” so that auditor can see things for
himself by watching how others are performing certain procedure or process e.g. stock
taking.
- Inquiry: Asking question said seeking information from knowledgeable persons within
and without the organization can enable the auditor to obtain information not previously
possessed or to corroborate information previously made available to him.
- Re - computation
The auditor can confirm independent calculations, additions, subtractions, etc to check
the arithmetical accuracy of source documents and records.
- Analytical procedures. The auditor can analyse and compare related figures, trends, ratios
and other statistics such analytical review may reveal unusual or unexpected variations or
trends which could call for further investigations.

5. Internal Control and essential features of Internal control

Internal control can be defined as the whole system of controls, financial and otherwise,
established by the management in order to carry on the business of the enterprise in an orderly
and efficient manner, ensure adherence to management policies, safeguard the assets and secure
as far as possible the completeness and accuracy of the liabilities.

Features of Internal Control

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The guideline on internal control puts forward eight essential features of systems on which an
auditor may place reliance.
i. Plan of organization
The plan covers the activities of both management and staff at all levels regarding
responsibilities, duties, authorities and reporting.
ii. Segregation of duties
No single person should process a transaction from initiation to conclusion. More than
one person should be involved in the processing and recording of transactions. Areas that
should be properly segregated are initiation, authorization, execution, custody and
recording.
iii. Authorization and approval
Every processed and recorded transactions should be authorized and approved by an
authorized officer. Limits, if any, should be specified.
iv. Physical
Physical custody of, and access to assets should be properly controlled in respect of
valuable, exchangeable and portable goods. Such controls may include use of locks or
passwords.
v. Personnel
Competent and experienced staff should be involved in the processing of transactions.
Appropriate recruitment procedure be established to identify and employ the right caliber
of staff and be well motivated.
vi. Acknowledgement of performance
There should be procedure that ensures that who performs an assignment acknowledges it
by signature, initials or any means possible.
vii. Arithmetical and accounting
There should be procedures that ensure that documents are subjected to casting test and
appropriately coded. This will include footings, cross-footing, recomputation, use of total
accounts and sequence tests.
viii. Management
Management impression and response to internal control matters will be a great extent
affect staff attitude to it. Management should (a) make the staff control conscious and (b)

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 create general control mechanisms which should include supervisory controls, budgeting
and budgetary controls, internal audit, preparation and review of management accounts.

CHAPTER FIVE
5.0 INTERVIEW TECHNIQUES
5.1 Learning objective
At the end of his chapter, readers should be able to:
− Understand the preparation for interview
− Know the purpose of the meeting
− Itemize the preparations to be made in readiness for the meeting.
− Explain the proceedings at the meeting to ensure its proper conduct.
− Explain the meanings of documentation of minutes of meetings and interview.
− Explain the objective of performing a tour of the taxpayer’s premises.
− Understand the reasons why a positive relationship should be maintained with the
taxpayer.

5.2 PREPARATION FOR INTERVIEW

a) PREPARATION FOR PRE-AUDIT MEETING

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Set up a pre-audit meeting between the audit team, the taxpayer, his auditors and consultants. In
this regard;
- Call the representative of the taxpayer and inform them of the impending tax audit and
arrange a mutually acceptable date for the commencement of the audit to be preceded
with pre-audit meeting. In this content a representative means the managing director, the
director of finance of the company or a very senior member of the company’s top
management who can take decision. The taxpayer is advised to invite his tax consultants
and or auditors.
- Follow up with a formal letter to commence the tax audit and inviting the taxpayer with
a suggestion that the taxpayers invite his auditors and consultants to the pre-audit
meeting scheduled to hold on the agreed date in the taxpayers premises
- Apart from the scheduled date of meeting, the letter should request for update of
taxpayers background information and accordingly a copy of the background
information questionnaire, form A4, should be attached for completion and returned to
the tax audit unit concerned on or before the day of the pre-audit meeting.
- The letters of invitation to attend the pre-audit meeting should be signed by the head of
audit unit. Ensure that proper attention is paid to the relevant provisions of the tax laws
empowering the tax officers to carry out their statutory duties e.g the FIRS establishment
act, sections 26, 29 and 53.
- Produce a list of schedules required for the audit. The list should be sent to the taxpayer
along with the notice of the pre-audit meeting, so that they can be available on
commencement of the field audit work.
- Review taxpayers tax status. Relevant information can be obtained from the web portal
and copy of receipts from the taxpayers file regarding the amount of taxes so far paid.
Note any outstanding assessment.

b) Objectives of Pre-Audit Meeting

- Informing the taxpayer the purpose of the audit.

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 - Confirming background information of the taxpayer earlier obtained in the permanent
Note Jacket of Assessment file.
- Getting other relevant facts that are not available in the file.
- Familiarizing with the company’s accounting and operational systems in order to
ascertain: -
- Whether the accounting system is manual or computerised.
- The invoicing system that is in place for sales and purchases.
- All cash received are banked intact before expending from it.
- Giving the taxpayer opportunity to express his/her views on the audit.
- Seeking the cooperation of the taxpayer in terms of providing books, records, documents
and explanation where necessary etc.

5.3 MANAGEMENT OF INTERVIEW PROCESS

PRE-AUDIT MEETING
Start the field audit work with a pre-audit meeting in accordance with the date earlier arranged.
In other to properly focus on the objectives of the meeting the following should be noted;
- Ensure that the chief executive or any of the executive director of the taxpayer and his
consultants/auditors are available to attend the meeting. Where the taxpayers fails to
allow the pre-audit meeting to hold and after several attempts to convince the taxpayer to
allow the pre-audit meeting to commence, the head of audit unit should refer the matter to
the legal and prosecution department which will take over the matter by invoking the
provision of the FIRS establishment act section 41.
- The team leader should chair the meeting and should introduce members of the tax audit
team
- Find out from the taxpayer who is to act as a liaison or contact person between the Tax
office and the taxpayer’s Management and ensure appropriate introductions are made
- Get one of the audit team members who has good listening and typing skills to take notes,
compose and type the minutes of the meeting as it progresses
- Update the relevant taxpayers file and tax audit database as appropriate
- Where the form is partly completed agree on a date the taxpayer will provide the missing
information

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 - Obtain brief information on the taxpayers accounting system, type of record being
maintained, extent of computerization and the software in use and arrange to review the
detail accounting records with the various taxpayers officials in charge
- Ask the taxpayer to submit the list of schedules required for the audit
- Ensure that all important issues are discussed and agreed at the meeting or at least a
position is adopted at the pre-audit meeting.
- At the end of the meeting, the minutes should be typed, briefly reviewed and signed by
representatives of the Tax office, the taxpayer and his tax consultants/ auditors and copies
filed in the tax audit file. The team leader must ensure that the minutes of the meeting are
prepared and signed by all concerned before completing the field audit.
While conducting your initial meeting it is important for you to ask questions that will allow you
to evaluate the reliability and accuracy of the taxpayer’s books and records. The more reliable
the taxpayer’s records, the more they can be used to determine the correct amount of tax that is
required to be paid. You should also determine what specific books and records the taxpayer
keeps. This will enable you to determine the type of audit testing that should be used.
- Direct testing will be more readily used with highly reliable books and records.
- Indirect testing is more suitable when the books and records are unreliable or non –
existent.
The reliability of the books and records will determine the extent to which each type of testing is
used.
Before proceeding to your audit testing you need to gather detailed information about the
taxpayers business. This will help you understand the taxpayer’s specific circumstances and
allow you to continue the risk assessment process while you complete the audit.

In preparing for this initial meeting, you need to develop an interview questionnaire that focuses
on several key areas. They are:
- Background information: You must obtain an understanding of when the taxpayers
business commenced and what their main products and services are. This information
will assist you in customizing your audit plan and audit testing to the taxpayer’s specific
situation.

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 - Business banking: You need to determine where the taxpayer conducts their banking,
the types of data they receive from their bank, and whether they have any loans. You will
refer to this information in numerous ways as you conduct your audit testing.
- Books and records: You need to understand the types of books and records the taxpayer
keeps as well as how they record their transactions. You should also determine if they
receive assistance from an accountant or bookkeeper. If they do, you need to understand
what that support entails. Since a significant component of your audit involves working
with the taxpayer’s books and records, you need an in-depth knowledge of how they are
maintained. it is important for you to ask questions that will allow you to evaluate the
reliability and accuracy of the taxpayer’s books & records.

Non – business banking

You need to be familiar with where the taxpayer conducts their non – business banking
and whether they have any non-business loans. It is likely that information found in the
taxpayer’s non- business banking will have a direct impact on the audit of their tax returns.

Other considerations
This section allows you to ask questions that are specific to items in your audit plan. It also
allows you to clarify issues that you noted during your file review. This is an important area, as
you should strive to customize your interview questions to your particular audit.

5.4 Preparation for Initial Interview

- What economic conditions have affected the business of the company during the period
under review?
- Have you opened new branches in the last three years? How many employees do you
have, by job category department?
- Do you have a cost accounting system?
- Describe your software
- Have you sold any assets or businesses in the last three years?

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 - At what point are bad debts determined? Etc
- Documentations of minutes of meetings and interview.

(a) Weak or Non-Existent Internal Controls

-> Reduced likelihood that the calculated taxes are correct.
-> Less reliance placed on the taxpayer’s books and records and reported data.
-> Indirect testing will be used more than direct testing.
-> More audit testing will be required to arrive at your conclusion.
Tour of the taxpayer’s premises
The preliminary meeting should be concluded with a tour of the taxpayer’s premises. This tour
will allow the auditor to see the taxpayer’s business in operation and it will help the auditors to
understand the nature of the taxpayer’s business. During the tour, the auditor should ask relevant
questions and be a keen observer of that which is specific to the taxpayer’s business. An
effective tour will allow you to observe:

• The size and scale of taxpayer’s operation;

• The way the taxpayer’s conduct their business; and the manner in which the taxpayer
processes work’
• The tour will also: Show the taxpayer that the tax auditors are interested in conducting a
professional audit;
• Enable the tax auditors to confirm and clarify information you received during your
interview; and
• Assist the tax auditors in risk assessment of the tax file.

TESTING
While conducting your initial meeting, it is important for you to ask questions that will allow you
to evaluate the reliability and accuracy of the taxpayer’s books and records. The more reliable
the taxpayer’s records, the more they can be use to determined the correct amount of the tax that
is required to paid. You should also determine what specific books and records the taxpayer
keeps. This will enable you to determine the type of audit testing that should be used.

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 ❖ Direct Testing – this will be used for taxpayers with highly reliable books and records
❖ Indirect Testing – is more suitable when the books and records are unreliable or non-
existent.
The reliability of the books and records will determine the extent to which each type of testing to
be used. When the taxpayer has very strong internal controls and very reliable accounting
systems, direct testing can be used to verify the amount that the taxpayer has reported.
One of the main risks associated with auditing revenue is that transactions have not been
recorded into the taxpayer’s books and records. If this is the case, the amount will not normally
be summarized in the taxpayer’s accounting data. This will generally result in the taxpayer’s
income and income taxes being lower than what they should be.
Addressing this risk area requires the use of indirect testing. The auditor should conduct direct
and indirect revenue testing in every audit that is conducting.

5.5 Audit report

The audit Report is very important and should be rendered immediately an audit is completed. It
is to contain everything of importance about the taxpayer and details of audit work done . So
audit reports tend to expose taxpayer’s weaknesses and strengths.
An audit report should always be completed with the auditors recommendations after the
findings have been stated, which should include details of indebtedness.
Recommendations can include the need for extended audit, tax investigation or even prosecution

5.6 Post-tax audit meeting

- Review the findings, conclusions and recommendations for evidential support in the files.
- Prepare an agenda for the meeting. Ensure that items to be discussed with the Taxpayer have
been properly listed and cross referenced to the appropriate supporting work papers.
- List all open items yet to be addressed and any additional information that may be required.
Ensure that the taxpayer is aware of the need to provide the information before or on the day of
the meeting.
- Hold an audit completion meeting with the taxpayer in the taxpayer’s premises between the
audit team and the management of the company. The meeting, which should be shared by the
Head of audit unit, should use the occasion to express appreciation to the company for providing

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the team with all the necessary information, documents, records etc and discuss all the audit
findings, conclusions reached and any addition tax assessments to be raised. The agenda must be
strictly followed in order to properly focus the meeting on the issues that are yet to be resolved,
and the company’s management attention is drawn to any outstanding information or documents
that are yet to be provided. The company’s management would also be informed of the
outcome/findings of the audit team during the exercise. The company would have the
opportunity to shed more lights on areas not yet clear and express their disagreement with any of
the issues they the need for. The meeting should also agree to the steps necessary to address all
exceptions noted. The end of the meeting marks the end of the field tax audit and the team will
leave the taxpayer’s premises.
- Minutes of the meeting should be prepared and signed by both the taxpayer and the tax official
at the end of the meeting. The decision reached on each item discussed with the taxpayer should
be noted. In this regard, each item should be marked agreed, not agreed, pending or requires
additional information in other to avoid any confusion as to what was agreed at the meeting.
- Send a letter of findings to the taxpayer asking for a reconciliation meeting along w
5.7 Human relation aspects of Field Interview
(a) Preparing for and conducting the Initial meeting
When conducting your initial interview you should try to build a positive relationship
with the tax payer
When auditor is dealing with a taxpayer you should always strive to:
− Be courteous and considerate
− Provide accurate and clear information that is by asking appropriate and relevant
questions
− Behaving in a professional manner
− Being cooperative
− Be fair and objective
− Treat every information with respect and privacy
However, maintaining a positive attitude and treating the taxpayer with respect will
have a significant impact on your ability to conduct a professional audit. It will also
help build the taxpayer’s level of confidence and respect for the tax system.

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 Despite your best efforts, there will be times when an initial meeting with the
taxpayer will be unproductive. If the taxpayer is uncooperative during your meeting
you need to be firm yet be professional. Let the taxpayer be awared that their
cooperation will assist both parties in completing the audit in a timely and accurate
manner. If your attempts to continue with a constructive meeting fail, you should
terminate the interview and re-schedule it for a later date. Sometimes carrying on with
an unproductive meeting can do more harm than good and it may damage the
relationship that you are trying to build.
If eventually your attempts to meet with the taxpayer do not succeed, you should refer
to your superior officer for further guidance.

(b) Evaluating the books and records

During the meeting it is important to ask questions that will allow you to evaluate the
reliability and accuracy of the taxpayer’s books and records. The more reliable the
taxpayer’s records the more they can be used to determine the correct amount of the tax is
required to be paid.
Auditor should also determine what specific books and records the taxpayer keeps. This
will enable you to determine the type of audit testing that should be used.
• Direct testing
This will be more readily used with highly reliable books and records.
• Indirect testing
It is more suitable when the books and records are unreliable or non-existent. The
reliability of the books and records will definitely determine the extent to which
each type of testing is used.
Before conducting audit testing, auditor should meet the taxpayer to gather
detailed information about their business. This information will help the auditor to
understand the taxpayer’s specific circumstances and allow the auditors to
continue the risk assessment process while completing the audit.

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(c) Reviewing the Internal Controls
Internal controls are policies, procedures or systems a taxpayer puts into place to ensure
that they meet various objectives including accurate financial reporting.
A very good internal control will help to ensure that the objectives of the business are
being met, while; not too good internal control will have the opposite effect. The primary
objective in reviewing the taxpayer’s internal controls is to determine if auditor can rely
on their data. This level of reliance will have a direct impact on the assessment of
whether the taxpayer’s income taxes have been properly calculated.
During the initial meeting with the taxpayer, it is important to determine if they have
implemented any internal controls. It is equally important to confirm the strength of those
internal controls whether they are strong or weak. It is necessary to establish this facts
before commencing audit testing since is going to have direct impact on the work.
During audit it is necessary to consider information that was prepared by others that is
relevant to your audit objectives. e.g. working papers prepared by an accountant working
for the taxpayer. Having reviewed and documented the internal controls that are in place,
the auditor must use his professional judgment to determine the type and extent of audit
testing that he will choose to conduct for each area of the file.
It is possible that one area of the taxpayer’s business will have strong internal controls,
such as systems used to record expenses, while it is also possible that another area of that
same business may have weak internal controls, such as the systems used to record
sales/revenues. Auditor should spend more time to audit the areas that have weak internal
controls as these may be the highest risk areas.

(d) Performing a tour of the taxpayer’s premises

The audit team should conduct a tour of the taxpayer’s premises as the final step of initial
meeting. This tour will allow:
− The auditor to see the taxpayer’s business in operation
− The auditors to understand the nature of taxpayer’s business
− The tour provides a visual picture of the business and gives an opportunity to validate
information, received during the initial interview.

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 During the tour auditor should ask relevant questions and be a keen observer of that which is
specific to the taxpayer’s business. An effective tour will enable the auditor to observe:-
− The size and scale of the taxpayer’s operation;
− The way the taxpayer conducts their business,
− The manner in which the taxpayer’s processes work.
− If fixed assets reported on the tax return are not found on the tour, inquire as to their
location or disposed.
− Are there as many time cards in the factory as people working?
− Observe equipment used for post production process such as packaging, haulage etc.
Ask if any of these services are performed elsewhere if not seen physically on the
premises.

However, this will also convince the taxpayer that auditors are interested to:-
− Conducting a professional audit
− Confirming and clarifying information received during initial interview, and
− Assist in your risk assessment of the file.
− The auditor should look for indications of the business success, for example if it is
observed that the taxpayer or his place of business has luxurious assets, this may
suggests that the business is very profitable. This could have a direct relationship to the
amount of taxes that should be paid and the type of audit tests that should be conducted.
Notes should be taken during the tour so that reference can be made to relevant items at
later stages of the audit exercise. Once the tour is completed, the interview with the
taxpayer can end. The tax auditors should continue to contact the taxpayer, as it is likely
that additional questions relating to the audit of the books and records may be asked.

5.8 Post Field Tax Audit Meeting

The post field tax audit meeting should be held immediately after the end of the field audit
between the tax auditors and the taxpayers and their representative at the taxpayer’s premises.
The meeting which should be chaired by the Head of audit unit. The purpose of this meeting is to
obtain any further outstanding information or documents that may be available from the

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taxpayer’s management and to answer outstanding questions that arose during the field audit
work.
− Prepare an agenda for the meeting.
− Ensure that items to be discussed with the taxpayer have been properly listed and cross
referenced to the appropriate supporting work papers.
− List all open items yet to be addressed and any additional. Ensure that the taxpayer is
aware of the need to provide the information before or on the day of the meeting.
The Head of Audit should use the occasion to express appreciation to the company for providing
the team with all the necessary information, documents, records etc. and discuss all the audit
findings, conclusion reached and additional tax assessments to be raised. The agenda must be
strictly followed in order to properly focus the meeting on the issues that are yet to be resolved,
and the company’s management attention is drawn to any outstanding information or documents
that are yet to be provided. The company would have the opportunity to shed more lights on
areas not yet clear and express their disagreement on matters that they need clarification. The
meeting should also agree to the steps necessary to address all exceptions noted. The decision
reached on each item discussed with the taxpayer should be noted. In this regard, each item
should be marked agreed, not agreed, pending or requires additional information as appropriate
in order to avoid any confusion as to what was agreed at the meeting.
Minutes of the meeting should be documented in writing, signed by both parties and a copy
given to each stakeholder. This marks the end of field audit and departure of tax auditors from
the taxpayer premises.

5.9 Post Audit (close out) Meeting

Immediately after the review of findings hold an audit completion meeting with the taxpayer.
The meeting, which should be chaired by the Head of audit unit or team leader, should discuss
all audit findings, conclusions reached and any additional tax assessment to be raised. The
agenda must be strictly followed in order to properly focus the meeting on the issues to be
resolved. The meeting should also agree on steps required to address all exceptions noted. The
minutes of the meeting should be prepared and signed by the taxpayer, and the FIRS officers at
the end of the meeting. The decision reached on each item discussed with the taxpayer should be

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noted. In this regard, each item should be marked agreed, not agreed, pending or requires
additional information in order to avoid any confusion as to what was agreed during the meeting.
Forward a letter of findings to the taxpayer asking for a reconciliation meeting along with a copy
of the minutes of post audit meeting.

REVISION QUESTIONS FOR CHAPTER FIVE

1) You have been chosen by the management of FIRS to lead a team to conduct tax audit
into three large tax companies.
a) You are required to state the areas/matters that you will discuss with the company’s
management or its representatives during the initial meeting before the commencement of
the field audit.
b) State the possible venue of the initial meeting in order to respect the taxpayer’s privacy.
2) Explain the main objectives of holding the exit meeting after the completion of the field
audit exercise
3) What are the objectives of performing a tour of the company’s premises?

4a) State and explain the two types of tax audit report
(b) What are the qualities of a good tax audit report

5(a) What is an indirect testing?

(b) State and explain briefly three (3) indirect audit tests you will carry out on the
taxpayers income assigned to you.

SUGGESTED SOLUTIONS FOR CHAPTER FIVE

1. Pre-audit meeting.

The team Leader will use the opportunity to:

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 i. Introduce the audit team members.
ii. Brief the taxpayer on the purpose the audit.
iii. Obtain background information about the company or confirm background
information earlier obtained from the company’s file in the tax office or other
sources of information. Such information may include: nature of the business,
corporate structure, branch network, auditors or tax consultants, bankers,
solicitors, secretaries, directors, related companies, shareholding structure, date of
incorporation, date of commencement of business, registered address, Taxpayer’s
Identification Number (TIN) etc.
iv. Solicit the co-operation of the taxpayer in terms of providing necessary
information, books, records etc promptly.
v. Inquiry about the accounting and operational systems of the company.
vi. Respond to questions from the company’s representatives on matters that they
need clarification, e.g. the purpose of audit, period covered, duration of the field
audit exercise, books/documents/information required for the audit etc.
vii. The team leader should chair the meeting.
viii. Ensure that the minutes are reviewed and signed by all parties present.
ix. Update the relevant taxpayers file and tax audit database as appropriate.
x. Where the form is partly completed agree on a date the taxpayer will provide the
missing information.

1b) The possible venue of the initial meeting:

i. The taxpayer’s office or business premises

ii. Office of the taxpayer’s authorised representatives ie tax consultant office.

2. Post audit meeting

The objectives of holding the exist meeting. The team leader will use the opportunity to:

− Thank the company for providing the necessary information, documents, records etc.

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 − Bring to the attention of the company management any outstanding information or
document that should be provided or outstanding matters/issues that need to be resolved.
− Brief the company management on the result of the audit exercise.
− Determine whether the company agrees with the result of the audit work.

3. You should conduct a tour of the taxpayer’s premises as the final step on your initial
meeting.

− This tour will allow you to see the taxpayer’s business in operation.
− The tour provide a visual picture of the business and gives an opportunity to validate
information received during the initial interview.
− If fixed assets reported on the tax return are not found on the tour, inquire as to their
location or disposal.
− Are there as many time cards in the factor as people working?
− Observe equipment used for post production process such as packaging, haulage etc. ask
if any of these service are performed elsewhere if not seen on the premises.

During the tour, the auditor should ask relevant questions and been a keen observer of that which
is specific to taxpayer’s business.

An effective tour will allow you to observe:

▪ The size and scales of taxpayer’s operation.

▪ The way the taxpayer’s conduct their business.
▪ The manner in which the taxpayer processes work.

The tour will also:

▪ Show the taxpayer that the tax auditors are interested in conducting a professional audit.
▪ Enable the tax auditors to confirm and clarify information received during the interview.
▪ Assist the tax auditor in risk assessment of the tax file.
▪ The auditors should work for indications of the business success e.g. if it is observed that
the taxpayer or his place of business has luxurious assets, this may suggest that the
business is very profitable. This could have a direct relationship to the amount of taxes
that should be paid and the types of audit tests that should be conducted.

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 4. The two types of tax audit report are:
i. Interim tax audit report
ii. Final tax audit report

i. Interim tax audit report

On completion of the field audit, an audit report has to be written. The initial tax audit is
the interim audit report. There may be need to produce an interim audit report for the
management before the final audit report. The team members will submit their individual
reports (Sub-reports) to the team leader. The team Leader will review the sub reports,
discuss with the team members, make necessary amendments and write interim audit
report. The interim audit report should highlight details of all the findings that may result
in additional tax assessment as well as areas of possible dispute with the taxpayer and
suggestion on how to resolve them. The report will be sent to Headquarters of the audit
Department, as appropriate, for review and directive on the matters reported therein.
Thereafter a reconciliation meeting may be held between the tax auditors and the tax
payer and/or his/its representatives
ii. Final tax audit report.
The final tax audit report is written by the team leader after the reconciliation meeting
with the tax payer. The report will contain, among other things, the additional assessment
agreed at the reconciliation meeting as well as the assessment disputed by the taxpayer
and how they were arrived at. The report must make recommendations etc.
(b) Qualities of a good tax audit report
- The report must be accurate
- The report must be clear
- The report must be timely prepared
- The report must avoid overstatement.
- The report should be devoid of subjective comments. It should contain
factual information. Assumptions should be avoided as much as possible.
- The report should be disclose relevant computations
- The report should be professionally written.
- It should be avoid the use of offensive Language.

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 - The report must be presented in a logical and concise manner
- Conclusions and recommendations stated that could be substantiated.
- Conclusions and recommendations stated in the report should be based on
facts that could be substantiated.
The report must be duly signed etc.
(4) Post Audit Meeting.
The team leader will use the opportunity to:
- Thank the company for providing the necessary information, records etc.
- Bring to the attention of the company’s management any outstanding
information or documents that should be provided or outstanding
matters/issues that need to be resolved.
- Brief the company’s management on the result of the audit exercise the
result of the audit work.

(5) An indirect testing is a tax audit procedure that focuses on transactions that are
not included in the tax payer’s books and records. In indirect audit testing, an
auditor makes use of externally generated audit evidence to establish those items
that were not recorded in the books of the company that is being audited.

Indirect audit test to be carried out on the tax player’s income.

- Analysis of bank deposits, provided that all or most of the company’s
sales proceed were paid into banks, an analysis of deposits as reflected in
the statements of accounts of the company obtained from its bank can
reveal to a great extent the undisclosed revenue.
- Analysis of cash inflows and outflows. A comparison of the company’s
cash inflows (receipts) with cash outflows (payments) within the same
period might indicate that the amount of cash out flows was greater than
cash inflows. That excess of cash outflows over cash inflows could be
assumed to be undisclosed income or turnover.
- Computation of the taxpayer’s net worth at the end of each year. This will
reveal changes in the taxpayer’s net worth year by year for comparison

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 with the income declared by the taxpayer. E.g, if the net worth at the end
of the current year is higher than that of the previous year, the change in
the net worth could be assumed to be the taxpayer’s income in the current
year.
- Confirmation. The tax auditor can obtain or confirm certain information about the
company’s revenue from knowledgeable independent third parties e.g customers,
debtors.

