See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/374191909

Effect of tax audit quality on tax compliance

Thesis · February 2023

DOI: 10.13140/RG.2.2.21630.77127

CITATIONS READS
0 213

1 author:

Moges Mengstu Kassaw

Ministry of Revenues Ethiopia
14 PUBLICATIONS 5 CITATIONS

SEE PROFILE

All content following this page was uploaded by Moges Mengstu Kassaw on 26 September 2023.

The user has requested enhancement of the downloaded file.

 EFFECT OF TAX AUDIT QUALITY ON TAX
COMPLIANCE፡
IN THE CASE OF ETHIOPIAN MINISTRY OF
REVENUES LARGE TAXPAYERS’ BRANCH
OFFICE (LTO)
Moges Mengstu Kassaw

Ethiopian Ministry of Revenue, Research and Development Directorate

mogmen25@gmail.com

Social Media Links:

https://www.researchgate.net/profile/Moges-Kassaw-2

https://scholar.google.com/citations?user=uwvbIxgAAAAJ&hl=en&authuser=1
 Table of Contents
LIST OF TABLES................................................................................................................................................. I

LIST OF FIGURES.............................................................................................................................................. II
ABBREVIATIONS AND ACRONYMS ............................................................................................................. III
ABSTRACT.........................................................................................................................................................IV
CHAPTER ONE................................................................................................................................................... 1

1. INTRODUCTION........................................................................................................................................ 1
1.1. BACKGROUND OF THE STUDY......................................................................................................................... 1
1.2. STATEMENT OF THE PROBLEM ....................................................................................................................... 2
1.3. RESEARCH QUESTIONS ................................................................................................................................. 4
1.4. OBJECTIVES OF THE STUDY ............................................................................................................................ 4
1.5. SIGNIFICANCES OF THE STUDY ........................................................................................................................ 4
1.6. SCOPE OF THE STUDY .................................................................................................................................. 4
1.7. ORGANIZATION OF THE STUDY ....................................................................................................................... 5

CHAPTER TWO.................................................................................................................................................. 6
2. REVIEW OF RELATED LITERATURE................................................................................................... 6
2.1. THEORETICAL REVIEW OF TAX AUDIT ............................................................................................................... 6
2.1.1. Theories of Auditing ...................................................................................................................... 7
2.1.2. Objectives of Tax Audit.................................................................................................................. 9
2.2. EMPIRICAL REVIEW ................................................................................................................................... 18
2.3. RESEARCH GAP ........................................................................................................................................ 21
2.4. CONCEPTUAL FRAMEWORK ......................................................................................................................... 22
CHAPTER THREE............................................................................................................................................ 23
3. RESEARCH METHODOLOGY............................................................................................................... 23
3.1. STUDY AREA ........................................................................................................................................... 23
3.2. DESIGN AND APPROACH ............................................................................................................................. 23
3.2.1. Research Design.......................................................................................................................... 23
3.2.2. Research Approach ..................................................................................................................... 23
3.3. TYPES AND SOURCES OF DATA ..................................................................................................................... 24
3.3.1. Type of Data ............................................................................................................................... 24
3.3.2. Source of Data ............................................................................................................................ 24
3.4. THE POPULATION OF THE STUDY ................................................................................................................... 24
3.5. DATA COLLECTION METHODS ...................................................................................................................... 24
3.5.1. Primary Data Collection Instruments........................................................................................... 25
3.5.2. Secondary Data Collection .......................................................................................................... 25
3.6. METHOD OF DATA ANALYSIS ....................................................................................................................... 25
3.7. MODEL SPECIFICATION .............................................................................................................................. 25
3.8. DATA VALIDITY AND RELIABILITY .................................................................................................................. 27
3.8.1. Reliability Test ............................................................................................................................ 27
3.8.2. Validity of the Research ............................................................................................................... 27
 3.9. VARIABLE MEASURE.................................................................................................................................. 29
3.10. ETHICAL CONSIDERATIONS IN THE STUDY ........................................................................................................ 30

CHAPTER FOUR .............................................................................................................................................. 31

4. RESULT AND DISCUSSION.................................................................................................................... 31

4.1. INTRODUCTION ........................................................................................................................................ 31

4.2. PROFILE OF RESPONDENTS .......................................................................................................................... 31
4.3. DESCRIPTIVE ANALYSIS............................................................................................................................... 34
4.4. CORRELATION .......................................................................................................................................... 36
4.5. CLRM ASSUMPTIONS AND DIAGNOSTIC TESTS ................................................................................................. 37
4.5.1. Heteroskedasticity Test ................................................................................................................ 37
4.5.2. Multicollinearity Test .................................................................................................................. 37
4.5.3. Autocorrelation test ..................................................................................................................... 38
4.5.4. Test of omitted variable bias ........................................................................................................ 39
4.5.5. Model specification Test .............................................................................................................. 39
4.6. ORDERED LOGISTICS REGRESSION ANALYSIS ..................................................................................................... 40
CHAPTER FIVE ................................................................................................................................................ 45

5. CONCLUSION AND RECOMMENDATION.......................................................................................... 45

5.1. CONCLUSION ........................................................................................................................................... 45
5.2. RECOMMENDATION .................................................................................................................................. 46
REFERENCES ................................................................................................................................................... 47

APPENDIX I ...................................................................................................................................................... 55
APPENDIX II ................................................................................................... ERROR! BOOKMARK NOT DEFINED.
 List of Tables

TABLE 1 OVERALL RELIABILITY ................................................................................................. 27

TABLE 2 VALIDITY OF TAX AUDIT QUALITY ................................................................................ 28

TABLE 3 VALIDITY OF TAX AUDIT EFFECTIVENESS ...................................................................... 29

TABLE 4 VARIABLE MEASURES ................................................................................................... 30

TABLE 5 RESPONDENT'S SEX ...................................................................................................... 31

TABLE 6 AGE CATEGORY............................................................................................................ 32

TABLE 7 EDUCATION STATUS ..................................................................................................... 33

TABLE 8 EDUCATION QUALIFICATION ........................................................................................ 33

TABLE 9 WORK EXPERIENCE ...................................................................................................... 34

TABLE 10 DESCRIPTIVE STATISTIC OF VARIABLES ....................................................................... 35

TABLE 11 CORRELATION MATRIX ............................................................................................... 36

TABLE 12 HETEROSKEDASTICITY TEST ....................................................................................... 37

TABLE 13 MULTI-COLLINEARITY TEST ........................................................................................ 38

TABLE 14 AUTOCORRELATION TEST ........................................................................................... 39

TABLE 15 TEST OF OMITTED VARIABLE ....................................................................................... 39

TABLE 16 MODEL SPECIFICATION TEST ....................................................................................... 40

TABLE 17 MODEL SUMMARY ...................................................................................................... 40

TABLE 18 LOGIT MODEL............................................................................................................. 41

TABLE 19 ODDS RATIO ............................................................................................................... 42

TABLE 19 MARGINAL EFFECT ESTIMATION.................................................................................. 43

i
 List of Figures

FIGURE 1 CONCEPTUAL FRAMEWORK ......................................................................................... 22

FIGURE 2 RESPONDENTS AGE GROUP ........................................................................................... 32

ii
Abbreviations and Acronyms

ANOVA - Analysis of Variance

AVE – Average Variance Extracted

CLRM - Classical Linear Regression Model

CR - Composite Reliability

ERCA – Ethiopian Revenues and Customs Authority

FIRS - Federal Inland Revenue Service

FRC - Financial Reporting Council

IA - Internal Audit

IAASB - International Auditing and Assurance Standards Board

ISA – International Standard of Auditing

IT- Information Technology

LTO – Large Taxpayers Office

MOR - Ministry of Revenues

OECD - Organization for Economic Co-operation and Development

OLS – Ordinary Least Square

PCAOB - Public Company Accounting Oversight Board

SAS - self-assessment system

SPSS - Statistical Package for Social Sciences

TAE- Tax Audit Effectiveness

TAQ - Tax Audit Quality

VAT - Value-Added Tax

iii
Abstract

Tax audit is an activity or a set of activities performed by Tax auditors to determine at taxpayer’s
correct tax liabilities for a particular tax period. The aim of the study is to assess the effect of tax
audit quality on tax compliance perception of Ministry of revenues Large Taxpayers branch
office. The quantitative research method was employed. Since, the target population to be
studied is small and there are 94 tax auditors and team leaders managed by three process owners.
The data collected from all parts of the tax audit department through structured questionnaires.
The researcher addressed 94 questionnaires and only 87 questionnaires were returned. The data
is analyzed based on descriptive and inferential using logistic regression model. The findings
from the study results revealed that both tax audit quality and tax audit effectiveness have a
positive significant effect on tax compliance behavior of the taxpayers. The following
suggestions are made in light of the study's findings. The tax office ought to have paid periodic
attention to the quality of the tax audit file because higher-quality tax audits will result in higher
rates of tax compliance, and the tax office could increase the quality of their audits by providing
auditors with ongoing training, educating taxpayers, increasing awareness, and encouraging all
necessary voluntary compliance.

Keywords: tax audit, compliance, audit quality, effectiveness, LTO

iv
 CHAPTER ONE
1. INTRODUCTION

In this chapter, the researcher discussed the context of a tax audit, the problem statement, the
research questions, the study's goals, its significance, its scope, and how the study was put
together.

1.1. Background of the Study

Tax is a mandated payment or contribution to the government that does not result in a direct
return for taxpayers. If a person is liable to pay a tax, they are personally obligated to do so.
The main theoretical idea is that people should be taxed based on their ability to pay, which is
considered to be their fair share, and that people in similar financial situations should be taxed
equally without discrimination. The ability to pay, on the other hand, is left as a guess
(McGee, 2008).

Ethiopia, like other developing nations, faces challenges in generating sufficient revenue to
expand its development efforts. For a considerable amount of time, Ethiopia has maintained a
constant expenditure surplus over revenue. As a result, a revenue body's effective tax audit
program serves several important functions and can significantly improve tax administration
(Engida, T.G. and Baisa, GA., 2014).

The self-assessment system (SAS) has been adopted by many nations to simplify the tax
assessment process and encourage voluntary compliance. The self-assessment system helps to
make taxpayers more responsible, reduce tax evasion, and encourage voluntary compliance.
Taxpayers in this system are expected to file returns based on their income, figure out how much
tax they owe, and pay in the time frame required by law. According to (Ojonta, 2011), this
system is subject to verification by the relevant tax authorities to maintain its credibility.
According to (Adimassu, N. A., & Jerene, W., 2016), SAS was only recently implemented in
Ethiopia in 2005; the primary approach taken to guarantee a high level of tax compliance during
the self-assessment tax system (SAS), particularly tax audit, is enforcement activities.

Tax audit is a critical and significant component of the compliance activities of tax
administration utilizing the proper use of enforcing tax laws, it is the conduct by audit staff of
appropriate verification of selected taxpayers whether he/she has been correctly declaring the tax

1
liabilities including a review of taxpayer's systems, books of account and other related
information. It may include cross-checks of taxpayer's records with those of taxpayer's suppliers
or with other government departments and agencies source of information and its effectiveness
and efficiency must be guaranteed using proper procedures and application of modern audit tools
and techniques (OECD, 2006).

A tax audit is a systematic examination process to assess whether the reported tax liability in the
financial statement of taxpayers complies with tax laws, regulations, and other obligations. To
achieve a balanced program of tax audits such as audit coverage, audit quality, and deterrent are
the aim of the revenue authority (Organization for Economic Co-Operation and Development
(OECD, 2006).

As (Biber, 2010), a tax audit is extending beyond verifying a taxpayer's reported obligations and
detecting discrepancies between a taxpayer's declaration and supporting documentation. Most
taxpayers report their tax liabilities more accurately if they believe that the tax administration can
detect any unreported liabilities and that heavy penalties may be applied when they are detected.
(Micci-Barreca, 2004), noted that the purpose of a tax audit is to check the evasion of tax and
ensure compliance with the laws and regulations.

1.2. Statement of the Problem

An audit is a systematic and scientific process to obtain objective evidence and examination of
several books of accounts by independent auditors. It aims to ascertain the accuracy of financial
statements provided by an organization based on established criteria and reports the result to
interested users (Rick, 2005).

Currently, auditors are expected to provide value-audit services to stakeholders who are involved
in the supply chain of the financial statements in addition to enhancing the credibility of financial
statements because of the constant changing of both the audit objectives and the role of auditors
(Eck-Heang, 2008). Therefore, the ultimate aim of the audit assignment given to auditors is to
produce a quality audit report. Hence, an auditor’s major role is the issuance of audit opinion to
the standards based on established criteria as per the principles of audit quality ( Enofe et al,
2013).

2
Audit quality can be defined in general from two perspectives: first, an auditor discovers a
breach in the client's accounting report and system and second, an auditor should report
independently the discovered breach to the users of the information (Chadegani, 2011). This
definition is supported by those who noted that audit quality is a function of the auditor's ability
to detect material misstatements, i.e., technical capabilities, and reporting errors, i.e., auditor
independence (Duff, 2009).

The difference in interest between the government and taxpayer body triggers non-compliance
by the management of the company. Such disobedience is the company’s effort to conduct tax
avoidance that impacts the diminishing of state treasury receipts. Tax avoidance activity is a
transaction made by the company to reduce the burden of taxation by utilizing gaps in the tax
rules (Nanik Lestari and Sucitra Nedya, 2019).

One indicator that causes tax avoidance is the audit quality factor. Audit quality is a performance
auditor in the auditing process that is guided by the Professional Public Accountant Standard.
The more qualified audit results carried out by auditors in providing services to the company; the
more the action of profit manipulation for tax interest tends not to be done by the company (H.
Chai, and Q. Liu, 2010).

