ETHIOPIAN REVENUES AND

CUSTOMS AUTHORITY

DOMESTIC TAX AUDIT MANUAL

May 2014
Addis Ababa
 Preface
This manual is a guide for Auditors conducting audits of Tax payers. It outlines the
procedures to be followed. It provides a framework for planning, preparation, carrying out
an audit and making reports. It is particularly important in that it sets out a different and
more professional approach to audit. It describes many of the standard techniques used to
check or assess the correctness of a tax payer’s liability to direct & indirect tax. This
manual seeks to be comprehensive and it covers most of the recognized means of detecting
errors and underreported tax. Techniques used can often vary but the results are usually
very similar. Auditors need a sound understanding of tax Law and audits should be seen as
routine activity. In order to be effective communicators, accurate gatherers and interpreters
of relevant information, auditors must be courteous but firm in their approach without
being rude or arrogant. These skills can help prevent a hostile environment. Most tax
payers will accept a professional approach and will often voluntarily explain how their
business operates. Many tax payers will also accept that they make errors that must be
corrected. Auditors must nevertheless be alert to the possibility of evasion.
The manual is references book those Auditors who are conducting audits of tax payers. Not
everything in the manual will be applicable to all tax payers. In fact it is doubtful if
everything included in the manual will be applicable to any one tax payers. Auditors may
give their valuable suggestions based on their experience which will help to make further
improvement of this manual.
As part of a project under taken by ERCA, this manual has been collectively developed by
a working group team:
 Tsegay Asefa
 Belayneh Molla
 Gezahagh Hailemichael
 Simegnew Teshome
 Alem Tadesse
 Worku Degu
 Alem Tamrat
ERCA express sincere gratitude to the working group, for their tireless effort.

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 Table of Contents
Page
CHAPTER ONE ................................................................................................................................ 1
1. INTRODUCTION ................................................................................................................... 1
1.1. Country tax policy......................................................................................................... 1
1.2. ERCA Mission and Vision............................................................................................ 1
1.3. Values and Beliefs ........................................................................................................ 1
1.4. Tax audit policy and strategy ........................................................................................ 2
1.5. Audit policy framework ................................................................................................ 2
1.6. Policy principles............................................................................................................ 2
1.7. Organizational structure ................................................................................................ 3
1.7.1. Head quarters & Branch ..................................................................................... 3
1.8. Purpose & Scope of the manual .................................................................................... 4
1.8.1. Purpose of the manual ........................................................................................ 4
1.8.2. Scope of the manual ........................................................................................... 4
1.9. Implementation Remark ........................................................................................... 4
1.10. Fairness & Taxpayers Right ...................................................................................... 4
1.10.1. Fairness ............................................................................................................. 4
1.10.2. Confidentiality .................................................................................................. 5
1.10.3. Consultation Invoicing Disclosure .................................................................. 5
1.10.4. Dispute Resolution
CHAPTER TWO
2. Auditor’s Ethical code of conduct ......................................................................................... 6
2.1 Treats & safeguards’ ............................................................................................................. 7
CHAPTER THREE
3. Audit Framework ................................................................................................................... 9
3.1. Definition of tax Audit........................................................................................................... 9
3.2. Objective of The Audit’ ......................................................................................................... 9
3.3. Types of Audit ..................................................................................................................... 10
3.3.1. Comprehensive Audit............................................................................................ 10
3.3.2. Issue Audit……. ............................................................................................. …..10
3.3.3. Desk Audit ............................................................................................................ 11
3.3.4. Distinction b/n comprehensive & field issue audit ............................................... 11
3.3.5. Special Audit Project............................................................................................. 12
3.3.6. Advisory Visit Audit.............................................................................................. 12
3.3.7. Refund Audit ......................................................................................................... 13
3.3.8. Investigation audit ................................................................................................. 13
3.3.9. Deregistration Audit .............................................................................................. 13
CHAPTER FOUR
4. Risk Assessments ................................................................................................................ 14
4.1. Need for risk assessment Approach .................................................................................... 14
4.2. Understanding risk from taxpayer’s perspective ................................................................. 15
4.3. Analyzing risk & potential for collection ........................................................................... 15
CHAPTER FIVE
5. Audit approach & evidence
5.1. Audit Approach ................................................................................................................... 17
5.1.1. The substantive Procedure approach .................................................................... 17
5.1.2. The balance sheet approach .................................................................................. 17
5.1.3. The system based approach ................................................................................... 17
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 5.1.4. The risk based approach ........................................................................................ 18
5.2. Audit Evidence .................................................................................................................... 18
5.2.1. Type of audit evidence ............................................................................................ 18
5.2.2. Test of audit evidence............................................................................................... 21
5.2.3. Audit procedures for obtaining audit evidence......................................................... 22
5.3. Audit test .............................................................................................................................. 23
5.3.1. Type of audit test ...................................................................................................... 23
CHATER SIX
6. Audit Planning ..................................................................................................................... 25
6.1. Detailed planning phase ...................................................................................................... 27
6.1.1. Understanding business entity(in office procedure) ................................................ 27
6.1.2. Understanding business entity(at taxpayers premises procedure) ........................... 28
6.2. Risk, materiality & sampling .............................................................................................. 34
6.2.1. Audit risk .................................................................................................................. 34
6.2.2. Materiality ................................................................................................................ 36
6.2.3. Audit sampling ......................................................................................................... 37
CHATER SEVEN
7. Conducting The Audit ......................................................................................................... 42
7.1. Auditing the balance sheet ................................................................................................... 42
7.1.1. Audit asset account ................................................................................................... 42
7.1.2. Auditing of liability account..................................................................................... 55
7.1.3. Audit of equity account ............................................................................................ 57
7.2. Auditing profit & loss account............................................................................................. 57
7.2.1. Sales and other income ............................................................................................. 59
7.2.2. Cost of goods sold ................................................................................................... 68
7.2.3. Administration & distribution expense .................................................................... 71
CHAPTER EIGHT
8. Audit working paper .............................................................................................................. 72
8.1. Definition of working paper .......................................................................................... 72
8.2. Purpose of working paper .................................................................................................... 72
8.3. General guideline for working paper ................................................................................... 72
8.4. Content of working paper .................................................................................................... 73
8.5. Electronic for working paper .............................................................................................. 75
8.6. Safe guarding working paper .............................................................................................. 76
8.7. Reviewing working paper .................................................................................................... 76
CHAPTER NINE
9. Audit report .......................................................................................................................... 77
9.1. Auditor report authorization .......................................................................................... 78
CHAPTER TEN
10. Computer assisted audit techniques (CAAT) ..................................................................... 80
10.1. Advantage of Computer assisted audit techniques ...................................................... 80
10.2. The computer assisted audit process............................................................................ 81
10.3. CAAT software............................................................................................................ 82
CHAPTER ELEVEN
11. Review of audit ................................................................................................................... 83
11.1. Different level of review.............................................................................................. 83
11.2. How review process works .......................................................................................... 85
11.3. The role of review procedure in detecting material misstatement ............................... 85
CHAPTER TWELVE
12. Definition of Fraud .............................................................................................................. 86
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13. ANNEXES
13.1. PLANING PHASE .....................................................................................................
13.1.1. Audit Plan ..................................................................................................... i
13.1.2. Notice of intention to audit ......................................................................... iv
13.1.3. Entrance interview questions ....................................................................... v
13.2. EXECUTION PHASE ................................................................................................
13.2.1. Audit Program .......................................................................................... viii
13.2.2. Stock count sheet ........................................................................................ xl
13.2.3. Query sheet ................................................................................................... l
13.2.4. Time sheet.................................................................................................... li
13.2.5. Individual accounts Working papers .......................................................... lii
13.3. REPORTING PHASE ................................................................................................
13.3.1. Audit report template ................................................................................. liv
13.3.2. Exit conference ........................................................................................... lx
13.3.3. Assessment notification ........................................................................... lxiii
13.3.4. Recommendation letter ........................................................................... lxvii
13.3.5. Criminal transfer .................................................................................... lxviii

