(a) Tax Audit and its purpose:-

Tax audit is a detailed examination of the accounting and financial records of the taxpayer including third party records to establish that the return submitted by the taxpayer to the Inland Revenue is true and correct.

(b) How the tax audit relates to the self- assessment system (SAS)

Tax audit is fundamental to the self assessment system as it ensure the following:

• compliance of tax laws

• correct reporting of income and expenses

The tax audit ensures that under the SAS:

• the taxpayer reports his income correctly

• maintains proper records

• identify areas of difficulties in law faced by the taxpayer

• a broad based tax payer education implementation

© Tax audit can be conducted by two methods:-

• desk audit

• field audit

(d) The following described what a Desk audit is about:-

• the tax officers do not visit the premises of the taxpayer

• examination of a tax file on the office to verify submission of returns are in order, properly supported and documented.

• if there is any need of additional information, or verification the IRB will communicate

• At the desk audit stage, the following items in the Income Statement & Balance Sheet would have been examined:

-  sales and turnover

- purchases

- stock movements

- other sources of income

- expenses

- leasing and rental payments

- advertisement and promotion expense

- traveling –local and overseas

- interest payments on loan, overdraft etc

- professional fees

- repairs, maintenance and upkeep

- fixed assets, motor vehicles, plant and machinery

- trade debtors and creditors

- directors accounts

- other debtors and creditors

- non-trade accounts

- investments

- reserves and provisions

• Some common issues examined includes the following:

- timing of income recognition (e.g. waiver year)

- transfer pricing-year end adjustments

- deductibility of expenses

- compliance and withholding tax provisions

- compliance with incentive conditions

- provisions treated as accruals

- inadequate documentation

- pertaining to related party transactions are issues like whether the transactions are charged, not being charged or without documentation or inadequate documentation or withholding tax compliance issues in off-shore transactions

(e) The following describes what are in a Field Audit:-

• the audit is carried out at the office, trading or the business premises of the taxpayer

• the tax authority will want to verify the accounting and financial records with the source documentations to ensure that the return submitted to the IRB fairly reflects the true picture on the ground

• the tax authority intends to audit all cases over a specific time period ( one to five years)

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Well, the selection process could involve any or all of the following:

• HQ instruction
• policy decisions
• computerized selection
• manual selection’
• informer based selection

Besides the above reasons, other factors that can trigger it include the following:

• industry analysis
• informer or information based
• taxpayer record and background
• specific issues (e.g. transfer pricing)
• inconsistent and conflicting expenditure in accounts
• repayment and loss cases
• media reports
• inter-governmental agencies/information

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Segregation of duties provides two benefits:

• A deliberate fraud is more difficult because it requires collusion of two or more persons; and

• It is much more likely that innocent errors will be found.

At the most basic level, segregation of duties means that no single individual should have control over two or more phases of a transaction or operation. Management should assign responsibilities to ensure a crosscheck of duties.

If a single person can carry out and conceal errors and/or irregularities in the course of performing their day-to-day activities, they have generally been assigned or allowed access to incompatible duties or responsibilities. Some examples of incompatible duties are:

Take note when we review duties or responsibilities, we can broadly classified it into the four categories which are:

1. Authorization;

1. Custody;

1. Record-keeping; and

1. Reconciliation.

In an ideal system, different employees would perform each of these four major functions. In other words, no one person should have control of two or more of these responsibilities. The more negotiable the asset, the greater the need for proper segregation of duties, especially when dealing with cash, negotiable checks and inventories.

Authorization

Authorization is the process of reviewing and approving transactions or operations.

Some examples are:

• Verifying cash collections and daily balancing reports;
• Approving purchase requisitions or purchase orders;
• Approving time sheets, payroll certifications, leave requests and cumulative leave records; and
• Approving change orders, computer system design or programming changes.

Custody

Custody is the process of having access to, or control over, any physical asset such as cash, checks, equipment, supplies or materials.