A study on tax compliance and its determinant in the case of Jimma Zone by employing a
quantitative research design to the category "A" taxpayers (Ahmed A, Kedir S., 2015), has been
conducted in Ethiopia, but insufficient studies have been conducted in the study area at different
scenes (Engida, T.G and Baisa, GA., 2014) have studied on factors influencing taxpayers’
compliance with the tax framework in Mekelle City by utilizing cross-sectional overview
technique for research plan to the category "C" taxpayers, (Mebratu, 2016) has attempted
concentrate on effect of tax audit review on improving taxpayers’ compliance by utilizing
secondary source of data from Ethiopian Revenues and Customs Authority (ERCA). In addition
to the fact that, according to the researcher's knowledge and the available literature, the effect of
tax audit quality on taxpayer compliance has not been extensively studied in Ethiopia, this study
sets itself apart from other studies by utilizing tax audit quality and tax audit effectiveness as
measures of tax compliance from the auditors' perspective.

The use of tax audit quality and tax audit effectiveness as measures of tax compliance from the
auditors' perspective distinguishes this study from others in addition to the fact that, according to

3
the researcher's knowledge and the literature, the effect of tax audit quality on taxpayer
compliance has not been extensively studied in Ethiopia.

1.3. Research Questions

The following research questions were answered by the research conducted to explore the effect
of tax audit quality on tax compliance activities of taxpayers in Large Tax Payers Offices (LTO);

 Does audit quality affect tax compliance?

 Does tax audit effectiveness affect tax compliance or not?

1.4. Objectives of the Study

The general objective of this study is to investigate the effect of tax audit quality on tax
compliance in the case of the Ethiopian Ministry of Revenues large taxpayer office (LTO). And
the specific objective of the study is to find out the effect of tax audit effectiveness on the tax
compliance behavior of taxpayers

1.5. Significances of the Study

This study is important for the following major reasons. Firstly, it helps regulators and
practitioners to see the impact of tax audit quality and effectiveness on taxpayers' tax compliance
behavior. Secondly, it would be used as a reference for those researchers who want to make a
further study on tax audit quality and tax compliance relationship. Furthermore, this study will
give insight to MOR and other stakeholders.

1.6. Scope of the Study

The scope of the study is established based on geographic coverage, thematic area, temporal or
time frame, and methodology; therefore, this study is limited to the large taxpayer's branch office
(LTO); Since the large taxpayer's branch is the branch that generates more than 80 percent of the
income collected at the federal level, the effectiveness of the tax operations performed by this
branch will have significant positive and negative effects on the overall tax revenue collection.

Besides, It has been determined that it is practically impossible for the researcher to conduct the
study on all of the branch offices; instead, they have chosen to concentrate on the Large
taxpayer's branch office because doing so requires adequate information, as well as the time and
money they have available.

4
1.7. Organization of the Study

The thesis has five parts with different contents within them. Thus, the first part covers the
introductory part that assesses the entire introductory framework of the study those are
background, problem statement, research question, objectives (general objective and specific
objectives), the significance of the study, and the scope of the study, and organization of the
study. Part two deals with a review of related literature. Part three presents the methodology of
the study including research paradigm, design and approach, types and sources of data, sampling
techniques and method of data collection and method of data analysis, and ethical issues. Part
four deals with the data analysis and interpretation of the results. Part five of this study paper
presents the summary result of the study, conclusion, and recommendation parts.

5
 CHAPTER TWO
2. REVIEW OF RELATED LITERATURE

2.1. Theoretical Review of Tax Audit

An audit's objective is to boost intended users' confidence in the financial statements. This is
achieved by the expression of an opinion by the auditor on whether the financial statements are
prepared, in all material respects, following an applicable financial reporting framework. In the
case of most general purpose frameworks, that opinion is on whether the financial statements are
presented fairly, in all material respects, or give a true and fair view under the framework
(IAASB, 2020).

According to the (OECD, 2006), a tax audit is an examination to determine whether a taxpayer
has met other obligations and accurately assessed and reported their tax liability. However,
according to (ERCA, 2010), a tax audit is defined as "an activity or a set of activities performed
by tax auditors to determine a taxpayer's correct tax liabilities for a specific accounting or tax
period, by examining a taxpayer's organization products and financial records to assess
compliance with tax laws and verifying the true, fair, reliable, and accuracy of tax returns and
financial statements."

A tax audit examines a taxpayer's financial and business records to ensure that the amount of
tax paid and reported complies with tax regulations. According to ( (Okonkwo, 2014) cited in
(Amah, et.al., 2018)), critical evaluation of tax audit & investigation processes in enhancing
tax compliance; tax audit bodybuilding is a very important tool for compliance in the majority
of tax authorities worldwide. It has significantly contributed to enhancing the self-assessment
tax system, increasing the number of taxpayers, generating more tax revenue, and preventing
various cases of abuse of the tax system. On the other hand, a solid internal control system
helps an organization cut costs and waste while also preventing errors and fraud.

The tax audit program also plays a crucial role in elucidating the law and instructing taxpayers
on the most effective ways to comply with it, such as the requirements for filing and making
payments, the practices of record keeping, relevant legal interpretations, and new legislation.
This can be accomplished by the auditors directly interacting with taxpayers or influencing

6
the taxpayer services program in the creation of strategies to address areas of tax non-
compliance discovered during audits (OECD, 2006).

Registration Audit, Advisory Audits and Record-Keeping Audits (or Desk, field, or back-duty
audits) are all examples of tax audits (Oyedokun, P., & Emmanuel, G., 2016); (Olaoye, C. O.,
& Ogundipe, A. A., 2018). These authors assert that an office or desk audit is carried out
within the tax officials' office. The primary objective is to conduct some administrative
checks on submitted returns to guarantee compliance with tax regulations. The taxpayer is not
given prior notice when this audit is carried out. When the taxpayer is asked for specific
documents or to show up for an interview, he only learns about the audit. If the tax office is
dissatisfied with the taxpayer's level of compliance, the desk audit may result in a field audit.

A tax audit, according to ( (Kirchler, E., et.al., 2007) cited in (Dauda, et.al., 2018)), is a look
at a taxpayer's accounts to see how well they comply with a state's tax laws, procedures, and
standards. It is an essential component of a tax system that ensures taxpayers comply with
their obligations. According to (Modugu, K. P., & Anyaduba, J. O., 2014), a tax audit is a
process of examining a company's profits and returns under relevant tax laws. According to
(Olaoye, C. O., & Ogundipe, A. A., 2018), a tax audit is an independent examination of a
taxpayer's books of accounts by specialized revenue authority staff to ensure the accuracy of
tax returns. It involves looking at a taxpayer's records to make sure that taxes that are due,
reported, and paid are done per tax laws.

Most of the time, tax audits focus on areas where there is a high risk of overpaying or
underpaying taxes. However, determining the correct amount of tax to be paid is the primary
goal of an audit. The primary principles of the Ethiopian Ministry of Revenues, tax audit policy,
and strategy are facilitation vs. control, taxpayer relationship, improved tax audit management,
and auditor professionalism. Ethiopia's revenue administration system relies on taxpayers
assessing their liability under the law and paying the correct amount of tax (ERCA, 2010).

2.1.1. Theories of Auditing

The need for auditing in society is supported by auditing theory: the job and motivation behind
review administrations in correspondence between an organization and its current circumstance.

Agency theory

7
The accounting literature uses agency theory a lot to explain and predict the appointment and
performance of external auditors (Adams, 1994). Agency theory was used to explain that
management wants to keep a strong internal audit department. Execution of review suggestions
is exceptionally applicable to review adequacy (Van Gansberghe, 2005) the administration of an
association is seen as the client getting inward review administrations. Therefore, for an audit to
be effective, management's support for strengthening internal audits and its commitment to using
audit recommendations are essential.

Utilizing of agency theory, (Xiangdong, 1997) explained the role that audit plays in an economy
and points out that internal audit has an advantage over external audit in acquiring data quickly
and finding problems at an earlier stage. Audit findings and recommendations would not serve
much purpose unless management is committed to implementing them. "Auditors are engaged as
agents under contract but they are expected to be independent of the agents who manage the
operations of the business. The primary purpose of audited accounts in this context is one of
accountability and audits help to reinforce trust and promote stability”.

Positive Accounting Theory (PAT)

Watts and Zimmerman seek to develop a positive theory of the determination of accounting
standards. “Such a theory will help us to understand better the source of the pressures driving the
accounting standard-setting process, the effects of various accounting standards on different
groups of individuals and the allocation of resources, and why various groups are willing to
expend resources trying to affect the standard-setting process” (Watts, R. L., & Zimmerman, J.
L., 1979).

Institutional theory

The concept of institutionalization is related to organizations' actions over time. Institutional

theory suggests that internal operating processes loosely coupled with observable structures
accomplish the real work of an organization. As a result, organizations with the appropriate
structures in place will avoid deep investigations of their function by external auditors (Meyer, J.
W., & Rowan, B., 1977). Organizations are subject to rules and regulations to which they must
conform to ensure their legitimacy and thus have access to resources and ensure their survival
(DiMaggio, P. J., & Powell, W. W., 1983). However, these rules and regulations don’t
necessarily guarantee that organizations will continue to operate efficiently (Scott, 2008).

8
 2.1.2. Objectives of Tax Audit
The overall objective is to improve the compliance of taxpayers whether they declare the correct
amount of tax and paid at the right time. The expectation by a taxpayer of an audit should have a
deterrent effect and encourage the taxpayer to declare as far as possible a credible tax return, it
also improves the taxpayer’s understanding and awareness of the relevant taxes (MOR,
Compliance Risk Management Strategy, 2019). The main purposes of tax audit in MOR are:
Establish the extent of risks and quantify any errors which may have arisen as a result, improve
future compliance, support those who wish to comply and deter noncompliance.

As (Biber, 2010) noted, the role of an audit program in a modern tax administration must extend
beyond merely verifying a taxpayer's reported obligations and detecting discrepancies between a
taxpayer's declaration and supporting documentation. Most of taxpayers declare and pay their tax
liabilities precisely, if they believe that the tax administration can detect any unreported tax and
that weighty punishments might be applied when they are identified. Thus, tax audit results in
increased tax revenue in two ways: first, directly through assessment of additional taxes; and
secondly, indirectly by discouraging underreporting of liabilities by all taxpayers.

The purpose of tax audits is to check the evasion of tax and ensure compliance with the laws and
regulations (Micci-Barreca, D., & Ramachandran, S., 2004). According to the OECD, tax audit
would serve the following purposes: Firstly, Ensure that the books of accounts and other records
are properly maintained, Secondly, Faithfully reflect the income of the taxpayers and claims for
deduction correctly made by him, thirdly, help in checking fraudulent practices, and lastly,
facilitate the administration of tax by a proper presentation of accounts before the tax authorities
and considerably saving the time of assessing officers in carrying out routine verifications like
checking correctness of totals and verifying whether purchases and sales are properly vouched or
not, thereby their time could be utilized for attending to more important investigational aspects
of the case (OECD, 2006).

A revenue body's audit programs play a number of important roles that, when carried out well,
can significantly contribute to better tax administration. First and foremost, advance deliberate
consistence: The audit program's primary objective is to encourage taxpayers to comply with tax
laws on their own. It aims to accomplish this by instilling confidence in the general public that
serious violations of the tax code will be identified and appropriately punished and by reminding

9
taxpayers of the dangers of noncompliance. Investigate individual taxpayers for noncompliance:
Audits may uncover significant understatements of tax liabilities and additional tax revenue
collections by focusing on major areas of risk and taxpayers most likely to evade their
responsibilities.

Second, collect data regarding the "health" of the tax system, including patterns of taxpayer
compliance: Random audits can help with overall revenue administration by gathering crucial
data that can be used to make judgments about overall levels of tax compliance. Over time, this
data can be used to identify trends in overall organizational effectiveness and to gather more
precise data that can be used to make decisions about future compliance improvement strategies,
to improve automated risk-based case selection processes, and even to support changes to tax
legislation (OECD, 2006)

Thirdly, gather intelligence: Audits may bring to light information on evasion and avoidance
schemes involving large numbers of taxpayers that can be used to mount major counter-abuse
projects. Fourthly, educate taxpayers: Audits can assist clarify the application of the law for
individual taxpayers and identify improvements required to record-keeping and thus may
contribute to improved compliance by taxpayers in the future.

Last but not least, determine which aspects of the law require clarification: According to the
(OECD, 2006), audits may reveal areas of the tax law that are causing problems and confusion
for a large number of taxpayers. As a result, the revenue body will need to make additional
efforts to either better educate taxpayers or make the requirements of the law clearer.

Audit Quality

Quality is “the degree to which a set of inherent characteristics of an object fulfills

requirements.” Simply stated, quality is meeting Audit requirements (ISO 9000, 2015).

Through research on the determinants of audit quality, regulators, practitioners, and academics
are most interested in improving audit quality (Sulaiman, 2018). In audit quality analysis, the
definition and measurement of quality are major concerns because there is little agreement on a
unified definition and measurement. Academic researchers have measured the factors that
influence audit quality in a variety of ways. Some of the factors that influence audit quality
include tenure, client size, prior experience, auditor size (Pitkänen, 2016), audit team-related

10
factors, audit environment, and audit office-related factors. However, little attention is paid to the
quality of tax audits.

One of the most prominent factors on which audit effectiveness is anchored is audit quality,
which is demonstrated by the office's capacity to provide useful audit findings and
recommendations (Cohen, A., & Sayag, G., 2010). Audit quality is considered to be a
determinant of IA effectiveness. The auditor must plan and carry out the work by the IA's
performance standards to provide useful audit findings and recommendations for improvement.
A proxy for audit quality is the office's capacity to properly plan, carry out, and communicate
audit results. Therefore, extensive staff expertise may be a factor in audit quality; the
reasonableness of the service's scope; and efficient audit communication, planning, and
execution. The Director of the Audit Office and responses to a questionnaire were used as
evidence to evaluate these factors that influence the quality of an audit.