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 ACRONYMS

ASYCUDA++: Automated system for customs data base

CAAP: Computer Assisted Audit Process
CAAT: Computer Assisted Audit techniques
CIN: Code Identification Number
ERCA: Ethiopia Custom & Revenue Authority
GRN: Goods receiving note
IT: Income Tax
LTO: Large Taxpayers’ Office
MTO: Medium Taxpayers’ Office
SIGTAS: Standard Integrated Government Tax Administration System
STO: Small Tax payers Office
TOT: Turn over tax
VAT: Value Added Tax
VIN: Vehicle identification number
WHT: withholding tax

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 CHAPTER ONE

1. INTRODUCTION
The merger of the former Ministry of Revenue, Federal Inland Revenue and Ethiopian
Customs Authority, which took place on the 14th day of July 2008, established the
Ethiopian revenue and customs authority /ERCA/ by proclamation no 587/2008 G.C
has helped to build a modern organization that is committed to leadership and client
service.
ERCA is responsible for the administration of tax programs, as well as the delivery of
economic and social benefits.

1.1. Country Tax policy

Ethiopian tax policy is based on tax payers’ voluntary compliance i.e. self assessment. It is
geared towards promoting investment, supporting industrial development; and broadening
the tax base and decreasing the tax rate, at least maintaining the current reduced tax rates
compared to most other countries, in view of financing the ever-growing needs of the
government expenditure. ERCA has the mission for accomplishment of these policy
objectives.

1.2. ERCA`s Vision, Mission and Values

ERCA’s Vision, Mission and Value form the backdrop against which all policies,
procedures and operations should be designed and implemented. In summary:-
Vision: - “To be leading fair and modern tax and customs administration in Africa by
2020 that can be financing the Government expenditure through domestic
tax revenue collection“
Mission: - “ERCA shall promote the voluntary compliance of the taxpayers, ensure
integrity and develop the skill of the employees, support modernization,
trade and investment facilitation and harmonization of the taxes and
customs administration system, contribute to the economic development and
social welfare through effective revenue collection
1.3. Values and Beliefs
 Customer focus service delivery (Trust, Respect, Protect, Support);
 Protect the wellbeing of society
 Integrity
 Professionalism
 Law enforcement
 Team working
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  Ensuring the participation of women.

1.4. Tax audit policy and Strategy

The mission, vision and value statements of ERCA form the backbone of the tax audit
policy and strategy. The key guiding principles of the tax audit policy and strategy are
drawn directly from these statements. They are:-
 Fair and modern tax administration
 Effective revenue collection
 Promote voluntary compliance
 Develop the skill of ERCA’s employees
1.5. Audit Policy Framework
Audit is defined as the structured examination of a business’ relevant commercial systems,
financial and non-financial records, physical stock and other assets, internally generated
data and that produced independently of the business. The main purposes of Tax Audit in
ERCA are to:

 Establish the extent of a risk or risks and quantify any errors which may have
arisen as a result;
 Improve future compliance;
 Support those who wish to comply, and
 Deter non-compliance.
A by-product of the above may be the detection of material and deliberate error and fraud.

1.6. Policy Principles

The main principles of ERCA tax audit policy and strategy are:-
 Facilitation vs. Control,
 Taxpayer Relationship,
 Improved Tax Audit Management and
 Auditor Professionalism.

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 1.7. Organization and Structure
1.7.1.Head Quarters and Branch Offices
There needs to be clear accountability for strategic management and support of the audit
program at headquarters level and delivery of the program at Branch offices (i.e. the large
taxpayer’s office (LTO), medium taxpayer’s office (MTO), small taxpayers office (STO)
and Micro taxpayers offices.) The distinction between the role of headquarters and Branch
offices is described below.
1.7.1.1. Role of the headquarters
 Set objectives, policies, priorities and strategies for the audit program.
 Establish institutional audit targets,
 Collect and forward feedback for the development and continuous improvement a
case selection criterion.
 Develop and maintain computer systems to aid audit and reporting.
 Provide training materials, manuals, technical assistance, forms, and other support
to auditors.
 Design structures at all levels and assign responsibility to positions.
 Communicate legislative changes, policy decisions and procedures to branch
offices.
 Conduct quality assurance programs to ensure consistency in policy and
procedures.
 Develop and disseminate industry/sector trends to guide audit operations.
 Identify training needs, and facilitate both refresher and specialized training.
 Evaluate and monitor program performance against targets.
1.7.1.2. Role of the Branches offices
 Develop operational plans aligned to corporate goals and objectives.
 Select cases for audit based on established risk criteria.
 Allocate audit cases to staff according to experience and skills.
 Implement internal systems to ensure quality audits.
 Identify training needs and inform headquarters
 Monitor and evaluate the achievement of operational plans on a regular basis.
 Conduct the audit on selected tax payers, and undertake analysis of compliance.
 Implement compliance projects that are appropriate to the office.