Some examples are:

• Access to any funds through the collection of funds or processing of payments;
• Access to safes, lock boxes, file cabinets or other places where money, checks or other assets are stored;
• Custodian of a petty cash or change fund;
• Receiving any goods or services;
• Maintaining inventories; and
• Handling or distributing paychecks/advices, limited purchase checks or other checks.

Record-Keeping

Record-keeping is the process of creating and maintaining records of revenues, expenditures, inventories and personnel transactions. These may be manual records or records maintained in automated computer systems.

Some examples are:

• Preparing cash receipt back-ups or billings, purchase requisitions, payroll certifications and leave records;
• Entering charges or posting payments to accounts receivable system; and
• Maintaining inventory records.

Reconciliation

Reconciliation is verifying the processing or recording of transactions to ensure that all transactions are valid, properly authorized and properly recorded on a timely basis. This includes following-up on any differences or discrepancies identified.

Some examples are:

• Comparing billing documents to billing summaries;
• Comparing funds collected to accounts receivable postings;
• Comparing collections to deposits;
• Performing surprise counts of funds;
• Comparing payroll certifications to payroll summaries;
• Performing physical inventory counts;
• Comparing inventory changes to amounts purchased and sold; and
• Reconciling departmental records of revenue, expenditures and payroll transactions to management reports

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1.0 General

• Policies and procedures for HR management such as recruiting, termination and turnover management should be clearly documented and communicated.

2.0  Planning and Policy

• An annual manpower budget that addresses the organisation’s future workforce needs and anticipates organisation changes (i.e. structure, services, processes and new technology) should be complied with by the HR department.

• Salary structure and incentive compensation programs should be reviewed annually and quarterly respectively to ensure that they are fully competitive with the marketplace.

• Changes made to incentive compensation and employee fringe benefit programs must be approved by Group MD/FD.

• All employees should be covered under group medical insurance in accordance with the local conditions and practices.

• A formal system of appraisal and counselling should be established whereby:

All employees are formerly evaluated and counselled at least once a year; - Supervisors and managers are given appropriate training in counselling and evaluation techniques.

A training policy and program for staff should be in place.

• An updated copy of Employees’ Handbook should be given to all permanent employees. The contents to be included should be as follows:

- Employment contract terms and conditions

- Health and safety regulations

- Disciplinary actions

3.0  Recruitment

• There should be a clear and defined recruitment process in place to attract the highest quality of employees.

4.0 Termination and Resignation of Employees

• There should be clear and defined termination process in place.

• Exit interviews should be conducted by HR department for all employees who resigned.

• All items and equipment belonging to the organisation should be returned by resigned employee.

• An exit clearance checklist should be completed for all resigned employees.

5.0 Payroll

• Individual files should be maintained for every employee containing:

- Contract of employment
- Latest salary rate
- Updated personal particulars

• Access to employee files and payroll system should be restricted to authorised personnel.

• Prescribed forms should be used for:

- Adding employees to the payroll
- Deleting employees from the payroll (via letter of resignation)
- Changing important payroll information such as bank account number
- Changing employees’ salary scale
- Changing employee-authorised deductions

• Such forms should be approved in accordance with the DOA prior to processing.

• Amendments made to payroll masterfile should be automatically generated for approval.

• Monthly payroll reports should be reviewed by the head of HR Approval must be obtained from two senior management staff (e.g. two General Managers, or one Finance Manager and one General Manager) before payment of the payroll.

6.0  Reconciliation

• Payroll summary should be reconciled to the actual amount paid per bank statement monthly. Payroll summary prepared by HR should be based on payroll records.

7.0  Travel and Entertainment

• Travel and entertainment claim policies should be clearly documented and communicated. These should include:

- Airline class
- Hotel grade
- Allowable expenses and claims limit
- Documentation requirements
- Approval requirements

• Prescribed forms for entertainment claim should include the following:

- Purpose of entertainment
- Company employees included
- Persons entertained
- Designation of persons entertained

• No employee should be able to approve his/her own expense claim. Any expense claims by both the Managers and Directors should be approved by the next higher level of management authority.