Audit quality has been a big topic of discussion since the financial crisis (Neri, L., & Russo, A.,
2014). In recent years, significant efforts have been made to make audit firms and their services
more transparent and to provide tools for evaluating auditors. According to (Knechel, 2013) and
academic studies that looked at a lot of input and output factors haven't been able to prove that
audit quality has a direct positive relationship. In their studies, they presented a framework for
audit quality derived from the audit quality literature review.

The Public Company Accounting Oversight Board (Gunny, K. A., & Zhang, T. C., 2013),
identified the following three elements that affect audit quality: audit the processes, outcomes,
and inputs. In addition, one of the six constructs that affect audit quality, as stated by (Francis,
2011), are audit inputs; audit technique; accountant firms; the audit business and audit markets;
institutions; and the financial consequences of the findings of the audit.

According to (Dittenhofer, 2001), if an audit quality is maintained, it will contribute to the

appropriateness of the audit's procedures and operations, which in turn contributes to the audit's
effectiveness and that of the organization as a whole. Audit effectiveness is a major contributor
to both the effectiveness of each audit in particular and the organization as a whole.

The Ministry of Revenue's TAQA program's objectives are to determine whether the audit teams
adhere to the Ministry's tax auditing standards and procedures (MOR, Tax Audit Quality
Assurance Review Manual, 2019) and (ERCA, 2010); The auditors are keeping accurate records

11
of the audit procedure; high standards of professional conduct are being displayed by the
auditors, basic infrastructure facilities have been provided to the audit formation, the staff
allocated is adequate, and senior staff involvement is proportional to the complexity of the audit.
There may be capability gaps, and if so, whether the auditors' training needs, particularly in
terms of audit knowledge, are being met.

Auditor’s Experience (AC)

An auditor's unique knowledge, skills, and abilities are derived from their work in the auditing
profession. According to Paithun, 2010 cited (Yeshiwork, 2021), auditing experiences enhance
the auditor's capacity for information processing, alternative solution comparison, and
subsequent action-taking. A solid memory for the information that is required and an accurate
assessment of the audit tasks, it has a direct impact on the efficiency and effectiveness of
decision-making. They can use it to find their clients' misstated accounts and identify operational
errors. Similarly, auditors with a lot of experience are more likely to improve their judgments by
putting risk assessments into more comprehensive and intricate categories. They are more likely
to develop the consistency and consensus of risk judgments, assessments, and evaluations in
auditing practices under different conditions, situations, and circumstances as a result of audit
experience (Ayalew, 2014).

According to (Fleming, 2014), audit specialization is the ability of auditors to possess a

comprehensive understanding of audit practices and operations through complete and accurate
knowledge of a company's characteristics, businesses, and industries. This improves and
enhances their competencies, capabilities, and methods for error detection of unanticipated
financial statement balance fluctuations. A strong audit specialization can be achieved by
auditors who have relevant practical experience, education, and training in a particular industry.
They reasonably facilitate the refinement of the elements of audit knowledge, which can assist in
anticipating potential misstatements, detecting anomalies, effectively verifying consistencies,
and explicitly improving audit risk assessments.

The importance of audit specialization in enhancing effective audit planning, outstanding audit
quality, and excellent audit performance is growing. First, audit specialization can assist auditors
in providing valuable and efficient program planning. According to (Low, 2004), it can assist
auditors in modifying planned audit procedures, determining the level of audit staff that

12
possesses the necessary skills and knowledge, and establishing the amount of time required to
carry out the planned audit procedures. As a result, specialized auditors can enhance audit risk
assessments and the quality of audit planning decisions. They might be able to establish and
provide audit planning that is more successful and effective. Then, it is suggested that audit
specialization has a positive impact on audit planning. Second, audit quality is significantly
influenced by audit specialization. By adhering to auditing and professional standards as well as
other related regulations, it can assist auditors in discovering and reporting errors or omissions
that could have a significant impact on a financial statement (Elder, et.al., 2015).

Information Technology (IT)

The use of information technology is closely related to user expectations of increased

performance that can help users in their work and can have an impact on job performance (
(Davis, 1989); (Goodhue, D. L., & Thompson, R. L., 1995); (Venkatesh, V., et.al., 2003)).
Mustapha and Lai (2017) explain that the use of information technology can shorten work time
and make work more efficient. (Tarek, M., et.al., 2017), in their research concluded that the use
of information technology can increase the productivity of auditors in carrying out each stage of
the audit task. Thus, there is a relationship between the use of information technology and the
quality of audit results.

Task Complexity (TC)

Task complexity can be experienced by individuals in their interactions with tasks, such as the
difficulty level of the task, cognitive abilities, unclear task procedures, and individual capacity to
complete the task, (Campbell, 1988). And (Huey, B. M., & Wickens, C. D., 1993), explain that
complex tasks will make individual performance relatively lower compared to simple tasks. At
higher workloads, complex tasks can create dramatic performance drops. Thus, the complexity
of the task tends to lower the quality of the work.

Task complexity in the context of auditing (Abdolmohammadi, M., & Wright, A., 1987),
explains that complex tasks are closely related to the structure of the audit task, which in turn can
affect the auditor's judgment in resolving audit cases. In structured tasks with clear procedures,
auditors need a little judgment in solving audit cases, because problems are clearly defined.
When the task is complex (unstructured), auditors need more judgment.

13
Auditors’ Training

For auditors to improve their abilities, training is an essential component. For audits to be
effective, new methods must be learned. According to (Masood, A., & Afzal, M., 2016), auditor
training institutes have been established, but they fall short of the mark. Therefore, assert that
auditor training enhances audit efficiency.

According to (OECD, 2006), auditors must receive both initial trainings (in the classroom and on
the job) to bring them up to the required level and ongoing training to keep their skills current
and relevant to maintain auditing standards. The amount, type, and balance of this training vary
based on the requirements and the recruitment and development policies implemented, which
vary based on the level of experience and qualifications expected of new hires.

Audit effectiveness

The word effectiveness has been defined by different researchers, for instance (Dittenhofer,
2001), views effectiveness as the ability toward the achievement of objectives and goals. (Arena,
M., & Azzone, G., 2009), defined effectiveness as the capacity to obtain results that are
consistent with the target's objective.

Effective tax audit program provides valuable support in gathering information on the health of
the tax system, improving future compliance, and identifying areas of the tax law that require
clarification (Sarfo, 2015). When tax audit practice becomes ineffective, it may result in the
deterioration of tax compliance and a loss of credibility of the tax administration (Tesfaye,
2018).

Audit effectiveness starts with selecting high-risk taxpayers for audit and ends with rising
taxpayer compliance. The common audit case selection methods include a random selection of
cases, manual screening/case review by auditors, and risk-based case selection (Bank, 2011).

Tax administration should be effective in the sense of ensuring high compliance by taxpayers,
and efficient in the sense that administrative costs are low relative to revenue collected. Good tax
administration requires strong technical capacity by the administrative agency but also a well-
designed tax (Thomson, 2008).

An effective tax audit can improve deterrence measures by increasing the probability of being
detected, rather than imposing sanctions. According to the Tax audit manual (MOR, Tax Audit

14
Quality Assurance Review Manual, 2019), audit performance evaluation should consider Audit
quality, Audit yield, and Audit coverage.

A good audit program employs strategies to optimize both the direct and the deterrent effects of
audits (Biber, 2010). Voluntary compliance is generally enhanced by increasing the number of
taxpayers audited than by auditing fewer taxpayers with large tax potential. Perversely, revenue
is increased by concentrating on those taxpayers where a large amount of revenue is at risk. But
there should be careful planning when there is a widespread belief that most tax returns are
underreported, otherwise, there may be an over-the-selection of returns for audit (Tait, 1988).

According to (Dittenhofer, 2001), if an audit quality is maintained, it will contribute to the

appropriateness of the audit's procedures and operations, which in turn contributes to the audit's
effectiveness and that of the organization as a whole. Audit effectiveness is a major contributor
to both the effectiveness of each audit in particular and the organization as a whole.

The Ministry of Revenues Tax Audit Quality Assurance (TAQA) program's objectives are to
determine whether the audit teams adhere to the Ministry tax auditing standards and procedures
(MOR, Tax Audit Quality Assurance Review Manual, 2019) and (ERCA, 2010).

We say that the audit result is effective if the tax audit quality assurance accepts an effective
report; based on this, the audit effectiveness work will be dependent on the audit quality; The
auditors' knowledge and experience, support from senior management, organization structure,
and other factors that can lower audit quality all affect the quality of the tax audit and will affect
the quality assurance of the tax audit.

Audit attribute

Audit attributes with implications on audit effectiveness include the auditors' proficiency to
efficiently and effectively meet organizational sub-goals, their attitude towards tax Audit, the
cooperation or support of taxpayers at the time of auditing provided to the tax auditor, to have
full and unrestricted access to all activities, records, and properties, and be provided with
cooperation from the audit.

Organizational setting

According to the findings of studies carried out (Abera, 2016) and (Ayalew, 2014), the
relationship between the organizational setting and tax audit effectiveness is thought to be a

15
factor that influences tax audit effectiveness. The state of internal audit within the organizational
structure is included in the organizational setting; the integrity of the internal organization of the
tax audit function; the status of the tax audit program's budget; as well as the existence of well-
established standards for evaluating audit practices. The tax audit function's organizational
profile, internal organization, and budgetary situation are all referred to as its organizational
setting.

As well as the policies and procedures of the organization that controls how audits are carried
out. It describes the setting in which a tax audit takes place. As a result, the organizational
environment may affect the level of efficiency that a tax audit might achieve. The audit's ability
to achieve its intended goals is reflected in its attributes.

Top management support

According to (Abera, 2016), (Ayalew, 2014), and (Mihret, D. G., & Yismaw, A. W., 2007), top
management support for tax auditing is a significant factor in its effectiveness. One of the two
most significant influences on audit efficiency is management support, along with tax audit
quality. (Leung, P., et.al., 2011), discovered in a survey of Australian internal auditors that chief
audit executives generally have very high praise for IA's performance. They think they can have
an impact on decisions and see themselves as an essential member of the management team; in
their jobs, maintain a sufficient level of objectivity, integrity, and competence; and give their
employees good support. More importantly, they believe that upper management's support is
essential to their role's effectiveness.

Tax compliance

The practice of adhering to tax laws and regulations in a particular state, nation, or international
community is known as tax compliance. This means that working people must file their tax
returns every tax period as part of being tax compliant. Additional payments of various types of
taxes are required for tax compliance. For instance, organizations that own structures or offices
need to pay local charges for such resources and extract charges for the utilization of specific
merchandise like energizes or other natural items. In the grand scheme of things, paying taxes is
a big part of how the government pays for services that make people's lives better. Taxes are
used by governments to pay for things like health and education programs, unemployment and

16
disability benefits, national security and defense programs, roads and bridges, and so on (Brody,
2021).

According to (Verboon, P., & Van Dijke, M., 2007) stated that tax compliance is the willingness
of individuals to comply with relevant tax authorities by paying their taxes. Others like, (Alm,
1991) defined tax compliance as the reporting of all incomes and payment of all taxes by
fulfilling the provisions of laws, regulations, and court judgments.

According to the report (OECD, 2008), all residents and organizations would fulfill their
commitments under the expense regulation to enroll where explicitly required and to
intentionally proclaim and pay on time their tax liabilities, all determined completely and
precisely adhering to the law. Citizens and businesses are required to comply with four
fundamental tax compliance obligations, which are governed by each revenue body's respective
tax laws: to register for tax purposes, correctly report tax liabilities (including as withholding
agents), and pay taxes on time (i.e. by the date stipulated in the law).

Kirchler, (Kirchler, E., et.al., 2007), provide a thorough description of the determinants of tax
compliance, dividing them into three categories. He states there are social psychological
determinants comprising attitudes, different types of norms, fairness perceptions, as well as
motivational features relating to tax compliance, political determinants such as complexity of
law and tax system, or fiscal policy, and economic determinants like the rational decision-
making process and the effect of audits, fines, tax rates, income on tax behavior. Taxpayer
compliance can be achieved optimal only if there is a part of voluntary compliance and enforced
compliance (Kirchler, E., et.al., 2007) so that trust in the state is needed and the strength of the
state.

Studies in Mekelle City by (Tadesse, G. and Goitom, A., 2014), also in their empirical studies
they examined factors like; the probability of being audited and the penalty having a positive
impact on tax compliance.

Also, the compliance model from the Ethiopian Ministry of Revenues (MOR, Compliance Risk
Management Strategy, 2019) shows that taxpayers who do not intend to be non-compliant tend
to take action in the form of services and counseling (voluntary compliance), while taxpayers
who intend not to comply to be supervision, inspected, and enforced by law compliance).

17
Empirical work on taxpayer compliance by (Alm, J., Jackson, B. R., & McKee, M., 1992)
concluded that the tax audit probability affects taxpayers' compliance and the study by (Dewi, C.
S., & Supadmi, N. L., 2014) concluded that the tax audit positively affects corporate taxpayers'
compliance.

The tax audit quality is a deterrent effect that will increase enforced compliance, it can also
increase taxpayers' trust in the state so that voluntary compliance can also be increased (Kirchler,
E., et.al., 2007)). Various internal and external factors can influence the quality of examination
results that are not yet optimal. Internal factors come from the tax auditors' quality, while
external factors can come from situations influenced by the audit rules. Regarding the quality of
human resources, audits are carried out by a tax auditing team called the Tax Auditor Functional,
which consists of a supervisor, team leader, and team members.