CHAPTER SIX

6. AUDIT EVIDENCE: OBTAINING, EVALUATING AND RECOREDING

OUTLINE

6.0 Audit evidence: Introduction

• Definition
• Sufficient and appropriate
6.1 Financial statements assertions
6.2 Obtaining audit evidence:
• Use of financial statements assertions in obtaining audit evidence
• Audit procedures for obtaining audit evidence
• Sampling technique
• Sources of audit evidence
6.3 Evaluating audit evidence
6.4 Recording audit evidence
6.5 Identification and assessment of risks
6.6 Reliance on the work of an expert
6.7 Reliance on the work of internal auditor
6.8 Management representation

6.0 Purpose

After studying this section, the reader should be able to:

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• Understand audit evidence and the reason why auditors must obtain audit evidence;
• Understand what constitute sufficient and appropriate audit evidence;
• Identify and describe the procedures for obtaining audit evidence;
• Identify and evaluate audit evidence to support the financial statement assertions;
• Apply analytical procedures to support audit evidence;
• Understand and explain specific audit problems and procedures concerning related parties
and related parties’ transactions;
• Evaluate the use of written management representations to support other audit evidence;
• Recognise and explain when reliance can be placed on the work of an expert; and
• Assess the appropriateness and sufficiency of the work of internal auditors and the extent
to which reliance can be placed on it.

Audit evidence: Introduction

This is all the information used by the auditor in arriving at the conclusions upon which he is
basing his audit opinion, this includes all the information contained in the accounting records
underlying the financial statements and all other information.
There are three basic issues regarding audit evidence, these are:
• The auditor must obtain evidence to support financial statement assertions;
• The evidence obtained by the auditor must be sufficient and appropriate; and
• The auditor must evaluate and documents such evidence sufficiently.

According to ISA 500.4, the objective of the auditor is to design and perform audit
procedures in such a way as to enable the auditor to obtain sufficient appropriate audit
evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.

Sufficient and appropriate audit evidence

ISA 500 states that there should be sufficient and appropriate audit evidence for the auditor
to be able to draw reasonable conclusions on which to base his audit opinion. This means
that the auditor should obtain enough reliable evidence upon which he can draw reasonable
conclusions to form an opinion on the financial statements which he has audited.

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 Sufficiency and appropriateness of audit evidence are interrelated and both apply to tests of
controls and substantive procedures. Sufficiency is the measure of the quantity of audit
evidence while appropriateness refers to the measure of the quality or reliability of the audit
evidence.

Factors that may influence the sufficiency of audit evidence are:

▪ Materiality of the item being tested;

▪ Level of audit risk involved;
▪ Persuasiveness of the audit evidence obtained;
▪ Population of the item –how large the item is;
▪ Client’s accounting and internal control system; and
▪ Client’s financial condition.

However, the auditor is expected to exercise judgement on what the auditor considered to be
sufficient relevant and reliable evidence. The auditor’s judgement will be influenced by factors
such as:

▪ The auditor’s knowledge of the business and its environment;

▪ The risk of misstatement the auditor has identified;
▪ The persuasiveness of the evidence;
▪ The nature of the accounting and internal control system;
▪ The materiality of the item being examined;
▪ The experience the auditor gained during previous audit;
▪ The results of audit procedures; and
▪ The source and reliability of information available.

6.1 Financial statement assertions

Modern auditing theory is of the view that, in preparing an entity’s financial statements, the
management of the entity made some assertions about these reports to the auditor. However,
these assertions cannot be trusted, so the auditor needs to collect evidence that confirms that the
information produced by the management is accurate. The process the auditor uses to confirm
these management assertions on the financial statements is known as, collection and evaluation

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of audit evidence. The auditor is expected to generate evidence designed to reach a conclusion
about each of these assertions.

These assertions are set out in ISA 315 and are in two categories, viz:

▪ Assertions about classes of transactions and events, and related disclosures for the period
under audit (income statement); and
▪ Assertions about account balances and related disclosures at the period (statement of
financial position assertions).

Assertions about classes of transactions and events, and related disclosures

These assertions are:

▪ Occurrence: This is the assertion that transactions and events that occurred and recorded
or disclosed relate to the entity;
▪ Completeness: This is the assertion that all transactions and events that should have been
recorded have been recorded, and that all related disclosures that should have been
included in the financial statements have been included;
▪ Accuracy: This assertion is that amounts and data relating tom recorded transactions and
events have been recorded appropriately with related disclosures appropriately measured
and described;
▪ Cut – off: This is the assertion that all transactions and events have been recorded in the
appropriate financial year or accounting period;
▪ Classification: This is the assertion that all transactions and events have been correctly
recorded in the appropriate accounts; and
▪ Presentation: This is the assertion that all transactions and events are appropriately
aggregated or disaggregated and clearly described and that related disclosures are
relevant and could be understood in the context of the requirements of the appropriate
financial reporting framework.

Assertions about account balances and related disclosures

These are:

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 ▪ Existence: This is the assertion that all assets, liabilities and equity interests exist;
▪ Rights and obligations: This is assertion that the entity owns or controls the rights to the
assets and liabilities are those of the entity;
▪ Completeness: This is assertion that all the assets, liabilities and equity interests that
ought to have been recorded have been recorded and all related disclosures that ought to
have been included in the financial statements have been included;
▪ Accuracy, valuation and allocation: This is the assertion that assets, liabilities and
equity interests are included in the financial statements at appropriate amounts and any
resulting valuation or allocation adjustments disclosures have been appropriately
measured and described;
▪ Classification: This is the assertion that assets, liabilities and equity interests have been
recorded in the proper accounts; and
▪ Presentation: This is the assertion that assets, liabilities and equity interests are
appropriately aggregated or disaggregated and clearly described and related disclosures
are relevant and understandable in the context of the requirements of the applicable
financial reporting framework.

The auditor must generate evidence for each of the items in the financial statements for the
purpose of reaching conclusion on the reliability of the appropriate assertions.

According to Marlene and Aston (2010), in determining whether a particular assertion is relevant
to a significant account balance or disclosure, the auditor should evaluate:

▪ The nature of the assertion;

▪ The volume of transactions or data related to the assertion; and
▪ The nature and complexity of the systems, including the use of information technology,
by which the entity processes and controls information supporting the assertion.

For the auditor, obtaining an assurance about these assertions involve a combination of audit
procedures.

6.2 Audit procedures for obtaining audit evidence

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We discussed earlier that the auditor must obtain audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion. The auditor is required to perform the following
three audit procedures so as to obtain sufficient and appropriate audit evidence:

Risk assessment procedures: These are procedures that will help the auditor obtain an
understanding of the entity and its environment, including its internal control, so as to assess the
risks of material misstatements. The purpose of risks assessment procedures is to provide a
satisfactory basis for the assessment of risks at the financial statements and relevant assertion
levels. However, it has to be borne in mind that risks assessment procedures by themselves do
not provide sufficient appropriate audit evidence upon which to base audit opinion. The auditor
must supplement the risks assessment procedures with further audit procedures, such as, tests of
controls and substantive procedures.

Tests of controls: This is the audit procedure to test the reliability of the entity’s internal control
systems in preventing or detecting material misstatements at the relevant assertion level. Tests of
controls procedures are necessary under two situations:

• When the auditor’s risk assessment includes an expectation of the operating effectiveness of
the internal controls, the auditor is required to test those controls to support the risk
assessment; or
• When the substantive procedures alone do not provide sufficient appropriate audit evidence.

Substantive procedures: These are the audit procedures aimed at detecting material
misstatements at the relevant assertion level. These include tests of details of classes of
transactions, accounts balances and disclosures, and substantive analytical procedures. The
auditor is required to carry out substantive procedures for two reasons, these are:

• First, because the auditor’s risks assessment is judgemental and may not be sufficiently
precise to identify all risks of material misstatements; and
• Secondly, because of the inherent limitations in internal control due to the risk of
management override, the possibility of human error and the effect of system changes.

The auditor uses a combination of audit procedures to obtain audit evidence to be able to obtain
an assurance about the management assertions discussed above. These procedures are:

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Inspection of assets: The inspection of assets in the accounting records which form the basis of
the financial statements provide confirmation for the existence of the assets, gives evidence of
valuation but does not confirm rights and obligations of ownership. Also, confirmation that
assets seen during inspection are recorded in the accounting records provide evidence of
completeness;

Inspection of documents:Inspection of documentation provides the following confirmation:

• Confirmation to documentation of items entered into the accounting records provides

evidence that the assets exist or the transaction occurred;
• Confirmation that items recorded in supporting documentation are entered into the
accounting records gives proof of completeness;
• Confirmation as to evidence of valuation, measurement, rights and obligations,
presentation and disclosure; and
• It can also be used to test consistency of audit evidence and to confirm authorization.

Observation: This is the auditor watching a procedure being performed, for example, the audit
watching the inventory counts or payment of wages to workers. However, its limitations is that
it is limited as to the point of time the auditor is watching. The person performing the procedure
may act in a different way when not being observed;

Enquiries: These involve seeking information from knowledgeable person insider or external to
the entity under audit. The auditor, however, is to evaluate responses to the inquiries and
corroborate them with other audit evidence. The auditor should be aware that responses to
enquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence. It may also provide information that differs significantly from
other information that the auditor has obtained. Therefore, responses to enquiries may
necessitates the auditor to modify or perform additional audit procedures. The auditor may obtain
written responses to enquiries, if necessary. Enquiries involves the following processes:

• Considering the knowledge, objectivity, experience, responsibility and qualifications of

the individual to be questioned;
• Asking clear, concise and relevant questions;
• Using open or closed questions appropriately;
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 • Listening actively and effectively;
• Considering the reactions and responses and asking follow-up questions; and
• Evaluating the responses;

External confirmation: This is seeking confirmation from another source, external to the entity,
of details in the client’s accounting records such as confirmation of bank balances from the bank
directly or confirmation of receivable balances from the client’s customers directly. This
procedure is specifically covered by ISA 505, external confirmations. However, ISA 305
identifies the following situations where external confirmations are relevant:

• Bank balances and other information from bankers;

• Accounts receivable balances;
• Inventories held by third parties;
• Property deeds held by lawyers;
• Investments held by third parties or purchased from stockbrokers but not delivered at the
end of the reporting period;
• Loans from lenders; and
• Accounts payable balances.

Recalculation: This is checking the arithmetical accuracy of the client’s accounting records, an
example is adding up the client’s year – end trade receivables or recalculating the age analysis of
the client’s year end receivables;

Reperformance: This is the auditor’s independent execution of procedures or controls originally

performed by the client, for example, performing the age analysis of client’s year end receivable
balances.

Analytical procedures: These consist of evaluation of financial information or comparison of

financial and/or non – financial data for plausible relationships and investigating unexpected
fluctuation.

Examples of analytical procedures include:

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 • comparison of previous year’s financial statements with the current year, using ratio
analysis and ensure that any change is in line with expectations;
• A comparison of payroll costs on a monthly basis taking account of wage rises, starters
and leavers;
• A comparison of sales with expenses, on a monthly basis and as a comparison with
previous years; and
• A comparison of the ageing inventories or receivables on a monthly or quarterly basis
and calculation of receivable days or inventory turnover

Audit sampling

Audit sampling is defined by ISA 530 as “the application of audit procedures to less than 100%
of items within a population of audit relevance such that all sampling units have a chance of
selection in order to provide the auditor with a reasonable basis on which to draw conclusions
about the entire population”.

Sample is used by the auditor because:

• It is too costly and time consuming to test all the items in a population; and
• Since audit opinion only gives a reasonable assurance and not a guarantee, there is no
need to waste time and money to test all the items in the population.

However, the use of sampling has its own inherent risk, the risk that the auditor’s conclusion,
based on the sample, may be different from the conclusion the auditor would reach if the entire
population is tested. Therefore, the auditor must draw up his sample in such a way that the
sample selected would be representative of the whole items in the population.

There are two methods of audit sampling and ISA 530 distinguishes between these methods.
These are statistical and non-statistical sampling.

Statistical sampling: This is a sampling approach that involves random selection of a sample
and use of probability theory to evaluate the result and the measurement of sampling risk.

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Non-statistical sampling: This is also known as judgemental sampling. It is a sampling technique
that is not based on probability theory but is based on the auditor’s judgemental opinion about
the population.

Population

ISA 530 defines population as the entire set of data from which the auditor plans to examine a
sample upon which the auditor plans to draw conclusions. The auditor must ensure that the
population is complete, that is, all relevant items must be included in the population. And the
population from which the sample is to be drawn must be appropriate for the audit objective to
be achieved.

Sampling unit

ISA 530 defines a sampling unit as each individual item in the population. In sampling, it is
important that the entire sampling unit have the same characteristics, i. e., the sampling unit must
be homogenous. The auditor is required by ISA 530 to select a sample in such a way that each
item in the population (each sampling unit) has an equal chance of being selected.

Methods of sample selection

There are many methods of selecting sample from a population, some of these are:

Random sampling: This is a sample selection method which gives each of the sampling units an
equal chance of being selected. This is usually achieved by using random numbers to select items
for testing.

Systematic sampling: In systematic sampling, a random starting point is selected from the
population, then subsequent selection of items will be based on equal interval or gap, say every
10th item. For example, it a sample is to be drawn from sales invoices, the invoice will be
arranged serially or in date order. The first invoice will be selected from the entire population to
form the sample.

Haphazard sampling: This is not a scientific method of sample selection. It involves the
auditor, having decides on the total item he wants to use as sample, goes on to select arbitrarily
the sample from the population. This system of sample selection is subject to bias.

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Factors to consider when selecting sample size

The auditor must design his sampling in an appropriate way that will make it effective. An
effective sampling is the one that reduces sampling and detection risks. Therefore, when
designing a sampling, ISA 530 requires the auditor to take the following into consideration:

• Consider the purpose of the audit procedure and the population from which the sample
will be drawn;
• Determine a sample size sufficient to reduce sampling risk to an acceptable low level;
and
• Select items for the sample in such a way that each sampling unit in the population has an
equal chance of selection.

The above factors require the auditor to make a number of key decisions which include:

• The sampling approach to be used (statistical or non-statistical);

• The characteristics of the population from which the sample is to be drawn;
• The sample selection method;
• What constitute a misstatement or deviation;
• The tolerable misstatement or rate of deviation; and
• The expected misstatement or rate of deviation.

All these would influence the sample size to be selected by the auditor.

Sampling risk

This is the risk that the auditor is likely to reach a different conclusion based on the sample than
he would have reached had he tested the entire population. Therefore, to reduce this risk (and by
so doing, detection risk) to a minimum, the sample must be designed in such a way as to be
representative of the entire population.

Also, in deciding on his sample size, the auditor would have to consider the expected
misstatement (for tests of details) or rate of deviation (for tests of controls). The auditor will
make this assessment based on his experience in this area from previous audits and on any

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related areas on the current audit. The auditor will project the results of the sample (projected for
tests of detail) and then compare it with tolerable misstatement/rate of deviation.

Tolerable misstatement: This is a monetary amount set by the auditor in order to address the
risk that the total of individually immaterial misstatements may cause the financial statements to
be materially misstated. A misstatement above tolerable misstatement would therefore, be
considered material (EW, 2019).

Tolerable rate of deviation: This is the rate of deviation from prescribed internal control
procedures set by the auditor in respect of which the auditor seeks to obtain an appropriate level
of assurance that the rate of deviation set by the auditor is not exceeded by the actual.

Non-sampling risk: This is risk that arises from factors that made the auditor to reach an
erroneous conclusion for reasons not related to the sampling risk.

Sources of evidence

There are many sources the auditor can collect audit evidence from., However, the precise list of
these sources will depend on the objective of the audit test the auditor is carrying out and the
nature of the client. The sources include but not limited to:
• The accounting system
• Underlying documentation
• Tangible assets
• Management and employees
• Third Parties experts, solicitors, valuers, etc.
• Customers
• Suppliers
• Insurers
• Banks

6.3 Evaluating audit evidence

ISA 500 sets out some general principles to assist the auditor in assessing the reliability
(appropriateness) of audit evidence. These are summarised as follows:

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 ▪ External evidence, that is, evidence obtained from independent sources outside the entity
under audit, is better than the entity’s records. An example is the confirmation received
from the bank for bank balances and confirmation received from customers in respect of
outstanding receivables;
▪ Evidence obtained directly by the auditor is more reliable than the evidence passed on by
the client. For example, observation of the of the operation of a control by the auditor is
more reliable than inquiry about the operation of that control;
▪ Audit evidence is more reliable when it exists in documentary (written) form. This could
be paper, electronic or other medium;
▪ Audit evidence in the original form is more reliable than photocopies or document that
has been filmed or otherwise transformed into electronic form; and
▪ Audit evidence is more reliable if there is good internal control system.

6.4 Recording and documentation of audit evidence

The Auditor is required to document matters, which are important in providing evidence to
support the work done, the audit opinion and evidence that the audit was carried out in
accordance with acceptable standards. Nothing enhances the efficiency with which an audit may
be conducted more than the careful compilation and maintenance of audit files and working
papers. The form and contents of audit documentation should be designed to meet the objective
of the audit. The information in the audit documentation constitute the principal records of the
work performed by the auditor in accordance with the standards and the conclusions that the
auditor has reached.

However, the quantity, type and contents of audit documentation are a matter of the auditor’s
judgement. Audit documentation is not limited to papers but can also be in electronic form.
Audit documentations are always in form of working papers that are filed in audit working paper
files. The factors that determine the contents of audit documentation are:

• The nature of the audit or assurance engagement;

• The nature and complexity of the business activities of the entity being audited;
• The status of the client;
• The form of the auditor’s report;

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 • The entity’s reporting format;
• The legal frameworks under which the entity is operating;
• The nature of accounting records being maintained by the entity;
• The client’s internal control systems;
• The quality of the auditor’s audit assistants working on the assignment and the need for
supervision; and
• The methodology and technology the auditors use

Audit working papers

The use of standardized working papers, such as, check list, specimen letters, standard
organization’s working papers, may improve the efficiency with which such working papers are
prepared and reviewed. To improve audit efficiency, the auditors may also use schedules,
analyses and other documentation prepared by the entity. However, in such circumstances the
auditors require evidence that such information is properly prepared.

Working papers include the following:

• Information concerning the incorporation documents, legal and organisational structure of
the client;
• Extracts or copies of important legal documents, agreements, and minutes of board
meetings, committees of the board meetings, tender board meetings, etc.;
• Evidence of the audit planning process including audit programmes and any changes
thereto during the audit;
• Evidence of the auditors understanding of the accounting and internal control systems of
the client;
• Evidence of the inherent and control risk assessments and any revisions thereof in the
course of the audit;
• Evidence of the auditor’s consideration of the work of internal audit and their conclusions
thereon;
• Analyses of transactions and accounts balances;
• Analyses of significant ratios and trends;
• A record of the nature, timing and extent of auditing procedures undertaken and the results
of such procedures;
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• Details of procedures regarding companies whose financial statements are audited by other
auditors;
• Copies of communications with other auditors, expert and other third parties including
replies to circularization letters to the client’s bankers; customers, suppliers and lawyers;
• Copies of correspondence with the entity, reports to management and note of discussions
with the entity’s management;
• A summary of the significant aspects of the audit including details of the information
available, the amounts involved, management views, the conclusions reached and how
these matters are resolved or treated; and
• Copies of the approved financial statements and the auditor’s report.

Working papers:
• Assist in the planning and performance of the audit
• Assist in the supervision and review of audit work
• Enable the audit team to be accountable for its work
• Retain a record of matters of continuing significanceto future audits; and
• Enable quality control reviews to be performed.
Audit working paper files
Audit working papers are normally classified into two. In the case of recurring audit, some
working papers will be classified as permanent audit files which are updated with new
information of continuing importance. The other file is called the current audit working papers
files where information and documents relating primarily to the audit of the current period are
filed.

Permanent Files
The permanent file normally contains documents and matters of continuing importance which
will be required for more than one audit period. It is usually indexed. Contents include the
following:
• Statutory materials governing the existence, the conduct, accounts, and audit of the
enterprise e.g. copies of incorporation documents, companies governance code, stock
Exchange Regulations, Security and Exchange regulations, etc.

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• The operational instructions, rules and regulation of the enterprise
• Copies of documents of continuing importance and relevant to the auditors, for example:
▪ Letter of engagement and minutes of appoint of the auditor;
▪ Trade license and royalty agreements entered into by the client;
▪ Debenture deeds; and
▪ Leases;
• Addresses of the registered office and all other business locations of the client company
• An organisation chart showing the various departments, sections, authority – responsibility
relationships and capital, Capital Surplus/General Reserve, Prospectuses and record of
important ratios.
• List of accounting matters of importance e.g. accounting policies with respect to inventory,
work-in-progress, depreciation, research and development, etc.;
• Notes of interviews and correspondence in respect of internal control matters and all past
management letters.
• Client’s internal audits and accounting manual.
• A list of the company’s directors, their shareholdings and service contracts.
• A list of the company’s properties and investments with notes on verifications.
• A list of the company’s bankers, stockbrokers, solicitors, valuers, insurance brokers etc.
However, it is essential that the permanent file be updated prior to commencement of a new
financial
year’s audit.

The Current File

The Current file contains matters relating to the current year’s audit. The contents include the
following:
• A copy of the accounts being audited;
• An index to the file;
• A description of the internal control system in the form of ICQ, Flowcharts, or written
description together with supervision documents, cross referenced to the internal control
record and letter of weakness;
• A schedule for each item in the statement of financial position;

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• A schedule for each item in the statement of profit or loss and other comprehensive
incomes showing its makeup;
• A schedule of important statistics including output, sales composition, employment,
accounting ratios and names of responsible managers and officers;
• Lists of books and other records and where they are kept, together with designation, names
and signatures of responsible officers; and
• An outline history of the organization including history of stated share capital
• Letters of representation
• Letters to the client setting out internal control weaknesses.

Confidentiality, Custody and Ownership of Working Papers

The auditor should establish policies and procedures designed to maintain the confidentiality,
safe custody, integrity, accessibility and retrievability of documentation, for example:
• Passwords to restrict access to electronic documentation to authorised users only
• Back-up routines
• Confidential storage of hard copy documentation.
The auditors should adopt appropriate procedures for maintaining the confidentiality and safe
custody of their working papers. There are no specific statutory requirements regarding the
period of retention of audit working papers. The auditors need to exercise judgement to
determine the appropriate period of retention. However, it is considered advisable for auditors to
retain their working papers for a period of at least six years from the completion of the relevant
audit and then, prior to their destruction, to obtain satisfaction that there is unlikely to be a need
to refer to them again. Working papers are the property of the auditors. They are not a substitute
for the entity’s accounting records.

6.5 Identification and assessment of risks

ISA 315 states that, “the auditor shall perform risk assessment procedures to provide a basis for
the
identification and assessment of risks of material misstatement at the financial statement and
assertion levels”.

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The objective of the auditor in carrying out risk assessment, according to ISA 315, “is to identify
and assess the risks of material misstatement, whether due to fraud or error, at the financial
statement and assertion levels, through understanding of the entity and its environment, including
the entity’s internal control, thereby providing a basis for designing and implementing responses
to the assessed risks of material misstatement”.
The auditor is required by the same ISA to carry out the following audit procedures in its risk
assessment:
• Inquiries of management, and of others within the entity who in the auditor’s
judgment may have information that is likely to assist in identifying risks of
material misstatement due to fraud or error;
• Analytical procedures; and
• Observation and inspection
Assessing risk
The auditor’s assessment, according to ISA 315, includes:
• Identifying risks by considering the entity and its environment, including its internal
Control
• Relating the identified risks to what can go wrong at the assertion level
• Considering the significance and likelihood of the risks
• Establishing materiality and evaluating whether the original level set remains
appropriate as the audit progresses
• Developing expectations for use when performing analytical procedure
• Designing and performing further audit procedures to reduce audit risk to an
acceptably low level
• Evaluating the sufficiency and appropriateness of audit evidence

The Entity and Its Environment

In his risk assessment the auditor is required by ISA 315 to obtain an understanding of the entity
and its environment which involves:
(a) Relevant industry regulatory and other external factors including the applicable financial
reporting framework;
(b) The nature of the entity, including:

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 • its operations;
• its ownership and governance structures;
• the types of investments that the entity is making and plans tomake, including
investments in special-purpose entities; and
• the way that the entity is structured and how it is financed,to enable the auditor to
understand the classes of transactions, accountbalances, and disclosures to be expected in
the financial statements.
(c) The entity’s selection and application of accounting policies, includingthe reasons for
changes thereto. The auditor shall evaluate whether theentity’s accounting policies are
appropriate for its business andconsistent with the applicable financial reporting framework
andaccounting policies used in the relevant industry.
(d) The entity’s objectives and strategies, and those related business risks that may result in risks
of material misstatement.
(e) The measurement and review of the entity’s financial performance.

The Entity’s Internal Control environment

The auditor is also required to obtain an understanding of internal control relevant to theaudit.
Although most controls relevant to the audit are likely to relate tofinancial reporting, not all
controls that relate to financial reporting are relevantto the audit. It is a matter of the auditor’s
professional judgment whether acontrol, individually or in combination with others, is relevant to
the audit.

Nature and Extent of the Understanding of Relevant Controls

Control environment
ISA 315 requires that the auditor should seek to obtain an understanding of the control
environment of the entity. To this end, ISA 315 requires the auditor to evaluate whether:
• Management, with the oversight of those charged with governance, has created and
maintained a culture of honesty and ethical behavior; and
• The strengths in the control environment elements collectively providean appropriate
foundation for the other components of internal control, and whether those other
components are not undermined by deficiencies in the control environment.

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As part of the auditor’s entity’s risk assessment process, the auditor is required to obtain an
understanding of whether the entity has a process for:
• Identifying business risks relevant to financial reporting objectives;
• Estimating the significance of the risks;
• Assessing the likelihood of their occurrence; and
• Deciding about actions to address those risks.

Risk assessment includes both an assessment of:

• Business risk resulting from the entity's objectives and strategies that may result in
material misstatement of the financial statements
• Audit risk and its component parts.
Business risk
ISA 315 defines business risks as risks result from significant conditions, events, circumstances
or actions that could adversely affect the entity's ability to achieve its objectives and execute its
strategies, or through the setting of inappropriate objectives and strategies’.
It is usually split into financial risk, operational risk and compliance risk.
The auditor should obtain an understanding of the entity's process for identifying business
risks relating to financial reporting objectives and deciding about actions to address those
risks, and the results thereof.

Uses of forensic accounting/audit techniques in tax audit and investigation

The tax auditor or investigator is expected to be skilled in the use of forensic accounting/audit
techniques in gathering tax audit evidence. Forensic accounting is a specialised field of
accountancy which investigates fraud and analyses financial information to be used in legal
proceedings. Forensic accounting uses accounting, auditing and investigative skills to conduct
investigations into fraud or theft. It involves litigation support and investigative accounting.

‘Forensic auditing’ refers to the specific procedures carried out in order to produce evidence.
Audit techniques are used to identify and to gather evidence to prove, for example, how long the
fraud has been carried out, and how it was conducted and concealed by the company. Evidence

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may also be gathered to support other issues which would be relevant in the event of a court
case.

Forensic audit can also be defined as an examination of evidence regarding an assertion to

determine its correspondence to establish criteria carried out in a manner suitable to the court.
Since the tax auditor’s work may result into a court action to enforce payment of established
underpayment of tax, the tax auditor must ensure he gathers enough evidence to support his
claim of tax underpayment in the court. He therefore, needs the skill of a forensic auditor.

To effectively carry out the above duty, the tax auditor must:

• Identify areas of risk of material misstatement that could affect the tax payable by the
entity. This involves understanding the entity’s business environment, its control
environment and its industry environment;
• Understand and assess the scale of risk;
• Develop a risk response strategy, using appropriate audit procedures and tests to gather
suitable evidence; and
• Documents sufficiently the evidence obtained.