7.0  Segregation of duties

• There should be segregation of duties between the following functions:

- Human Resource
- Payroll

8.0  Delegation of Authority (DOA)

• The documented DOA should cover the authority to:

- Approve salary and salary-related changes
- Approve expense claims
- Hire, terminate, promote, transfer of employees
- Travel and entertainment expenses
- Approve changes to payroll master-file

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In my forthcoming articles, I shall be suggesting some minimum controls that have to be in place to ensure that key strategic, operational and financial risks of the company are managed.
The areas for discussion are:
Control Environment
General Accounting
Revenue Cycle
Expenditure Cycle
Bank and Cash
Fixed Assets Management
Inventory, Logistic and Distribution
This article, today discuss on the minimum controls suggested to be in Control Environment of a company and is segregated into the following categories:

• General,
  
• Delegation of Duties,
  
• Risk Management,
  
• Management Information Systems.
  

Control Environment

(a) General

In the Control Environment, generally, certain minimum key salient features should at least be there:
there should be a champion at the director level within the organisation who strongly and clearly supports a strong control culture and environment,

• a clear policy statement on controls should be issued to all staff,
  
• there should be a company-wide framework of policies and procedures documented in a comprehensive manual,
  
• there should be clear policies and procedures in place to ensure that staffs fully declare all related party transactions and potential conflict of interest situations on a periodic basis.
  

(b) Delegation of Authority (DOA)

• an overall delegation of authority guideline should be documented for all functions and operations,
  
• in particular, delegation of authority guidelines must be documented for the following:
  

- Appointment and dismissal of members of top management team
- Awarding of salary, bonuses, benefits for all staff
- Setting terms and conditions for all staff
- Debt and Capital restructuring
- Investment functions
- Treasury functions
- Issuing of guarantees
- Issuing of charges on assets
- Acquisition or disposal of investments, businesses and commercial rights
- Establishment of exclusive and/or special types of arrangements

©  Risk Management

• There should be a mechanism in place to ensure that all significant operational risks are identified and recorded on an ongoing basis.
  
• Procedures should be established to ensure that suitable action plans are implemented to address all the risks that have been identified.
  
• The action plans should be measurable to assess whether the identified risks have been successfully managed.
  
• There should be an effective system or process (e.g. Internal Audit checks) to ensure that adequate controls are in place to address identified Operational and Financial risks.
  
• Adequate insurance coverage should be undertaken for both the company’s assets.
  

(d) Management Information

The Management Information System (MIS) should be able to generate explanatory management reports, incorporating the usage of comprehensive graphs and schedules, on a timely basis.

In particular, the management reports should include the following:

- Profit and loss account
- Balance sheet
- Cash-flow statement
- Aged debtor listings
- Creditor listings
- Inter-company balance/transaction report
- Foreign exchange exposure report
- Contingent liabilities and other commitments report
- Action plan report
- Operational risk report
- Division sales report
- Division inventory report
- Stock category month stock trend with comparison between stock holding vs prior month
- Commentaries on the followings:

(a) Sales/GP - on a current month versus budget, current month versus prior month and actual YTD versus budget YTD basis

(b) Expenses - in terms of Staffing, Selling and General Expenses on a current month versus budget, current month versus prior month and actual YTD versus budget YTD basis

(c) Other Income - explain and indicate the nature and comparison of current month versus budget and prior month , and current YTD versus budget YTD

(d) Profit before Tax - comments in summary what caused the change in PBT

(e) Cash Flow, Capital Expenditure and other significant items

(f) Assets Management - in terms of AR and Stock turnover, ageing etc
- Month end borrowing position (amount utilised versus facilities provided, interest rate)
Comprehensive documented period end procedures should be in place to facilitate timely preparation of the management reports.

Management reports should be reconciled to underlying accounting records and all reconciling items should be addressed promptly.

Major variances against budget should be analysed monthly as part of management reporting.

Provisions for taxation, both current and deferred, should be checked quarterly to ensure accuracy and compliance with local regulations.