A study in Addis Ababa (Melaku, 2017) examines Problems of Tax Audit of Categories "A"
taxpayers and investigates key problems in tax audit operation regarding the appropriateness of
tax audit type used and audit effectiveness, the study result shows that a tax audit program is a
toddler tool in improving voluntary compliance and increasing future revenue collection.

2.2. Empirical Review

In 2020, (Tarfa, E.G, et.al., 2020), investigated the impact of tax audits on tax revenue
generation. The purpose of the study was to investigate how the Federal Ministry of Revenue's
Jimma and Hawassa branches conduct tax audits. To address issues that could not be obtained
using a single method, the study has been carried out using a mixed method. Additionally, both a
descriptive and an explanatory research design were used in the study. According to the study,
the implementation of tax audit techniques and the provision of taxpayers with training are
positive factors that have a significant impact on tax revenue generation. On the other hand,
taxpayers' illegal behavior hurts tax revenue generation.

Another study by (Ayalew, 2014), investigates the factors that influence the efficiency of tax
audits for taxpayers in category "A". The purpose of the study is to determine whether or not
factors and tax audit efficiency are statistically significant. The simple random sampling method
of the census and the lottery were then used to select taxpayers and tax auditors, respectively. As
a result, a sample of three hundred thirty-three (333) people with 1518 observations was chosen
for the study. Then, descriptive statistics, Pearson's correlation, and linear regression analysis

18
were used to conduct a quantitative analysis of the data. The findings demonstrated that there is
no statistically significant negative correlation between tax audit efficiency and audit attributes.
Additionally, there was no statistically significant positive correlation between tax audit
efficiency, top management support, or organizational setting.

According to the study (Laykemaryam, 2020) looks into the factors that affect the effectiveness
of tax audits on taxpayers in categories "A" and "B" as well as tax auditors in the North Shewa
Zone Revenue Office. Explanatory and descriptive research designs, as well as qualitative and
quantitative research methods, were used to accomplish the study's goal. A questionnaire survey,
interviews with audit team leaders and process owners, and a documentary analysis of the
organizations were all used in the study. 35 auditors and 361 taxpayers were chosen as the
study's sample respondents, and censuses and simple random sampling were used to collect 318
questionnaires. Then, descriptive statistics, linear regression analysis, and Pearson's correlation
were used to conduct a quantitative analysis of the data. Quality of tax audits, organizational
independence, support from top management, staff auditors' competence, and information
systems all had a positive and statistically significant effect on tax audit effectiveness. However,
the organizational setting has no statistically significant effect on tax audit efficiency. A tax
audit, on the other hand, is impacted negatively and statistically significantly by tax legislation.
To reduce the negative impact of tax legislation on tax audit effectiveness, the organization
ought to simplify tax laws and issue practical regulations.

In the South Gondar Zone, (Tesfie, D. S., et.al., 2021), investigate factors affecting the
effectiveness of tax audits; Through the use of questionnaires, primary data from taxpayers in
categories "A" and "B" were gathered for the study. Tax auditors and tax officers (such as tax
assessment and collection, taxpayer education, job process owners, and the head of the revenue
administration office) made up the study's population. The analysis was based on the responses
of 105 people, with a response rate of 75%. The study evaluated the relationship between the
variables using the binary Logit model to accomplish the preceding goals. The conclusion was
that the South Gondar zone revenue office's tax audit effectiveness was statistically significantly
improved by factors such as audit case selection, audit experience, and audit types performed.
On the other hand, the South Gondar zone revenue office has found that the auditors' age, the
field of study, occupation, audit resource, rate of tax audits, and field of study have a statistically
significant negative impact on tax audit effectiveness.
19
The study by (Tesema G. and Teklu K., 2020 ), used descriptive statistics to investigate the
performance of tax audits in the case of the Western Addis Ababa Small Taxpayer Branch office.
The population consists of all 62 risk-based tax auditors and 10 team leaders. The study findings
show that most audit cases were not conducted as per the audit manual and weak performance in
detecting non-compliant taxpayers. Further tax auditors give less attention to audit awareness
creation during the audit process and tax auditor's professional advice and recommendations
were not given in written form to the taxpayers.

A Tunisian study on the Quality Effect of Auditing Tax Compliance (Soltani, 2021) found that,
when tax evasion is measured by the difference between the statutory tax rate and the effective
tax rate, audit quality improves tax compliance in the Tunisian context. Better audit quality may
have reduced tax evasion in Tunisian businesses, according to this study.

Study on the effectiveness of tax audit on revenue collection in Ethiopian Revenues and Customs
Authority Large Taxpayers Branch office (Gizaw, 2017), the target groups for the study were 85
tax auditors for questioners and six managers and supervisors for interview by census method
used and data was analyzed on quantitative basis using Pearson's correlation, linear regression
analysis, and descriptive statistics. The result of the study revealed that tax audit effectiveness in
LTO was determined by the legal framework, audit selection process, and auditors' performance
and management support.

Jara Nasir, (Jara, 2020) studied the impact of tax audits on improving the compliance of
taxpayers: the case of the Jimma city administration revenue authority office. To achieve the
objective of the study, he used both qualitative and quantitative research methods. The Sample of
respondents selected for the study was all tax audit staff members and descriptive statistical tools
and multiple linear regression analysis were used in analyzing the data collected. The result of
study findings showed that the probability of being a tax auditor and taxpayer attitudes and
awareness has a positive effect on the level of tax compliance.

A study by (Mersha, S. Z., et.al., 2022), investigated the factors that influence the quality of tax
audits in Ethiopia using the audit procedure as a mediator, with particular attention paid to the
Ministry of Revenues. The study employed a mixed research design and concurrent
triangulation. The results showed that the quality of the tax audit was positively impacted by
audit input factors, audit process, and contextual factors.

20
 2.3. Research Gap

There is a general agreement on the need to improve tax compliance through tax audits, thus
helping the government to maximize the expected tax revenue needed to defray expenditures.

In many countries, whether developed or developing nations, tax compliance has been a hotly
debated topic of investigation. The factors that have impacts on tax compliance behavior appear
to vary from country to country because each country has its approach to managing levels of tax
compliance and has distinct tax laws and regulations. According to the researcher's knowledge,
there is no standard for the proportion of audit methodologies that should have been used in a
specific tax authority in the theoretical review. In addition, there is insufficient literature on the
appropriate audit examination techniques for determining the accuracy of tax returns following
economic and technological development, particularly in developing nations. The empirical
studies examined focused on the effect of a tax audit on increasing taxpayer compliance.

Further, the majority of previous studies on tax compliance issues attempted to investigate the
factors that influence fraud detection and improvement in compliance. However, as far as the
researcher is aware, it is possible to conclude that, even though there have been several studies
on issues related to tax audits in both developed and developing nations, Ethiopia in particular,
there are not sufficient studies that thoroughly examine the factors that affect tax compliance.

There is a lack of research on the possibility of the quality of tax audits affecting tax compliance
in Ethiopia and on LTO. In a similar vein, no study has been able to examine the level of
taxpayer compliance from the perspective of a tax auditor. It leaves a void that this study aims to
fill empirically by examining some studies on tax audit practice, effectiveness, and quality in
Ethiopia. Studies by (Ayalew, 2014); (Mihret, D. G., & Yismaw, A. W., 2007); (Nurebo, B. Y.
& Lakew, D. M., 2019); (Mersha, S. Z., et.al., 2022), (Laykemaryam, 2020), (Yeshiwork, 2021),
(Mebratu, 2016), (Abera, 2016), and (Feleke, 2017), and the majority of research findings have
indicated that tax audits' effectiveness and quality need improvement.

Even these studies didn't look at the full impact of tax audit quality on Ethiopia's tax compliance
activities. The study (Jara, 2020) mainly focused on the impact of tax audits on improving a
compliance level of taxpayer compliance. This study did not thoroughly examine issues
regarding tax audit quality and its effect on tax compliance attitudes. The following research
question is formulated based on these gaps in the literature in addition to the issues outlined in

21
Section 1.3: What is the relationship between tax audit quality and tax compliance in LTO,
Ethiopia?

2.4. Conceptual Framework

Understanding the factors affecting tax compliance relies heavily on the conceptual framework
of audit quality and audit effectiveness. The conceptual framework summarizes the skeleton of
the study in terms of variables relationships.

The researcher takes the tax compliance behavior as determined by tax audit quality and tax
audit effectiveness. It can be seen diagrammatically in the figure below.

Tax Audit Quality

Tax Compliance

Tax Audit Effectiveness

Figure 1 Conceptual framework

Source: Author

22
 CHAPTER THREE

3. RESEARCH METHODOLOGY

3.1. Study Area

The effect of tax audit quality on tax compliance practice in the case of the Ethiopian Ministry of
Revenues large taxpayers’ branch office (LTO), this study is conducted on the Ethiopian
Ministry of Revenues, LTO branch.

3.2. Design and Approach

3.2.1. Research Design

As per (Mwinyipembe, 2014) and (Ersoy, et.al., 2019) define a research design as the plan,
outline, or scheme used to come up with solutions to the research questions. An arrangement of
conditions for the collection and analysis of data that aims to combine relevance and the purpose
of the research is known as a research design. Research was carried out within this conceptual
framework. It is the blueprint for how data should be collected, measured, and analyzed.

Therefore, this study adopted an explanatory research design. Because it is mainly concerned
with the causes or ''how‟ factor of some phenomenon (Akhtar, 2016). According to Akhtar
(2016), the explanatory research design is used to formulate a problem for specific investigations
or to aim at formulating a research design. As a result, this design typically serves as the first
step of research when the universe of study is an unidentified community.

3.2.2. Research Approach

A research approach can be regarded as a blueprint, a master plan that specifies the methods.
Thus, every research requires a research design that is carefully tailored to the exact needs of the
problem under investigation (Creswell, 2014).

This paper is interested in examining the effect of tax audit quality on tax compliance the
quantitative method was typically used.

23
3.3. Types and Sources of Data

3.3.1. Type of Data

The researcher used both primary and secondary sources of data to achieve the objective of the
study.

3.3.2. Source of Data

to examine the effect of tax audit quality on tax compliance in the Ministry of Revenue
specifically the large taxpayer's branch office (LTO), primary sources of data were collected
from the Ministry of Revenue's large taxpayer's branch office tax auditors, team leaders, and core
process owners of the tax audit department. The secondary sources of data are used to strengthen
the primary sources. These included tax manuals, directives and annual statistical abstracts from
the tax office.

3.4. The population of the study

The researcher has access to a specific, conceptually bounded group of potential participants that
represents the nature of the population of interest and is referred to as the target population. To
find actual success in characterizing the objective population, one should look at all the limit
contemplations iteratively to guarantee that the end portrayal of the objective populace is
adequately comprehensive to give adequate information to the review (Casteel & Bridier, 2021).

This study was focused on the tax audit quality effect on tax compliance in LTO, Ministry of
Revenue, which has 94 tax auditors, tax audit team leaders, and tax audit work process owners
which is the required number the study has drawn.

Since the number of staff is not large, the study was a census approach. The researcher
administered 94 questionnaires out of which 87 questionnaires were completed and returned.

3.5. Data Collection Methods

The data was collected through quantitative types of data using primary and secondary sources of
data. These collected data instruments are standardized questionnaires and a review of relevant
documents. According to Best and Kahn (1998), the questionnaire is advantageous to gather
data from several respondents in one place which makes possible an economy of time and
expense and provides a high proportion of usable responses.

24
In addition to primary sources, relevant information was included from secondary sources that
are document analysis. This technique helped the researcher to cross-check the data that was
obtained through primary sources.

3.5.1. Primary Data Collection Instruments

Questionnaires that have structured (closed-ended) questions were prepared and administered to
collect a wide range of data from tax audit officers. Then, before the real dissemination of the
instruments for a full-scale survey, a pilot test was made and data was collected from 7 tax
auditors at the branch office, which is selected through the population of the study.

3.5.2. Secondary Data Collection

Secondary data was drawn from the existing official documents, tax audit manual, directives,
and different documents relating to tax auditing practice.

3.6. Method of Data Analysis

Before presenting the data analysis methods adopted, the study was try to specify the variables
and models used in the study. Accordingly, the study used a total of two (2) independent
variables (tax audit quality and tax audit effectiveness), that measure the practice of tax
compliance in the branch office.

The use of computational and statistical techniques focuses on the statistical, mathematical, or
numerical analysis of datasets in quantitative data analysis. In the research, raw data was
changed into a data structure that enables the generation of meaningful and useful bits of
information. Descriptive statistics like frequency, percentage, mean, and standard deviation and
logistic regression models were employed to examine the tax audit quality and tax audit
effectiveness in LTO, using Stata-15 software.

After processing and analysis of the data, the result would interpret to draw inferences from the
collected information and facts with the research objectives.

3.7. Model Specification

Techniques such as Ordinary Least Squares Regression (OLS) require that outcome variables
have interval or ratio level measurement. When the outcome variable is ordinal (i.e., the relative
ordering of response values is known but the exact distance between them is not), other types of

25
methods should be used. When the response variable of interest is ordinal, it is advisable to use a
specific model such as the ordered logit model.

Ordered logit model depends on the total probabilities of the reaction variable: In particular, the
regression coefficients are assumed to be constant across response categories and the logit of
each cumulative probability is assumed to be a linear function of the covariates (Agresti, 2010).