Most tax frauds involve financial statement fraud, known as fraudulent financial reporting, and is
a type of fraud that causes a material misstatement in the financial statements. It can include
deliberate falsification of accounting records; omission of transactions, balances or disclosures
from the financial statements; or the misapplication of financial reporting standards. This is often
carried out with the intention of presenting the financial statements with a particular bias, for
example concealing sales revenue in order to reduce taxable profit. This usually involves
falsification of annual accounts of the companies to show reduced turnover as well as reduced
profits that will result in underpayment of tax. This can be achieved in the following ways:

• Understatement of revenue through suppression of sales invoices;

• Undervaluation of inventory to produce an over bloated cost of sales;
• Using transfer pricing mechanism to reduce profit declared in a particular country while
increasing profit in another territory;

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 • Large amount of unsubstantiated expenses that have no bearing to the company’s
operations;
• Passing capital expenditures as revenue expenditures so as to reduce profit of the year;
and
• Suppressing bank accounts to conceal the true level of business activities.
• Cheating in foreign exchange transactions by showing fictitious imports;

Methods of detecting tax frauds

• All the relevant documents and bank accounts of a company suspected to be involved in
fraudulent activities are to be collected from the company’s bankers directly
• Fraudulent activities of a company can also be traced by collecting information from
diverse sources such as capital market, its related business concerns, promoters, directors
and employees of the company obtained from banks, various records of companies
available with different Government agencies i.e. Customs & Excise, Director General of
Revenue Intelligence (DGRI), etc.
• Disgruntled employees and trading partners can be very good source for gathering
intelligence and collecting evidence. Pattern of deteriorating financial condition of the
company and flourishing economic condition of promoters, employees, directors and
related concerns of the company can be analysed to detect possible fraud.

6.6 Reliance on the work of an expert

Generally, the expertise of the auditor is limited and it may therefore, be necessary to engage the
services of an expert to enable the auditor to gain sufficient appropriate audit evidence. This is
to ensure that the risk of material misstatement is reduced to an acceptable level. ISA 620 gives
specific guidelines on the use of an auditor’s expert while ISA 500 requires the auditor to
evaluate the technical competencies of the expert as well as the objectivity of the expert, as the
expert should be independent of the organisation being audited.

The auditor is expected to gain an understanding of the specific matters the expert will undertake
and evaluate the appropriateness of the expert’s work to determine whether it is sufficiently
reliable. The auditor should also consider whether the expert has any interest in the entity and or

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whether it has any business or personal relationship with the entity, or if there are other
circumstances which may affect the independence and objectivity of the expert.

The auditor, in determining whether the work done by an expert is sufficient and appropriate,
should consider the following factors:

• The nature and the complexity of the matter which requires the service of an expert;
• The experience and reputation of the expert in the area in which the auditor requires audit
evidence;
• The independency and objectivity of the expert – is the expert employed by the client?
• The professional qualification of the expert;
• Whether there is any other sources of audit evidence;
• Whether management have control over the performance of the work by the expert or
whether the management wholly rely on the expert; and
• The auditor’s own previous experience with the work of the expert.
However, if the auditor considers that the audit evidence from the expert is insufficient and there
are no satisfactory alternative sources of evidence, the auditor should consider the implications
for the audit report. The following factors would guide the auditor in concluding whether the
expert’s work is sufficient and appropriate:
• Whether the findings and conclusions reached by the expert are consistent with other
sources of audit evidence;
• Where judgements and assumptions are used, whether these judgements and assumptions
are reasonable, based on other audit evidence obtained; and
• Where source data is used, the relevance and completeness of that source.

6.7 Reliance on the work of internal auditor

It is generally agreed that the work of the external auditor may overlap with that of the internal
audit. And so, the external audit may be able to reduce the quantity of testing and checking he
has to carry out by relying on the work of the external auditor, as this will lead to a more
efficient and cost- effective audit. However, whether he relies on the works of an internal

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auditor or not, the external audit is still responsible for the opinion he expresses on the financial
statements.

Therefore, the external auditor must satisfy himself that he can rely on the work of the internal
auditor to support his audit opinion by evaluating the work of the internal auditor. In the same
vein, the external auditor of a holding company may have to rely on the work done by the auditor
of the subsidiary he is not the auditor. At the same time, a tax auditor may sometimes also rely
on the work done by the external auditor of the tax payer. In such cases, the auditor who is
relying on the work of another auditor must evaluate the work of that auditor and satisfy himself
that he can rely on the other auditor’s work.

Where an external auditor is satisfied that he wants to rely on the work of the internal auditor,
ISA 610 provides guidance to the external auditor, which should also be a guide to the tax
auditor who has satisfy himself that he can rely on the work of the tax payer’s external auditor.
ISA 610 requires that, in that instance, the objectives of the external auditor are to decide:

• Whether and to what extent to use specific work of the internal auditor; and
• Is so, whether such work is adequate for the purposes of the external audit.

The following factors are to be considered by the external auditor in evaluating and assessing the
work of the internal auditor:

• The status of the internal audit department within the entity. This will comprise the
objectivity and independency of the internal auditor. To whom does the internal auditor
reports to in the organisation, is it to the audit committee or the chief executive officer,
rather than the finance director. This will also include the scope of the work of the
internal audit department and whether there is any restriction place on the internal audit’s
work or the internal auditor has some degree of operational independence. The external
auditor will also need to consider to what extent the management acts on the report of the
internal auditor;
• The technical competence and professional due care of the internal auditor. The external
auditor must satisfy that the internal auditor is technically competent and uses a
professional approach in his work; and

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 • There is a need for regular communication between the external auditor and the internal
auditor about significant matters that affect each other.

ISA 610 further requires that the external auditors evaluate each specific work performed by the
internal auditor before it is used as external audit evidence. In this regard, ISA 610 requires the
external auditor, in determining the planned effect of the work of internal audit on the nature,
timing and extent of the external auditor’s procedures, to consider:

• The nature and scope of specific work performed or to be performed by the internal
auditor;
• The assessed risks of material misstatement at the account balance/transaction level; and
• The degree of subjectivity involved in the evaluation of evidence gathered by internal
auditor.

However, because the external auditor is responsible for his opinion on the financial statement,
before using the specific work of the internal auditor, he is required to evaluate whether:

• The internal auditor who performed the work has adequate technical training and
proficiency;
• The work of the internal auditor was properly supervised and documented;
• The internal auditor obtained enough audit evidence;
• The internal audit reaches appropriate conclusions and consistent with the reports written;
and
• Any exceptions or unusual issues were properly resolved.

The following audit procedures are recommended for the external audit in evaluating the specific
work done by the internal auditor:

• Examine items already examined by the internal audit;

• Examine other similar works; and
• Observe the procedures performed by the internal audit.

Finally, the external auditor is required to document his evaluation of the internal auditor
function and its work in the external auditor’s working paper.

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Reliance on the work of the external auditor by the tax auditor

Tax audit is not the same thing with external or statutory audit. However, the tax auditor is
expected to use the same principle of due care and professionalism as the statutory auditor. Also,
the are overlap in the work of both the statutory auditor and the tax auditor. And usually, the tax
auditor relies on the audited financial statements submitted by the tax payer’s statutory auditor,
except where there is reason to doubt the statutory auditor’s work. The tax auditor also uses the
same principle of audit that statutory auditors normally use.

Therefore, the tax auditor will place a lot of reliance on the work of the external auditor so as to
reduce the level of work the tax auditor will undertake in tax audit. However, before doing so,
the tax auditor is expected to apply the same principle and procedures stated above on evaluation
of the internal auditor’s work by the external auditor, to determine the level of reliance the tax
auditor will place on the work of the statutory auditor.

6.8 Written management representation

ISA 580 requires auditors to obtain written representation from management and those charged
withgovernance. And the standard defines written representation as “a written statement by
management provided to confirm certain matters or to support other audit evidence”
Written representations are necessary information that the auditor requires and written
representations are part of audit evidence. However, although they are necessary audit evidence,
theyare not sufficient audit evidence on their own on any of the matters with which they deal.
Nor do awritten representation affect the nature and extent of other audit evidence that the
auditor needs toobtain.
The objectives of the auditor concern written representations, as stated by ISA 580 are:
• Obtain written representations from management that it has fulfilled its responsibilities in
respect of the financial statements and the audit;
• Obtain written representation as appropriate to support other audit evidence; and
• Respond appropriately to written representations provided by management or if
management refuses to provide the written representation requested.

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The written representations, which is usually inform of a letter, letter of representation, addressed
to the auditor, should be dated as near as possible to, but not after, the date of the audit
report.
Letters of representation are important where the auditor finds it difficult to confirm that certain
problems do not exist, or that management does not have certain intentions or plans. If the
auditor doesn’t know about a liability it can be difficult to discover. It can also be difficult to
discover management plans if they have not been discussed at board meetings and recorded in
the board minutes.
Management representations cannot substitute for other audit evidence except where knowledge
has confined to management and where the auditor is relying on the management’s judgment and
opinion, for example on the future sale or closure of part of their operation.
Otherwise, when a letter of representation is received, the auditors should look for corroboration
from
other sources to support what management has said, and to evaluate whether the representations
made by management appear to be reasonable and consistent with other audit evidence that has
been obtained by the auditors.
If the letter of representation is not provided then the auditor must:
• Discuss the matter with management;
• Re-evaluate the integrity of management and reconsider the impact on other
representations and audit evidence; and
• Take appropriate action, including considering the effect on the audit report.
Where a written representation contradicts other audit evidence, the auditor:
• Should consider whether his risk assessment of that area is still appropriate;
• Should consider whether additional audit procedures are needed; and
• If the auditor has concerns about management integrity, he should document those
concerns and considers whether to withdraw from the audit.
Contents of a letter of representation
Examples of content of a typical letter of representation are:
• No material irregularities. In other words, the directors are not aware of any material
frauds that
has taken place during the period.

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 • The company has complied with all laws and regulations.
• That all liabilities have been disclosed and these are reflected in the financial statements.
• That management is not aware of any pending legal actions, apart from the ones already
disclosed.
• That there have been no subsequent events (events occurring after the statement of
financial position date) which may require the financial statements to be adjusted or if not
requiring it to be adjusted, at least requiring some disclosure.
• That the directors have no plans to discontinue any parts of the operations of the
organisation. If there were plans to discontinue part of the organisation that would
probably affect the valuation of certain assets.
• That inventory is valued at the lower of cost or net realisable value.
• That the directors do not believe that there is a going concern problem.
• That all charges and assets have been disclosed, that is any assets which have been
pledged for security of a loan for example, which would affect the rights and obligation
assertion of those assets.

6.9 End of chapter questions

Q1. As a tax auditor, your objective is to gather evidence from your audit of a taxpayer’s
financial records. However, such evidence must be sufficient and appropriate.

Required:

a. What do you understand by sufficient and appropriate audit evidence? (5 marks)

b. Discuss the factors that will affect your decision on what you think is a sufficient
and appropriate audit evidence. (5 marks)
c. You are expected to exercise judgement on what you will consider to be a
sufficient relevant and reliable audit evidence. What are the factors that will
influence your judgement? (5 marks)

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Q2. Modern auditing assumes that, in preparing a taxpayer’s financial statements, the
management of the entity made some assertions about the reports contained in the financial
statements to the auditor. These assertions are divided into two categories.

Required:

Discuss these assertions under the two categories as set out in ISA 315. (15 marks)

Q3. The auditor uses a combination of audit procedures to obtain an assurance on management
assertions about the reports in the financial statements.

Required:

Discuss briefly eight of these procedures. (15 marks)

Q4. It is not possible for the tax auditor to examine a taxpayer’s financial records 100 %,
therefore, he has to rely on a carefully selected samples, chosen by him for examination.

Required:

a. Discuss briefly the three methods of sample selection. (6 marks)

b. List the three factors the auditor has to consider when selecting his sample
Size. (3 marks)
c. The factors in (b) above require the auditor to make six key decisions. What are
these key decisions? (6 marks)

Q5. The tax auditor, most of the time, will have to depend on the work of taxpayer’s statutory
auditor and work of other experts.

Required:

a. List the factors the tax auditor will consider in determining whether or not the work done
by an expert is sufficient and appropriate. (9 marks)
b. What are the factors the tax auditor will consider in assessing and evaluating the work of
the taxpayer’s statutory auditor? (6 marks)

6.10 Suggested answers to end of chapter questions

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 A1.

a. Sufficiency and appropriateness of audit evidence are interrelated and both apply to tests
of controls and substantive procedures. Sufficiency is the measure of the quantity of
audit evidence while appropriateness refers to the measure of the quality or reliability of
the audit evidence.
b. Factors that may influence the sufficiency of audit evidence are:
▪ Materiality of the item being tested;
▪ Level of audit risk involved;
▪ Persuasiveness of the audit evidence obtained;
▪ Population of the item –how large the item is;
▪ Client’s accounting and internal control system; and
▪ Client’s financial condition.
c. The auditor’s judgement will be influenced by factors such as:
▪ The auditor’s knowledge of the business and its environment;
▪ The risk of misstatement the auditor has identified;
▪ The persuasiveness of the evidence;
▪ The nature of the accounting and internal control system;
▪ The materiality of the item being examined;
▪ The experience the auditor gained during previous audit;
▪ The results of audit procedures; and
▪ The source and reliability of information available.

A2. The assertions as set out in ISA 315 are in two categories, viz:

▪ Assertions about classes of transactions and events, and related disclosures for the period
under audit (income statement); and
▪ Assertions about account balances and related disclosures at the period (statement of
financial position assertions).

Assertions about classes of transactions and events, and related disclosures

These assertions are:

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 ▪ Occurrence: This is the assertion that transactions and events that occurred and recorded
or disclosed relate to the entity;
▪ Completeness: This is the assertion that all transactions and events that should have been
recorded have been recorded, and that all related disclosures that should have been
included in the financial statements have been included;
▪ Accuracy: This assertion is that amounts and data relating tom recorded transactions and
events have been recorded appropriately with related disclosures appropriately measured
and described;
▪ Cut – off: This is the assertion that all transactions and events have been recorded in the
appropriate financial year or accounting period;
▪ Classification: This is the assertion that all transactions and events have been correctly
recorded in the appropriate accounts; and
▪ Presentation: This is the assertion that all transactions and events are appropriately
aggregated or disaggregated and clearly described and that related disclosures are
relevant and could be understood in the context of the requirements of the appropriate
financial reporting framework.

Assertions about account balances and related disclosures

These are:

▪ Existence: This is the assertion that all assets, liabilities and equity interests exist;
▪ Rights and obligations: This is assertion that the entity owns or controls the rights to the
assets and liabilities are those of the entity;
▪ Completeness: This is assertion that all the assets, liabilities and equity interests that
ought to have been recorded have been recorded and all related disclosures that ought to
have been included in the financial statements have been included;
▪ Accuracy, valuation and allocation: This is the assertion that assets, liabilities and
equity interests are included in the financial statements at appropriate amounts and any
resulting valuation or allocation adjustments disclosures have been appropriately
measured and described;
▪ Classification: This is the assertion that assets, liabilities and equity interests have been
recorded in the proper accounts; and

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 ▪ Presentation: This is the assertion that assets, liabilities and equity interests are
appropriately aggregated or disaggregated and clearly described and related disclosures
are relevant and understandable in the context of the requirements of the applicable
financial reporting framework.

A3. The auditor uses a combination of audit procedures to obtain audit evidence to be able to
obtain an assurance about the management assertions discussed above. These procedures are:

Inspection of assets: The inspection of assets in the accounting records which form the basis of
the financial statements provide confirmation for the existence of the assets, gives evidence of
valuation but does not confirm rights and obligations of ownership. Also, confirmation that
assets seen during inspection are recorded in the accounting records provide evidence of
completeness;

Inspection of documents:Inspection of documentation provides the following confirmation:

• Confirmation to documentation of items entered into the accounting records provides

evidence that the assets exist or the transaction occurred;
• Confirmation that items recorded in supporting documentation are entered into the
accounting records gives proof of completeness;
• Confirmation as to evidence of valuation, measurement, rights and obligations,
presentation and disclosure; and
• It can also be used to test consistency of audit evidence and to confirm authorization.

Observation: This is the auditor watching a procedure being performed, for example, the audit
watching the inventory counts or payment of wages to workers. However, its limitations is that
it is limited as to the point of time the auditor is watching. The person performing the procedure
may act in a different way when not being observed;

Enquiries: These involves seeking information from knowledgeable person insider or external
to the entity under audit. The auditor, however, is to evaluate responses to the inquiries and
corroborate them with other audit evidence. The auditor should be aware that responses to
enquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence. It may also provide information that differs significantly from

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other information that the auditor has obtained. Therefore, responses to enquiries may
necessitates the auditor to modify or perform additional audit procedures. The auditor may obtain
written responses to enquiries, if necessary. Enquiries involves the following processes:

• Considering the knowledge, objectivity, experience, responsibility and qualifications of

the individual to be questioned;
• Asking clear, concise and relevant questions;
• Using open or closed questions appropriately;
• Listening actively and effectively;
• Considering the reactions and responses and asking follow-up questions; and
• Evaluating the responses;

External confirmation: This is seeking confirmation from another source, external to the entity,
of details in the client’s accounting records such as confirmation of bank balances from the bank
directly or confirmation of receivable balances from the client’s customers directly. This
procedure is specifically covered by ISA 505, external confirmations. However, ISA 305
identifies the following situations where external confirmations are relevant:

• Bank balances and other information from bankers;

• Accounts receivable balances;
• Inventories held by third parties;
• Property deeds held by lawyers;
• Investments held by third parties or purchased from stockbrokers but not delivered at the
end of the reporting period;
• Loans from lenders; and
• Accounts payable balances.

Recalculation: This is checking the arithmetical accuracy of the client’s accounting records, an
example is adding up the client’s year – end trade receivables or recalculating the age analysis of
the client’s year end receivables;

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Reperformance: This is the auditor’s independent execution of procedures or controls originally
performed by the client, for example, performing the age analysis of client’s year end receivable
balances.

Analytical procedures: These consist of evaluation of financial information or comparison of

financial and/or non – financial data for plausible relationships and investigating unexpected
fluctuation.

Examples of analytical procedures include:

• comparison of previous year’s financial statements with the current year, using ratio
analysis and ensure that any change is in line with expectations;
• A comparison of payroll costs on a monthly basis taking account of wage rises, starters
and leavers;
• A comparison of sales with expenses, on a monthly basis and as a comparison with
previous years; and
• A comparison of the ageing inventories or receivables on a monthly or quarterly basis
and calculation of receivable days or inventory turnover

A4.

a. The three methods of selecting sample from a population are:

i. Random sampling: This is a sample selection method which gives each of the sampling
units an equal chance of being selected. This is usually achieved by using random
numbers to select items for testing.
ii. Systematic sampling: In systematic sampling, a random starting point is selected from
the population, then subsequent selection of items will be based on equal interval or gap,
say every 10th item. For example, it a sample is to be drawn from sales invoices, the
invoice will be arranged serially or in date order. The first invoice will be selected from
the entire population to form the sample.
iii. Haphazard sampling: This is not a scientific method of sample selection. It involves
the auditor, having decides on the total item he wants to use as sample, goes on to select
arbitrarily the sample from the population. This system of sample selection is subject to
bias.

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b. The three factors the auditor must consider when determining a sample size are:
i. Consider the purpose of the audit procedure and the population from which the
sample will be drawn;
ii. Determine a sample size sufficient to reduce sampling risk to an acceptable low level;
and
iii. Select items for the sample in such a way that each sampling unit in the population
has an equal chance of selection.
c. The above factors require the auditor to make a number of key decisions which include:
i. The sampling approach to be used (statistical or non-statistical);
ii. The characteristics of the population from which the sample is to be drawn;
iii. The sample selection method;
iv. What constitute a misstatement or deviation;
v. The tolerable misstatement or rate of deviation; and
vi. The expected misstatement or rate of deviation.

A5.

a. The auditor, in determining whether the work done by an expert is sufficient and
appropriate, should consider the following factors:

• The nature and the complexity of the matter which requires the service of an expert;
• The experience and reputation of the expert in the area in which the auditor requires audit
evidence;
• The independency and objectivity of the expert – is the expert employed by the client?
• The professional qualification of the expert;
• Whether there is any other sources of audit evidence;
• Whether management have control over the performance of the work by the expert or
whether the management wholly rely on the expert; and
• The auditor’s own previous experience with the work of the expert.
However, if the auditor considers that the audit evidence from the expert is insufficient and
there are no satisfactory alternative sources of evidence, the auditor should consider the

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 implications for the audit report. The following factors would guide the auditor in
concluding whether the expert’s work is sufficient and appropriate:
• Whether the findings and conclusions reached by the expert are consistent with other
sources of audit evidence;
• Where judgements and assumptions are used, whether these judgements and assumptions
are reasonable, based on other audit evidence obtained; and
• Where source data is used, the relevance and completeness of that source.
b. The following factors are to be considered by the external auditor in evaluating and
assessing the work of the internal auditor:
i. The status of the statutory auditor. This will comprise the objectivity and independency
of the statutory auditor. This will also include the scope of the work of the statutory
auditor;
ii. The technical competence and professional due care of the statutory auditor. The tax
auditor must satisfy that the statutory auditor is technically competent and uses a
professional approach in his work; and
iii. There is a need for regular communication between the tax auditor and the statutory
auditor about significant matters that affect the tax liability of the entity.

CHAPTER SEVEN

7. RISK-BASED AUDIT APPROACH

Outline
7.0 Introduction
7.1 Understanding Risk Based Auditing
7.2 Steps of risk-based audit
• Determination of the threats (fraud and errors) confronting the organisation

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 • Identification of control procedures for preventing, detecting or correcting threats
• Evaluation of control procedures – systems review and test of controls
• Determination of impact of control weaknesses and degree of auditing required

7.3 Tax audit risk-based approach

• Taxpayer and Industry Profiling
• Identifying specific compliance risks e.g. low stock values compared to turnover;
International transfer pricing; financing arrangements; wrongly classifying capital
expenditure as deductions; etc.
7.4 Process of risk-based audit approach
• Understand the Business Environment
• Develop a Three-year Audit Plan
• Preliminary Risk Assessment
• Secondary Risk Assessment
• Formal Exit Meeting
• Reporting and Communication
7.5 End of chapter questions
7.6 Suggested answers to end of chapter questions

Objective

After studying this chapter, candidates should be able to understand:

• Types of risk;
• Risk assessment procedures;
• Steps for carrying out a risk-based audit;
• Taxpayer profiling;
• The concept of materiality; and
• How to identify specific compliance risk.

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7.0 Introduction

One of the principal considerations by an auditor is the need to plan and perform the audit with
an attitude of professional scepticism, bearing in mind that there may be circumstances that
cause the financial statements to be materially misstated.
ISA 200 defines professional scepticism as “an attitude that includes a questioning mind, being
alert to conditions which may indicate possible misstatements due to error or fraud and a critical
assessment of audit evidence”. Professional skepticism requires that the auditor carries out the
audit with:
• Critical assessment, with a questioning mind, of the validity of the evidence obtained;
• Alertness to possibility of contradictory evidence; and
• No assumption that the management is neither dishonest nor honest.

International standards on audit required the auditor to follow a risk – based approach in every
audit engagement. Risk – based approach involves the auditor:
• To first perform a risk assessment procedure, to consider if the financial statements
contain any material misstatement; and
• Based on the assessment, to perform other procedures such as test of controls and
substantive tests.
ISA 315 states that ‘’the objective of the auditor is to identify and assess the risks of material
misstatement, whether due to fraud or error, at the financial statement and assertion levels,
through understanding the entity and its environment, including the entity’s internal control and
risk
assessment process, thereby providing a basis for designing and implementing responses to the
assessed risks of material misstatement’’.
ISA 315 therefore, requires that the auditor to “obtain an understanding of the entity and its
environment sufficient to identify and assess the risk of a material misstatement in the financial
statements”.
7.1 Understanding risk - based auditing
The total risk of material misstatement can be divided into two categories, business risks and
audit risks.

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Business risks
ISA 315.2 defines business risk as ‘a risk resulting from significant conditions, events,
circumstances,actions or inactions that could adversely affect an entity’s ability to achieve its
objectives andexecute its strategies, or from the setting of inappropriate objectives and strategies.
Business risks can be grouped into three as follows:

Operational risk – this arises as a result of operational errors, e. g. bad quality products, etc.;

Financial risk – this is as a result of the company being high geared, i. e., high borrowing and a
rise in interest rate which can put the company into pressure which increases possibilities of
material misstatement;

Compliance risk – this arises as a result of failure to comply with regulations;

The auditor is not concerned with business risks as it is not the auditor’s responsibility to run the
business for the benefit of shareholders. The auditor, however, must consider business risk
because business risk often results into audit risk as it can cause a material misstatement in the
financial statements.

Audit risk
Audit risk is the risk that the financial statements contain a material misstatement that have not
been discovered by the auditor which will results in the auditor giving an inappropriate opinion.
According to ISA 200, the auditor should plan and perform the audit in such a way as to reduce
audit risk to an acceptably low level.
Audit risk is defined by ISA 200, “as the risk that the auditor expresses an inappropriate opinion
when the financial statements are materially misstated”. Audit risk is a function of the risks of
material misstatement and detection risk. Audit risk is fundamental to the audit process because
auditors
cannot and do not attempt to check all transactions. This is because it would not be practicable
for the auditor to check all transactions as no one would be prepared to pay the auditor to do so,

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given the volume of transactions that make up the financial statements. And besides, it would be
a waste of time and money for auditor to attempt to check all the transactions, hence the
importance of the risk‑based approach toward auditing.
The risk‑based approach to auditing enables the auditor to carry out his audit work efficientlt,
using the most effective audit procedures based on the audit risk assessment, by focusing on
areas of significant risks, i. e., where it is more likely that errors in transactions and balances can
lead to material misstatement in the financial statements.

Audit risk comprises of three components which must be considered together, these are:

Inherent risk: This is “the susceptibility of an assertion about a class of transaction, account
balance or disclosure to a misstatement that could be material, either individually or when
aggregated with other misstatements, before consideration of any related controls” (IAASB
Handbook – Glossary of terms).
Inherent risk is the risk that items may be misstated as a result of their inherent characteristics,
which may be from:
• The nature of the items themselves, for example, estimated items because they are not
based on specific measure; and
• The nature of the entity and the industry in which it operates.
It should be noted that inherent risk exists despite the controls in place as it is independent of
controls. When inherent risk is assessed to be high, then there is a high risk of misstatement of an
item in the financial statements.

Control risk: This is defined as, “the risk that a misstatement that could occur in an assertion
about a class of transaction, account balance or disclosure and that could be material either
individually or when aggregated with other misstatements, will not be prevented or detected and
corrected, on a timely basis by the entity’s internal control” (IAASB Handbook – Glossary of
terms).
This risk is based on the effectiveness of the design and operation of internal control in achieving
the entity’s objective relevant to preparation of the entity’s financial statements.

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However, some control risk will always exist because of the inherent limitations of internal
controls which include:
• Management override;
• Possibility of human error; and
• Effect of system change.
When the auditor is preparing the audit plan, the auditor needs to make an assessment of control
risk for different areas of the audit. The auditor’s test of control will provide evidence about
control risk.