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Monthly Reports
· Month-end reporting requirements and their due dates should be clearly communicated.
· Monthly management accounts and reports should be reviewed by senior management.
· Foreign currency transactions and balances should be translated at approved rates.
· Suspense items should be investigated and reviewed by senior management.
· Journal vouchers should be supported and approved prior to processing.

Chart of Accounts
· Creation of new accounts and changes to existing accounts should be authorised by the Financial Manager, and all Functional Managers and Divisional Directors informed immediately.
· Dormant accounts should be reviewed and deleted/deactivated annually.

Reconciliation
· Reconciliations should be prepared for all key control accounts including Stock Ledger, Payroll, Fixed Assets and Cash Book.
· Inter-company balances should be confirmed and reconciled on a monthly basis. All reconciling items should be checked and cleared.

Segregation of Duties
· There should be segregation of duties between the following functions:
- Cash handling
- Maintenance of GL data

Delegation of Authority (DOA)
The documented DOA should cover the authority to:
- Create and edit of GL
- Sign cheques and payment instructions

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• Polices and procedures for project initiation, planning, procurement planning, execution and performance reporting should be clearly documented and communicated.
  

Initiation

• Project managers should be identified and assigned early in project planning, but not later than at the start of project execution.
  

• Contractual requirements should be analysed and, where significant, catered for in the project planning stage.
  

Planning

• Formally approved project plans should be used to manage and control project execution.
  

• Project plans include the following:
  

- Definition of objectives, scope and boundaries
- Allocation of responsibilities and authorities
- Work breakdown structure (tasks)
- Cost estimated
- Performance measurement baselines or schedule and cost
- Key risks, and responses to mitigate them
- Milestones, checkpoints and approvals
- Technical documentation, such as requirements, specifications and designs
- Project quality plan
- Adequacy of insurance coverage
- Documentation or reference to relevant standards

• Standard checklists of required steps for project monitoring should be available and used.
  

• Applicable delegation of authority guides should be used to document project approval requirements.
  

• Cost contingency reserves should be determined at project inception.
  

• All contractual agreements entered into should be reviewed by the Functional Manager prior to commencement of the projects.
  

Procurement Planning

• Standard documents such as bid documents, purchase orders and contracts should be used.
  

• Standard terms and conditions in the purchasing documents should have been explicitly approved by Divisional Manager.
  

• Terms and conditions appearing in the purchase documents should be updated annually in order for account changes in the business environment to be taken into.
  

• Procurement bid documents should have been structured to facilitate accurate and complete responses from vendors by including:
  

- Statement of work
- Statement of desired form of response
- Copy of model contract

• Explicit criteria should have been defined to evaluate vendor proposals:
  

- Demonstrated understanding of need
- Overall or lifecycle cost of product or service (not just lowest price)
- Technical and managerial capabilities
- Financial capacity needed to fulfil the contract

Execution

• There should be a work authorisation system to ensure that work is performed at the right time and correct sequence.
  

• Approvals to proceed at each appropriate stages of the project should be documented.
  

• Status review meetings should be held weekly and documented.
  

• Project records and information should be stored in a manner that facilitates easy retrieval. Such records should include:
  

- Project management software and data
- Computer Aided Design (CAD) systems and files
- Engineering and technical drawings
- Minutes of status review and/or other project meetings
- Correspondence and memos
- Reports and schedules
- Variation order requests

• Contract variations (approved and unapproved) should be communicated through appropriate project planning and procurement process and plans updated accordingly.
  

Performance Reporting

• Schedules meetings should be held monthly to assess project status.
  

• Action items and accountabilities arising from meetings should be documented and followed up by the relevant project managers.
  

• Budgeted project milestones and costs versus actual costs should be monitored and reported to the Functional Manager throughout every major project phase.
  

• Project milestones and costs in excess of budgeted timeframes and amounts should be required to be approved by Department Senior Management.
  

Closing

• A final set of indexed records should be assembled and archived.
  

• There should be a mechanism for capturing, documenting and communicating the lessons learned in projects (post implementation review).
  