Questions relating to tax compliance behaviors of taxpayers with tax audit quality and tax audit
effectiveness are ordinal. The answer to the question on, how do you rate the quality of tax audits
enable taxpayers to comply with the tax law: ranges from 1 to 3, with 1 being low compliant and
3 being highly compliant. The response variable for this study was compliance, which is
categorized as:

1, 𝑙𝑜𝑤
𝑐𝑜𝑚𝑝𝑙𝑖𝑎𝑛𝑐𝑒 = {2, 𝑚𝑒𝑑𝑖𝑢𝑚
3, ℎ𝑖𝑔ℎ
To accomplish the goals of this study ordered logistic regression model was used. The primary
goal of this study's use of regression analysis is to assess the effect of audit quality on the tax
compliance of taxpayers.

Accordingly, a logistic regression model function is as follows:

𝑐𝑜𝑚𝑝𝑙𝑖𝑎𝑛𝑐𝑒
𝑙𝑜𝑔𝑖𝑡(𝑐𝑜𝑚𝑝𝑙𝑖𝑎𝑛𝑐𝑒 ) = 𝑙𝑜𝑔
1 − (𝑐𝑜𝑚𝑝𝑙𝑖𝑎𝑛𝑐𝑒)

𝑙𝑜𝑔𝑖𝑡(𝑐𝑜𝑚𝑝𝑙𝑖𝑎𝑛𝑐𝑒) = 𝛽0 + 𝛽′𝑥𝑖

Where: compliance is the dependent variable and Xi is the value of the predicted coefficient

β0 = constant

β’ = Unstandardized regression coefficient, and

To test the determinants of tax audit quality, tax audit effectiveness, and tax compliance (affected
by tax audit quality and tax audit effectiveness) this study considers the following model:

𝑙𝑜𝑔𝑖𝑡(𝑐𝑜𝑚𝑝𝑙𝑖𝑎𝑛𝑐𝑒 ) = 𝛽0 + 𝛽1. 𝑇𝐴𝑄 + 𝛽2. 𝑇𝐴𝐸

26
3.8. Data Validity and Reliability

This study assesses the effect of tax audit quality on tax compliance exercise in the LTO using
primary data. The questionnaire is one of the best methods of collecting valid information. The
questionnaires are taken from previous studies on tax audit quality ( (Nanik Lestari & Sucitra
Nedya, 2019)), tax audit effectiveness ( (Tewabe, 2016) and (Tefera, 2021), and Ministries Tax
Audit Manual (ERCA, 2010).

The questionnaires were written in English so that all team coordinators and tax auditors could
participate in the study. Before embarking on the main study, certain branch office tax auditors
were asked to provide feedback on the questionnaires before the actual data collection process.
As a result, a necessary adjustment was done before the actual data collection exercise.

3.8.1. Reliability Test

Reliability is the consistency of a set of measurements often used to describe a test. There are
several different reliability coefficients. One of the most commonly used is Cronbach’s Alpha.
Cronbach's alpha is based on the mean correlation of items in a test because the measurement
questions are standardized. If Cronbach's alpha index is greater than 0.70, the questionnaires
submitted to the study are considered reliable indicators (Hair, J. F., et.al., 2014).

Table 1 Overall reliability

Reliability Statistics
Cronbach's Alpha Average interitem covariance: Number of items in the scale:
.726 .0938737 32
Source: author compilation using Stata-15
The overall Cronbach's Alpha of variables in the model almost equals 0.72 for the entire
questionnaire, which indicates very good reliability. Therefore, the responses generated from all
variables in this study were reliable enough for data analysis.

3.8.2. Validity of the Research

Validity consideration is an indicator that makes some variables reasonable. It is the subjective
judgment that the instrument measures what it intends to measure in terms of relevance. Thus,
the researcher of this study, when developing the instruments, ensured that uncertainties are
eliminated by using appropriate words and concepts to enhance clarity and general suitability.

27
A measure of the amount of variance that is captured by a construct regarding the amount of
variance that is caused by measurement error is known as the Average Variance Extracted
(AVE). Factor loadings from maximum likelihood regressions create these conventional indices.
For each construct, the assessment of Average Variance Extracted (AVE) greater than 0.50
(Hair, J. F., et.al., 2014).

Composite reliability (construct reliability) is a measure of internal consistency in scale items,

much like Cronbach’s alpha (Netemeyer, 2003). Thresholds for composite reliability can be from
.60 and above.

As we see from Table-2 the average variance extracted or explained (AVE) for tax audit quality
(0.574) measure with four different factors contained 19 items, the AVE value of Auditors
Experience was 0.632 with five items, task complexity 0.567, Information Technology 0.535 and
Training 0.557.

Table 2 Validity of Tax audit quality

Variables Factors Items Factor loading CR AVE CR AVE

Auditors AE1 0.893 0.895 0.632

Experience AE2 0.763
AE3 0.742
AE4 0.818
AE5 0.749
Task TP1 0.774 0.867 0.567
Complexity TP2 0.700
Tax Audit TP3 0.740
Quality 0.962 0.574
TP4 0.793
TP5 0.755
Information IT1 0.736 0.852 0.535
Technology IT2 0.767
IT3 0.730
IT4 0.691
IT5 0.732
Training TR1 0.735 0.834 0.557
TR2 0.743
TR3 0.776
TR4 0.730
Source: author compilation (2023)

28
The tax audit effectiveness average variance extracted was 0.629, and it was measured in the
proxy of organization structure, management support, and audit attributes with AVE values of
0.585, 0.650, and 0.647 respectively.

Table 3 Validity of Tax audit effectiveness

Variables Factors Items Factor loading CR AVE CR AVE

Organization OS1 0.740 0.849 0.585

structure OS2 0.768
OS3 0.780
OS4 0.771
Tax Audit Management Mgs1 0.851 0.902 0.650
Effectiveness Support Mgs2 0.827 0.957 0.629
Mgs3 0.781
Mgs4 0.750
Mgs5 0.816
Audit Attribute AT1 0.781 0.880 0.647
AT2 0.786
AT3 0.826
AT4 0.823
Source: author compilation (2023)

Since, the composite reliability (CR) for tax audit quality was 0.962 and tax audit effectiveness
0.957; the CR for auditor's experience (0.895), task complexity (0.867), information technology
(0.852), training (0.834), organization structure (0.849), management support (0.902) and audit
attributes (0.880).
This indicates that construct reliability is sufficient. The measurement model contained 32 items,
all of which demonstrated an acceptable level of construct validity and construct reliability.

3.9. Variable Measure

The following variables are used as the variables that determine tax audit quality (auditor's
competence, tax complexity, training and information technology (IT)), and the variables that
determine the effectiveness of tax audit are audit attributes, management support, and
organization setting.

Dependent variable: Tax compliance is the dependent variable. We include a question in

evaluating the tracking of tax compliance. The question was measured on a 3-point Likert scale
ranging from (1) ‘low’ to (3) ‘high’.

29
Independent variables: Tax Audit Quality, which is measured through Auditor experience, tax
complexity, training and Information technology, and Tax audit effectiveness, is measured by
Organization Structure, audit attributes, and management support having a direct effect on tax
audit effectiveness.

Table 4 Variable measures

Variable Description Expected sign Measures

complianc Tax compliance Scale
TAQ
e Tax Audit Quality + Scale
TAE Tax Audit Effectiveness + Scale
3.10. Ethical Considerations in the Study

Research ethics refers to the type of agreement that the researcher enters with the research
participants. It was clearly announced to the participants that the study has an obligation the
protection them from stress, harm, or danger; the right to privacy; confidentiality; and honesty
with professional colleagues, and oral informed consent was obtained, from research
participants.

In this study, ethical consideration was applied by maintaining the confidentiality of information
about the organization and respondents. In addition to this, the gathered data were only used for
this study, not used for another purpose, or not transferred to another party. Furthermore, the
respondents were ordered not to write any information like their name and other personal code
while responding to the questionnaire.

30
 Chapter Four

4. Result and Discussion

4.1. Introduction
This chapter presented data analysis, presentation interpretation of findings on data collected
from the Large Taxpayers Office (LTO) in tax auditor’s questionnaires. This study is based on a
survey of 87 tax auditors. So that 94 tax auditors' questionnaires were distributed. But, the survey
response was collected from only 87 tax auditors.
Kothari (2004) asserted that a response rate of 50% is adequate, while a response rate greater
than 70% is very good. Based on these assertions; the response rate for this study, 92.5% is
reasonably very good. To enhance research ethics, the researcher included all the resulting
responses on the outcomes of analyses of the data collected during the study and make
interpretations accordingly.

4.2. Profile of respondents

This section describes the respondent's general information of age, sex, field of study, education
level, and experience in tax auditing.

Generally, the respondent’s background information status is presented below. The tax audit
work requires time and energy which involves sitting for long hours during the audit then the age
affects audit work. Tax audits should be supported with the appropriate experience and education
to be more effective within a relatively shorter period. As a result, tax auditors with more
experience are more likely to follow best audit practices, produce superior audit results, and
achieve exceptional audit success.

Sex
According to Table 4, more than sixty percent of the respondents (60%) were male taxpayers
while the remaining were females. It has seen male tax auditors had a greater representation of
the whole auditors in the branch office.

Table 5 Respondent's sex

Sex Freq. Percent Cum.
male | 52 59.77 59.77
female | 35 40.23 100.00
Source: Stata-15 output compiled by Author

31
Age
The age brackets of respondents and the age distribution of the respondent who participated in
the study are provided in Table 5.

Table 6 Age category

Age Freq. Percent Cum.

<=25 | 50 57.47 57.47
26-35 | 29 33.33 90.80
36-45 | 8 9.20 100.00
Source: Stata-15 output compiled by Author

The age categories were divided into a range of 10 years except for the age category under 26
and above 45.

Age

9%
<=25
33% 26-35
58%
36-45

Figure 2 respondents age group

Of the respondents 58% are less than 26 years of age, 33.3% are between 26-35 years, and those
respondents between 36-45 years account for 9%. This result shows that most of the respondents
are below 36 years of age and the tax office is mostly dominated by younger employees.

Educational status
According to Table 6, Shown above, 2% of the respondents are diploma and below holders, 53%
of respondents were accomplished first degree, and 45% of respondents represent Masters and
above degrees respectively.

32
Table 7 Education Status

Education level Freq. Percent Cum.

Diploma & below | 2 2.30 2.30
BA/BSc | 46 52.87 55.17
MA/MSc and above | 39 44.83 100.00
Source: Stata-15 output compiled by Author

Therefore, 97% of the respondents are first-degree graduates and above. It can infer that the
respondents have been highly educated. For that reason, to maximize voluntary tax compliance,
the tax office has a chance to detect and address a potential tax collection hurdle through an
audit.

Education qualification
According to Table 7, shown below, 38% of the respondents were an accounting and finance
background, 27% of the tax auditors have tax policy graduates and 20% were management
qualifications. The other 7.8%, 5.2%, and 1.7% of the tax auditors have Economics, Business
related graduates, and other qualifications respectively.

Table 8 Education Qualification

Qualification Freq. Percent Cum.

Accounting | 35 40.23 40.23
Management | 20 22.99 63.22
Economics | 8 9.20 72.41
Tax | 21 24.14 96.55
Business related | 3 3.45 100.00
Source: Stata-15 output compiled by Author

Experience
About 47% of the respondents have been in a tax auditing below four years, 31% of the tax
auditors have tax auditing experiences between four and six years, 18.4% have been in the
auditing position between seven and nine years and the remaining 3.4% have been in the same
field for ten and above years.

33
Table 9 Work experience

Experience Freq. Percent Cum.

<4years | 41 47.13 47.13
4-6 years | 27 31.03 78.16
7-9 years | 16 18.39 96.55
>=10 years | 3 3.45 100.00
Source: Stata-15 output compiled by Author

The result shows that the majority of the firm (78%) has been in operation for below seven years.
which implies that most of the tax auditors in the branch office have medium experience in the
business.

4.3. Descriptive Analysis

This study is determined to see the effect of tax audit quality on tax compliance, this is based on
a Likert scale, where strongly Disagree to 1; Disagree to 2; Neutral to 3; Agree to 4, and Strongly
Agree to 5.

According to (Pimentel, 2019) the mean scores for a five-point Likert scale ranging from 1 - 1.79
were coded as very poor (strongly disagree), 1.80 - 2.59 poor (disagree); 2.60 - 3.39, fair
(neutral); 3.40 - 4.19, good (agree); and 4.20 - 5.00, very good (strongly agree). The Three-point
Likert scale of 1 - 1.66 was coded as low, 1.67 - 2.33 as medium (average), and 2.34 - 3.00 as
high.

According on the Table 9, experience of tax auditors has a mean of 3.98 and a standard deviation
of 1.056 with minimum and maximum values of one and five respectively. From this, it can be
understood that the majority of the respondents have responded that they agreed to the statements
provided regarding the experiences of tax auditors. Since the mean value ranges from 3.40 -
4.19.

The mean value and standard deviation of task complexity were 3.896 and .95 respectively. It
can be understood from the above table that the majority of the respondents agreed with the
statements provided regarding the complexity of the task or audit cases.

Usage of information technology (IT) has a mean value of 3.8 and a standard deviation of 0.
.998, with the minimum and maximum values of one and five respectively. It indicates that the

34
average response of respondents regarding the statements related to the usage of information
technology is good.

Table 10 Descriptive statistic of variables

Variable | Obs Mean Std. Dev. Min Max

-------------+-------------------------------------------------
Auditor_Exp | 87 3.977011 1.056288 1 5
Task_Comp | 87 3.896552 .9527742 1 5
IT | 87 3.804598 .9981271 1 5
Train | 87 3.597701 .8416453 1 5
Org_Struct | 87 3.908046 .7413405 1 5
-------------+-------------------------------------------------
Mgt_Support | 87 3.770115 .8983337 1 5
Attribute | 87 4.114943 .7221622 1 5
TAQ | 87 3.942529 .7679075 1 5
TAE | 87 3.655172 1.097858 1 5
compliance | 87 2.218391 .5791993 1 3

Source: Stata-15 output compiled by Author

Training tax auditors have expected to increase tax audit quality, training has a mean value of
3.597 and a standard deviation of .841 with minimum and maximum values of one and five
respectively. It indicates that the average response of respondents regarding the statements
regarding training was agreed upon.