Detection risk: Detection risk is defined as, “the risk that procedures performed by the auditor to
reduce audit risk to an acceptably low level will not detect a misstatement that exists and that
could be material, either individually or when aggregated with other misstatements” (IAASB
Handbook – Glossary of terms). It is the risk that the auditor’s procedures will fail to detect a
misstatement in a transaction or in an account balance. Detection risk therefore, is a function of
the effectiveness of an audit procedure and of its application by the auditor. It is borne out of the
consequence of the inability of the auditor to examine all available evidence or what is referred
to as “sampling risk”.

Detection risk has two components, sampling risk and non- sampling risk.
Sampling risk: This is the risk that the auditor is likely to reach a different conclusion based on
the sample than he would have reached had he tested the entire population.
Non-sampling risk: This is risk that arises from factors that made the auditor to reach an
erroneous conclusion for reasons not related to the sampling risk.

7.2 Risk assessment procedures

The following procedures are required under ISA 315 for the auditor to obtain an understanding
of the entity and its environment, including its internal control systems:

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 • Enquiries of management and other within the entity: Auditors must have discussions
with the client’s management about its objectives and expectations, and its plans for
achieving those goals;
• Analytical procedures: Analytical procedures performed as risk assessment procedures
should help the auditor in identifying unusual transactions or positions. They may
identify aspects of the entity of which the auditor was unaware, and may assist in
assessing the risks of material misstatement in order to provide a basis for designing and
implementing responses to the assessed risks; and
• Observation and inspection: Observation and inspection may also provide information
about the entity and its environment. Observation and inspection as audit procedures can
potentially cover a very broad area, including observation or inspection of the entity’s
operations, documents, and reports prepared by management, and also of the entity’s
premises and production facilities.

Analytical procedures
This is the analysis of relationships to identify inconsistencies and unusual relationships.
The auditor is required to apply analytical procedures in his risk assessment procedures and in
the final overall review of the financial statements at the end of the audit. It can also be used as a
source of audit evidence when it is more appropriate than tests of details in reducing detection
risk.
In carrying out analytical procedures, the auditor may compare the entity’s financial statement
being audited with:
• Prior periods;
• Budget and forecasts;
• Industry averages; and
• Predictive estimates.
Also, analytical procedures involve analysis of:
• Ratios analysis which involves relationship between elements of financial statements;
• Relationships between financial and non- financial data, for example, total salaries and
wages with the average number of employees over many periods.

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Results of the analytical procedures may reveal to the auditor aspects of the entity which the
auditor may not be aware initially and will assist the auditor in assessing risks of material
misstatement.

Ratios commonly considered in analytical review

The following ratios are usually computed when considering relationships between the elements
in the financial statements, which may also be used in comparison with prior period and the
industry average:

Profitability
Return on capital employed (ROCE):

Profit before interest and tax (PBIT)

Net assets (share capital + reserves + NC liabilities)

Gross profit margin:

Gross profit
Revenue

Net profit margin:

PBIT
Revenue
Assets turnover
Revenue
Net assets (share capital + reserves + NC liabilities)

Liquidity
Current ratio:
Current assets
Current liabilities

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 Quick ratio (Acid test):
Current assets – inventories
Current liabilities

Inventory turnover:
Inventories X 365
Cost of sales
Or
Cost of sales
Inventories
= Rate of turnover
Trade receivable days:
Trade receivables X 365
Credit sales

Trade payable days:

Trade payables X 365
Credit purchases

Gearing

Debt/equity:
Interest bearing debt
Share capital and reserves
Debt/equity + debt:
Interest bearing debt
Equity + debt

The following, benefits, limitations of audit risk assessment and how to minimise audit risk are
from NOUN Advanced Audit study notes.
Benefits of audit Risk assessment

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The benefits of audit risk assessment are:
a. It saves audit cost and fees;
b. It ensures that the audit work is completed expeditiously and economically;
c. It removes all avoidable pitfalls in the audit procedure;
d. It reduces the possibility of under or over auditing;
e. It results in a more effective and efficient audit work;
f. It focuses the auditor’s attention on factors which are more likely to result in misstatement;
and
g. It facilitates the use of sampling and the attendant benefits derived there from.

Limitations of audit risk assessment

The limitations of audit assessment include the following:
a. Subjective values have to be placed on inherent and control risk;
b. It may result in a mechanical approach which leads to a loss of auditor’s judgment;
c. The auditor may spend more time on the mechanic of the process and assessment at the
expense of time spent obtaining audit evidence; and
d. The assignments of risk levels are often not suitably specific
which puts into question the validity of any conclusions reached.

Factors that can minimise audit risks

Audit risk may be reduced if some of the following “positive” factors are identified:
a. The enterprise is financially stable without excessive debts, and is likely to remain so in the
foreseeable future;
b. The enterprise is profitable, if its objective is to make profit;
c. The proprietor, in the case of a private company plays active role in the business;
d. The internal controls are strong and the company’s accounting personnel are competent;
e. The past audit experience has provided evidence of good accounting controls with no major
audit problems; and
f. The enterprise’s relationship with the regulatory authorities has been good.

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Auditor and fraud
Fraud is an intention breach of controls by one or more person and involving the use of
deception to gain an unjust or an illegal financial advantage. This is different from error. Error is
an intentional mistake or omission.
The primary objective of statutory or external audit is to express an opinion on the truth and
fairness of financial statements audited and not to prevent or detect fraud. However, the auditor
is concerned with fraud to the extent that it can result in a material misstatement and thus his
opinion on the financial statements. The auditor is therefore concerned with material fraud, this
is covered by ISA 240.
The objectives of the auditor under ISA 240 is the same with the auditor’s objectives in
identifying and assessing the risks of material misstatement and obtaining sufficient appropriate
evidence about those risks through appropriate audit procedures. ISA 240 also requires the
auditor to respond appropriately to fraud or suspected fraud identified during the audit.
Just like under ISA 200, the auditor is required by ISA 240 to maintain an attitude of
professional scepticism as follows:
• Unless the auditor has reason to believe the contrary, he may accept records and documents
as genuine; and
• Where responses to inquiries of management are inconsistent the auditor shall investigate
the inconsistencies, as this may indicate potential fraud.

ISA 240 identifies two types of fraud, which are:

• Fraudulent financial reporting; and
• Misappropriation of assets.

Fraudulent financial reporting

This includes:
• Forging or altering accounting records or supporting documentation which form the basis of
the financial statements;
• Misrepresenting or intentionally omitting events or transactions from the financial
statements; and
• Intentionally misapplying accounting principles.

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Misappropriation of assets
This includes:
• Embezzling receipts, for example, diverting cash receipts to personal bank account;
• Stealing physical assets, such as inventory or intellectual property, for example, selling trade
secret to a competitor;
• Causing an entity to pay for goods and services not received, resulting in a fictitious
supplier; and
• Using an entity’s assets for personal use.

Under ISA 240, the auditor is required to perform the following audit procedures to identify the
risk of material misstatement due to fraud:
• Make enquiries of management in respect of:
▪ Their assessment of the risk of material fraud;
▪ The process in place for identifying and responding to the risks of fraud;
▪ Any specific risks of fraud identified or likely to exist; and
▪ Any communications within the entity in respect of fraud, including to employees
regarding management’s views on business practices and ethical behavior.
• Make inquiries of management and others within the entity as to whether they have any
knowledge of any actual suspected or alleged fraud and to obtain views about the risks of
fraud;
• Evaluate any unusual or unexpected relationships identified in performing analytical
procedures which might indicate a risk of material fraud; and
• Evaluate information obtained from other risk assessment procedures and see if any fraud
risk factors are present.
Fraud risk factors
These include:
• The need to meet expectation s of third parties, for example, if the entity is trying to raise
additional finance;
• Management remuneration is based on profit – related bonus;
• The control environment is judged ineffective;

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• The entity’s profitability is being eroded, either due to intense competition or technological
changes;
• The nature of the industry or the operations of the entity provide opportunity for fraud, for
example, complex transactions or significant accounting estimates;
• Low workers’ morale or poor communication and or non - enforcement of ethical standards
by management;
• Personal pressure on workers to misappropriate assets, for example, where there is a threat
of redundancy;
• Where there is opportunity to misappropriate assets, for example, large amount of cash is
being held by individual staff regularly; and
• Poor internal control over entity’s assets, for example, where there is little or no segregation
of duties.
To address the risks of material misstatement as a result of fraud identified as above, the auditor is
required by ISA 330 to design and perform further audit procedures. Where fraud is discovered by
the auditor, he should report such to the appropriate level of management as soon as possible. The
auditor is required to consider reporting to the authorities, if there is a statutory duty to do so.

The auditor and materiality

As stated earlier, the objective of an audit of financial statements is to enable the auditor to express
an opinion as to whether the financial statements are prepared in all material respect in accordance
with appropriate reporting framework.
In this section, we are looking at the concept of materiality as it affects the auditor and the audit of
financial statements.
Materiality is defined as any information that its omission or misstatement could influence the
decisions of users taken on the basis of the financial statements. Therefore, the auditor is expected
to identify material errors, omissions and misstatements, as regards to amount (quantity) and
nature (quality).
To assist the auditor in this regard, the auditor has to set a level for what he considered to be
material. This is based, however, on the auditor’s judgement. The level of materiality set by the
auditor will have impact on the audit in two ways:
• The type, timing and extent of audit procedures; and

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 • The evaluation of effect of misstatements which may be to seek adjustments of the
materiality levels or to determine the degree of any auditor’s report modification.

Calculation of materiality
This is purely a matter of professional judgement of the auditor. However, the following levels of
materiality are usually followed:
• Between 1/2 and 1% of revenue;
• Between 1 and 2% of total assets; or
• Between 5 and 10% of profit before tax.
However, the figure chosen by the auditor will depend on the confidence the auditor has in the
entity’s figures, what the financial statements are to be used for and other factors that may affect
the auditor’s professional judgement.

7.3 Tax audit risk-based approach

According to Deloitte (2015),” in view of the numerous hitches inherent in the
traditional/vouching tax audit approach, tax authorities in other jurisdictions are adopting risk-
based tax auditprocedures. Unlike the traditional tax audit approach where tax officers carry out
substantive audit procedure on all items in the financial records of the tax payers, the risk-based
tax audit approach is more specific”. Risk-based approach involves carrying out a risk
assessment and conducting audit procedures on identified areas of risk to form a tax audit
opinion.
To achieve an efficient tax audit process, according to Deloitte (2015), there is a need for tax
authorities to focus more on specific key audit risk-based issues by profiling tax payers to
establish areas in their operations which may result in material misstatements.

Taxpayer and Industry Profiling

Taxpayer and industry profiling are risk assessment techniques in risk-based tax audit. It
involves an understanding of the taxpayer and its industry environment. Taxpayer profiling is
defined by the Australian Taxation office (OECD) as”the development of a thorough

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understanding of the taxpayer’s compliance behaviour and their business. It involves carrying
out of the following tasks by the tax auditor:
a. Review of basic tax information which includes determination whether:
• The return was filed by due date;
• Required schedules are were completed;
• Taxes are were overdue; and
• Financial statements have been filed with other statutory authorities.
b. Review the taxable income and tax payable calculated by the taxpayer, which include
determination whether:
• Carry over loss, exempted income and deducted income were properly applied;
• Accumulated income tax is properly calculated; and
• The tax payable and tax credit are properly calculated.
c. Review financial statements, which should include:
• Trend analysis on major accounts; and
• Calculation of important ratios
d. Review changes in paid-in capital and major shareholders
e. Review inventories movements between affiliated companies
f. Review of transfer pricing issues if the taxpayer is a member of multinational, which
involves:
• Review transfer pricing
• Review the flow of funds to or through tax havens
• Examine arm’s length dealings;
• Research any Advance Pricing Arrangements.
g. Review the taxpayer, which includes examination of the taxpayer’s
• Organisation chart
• Major products
• Functions of each department of enterprise
• Documentation relating to tax planning strategies
• Taxpayer’s use of e-commerce
h. Review third party information, which includes, quarterly returns from banks, returns from
Customs, etc.

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i. Review of the current industry environment of the taxpayer, which includes:
• The current market trend of the products;
• The position of the taxpayer in the market place; and
• The average industry indices.
The level of other pre-contact work will largely depend on the complexity of theaffairs of the
customer concerned, and the tax risks identified during riskassessment. However, these can be
categorised into four general headings:
• Reviews of unreported income
• Intelligence gathering
• Reviews of prior compliance history.
• Returns preparer performance, i.e. the tax consultant of the taxpayer that filed the returns.

Identifying specific compliance risks

In the auditor’s initial risk assessment procedures, which includes, analytical procedures, the tax
auditor should be able to identify areas of compliance risks such as, low stock values compared
to turnover; International transfer pricing; financing arrangements; wrongly classifying capital
expenditure as deductions; etc. The calculation of appropriate ratios and comparing them with
those of previous years and possible industry average will throw out areas where the auditor
needs to carry out additional procedures, such as substantive procedures to assure himself that
there is no risk of material misstatements.

7.4 Process of risk-based audit approach

The process of tax audit risk-based approach is essentially the same process under statutory audit
and it involves obtaining an understanding of the entity and its environment sufficient to identify
and assess the risk of a material misstatement in the financial statements.

Understanding the Business Environment

It is essential that a tax auditor should seek sufficient knowledge and information about a
taxpayer to be audited for the following reasons:

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• The tax auditor needs to assess the audit risks and identify likely challenges of the business
and industry in which the taxpayer operates. Risks are essentially present in every business
and industry, the seasonal and cyclical changes, weather, infrastructural needs, personnel
and labour practices that are prevalent, input and raw materials supplies etc.
• Knowledge of the taxpayer to be audited is essential because it will assist in audit planning
and performing the audit effectively and efficiently.
• The approach to audit of stock broking firms, hotels, hospitals, aviation, engineering,
manufacturing, pharmaceutical and such other businesses is different based on the
peculiarities and needs of each.
Matters to be considered by the auditing when seeking understanding of the entity and its
environment are:
• Industry, economic environment, regulatory and other external factors, including the
applicable financial reporting framework. Specifically, these are the market and
competition, product technology, accounting principles, tax, legislation, etc.;
• Nature of the entity, this includes, whether a multinational, its revenue sources, products
or service, locations, key customers and suppliers, financing sources, e-commerce, etc.;
• Objectives and strategies and related business risks. These include new products and
services, expansion opportunities, deployment of information technology, etc.;
• Measurement and review of the entity’s financial performance, by carrying out and
analytical review showing performance trend analysis, ratios analysis, and comparison
with key performance indicators (KPI) and budgets and forecasts; and
• Assessment of internal control systems in operation.

Preliminary Risk Assessment

The preliminary risk assessment is carried out during the planning stage. The tax auditor will be
required, at the planning stage to gain an understanding of the entity to be audited through entity
profiling. This involves:
• Understanding the nature of the entity, is it a single business unit, a member of a group or
a multinational. Is it a public limited liability company, a limited liability company, a
partnership business or a sole trader?

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 • Understanding the industry in which the entity is operating and the current condition of
the industry; Prepare an analysis of the tax history of the company;
• Carry out an analytical review of the company’s financial statement over three to four
years, and comparing this with the industry average, where possible; and
• Determine and document unusual figures shown by the analytical review.

Secondary Risk Assessment

Secondary risk assessment is carried out by the tax audit at the commencement and during the
audit. The tax auditor will corroborate his initial risk assessment by enquiring from the
management to confirm what he has documented during his preliminary risk assessment. Also,
the observations of the tax auditor during the audit may show new areas of risk which the tax
auditor must document and carry out audit procedures to obtain sufficient and appropriate
evidence to confirm.

7.5 End of chapter questions

Q1. The total risks of material misstatements in the taxpayer’s financial statements can be
grouped under two categories.

Required:

a. Discuss briefly each of these two categories. (6 marks)

b. List and discuss briefly the component risks under each category. (9 marks)

Q2.

a. Auditor’s risk assessment procedures involve understanding the entity and its
environment.

Required:

What are the matters the auditor would consider when seeking to understand the
entity’s business environment? (5 marks)
b. Discuss briefly the three risks assessment procedures required under ISA 315. (10 marks)
Q3.

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 a. List seven benefits of audit risk assessment. (7 marks)
b. List four limitations of audit risk assessment. (4 marks)
c. List four positive factors that can minimize audit risks. (4 marks)

Q4. Discuss briefly the concept of taxpayer’s and industry profiling in tax audit. (15 marks)

Q5. Discuss briefly the concept of materiality and explain how materiality for an audit can
be decided. (15 marks)

7.6 Suggested answers to end of chapter questions

A1.

a. The total risk of material misstatement can be divided into two categories, business risks
and audit risks.

Business risks
ISA 315.2 defines business risk as ‘a risk resulting from significant conditions, events,
circumstances, actions or inactions that could adversely affect an entity’s ability to
achieve its objectives and execute its strategies, or from the setting of inappropriate
objectives and strategies.
Audit risk
Audit risk is the risk that the financial statements contain a material misstatement that
have not been discovered by the auditor which will results in the auditor giving an
inappropriate opinion. According to ISA 200, the auditor should plan and perform the
audit in such a way as to reduce audit risk to an acceptably low level.
Audit risk is defined by ISA 200, “as the risk that the auditor expresses an inappropriate
opinion when the financial statements are materially misstated”. Audit risk is a function
of the risks of material misstatement and detection risk. Audit risk is fundamental to the

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 audit process because auditors cannot and do not attempt to check all transactions. This is
because it would not be practicable for the auditor to check all transactions as no one
would be prepared to pay the auditor to do so, given the volume of transactions that make
up the financial statements. And besides, it would be a waste of time and money for
auditor to attempt to check all the transactions, hence the importance of the risk‑based
approach toward auditing.

b. Business risks can be grouped into three as follows:

Operational risk – this arises as a result of operational errors, e. g. bad quality products,
etc.;

Financial risk – this is as a result of the company being high geared, i. e., high
borrowing and a rise in interest rate which can put the company into pressure which
increases possibilities of material misstatement;

Compliance risk – this arises as a result of failure to comply with regulations;

The auditor is not concerned with business risks as it is not the auditor’s responsibility to
run the business for the benefit of shareholders. The auditor, however, must consider
business risk because business risk often results into audit risk as it can cause a material
misstatement in the financial statements.
While audit risk comprises of three components which must be considered together, these
are:

Inherent risk: This is “the susceptibility of an assertion about a class of transaction,

account balance or disclosure to a misstatement that could be material, either individually
or when aggregated with other misstatements, before consideration of any related
controls” (IAASB Handbook – Glossary of terms).
Inherent risk is the risk that items may be misstated as a result of their inherent
characteristics, which may be from:

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• The nature of the items themselves, for example, estimated items because they are not
based on specific measure; and
• The nature of the entity and the industry in which it operates.
It should be noted that inherent risk exists despite the controls in place as it is
independent of controls. When inherent risk is assessed to be high, then there is a high
risk of misstatement of an item in the financial statements.

Control risk: This is defined as, “the risk that a misstatement that could occur in an
assertion about a class of transaction, account balance or disclosure and that could be
material either individually or when aggregated with other misstatements, will not be
prevented or detected and corrected, on a timely basis by the entity’s internal control”
(IAASB Handbook – Glossary of terms).
This risk is based on the effectiveness of the design and operation of internal control in
achieving the entity’s objective relevant to preparation of the entity’s financial
statements.
However, some control risk will always exist because of the inherent limitations of
internal controls which include:
• Management override;
• Possibility of human error; and
• Effect of system change.
When the auditor is preparing the audit plan, the auditor needs to make an assessment of
control risk for different areas of the audit. The auditor’s test of control will provide
evidence about control risk.

Detection risk: Detection risk is defined as, “the risk that procedures performed by the
auditor to reduce audit risk to an acceptably low level will not detect a misstatement that
exists and that could be material, either individually or when aggregated with other
misstatements” (IAASB Handbook – Glossary of terms). It is the risk that the auditor’s
procedures will fail to detect a misstatement in a transaction or in an account balance.
Detection risk therefore, is a function of the effectiveness of an audit procedure and of its

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 application by the auditor. It is borne out of the consequence of the inability of the
auditor to examine all available evidence or what is referred to as “sampling risk”.
A2.
a. Matters to be considered by the auditing when seeking understanding of the entity and its
environment are:
• Industry, regulatory and other external factors, including the applicable financial
reporting framework. Specifically, these are the market and competition, product
technology, accounting principles, tax, legislation, etc.;
• Nature of the entity, this includes, revenue sources, products or service, locations, key
customers and suppliers, financing sources, e-commerce, etc.;
• Objectives and strategies and related business risks. These include new products and
services, expansion opportunities, deployment of information technology, etc.;
• Measurement and review of the entity’s financial performance, by carrying out
performance trend analysis, ratios analysis, and comparison with key performance
indicators (KPI) and budgets and forecasts; and
• Assessment of internal control systems.
b. The following procedures are required under ISA 315 for the auditor to obtain an
understanding of the entity and its environment, including its internal control systems:
• Enquiries of management and other within the entity: Auditors must have discussions
with the client’s management about its objectives and expectations, and its plans for
achieving those goals;
• Analytical procedures: Analytical procedures performed as risk assessment procedures
should help the auditor in identifying unusual transactions or positions. They may
identify aspects of the entity of which the auditor was unaware, and may assist in
assessing the risks of material misstatement in order to provide a basis for designing and
implementing responses to the assessed risks.
It is the analysis of relationships to identify inconsistencies and unusual relationships.
The auditor is required to apply analytical procedures in his risk assessment procedures
and in the final overall review of the financial statements at the end of the audit. It can
also be used as a source of audit evidence when it is more appropriate than tests of details
in reducing detection risk.

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 In carrying out analytical procedures, the auditor may compare the entity’s financial
statement being audited with:
▪ Prior periods;
▪ Budget and forecasts;
▪ Industry averages; and
▪ Predictive estimates.
Also, analytical procedures involve analysis of:
▪ Ratios analysis which involves relationship between elements of financial statements;
▪ Relationships between financial and non- financial data, for example, total salaries
and wages with the average number of employees over many periods.
Results of the analytical procedures may reveal to the auditor aspects of the entity which
the auditor may not be aware initially and will assist the auditor in assessing risks of
material misstatement; and

• Observation and inspection: Observation and inspection may also provide information
about the entity and its environment. Observation and inspection as audit procedures can
potentially cover a very broad area, including observation or inspection of the entity’s
operations, documents, and reports prepared by management, and also of the entity’s
premises and production facilities.
A3.
a. The benefits of audit risk assessment are:
i. It saves audit cost and fees;
ii. It ensures that the audit work is completed expeditiously and economically;
iii. It removes all avoidable pitfalls in the audit procedure;
iv. It reduces the possibility of under or over auditing;
v. It results in a more effective and efficient audit work;
vi. It focuses the auditor’s attention on factors which are more likely to result in
misstatement; and
vii. It facilitates the use of sampling and the attendant benefits derived there from.
b. The limitations of audit assessment include the following:
i. Subjective values have to be placed on inherent and control risk;

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 ii. It may result in a mechanical approach which leads to a loss of auditor’s judgment;
iii. The auditor may spend more time on the mechanic of the process and assessment at the
expense of time spent obtaining audit evidence; and
iv. The assignments of risk levels are often not suitably specific
v. which puts into question the validity of any conclusions reached.

c. Audit risk may be reduced if some of the following “positive” factors are identified:
i. The enterprise is financially stable without excessive debts, and is likely to remain so in
the foreseeable future;
ii. The enterprise is profitable, if its objective is to make profit;
iii. The proprietor, in the case of a private company plays active role in the business;
iv. The internal controls are strong and the company’s accounting personnel are competent;
v. The past audit experience has provided evidence of good accounting controls with no
major audit problems; and
vi. The enterprise’s relationship with the regulatory authorities has been good.

A4. Taxpayer and industry profiling are risk assessment techniques in risk-based tax audit. It
involves an understanding of the taxpayer and its industry environment. Taxpayer profiling is
defined as “the development of a thorough understanding of the taxpayer’s compliance
behaviour and their business. It involves carrying out of the following tasks by the tax auditor:
e. Review of basic tax information which includes determination whether:
• The return was filed by due date;
• Required schedules are were completed;
• Taxes are were overdue; and
• Financial statements have been filed with other statutory authorities.
f. Review the taxable income and tax payable calculated by the taxpayer, which include
determination whether:
• Carry over loss, exempted income and deducted income were properly applied;
• Accumulated income tax is properly calculated; and
• The tax payable and tax credit are properly calculated.
g. Review financial statements, which should include:

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 • Trend analysis on major accounts; and
• Calculation of important ratios
h. Review changes in paid-in capital and major shareholders
e. Review inventories movements between affiliated companies
f. Review of transfer pricing issues if the taxpayer is a member of multinational, which
involves:
• Review transfer pricing
• Review the flow of funds to or through tax havens
• Examine arm’s length dealings;
• Research any Advance Pricing Arrangements.
g. Review the taxpayer, which includes examination of the taxpayer’s
• Organisation chart
• Major products
• Functions of each department of enterprise
• Documentation relating to tax planning strategies
• Taxpayer’s use of e-commerce
j. Review third party information, which includes, quarterly returns from banks, returns from
Customs, etc.
j. Review of the current industry environment of the taxpayer, which includes:
• The current market trend of the products;
• The position of the taxpayer in the market place; and
• The average industry indices.
The level of other pre-contact work will largely depend on the complexity of theaffairs of the
customer concerned, and the tax risks identified during riskassessment. However, these can be
categorised into four general headings:
• Reviews of unreported income
• Intelligence gathering
• Reviews of prior compliance history.
• Returns preparer performance, i.e. the tax consultant of the taxpayer that filed the returns.

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A5. The objective of a tax audit is to enable the tax auditor to have a reasonable assurance that the
financial statements upon which the tax payer’s tax liability is based are true and fair in all material
respect.
Materiality is defined as any information that its omission or misstatement could influence the
decisions of users taken on the basis of the financial statements. Therefore, the auditor is expected
to identify material errors, omissions and misstatements, as regards to amount (quantity) and
nature (quality).
To assist the auditor in this regard, the auditor has to set a level for what he considered to be
material. This is based, however, on the auditor’s judgement. The level of materiality set by the
auditor will have impact on the audit in two ways:
• The type, timing and extent of audit procedures; and
• The evaluation of effect of misstatements which may be to seek adjustments of the
materiality levels or to determine the degree of any auditor’s report.

Calculation of materiality
This is purely a matter of professional judgement of the auditor. However, the following levels of
materiality are usually followed:
• Between 1/2 and 1% of revenue;
• Between 1 and 2% of total assets; or
• Between 5 and 10% of profit before tax; or
• Between 5 and 10% of tax payable.
However, the figure chosen by the auditor will depend on the confidence the auditor has in the
entity’s figures and other factors that may affect the auditor’s professional judgement.