Segregation of Duties

• There should be segregation of duties between the following functions:
  

- Approving authority for project commencement
- Approval of project requisitions
- Receipt of goods and services

Delegation of Authority (DOA)

• The documented DOA should cover the authority to:
  

- Project requisitions
- Exceptions to competitive bidding and tendering requirements
- Exceptions to approved project contract terms and conditions
- Procurement of stocks required for the project
- Approval of vendor and sub-contractor invoices

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• Policies and procedures for credit and collections management should be clearly documented and communicated.
  

Credit Assessment
· The credit worthiness of all new credit customers should be evaluated and documented for approvals in the credit assessment forms.
· Credit limits of customers must be approved in accordance with the DOA.
· The credit assessments should include at least two of the following:
- Analysis of customers’ latest available financial statements or credit rating agency’s reviews
- Understanding customers’ management and business
- Personal guarantee
- Site visit
· Credit ratings of one to six should be specified for each customer based on the credit assessments.  Customer credit terms and limits should be granted based on the credit ratings.
· Overrides to the credit rules should be approved in accordance with the authority levels.
· Credit assessments for all major customers should be updated annually.

• No delivery order should be generated by the system if the relevant customers had trade debts exceeding either their credit terms or credit limits. Overrides require pre-approval from both the Divisional Director and Finance Manager before the orders can be processed.
  

Sales, Invoicing and Recording
· Price and volume discounts should be approved in accordance with the authority levels.
· Sales orders should be evaluated to ensure compliance with approved credit limits.
· Outstanding sales orders should be monitored daily for their progress and status.
· All Delivery Orders should be matched with Invoices and Customer’s Purchase Orders.
· All Credit Notes should be supported and approved in accordance with the authority levels.
· There should be sequential control over all Invoices, Credit Notes, Delivery Orders and Goods Returned Notes.
Collections and Bad debts

• Monthly debtors ageing reports showing old debts beyond credit period should be generated for monthly credit review.
  

• Follow up actions for long outstanding debts should be established and documented during credit review meetings.  Follow-up actions should include sending of reminder/warning letters and, ultimately legal letters as a last resort.
  

• All debtors write-off should be approved by both the Group MD or Group FD in accordance with the DOA.
  

• Customer statements should be mailed monthly to customers. Disputes must be investigated and resolved within two weeks and monitored by Functional Manager independent of sales function.
  

Credit Notes Issue

• Credit notes should be approved by Functional Managers independent of sales function.
  

• Credit notes are sequentially controlled.
  

Reconciliation

• Debtors ageing report should be reconciled to the GL monthly and reviewed by Finance Manager.
  

Segregation of Duties

• There should be segregation of duties between the following functions:
  

- Credit control
- Credit notes
- Collections
- Accounts receivable
Delegation of Authority (DOA)

• The documented DOA should cover the authority to:
  

- New credit customers
- Credit limits and terms, and overrides to the credit rule
- Sales orders
- Bad debt provision and write-off
- Credit note issues

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• Procedures and policies for acquisitions, transfers and disposals of fixed assets should be established.  Fixed assets’ useful lives should be clearly defined and be consistent with the Group’s fixed assets policies. Operating units may have different policies subject to the Group Finance Director’s approval.
  

Fixed Assets Register

• Each operating unit’s finance department must maintain a comprehensive and up-to-date Fixed Assets Register.
  
• The register should include the following details:
  

- Cost of asset
- Asset useful life or depreciation rate
- Location and custodian rate
- Current and accumulated depreciation rate
- Net book value

• As far as possible all tangible fixed assets should be promptly tagged to permit easy identification.
• Accuracy of the register should be verified through periodic physical fixed assets counts and confirmations with custodians.
• All adjustments to the Fixed Assets Register should be authorised by the Finance Manager/Accountant after sufficient investigation.
• Land, buildings and leasehold buildings should be revalued by independent professional valuers once every X years.
• Fixed assets’ useful lives should be reviewed once every X years.
• There should be adequate insurance coverage policy for fixed assets.
  

Fixed Assets Movements

• All fixed asset movements should be approved in accordance with the authority limits.
  