Management support has a mean of 3.77 and a standard deviation of .898 with minimum and
maximum values of one and five respectively. It indicates that the response of respondents
agreed with the statements regarding management support.

Organization structure means and the standard deviation is 3.91 and .74 respectively with
minimum and maximum values of one and five. It indicates that the response of respondents was
minimum and maximum values of one and five respectively. It indicates that the majority of
respondents agreed with the statements.

The audited attributes mean of 4.11 and standard deviation of .72 indicates that the majority of
respondents agreed with the statements provided regarding tax audit attributes.

35
The mean value related to the statement of tax compliance perception of taxpayers is 2.21 and
the standard deviation is .579 with minimum and maximum values of one and three respectively.
From this, it can be revealed that the majority of the respondents responded that the majority of
taxpayers have a medium compliance level.

4.4. Correlation
This study used Pearson’s correlation coefficient matrix generated through the Stata-15 software.
Correlation analysis and discussions are included to investigate the relationship between the
variables of factors that determine the tax compliance behavior of taxpayers through the tax
auditor's perspective (tax audit quality and tax audit effectiveness) and tax compliance.

Pearson correlation between explanatory variables is used to test the presence of a

Multicollinearity problem in the model used. The range of this correlation analysis is -1 to +1
and any value different from zero indicates some correlation among variables or relationship
among variables. The correlation coefficient results are presented below.

Table 10, shows a correlation matrix that predicts the likely relationship of tax compliance with
independent variables. The computation results gained through the Pearson correlation matrix
show explanatory variables which have a positive association with the dependent variables of the
study.

Table 11 Correlation matrix

| compliance TAQ TAE

compliance | 1.0000

TAQ | 0.2638* 1.0000

| 0.0135
TAE | 0.2844* -0.0927* 1.0000
| 0.0076 0.3929
Source: survey result, 2023

As shown in Table 10 above, tax audit quality and tax audit effectiveness have a positive
relationship with tax compliance and are significant at the 5% level of significance. The Pearson
correlation coefficient values for tax audit quality and tax audit effectiveness were 0.26, and

36
0.28, respectively. This reveals that there is a good relationship between independent variables
and dependent variables.

4.5. CLRM assumptions and Diagnostic tests

The diagnostic tests were undertaken to ensure that the data fit the basic assumption of the
classical linear regression model. It is very important to determine whether the model improves
the predicting ability of the outcome before evaluating the effect of each explanatory variable in
the model. The test of the classical linear regression model assumptions was presented as
follows.

4.5.1. Heteroskedasticity Test

The Breusch-pagan test was used by the researcher to determine the heteroskedasticity of the
study's variables. The alternative hypothesis asserts that the error variances are a multiplicative
function of one or more variables, whereas the test employs the null hypothesis, which states that
the error variances are all equal (homoscedasticity). The outcome of the output is as follows:

Table 12 Heteroskedasticity Test

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of compliance
chi2(1) = 2.91
Prob > chi2 = 0.088
Source: Stata-15 output result, 2023

As per the results, the null hypothesis suggests the presence of constant variance which means
data is homoscedastic. The figure above shows that the probability value of the chi-square
statistic 0.088 is greater than the significance value of 0.05, indicating a statistically insignificant
Chi-square test. This result indicates there is no problem with heteroskedasticity.

4.5.2. Multicollinearity Test

One of the important steps in a regression model is determining whether there exists
multicollinearity among independent variables. Multicollinearity happens when at least two
illustrative factors are profoundly connected to one another.

37
Therefore, the variance inflation factor (VIF) can be customized to detect the multicollinearity
diagnostic for independent variables. VIF (variance inflation factor) is an indicator of how much
of the inflation of the standard error could be caused by collinearity.

As stated by (Pallant, 2007), if the value of VIF is greater or equal to 10, then a multicollinearity
problem exists. A tolerance (1/VIF) less than 0.1 also indicates the existence of multicollinearity
between the variables.

Table 13 Multi-collinearity test

Variable VIF 1/VIF

TAE 1.02 0.991385
TAQ 1.01 0.991399
Mean VIF 1.01
Source: Stata-15 output result, 2023

As reflected in Table 12, the result confirms that the VIF for all the estimated parameters, TAQ,
and TAE are 1.01 and 1.02 respectively. Since the variance inflation factor is less than the cutoff
point, 10, and the tolerance (1/VIF) is greater than 0.10, this indicates that all variables are
relevant and multicollinearity is not there.

4.5.3. Autocorrelation test

When the OLS estimator's assumption that error terms are not serially corrected is violated, the
problem of serial correlation arises. The presence of autocorrelation leads to the inefficiency of
the OLS estimator and biased and inconsistent estimation.

Therefore, Breush Godfery Lagrange Multiplier (LM) test to ensure that, the models are free
from serial correlation problems. The null hypothesis describes no serial correlation, while the
alternative hypothesis says that there is a serial correlation among the error terms.

Since from the Table 13 below, Prob > chi2 is (0.538) which is greater than the 5% significance
level and the null hypothesis can be accepted, therefore there is no serial correlation between the
residuals in the model.

38
Table 14 Autocorrelation test

Breusch-Godfrey LM test for autocorrelation

lags(p) | chi2 df Prob > chi2
1 | 0.380 1 0.538
H0: no serial correlation
Source: Stata-15 output result, 2023

4.5.4. Test of omitted variable bias

The Ramsey regression specification error test (Ramsey RESET- test) is used to investigate the
assumption that the error term and independent variables in the model are not correlated, (E (e|X)
=0). The null hypothesis is that the model does not have an omitted-variables bias or that the
regression model is correctly specified.

According to Ramsey RESET test F (3, 81) =2.72, Prob > F =0.052), the p-value (0.052) is
higher than the threshold of 0.05, so the study failed to reject the null hypothesis, and we
conclude that no need of more variables for the analysis.

Table 15 test of omitted variable

Ramsey RESET test using powers of the fitted values of compliance

Ho: the model has no omitted variables
F(3, 81) = 2.72
Prob > F = 0.0521
Source: Stata-15 output result, 2023

4.5.5. Model specification Test

The model specification refers to the determination of which independent variables should be
included in or excluded from a regression equation (Allen, 1997). A model specification error
occurs when one or more than one relevant variable is omitted and/or one or more irrelevant
variables are included from the regression model, and it substantially affects the estimate of
regression coefficients. To ascertain the correctness of the regression specified in estimating the
model, it is important to conduct a test for misspecification.

39
Table 16 Model specification test

Compliance | Coef. Std. Err. t P>|t| [95% Conf. Interval]

_hat | -1.521 3.515 -0.43 0.666 -8.512 5.469
_hatsq | .586 .815 0.72 0.474 -1.035 2.207
_cons | 2.676 3.762 0.71 0.479 -4.805 10.158
Source: Stata-15 output result, 2023

The null hypothesis is there is no model specification error. The p-value of _hatsq is insignificant
(0.474) then the researcher fails to reject the null hypothesis and concludes that the model is
correctly specified. Therefore, the independent variables: tax audit quality, and tax audit
effectiveness have been important factors for tax compliance in the Ministry of Revenues Large
Taxpayers Office (LTO). Accordingly, the ordered logistic regression model is presented below;

4.6. Ordered logistics regression analysis

The ordered logistic regression (logit) model is a regression model for an ordinal response
variable, when the response variable has three or more possible outcomes, and these values do
have a defined order. To answer the question: Does the quality of tax audits enable taxpayers to
comply with the law, as a dependent variable the study used an ordered logistic regression
model.

Table 17 model summary

Model Summary
Iteration 0: log-likelihood = -74.796987

Iteration 1: log-likelihood = -67.423337

Iteration 2: log-likelihood = -67.117115
Iteration 3: log-likelihood = -67.116528
Iteration 4: log-likelihood = -67.116528
Ordered logistic regression Number of obs = 87

LR chi2(2) = 15.36
Prob > chi2 = 0.0005
Log likelihood = -67.116528 Pseudo R2 = 0.1027
Source: Stata-15 output result, 2023

40
The "null" model's log-likelihood is the first iteration, iteration 0; namely, a model devoid of
predictors. At the following emphasis, the predictor(s) are included in the model. The Likelihood
Ratio (LR) Chi-Square test to ensure that the model's regression coefficients for at least one
predictor are not zero. The degree of freedom of the Chi-Square distribution used to test the LR
Chi-Square statistic is indicated by the number of predictors in the model, as indicated by the
number enclosed in parenthesis. The LR Chi-Square statistic, -2*(L(null model) – L(fitted
model)) = -2*((-74.796987) – (-67.116528) = 15.36, where L(null model) comes Iteration 0 and
L(fitted model) comes from the log-likelihood from the final iteration.

All of the model's regression coefficients must be zero to satisfy the null hypothesis. To put it
another way, this is the chance of getting this chi-square statistic (15.36) if the predictor
variables have no effect. The p-value (Prob > chi2) from the LR test is 0.0005, which would lead
us to conclude that at least one of the regression coefficients in the model is not equal to zero.
We can conclude that there is a statistically significant association between the response variable
and the explanatory variables.

Table 18 Logit model

Coefficient Estimation
compliance | Coef. Std. Err. z P>|z| [95% Conf. Interval]
TAQ | .9176763 .3159758 2.90 0.004 .2983752 1.536977
TAE | .6464597 .2340746 2.76 0.006 .1876819 1.105238

/cut1 | 3.201714 1.525145 .2124854 6.190944

/cut2 | 7.031368 1.725828 3.648807 10.41393
Source: Stata-15 output result, 2023

The results presented in the table indicate that all the independent variables had significant
regression coefficients. The regression model as a whole is statistically significant and all the
variables are important in the model.

The ordered logistic regression results show the existence of a statistically significant
relationship between tax audit effectiveness and tax compliance perception of tax auditors, tax
audit quality, and tax compliance.

Regarding tax audit quality, the result of ordered logistic regression shows a positive and
significant relationship with tax compliance with a p-value of 0.004. This is the ordered log-odds
41
estimate for a one-unit increase in TAQ score on the expected compliance level given the other
variables are held constant in the model. The positive coefficient for TAQ means that the
likelihood of tax compliance perception (compliance) did increase with the occurrence of audit
quality. If there were an increase in TAQ score by one unit, the ordered log odds of being in a
higher compliant category would increase by 0.918 while the other variables in the model are
held constant.

The cut points (thresholds) are used to differentiate the adjacent levels of the response variable.
A threshold can then be defined to be points on the latent variable, a continuous unobservable
mechanism/phenomena, that result in the different observed values on the proxy variable (the
levels of our dependent variable used to measure the latent variable).

_cut1 –is the estimated cut point on the latent variable used to differentiate strongly disagree
compliance from disagree, neutral, agree, and strongly agree compliance, when values of the
predictor variables are evaluated at zero.

Table 19 Odds ratio

compliance | Odds Ratio Std. Err. z P>|z| [95% Conf. Interval]

TAQ | 2.503466 .7910346 2.90 0.004 1.347667 4.650512

TAE | 1.908771 .4467949 2.76 0.006 1.20645 3.019942

/cut1 | 3.201714 1.525145 .2124854 6.190944

/cut2 | 7.031368 1.725828 3.648807 10.41393

Source: Stata-15 output result, 2023

For a one-unit increase in TAQ (tax audit quality) score, the odds of high compliance versus the
combined middle and low compliance categories are 2.503 times greater, given that the other
variables in the model are held constant. For a one-unit increase in TAQ, the odds of the
combined high and middle compliance versus low compliance are 2.503 times greater, given the
other variables are held constant, or TAQ increases by one unit, the odds of compliance = 1
increase by 150.3%. We get this 150% as follows: (2.503466 - 1) * 100 = 150.3.

The proportional odds ratio for a one-unit increase in TAE score on compliance level is given
that the other variables in the model are held constant. Thus, for a one-unit increase in
TAE score, the odds of high compliance versus the combined middle and low compliance are

42
1.91 times greater, given the other variables are held constant in the model. We would say that
for a one-unit increase in TAE, i.e., going from 1 to 2, the odds of high compliance versus the
combined middle compliance and low compliance categories are 1.91 greater, given that all of
the other variables in the model are held constant. Likewise, the odds of the combined middle
and high categories versus low compliance categories is 1.91 times greater, given that all of the
other variables in the model are held constant.

Marginal effect

To assess the quantitative effects of the independent variables, marginal effects are calculated.
The table below presents the marginal effect of ordered logistic regression for the five categories
(strongly agree, agree, neutral, disagree, and strongly disagree).

Table 20 Marginal effect estimation

Delta-method
TAQ dy/dx Std. Err. z P>|z| [95% Conf. Interval]

_predict
1 -.0632451 .027024 -2.34 0.019 -.116211 -.010279
2 -.1038077 .0390034 -2.66 0.008 -.180253 -.027362
3 .1670528 .0523709 3.19 0.001 .0644077 .269698

TAE
_predict
1 -.0445532 .0197569 -2.26 0.024 -.083276 -.0058304
2 -.0731276 .0284237 -2.57 0.010 -.1288371 -.0174182
3 .1176808 .0389882 3.02 0.003 .0412655 .1940962

Notes: 1= low, 2= medium and 3= high

Source: Stata-15 output result, 2023

In terms of marginal effects, a one-point increase in tax audit quality (TAQ) is associated with
being 6.32% less likely to low with the statements related to tax compliance, 10.4% less likely to
medium tax compliance with the statements, and 16.7% more likely high to the statements
related to tax compliance or they were more compliant.