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 1.8. Purpose and Scope of The Manual
1.8.1. Purpose of the Manual
The purpose of this manual is to provide tax auditors with a working appreciation of the
audit work. The audit manual sets out the audit framework and related policies that govern
the conduct of all audits.
 It represents the audit and recommended audit procedures with which an auditor
should be familiar with in order to conduct an audit.
 It is also intended to provide the user with a clear understanding of the audit
function.
 It gives guidance to auditors in complying with tax laws.
 It assists auditors in achieving the highest possible quality audits.
 It describes how audits should be selected, planned, conducted and reported.
1.8.2. Scope of the manual
This manual offers detailed guidance on the use of audit methodologies, which if applied
correctly will enable the ERCA to address identified risks in revenue systems that may
affect the accurate declaration and timely payment of tax. It should be used as a reference
manual for all Audit staff conducting tax audits.
This manual is aimed at Taxation staff and should not be relied up on by taxpayers in
calculating their taxes and duties. In cases of differences between this manual and the
applicable tax laws/regulations/directives, the tax laws/regulations/directives will prevail.
1.9. Implementation remark
Auditors should find it convenient to use always this guide in performing their audit duties.
Make use of attached working papers which is used for both Desk and Field audits to
create a standardized documentation in all audit work performed.
Finally this manual should be used in conjunction with the tax audit training module, tax
audit policy and strategy and tax laws.
1.10. Tax Payers’ Rights
1.10.1. Fairness
In order to maintain public confidence and encourage voluntary compliance, ERCA should
create an atmosphere where taxpayers feel and believe they are being fairly treated.
For the audit to be completed efficiently and within a reasonable period of time, the
cooperation of tax payers with regard to source document availability and timely query
disposal is essential. The auditor also is required to accomplish the audit with a minimal
disturbance of taxpayers’ staff.
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 1.10.2. Confidentiality
At ERCA, the privacy and confidentiality of tax payer information is protected and
managed in accordance with the confidentiality provisions of the income tax proclamation
286/2002 article 39.
Tax payer information will not be disclosed to unauthorized person unless one of the
following applies:-
 The taxpayer has provided ERCA with consent. The consent must be in writing and
signed using ERCA`s standard forms, or some other form of written consent that
provides all the information addressed on ERCA standard forms.
 Specific provisions in the legislation administered by authorized bodies in Ethiopia
provide for the disclosure of information.
Audit staff must be aware of the importance of using and disclosing taxpayers` confidential
information only when consistent with the confidentiality provisions of the legislation.
1.10.3. Consultations Involving Disclosures
Consultations involving disclosure of information with a local government or other
Federal department or agency should be addressed to the concerned body.
The one who is requested for consultation will still consult the prosecution directorate
where there is any doubt about the use and disclosure of taxpayer and confidential
information.
1.10.4. Dispute Resolution
If the taxpayer believes that they have not received the full benefit of their entitlements and
have been unable to reach an agreement with audit, they have the right to a formal review
of their file. In this situation, appeal officers who were not involved in the original decision
are available to conduct a formal and impartial review.

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 CHAPTER TWO

2. AUDITORS’ ETHICAL CODE OF CONDUCT

A code of ethics is a set of values and principles, which should guide the auditors in their
daily work. Auditor's independence, power and responsibility in the line of their duty
should demonstrate high ethical values.
It is especially important that auditors are looked upon with confidence, security and trust
by the taxpayers they audit. They can encourage this confidence by mastering and applying
the ethical requirements while exercising their functional duty.
Every violation of professional behavior or inappropriate behavior in their personal lives
affects the integrity of the entire tax office as well as the quality and validity of their work
and they can create suspicions as to the credibility of audit itself.
Besides the code of conduct and ethical rules stipulated in the legislation of ERCA and
employees administrative Regulation No.155/2000, tax auditors should comply with
professional ethical requirements for all audit engagements. These requirements relate to
the following fundamental principles:
 Integrity- is the principal value in the Code of Ethics. It is the auditors' duty to
comply with high standards of behavior (honesty, fairness, justice and
credibility in their work etc…). The integrity of the auditors and audit section
should rely on the principles of independence and objectivity.
 Auditors' independence- means that the auditors` decision should not be
affected by personal or external interests. Auditors should not only try to be
independent from the taxpayer and interest groups, but they should also be
objective and impartial in the issues they audit. Objectivity and impartiality
are necessary in every work performed by the auditors, and much more so in
their reports. Conclusions and reports should be based on facts gathered
according to tax audit standards.
 Professional competency and due care- Auditors should make sure that their
work is reliable, timely, useful, convincing and neat. The auditors have the
professional obligation to update and improve the required knowledge and skills
to fulfill their professional responsibilities and they should adopt the highest
possible quality methods and practices when conducting an audit.
 Professional behavior- auditors should comply with relevant laws and

6
 regulations and should avoid any action that discredits the profession as well to
the institution.
 Confidentiality or professional secrecy- auditors should not disclose
information obtained in the course of the audit to un-authorized, either orally or
in writing, except for the purposes of meeting ERCA`s legislation or other
concerned bodies.
Auditors should respect the methods applied by other professions in their
professional activity. When making personal declarations in a public context,
the auditors should clarify that they are speaking from their personal position
and not on behalf of tax office.
2.1.Threat and Safeguards

2.1.1.Threats

Threats are those conditions or activities that may impair the auditors from acting ethically.
An auditor has an obligation to evaluate any threats to compliance with the fundamental
principles, when the tax auditors know or could reasonably be expected to know, of
circumstances or relationships that may compromise compliance with the fundamental
principles.

Many threats fall into one of the following categories:

 Self-interest threat- when an auditor or his/her immediate or close family

member has financial or other interests.
 Self-review threat- when an auditor re-evaluates his own judgment.
 Advocacy threat- when an auditor promotes an opinion that compromises his
own objectivity.
 Familiarity threat- when an auditor due to a close relationship, becomes too
sympathetic to the interests of others.
 Intimidation threat- when an auditor is threatened from acting objectively.

Other than clearly insignificant threats, an auditor should apply safeguards to either
eliminate or reduce the threat to an acceptable level so that the fundamental principles are
not compromised.

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 2.1.2.Safeguards

Safeguards are those conditions or activities which would help the auditor to solve ethical
dilemmas or threats to ethical stand.

 Safeguards created by the profession, legislation or regulation, such as

professional standards, continuing professional development, education and
training.
 Safeguards in the work environment: - The purpose of safeguards is to increase
the likelihood of identifying or deterring ethical dilemmas. However, if a
professional has violated the Code without knowing he or she has done so, once
discovered the auditor must make immediate remedial action. The violation may
or may not compromise compliance dependent on the nature and significance of
the matter.

