BTX THREE
TMU 08605
TAX AUDIT AND INVESTIGATION
What is auditing?
Auditing may be said to be the verification of the accuracy and correctness of the books of
account by an independent person qualified for the job and not in any way connected with the
preparation of such accounts with the purpose of determining if the financial statements presents
true and fair view.
Simply auditing is concerned with the verification of accounting data with the purpose of
determining their accuracy and reliability.
Characteristics of Auditing
Auditing is a crucial review of the system of accounting and internal control
It is an organized and scientific examination of books of accounts of a business
Audit is undertaken by an independent person or body of person who are duly qualified
for the job.
Audit is a verification of the results shown by the profit & loss account and balance sheet
Audit is done with the help of –
-Vouchers
- Documents
- Information and explanation received from the organization being audited.
Objectives of Auditing
Primary objectives
Secondary objectives
Primary objectives
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The primary objective of audit is to report to the owners of the business whether the balance
sheet, profit and loss account presents true and fair view of the state of the affairs of the company
as at the end of the accounting period.
Secondary Objectives
Secondary objectives may be categorized into two parts
Detection and prevention of errors
Detection and prevention of fraud
Detection and prevention of errors
Errors refer to unintentional mis-statements or dis-description made in the books of account.
Errors are reportedly committed innocently, an auditor should be very careful about it, because
sometimes errors which might appear as innocent are the results of fraudulent manipulation.
Types of Errors
a) Technical error or Clerical error
b) Error of Principle
Technical error or Clerical error
These are errors which are committed during-
o Recording transaction I the books of original entry such as the cash book, purchases,
sales book etc
o In casting/posting carry forward and balancing the subsidiary books
o In posting the entries from the books of original entry to the concerned accounts in the
ledger
o In the totaling or balancing ledger accounts.
Technical or clerical errors may be subdivided into three types
i) Error of omission
ii) Error of commission
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iii) Compensating Errors
i) Error of Omission
Errors which are arise on account of transaction not being recorded in the books of accounts
either wholly or partially are called errors of omission. If a transaction is completely omitted to
be recorded in a subsidiary book, it is an error of complete omission. This kind of error doesnot
affects the agreement of trial balance as both aspects of the transaction are omitted from the trial
balance. Therefore such error cannot be detected easily; an intensive checking of the subsidiary
books and the posting from subsidiary books to the ledger is required.
ii) Error of Commission
This happens when incorrect entries are made in the books of accounts either wholly or partly.
Eg. The amount 535 might be entered as 353 in the books of original entry such an error can be
located while vouching the purchases with original invoice.
iii) Compensating Errors
When the effect of one error is countered-balanced, set off or compensated by another error the
action is known as compensating error. Eg If salary and wages account is under recorded by 150
and general expenses account is over recorded by the same amount (150) then the error is
automatically offset. Such error can be detected only through checking of different subsidiary
books and ledger accounts.
b) Error or Principle
This error refers to an error of recording transactions without following the general accepted
principles of accounting. The error cannot be detected by the disagreement of the trial balance or
by mere routine checking.
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Detection and prevention of fraud
Fraud refers to intentional misstatements or mis-dscription made in the books of accounts with
the view of cheating.
Types of fraud
a) Misappropriation
b) Fraudulent manipulation of accounts
a) Misappropriation
It refers to dishonest use of another’s fund or property for the one’s own benefit or use
Misappropriation may be sub divided into two types
Misappropriation or embezzlement of cash
Misappropriation of goods
Misappropriation or embezzlement of cash
This includes
Non-disclosure of cash receipts
Recording the cash sales proceeds at a figure lower than the actual cash sale proceeds.
Omitting to record the sales
Showing false cash payments, recording false cash purchase and pocketing the amount.
Inflating the cash purchases at the figure higher than the actual and pocketing the
difference.
Misappropriation of goods
It means the wrongful or fraudulent conversion or fraudulent application of goods by those who
handle them. This involves
Recording sales of large quantities than actually supplied and misappropriation of the
balance quantity
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Recording purchase of large quantities while getting delivery of less quantities and
receiving the balance quantity privately.
b) Fraudulent manipulation of accounts
It is said to be committed when a person makes a false entry in the business records or alters,
erases, removes or destroys a true entry in the business records. This can be done through the
flowing.
Provision of more or less depreciation on fixed assts
Over valuation or under valuation of fixed asset
Creation of secret reserves ( provision for doubtful debt, provision for loss)