43
The marginal effects indicate that a unit increase in tax audit effectiveness is associated with a
4.45% less likely to belong to low and 7.3% less likely to belong to medium compliance and
11.8% more likely high with the statements of tax compliance perception.

The result of the ordered logistic regression shown in Tables 16 and 17, shows that the
coefficient and odds ratio of tax audit quality (TAQ) concerning the dependent variable was .917
and 2.50 respectively, and its p-value is 0.004, which is less than 0.05, it implies that tax audit
quality does affect tax compliance. The finding is consistent with the study of (Soltani L., 2021)
and (Kirchler, E., et.al., 2007), audit quality improves tax compliance.

The result of the ordered logistic regression shown in Tables 16 and 17, shows that the
coefficient and odds ratio of tax audit effectiveness (TAE) about the dependent variable was .646
and 1.908 respectively with its p-value is 0.006; it indicates that tax audit effectiveness has a
positive significant effect on the tax compliance perception of taxpayers in large taxpayers office
(LTO).

44
 Chapter Five

5. Conclusion and Recommendation

5.1. Conclusion

The main objective of the study was to examine the effect of tax audit quality on the tax
compliance of taxpayers of LTO. A survey design was used with a questionnaire as the major
tool for data collection. The study used tax compliance as a dependent variable and predictor
variables were tax audit quality and tax audit effectiveness.

Since tax audit is very crucial for the tax collection process for any tax authority, tax audit
quality is the main means to ensure tax compliance of taxpayers. The existence of tax audit
quality in the tax authority increases tax compliance and reduces tax evasion, hence improving
the tax collection process.

The results show that 60% of the respondents are males and the remaining are females. The
largest percentage of tax auditors are in the age group of under 25 years old. It was also brought
to light that the majority of respondents were fairly educated, with those with an undergraduate
degree (62%) contributing the highest percentage levels of literacy, among the respondent's
majority of them is 6 years and under-experienced workers in the branch office.

Based on the ordered logistic regression result tax audit quality and tax audit effectiveness were
positively affect the tax compliance perception of LTO taxpayers.

Giving attention to this aspect, this study investigated the effect of tax audit quality on tax
compliance in the Ethiopian Ministry of Revenues large Taxpayers (LTO) Branch Office. The
following conclusions were drawn based on the tested hypotheses which were proposed initially.

As we understand from the correlation analysis as shown in Table 10, and the logit regression
results as shown in Table 17, the study finding provide evidence that tax audit quality has a
significant effect on tax compliance. In this study tax compliance and tax audit quality was found
to have a positive relationship, implying as the quality of tax audit increase tax compliance will
increase and vice versa. The study also examined the effect of tax audit effectiveness on tax
compliance. Accordingly, the findings show that there is a strong positive relationship between
the two implying that enhanced tax audit effectiveness will in turn enhance tax compliance.

45
5.2. Recommendation

On the bases of the research findings and achieved results concerning the main objective of this
study to determine the effects of tax audit quality on tax compliance in the Ethiopian Ministry of
Revenues Large Taxpayers Branch Office (LTO) and also to demonstrate the hypotheses, the
study provides the following recommendations to LTO, the tax audit department and the tax
policymakers.

The finding of this research proved that the tax audit quality and tax audit effectiveness were
statistically significant and positively related to tax compliance in LTO.

Recommendations regarding the quality of tax audit as a result of findings on the effect of tax
audit quality on tax compliance revealed a positive correlation meaning that the quality of tax
audit has a significant positive effect on the level of tax compliance. This means that higher-
quality tax audits will increase tax compliance levels. So the tax office should have stretched
attention to the quality of the tax audit file from time to time.

Recommendations regarding the effectiveness of tax audit, effectiveness of tax audit, and tax
compliance revealed a positive relation meaning that the effectiveness of tax audit has a
significant positive effect on the level of tax compliance. This will be improved by giving
management support, and by improving the organizational structure

Finally, the study suggests a series of measures, which could be taken by the tax authorities in
improving the thoroughness of audit quality, provide continuous training to auditors, educate the
taxpayers and conduct awareness creation, and provide all necessary, voluntary compliance will
likely increase.

The tax office should highly invest in information technology by making the information system
more appropriate, simple, and easy to use for tax auditors.

Although the researcher believes that this study is deep, it is still believed that it can be further
extended to include more respondents from externals like taxpayers and independent variables to
make it more realistic and more reliable.

46
References

Enofe et al. (2013). Determinants of audit quality in the Nigerian business environment. Research
Journal of Finance and Accounting,, 17.

Tacy Foster, Evgeniya Makarova, and Vanya Telpis. (2021). Making quality assurance smart. Mckinsey
and Company.

Abdolmohammadi, M., & Wright, A. . (1987). An examination of the effects of experience and task
complexity on audit judgments. . Accounting Review, 1-13.

Abera, M. (2016). FACTORS AFFECTING TAX AUDIT EFFECTIVNESS EVIDENCE FROM LARGE TAX PAYERS
OFFICE OF ETHIOPIAN REVENUE AND CUSTOMS AUTHORITY (Based on Auditors perception).
scholar.archive.org.

Adam, A. M. (2021). A Study on Sample Size Determination in Survey Research. New Ideas Concerning
Science and Technology Vol. 4, , 125-134.

Adams, M. B. (1994). Agency theory and the internal audit. Managerial auditing journal, 9(8), 8-12.

Adimassu, N. A., & Jerene, W. (2016). Determinants of voluntary tax compliance behavior in self
assessment system: Evidence from SNNPRS, Ethiopia. International Journal of Science and
Research, 5(12), 967-973.

Agresti, A. (2010). Analysis of ordinal categorical data (2nd ed.). New York: Wiley.

Ahmed A, Kedir S. . (2015). Tax compliance and its determinant the case of Jimma zone, Ethiopia.
International Journal of Social Science Research , 2307-2327.

AICPA. (1996). Report of the AICPA Special Committee on Assurance Services (Elliott Committee). New
York: AICPA.

Allen, M. P. (1997). Model specification in regression analysis. In: Understanding Regression Analysis.
Boston: Springer, Boston, MA.

Alm, J. (1991). A perspective on the experimental analysis of taxpayer reporting . The Accounting
Review, 66(3), 577-593.

Alm, J., Jackson, B. R., & McKee, M. (1992). Estimating the determinants of taxpayer compliance with
experimental data. National tax journal, 45(1), 107-114.

Amah, et.al. (2018). Tax audit practice and down south tax revenue generation in Nigeria. International
Journal of Innovative Finance and Economic Research, 6(1), 99-112.

Arena, M., & Azzone, G. (2009). Identifying organizational drivers of internal audit effectiveness.
International Journal of Auditing, 13(1), 43-60.

47
Ayalew, E. (2014). Factors Affecting tax audit effectiveness: A study on category ‘A’Taxpayers in Bahir
Dar City Administration Revenue Office. Unpublished Thesis,, Bahir Dar University. Retrieved
from academia.edu: https://d1wqtxts1xzle7.cloudfront.net/35597265/final_thesis-elias---------
libre.pdf?1416179723=&response-content-
disposition=inline%3B+filename%3DFACTORS_AFFECTING_TAX_AUDIT_EFFECTIVENES.pdf&Expi
res=1673859046&Signature=RUNpapp4D5UomPwI2m-B8D5H4Rb-Lu7RafZ

AZENE, K. T. (2016). TAX AUDIT EFFECTIVENESS IN ADDIS ABABA, ETHIOPIA:TAX AUDITORS'

PERCEPTIONS IN ETHIOPIAN REVENUES AND CUSTOMS AUTHORITY (ERCA) EASTERN ADDIS
ABABA BRANCH. Addis Ababa: ST. Mary University.

Bank, W. (2011). Risk based tax audits: Approaches and Country Experiences . Washington DC: World
bank.

Biber. (2010). Revenue Administration: Taxpayer Audit--Development of Effective Plans. Technical Notes
and Manuals. elibrary.imf.org. Retrieved from elibrary.imf.org

Brody, R. (2021, July 16). Tax Compliance 101: The Ultimate Guide. Retrieved from TaxSamaritan:
https://www.taxsamaritan.com/tax-article-blog/tax-compliance-101/

Campbell, D. J. (1988). Task complexity: A review and analysis. . Academy of management review, 13(1),
40-52.

Chadegani, A. (2011). Review of studies on audit quality. Available at SSRN 2227359.

Cohen, A., & Sayag, G. . (2010). The effectiveness of internal auditing: an empirical examination of its
determinants in Israeli organisations. . Australian Accounting Review, 20(3), 296-307.

Cohen, et.al. (1972). Research methods in education.

Creswell, J. W. (2014). A concise introduction to mixed methods research. . SAGE publications.

Dauda, et.al. (2018). IMPACT ASSESSMENT OF TAX AUDIT ON TAX COMPLIANCE: A CASE STUDY OF
KATSINA STATE BOARD OF INTERNAL REVENUE. 3. 51-60. AE-FUNAI JOURNAL OF ACCOUNTING,
BUSINESS AND FINANCE(FJABAF), 57-60.

Davis, F. D. (1989). Perceived usefulness, perceived ease of use, and user acceptance of information
technology. MIS quarterly, 319-340.

Dewi, C. S., & Supadmi, N. L. (2014). The effect of tax audits, awareness, quality of service on the level of
compliance of corporate taxpayers. . E-Journal of Accounting Udayana University, 9(2), , 505-
514.

DiMaggio, P. J., & Powell, W. W. (1983). The iron cage revisited: Institutional isomorphism and collective
rationality in organizational fields. American sociological review, 147-160.

48
Dittenhofer, M. (2001). Internal auditing effectiveness: an expansion of present methods. . Managerial
auditing journal., 446-448.

Duff, A. (2009). Measuring audit quality in an era of change. . Managerial Auditing Journal., 18.

Eck-Heang, L. &. (2008). The evolution of auditing: An analysis of the historical development. Journal of
Modern Accounting AUDITING: A Journal of Practice & Theory, 4(12), 1. 19.

Elder, et.al. (2015). Audit firm rotation, auditor specialization, and audit quality in the municipal audit
context. Journal of Government & Nonprofit Accounting, 88-96.

Engida, T.G and Baisa, GA. (2014). Factor affecting tax payers Compliance with the tax system. An
emperical study.

ERCA. (2010). Ethiopian Revenues and Customs Authority Tax Audit Manual. Addis Ababa: ERCA.

Ersoy, et.al. (2019). Research Design. Anadolu University Open Education Faculty: ISBN: 978-975-06-
3035-4.

FDRE. (2016). Federal Tax Administration Proclamation No. 983. Addis Ababa: Federal Negarit Gazette.

FDRE-HPR. (2002). Excise Tax Proclamation No. 307. Addis Ababa: Federal Negarit Gazette.

FDRE-HPR. (2019). VAT Proclamation No. 1157. Addis Ababa: Federal Negarit Gazette.

FDRE-HPR. (2020). Excise Tax Proclamation No. 1186. Addis Abeba: Federal Negarit Gazette.

Feleke, B. T. (2017). Auditors Perception of Audit Quality in Ethiopia. Addis Ababa University.
academia.edu.

Fleming, D. (2014). Auditor industry specialization and audit fees surrounding Section 404
implementation. Review of Accounting and Finance, 359-371.

Francis, J. R. (2011). A framework for understanding and researching audit quality. Auditing: . A journal
of practice & theory, 30(2), 127-131.

Gelan, A. S. (2019). Tax Audit Quality Assurance Review Manual. Addis Ababa: MoR.

Gizaw, B. (2017). The Effectiveness of Tax audit on Revenue Collection: The Case of Ethiopian Revenues
and Customs Authority Large Taxpayers Branch Office (LTO). St. Mary’s University (unpublished
thesis), 66-68.

Goodhue, D. L., & Thompson, R. L. . (1995). Task-technology fit and individual performance. MIS
quarterly, 213-236.

Gunny, K. A., & Zhang, T. C. (2013). PCAOB inspection reports and audit quality. . Journal of Accounting
and Public Policy, 32(2), 136-158.

49
H. Chai, and Q. Liu,. (2010). Competition and corporate tax avoidance: Evidence from Chinese industrial
firms. The Economic Journal, 764-795.

Hair, J. F.,et.al. (2014). Multivariate data analysis. Pearson new international edition. Essex: Pearson
Education Limited.

HEVO. (2023, January 18). hevodata. Retrieved from hevodata.com:

https://hevodata.com/learn/quantitative-data-analysis/

Huey, B. M., & Wickens, C. D. (1993). Workload transition: Implications for individual and team
performance. . National Research Council Washington DC.

ICAN. (2021). Advanced Audit and Assurance. Nigeria : The Institute of Chartered Accountants of Nigeria.

ISO 9000. (2015). Quality management systems fundamentals and vocabulary. ISO.

Jara, N. (2020). impact of tax audit on improving The compliance of tax payer a case study of Jimma city
administration revenue authority office. Jimma University research portal (unpublished thesis),
70-74.

Kirchler, E., et.al. (2007). Why paying taxes? A review of tax compliance decisions. Paper presented at
the Conference on Tax Compliance and Evasion,. Atlanta, Georgia, USA,.

Knechel, W. R. (2013). Audit quality: Insights from the academic literature. Auditing. A journal of practice
& theory, 32(Supplement 1), , 385-421.

Laykemaryam, A. (2020). FACTORS AFFECTING TAX AUDIT EFFECTIVENESS A STUDY ON CATEGORY “A”
AND “B” TAX PAYERS IN NORTH SHEWA ZONE REVENUE OFFICE, ETHIOPIA (Doctoral
dissertation). Debre Birhan : Debre Birhan University, Ethiopia.