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 CHAPTER THREE
3. TAX AUDIT FRAMEWORK
3.1. Definition of Tax Audit

A tax audit is a systematic examination of business`s relevant commercial system to

determine whether a taxpayer’s declaration states the tax liability correctly and complying
with the provisions of the tax laws and related subsidiary legislations.
Auditing involves examination of financial statements, books of accounts and vouchers of
a taxpayer by Tax Auditors so as to ascertain whether the taxpayer has accurately
considered revenues and expenses when determining the taxes shown in the declarations as
per the requirements of the tax laws. It also involves other approaches such as observation
of premises, direct monitoring of receipts in cash businesses, use of mark-up techniques
and analysis of key ratios.
3.2. 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.
To achieve these objectives, the following actions are required;
 Verifying that the recorded particulars of a taxpayer are correct and, if not, ensuring
corrective action is taken,
 Establishing, or confirming, if previously visited, what activities are carried on by
the business, what records are maintained and whether they sufficiently and
accurately record the activities of the business to enable the tax liabilities to be
correctly determined. If necessary, agreeing with the taxpayer what corrective
action is needed,
 Ensuring that the taxpayer or his agent understands clearly the operation of the
taxes and the requirements of the Tax Laws as they affect their business,
 Assessing the degree to which risks are found and, if there are any, what measures
need to be taken to counter them,
 Checking the correctness of the tax return(s) being verified and that any tax due is
paid,
 Ensuring that, if any further tax, refund or a repayment is due, it is correctly
identified and accounted for,
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  Being alert for any indications of fraud and determine adequate audit procedure are
in place to quantify the risk of fraud or malpractice.
 Ensuring that any unsatisfactory features discovered on an earlier audit have been
corrected. Divert the taxpayer’s attention to any discovered features on the current
audit and either noting them in the audit report for attention next time or, if of a
serious nature, arranging a further audit in the near future to ensure that they have
been corrected.
3.3. Types of tax Audit
The types of audits are defined by three major factors, namely:-
a) The audit scope and intensity
b) The period(s) under examination
c) The location of the audit activity
The major types of audit in ERCA are described below:-
3.3.1. Comprehensive Audit
 A comprehensive audit is all-encompassing in scope and entails an in-depth
examination of all information relevant to the calculation of a taxpayer’s tax liability
for all tax type for a given period. Given the broad scope, comprehensive audit is
typically costly to undertake in terms of time and resources, and thus reduces the rate
coverage of taxpayers that could otherwise be audited.
 Comprehensive audit is classified into Very Complex, Complex and simple. This
classification will depend on a number of factors ranging from size, group, trade or
profession, volume of records or transactions, nature of business to location. In practice,
the scope and nature of any comprehensive audit activity to be undertaken will depend
on the available evidence pointing to the likely risks of non-compliance and a taxpayer’s
history. An audit may also be classified and justified as complex or very complex
because of the taxpayer’s financial and/or business activities which are unusually
complex.
3.3.2. Issue Audit
 This is a limited scope audit that may be confined to specific issues in a tax return
and/or a particular tax type. The objective here is to examine key potential risk
areas of non-compliance. This type of audit is recommended because it consumes
relatively fewer resources than comprehensive audits and allows for an increased
coverage of the taxpayer population. The audit will normally focus on a single tax
type, period or item. Where a field issue audit escalate the case into a
comprehensive audit, the team coordinator`s concurrence must be sought and the

10
 procedures prescribed for comprehensive audits adhered to.
Issue audits may be conducted either on the Desk or in the Field:-
3.3.2.1.Desk Issue Audit
This can be conducted in relation to specific issue(s) of a taxpayer or enterprise
when the auditor is confident that all the necessary information can be ascertained
by conducting an examination in the office. All the required or relevant
information or data may be accessed from internal sources or official reference
without the need to contact the taxpayer.
3.3.2.2.Field Issue Audit
 This is the escalation of a desk issue audit into a field activity or exercise. It is
important to remember that the audit is limited to key issues of compliance or to a
tax type or period. Field issue audit is commonly used in examining whether a
taxpayer has met his/her obligations in respect of PAYE, VAT/TOT and Excise tax,
Withholding Tax or Income Tax normally for a specified tax period.
 Care should always be taken to guard against being derails and thus progressing
field issue audits into comprehensive audits. The objective of the field issue audit
is to focus on a shorter period for a single tax item for a faster and effective
outcome. This audit type should therefore be the commonest and most effective
audit type to be utilized for faster results.
3.3.3. Desk Audit
A Desk audit is used as a preliminary examination of declarations analyzing accuracy,
completeness, ratios and crosschecking information to determine if further audit or
investigation is warranted. By implication, returns which are stated on certain level of risk.
3.3.4. Distinction between Comprehensive and Field Issue audits

a) In order for an audit to be classified as Comprehensive, the following factors must

be evidenced-
 The audit must be detailed and involve an in-depth inquiry into all aspects of
compliance,
 The audit must cover all tax types to which the taxpayer is liable;
 The audit must cover a period of at least one accounting year;
 The audit process involving all procedures outlined under Pre-engagement
activities, Planning and Evaluation activities, Execution or Performance of the audit
activities, and Audit conclusion activities;
 The relevant documentation in respect of the audit assignment i.e. from initiation to
conclusion must be kept in an Audit Box File;
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b) In the case of Field-Issue Audits, the requirements are as follows:–
 A Field Issue audit will ordinarily emanate from a desk review of returns and
disclosures made by the taxpayer in financial statements, together with any
privileged third party information;
 A Field-Issue audit will normally target an issue in a particular tax head and cover a
specified period, depending on the tax head under review;
 A specific issue(s) must be identified and the field activity must be sanctioned by
the Team coordinator;
 A Field-Issue audit must involve a review of the taxpayer’s primary records
relating to the identified subject matter at the taxpayer’s premises or in the tax
office, as the case may be;
 Documentation in respect of the specific review must be kept in a separate file
folder;
 The Standard Audit Working Papers must be used to report the specific review
activity. Additional reporting on the field assignment may be provided where the
case warrants.
3.3.5.Special Audit Projects
Audits can be organized as a separate project for a targeted or specific group of taxpayers
in a given period to verify compliance in the sector. These audit projects may cover an
industry, trade, profession or a line of businesses. They will consist of specific checks and
are used to address a particular risk or to establish the degree of non-compliance in a
particular sector, industry or trade. For this audit type to be effective, all taxpayers in the
targeted sector must be considered and handled within the shortest time possible.
3.3.6.Advisory Visit Audits
All registered taxpayers or businesses need to be visited with the aim of offering advice on
tax obligations and the taxpayer’s rights, and any other developments pertinent to the tax
system and administration. It is highly recommended that auditors carry out these audits to
keep abreast with compliance trends of their taxpayers and offer timely advice so as to
improve compliance. These audits are expected to be spontaneous and hence should not
take more than a day.