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 CHAPTER EIGHT
8. STATUTORY POWERS OF TAX AUDITORS AND INVESTIGATORS

Outline
8.0 Legal bases for tax audit and investigation
8.1 Power of tax authorities on audit and investigations
• Power to co-opt law enforcement officers
• Power to obtain information
• Power to enter premises
• Power to obtain third party confirmation from banks, etc.
• Power of search and seizure under investigation
8.2 Power of tax authorities to recover outstanding tax liability
• Power of distraint
• Power to prosecute tax defaulters for recovery of tax
8.3 End of chapter questions
8.4 Suggested answers to end of chapter questions

Objective
After studying this chapter candidates should be able to understand:
• Provisions of the relevant tax laws on audit and investigation;
• The power of the tax authorities in audit and investigation; and
• The avenues opened to the tax authorities to recover outstanding tax liability

8.0 Legal basis for the power of tax authorities to conduct tax audit and tax investigation
Introduction
Almost all the tax laws in operation in the country have provisions for audit, verification and
investigation. Also, the Federal Inland Revenue Establishment Act 2007 gives the power of
investigation to the Federal Inland Revenue Service in section 35 which states in sub sections 1
and 2 that:

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‘the Service shall employ Special Purpose Tax Officers to assist any relevant law
enforcement agency in the investigation of any offence under this act. Notwithstanding
anything to the contrary in any other enactment or law, the Service shall have the power to
investigate or cause investigation to be conducted to ascertain any violation of any tax law
whether or not such violation has been reported to the Service.’

Subsection (3) further provides that:

‘in conducting any investigation under subsection (2) of this section, the service may cause
investigation to be conducted into the properties of any person if it appears to the Service
that the lifestyle of the person and the extent of the properties are not justified by his
source of income’.

In section 25, sub section 1, the act provides that:

“the Service shall have power to administer all the enactment listed in the First Schedule to
this Act and any other enactment or law on taxation in respect of which the National
Assembly may confer power on the Service.” And section 68 states that “Notwithstanding
the provisions of this Act, the relevant provisions of all existing enactments including but
not limited to, the laws in the First Schedule shall be read with such modifications as to
bring them into conformity with the provisions of this Act.

Sub section 2 states further

“If the provisions of any other law, including the enactments in the First Schedule are
inconsistent with the provisions of this Act, the provisions of this Act shall prevail and the
provisions of that other law shall to the extent of the inconsistency void”.

The implication of the above is that the Service has power of audit, verification and investigation
in respect of all the enactments in the First Schedule. The enactments in the first schedule are:

1. Companies Income Tax Act

2. Petroleum Profits Tax Act
3. Personal Income Tax Act
4. Capital Gains Tax Act

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 5. Value Added Tax Act
6. Stamp Duty Act
7. Taxes and Levies (Approved List for Collection) Act
8. All regulations, proclamation, government notices or rules issued in terms of these
legislation.
9. Any other law for the assessment, collection and accounting of revenue accruable to
the Government of the Federation as may be made by the National Assembly from
time to time or regulation incidental to those laws, conferring any power, duty and
obligation on the Service.
10. Enactment or Laws imposing Taxes and Levies within the Federal Capital Territory.
11. Enactment or Laws imposing collection of taxes, fees and levies collected by other
government agencies and companies including signature bonus, pipeline fees, penalty
for gas flared, depot levies and Licences, fees for Oil Exploration Licence (OEL), Oil
Mining Licence (OML), Oil Production Licence (OPL), royalties, rents (productive
and non-productive), fees for licences to operate drilling rigs, fees for oil pipeline
licences, haulage fees and all such fees prevalent in the oil industry but not limited to
the above list.

Tax audits are similar to specialisedaudits. They are additional to statutory audits and are carried
out by tax officials from relevant tax authority(ies). The approach and scope of work would be
slightly different from theauditcarried out under CAMA, 1990.

The legal backing for conducting tax audit and tax investigation by the relevant tax authorities
could be found in the following provisions of the tax laws:

Section 60(4) of the Companies Income Tax Act, Cap. C21, LFN 2004 as amended provides
that:

“Nothing in this section or in any other provision of this Act shall be constructed as precluding
the Service from verifying by tax audit or investigation into any matter relating to any return or
entry in any book, document, accounts, including those stored in a computer, digital or magnetic,

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optical or electronic media as may, from time to time, be specified in any guideline by the
Service”

Section 66(1) of the Companies Income Tax Act, Cap. C21, LFN 2004 further provides that:

“If the Board discovers or is of the opinion at any time that any company liable to tax has not
been assessed or has been assessed at a less amount than that which ought to have been charged,
the Board may, within the year of assessment or within six years after the expiration thereof and
as often as may be necessary, assess such company at such amount or additional amount, as
caught to have been charged, and the provision of this Act as to notice of assessment, appeal and
other proceedings shall apply to such assessment or additional assessment and to tax charged
thereunder”
Provided that where any form of fraud, willful default or neglect has been committed by or on
behalf of any company in connection with any tax imposed under this Act or under the
Companies Income Tax Act, the Board may at any time and as often as may be necessary, assess
such company at such amount or additional amount as may be necessary for the purpose of
making good any loss of tax attributable to the fraud, willful default or neglect.

Section 55 of Personal Income Tax Act, Cap. P8, LFN 2004 stipulates as follows:
“(1) If the relevant tax authority discovers or is of opinion at any time that a taxable person liable
to income tax has not been assessed or has been assessed at a less amount than that which ought
to have been charged, the relevant tax authority may, within the year of assessment or within six
years after the expiration thereof and as often as may be necessary assess the taxable person
assess the taxable person at such amount or additional amount as ought to have been charged,
and the provisions of this Act as to notice of assessment, appeal and other proceedings shall
apply to that assessment or additional assessment and to the tax thereunder.
(2) For the purpose of computing under subsection (1) of this section the amount or the
additional amount which ought to have been charged, all relevant facts consistent with paragraph
(b) of the proviso to section 66 (2) of this Act shall be taken into account whether or not known
when a previous assessment on the same taxable person for the same year was being made or
could have been made:

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Provided that where any form of fraud, wilful defraud or neglect has been committed by or on
behalf of a taxable person in connection with any tax imposed under this Act, the relevant tax
authority may at any time and as often as may be necessary assess that taxable person at such
amount or additional amount as may be necessary for the purpose of making good any loss of tax
attributable to the fraud, wilful default or neglect”.

Section 3(1) of Petroleum Profits Tax Act, Cap. P13, LFN 2004 says:
“The due administration of this Act and the tax shall be under the care and management of the
Board who may do all such acts as may be deemed necessary and expedient for the assessment
and collection of the tax and shall account for all amounts so collected in a manner to be
prescribed by the Minister.

Section 36 of Petroleum Profits Tax Act, Cap. P13 LFN 2004 says:
“If the Board discovers or is of the opinion at any time that, with respect to any company liable
to tax, has not been charged and assessed upon the company or has been charged and assessed
upon the company at a less amount than that which ought to have been charged and assessed for
any accounting period of the company, the Board may within six years after the expiration of
that accounting period and as often as may be necessary, access such company with tax for that
accounting period at such amount or additional amount as in the option of the Board ought to
have been charged and assessed, and may make any consequential revision of the tax charged or
to be charged for any subsequent accounting period of the company.
(4) Notwithstanding the other provisions of this section, where any form of fraud, willful
default or neglect has been committed by or on behalf of any company in connection with any
tax imposed under this Act, the Board may, at any time and as often as may be necessary, assess
the company on such amount as may be necessary for the purpose of recovering any loss of tax
attributable to fraud, willful default or neglect.”

Section 39 of the Value Added Tax Act, CAP, V1, LFN 2004 stipulates:
“An authorized officer may at any time enter without warrant any premises upon which he has
reasonable grounds to believe that a person is carrying on business in order to ascertain whether
this Act is being complied with (whether on the part of the occupier of the premises or any other

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person) and no entry he may carry out such inspections and make such requirements as may be
specified by the Board.
Where an authorized officer enters any premises in exercise of the power conferred on him by
subsection (1) of this section he may take with him such persons as he considers necessary for
carrying out his functions under this Act.”

Section 24 of Stamp Duties Act, Cap. S8, LFN 2004 states:

“Every person having in its custody any rolls, books, records, papers, documents, or proceedings,
the inspection whereof may tend to secure any duty, or to prove or lead to the discovery of any
fraud or omission in relation to any duty, shall at all reasonable times permit any person thereto
authorized by the commissioner to inspect the rolls, books, records, paper, documents and
proceedings, and to take such notes and extracts as he deems necessary, without fee or reward
and in case of refusal, shall for every such refusal be guilty of an offence and be liable on
conviction to a fine of twenty Naira.
Where such rolls, books, records, papers, documents or proceedings are in the custody of any
bank, such inspection shall first be made by a commissioner unaccompanied by any other person
unless the commissioner decides that it is necessary for him to have assistance in determining
whether any fraud or omission in relation to any duty has taken place.”

The need to periodically verify and audit taxpayers’ tax returns and the records from which the
tax returns are prepared is an integral part of the self-assessment scheme. The tax audit exercise
essentially is meant to enable the tax authority to further satisfy itself that audited financial
statements and the related tax computations submitted by the taxpayer agree with the underlying
records. This periodic check is carried out by the tax audit branch of the relevant tax authority.
Examples of specific legal provisions, according to Okonkwo (2014) and Bassey (2013) include:

i) FIRS (Establishment) Act, 2007- S.8, S. 23, S 29 & S.35;

ii) Companies Income Tax Act Cap. C21, LFN 2004-S.60, S.66, S. 58 (Section 17, of the
Companies Income Tax (Amendment) Act 2007;
iii) Personal Income Tax Act 2004, as amended - S.46, S.47, S. 55, S.103;
iv) Petroleum Profit Tax Act Cap. P13, LFN 2004 S3(1), S.36;
v) Value Added Tax Cap. VI LFN 2004. S. 39;

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vi) Stamp Duties Act Cap. S8, 2004 S 24; and
vii) Education Tax Act Cap E4, LFN 2004 S. 2(1)(b).

8.1 Power of tax authorities on audit and investigations

The tax authorities and by extension, the tax auditors and investigators have been granted many
powers under the various tax laws to ensure the enforcement of the revenue laws. The various
powers are discussed below.

Power to co-opt law enforcement officers

Section 36, sub-sections 1 to 3 of the Federal Inland Revenue Service (Establishment) Act
empowers Federal Inland Revenue Service (FIRS) to co-opt into the service in its discharge of
enforcement duties, as follows:
“(1) The Service 'may co-opt the assistance and co-operation of any of the law enforcement
agencies in the discharge of its duties under this Act.
(2) The law enforcement officers shall aid and assist an authorized officer in the execution of any
warrant of distraint and the levying of distraint.
(3) Any tax officer armed with the warrant issued by a judicial officer and accompanied by a
number of law enforcement officers as may be determined by the Executive Chairman shall-
(a) enter any premises covered by such warrant and search for seize and take
possession of any book, document or other article used or suspected, to have been used
in the commission of an offence;
(b) inspect, make copies of, or take extracts including digital copies from any
book, record, document or computer, regardless of the medium used for their
storage or maintenance;
(c) search any person who is in or on such premises;
(d) open, examine and search any article, container or receptacle;
(e) open any outer or inner door or window of any premises and enter or
otherwise forcibly enter the premises and every part thereof; or
(f) remove by reasonable force any obstruction, to such entry, search, seizure
or removal as he is empowered to effect.”

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Power to obtain information
The various tax laws contain provisions that empowered the relevant tax authorities to call for
returns, books, documents and information from the taxpayers or other parties who are in
custody of such records, books, documents, etc., that can assist the tax authority assess the
taxpayer’s tax liability. These provisions are:
Companies Income Tax Act, Cap LFN 2007
Section 60 - Call for returns, books, documents and information – provides that:
“(1) For the purpose of obtaining full information in respect of the profits within the time
specified by the notice to any person the Service shall give notice to that person
requiring him to-
(a) complete and deliver to the Service any return specified in such notice;
(b) appear personally before an officer of the Service for examination with respect
to any matter relating to such profits;
(c) produce or cause to be produced for examination books, documents, and any
other information at the place and time stated in the notice, which time may be
from day to day, for such period as the Service may deem necessary; or
(d) give orally or in writing any other information including a name and address
specified in such notice.
(2) For the purposes of paragraphs (a) to (a) of subsection (1) of this section, the time
specified by such notice shall not be less than seven days from the date of service
of such notice, except that an officer of the Service not below the rank of a chief
inspector of taxes or its equivalent may act in any of the cases stipulated in
paragraphs (a) to (a) of subsection (1) of this section, without giving any of the
required notices set out in this section.”
Personal Income Tax Act 2007, as amended
Section 47 - Power to call for returns, books, documents and information – states:
“(1) For the purpose of obtaining full information in respect of the income or gain of a person,

232
the relevant tax authority may give notice to the person requiring him, within the time
limited by the notice, to-
(a) complete and deliver to the relevant tax authority, any return specified in the notice;
(b) attend personally before an officer of the relevant tax authority for examination with
respect to any matter relating to such income gains;
(c) produce or cause to be produced for examination at the place and time stated in the
notice which time may be from day-to-day for such period as the relevant tax
authority may consider necessary, for the purpose of the examination of any book,
document, account and return which the relevant tax authority may deem necessary;
or
(d) give orally or in writing any other information including a name and address specified
in the notice:
Provided that a person engaged in banking shall not be required to disclose any information
unless a disclosure is required in a letter signed by the chairman of the relevanttax authority.”

Power to enter premises

The tax laws also permit the relevant tax authorities to enter premises of tax payers as at when
necessary in relation to the tax payer’s tax affairs. Some of these provisions are:
Casino Taxation Act Cap C3
Section 2 - Power to enter and inspect, etc., returns – states that:
“(1) Any person may, on production of a warrant signed by the chairman of the Board
authorising him in that behalf, enter on any part of the premises where the casino is. at
any time during the hours of play or at reasonable times outside those hours and inspect
statements or returns required for the purposes of this Act and where necessary certify as
correct any such statement or return, whether or not it is intended to be delivered or sent
to the Board.”

Personal Income tax Act 2004, as amended

Section 103 - Power to enter and require information - stipulates:

233
“Whenever it is necessary for the purpose of obtaining information in relation to a personwho is
or may be liable to the tax imposed by this Act, or the income, occupation ordomestic
circumstances of that person, or for the purpose of collecting the tax, a tax collector may, during
daylight hours, enter into and upon any house or premises, providedhe does so without damage
to the house or premises, and require a person found thereinto give all the information orally to
him.”
Companies Income Tax Act 2004, as amended
Section 64 - Power to enter and search premises – stipulates:
“(1) Where in respect of any trade or business carried on in Nigeria by any companywhether or
not part of the operations is carried on outside Nigeria), the Board –
(a) is satisfied that there is reasonable ground for suspecting that an offence involving any form
of total or partial non-disclosure of information or any irregularityor offence in connection with,
or in relation to tax, has been committed; and
(b) is of the opinion that evidence of the offence or irregularity is to be found in thepremises,
registered office, any other office, or place of management of thecompany or in the residence of
the principal officer, factor, agent or representative of the company,the Board may authorise an
officer of the Board to enter if necessary by force thepremises, registered office, any other office
or place of management or the
residence of the principal officer, factor or agent or representative of the company,at any time
from the date of such authorisation by the Board and conduct a search.
(2) An authority to enter the premises, registered office, any other office or place ofmanagement
or residence of the principal officer, agent or factor of a company, toconduct a search, shall be in
the form contained in the Sixth Schedule to this Act,and such authority shall be sufficient
warrant to search, seize and remove anyrecords and documents found on such premises, office
or, residence of the principal
officer, agent or factor of the company, whether or not belonging to the company.”

Value Added Tax Act Cap Vi, LFN 2004

Section 39 - Power of inspection- states that:

234
“(1) An authorised officer may at any time enter without warrant any premises upon which hehas
reasonable grounds to believe that a person is carrying on business in order toascertain whether
this Act is being complied with (whether on the part of the occupier ofthe premises or any other
person), and on entry he may carry out such inspections andmake such requirements as may be
specified by the Board.
(2) Where an authorised officer enters any premises in exercise of the power conferred onhim by
subsection (1) of this section, he may take with him such persons as he considersnecessary for
carrying out his functions under this Act.”

Power to obtain third party confirmation from banks, etc

Some of the tax laws also give power to the tax authority to demand third parties, especially
banks, to summit quarterly reports on the activities of the accounts maintained by taxpayers with
the bank. These provisions are:
Companies Income Tax Act Cap LFN 2007:
Section 61- Information to be delivered by bankers – states:
“(1) Without prejudice to section 60 of this Act, every person engaged in banking including any
person charged with the administration of the Federal Savings BankAct, shall prepare a return at
the end of each month specifying the names andaddresses of new customers of the bank and shall
not later than the seventh day ofthe next following month deliver the return to a tax authority of
the area where thebank operates, or where such customer is a company to the Federal Board
ofInland Revenue.
(2) Subject to the foregoing provisions of this section, for the purpose of obtaininginformation
relative to taxation, the Board may give notice to any person includinga person engaged in
banking business in Nigeria and any person charged with theadministration of the Federal
Savings Bank Act to provide within the timestipulated in the notice, information including the
name and address of any personspecified in the notice:
“Provided that a person engaged in banking business in Nigeria including any person charged
with the administration of the Federal Savings Bank Act, shall not berequired to disclose any
further information under this section unless suchdisclosure is required by a notice signed by the
chairman of the Board”.

235
Personal Income Tax Act 2007, as amended:
Section 49- Information to be delivered by bankers – stipulates that:
“(1) Without prejudice to section 48 of this Act, a person engaged in banking shall prepare
areturn at the end of each month specifying the names and addresses of new customers ofthe
bank and shall not later than the seventh day of the next following month deliver thereturn to a
tax authority of the area where the bank operates, or where such customer is acompany, to the
Federal Board of Inland Revenue.
(2) Subject to subsection (1) of this section, the relevant tax authority may, for the purpose
ofobtaining information relative to taxation, give notice to a person, including a personengaged
in banking business in Nigeria to provide within the time stipulated in the notice,information
including the name and address of any person specified in the notice:
Provided that a person engaged in banking business in Nigeria shall not be required todisclose
any further information under this section unless the disclosure is required by anotice signed by
the chairman of the relevant tax authority.
(3) A person engaged in banking in Nigeria who contravenes the provisions of this section is,in
respect of each offence, liable on conviction to a fine of N500,000 in the case of abody
corporate, and a fine of N50,000 in the case of an individual.
(4) Nothing in the foregoing provisions of this section or in any other provision of this Actshall
preclude the relevant tax authority from verifying by tax audit any matter relating tothe profits of
a company or any matter relating to entries in any book, document, accountor return as the
relevant tax authority may, from time to time, specify in its guidelines.”

Federal Inland Revenue (Establishment) Act, 2007:

Section 28states that:
“(1) Without prejudice to section 26 of this Act, every bank shall prepare upon demand by
theService, quarterly returns specifying-
(a) in the case of an individual, all transactions involving the sum N5,000,000.00 andabove; or
(b) in the case of a body corporate, all transactions involving the sum ofN10,000,000.00 and

236
above, the names and addresses of all customers of the bankconnected with the transaction and
deliver the returns to the Service;
(c) the names and addresses of new customers of the bank and shall not later than theseventh day
of the succeeding month deliver the returns to the Service.
(2) Subject to subsection (1) of this section, for the purpose of obtaining information relativeto
taxation, the Service may give notice to any person including a person engaged inbanking
business in Nigeria to provide within the time stipulated in the notice,information including the
name and address of any person specified in the notice:
Provided that a person engaged in banking business in Nigeria, shall not be required todisclose
any additional information about his customer or his bank under this sectionunless such
additional disclosure is required by a notice signed by the ExecutiveChairman of the Service on
the advice of the Technical Committee of the Board.
(3) Any bank that contravenes the provisions of this section commits an offence and shall,
onconviction be liable to a fine not exceeding N500,000.00 on corporate customers and
notexceeding N50,000.00 in the case of individual customer.”

Power of search and seizure under investigation

The tax laws further give power to the relevant tax authorities to enter taxpayers’ business
premises, search and if necessary, seize some documents, chattels, records, etc. The various
provisions are:

Federal inland Revenue (Establishment) Act, 2007

Section 29states:
:(1) Notwithstanding anything to the contrary in any other enactment or law, an authorized
officer of the Service shall at all reasonable times have free access to all lands, buildings,places,
books and documents, in the custody or under the control of a public officer,institution or any
other person, for the purpose of inspecting the books or documentsincluding those stored or
maintained in computers or on digital, magnetic, optical orelectronic media, and any property,
process or matter which the officer considers

237
necessary or relevant for the purpose of collecting any tax under any of the relevantenactment or
law or for the purpose of carrying out any other function lawfully conferredon the Service or
considered likely to provide any information required for the purposesof any of those enactments
or any of those functions and may, without fee or reward,make extract from, or copies of, such
books or documents.
(2) Where the hard copies of any of the books or documents mentioned in subsection (1) ofthis
section are not immediately available because they are stored in a computer or ondigital,
magnetic, optical or electronic media, the Service shall take immediate possessionof such
removable media and the related removable equipment or computer used toaccess the store
documents on the media in order to prevent the accidental or intentionaldestruction, removal or
alteration of records and documents, especially where such could
be needed as potential evidence in the investigation or criminal proceedings.
(3) Where the Service is able to obtain in place of taking physical possession of suchequipment,
computer or storage media under subsection of this section, and the Servicepossesses the ability,
equipment and computer software to make exact duplicate copies ofall information stored on the
computer hard drive and preserve all the information exactlyas it is on the original computer, the
Service shall make such copy and use it as digitalevidence during the investigation or criminal
proceedings.
(4) The occupier of a land, building or place that is entered or proposed to be entered by
anauthorised officer, shall-
(a) provide the officer with all reasonable facilities and assistance for the effectiveexercise of
powers under this section; and
(b) answer questions relating to the effective exercise of the powers under this
section, orally, or if required by the officer, in writing or by statutory declaration.”

Companies Income Tax Act Cap LFN 2007

Section 64- Power to enter and search premises – states:
“(1) Where in respect of any trade or business carried on in Nigeria by any company(whether or
not part of the operations is carried on outside Nigeria), the Board –

238
(a) is satisfied that there is reasonable ground for suspecting that an offence involving any form
of total or partial non-disclosure of information or any irregularityor offence in connection with,
or in relation to tax, has been committed; and
(b) is of the opinion that evidence of the offence or irregularity is to be found in thepremises,
registered office, any other office, or place of management of thecompany or in the residence of
the principal officer, factor, agent or representative of the company,the Board may authorise an
officer of the Board to enter if necessary by force thepremises, registered office, any other office
or place of management or the
residence of the principal officer, factor or agent or representative of the company,at any time
from the date of such authorisation by the Board and conduct a search.
(2) An authority to enter the premises, registered office, any other office or place ofmanagement
or residence of the principal officer, agent or factor of a company, toconduct a search, shall be in
the form contained in the Sixth Schedule to this Act,and such authority shall be sufficient
warrant to search, seize and remove anyrecords and documents found on such premises, office
or, residence of the principal
officer, agent or factor of the company, whether or not belonging to the company.
(3) On entering the premises with a warrant under this section, the officer may seizeand remove
anything whatsoever found therein which he has reasonable cause tobelieve may be required for
the purpose of arriving at a fair and correct taxchargeable on the company or as evidence for the
purposes of proceedings inrespect of such an offence as is mentioned insubsection (1) of this
section.
(4) For the purpose of this section, an officer authorised by the Board to execute anywarrant of
search under this section may call to his assistance a police officer and itshall be the duty of the
police officer when so required to aid and assist in theexecution of any warrant, to obtain
documents for the purposes of the taxchargeable or to be charged on the company or of the
proceedings in respect of t he
offence referred to in section (1) of this section.
(5) Where an entry to a premise has been made with a warrant under this section andthe officer
making the entry has seized anything under the authority of the warrant,he shall immediately
before the seizure if required by either-

239
(a) the principal officer of the company; or
(b) any other person who has had the possession or custody of those things, providethat principal
officer or person with the list of items seized or surrendered.
(6) It shall be the responsibility of any person on whom such warrant as mentioned insubsection
(2) of this section is served to:
(a) co-operate fully with the person or persons authorised to conduct a search byallowing easy
access to the premises to be searched and to the items or documents that may be required for the
investigation;
(b) answer all questions and queries put to him in the cause of the search;
(c) put in accessible position and facilitate the removal of all items that may berequired to assist
the investigation.”

Personal Income Tax Act 2007, as amended

Section 53- Power to enter and search premises, etc. – states:
“(1) Where in respect of a trade, vocation, profession or business carried on in Nigeria by
anindividual (whether or not part of the operations is carried on outside Nigeria), therelevant tax
authority-
(a) is satisfied that there is reasonable ground for suspecting that an offence involvingany form
of total or partial non-disclosure of information, or any irregularity or anoffence in connection
with or in relation to tax has been committed; and
(b) is of the opinion that evidence of the offence or irregularity is to be found in thepremises, the
registered office, or any other office or place of management of thetrade, vocation, profession or
business or in the residence of the principal officer,factor, agent or representative of the
individual,
the relevant tax authority may authorise any of its officers to enter, if necessary, by force,the
premises, registered office or the place of management or the residence of theindividual, factor,
agent or representative of the individual, at any time from the date ofthe authorisation and
conduct a search.
(2) An authority to enter the premises, registered office, place of management or residence ofan
individual, factor or agent of the individual, to conduct a search, shall be in the formcontained in
the Eighth Schedule to this Act, and the authority shall be sufficient warrantto search, seize and

240
remove any records and documents found on such premises, office orplace of management or
residence of the individual, his factor or agent whether or not,belonging to that individual, factor,
agent or the business.
(3) On entering a premises with a warrant under this section, the officer may seize andremove
anything whatsoever found therein which he has reasonable cause to believe maybe required for
the purposes of arriving at a fair and correct tax chargeable on theindividual or as evidence for
the purposes of a proceeding in respect of such an offence asis mentioned in subsection (1) of
this section.
(4) For the purposes of this section, an officer authorised by the relevant tax authority toexecute
a warrant of search under this section may call to his assistance a police officer,and it shall be the
duty of the police officer when so required to aid and assist in theexecution of a warrant for the
purpose of obtaining an information on the tax charged orto be charged on the individual or of
the proceeding in respect of an offence referred to insubsection (1) of this section.
(5) Where an entry to a premises has been made with a warrant under this section and theofficer
making the entry has seized anything under the authority of the warrant, he shall, immediately
before the seizure, if required by any person appearing to be the custodian ofthose things seized,
provide that person with the list of items seized or surrendered.
(6) An individual on whom a warrant under this section is served shall-
(a) cooperate fully with any person authorised to conduct a search by allowing him easyaccess to
the premises to be searched and to the items or documents that may berequired for the
investigation;
(b) answer all questions and queries put to him in the course of the search;
(c) facilitate the removal of all items that may be required to assist the investigation.”