• Fixed Assets Transfer Form must be completed and acknowledged by the receiving department for all permanent transfer of fixed assets.
  

Fixed Assets Acquisition

• Additions to fixed assets (including long-term leases) should be approved in accordance with the authority limits. For long-term leases, the total amount committed should be used as the amount determining the level of approval.
  
• Fixed assets additions more than $1,000 (or FC equivalent) should be capitalised. Additions below $1,000 should be written off and monitored separately.
  
• For acquisitions of fixed assets less than $10,000, the relevant departments should refer to a pre-selected list of suppliers whom have been reliably evaluated for quality every x years.
  
• For acquisition of fixed assets more than $20,000, three quotations should be obtained.
  
• For contracts that cost more than $500,000, the open tender system should be adopted with a minimum of three quotations.
  
• Any variation orders more than 10% of the original approved contract should be re-approved in accordance with the authority limit.
  

Fixed Assets Disposal

• Fixed assets disposals should be authorised in accordance with the authority limits.
  

Reconciliation

• Fixed Assets Register should be reconciled to the GL on a monthly basis.
  

Segregation of duties

• There should be segregation of responsibilities between the following functions:
  

- Fixed assets custodians
- Approving authorities for fixed assets movement
- Maintenance of fixed assets account
- Fixed assets verification

Fixed Assets Count

• Physical fixed assets at all locations should be counted and checked against book records at least once every two years.
  

• Differences between fixed assets counts and book records should be investigated
  
• Thoroughly before adjustments are approved and made to the books.  Results from the investigation should be documented and reported back to Head Office.
  

Delegation of Authority (DOA)

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• Policies and procedures for procurement and vendor selection should be clearly documented and communicated.
  

Raising of Purchase Orders, approval of payments and signing of cheques should not be handled by a single employee.
Vendor Qualification and Selection

• New suppliers should be vetted against key performance criteria and approved by the Functional Managers.
  

• The key performance criteria should include:
  

- Product quality
- Cost effectiveness
- Timeliness of delivery

• Justification for non-competitive procurement should be documented and subjected to lower authority threshold than competitive orders in accordance with the authority matrix.
  

• Reasons for selecting a bid other than the lowest should be clearly documented and approved.
  

• Sole suppliers on long term arrangements should be reviewed annually to ensure continuity of competitive pricing.
  

• A list of approved vendors should be maintained in the Vendor Master File (VMF).
  

• Vendor performance should be reviewed annually (based on key performance criteria) and updated in the VMF.  This review should also cover volume/frequency of transaction (reflection of saleability of the stock) to determine if a particular product be returned to the vendor.
  

Purchase Commitments

• Purchase Orders should be controlled sequentially.
  

• The person authorising the Purchase Orders should confirm the need to purchase and evaluate it against the following “value for money” considerations:
  

- Economic quantity
- Pricing
- Quality of product
- Timeliness of delivery
- Alternative sourcing

• Purchase Orders should include information on:
  

- Supplier name
- Description of goods and services
- Prices
- Delivery location
- Freight and payment terms
Vendor Master File (VMF)

• Access to VMF maintenance (add, edit, delete) functions should be restricted. This function should be segregated from payment processing.
  

• Open Purchase Order information should be maintained to facilitate monitoring of open and unfulfilled past due orders.
  

• Edit lists of all VMF changes should be automatically generated monthly for independent review by Finance Manager.
  

Reconciliation

• Major suppliers’ statements should be reconciled to the Accounts Payable subsidiary ledger quarterly.
  

Segregation of Duties

• There should be segregation of duties between the following functions:
  

- Raising of purchase requisitions
- Approval of purchase requisitions
- Receipt of goods and services
- Vendor masterfile maintenance
- Payment processing
- General accounting
Delegation of Authority (DOA)

• The documented DOA should cover the authority to:
  

- Requisitions
- Exceptions to competitive  bidding and tendering requirements
- Exceptions to approved terms and conditions
- Procurement of stocks
- Approval of vendor invoices

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