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 3.3.7.Refund Audits
This is the verification of a taxpayer’s claim for a tax refund prior to processing the refund.
The predominant claim for refund is VAT and/or WHT which is submitted monthly. The
details are specified in the Refund Guidelines.
3.3.8.Investigation Audit

Involve the most serious cases of non-compliance with Criminal implications. Require
special skills in investigation and evidentiary requirements as they often involve seizure of
records, taking testimonies from witnesses and preparing briefs for courts.

3.3.9.De-Registration Audits
In order to establish outstanding obligations or liabilities, a de-registration audit will be
conducted for all reported cases of cessation of business, winding up or uncertainty. The
audit will focus on determining taxes due and any other pertinent issues. The objective of
de-registration audit is to ensure orderly exit from the tax register with the attendant
obligations and liabilities sorted out.

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 CHAPTER FOUR
4. RISK ASSESSMENTS
4.1. Need For Risk-Based Approaches
No tax administration has, nor should have the resources to control 100 percent of their tax
payers and transaction base. Instead, they increasingly rely on risk management
methodologies to allocate better the available scarce resources in order to achieve an
optimal compliance strategy.
Risks are those events that could negatively impact on an organization’s ability to deliver
on its mission. Risk assessment must therefore be an integral part of the entire audit
process and should involve:-
 a review of the economy to identify risk-prone sectors;
 a review of the sectors to profile the various operators therein; and
 a profile of the operators in order to identify risky trends or behavior.
Risk assessment should also involve a review of the internal systems within an
organization to obtain a picture of any in-house factors that influence the non-attainment of
audit objectives.
The adoption of risk-based approaches goes beyond audit case selection and applies to
more than direct revenue risk. A tax administration will usually have as part of its
objectives, the need to deliver a certain amount of revenue to the government to meet
budget objectives, but this will usually be supplemented by other objectives such as:
improving compliance; maintaining expenditure within a specific budget; minimizing
taxpayer compliance costs; and maintaining community confidence in the tax system (often
an important political objective). The administration therefore has to manage the risks of
failing to achieve each of these objectives and not just the risk of non-compliance.
From an audit perspective, management needs to complement the administrations
objectives. This requires a review of all activities related to the audit program, and to
assess the value they add to meeting the administration’s objective. Only by having a clear
understanding of the objectives, is it possible to formulate a risk-based approach? As
resources are limited, the administration needs to allocate resources to activities that will
provide the greatest impact on the achievement of objectives; this usually means gaining
the biggest improvements in voluntary compliance at the lowest cost to both the taxpayer
and the administration, while maintaining community confidence in the tax system. If
activities performed do not contribute to the attainment of these objectives, management
needs to reconsider the performance of such activities. As there are likely to be more risks
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identified than can be adequately addressed by the administration, it is necessary to rank
and prioritize the risks according to the likelihood and consequence of their impact on the
objectives.
4.2. Understanding Risk From a Taxpayer`s Perspective
Taxpayers can use a number of options to avoid paying the correct amount of tax. For
instance they can decide to:
 stay out of the system by not registering;
 not maintain books and records (those who are obliged by law);
 not submit declarations on time;
 submit incorrect declarations;
 not pay outstanding taxes;
 make aggressive interpretation of the law;
 enter into schemes or tax avoidance arrangements that hide or alter the commercial
reality of their dealings; and
 Negotiate a compromised assessment or payment.
Non-compliance and tax avoidance therefore can take many forms and, for this reason, the
tax administration needs to develop a range of strategies to treat particular risks and have
the flexibility to apply them, rather than being constrained by standardized and mandatory
processes. It is imperative that the audit programs seek to understand taxpayer’s behavior
and adopt appropriate treatment strategies, including a range of audit methods and
techniques. Hence, risk identification is more than selecting a case for audit. It should
involve identifying and articulating the nature of the risk so that the case is appropriately
allocated and acted upon.
4.3. Analyzing Risk and Potential for Collection of
Assessment/Reassessment
Selecting files for audit should always be based on sound risk assessment. Sound risk
assessment includes evaluating the potential collectability of a debt that could arise as a
result of an audit action. Difficulty to collect a potential debt is only one aspect to consider
in selecting a file for audit or closing a file early. The collection of an assessment is an
important final step in the audit process. While the Branch does not intend to
overemphasize the collection of an assessment, it must be recognized that uncollectible
assessments are not in the best interests of the ERCA.

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 4.3.1. Audit File Assignment
Audit files are assigned from the inventory of files selected by the concerned team and
from other sources. The team coordinator generally assigns audit files to the individual
auditors based on gross revenue of the taxpayers and categories established for each group
and level of auditors.
4.3.2. Other Assignment Criteria
In addition to gross revenue, the following factors must be considered when assigning
audit files in order to be transparent:-
 the nature of the audit
 rotation or specialization of auditors
 training and development of auditors
 Idle or on duty of auditors (work in process)

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 CHAPTER FIVE

5. AUDIT APPROACHES AND EVIDENCES

5.1. Audit Approach
The approach adopted by ERCA auditor to specified audit assignment will be a key
factor in determining outcome of the audit. If auditors fail to adopt the correct audit
approach then the likelihood of audit failure increases, failure which could lead to a
damaged reputation and potentially costly for ERCA and taxpayer.

Essentially there are four different audit approaches:

1. The substantive procedures approach
2. The balance sheet approach
3. The systems-based approach
4. The risk-based approach
5.1.1. The substantive procedures approach
This is also referred to as the vouching approach or the direct verification approach. In this
approach, audit resources are targeted on testing large volumes of transactions and account
balances without any particular focus on specified areas of the financial statements.
5.1.2. The balance sheet approach
In this approach, substantive procedures are focused on balance sheet (statement of
financial position) accounts, with only very limited procedures being carried out on income
statement/profit and loss account items. The justification for this approach is the notion
that if the relevant management assertions for all balance sheet (statement of financial
position) accounts are tested and verified, then the profit/loss figure reported for the
accounting period will not be materially misstated.
5.1.3. The systems-based approach
This approach requires auditors to assess the effectiveness of the internal controls of an
entity, and then to direct substantive procedures primarily to those areas where it is
considered that systems objectives will not be met. Reduced testing is carried out in those
areas where it is considered systems objectives will be met.