Leung, P., et.al. (2011). Accountability structures and management relationships of internal audit: An
Australian study. Managerial auditing journal., 811-814.

Low, K. Y. (2004). The effects of industry specialization on audit risk assessments and audit‐planning
decisions. . The accounting review, 79(1), 213-217.

Masood, A., & Afzal, M. . (2016). Determinants of audit quality in Pakistan. Journal of Quality and
Technology Management,, 35-46.

Mc Gee, R. (2008). Taxation and public finance in transition and develping economies. 17.

Mebratu, A. A. (2016). Impact of tax audit on improving taxpayers compliance: emperical evidence from
ethiopian revenue authority at federal level. . International Journal of Accounting Research,
2(12), 3-14.

Melaku, D. (2017). Problems of Tax Audit of Categories “A” tax payers: (a case of manufacturing
companies in Kirkos Sub. Addis Ababa, Ethiopia.

50
Mersha, S. Z., et.al. (2022). Determinants of tax audit quality with audit process as the mediator in
Ethiopia: the case of the ministry of revenues. Management & Accounting Review (MAR), 21(1),,
181-202.

Meyer, J. W., & Rowan, B. . (1977). Institutionalized organizations: Formal structure as myth and
ceremony. American journal of sociology, 83(2), 340-363.

Micci-Barreca. (2004). Improving tax administration with data mining. . White paper, Elite Analytics LLC.,
2.

Micci-Barreca, D., & Ramachandran, S. (2004). Improving tax administration with data mining. . White
paper. Elite Analytics LLC.

Mihret, D. G., & Yismaw, A. W. (2007). Internal audit effectiveness: an Ethiopian public sector case
study. . Managerial auditing journal., 9-12.

Modugu, K. P., & Anyaduba, J. O. . (2014). Impact of tax audit on tax compliance in Nigeria. .
International journal of business and social science, 5(9), , 211-214.

MOR. (2019). Compliance Risk Management Strategy. Addis Ababa.

MOR. (2019). Tax Audit Quality Assurance Review Manual. Addis Ababa: MOR.

Mwinyipembe, M. M. (2014). Effectiveness of quality assurance and standards officers school

supervisory roles in enhancing students’ academic performance in national examinations in
Nakuru District, Kenya. . Journal of Education and Practic, 51-65.

Nanik Lestari & Sucitra Nedya. (2019). The Effect of Audit Quality on Tax Avoidance. Advances in Social
Science, Education and Humanities Research, volume 354, 329-333.

Nanik Lestari and Sucitra Nedya. (2019). The Effect of Audit Quality on Tax Avoidance . Advances in
Social Science Education and Humanities Research, volume 354, 329-333.

Neri, L., & Russo, A. (2014). A framework for audit quality: Critical analysis. . Business and Management
Review, 3(9), 27-29.

Netemeyer, e. (2003). Scaling Procedures: Issues and Applications. SAGE.

Nurebo, B. Y. & Lakew, D. M. (2019). Effectiveness of Tax Audit: A Study in Kembata Tembaro Zone,
Southern Ethiopia. International Journal of Commerce and Finance, 34-50.

OECD. (2006). Strengthening Tax Audit Capabilities: General Principles and Approaches. CENTRE FOR TAX
POLICY AND ADMINISTRATION, Forum on Tax Administration’s compliance sub group. OECD.

OECD. (2008). Monitoring Taxpayers’ Compliance: A Practical Guide Based on Revenue Body Experience.
oecd.

51
Ojonta, B. A. (2011). Open Educational Resources (OER)-University of Nigeria Nsukka. University of
Nigeria Nsukka.

Okonkwo, A. I. (2014). Critical evaluation of tax audit & investigation processes in enhancing tax
compliance. Being a Paper Presented at the CITN MPTP in Uyo on October, 8-9.

Olaoye, C. O., & Ogundipe, A. A. (2018). Application of tax audit and investigation on tax evasion control
in Nigeria. Journal of Accounting, Finance and Auditing Studies, Volume 4, Issue 1, 81-87.

Oyedokun, P., & Emmanuel, G. . (2016). Imperatives of tax audit and investigation for revenue
generation in Nigeria. . Available at SSRN 2913151., 5-6.

Pallant, J. (2007). SPSS survival manual- A step by step guide to data analysis using SPSS for windows
(3rd ed.). Maidenhead: Open University Press.

Pimentel, J. L. (2019). Some Biases in Likert Scaling Usage and its Correction. International Journal of
Sciences: Basic and Applied Research (IJSBAR), 1-9.

Pitkänen, J. (2016). Audit quality: the effect of prior experience. University of Jyväskylä
http://urn.fi/URN:NBN:fi:jyu-201602111542, 31-32.

Ratnawati, V. (2020, March 30). Factor affecting tax auditors performance: The moderating role of locus
of control. Business Perspective, 10.

Rick, H. e. (2005). Principles of Auditing: An Introduction to International Standards on Auditing. Person

Education Limited (UK).

Sarfo. (2015). The Role of Tax Audit in Revenue Mobilization in Ghana Revenue Authority:The Case Of
Ashanti Region. Kwame Nkrumah University of Science and Technology (KNUST).

Scott, W. R. (2008). Approaching adulthood: the maturing of institutional theory. Theory and society, 37,
, 427-442.

Shafritz, J. e. (2016). Introducing public administration. Routledge.

Soltani. (2021). The Quality Effect of Auditing on Tax Compliance: Evidencefrom Tunisian Context.
International Journal of Economics and Financial Issues, 24-27.

Soltani, L. (2021). The Quality Effect of Auditing on Tax Compliance: Evidence from Tunisian Context.
International Journal of Economics and Financial Issues, 24-27.

Sulaiman, N. A. (2018). Attributes and Drivers of Audit Quality: The Perceptions of Quality Inspectors in
the UK. Asian Journal of Accounting & Governance, 10-11.

Tadesse, G. and Goitom, A. (2014). Factors influencing taxpayers’ compliance with the tax system:An
empirical study in Mekele city, Ethiopia. Journal of tax research, vol. 12 no.2, 433-452.

52
Tait, A. (1988). Value Added Tax: International Practice and Problems. Washington DC: IMF.

Tarek, M., et.al. . (2017). The implication of information technology on the audit profession in
developing country: Extent of use and perceived importance. International Journal of
Accounting & Information Management.

Tarfa, E.G, et.al. (2020). Effects of Tax Audit on Revenue Generation. Journal of International Trade,
Logistics and Law, 69-72.

Tax Justice Network-Africa. (2020). LAUNCH OF TAX AUDIT & QUALITY ASSURANCE UNIT AT GRA. Acra:
Office of the Hon Minister.

Tefera, T. (2021). ASSESSMENT OF TAX AUDIT EFFECIVENESS: THE CASE OF ADDIS ABABA CITY
GOVERNMENT REVENUE AUTHORITY LARGE TAX PAYER’S BRANCH OFFICE. unpublished research
paper, 1-80.

Tesema G. and Teklu K. (2020 ). Tax Audit Performance in Ethiopia: The Case of Western Addis Ababa
Small Taxpayer Branch office . Journal of Economics and Sustainable Development, 56-63.

Tesfaye, B. (2018). Tax audit in Oromia Revenue Authority: Practices and Challenges. Addis Ababa
University.

Tesfie, D. S., et.al. (2021). Assessment of Factors Affecting Tax Audit Effectiveness in Ethiopia: Empirical
Evidence from South Gondar Zone Revenue Offices. www.journal-innovations.com, 199-201.

Tewabe. (2016). TAX AUDIT EFFECTIVENESS IN ADDIS ABABA, ETHIOPIA: TAX AUDITORS' PERCEPTIONS
IN ETHIOPIAN REVENUES AND CUSTOMS AUTHORITY (ERCA) EASTERN ADDIS ABABA BRANCH. 1-
71.

Thomson, R. (2008). Strengthening Risk Management and Audit Strategies to Improve Compliance.
Caribbean Organization of Tax Administration (COTA) General Assembly. CARTAC, Belize:
www.cartac.org/ COTA/ Paper/Strengthening/Risk/Management/Final.pdf.

Van Gansberghe, C. N. (2005). Internal Audit. Finding its Place in Public Finance Management.
Washington, DC: World Bank Institute.

Van Gansberghe, C. N. (2005). Internal auditing in the public sector: a consultative forum in Nairobi,
Kenya, shores up best practices for government audit professionals in developing nations. .
Internal Auditor, 62(4), 69-73.

Venkatesh, V., et.al. (2003). User acceptance of information technology: Toward a unified view. MIS
quarterly, 425-478.

Verboon, P., & Van Dijke, M. . (2007). A self-interest analysis of justice and tax compliance: How
distributive justice moderates the effect of outcome favorability. Journal of Economic
psychology, 28(6), 704-727.

53
Watts, R. L., & Zimmerman, J. L. . (1979). The demand for and supply of accounting theories: The market
for excuses . Accounting review, 273-305.

Xiangdong, W. (1997). Development trends and future prospects of internal audit. . Managerial Auditing
Journal, 12(4/5), 200-204.

Yeshiwork, Z. (2021). DETERMINANTS OF TAX AUDIT EFFECTIVENESS IN THE MINISTRY OF REVENUE

EVIDENCE FROM LARGE TAXPAYER’S OFFICE. Addis Ababa: ST. MARY’S UNIVERSITY.

54
Appendix I

Reliability Test of Items

Variables Item alpha

Tax Audit Quality TAQ1 0.7675 0.8700
(TAQ) TAQ2 0.7746
TAQ3 0.7741
TAQ4 0.7669
TAQ5 0.7658
Tax Audit Effectiveness TAE1 0.7741 0.6358
(TAE) TAE2 0.7669
TAE3 0.7658
TAE4 0.7741
TAE5 0.7871
TAE6 0.7791
Audit Experience AE1 0.7641 0.7451
(AE) AE2 0.7817
AE3 0.7816
AE4 0.7811
AE5 0.7844
Task Complexity TC1 0.7822 0.7256
(TC) TC2 0.7810
TC3 0.7819
TC4 0.7779
TC5 0.7767
Information Technology IT1 0.7880 0.7564
(IT) IT2 0.7812
IT3 0.7814
IT4 0.7812
IT5 0.7889
Training TR1 0.7742 0.7279
(Train) TR2 0.7814
TR3 0.7819
TR4 0.7794
Organization structure OS1 0.7816 0.7374
(Org) OS2 0.7823
OS3 0.7826
OS4 0.7844
Management Support Mgs1 0.7661 0.7333
(Mgs) Mgs2 0.7652
Mgs3 0.7645
Mgs4 0.7743
Mgs5 0.7634
Audit Attribute AT1 0.7743 0.7392
(AT) AT2 0.7666
AT3 0.7731
AT4 0.7611
Test scale 0.7802

55
Summary Table

Variable | Obs Mean Std. Dev. Min Max

Sex | 87 1.402299 .4932043 1 2
Age | 87 1.517241 .6623087 1 3
Educ | 87 2.425287 .5420071 1 3
Qualificat~n | 87 2.275862 1.309089 1 5
Exp | 87 1.781609 .8683758 1 4
-------------+---------------------------------------------------------
Task_Comp | 87 3.896552 .9527742 1 5
Auditor_Exp | 87 3.977011 1.056288 1 5
Info_Tech | 87 3.804598 .9981271 1 5
Train | 87 3.597701 .8416453 1 5
-------------+---------------------------------------------------------
Org_Struct | 87 3.908046 .7413405 1 5
Mgt_Support | 87 3.770115 .8983337 1 5
Attribute | 87 4.114943 .7221622 1 5
-------------+---------------------------------------------------------
compliance | 87 2.218391 .5791993 1 3
TAQ | 87 3.942529 .7679075 1 5
TAE | 87 3.655172 1.097858 1 5

56
OLS Estimation

Variable | TAQ TAE compliance

-------------+------------------------------------------------
Auditor_Exp | .22663655***
Task_Comp | .47495508***
Info_Tech | .26241865***
Train | .10602943*
Org_Struct | .21927661*
Mgt_Support | .37914009***
Attribute | .22068328*
TAQ | -.18006393*
TAE | .00625448
_cons | -.20084833 .74808493 3.0509951***
-------------+------------------------------------------------
N | 87 87 87
r2 | .82099065 .50467789 .05026076
r2_a | .81225848 .48677468 .02764792
--------------------------------------------------------------
legend: * p<0.05; ** p<0.01; *** p<0.001

Standardized normal probability plot

1.00 0.75
Normal F[(resid-m)/s]
0.25 0.500.00

0.00 0.25 0.50 0.75 1.00

Empirical P[i] = i/(N+1)

57
 Logit estimation

Variable | TAQ TAE compliance

-------------+------------------------------------------------
TAQ |
Auditor_Exp | .14734708
Task_Comp | -.14091158
Info_Tech | -.04478565
Train | .0439271
-------------+------------------------------------------------
/cut1 | -4.4409662* -4.4287396** 3.2017145*
/cut2 | -2.7842426 -3.0070521* 7.0313676***
/cut3 | -1.5544278 -2.5957682*
/cut4 | 1.5213569 .15087776
-------------+------------------------------------------------
TAE |
Org_Struct | -.85351952*
Mgt_Support | .32322434
Attribute | .14405257
-------------+------------------------------------------------
compliance |
TAQ | .91767626**
TAE | .64645971**
-------------+------------------------------------------------
Statistics |
N | 87 87 87
chi2 | .53967311 6.4361661 15.360918
p | .96952564 .09221424 .00046176
--------------------------------------------------------------
legend: * p<0.05; ** p<0.01; *** p<0.001

58

View publication stats