8.2 Power of tax authorities to recover outstanding tax liability

After tax liability has become final and conclusive, the tax authorities have been granted the
following powers to enforce payment of the outstanding tax liability.
Power of distraint
According to Somorin (2012), distraint means a process whereby force is applied to collect the
tax due by seizing the movable properties of the debtor taxpayer and sealing the office premises

241
thus forcing him to pay the owed tax. She further opined that it is a legal process which allows
the Inland Revenue to seize a taxpayer’s possessions and, if necessary, sell them to settle a debt
owed to the Inland Revenue.
She said further that Distraint is an effective method of enforcement which is usually carried out
where all administrative procedures have failed.
The provisions of power of distraint are contained in the Federal Inland Revenue Establishment
Act, LFN 2007, section 33 and the fourth schedule, Companies Income Tax Act cap LFN 2007,
section 86, subsections 1 to 2 and the fourth schedule; and personal Income tax Act LFN 2007 as
amended by The Amendment act 2011, section 104.
The provisions are as follows:

Federal Inland Revenue (Establishment) Act 2007

Section 33 states-
“( 1) Without prejudice to any other power conferred on the Board for the enforcement of
payment of tax due from a company, where an assessment has become final and conclusive and a
demand notice has, in accordance with the provisions of the relevant tax laws tax in the First
Schedule to this Act, been served upon the taxable person or upon the person in whose name the
taxable person is chargeable, then, if payment of the tax is not made within the time limited by
the demand notice, the Board may in the prescribed form, for the purpose of enforcing payment
of the tax due-
(a) distrain the taxpayer by his goods or other chattels, bonds or other securities;
(b) distrain upon any land, premises, or place in respect of which the taxpayer is the owner and,
subject to the following provisions of this section, recover the amount of tax due by sale of
anything so distrained.
(2) The authority to distrain under this section shall be in the form contained in the Fourth
Schedule to this Act and such authority shall be sufficient warrant and authority to levy by
distraint the amount of any tax due.
(3) For the purpose of levying any distraint under this section, any officer duly authorized by the
Board may execute any warrant of distraint and if necessary break open any building or place in
the day time for the purpose of levying such distraint, and he may call to his assistance any

242
police officer and the police officer shall, when so required aid and assist in the execution of any
warrant of distraint and in levying the distraint.
(4) Things distrained under this section may, at the cost of the taxpayer, be kept for 14 days and
at the end of that time if the amount due in respect of the tax, cost and charges of any incidental
to the distraint are not paid, they may, subject to subsection (6) of this section, be sold at any
time thereafter.
(5) Out of the proceeds of such sale, there shall, in the first lace, be paid the cost or charges of
any incidental to the (sale and keeping of the) distraint, and disposal there under and in the next
place the amount due in respect of the tax, and the balance (if any) shall be payable to the
taxpayer upon demand being made by him or on his behalf within one year of the date of sale.
(6) Nothing in this section shall be construed so as to authorize the sale of any immovable
property without an order of a High Court, lade on application in such form as may be prescribed
by the rules of court,
(7) In exercise of the powers of distraint conferred by this section, the person to- whom the
authority is granted under subsection (3) of this section may distrain upon all goods, chattels and
effects belonging to the debtor wherever the same may be found in Nigeria.”

FORM OF WARRANT OF DISTRAINT

To ……………………………………………………………………………………………….
Name Company …................................................................................................................
Amount of tax to be levied by distress (c) …................................................................... .. .
The Federal Inland Revenue Service, in exercise of powers vested in it by section 33 of
the Federal Inland Revenue Service Act, 2007, hereby authorizes you to collect and
recover the sum of..….............................................................. being arrears of tax due for
the years of assessment hereinafter mentioned from the above namedcompany whose
place of business is at (d);…....................................................................... and for the
recovery thereof the said Service further authorizes that you, with the aid (if necessary)
of your assistants and calling to your assistance any police officer (if necessary) which
assistance he is by Law required to give, do forthwith levy by distraint, the said sum

243
together with the costs and charges of and incidental to the taking and keeping
of such distraint, on goods, chattels, land, premises, or other distrainable things of the
said company wherever the same may be found and on all goods which you may find in
any premises or on any land in the use of or possession of the said company or any other
person on its behalf or in trust for the company.
And for the purpose of levying such distraint you are hereby authorized, if necessary,
with such assistance as aforesaid to break open any building or place in the daytime.
ii. The particulars of the said arrears of tax are as follows
Year of
Assessment
(i)…............................
(ii) …............................ .
(iii} …..................... .
No. of Notice of
Assessment N : k
SIGNED and issued under the hand of the Executive Chairman of the Federal
Inland Revenue Service at……......................... this ….......day of…….............. 20 ….....
Signature (f) …................................... .
Executive Chairman
Federal Inland Revenue Service
Sections 33 (2)
Amount of Tax due
………………………………. ……………………………………………
………………………………. ……………………………………………
………………………………. ……………………………………………

1. Companies Income Tax Act Cap C21, LFN 2004

Section 86 - Power to distrain for non-payment of tax- states:

244
“(1) Without prejudice to any other power conferred on the Board for the enforcementof
payment of tax due from a company, where an assessment has become final andconclusive and
a demand note has, in accordance with the provisions of this Partof this Act, been served upon
the company or upon the person in whose name thecompany is chargeable, then, if payment of
the tax is not made within the time limited by the demand note, the Board may in the
prescribed form, for the purposeof enforcing payment of the tax due-
(a) distrain the taxpayer by his goods or other chattels, bonds or other securities;
(b) distrain upon any land, premises, or place in respect of which the taxpayer isthe owner and,
subject to the following provisions of this section, recover theamount of tax due by sale of
anything so distrained.
(2) The authority to distrain under this section shall be in the form contained in theFourth
Schedule to this Act, and such authority shall be sufficient warrant andauthority to levy by
distress the amount of tax due.”

Fourth Schedule stipulates:

“(3) For the purposes of levying any distress under this section, any officer authorised in writing
by the Board may execute any warrant of distress and if necessary, break open any building
or place in the day time for the purpose of levying such distress, and he may call to his
assistance any police officer and it shall be the duty of that police officer when so required to
aid and assist in the execution of any warrant of distress and in levying the distress.
(4) Things distrained under this section may, at the cost of the taxpayer, be kept for fourteen
days and at the end of that time if the amount due in respect of the tax and the cost and
charges of and incidental to the distress are not paid, they may, subject to subsection (6) of
this section, be sold at any time thereafter.
(5) Out of the proceeds of any such sale there shall, in the first place, be paid the cost or charges
of and incidental to the (sale and keeping of the) distress, and disposal there under and in the
next place the amount due in respect of the tax; and the balance (if any) shall be payable to
the taxpayer upon demand being made by him or on his behalf within one year of the date of
the sale.

245
 (6) Nothing in this section shall be construed so as to authorise the sale of any immovable
property without an order of a High Court, made on application in such form as may be
prescribed by rules of court.”
3. Personal Income Tax Act Cap P8, LFN 2004, as amended by the Amendment Act 2011
Section 104.Power to distrain – states:
“(1) Without prejudice to any other power conferred on the relevant tax authority for the
enforcement of payment of tax due from a taxable person that has been properly served with an
assessment which has become final and conclusive and a demand notice has been served upon
the person in accordance with the provisions of this Part of this Act, or has been served upon the
person, then, if payment of tax is not made within the time specified by the demand notice, the
relevant tax authority may, in the prescribedform, for the purpose of enforcing payment of tax
due-
(a) distrain the taxpayer by his goods, other chattels, bond or other securities; or
(b) distrain upon any land, premises or places in respect of which the taxpayer is the owner and,
subject to the provisions of this section, recover the amount of tax due by sale of anything so
distrained.
(2) The authority to distrain under this section shall be in the form prescribed by the relevant tax
authority.
(3) For the purpose of levying any distress under this section, an officer duly authorized by the
relevant tax authority shall apply to a Judge of a High Court sitting in Chambers, under oath for
the issue of a warrant under this section.
(4) The Judge may, on application made ex-parte, authorize such officer, referred to in sub-
section (3) of this section, in writing to execute any warrant of distress and, if necessary, break
open any building or place in the daytime for the purpose of levying such distress and he may
call to his assistance
any police officer and it shall be the duty of any police officer when so required to aid and assist
in the execution of any warrant of distress and in levying the distress.
(5) The distress taken pursuant to this section may, at the cost of the owner, be kept for 14 days,
at the end of which time, if the, amount due in respect of tax and the cost and charges incidental
to the distress are not paid, the same way be sold.

246
(6) There shall be paid out of the proceeds of sale, in the first instance, the cost or charges
incidental to the sale and keeping of the distress and the residue, if any, after the recovery of the
tax liability, shall be payable to the owner of the things distrained or to the appropriate court
where the owner cannot be traced, within 30 days of such sale.
(7) In exercise of the powers of distress conferred by this section, the person to whom the
authority is granted under sub-section (3) of this section may distrain upon all goods, chattels and
effects belonging to the debtor wherever the same may be found in Nigeria.
(8) Nothing in this section shall be construed as authorizing the sale of any immoveable property
without an order of a court of competent jurisdiction.”

2. Casino Taxation Act Cap C3,

Section 16 - Power to distrain – states:
“(1) If the licensee neglects or refuses to pay the sum charged upon demand made, a principal
inspector of taxes shall for non-payment thereof distrain upon the premises in respect of which
the tax is charged, without any further authority for the purpose than a warrant under this section
issued for the purpose by the Board.
(2) The sum included in the demand shall be deemed to be a debt by the licensee as judgment
debtor owing to the Board as judgment creditor and payable under a judgment of a High Court in
the Federation, and for the purpose of levying distraint under the foregoing subsection, the
chairman oftheBoard or, in his absence, his deputy, shall have the powers of registrar and sheriff
of such a court; but any seizure and sale by way of distress may be enforced under the following
provisions of this section by a principal inspector of taxes acting under a warrant signed by the
chairman of the Board or his deputy.
(3) For the purpose of levying any such distraint, any inspector duly authorised by a warrant for
that purpose, may break open in the daytime any premises, calling to his assistance any
constable, and any such constable shall, when so required, aid and assist the inspector in the
execution of the warrant and in levying the distress.
(4) The warrant to break open shall be executed by or under the direction of and in the
presence of the inspector, and any distress so levied shall be kept for five days at the costs
and charges of the licensee.

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(5) If the licensee does not pay the sum due, together with the costs and charges within the said
five days, the distress shall be appraised by a competent valuer and shall be sold by public
auction for payment of the sum due and all costs and charges. Any overplus coming by the
distress, after the deduction of the costs and charges and of the sum due, shall be restored to the
licensee.
(6) If the premises are unoccupied and no distress can be found thereon at the time the tax is
payable, the inspector may at any future time when there is any distress to be found on the
premises enter, seize and sell under the same powers as if a distraint had been made on the
premises at the time the tax became due and as if the licensee had been in occupation at that
time.”
However, before the tax authority can exercise the power of distraint, the following conditions
must be fulfilled:
The assessment raised against the taxpayer becomesfinal and conclusive, which means that, the
tax payable has been decisively determined and no valid objection orappeal has been lodged
against the assessment within the time stipulated by the Act, and no further notice has beengiven
of a further appeal against a decision of the Tax Appeal Tribunal or a judge;
The demand note must have been served in accordance with the provision of the Act and the
taxpayer has not lodged any objection to the demand notice within the time stipulated by the Act.
Also, the tax authority must have sent a reminder and a final notice, and intention to distrain to
the tax payer;
Thirdly, the distrainment must have been authorized and approved by the Executive Chairman of
the tax authority. Section 33(2) FIRS (Establishment) Act, 2007 provides that the authority to
distrain under this section shall be in the form contained in the fourth schedule to this Act and
such authority shall be sufficient warrant and authority to levy by distraint the amount of any tax.
But under the Personal Income Tax Act, the tax officer authorised to carry out a distrainment
must obtained a warrant of distrain at the High Court of a state through a motion exparte. Section
104(4) states that the judge may, on application made exparte, authorise such officer, referred to
in sub-section (3), in writing execute any warrant of distress; and
Fifthly, the goods distrained may be kept at the cost of the taxpayer for 14 days and at the end of
that

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time if the amount due in respect of the tax and the cost and charges of and incidental to the
distress are not paid, they may be sold at any time thereafter- see section 33(4) & (6) FIRS
(Establishment) Act, 2007.

Power toprosecute tax defaulters for recovery of tax

Tax may be sued for and recovered in a court of competent jurisdiction with full cost of action
from the taxpayer as a debt due to the government. Section 87(2) Companies Income Tax Act
provides that a court of competent jurisdiction shall include a magistrate’s court, which court is
hereby vested with the necessary jurisdiction provided that the amount claimed in any action
does not exceed the amount of the jurisdiction of the magistrate concerned with respect to action
for debt.
However, The Federal InlandRevenue Service (Establishment) Act, 2007 establishes the Tax
Appeal Tribunal under section 59 to settledisputes arising from the operations of the Act as well
as the administration of the legislations listed in the First Schedule to the Act. The Tribunal has
power to adjudicate on disputes and controversies arising from the following legislation:
(a) The Companies Income Tax Act;
(b) Personal Income Tax Act;
(c) Petroleum Profits Tax Act;
(d) Capital Gains Tax Act;
(e) Stamp Duties Tax Act; and
(f) Value Added Tax Act.
(g) Any other law contained in or specified in the First Schedule to this Act or
other laws made or to be made from time to time by the National Assembly.
Either the Tax Authorities or the taxpayers may appeal to the tribunal. The tax authority can
appeal to the tribunal for the non-compliance of the taxpayer with the provisions of the tax laws,
while thetaxpayer can appeal on the assessment, demand notice or any action made against him
by the tax authority with respect to payment of tax.
According to the fifth schedule of the FIRSE act, after judgment the tax authority is required to
serve on the taxpayer notice of the amount of the tax chargeable as determined by the tribunal
and the award or judgment of the tribunal shall be enforced as if it were judgment of the Federal
High Court upon registration of a copy of such judgment with the chief Registrar of the court.

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An appeal from the decision of the tribunal, on point of law goes to the Federal High Court and
notwithstanding the pendency of the appeal, tax shall be paid in accordance with the decision of
the tribunal within 30 days of the notification of the amount of the tax payable. If the aggrieved
party is not satisfied with the judgement of the High Court, he can proceed to the federal Court
of Appeal and finally to the Supreme Court.

8.3 End of chapter questions

Q1. Discuss fully the provisions of the FIRS establishment Act 2007 on tax audit and
investigation.
(15 marks.
Q2. Discuss the provisions of section 36 FIRS Establishment Act 2007 on the power of FIRS to
coopt law enforcement officers in carrying out tax audit and investigation. (15 marks)

Q3. List and discuss the powers of the tax authorities under the tax laws for audit and
investigation.
(15 marks)
Q4. What are the powers open to tax authorities to recover outstanding tax liabilities? (15 marks)

Q5. What are the contents of the form of Warrant of distraint? (15 marks)

8.4 Suggested answers to end of chapter questions

A1. the Federal Inland Revenue Establishment Act 2007 gives the power of investigation to the
Federal Inland Revenue Service in section 35 which states in sub sections 1 and 2 that

‘the Service shall employ Special Purpose Tax Officers to assist any relevant law
enforcement agency in the investigation of any offence under this act. Notwithstanding
anything to the contrary in any other enactment or law, the Service shall have the power to

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investigate or cause investigation to be conducted to ascertain any violation of any tax law
whether or not such violation has been reported to the Service.’

Subsection (3) further provides that:

‘in conducting any investigation under subsection (2) of this section, the service may cause
investigation to be conducted into the properties of any person if it appears to the Service
that the lifestyle of the person and the extent of the properties are not justified by his
source of income’.

In section 25, sub section 1, the act provides that:

“the Service shall have power to administer all the enactment listed in the First Schedule to
this Act and any other enactment or law on taxation in respect of which the National
Assembly may confer power on the Service.” And section 68 states that “Notwithstanding
the provisions of this Act, the relevant provisions of all existing enactments including but
not limited to, the laws in the First Schedule shall be read with such modifications as to
bring them into conformity with the provisions of this Act.

Sub section 2 states further

“If the provisions of any other law, including the enactments in the First Schedule are
inconsistent with the provisions of this Act, the provisions of this Act shall prevail and the
provisions of that other law shall to the extent of the inconsistency void”.

The implication of the above is that the Service has power of audit, verification and investigation
in respect of all the enactments in the First Schedule. The enactments in the first schedule are:

1. Companies Income Tax Act

2. Petroleum Profits Tax Act
3. Personal Income Tax Act
4. Capital Gains Tax Act
5. Value Added Tax Act
6. Stamp Duty Act
7. Taxes and Levies (Approved List for Collection) Act

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 8. All regulations, proclamation, government notices or rules issued in terms of these
legislation.
9. Any other law for the assessment, collection and accounting of revenue accruable to
the Government of the Federation as may be made by the National Assembly from
time to time or regulation incidental to those laws, conferring any power, duty and
obligation on the Service.
10. Enactment or Laws imposing Taxes and Levies within the Federal Capital Territory.
11. Enactment or Laws imposing collection of taxes, fees and levies collected by other
government agencies and companies including signature bonus, pipeline fees, penalty
for gas flared, depot levies and Licences, fees for Oil Exploration Licence (OEL), Oil
Mining Licence (OML), Oil Production Licence (OPL), royalties, rents (productive
and non-productive), fees for licences to operate drilling rigs, fees for oil pipeline
licences, haulage fees and all such fees prevalent in the oil industry but not limited to
the above list.

A2. Section 36, sub-sections 1 to 3 of the Federal Inland Revenue Service (Establishment) Act
empowers Federal Inland Revenue Service (FIRS) to co-opt into the service in its discharge
of enforcement duties, as follows:
“(1) The Service 'may co-opt the assistance and co-operation of any of the law enforcement
agencies in the discharge of its duties under this Act.
(2) The law enforcement officers shall aid and assist an authorized officer in the execution
of any warrant of distraint and the levying of distraint.
(3) Any tax officer armed with the warrant issued by a judicial officer and accompanied by a
number of law enforcement officers as may be determined by the Executive Chairman shall-
(a) enter any premises covered by such warrant and search for seize and take
possession of any book, document or other article used or suspected, to have been used
in the commission of an offence;
(b) inspect, make copies of, or take extracts including digital copies from any
book, record, document or computer, regardless of the medium used for their
storage or maintenance;
(c) search any person who is in or on such premises;
(d) open, examine and search any article, container or receptacle;

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 (e) open any outer or inner door or window of any premises and enter or
otherwise forcibly enter the premises and every part thereof; or
(f) remove by reasonable force any obstruction, to such entry, search, seizure
or removal as he is empowered to effect.”

A3. The various power of the tax authorities concerning audit and investigation are:
Power to obtain information
The various tax laws contain provisions that empowered the relevant tax authorities to call
for returns, books, documents and information from the taxpayers or other parties who are in
custody of such records, books, documents, etc., that can assist the tax authority assess the
taxpayer’s tax liability. The sections on this power in the various tax laws are:
• Companies Income Tax Act, Cap LFN 2007,Section 60; and
• Personal Income Tax Act 2007, as amended, Section 47.

Power to enter premises

The tax laws also permit the relevant tax authorities to enter premises of tax payers as at when
necessary in relation to the tax payer’s tax affairs. Some of these provisions are:
• Casino Taxation Act Cap C3, Section 2;
• Personal Income tax Act 2004, as amended, Section 103;
• Companies Income Tax Act 2004, as amended, Section 64; and
• Value Added Tax Act Cap Vi, LFN 2004, Section 39.
Power to obtain third party confirmation from banks, etc
Some of the tax laws also give power to the tax authority to demand third parties, especially
banks, to summit quarterly reports on the activities of the accounts maintained by taxpayers with
the bank. These provisions are:
• Companies Income Tax Act Cap LFN 2007,Section 61;
• Personal Income Tax Act 2007, as amended, Section 49; and
• Federal Inland Revenue (Establishment) Act, 2007, Section 28.
Power of search and seizure under investigation

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The tax laws further give power to the relevant tax authorities to enter taxpayers’ business
premises, search and if necessary, seize some documents, chattels, records, etc. The various
provisions are:
• Federal inland Revenue (Establishment) Act, 2007, Section 29;
• Companies Income Tax Act Cap LFN 2007, Section 64; and
• Personal Income Tax Act 2007, as amended, Section 53.

A4. The powers of tax authorities to recover outstanding tax liability are:
Power of distraint
Distraint means a process whereby force is applied to collect the tax due by seizing the movable
properties of the debtor taxpayer and sealing the office premises thus forcing him to pay the
owed tax. She further opined that it is a legal process which allows the Inland Revenue to seize a
taxpayer’s possessions and, if necessary, sell them to settle a debt owed to the Inland Revenue.
She said further that Distraint is an effective method of enforcement which is usually carried out
where all administrative procedures have failed.
The provisions of power of distraint are contained in the
• Federal Inland Revenue Establishment Act, LFN 2007, section 33 and the fourth
schedule,
• Companies Income Tax Act cap LFN 2007, section 86, subsections 1 to 2 and the fourth
schedule;
• Personal Income tax Act LFN 2007 as amended by The Amendment act 2011, section
104; and
• Casino Taxation Act Cap C3, Section 16.
Power toprosecute tax defaulters for recovery of tax
Tax may be sued for and recovered in a court of competent jurisdiction with full cost of
action from the taxpayer as a debt due to the government. Section 87(2) Companies
Income Tax Act provides that a court of competent jurisdiction shall include a
magistrate’s court, which court is hereby vested with the necessary jurisdiction provided
that the amount claimed in any action does not exceed the amount of the jurisdiction of
the magistrate concerned with respect to action for debt.

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 However, The Federal InlandRevenue Service (Establishment) Act, 2007 establishes the
Tax Appeal Tribunal under section 59 to settledisputes arising from the operations of the
Act as well as the administration of the legislations listed in the First Schedule to the Act.
The Tribunal has power to adjudicate on disputes and controversies arising from the
following legislation:
(a) The Companies Income Tax Act;
(b) Personal Income Tax Act;
(c) Petroleum Profits Tax Act;
(d) Capital Gains Tax Act;
(e) Stamp Duties Tax Act; and
(f) Value Added Tax Act.
(g) Any other law contained in or specified in the First Schedule to this Act or other laws
made or
to be made from time to time by the National Assembly.
Either the Tax Authorities or the taxpayers may appeal to the tribunal. The tax authority can
appeal to the tribunal for the non-compliance of the taxpayer with the provisions of the tax
laws, while thetaxpayer can appeal on the assessment, demand notice or any action made
against him by the tax authority with respect to payment of tax.

A5. The contents of the form of Warrant of distraint are:

i. The name of the officer of the Revenue Board who is authorised to execute the warrant of
distress;
ii. Name of the company/taxpayer and place of business;
iii. Amount of tax to be levied by distress;
iv. Details about arrears of tax due for the relevant assessment years;
v. Year of assessment
vi. Amount of tax due
vii. Signature of Execute Chairman of FIRS/SIRS
viii. Date of signing
ix. Amount of tax outstanding against the company and which amount is to be levied by
distress

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 CHAPTER NINE

9. TAX AUDIT PROCEDURES AND RISK ASSESSMENT

Outline

9.0 Tax audit procedures and risk assessment

• Tax audit procedures on income ascertainment
• Tax audit procedures on expenditure ascertainment
• Tax audit procedures on VAT - Input and output tax including refunds
• Tax audit procedures on import goods
• Tax audit procedures by states internal revenue
• Tax audit procedures for withholding taxes
• Tax audit procedures for excise duties
• Risk in stock taking
9.1 Sampling risk and forensic investigations
9.2 Materiality concept and tax audit investigations
9.3 Computer Assisted Audit Techniques (CAAT) relating to income and expenditure
9.4 End of chapter questions
9.5 Suggested answers to end of chapter questions
Objective

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After studying this chapter, candidates should be able to understand:

• Procedures on ascertainment of taxpayer’s revenue;

• Procedures onascertainment of taxpayer’s expenditure;
• Procedures on VAT audit;
• Procedures on imported goods;
• Procedures on PAYE audit;
• Procedures on Withholding tax audit; and
• Computer assisted audit techniques.

9.0 Tax audit procedures and risk assessment

Tax audit procedures on income ascertainment
The purpose of tax audit procedures on income ascertainment is to ensure that revenue in the
financial statement has not been understated and thus leading to understatement of profit for tax
purposes.
Therefore, the tax auditor should device audit procedures that will give him an assurance that
revenue figure in the financial statements has not been understated. The tax auditor should
follow the following procedures:
• Summarisethe sales day book for the year and obtain the total credit sales for
the year;
• Check monthly postings of the sales day book to the general ledger and the
receivable ledger and note any discrepancies;
• Summarise the total cash sales from cash book to get the total cash sales for
the year;
• Check monthly postings to the general ledger and note any discrepancies;
• Check the returns inward day book and summarise the total sales return for
the year;
• Determine the total sales revenue for the year by adding both the credit and
cash sales and removing the total sales return for the year;

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 • Compare your calculated total sales revenue with the revenue figure reported
in the financial statement and note any variation;
• Reconcile the receivable balance at the year end as follows:
▪ From the cash book or bank account, determine the payments by
customers during the year;
▪ Add the receivable balance at the beginning of the year with the total
credit sales for the year, which will give amount collectible from
customers;
▪ From the amount collectible from customers, deduct the total amount
collected from customers during the year, which will give expected
receivable balance at the year end; and
▪ Compare the expected receivable balance with the figure of receivable
on the financial statement and note any variation.
An alternative procedure is:
• Collect the bank statements from all the taxpayer’s banks;
• Summarise the receipts paid into the bank month by month for all the banks;
• Calculate the total payment into all the banks during the year;
• Summarise the unusual payments into bank, such as proceeds from loans,
sales of assets, etc. during the year and remove the total from total payments
into bank during the year. The balance should represent the taxpayer’s
revenue for the year.
• Compare the figure above with the revenue figure in the financial statements
and note any difference for reconciliation with the tax payer.

Tax audit procedures on expenditure ascertainment

Expenditure includes purchase of goods for resale and purchases of raw materials for production
activities. These may include goods or raw materials imported into the country. Expenditure also
includes all the expenses incurred for the running of the taxpayer’s business. Theseexpenditures
include wages and salaries, administration expenses, marketing expenses, staff welfare expenses,
etc.

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Procedures for ascertainment of expenditure will be discussed under two headings, i.e.,
procedures for ascertainment of purchases of goods or raw materials, and procedures for
ascertainment of the expenditure.

Tax audit procedures for ascertainment of purchases

The tax auditor will follow the following procedures to ascertain purchases of the tax payer for
the relevant year:
• Summarise the monthly purchases day book total to determine the total credit
purchase during the year;
• Compare the summary with the monthly posting into the general ledger and
the payable ledger and note any discrepancies;
• Summarise monthly cash purchases from the cash book or bank accounts to
determine total cash purchases during the year;
• Add the credit purchases and cash purchases together to determine the total
purchases for the year;
• Compare your total purchases as above with the figure used in calculating
cost of sales reported in the income statement and note the difference;
• Ask for explanations for the difference from the taxpayer’s management.
Reconcile the receivable balance at the year end as follows:
▪ From the cash book or bank account, determine the payments to suppliers
during the year;
▪ Add the payable balance at the beginning of the year with the total credit
purchases for the year, which will give amount payable to suppliers;
▪ From the amount payable to suppliers, deduct the total amount paid
tosuppliers during the year, which will give expected payable balance at
the year end; and
▪ Compare the expected payable balance with the figure of trade payable on
the financial statements and note any variation.