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 5.1.4. The risk-based approach
In this approach, audit resources are directed towards those areas of the financial
statements that may contain misstatements (either by error or omission) as a consequence
of the risks faced by the business.
ERCA is emphasizing the risk based approach. So every audit will be directed towards this
approach, which is more explained as follows:-
Given the nature of the audit process, every audit assignment presents a different challenge
to ERCA, with no two audit assignments being the same. For example, no two entities are
the same in terms of business sector, location, size, employees, governance issues, ethos,
and complexity of operations. There is no one single approach to auditing which ensures
the performance of a perfect audit. However, it is generally accepted that for most entities
of size, the risk-based audit approach will minimize the possibility of audit objectives not
being met. Auditors to adopt a risk-based approach to audit in so doing, it requires
auditors to make risk assessments of material misstatements at the financial statement and
assertion levels, based on an appropriate understanding of the entity and its environment,
including internal controls.

5.2. Audit Evidence

Audit evidence is all the information used by the auditor in arriving at the conclusions on
which the re-assessment of tax returns and includes the information contained in the
accounting records underlying the financial statements and other information. A
considerable amount of the audit team’s work consists of obtaining, examining and
evaluating evidential matter.
The measure of the validity of evidence for audit purposes lies in the nature of the evidence
and the judgment of the audit team. Auditors are not expected to examine all information
that may exist.
Evidence may be categorized as follows.
5.2.1. Types of Evidence
 Physical  Confirmation
 Documentary  Recalculation
 Inquiry  Re-performance
 Analytical

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Physical
Physical evidence is obtained by direct inspection or observation of activities of people,
property or events. Such evidence may be documented in the form of memorandum
summarizing the matters inspected or observed photographs, charts, maps or other types of
physical evidence. When possible, important inspections or observations should be made at
least by two assigned auditors.
Documentary
Documentary evidence consists of information such as accounting records, invoices,
letters, contracts and management information on performance. It includes internally
generated documents prepared by the tax payer and third party documents.
Inquiry
Inquiry consists of seeking information of knowledgeable persons, both financial and
nonfinancial, inside or outside the entity. Inquiry is an audit procedure that is used
extensively throughout the audit and often is complementary to performing other audit
procedures. Inquiries may range from formal written inquiries to informal oral inquiries.
Evaluating responses to inquiries is an Integral part of the inquiry process.
Inquiry normally involves:
• Considering the knowledge, objectivity, experience, responsibility, and
qualifications of the individual to be questioned.
• Asking clear, concise, and relevant questions.
• Using open or closed questions appropriately.
• Listening actively and effectively.
• Considering the reactions and responses and asking follow-up questions.
• Evaluating the response.
In some cases, the auditor should obtain replies to inquiries in the form of written
representations from management. For example, when obtaining oral responses to
inquiries, the nature of the response may be so significant that it warrants obtaining written
representation from the source.
Responses to inquiries may provide the auditor with information not previously possessed
or with corroborative audit evidence. Alternatively, responses might provide information
that differs significantly from other information that the auditor has obtained, for example,
information regarding the possibility of management override of controls. In some cases,
responses to inquiries provide a basis for the auditor to modify or perform additional audit
procedures. The auditor should resolve any significant inconsistencies in the information
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obtained.
The auditor should perform audit procedures in addition to the use of inquiry to obtain
sufficient appropriate audit evidence. Inquiry alone ordinarily does not provide sufficient
appropriate audit evidence to detect a material misstatement at the relevant assertion level.
Moreover, inquiry alone is not sufficient to test the operating effectiveness of controls.
Although corroboration of evidence obtained through inquiry is often of particular
importance, in the case of inquiries about management's intent, the information available to
support management's intent may be limited. In these cases, understanding management's
past history of carrying out its stated intentions with respect to assets or liabilities,
management's stated reasons for choosing a particular course of action, and management's
ability to pursue a specific course of action may provide relevant information about
management's intent.
Analytical
Analytical evidence is obtained through analysis or Verification of information. Analytical
evidence can consist of:-
 Computations (anything reducible to numbers)
 Comparisons with
• Prescribed standards
• Past operations
• Other operations, transactions or performances
• Laws or regulations
• Legal decisions
Analytical Procedures
Analytical procedures consist of evaluations of financial information made by a study of
plausible relationships among both financial and non-financial data. Analytical procedures
also encompass the investigation of identified fluctuations and relationships that are
inconsistent with other relevant information or deviate significantly from predicted
amounts.
An analytical procedure might be examining, which is the auditor's use of professional
judgment to review accounting data to identify significant or unusual items and then to test
those items. This includes the identification of abnormal individual items within account
balances or other data through the reading or analysis of entries in transaction listings,
subsidiary ledgers, general ledger control accounts, adjusting entries, suspense accounts,
reconciliations, and other detailed reports.

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Confirmation
Confirmation, which is a specific type of inquiry, is the process of obtaining a
representation of information or of an existing condition directly from a third party. For
example, the auditor may seek direct confirmation of receivables by communication with
debtors. Confirmations are frequently used in relation to account balances and their
components but need not be restricted to these items. A confirmation request can be
designed to ask if any modifications have been made to the agreement, and if so, what the
relevant details are. For example, the auditor may request confirmation of the terms of
agreements or transactions an entity has with third parties. Confirmations also are used to
obtain audit evidence about the absence of certain conditions, for example, the absence of
an undisclosed agreement that may influence revenue recognition.
Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation can be performed through the use of information technology, for example,
by obtaining an electronic file from the entity and using Computer Assisted Audit
techniques /CAATs/ to check the accuracy of the summarization of the file.
Re-performance
Re-performance is the auditor's independent execution of procedures or controls that were
originally performed as part of the entity's internal control, either manually or through the
use of CAATs, for example, re-performing the aging of accounts receivable
5.2.2. Tests Of Evidence
The working papers should contain the details of the evidence and disclose how it was
obtained. The evidence should be presented following the rules of relevancy, competency
and sufficiency.
Relevancy
Relevancy refers to the relationship of evidence to its use. The information used to prove
or disprove an issue is relevant if it has a logical, sensible relationship to that issue.
Information that is irrelevant should not be included as evidence or made part of the
working papers. However, this requirement does not rule out making appropriate notes or
observations relative to other potential problem areas.