Tax audit procedures for ascertainment of other expenditure

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The tax auditor should follow the following procedures to ascertain expenditure other than wages
and salaries, and rent:
• Collect a copy of the taxpayer’s trial balance and summarise all expenses
other than purchases;
• Compare each expense with the figure in the financial statements and note any
difference;
• For major expenses, collect their ledger and compare their balances with the
ones on the trial balance;
• Pick out some of the entries in the ledger and ask for their supporting
documents;
• Vouch the supporting documents to ensure they are bonafide expenses
incurred by the taxpayer;
• If the records of the expenses in the ledger are found to be proper, then the tax
auditor can assume that the expenses on the trial balance are bonafide
expenses of the taxpayer.
For wages and salaries, the tax auditor should follow the following procedures:
• Collect the nominal roll (list of staff) of the taxpayer;
• Collect the payroll of the taxpayer for the year;
• Test checks the list of staff to the payroll;
• Summarise the payroll for the year;
• Compare the total of your summary to the figure of wages and salaries in the
trial balance and to the financial statements, note any difference;
• Summarise payment of salaries in the cash book or bank account month by
month and get a total for the year;
• Compare each month payment in the cash book with the net pay on the payroll
for each month;
• Check payroll journal, compare this with each month’s payroll and test checks
postings into the general ledger, noting any discrepancies; and
• Discuss any discrepancy and or observations with the taxpayer’s management.

To ascertain rent expenses, the tax auditor should follow the following procedures:
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 • Collect rent schedule and rent agreement files from the taxpayer;
• Review the rent schedule with the rent agreement;
• Recalculate the rent chargeable in the year;
• Compare your calculation with the taxpayer’s rent schedule and the financial
statements and note any discrepancy;
• Discuss the discrepancy with the taxpayer’s management.

Tax audit procedures for VAT

Introduction

Every vatable person is required by VAT Act to register with the Federal Inland Revenue
Service. The vatable person is also required to have a VAT invoice on with the vatable
person’sVAT identification number on it. The vatable person is expected to keep proper records
of all transactions, such records should be made available to VAT officers on inspection.

Objective of VAT audit

The objective of VAT audit is to ensure that a vatable person pays the amount of VAT legally
payable. To achieve this objective, VAT auditors are required to:
▪ Confirm the taxable person is correctly registered;
▪ Understand the business activities of the vatable person;
▪ Note the accounting records used by the vatable person;
▪ Ensure records correctly reflect the business activities;
▪ Assess the level of risk posed by the vatable person and determine the
appropriate audit procedures to reduce the identified risks;
▪ Educate the vatable person and give him the opportunity to ask questions
which the auditor either answers on the visit or seeks guidance at the
office; and
▪ Ensure that unsatisfactory details discovered on a previous visit have been
corrected and that return and other statutory filings are timely done.

Document required for VAT audit and investigation

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 The VAT auditor would have to ask for and collect the following documents for a
VAT audit and investigation:

a. Relevant documents to verify input and output VAT for local purchases and
sales to customers:
• The copy of the taxpayer’s VAT ledger, both for the input and output
VAT;
• The suppliers’ ledger (payable ledger) and invoices file;
• The cash book or bank accounts’ ledgers;
• The customers’ ledger (receivable ledger) and copies of customers’
invoices file;
• The suppliers’ ledger (payable ledger) and suppliers’ invoice files;
• The VAT returns file;
• The sales day book and sales ledger;
• The purchases day book;
• Returns inward and outward books or registers; and
• The taxpayer’s financial statements and management accounts.

b. Relevant documents to verify input VAT on imports are:

• The bill of entry;
• The treasury receipt issued by the Nigerian Customs Service; together
with the bank payment tellers;
• The approved “Form M” used in importing the goods, this will give the
rate of exchange used; and
• The attested invoice issued by the manufacturer or the supplier or
exporter of the goods as the case may be -the commercial invoice

Types of VAT audit

There are three types of VAT audit in connection, these are:
• General Audit;

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• Refund Audit; and
• Specific Audit.

General audit
This is an audit carried out to verify how a vatable person is complying with the VAT law. It
involves check the vatable person’s financial record to ensure that VAT are deducted from every
vatable transaction and they are properly remitted to the Federal Inland Revenue Service
promptly, in accordance to the law. The audit also ensures that only qualified input VATs are
deducted from the output VAT before remittance. Decision to carry out a general VAT audit on a
company is determined by the tax audit division of the FIRS. General Audits form the majority
of audits to be completed by the VAT authority

The objective of general audits should be to provide broad audit coverage of all vatable persons
within five years with additional audits for larger, more complex vatable persons and those with
identified under declaration risks.

Refund audit

A refund audit is carried out when a vatable person is asking for a refund of overpaid VAT,
where the input tax is regularly more than the output VAT. In such circumstances, FIRS will
initiate an audit to ensure that the claim of the vatable person is correct and according to the
VAT law. The audit is to check that only qualify VAT input is deducted from the output VAT. It
is also to ensure that all outputs VAT have been accounted for and that the claim for VAT refund
is appropriate. Any refund will only be paid out once the verification process has been completed

The verification/audit process often requires the vatable person to submit the VAT input and
VAT output detailed report, copies of the largest supplier tax invoices and detail of any assets
purchased including tax invoices as chosen by the auditor.

Specific VAT audit

Specific VAT audit arises where:

• There is the receipt of urgent references;

• There is a late registration;

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• There is cancellation of registration where large amounts ofrevenue are deemed to be at risk;

• There is credible information regardingsuspected major tax evasion from intelligence

resources;

• There is receipt of routine references where the Taxable person is not registered for VAT;

• Audits resulting from existing audits where the auditor is of the view that there is possibility of
tax risk, even if the taxable person is registered

• Audits resulting out of market related information from various sources received by any
auditing official.

Common challenges VAT audit and investigation of small entities

There are some challenges associated with any audit of small business entity, especially sole
proprietorships. Some challenges usually associated with the VAT audit of small entities are:

(i) Challenge in locating the small entity’s operational address. Most of them use
residential address which is quite different from the address submitted to the tax
authority.
(ii) Refusal of access to the premises where VAT audit will be conducted.
(iii) Insufficient knowledge of VAT operations in Nigeria.
(iv) Failure to keep appropriate accounts and records.
(v) Failure to issue VAT invoices;
(vi) Failure to file monthly VAT returns.
(vii) Failure to provide appropriate documents to substantiate the Input VAT claimed.
(viii) Mixing of VAT collected (Output VAT) with the entity’s income
(ix) Failure to remit the VAT to the dedicated accounts of Federal Inland Revenue Service
as required by VAT Act.
(x) Expecting immediate consideration from government before VAT could be paid.

Tax audit procedures on imported goods

• Ask for and collect the following documents:
▪ The bill of entry file for all imports in the year;

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 ▪ The treasury receipt issued by the Nigerian Customs Service; together with the bank
payment tellers;
▪ The approved “Form M” used in importing the goods, this will give the rate of
exchange used; and
▪ The attested invoice issued by the manufacturer or the supplier or exporter of the goods
as the case may be -the commercial invoice.
• There are some companies that maintain separate files for all import, it that is the case, ask
for all the files for imports during the year. The file will contain documents in respect of
each import, therefore, check that the following are complete for each import:
▪ The approved Form M together with the proforma invoice, duly signed by the bank;
▪ The Good in transit insurance certificate for the goods covered by the Form M;
▪ The Customs Bill of Entry for the import, showing duty, surcharge and VAT payable
on the goods;
▪ The bank tellers for the payment of the amount payable to the Customs together with
the treasury receipt issued by the Customs;
▪ The attested invoice or commercial invoice, issued by the overseas’ supplier of the
goods;
• Summarise the imports during the year on the basis of the following:
▪ The cost, and freight based on the amount on the commercial invoice multiplied by the
exchange rate on the approved Form M;
▪ The customs duty paid on the goods;
▪ The goods in transit insurance premium paid for the goods;
▪ Port charges on the goods;
▪ Clearance charges and transport expenses for bringing the goods into the company’s
warehouse; and
▪ Total of all the above, which represents the total cost of all imported goods during the
year.
• Vouch the above with the import ledger maintained by the taxpayer and trace each import to
the taxpayer’s inventory records and note any discrepancy;
• Discuss the discrepancy with the taxpayer’s management;

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• Trace each import into the purchases used in determining cost of sales or cost of
manufactured goods during year.

Tax audit procedures by states internal revenue

States internal revenues regularly carry out tax audit. This is provided for in section of the
Personal Income Tax Act, as amended. The state internal revenue service use consultants that are
called, Tax Monitoring Agent, for this audit exercise.
States internal revenues are only concerned with personal income tax payable by resident
individuals in their respective states. Since corporate bodies and other employers of labour are
agents of the state for the purpose of deduction and remittance of, to the respective states,
personal income tax from salaries and wages of their staff, the states’ internal revenue services
always carry out audit exercise to check their compliance with the provisions of the law on this
regard. Also, organisations are also agent of the revenue authorities saddled with the
responsibility of deducting withholding taxes from individual who renders services or supplies
items to them. Therefore, audit by state internal revenues always cover personal income tax and
withholding taxes on contracts, rent, professional services, etc., payable to individuals resident in
their respective state.
The following procedures are normally followed by states internal revenue service in carrying
out audit exercise:
a) A letter will be written by the state internal revenue service to the organisation intimating
the organisation of its intention to carry out an audit exercise. The letter will include the
name of the people who will carry out the audit and the date the audit is scheduled to take
place. A list of documents required for the audit will be attached to the letter;
b) The organization can write to the internal revenue service if the date is not suitable for the
organization. After an agreement has been reached by the internal revenue service and the
organization as to the date of the audit, the tax auditor will visit the organization on this
agreed date;
c) The auditors will carry out the audit following the following procedures:
i. There will be a pre-audit meeting with the management of the organization
together with the organisation’s tax consultant, if any;

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ii. The tax auditors will ensure that all the documents required for the audit are
provided;
iii. For wages and salaries, the tax auditors will follow the following procedures:
• Collect the organisation’s nominal roll (list of staff) with the payroll for
the year;
• Collect evidence of payment of salaries to staff, such as, letter of authority
to the bank to credit the accounts of the staff for their salaries, for the
whole year;
• Compare the above with the net pay on the payroll for selected staff so as
to ensure this agrees with the payroll;
• Summarise the total salaries month by month for the year;
• Compare the summary above with the payroll journal monthly;
• Compare the total wages and salaries, as summarised above with
theorganisation’s trial balance and financial statements and note any
difference;
• The difference, as calculated above should represents off payroll payment
of allowances/salaries to staff;
• Vouch the organisation’s payment vouchers, both cash and cheque
payment vouchers (100% of the population) to identify and list out the
following:
▪ Rent and or payment in lieu of accommodation;
▪ Leave/vacation allowances;
▪ Medical allowances;
▪ Dressing allowances;
▪ Telephone allowances;
▪ Lunch allowances; etc.
• Summarise the individual total salaries for the year, either paid through
the payroll or through payment vouchers;
• Ask for the company rent schedule and the occupier of each house to
enable you determine benefit in kind on accommodation;

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 • Ask for schedule of motor vehicles and the name and designation of users
to enable you calculate benefit in kind on the use of vehicles;
• Verify pension deductions and their remittance to the appropriate Pension
Fund Administrators. Determine total pension deducted from each staff
salary;
• Reconcile the total salaries and wages paid to all staff, based on your
calculation, with the total personnel emolument on the financial statements
and note the difference;
• The difference, as calculated above, will be used to increase each staff’s
total salaries based on the ratio of their basic pay;
• Calculate the tax payable by each staff and for the whole staff, using an
excel tax calculation template;
• Summarise the internal revenue receipts for remittances by the
organization during the year;
• Deduct the total remittances, summarized above, from the total tax payable
calculated above. The difference represents the organisation’s outstanding
paye liability, unremitted/under deducted tax;
iv. For withholding taxes, the tax auditors will carry out the following procedures:
• Collect all the organisation’s payment vouchers (both cash and cheque
payment vouchers) month by month for the year;
• Arrange the vouchers serially or according to date order;
• Ensure that the vouchers are complete, either by seriality or date order;
• Ensure that attachments to the vouchers have not been detached from the
vouchers;
• Collect the revenue receipts for all withholding taxes remitted by the
organization to the state internal revenue during the year;
• Collect the following from the organisation:
▪ List of suppliers, contractors, consultants, etc.;
▪ List of directors and their tax clearance; and
▪ Rent schedule including rent agreements.

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 • Vouch the payment vouchers one by one to identify withholding tax
payable by individual suppliers, contractors, consultants, etc. These
include services or supplies by individual, partnership, enterprises,
ventures or any unincorporated companies resident in the state;
• List the withholding tax payable under the following categories:
▪ Contract and supplies;
▪ Professional fees;
▪ Commissions;
▪ Directors’ fees;
▪ Dividends; and
▪ Rent and lease rentals.
• The summary of each of the categories of withholding tax above should
contain:
▪ The date of the invoice/bill;
▪ Name of the contractor/supplier/service provider;
▪ Description of the contract/supply/service;
▪ Gross amount on the invoice/bill;
▪ Rate of withholding tax payable; and
▪ Amount of withholding tax payable.
• Summarise and determine the total withholding taxes payable under each
category and in total;
• Summarise the total withholding tax remitted by the organization based on
the withholding tax receipts collected;
• Compare the total withholding tax you have calculated with the total
withholding tax remitted by the organisation. The difference represents
outstanding withholding tax liability or unremitted/under deducted
withholding tax during the year.
v. To determine the total outstanding tax liability of the company during the year, as
a result of the audit, the following procedures should be followed:
• Add the amount outstanding on:
▪ PAYE;

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 ▪ Withholding taxes; and
▪ Unremitted development levy; and
▪ Outstanding business premises permit.
• Add 10% to the total you get above, this represents penalty;
• Calculate and add interest rate at commercial rate to the total you get
above;
• The final total represents the amount due from the organization to the state
internal revenue service;
• The state internal revenue service will raise a demand notice on the
amount payable and send to the organisation for payment; and
• The organization can object to the liability within 30 days of receipt of the
demand notice, otherwise, it becomes final and conclusive.
Where an objection is raised by the organization, the state revenue service will fix a date for a
reconciliation meeting, called Tax reconciliation meeting (TARC). The organization will be
required to submit further documents in support of its objection during the meeting and if the tax
authority is satisfied, it will review the liability downward. Otherwise, the tax authority will give
a notice of refusal to reduce the liability. Further TARC meeting could be held until the matter is
resolved or an aggrieved party may approach the Tax Appeal Tribunal for adjudication.

Documents required for state internal revenue tax audit

1. Payment vouchers, both cash and cheque payment vouchers

2. Cheque stubs and bank statements
3. Payroll documents with bank instruction letters to credit staff accounts
4. Staff list together with designation
5. Staff salary structure
6. Reconciliation of payroll summary with the general ledger and the audited financial
statements
7. Schedule of development levy
8. General ledger and trial balance
9. Petty cash vouchers

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 10. Annual audited financial statements
11. Schedule of tax remittances and receipts
12. List of companies in the group, if it is a group of companies
13. List of contractors and suppliers of the company and their addresses
14. Expatriate quotas
15. Expatriate residence permit
16. Rent schedule and names of occupiers together with rent agreements
17. Staff files
18. Names and addresses of directors and their tax clearance
19. Last tax audit clearance letter
20. Schedule of monthly immigration returns
21. Evidence of payment in respect of business premises registration/renewal
22. List of motor vehicles and designation of users

FIRS tax audit procedures for withholding taxes

• Collect all the organisation’s payment vouchers (both cash and cheque
payment vouchers) month by month for the year;
• Arrange the vouchers serially or according to date order;
• Ensure that the vouchers are complete, either by seriality or date order;
• Ensure that attachments to the vouchers have not been detached from the
vouchers;
• Collect the revenue receipts for all withholding taxes remitted by the
organization to the Federal Inland Revenue Service during the year;
• Collect the following from the organization:
▪ List of suppliers, contractors, consultants, etc.;
▪ List of directors and their tax clearance; and
▪ Rent schedule including rent agreements.
• Vouch the payment vouchers one by one to identify withholding tax
payable by the organization to incorporated companies, government
agencies and parastatals;
• List the withholding tax payable under the following categories:

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 ▪ Contract and supplies;
▪ Professional fees;
▪ Commissions;
▪ Directors’ fees;
▪ Dividends; and
▪ Rent and lease rentals.
• The summary of each of the categories of withholding tax above should
contain:
▪ The date of the invoice/bill;
▪ Name of the contractor/supplier/service provider;
▪ Description of the contract/supply/service;
▪ Gross amount on the invoice/bill;
▪ Rate of withholding tax payable; and
▪ Amount of withholding tax payable.
• Summarise and determine the total withholding taxes payable under each
category and in total;
• Summarise the total withholding tax remitted by the organisation based on
the withholding tax receipts collected;
• Compare the total withholding tax you have calculated with the total
withholding tax remitted by the organisation. The difference represents
outstanding withholding tax liability or unremitted/under deducted
withholding tax during the year.
However, where the total withholding tax payable, based on the above is not satisfactory,
considering the volume of transactions of the company, or the organization refused to give the
auditor all payment vouchers, the tax auditor will follow the following procedures:
• Collect all receipts for withholding tax remittances to all the state internal revenue
services and the Federal Inland Revenue Service;
• Summarise the receipts to determine the total withholding tax remitted, both to the states
and FIRS;
• Determine the value of all purchases of goods and services during the year by:

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 ▪ Add wages and salaries together with depreciation, dividends, interest and profit
before tax for the year;
▪ Deduct the total you get above from the Revenue (Sales) for the year;
▪ The difference represents the value of goods and services bought by the company
during the year;
▪ Apply withholding tax rate of 10% to determine the withholding tax payable;
▪ Deduct the total remittances of withholding tax during the year, as calculated
earlier;
▪ The balance represents outstanding withholding tax liability for the year.

Documents required for FIRS audit

The essential documents usually required for tax audit are:
(i) Audited Accounts for the relevant years;
(ii) Management accounts;
(iii) Year end final trial balances;
(iv) General ledgers/ledger print outs;
(v) Back up documents for entries in the General ledger, including both cash and cheque
payment vouchers;
(vi) Audit adjustment journals;
(vii) Relevant schedules, e. g., rent schedule; schedule of bad debts and allowance for bad
debts;
(viii) Sales invoice file;
(ix) Purchases invoice file;
(x) Import Documents;
(xi) Export documents (where applicable);
(xii) Non – current assetsregister/schedules
(xiii) Value Added Tax File(s);
(xiv) Evidences of input VAT claimed;
(xv) Evidences of VAT Deducted at source (if any);
(xvi) Evidences of Zero rated / Exempted VAT items;
(xvii) Withholding tax file(s);

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(xviii) Capital Gains Tax records;
(xix) Schedule of Bankers and the bank statements for each of the period of audit;
(xx) Minutes of the meetings – Board and management; and
(xxi) Schedule of contracts executed, contract agreements/offer letters and Valuation
Certificates for company engaged in construction.

Tax audit procedures for excise duties

Excise duty is the duty paid by manufactures of some selected goods in the country. Excise duty
is paid per unit of the goods manufactured. Therefore, the volume or quantities manufactured of
the good is very critical to excise duty. Sometimes, excise duty is a percentage of cost of goods
manufactured. In Nigeria, some of the goods covered by excise duty include cigarette, tobacco,
spirits, etc. Auditing if excise duty is not so prevalent in Nigeria but Excise duty officers usually
visit manufactures of excisable goods to check their records so as to confirm that they are paying
the correct excise duty.
The following procedures are necessary for the verification of excise duty:
• Check the daily, weekly or monthly production report of goods manufactured;
• Determine the value of goods manufactured per week or per month;
• Trace the above to the taxpayers’ finished goods inventory records;
• Determine the excise duty payable on the cost of goods manufactured per month;
• Apply the rate of excise duty to the cost of goods manufactured per month, which gives the
excise duty payable per month;
• Determine the total excise duty payable in the year;
• Collect the taxpayer’s excise duty payment file;
• Check the treasury receipts for excise duty paid per month;
• Summarise the excise duty receipts for the year;
• Compare the total excise duty paid with the excise duty payable as above; and
• The difference is excised duty liability outstanding in the year.

Risk in stock taking

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Normally, the tax auditor will not be involved on stock taking exercise of the taxpayer, but the
tax auditor is expected to carry out the following procedures for assurance that the figures for
inventories in the financial statements represent the actual inventories balances:
• Check the taxpayer’s inventory management system;
• Obtain a copy of the taxpayer’s inventories valuation at the year end, used by the taxpayer
for the inventory balances on the financial statements;
• Re-calculate the valuation of the inventory balances on the inventories valuation sheets and
agree their arithmetical accuracy;
• Compare the final figure on the inventory valuation with the balance on the inventory
accounts in the general ledger, noting differences and the differences were treated in the
financial statements; and

• Take a sample of inventory items and check the receipts, issues and balance at the year end;
then compare these with the balances on inventories valuation at the end of the year.
Where the above procedures show any significant differences, the tax auditor may have to
perform further procedures to assure himself that the figures for inventory on the financial
statements have not been under or over stated. This may include insisting on actual inventory
count during the tax audit. The actual inventory balance, as counted, will then be reconciled by
the auditor, using receipts and issues from the year end to the date of the tax audit.
Inventory balances on the financial statement pose risk of underpayment of tax because:

(i) The amount at which the inventories are stated in the financial statements is almost
always material especially in the case of manufacturing companies;
(ii) The amount at which inventoriesare stated has directone-to-one effect on the taxpayer’s
financial results. Any understatement of the inventories’figuresrepresents an
understatement by equal amount of the profit figure (or overstatement of the loss); and
(iii) It is the only item in the published accounts which does not also feature in the closing
trial balance, i.e. it does not arise from the double entry process itself. In some
accounting systems, production costing and financial accounting will be integrated to
give a book figure for work-in-progress, but in majority of cases, the determination of

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 stocks is largely dependent upon physical stock taking procedures. This factor makes the
inventories figure the most susceptible to manipulation;

9.1 Sampling risk and forensic investigations

Sampling

Sampling risk has been covered in the previous chapter. Unless a tax auditor is auditing a
relatively small taxpayer, it is not possible to verify the taxpayer’s record 100 per cent.
Therefore, auditor will normally depend on a sample of the entire population. If, however, valid
statistical conclusions are to be drawnabout a population by relying on a sample, then the sample
must be free of bias. In other words, every event or transaction in the population has an equal
chance of being included in the sample. The various sampling method have been discussed
earlier.

Forensic investigation

Forensic investigation in tax investigation is a technique to determine whether accounting

transactions are in consonance with various accounting, auditing and legal requirements and
eventually determine whether any tax fraud has taken place. Forensic investigation uses a
combination of accounting, auditing and investigative skills. The purpose of forensic tax
investigation is to gather evidence that could be presented in the law court to support the claim of
a tax fraud. It involves:

• Detailed examination of financial statements and books of accounts of the taxpayer;

• Examination of related party transactions; and
• Verification of off statement of financial position items
• Interrogation of key personnel of the taxpayer;
• Assessment and evaluation of evidence gathered; and
• Determination of any violation of law.

9.2 Materiality concept and tax audit investigations

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Materiality is defined as any information that its omission or misstatement could influence the
decisions of users taken on the basis of the financial statements. Therefore, the auditor is
expected to identify material errors, omissions and misstatements, as regards to amount
(quantity) and nature (quality).

To assist the auditor in this regard, the auditor has to set a level for what he considered to be
material.

For further discussions on the concept of materiality, refer to chapter 6.

9.3 Tax audit in a computerised environment

The continue incursion of information technology into enterprise management has resulted into
many organisations computerizing their accounting information systems. Therefore, it is most
likely that most tax audit today will be conducted in a computerized environment.

There are two methods normally employed by the auditors in a computerized environment.
These are auditing around the computer and auditing through the computer.

Auditing around the computer

The objectives of the auditor in using this method is to ensure that data are correctly inputted into
the computer and that data are correctly generated by the computer. This method primarily
focuses on ensuring that source documents are correctly processed and are verified by checking
the output to the source documents.

Auditing through the computer

With the introduction of real time computer processing, there are now limited source documents
in form of paperwork, with many organisations operating a paperless environment. Therefore,
auditors have to use the approach of auditing through the computer. This involves the auditor
performing tests on the information technology system controls to evaluate their effectiveness.
After the tests if the auditor is satisfied that the controls are effective, the auditor will perform a
lesser substantive procedures testing.

There are some software that have been developed to assist the auditor when using this approach.
The software is known as computer assisted audit techniques (CAATs).

Computer assisted audit techniques (CAATs)

These are computer tools and techniques that an auditor can use as part of his audit procedures to
process data of audit significance contained in an entity’s information systems (Singleton, 2003).
CAATs are now part of an audit review to increase its overall efficiency and effectiveness.

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CAATs are normally categorized into those which review data and those which controls. Those
that review data involve the extraction, examination and manipulation of data by programmes.
Such techniques can enable the auditor to gain an assurance as to the accuracy and integrity of
the data being reviewed and, by implication, the strength or weakness of control. Those that
review controls look at the system rather than data and provide the auditor with an assurance as
to whether or not controls exist and are functioning effectively.

However, the mostly used CAATs are known as interrogation software. Interrogation software
involves the production of computer programme to interrogate either system or application data.
Some of these CAATs interrogation software are:

• IDEA – Interactive, data extraction and analysis;

• ACL – Auditor command language;
• SQL – Structured query language; and
• SAS – Statistical analysis software.

9.4 End of the chapter questions

Q1. In ascertaining the revenue of a taxpayer for a particular year, what are the procedures to be
followed by a tax auditor? (15 marks)

Q2. How can a tax auditor ascertain the total purchases of a taxpayer when carrying out a tax
audit?
(15 marks)
Q3.
a. List five objectives of VAT audit. (5 marks)
b. What are the documents a VAT auditor should collect from a vatable person
when carrying out a VAT audit? (10 marks)
Q4. What are the tax audit procedures in respect of imported goods by a taxpayer? (15 marks)

Q5. Discuss the tax audit procedures a tax auditor will follow when carrying out PAYE audit.
(15 marks)

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9.5 Suggested answers to end of chapter questions
A1. The purpose of tax audit procedures on income ascertainment is to ensure that revenue in the
financial statement has not been understated and thus leading to understatement of profit for
tax purposes.
Therefore, the tax auditor should device audit procedures that will give him an assurance that
revenue figure in the financial statements has not been understated. The tax auditor should
follow the following procedures:
• Summarisethe sales day book for the year and obtain the total credit sales for the year;
• Check monthly postings of the sales day book to the general ledger and the receivable
ledger and note any discrepancies;
• Summarise the total cash sales from cash book to get the total cash sales for the year;
• Check monthly postings to the general ledger and note any discrepancies;
• Check the returns inward day book and summarise the total sales return for the year;
• Determine the total sales revenue for the year by adding both the credit and cash sales
and removing the total sales return for the year;
• Compare your calculated total sales revenue with the revenue figure reported in the
financial statement and note any variation;
• Reconcile the receivable balance at the year end as follows:
▪ From the cash book or bank account, determine the payments by customers during
the year;
▪ Add the receivable balance at the beginning of the year with the total credit sales for
the year, which will give amount collectible from customers;
▪ From the amount collectible from customers, deduct the total amount collected from
customers during the year, which will give expected receivable balance at the year end;
and
▪ Compare the expected receivable balance with the figure of receivable on the financial
statement and note any variation.
An alternative procedure is:
• Collect the bank statements from all the taxpayer’s banks;
• Summarise the receipts paid into the bank month by month for all the banks;
• Calculate the total payment into all the banks during the year;

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• Summarise the unusual payments into bank, such as proceeds from loans, sales of assets,
etc. during the year and remove the total from total payments into bank during the year. The
balance should represent the taxpayer’s revenue for the year.
• Compare the figure above with the revenue figure in the financial statements and note any
difference for reconciliation with the tax payer.