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 Reliability
Evidence is competent when it is reliable and the best attainable through reasonable
methods. As reviews are planned and carried out, the soundness and credibility of the
evidence should be assessed on an ongoing basis. In collecting working paper support,
audit teams should obtain the "best" evidence possible relative to the review objectives.
The following presumptions are useful in judging the competency of evidence.
Evidence obtained from an independent source is more reliable than that secured from the
audited organization.
 Evidence developed under a good system of internal control is more reliable than
that obtained where such control is weak, unsatisfactory or nonexistent.
 Evidence obtained through physical examination, observation, computation and
inspection is more reliable than evidence obtained indirectly.
 Original documents are more reliable than copies.
 Evidence obtained through inquiry under conditions where persons may speak
freely is more credible than testimonial evidence obtained under compromising
conditions (e.g., where the persons may be intimidated).
Sufficiency
Sufficiency is the presence of enough factual and convincing evidence to support the audit
team’s findings, conclusions and recommendations. Determining the sufficiency of
evidence requires judgment. Sometimes, two sources of evidence may conflict. To
determine which is more precise, the evidence must be impartially judged for significance
and completeness. When appropriate, statistical methods should be used to establish
sufficiency.
5.2.3. Audit Procedures for Obtaining Audit Evidence
The auditor should obtain audit evidence to draw reasonable conclusions by performing
audit procedures to:
I. Obtain an understanding of the entity and its environment, including its internal
control, to assess the risks of material misstatement at the financial statement and
relevant assertion levels (audit procedures performed for this purpose are referred to
as risk assessment procedures)
II. When necessary, or when the auditor has determined to do so, test the operating
effectiveness of controls in preventing or detecting material misstatements at the
relevant assertion level (audit procedures performed for this purpose are referred to as
tests of controls); and

22
 III. Detect material misstatements at the relevant assertion level (audit procedures
performed for this purpose are referred to as substantive procedures and include tests
of details of classes of transactions, account balances, and disclosures, and substantive
analytical procedures or credibility test).
5.3. Audit test

An audit test is a procedure performed by a tax auditor in order to assess the accuracy of
various financial statement assertions. The two common categorizations of such tests are
System test and substantive tests. Both types are used in tax audits in order to reach
established audit objectives, as can be outlined in audit checklists or determined based on
the results of audit questionnaires. These tests typically are performed on a sample basis
over an existing group of similar transactions. Sampling approaches can either be statistical
or non-statistical, with the ultimate goal being to obtain the most representative sample of
the population before testing begins.
Aims of testing
One common outcome of testing is the identification of individual entries that may
indicate the possibility of error and which may therefore warrant further investigation of
internal control procedures. Testing in isolation will therefore not necessarily replace other
audit activities such as observational procedures, but rather form part of an overall
assurance program.
5.3.1. Types of audit test
System tests
System testing is used to test the operation of internal controls to determine if they are
being applied consistently and correctly. An auditor will seek to achieve a reasonable level
of audit assurance that such controls are operating properly. Examples of system tests
include
 confirm that checks of goods back to supplier invoice are being performed;
 stock-takes are being performed;
 reconciliations taking place;
 verification of the existence of error reporting routines;
 evidence that suspense files are routinely maintained;
 evidence that master file amendments have an audit trail and are authorized;
 existence of set instructions; and
 A check that purchase invoices are authorized prior to posting.

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 Substantive tests
Substantive tests are applied to determine if transactions comply with legislative
requirements and are completely and accurately recorded. The degree of substantive testing
applied will be influenced by the results of earlier system testing, in that strong controls
may require less substantive testing whilst weaker controls may require more. There are
two types of substantive audit tests, those on specific items and credibility tests

I. Specific Items:

Tests on specific items seek to prove that specific transactions have been correctly
accounted for. In the case of computerized systems, these tests will probably be
undertaken using computer assisted audit techniques (CAATs).

II. Credibility tests:

Credibility tests take a broader picture and examine groups of transactions or the
whole business’ activity. They can be useful in determining whether the level of
declarations is credible or consistent with other information, sometimes obtained from
entirely independent sources. Credibility testing can successfully test for the overall
completeness of the trader’s records and declarations and be performed at the planning
and testing stages. The audit team coordinator may be used when the teams are
planning, undertaking and reviewing credibility tests.
There are three main types of credibility testing:

a) Predictive Analysis – a modeling process based on combining financial,

production or other external data to develop a prediction of a Declaration. This
might include techniques such as, mark-up
b) Trend Analysis – comparisons over time or with similar organizations in a same
industry. Generally, the lower the level of trend analysis, e.g. at department or
income type level, the clearer any fluctuations can be seen and queried. Trend
analysis can quickly identify early indications of problem declarations across tax
periods.
c) Ratio Analysis – derives information in relation to profitability, liquidity, gearing
and going concern status, as well as overall accounts credibility. This analysis can
also look across sectors at key ratios in similar businesses.
These techniques could be used to identify risk, which may then require audit activity.

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 CHAPTER SIX
6. AUDIT PLANNING
Audit planning entails developing an overall audit strategy and a detailed plan for the
nature, timing and extent of the audit.
The auditor performs planning to determine an effective and efficient way to obtain the
evidential matter necessary to report on the taxpayer`s tax returns. The nature, extent, and
timing of planning vary with, for example, the entity's size and complexity, the auditor's
experience with the entity, and the auditor's knowledge of the entity's operations.
A key to a quality audit, planning requires the involvement of senior members of the audit
team. Although concentrated in the planning phase, planning is an iterative process
performed throughout the audit. For example, findings from the internal control phase
directly affect planning the substantive audit procedures. Also, the results of control and
substantive tests may require changes in the planned audit approach.
Auditors should consider the needs of, and consult in a timely manner with, other auditors
who plan to use the work being performed, especially when making decisions that require
the auditor to exercise significant judgment.
Detailed audit planning

The level of detail required will depend on the size and complexity of the system to be
audited and the audit product to be used. This detailed planning process should clarify
the taxpayer’s perception of what will be provided and the audit team’s perception of
what is required.

By the end of the detailed planning stage, the audit team should have:

 an understanding as to why the audit was selected;

 formulated detailed objectives for the audit to address the specific identified
risks;
 defined the scope and boundaries of the audit (e.g. period of interest, group
companies and departments to be included);
 Identified the resources required, including tax audit personnel, expert
advice.
 agreed the documentation to be produced as a result of the audit;
 a preliminary understanding of the taxpayer (i.e. business structure, location,
activities etc);
 a preliminary understanding of the system being audited (i.e. size,
importance, revenue implications etc);

25
  An understanding of management expectations of the audit.

Objectives for the Audit

Objectives must be set to address the identified risks. These will be agreed by the audit
team coordinator and the auditor and should be as specific as possible. Vague
objectives produce unfocused audits.