A2.
The tax auditor will follow the following procedures to ascertain purchases of the tax payer for
the relevant year:
• Summarise the monthly purchases day book total to determine the total credit purchase
during the year;
• Compare the summary with the monthly posting into the general ledger and the payable
ledger and note any discrepancies;
• Summarise monthly cash purchases from the cash book or bank accounts to determine total
cash purchases during the year;
• Add the credit purchases and cash purchases together to determine the total purchases for
the year;
• Compare your total purchases as above with the figure used in calculating cost of sales
reported in the income statement and note the difference;
• Ask for explanations for the difference from the taxpayer’s management.
• Reconcile the receivable balance at the year end as follows:
▪ From the cash book or bank account, determine the payments to suppliers during the
year;
▪ Add the payable balance at the beginning of the year with the total credit purchases
for the year, which will give amount payable to suppliers;
▪ From the amount payable to suppliers, deduct the total amount paid tosuppliers
during the year, which will give expected payable balance at the year end; and
▪ Compare the expected payable balance with the figure of trade payable on the
financial statements and note any variation.
A3.

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a. The objective of VAT audit is to ensure that a vatable person pays the amount of VAT
legally payable. To achieve this objective, VAT auditors are required to:
▪ Confirm the taxable person is correctly registered;
▪ Understand the business activities of the vatable person;
▪ Note the accounting records used by the vatable person;
▪ Ensure records correctly reflect the business activities;
▪ Assess the level of risk posed by the vatable person and determine the
appropriate audit procedures to reduce the identified risks;
▪ Educate the vatable person and give him the opportunity to ask questions
which the auditor either answers on the visit or seeks guidance at the
office; and
▪ Ensure that unsatisfactory details discovered on a previous visit have been
corrected and that return and other statutory filings are timely done.

b. The VAT auditor would have to ask for and collect the following documents for a VAT
audit and investigation:
i. Relevant documents to verify input and output VAT for local purchases and sales to
customers:
• The copy of the taxpayer’s VAT ledger, both for the input and output VAT;
• The suppliers’ ledger (payable ledger) and invoices file;
• The cash book or bank accounts’ ledgers;
• The customers’ ledger (receivable ledger) and copies of customers’ invoices file;
• The suppliers’ ledger (payable ledger) and suppliers’ invoice files;
• The VAT returns file;
• The sales day book and sales ledger;
• The purchases day book;
• Returns inward and outward books or registers; and
• The taxpayer’s financial statements and management accounts.

k. Relevant documents to verify input VAT on imports are:

• The bill of entry;

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 • The treasury receipt issued by the Nigerian Customs Service; together with the
bank payment tellers;
• The approved “Form M” used in importing the goods, this will give the rate of
exchange used; and
• The attested invoice issued by the manufacturer or the supplier or exporter of the
goods as the case may be -the commercial invoice

A4. Tax audit procedures in relation to imported goods are:

• Ask for and collect the following documents:
▪ The bill of entry file for all imports in the year;
▪ The treasury receipt issued by the Nigerian Customs Service; together with the bank
payment tellers;
▪ The approved “Form M” used in importing the goods, this will give the rate of
exchange used; and
▪ The attested invoice issued by the manufacturer or the supplier or exporter of the goods
as the case may be -the commercial invoice.
• There are some companies that maintain separate files for all import, it that is the case, ask
for all the files for imports during the year. The file will contain documents in respect of
each import, therefore, check that the following are complete for each import:
▪ The approved Form M together with the proforma invoice, duly signed by the bank;
▪ The Good in transit insurance certificate for the goods covered by the Form M;
▪ The Customs Bill of Entry for the import, showing duty, surcharge and VAT payable
on the goods;
▪ The bank tellers for the payment of the amount payable to the Customs together with
the treasury receipt issued by the Customs;
▪ The attested invoice or commercial invoice, issued by the overseas’ supplier of the
goods;
• Summarise the imports during the year on the basis of the following:
▪ The cost, and freight based on the amount on the commercial invoice multiplied by the
exchange rate on the approved Form M;

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 ▪ The customs duty paid on the goods;
▪ The goods in transit insurance premium paid for the goods;
▪ Port charges on the goods;
▪ Clearance charges and transport expenses for bringing the goods into the company’s
warehouse; and
▪ Total of all the above, which represents the total cost of all imported goods during the
year.
• Vouch the above with the import ledger maintained by the taxpayer and trace each import to
the taxpayer’s inventory records and note any discrepancy;
• Discuss the discrepancy with the taxpayer’s management;
• Trace each import into the purchases used in determining cost of sales or cost of
manufactured goods during year.

A5. The tax audit procedures for PAYE audit are:

• Collect the organisation’s nominal roll (list of staff) with the payroll for the year;
• Collect evidence of payment of salaries to staff, such as, letter of authority to the bank to
credit the accounts of the staff for their salaries, for the whole year;
• Compare the above with the net pay on the payroll for selected staff so as to ensure this
agrees with the payroll;
• Summarise the total salaries month by month for the year;
• Compare the summary above with the payroll journal monthly;
• Compare the total wages and salaries, as summarized above with theorganisation’s trial
balance and financial statements and note any difference;
• The difference, as calculated above should represents off payroll payment of
allowances/salaries to staff;
• Vouch the organisation’s payment vouchers, both cash and cheque payment vouchers
(100% of the population) to identify and list out the following:
▪ Rent and or payment in lieu of accommodation;
▪ Leave/vacation allowances;
▪ Medical allowances;

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 ▪ Dressing allowances;
▪ Telephone allowances;
▪ Lunch allowances; etc.
• Summarise the individual total salaries for the year, either paid through the payroll or
through payment vouchers;
• Ask for the company rent schedule and the occupier of each house to enable you
determine benefit in kind on accommodation;
• Ask for schedule of motor vehicles and the name and designation of users to enable you
calculate benefit in kind on the use of vehicles;
• Verify pension deductions and their remittance to the appropriate Pension Fund
Administrators. Determine total pension deducted from each staff salary;
• Reconcile the total salaries and wages paid to all staff, based on your calculation, with the
total personnel emolument on the financial statements and note the difference;
• The difference, as calculated above, will be used to increase each staff’s total salaries
based on the ratio of their basic pay;
• Calculate the tax payable by each staff and for the whole staff, using an excel tax
calculation template;
• Summarise the internal revenue receipts for remittances by the organization during the
year;
• Deduct the total remittances, summarised above, from the total tax payable calculated
above. The difference represents the organisation’s outstanding PAYE liability,
unremitted/under deducted tax;

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 CHAPTER TEN

10. THE RESPONSIBILITIES OF TAX CONSULTANTS IN TAX AUDIT AND

INVESTIGATION

Outline

10.0 Introduction

10.1 The role and responsibilities of tax consultants in state internal revenue tax audit and
investigations

10.2 The role and responsibilities of tax consultants during Federal Inland Revenue tax audit and
investigations.
10.3 End of chapter questions
10.4 Suggested answers to end of chapter questions

Objective

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After studying this chapter, candidates should be able to understand:

• The role and responsibilities of tax consultants in state internal revenue tax audit and
investigations; and
• The role and responsibilities of tax consultants during Federal Inland Revenue tax audit
and investigations.

10.0 Introduction

Most companies usually have tax consultants that represent them and manage their
responsibilities and interactions with various tax authorities. These tax consultants are expected
by the companies to manage their tax affairs in such a way that will minimize their overall tax
exposures.

Therefore, some companies usually work with their tax consultants to plan their tax affairs from
the beginning in the most beneficial way so as to reduce their overall tax liabilities. As long as
these tax consultants work within the armpit of the various tax laws, to evolve strategies that will
reduce the exposure of these companies to tax, their activities would not be called to question.

However, most companies only engage tax consultants to represent them with tax authorities so
as to file their tax returns regularly and attend to letter of queries that emanate from the tax
authorities. In such cases, the companies will carry out their own tax planning and craft strategies
that will enable them reduce their overall tax exposure.

In both instances, when a letter of tax audit or investigation is received by any of these
companies, they expect their tax consultants to manage the audit exercise by being present
during the tax audit exercise and seeing to the eventual disposal of liabilities that may arise from
the tax audit of investigation.

This chapter discusses the role of tax consultants in tax audit or tax investigation of their client.
There is a little difference between tax audit and investigation by state’s internal revenue service
and that of the Federal Inland Revenue Service. Tax audit and investigation by state internal
revenue service is narrower in scope than that of the Federal Inland Revenue Service (FIRS). The
state internal revenue service is only concerned with issues that borders on personal income tax
of the employees and directors of the company it is auditing while the FIRS is concerned with

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the income tax payable by the company itself together with the company’s other tax obligations
within the various tax laws. Therefore, the Tax audit or investigation by FIRS would cover all
areas of the company’s activities, financial and accounting records, production and marketing
activities as well as how it conducts its affairs with related parties.

10.1 The role and responsibilities of tax consultants during state internal revenue tax audit
and investigation

Tax audit and investigation by state internal revenue covers the following areas tax:

• Personal income tax payable by the company’s employees and directors residing in the
state;
• Withholding tax payable on contracts and supplies handled by the company’s contractors
and suppliers residing in the state;
• Withholding tax payable on consultancy and other professional fees payable to
consultants of the company residing in the state;
• Withholding tax on dividends the company paid to its shareholders residing in the state;
• Stamp duties payable by the company on agreement of sales or rent agreement executed
with individuals residing in the state; and
• Withholding tax on rent payable to individuals on properties situating in the state.

Usually, when the company receives a letter from the state internal revenue service intimating
the company of its intention to carry out a tax audit or investigation exercise in the company, the
company will send the letter to its tax consultant. On receipt of the letter, the tax consultants will
carry out the following activities:

1. The tax consultants will visit the company, discuss with the management and agree on
the date the company would be ready for the audit;
2. The tax consultants will get in touch immediately with the team coming for the audit,
always listed on the letter of audit, to discuss and agree the date for the audit;
3. If need be, the tax consultant will write a letter to the revenue service seeking for an
extension of time, if the company has a genuine reason why the audit could not take place
within the time stipulated on the letter of audit;

287
4. The tax consultant and his staff will visit the company before the date agreed with the tax
auditor to:
▪ Carry out a tax audit of the company’s books and generate the outstanding
liability, based on the audit;
▪ Discuss the liability with the company’s management; and
▪ Arrange the documents required for the audit, a list of this is usually attached to
the letter of audit. These documents have been discussed earlier.
5. On the first day of the audit, the tax consultants, with his staff, will arrive earlier, before
the tax audit team, at the company to:
▪ Secure and arrange the place the audit will take place;
▪ Arrange all the documents required for the audit;
▪ Receive the audit team on arrival;
▪ Arrange a meeting with the company’s management, himself and the audit team;
and
▪ Arrange for entertainment of the audit team.
6. The tax consultants or his staff must be on ground throughout the duration of the audit, to
answer any question from the audit team and or provide further information the audit
team may ask for;
7. On completion of the audit, the tax consultant will hold an exit meeting with the tax audit
team and the company’s management, where further clarifications could be sought by the
audit team from the management regarding their findings, to clear any doubt that may
arise;
8. On receipt of the notice of additional tax liability, based on the audit, from the state
internal revenue service, the company will send this to the tax consultant for advice;
9. If the liability is within the expectation of the tax consultant, in the light of the pre-audit
exercise he has earlier carried out, he may advise the company to pay the additional
liability, which will bring the audit exercise to a close;
10. However, it the liability is more than the expectation of the tax consultant, he will write a
letter of objection to the liability to the state internal revenue service, within the
stipulated time frame, attaching:
▪ His own computation of the additional liability; and

288
 ▪ A cheque for the tax liability, undisputed liability, as computed by the tax
consultant;
11. The tax consultant will liaise with the state internal revenue to fix a date for the
reconciliation of the two liabilities, the revenue’s liability and the one computed by the
tax consultant. This meeting is called, tax reconciliation committee (TARC);
12. If the disagreement is resolved during the meeting, the tax consultant and the
representative of the state revenue service will sign the agreement, which will now form a
basis of revised liability from the revenue service to the company;
13. On receipt of the notice of revised liability, the consultant will advise the company to pay
the balance liability, i. e., the difference between the new liability and the one paid with
the notice of objection. This will bring the audit exercise to a close and the tax consultant
will liaise with the state internal revenue service to write a letter of clearance to the
company. This letter will indicate that the company has settled its tax liability to the state
up to the date the audit covered;
14. If the company and the tax consultants are still not in agreement with the revised liability,
the tax consultant will write a new letter of objection to the state revenue service,
enclosing additional evidence to help the revenue service to revise the liability;
15. There will be another TARC meeting to resolve the dispute and for the revenue service to
revise the liability;
16. If the disagreement could not be resolved, either party can refer the dispute to the Tax
appeal Tribunal for adjudication;
17. If the company is still not satisfied with the ruling of the Tax Appeal Tribunal, the case
will be referred to the High Courts for settlement;
18. If the company or revenue service is not satisfied with the ruling of the High Court, the
party will appeal to the Court of Appeal; and
19. If either party is still not satisfied with the decision of the Court of Appeal, the party
could appeal to the Supreme Court. The decision of the Supreme Court is final on the
dispute.

289
10.2 The role and responsibilities of the tax consultants on tax audit and investigation by
the Federal Inland Revenue Service (FIRS)

Tax audit and investigation by FIRS covers the following areas tax:

• Companies income tax payable by the company;

• Withholding tax payable on contracts and supplies to other companies;
• Withholding tax payable on consultancy and other professional fees payable to other
companies;
• Withholding tax on dividends the company paid to its corporate shareholders;
• Stamp duties payable by the company on agreement of sales or rent agreement executed
with other companies; and
• Withholding tax on rent payable to corporate bodies on properties;
• Capital gains tax on disposal of the company’s assets; and
• Value Added tax.

Usually, when the company receives a letter from FIRS intimating the company of its intention
to carry out a tax audit or investigation exercise in the company, the company will send the letter
to its tax consultant. On receipt of the letter, the tax consultants will carry out the following
activities:

1. The tax consultants will visit the company, discuss with the management and agree on
the modalities for the audit;
2. The tax consultants will get in touch immediately with the team coming for the audit,
always listed on the letter of audit, for familiarisation;
3. If need be, the tax consultant will write a letter to FIRS seeking for an extension of time,
if the company has a genuine reason why the audit could not take place within the time
stipulated on the letter of audit;
4. The tax consultant and his staff will visit the company before the date agreed with the tax
auditor to:
▪ Ensure the companies accounting records are up to date; and
▪ Arrange the documents required for the audit, a list of this is usually attached to
the letter of audit. These documents have been discussed earlier.

290
5. On the first day of the audit, the tax consultants, with his staff, will arrive earlier, before
the tax audit team, at the company to:
▪ Secure and arrange the place the audit will take place;
▪ Arrange all the documents required for the audit;
▪ Receive the audit team on arrival;
▪ Arrange a pre-audit meeting with the company’s management, himself and the
audit team; and
▪ Arrange for entertainment of the audit team.
6. The tax consultants or his staff must be on ground throughout the duration of the audit, to
answer any question from the audit team and or provide further information the audit
team may ask for;
7. On completion of the audit, the tax consultant will hold an exit meeting with the tax audit
team and the company’s management, where further clarifications could be sought by the
audit team from the management regarding their findings, to clear any doubt that may
arise;
8. On receipt of the notice of additional tax liability, based on the audit, from FIRS, the
company will send this to the tax consultant for advice;
9. If the liability is within the expectation of the tax consultant, he may advise the company
to pay the additional liability, which will bring the audit exercise to a close;
10. However, if the liability is more than the expectation of the tax consultant, he will write a
letter of objection to the liability to FIRS, within the stipulated time frame, stating the
grounds of objection;
11. The tax consultant will liaise with FIRS to fix a date for a reconciliation meeting;
12. If the disagreement is resolved during the meeting, FIRS will send a revised liability,
based on the agreement during the reconciliation meeting, to the company;
13. On receipt of the notice of revised liability, the consultant will advise the company to pay
the liability. This will bring the audit exercise to a close and the tax consultant will liaise
with the FIRS to obtain a letter of clearance for the company. This letter will indicate that
the company has settled its tax liability to FIRS up to the date the audit covered;

291
14. If an agreement could not be reached during the reconciliation meeting, FIRS will send a
letter of refusal to amend the liability to the company or a reduced liability, based on
further evidence produced by the company during the reconciliation meeting;
15. If the company is not satisfied with the position of FIRS, the tax consultant will write a
letter of objection to FIRS, attaching further evidence;
16. FIRS may agree or disagree to amend the liability;
17. If the disagreement could not be resolved, either party can refer the dispute to the Tax
appeal Tribunal for adjudication;
18. If the company is still not satisfied with the ruling of the Tax Appeal Tribunal, on point
of law only, the case will be referred to the High Courts for settlement;
19. If the company or revenue service is not satisfied with the ruling of the High Court, the
party will appeal to the Court of Appeal; and
20. If either party is still not satisfied with the decision of the Court of Appeal, the party
could appeal to the Supreme Court. The decision of the Supreme Court is final on the
dispute.

10.3 End of chapter questions

Q1. You are the tax consultant of Adelab Nigeria Limited. The company’s chief
accountant has just informed you that he has received a letter from one of the state’s
internal revenue service for a tax audit.

Required:
Discuss your role as the company’s tax consultant, before, during and after the audit. (15
marks)

Q2. Your firm, Safade, Chukwu & Co, is the tax consultant to Adrec Nigeria Limited. The
company has sent to your firm a letter from FIRS, requesting for a tax audit in the
company.

292
 Required:
Discuss the role of your firm before, during and after the audit. (15
marks)

10.4 Suggested answers to end of chapter questions

A1. Usually, when the company receives a letter from the state internal revenue service
intimating the company of its intention to carry out a tax audit or investigation exercise in the
company, the company will send the letter to its tax consultant. The roles of the tax
consultant are:

Before the tax audit

On receipt of the letter, the tax consultants will carry out the following activities:

1. The tax consultants will visit the company, discuss with the management and agree on
the date the company would be ready for the audit;
2. The tax consultants will get in touch immediately with the team coming for the audit,
always listed on the letter of audit, to discuss and agree the date for the audit;
3. If need be, the tax consultant will write a letter to the revenue service seeking for an
extension of time, if the company has a genuine reason why the audit could not take
place within the time stipulated on the letter of audit;
4. The tax consultant and his staff will visit the company before the date agreed with the
tax auditor to:
▪ Carry out a tax audit of the company’s books and generate the outstanding
liability, based on the audit;
▪ Discuss the liability with the company’s management; and
▪ Arrange the documents required for the audit, a list of this is usually attached to
the letter of audit. These documents have been discussed earlier.

During the audit

293
2. On the first day of the audit, the tax consultants, with his staff, will arrive earlier, before
the tax audit team, at the company to:
▪ Secure and arrange the place the audit will take place;
▪ Arrange all the documents required for the audit;
▪ Receive the audit team on arrival;
▪ Arrange a meeting with the company’s management, himself and the audit team;
and
▪ Arrange for entertainment of the audit team.
3. The tax consultants or his staff must be on ground throughout the duration of the audit, to
answer any question from the audit team and or provide further information the audit
team may ask for;
4. On completion of the audit, the tax consultant will hold an exit meeting with the tax audit
team and the company’s management, where further clarifications could be sought by the
audit team from the management regarding their findings, to clear any doubt that may
arise;

After the audit

1. On receipt of the notice of additional tax liability, based on the audit, from the state
internal revenue service, the company will send this to the tax consultant for advice;
2. If the liability is within the expectation of the tax consultant, in the light of the pre-audit
exercise he has earlier carried out, he may advise the company to pay the additional
liability, which will bring the audit exercise to a close;
3. However, it the liability is more than the expectation of the tax consultant, he will write a
letter of objection to the liability to the state internal revenue service, within the
stipulated time frame, attaching:
▪ His own computation of the additional liability; and
▪ A cheque for the tax liability, undisputed liability, as computed by the tax
consultant;

294
 4. The tax consultant will liaise with the state internal revenue to fix a date for the
reconciliation of the two liabilities, the revenue’s liability and the one computed by the
tax consultant. This meeting is called, tax reconciliation committee (TARC);
5. If the disagreement is resolved during the meeting, the tax consultant and the
representative of the state revenue service will sign the agreement, which will now form a
basis of revised liability from the revenue service to the company;
6. On receipt of the notice of revised liability, the consultant will advise the company to pay
the balance liability, I’ e., the difference between the new liability and the one paid with
the notice of objection. This will bring the audit exercise to a close and the tax consultant
will liaise with the state internal revenue service to write a letter of clearance to the
company. This letter will indicate that the company has settled its tax liability to the state
up to the date the audit covered;
7. If the company and the tax consultants are still not in agreement with the revised liability,
the tax consultant will write a new letter of objection to the state revenue service,
enclosing additional evidence to help the revenue service to revise the liability;
8. There will be another TARC meeting to resolve the dispute and for the revenue service to
revise the liability;
9. If the disagreement could not be resolved, either party can refer the dispute to the Tax
appeal Tribunal for adjudication;
10. If the company is still not satisfied with the ruling of the Tax Appeal Tribunal, the case
will be referred to the High Courts for settlement;
11. If the company or revenue service is not satisfied with the ruling of the High Court, the
party will appeal to the Court of Appeal; and
12. If either party is still not satisfied with the decision of the Court of Appeal, the party
could appeal to the Supreme Court. The decision of the Supreme Court is final on the
dispute.

A2. Usually, when the company receives a letter from FIRS intimating the company of its
intention to carry out a tax audit or investigation exercise in the company, the company will

295
send the letter to its tax consultant. On receipt of the letter, the tax consultants will carry out
the following activities:

Before the audit

1. The tax consultants will visit the company, discuss with the management and agree on the
modalities for the audit;

2. The tax consultants will get in touch immediately with the team coming for the audit,
always listed on the letter of audit, for familiarisation;
3. If need be, the tax consultant will write a letter to FIRS seeking for an extension of time,
if the company has a genuine reason why the audit could not take place within the time
stipulated on the letter of audit;
4. The tax consultant and his staff will visit the company before the date agreed with the tax
auditor to:
▪ Ensure the companies accounting records are up to date; and
▪ Arrange the documents required for the audit, a list of this is usually attached to the
letter of audit. These documents have been discussed earlier.

During the audit

1. On the first day of the audit, the tax consultants, with his staff, will arrive earlier, before
the tax audit team, at the company to:
▪ Secure and arrange the place the audit will take place;
▪ Arrange all the documents required for the audit;
▪ Receive the audit team on arrival;
▪ Arrange a pre-audit meeting with the company’s management, himself and the
audit team; and
▪ Arrange for entertainment of the audit team.
2. The tax consultants or his staff must be on ground throughout the duration of the audit, to
answer any question from the audit team and or provide further information the audit
team may ask for;
3. On completion of the audit, the tax consultant will hold an exit meeting with the tax audit
team and the company’s management, where further clarifications could be sought by the

296
 audit team from the management regarding their findings, to clear any doubt that may
arise;

After the audit

1. On receipt of the notice of additional tax liability, based on the audit, from FIRS, the
company will send this to the tax consultant for advice;
2. If the liability is within the expectation of the tax consultant, he may advise the company
to pay the additional liability, which will bring the audit exercise to a close;
3. However, if the liability is more than the expectation of the tax consultant, he will write a
letter of objection to the liability to FIRS, within the stipulated time frame, stating the
grounds of objection;
4. The tax consultant will liaise with FIRS to fix a date for a reconciliation meeting;
5. If the disagreement is resolved during the meeting, FIRS will send a revised liability,
based on the agreement during the reconciliation meeting, to the company;
6. On receipt of the notice of revised liability, the consultant will advise the company to pay
the liability. This will bring the audit exercise to a close and the tax consultant will liaise
with the FIRS to obtain a letter of clearance for the company. This letter will indicate that
the company has settled its tax liability to FIRS up to the date the audit covered;
7. If an agreement could not be reached during the reconciliation meeting, FIRS will send a
letter of refusal to amend the liability to the company or a reduced liability, based on
further evidence produced by the company during the reconciliation meeting;
8. If the company is not satisfied with the position of FIRS, the tax consultant will write a
letter of objection to FIRS, attaching further evidence;
9. FIRS may agree or disagree to amend the liability;
10. If the disagreement could not be resolved, either party can refer the dispute to the Tax
appeal Tribunal for adjudication;
11. If the company is still not satisfied with the ruling of the Tax Appeal Tribunal, on point
of law only, the case will be referred to the High Courts for settlement;
12. If the company or revenue service is not satisfied with the ruling of the High Court, the
party will appeal to the Court of Appeal; and

297
13. If either party is still not satisfied with the decision of the Court of Appeal, the party
could appeal to the Supreme Court. The decision of the Supreme Court is final on the
dispute.

298
 Bibliography
Books
BPP (2016) ACCA P7: Advance Audit and Assurance, ninth edition, BPP Learning Media Ltd,
London

Emile Woolf (2018), ICAN Advanced Audit and Assurance, Second edition, Bracknell Enterprise
& Innovation Hub, Berkshire

IFAC (2004), IAASB Handbook .

NOUN (2014), Advanced Audit and Investigation, retrieved online from www.nou.edu.ng on
June 15, 2019.

Open Tuition (2019) ACCA Advanced Audit and Assurance, retrieved online from
https://opentuition.com June 15, 2019.

Reference books
Somorin (2012), Teju Tax: Reference book on Nigerian Tax System, Accounting and Taxation
Terms, Vol 1 and 2, 1st edition, Malthouse Press Limited, Lagos.

Journals and Articles

OECD (2006), Strengthening Tax Audit Capabilities: General Principles and Approaches,
Centre for tax policy and administration.
Deloitte (2015), Tax audit exercise: when will FIRS adopt risk – based approach in Nigeria,
retrieved online from www.deloitte.com/ng on June 15, 2019.
Marlene, J and Aston, D. (2010), Auditing Fundamentals, 1 edition, Prentice Hall

Revenue laws
Casino Taxation Act Cap C3
Companies Income Tax Act Cap. C21, LFN 2004
Companies Income Tax (Amendment) Act 2007;
Education Tax Act Cap E4, LFN 2004
Federal Inland Revenue Establishment Act 2007
Personal Income Tax Act 2004, as amended

299
Petroleum Profit Tax Act Cap. P13, LFN 2004
Stamp Duties Act Cap. S8, 2004
Value Added Tax Cap. VI LFN 2004.
International standards on auditing

ISA 200: Overall Objectives of the Independent Auditor and the Conductof an Audit in
Accordance with International Standards on Auditing

ISA 240: The Auditor’s Responsibilities Relating to Fraud in an Audit ofFinancial Statements

ISA 315: “Identifying and Assessing the Risksof Material Misstatement through Understanding
the Entity and Its Environment

ISA 330: The Auditor’s Responses to Assessed Risks

ISA 500: Audit evidence

ISA 530: Audit sampling

ISA 580: Written Representations

ISA 610: Using theWork of Internal Auditors

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