These objectives should take account of:

 inherent risks/specific risks ;

 industry risks and other revenue risk such as customs – this may require
consultation with other units of Expertise, customs specialists or Intelligence
and risk management analysts;

 Audit precedents, errors or irregularities identified by previous audits. An

Audit History Database should be used to assist;

 irregularities identified in other regimes, in order to generate a genuine whole

business approach;

Other considerations at the planning stage

Previous audit work should always be reviewed as part of the planning stage. This
should include audit reports, working papers, system flowcharts, software package
reviews detailed known controls and weaknesses and previous management letters and
outcomes.

The audit team may also wish to consider the relevance of any or all of the following
at the planning stage:

 Details of any prior rulings given which impact on the system e.g. allowed
deductions, depreciation allowances etc.

 return or declaration details for the tax system being audited – a copy of the
working papers with the “end” figures highlighted so that again the auditor
knows what they are responsible for checking;

 tax period dates;

 Details of the last date an assessment may be raised for periods that may fall
out of time during the audit. It may be possible to raise protective or
confirmed assessments to prevent tax loss;

26
  Details of any voluntary disclosures or assessments rose due to system errors.
Where these are to also be audited, the scoping document should include
reference to these as a specific objective;

 particular points of law;

 system interfaces (with other client systems or with SIGTAS or ASYCUDA

systems); and

 Information about the business that may impact on the timing of the audit
e.g. external or internal audits that are planned.

6.1. Detailed Planning Phase

6.1.1. Understanding of the Business Entity (In-office procedures)
Before commencing the audit, the auditor should conduct as much research on the taxpayer
as necessary to become familiar with the taxpayers operations, possible compliance issues,
specific legislation applicable to the taxpayer and sector specific issues. The inclusion of
comprehensive and pertinent information in the taxpayers file, obtained through previous
audits or enforcement actions, is essential to the effective planning and conduct of the
current audit assignment. In addition, effective pre-planning and familiarization with the
taxpayer`s operations and accounting systems by the auditor reduces the administrative
burden for the taxpayer during the audit.
The auditor should review all available and relevant information on the taxpayer
maintained within ERCA, including the following:-
 the reason for the selection of the taxpayer for audit and the supporting comments
from concerned Directorates, such as information provided by the tax data
administration directorate specific to the taxpayer; the results of the last audit
conducted by the ERCA and recommendations or comments made by the previous
auditor which needs to be addressed;
 The taxpayer’s business structure including parent, associated, related or subsidiary
companies or other related entities;
 The nature of the taxpayers operations such as the types of goods manufactured or
sold by retail/wholesale, imports, exports, income for services rendered or from
other sources;
 The application of income tax legislation specific to the taxpayer, including
legislative measures or specific requests by the taxpayer for a ruling on the
application of the law. With regard to the latter, the auditor should confirm the
accuracy of the facts presented by taxpayer upon which the ruling was based;

27
  The goods and/or services sold by the taxpayer that are taxable or tax exempt for
VAT/TOT purposes, or are subject to Excise Tax;
 The taxpayers accounting system (books, records, subsidiary ledgers) and system of
internal control. This assists the auditor in determining the source of information
for the audit test;
 Reviews information available on the industry such as gross profit trading margins,
how the taxpayers performance compares with industry norms and the after tax rate
of returns on capital invested, the timing of income recognition on contracts for the
supply of goods and/or services, specific tax legislation that has been the subject of
misinterpretation or misapplication;
 Comparative analyses of the taxpayer’s financial statements to ascertain unusual
fluctuations in gross and net profit margins, large changes in expenses claimed in
relation to revenue trends, fixed asset additions or disposals and changes in the
financial position of the taxpayer over the period since the last audit. The auditor
should also determine if the external public auditor’s opinion, notes and schedules
are submitted with the financial statements. Missing information should be obtained
from the taxpayer or the public auditor during the course of the audit;
 The information obtained from the previous audit.
The above information assist the auditor in developing his audit plan, preparing for the
initial interview with the taxpayer or his representatives and in gaining an understanding of
the taxpayer’s operations, systems and compliance issues.
The auditor should make arrangements with the taxpayer to conduct the audit as soon as
possible. The auditor should advise the taxpayer of the intended scope of the audit (i.e.
taxation years and taxes to be covered etc…), confirm the availability and location of all
records and documentations required for the audit, and specify the personnel that the
taxpayer should make available in order to expedite the conduct of the audit.
6.1.2. Understanding of the Business Entity (procedures at the taxpayer’s
premises)
The audit could be conducted at the premises of the taxpayer where the books and
accounting records are usually kept or on desk if found necessary. ERCA auditor will have
more ready access to supporting’ documentation at taxpayers premises and will gain a
firsthand insight to the operations of the taxpayer. The auditor could employ some of the
following steps in conducting the audit.

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 6.1.1.1. Initial Information about the Taxpayer’s Operations
The information obtained from Initial Interview Questionnaire will support the
development of the detailed audit plan. In addition, the information obtained will assist
ERCA management and operational officer in conducting future dealings with the
taxpayer. The auditor can provide the basic information on the Audit Working Papers.
The Audit Checklist provides the details of the relevant information that the auditor could
refer, including the following basic information;
6.1.1.2. Business Structure
The auditor should compile the following basic information:-
 the business entity, i.e. sole proprietorship private limited company, public share
company government owned enterprise etc.;
 the details of any other business enterprises that are associated with the taxpayer,
such as the parent company; wholly owned or partially owned businesses;
subsidiary company; retail or wholesale companies operated by the taxpayer, by
share holders or officers of the company;
 the trade name(s) under which the taxpayer operates, if applicable;
 the addresses of the business outlets operated by the taxpayer, including the
locations where goods are stored, possibly including the premises of officers or
directors;
 The names and responsibilities of the key officers, directors and controlling
shareholders of the company who are directly involved in the management of the
taxpayer’s operations. Include the TIN’s of the individuals.
 With respect to companies that are controlled by foreign interests, provide the
details of the agreements/contracts with any expatriate managers as to the
remuneration, including payments to overseas accounts, payments for the education
of children overseas, etc. The latter are considerations in conducting the audit test
of the personal income tax withheld from the expatriate manager.
 With respect to the taxpayer’s business dealings with the foreign parent/related
party; provide the basis for the values of inter-company sales, charges for
management fees, etc. The auditor should conduct subsequent audit tests to
determine if the values are artificially low for the purposes of proclamation
286/2002 Article 29 or Regulation 78/2002 Article 8(6) with respect to charges
for services
 Provide the names and addresses of key employees, and their positions, whose

29
 responsibilities are important with respect to gathering information about the
taxpayer’s operations. Include information about employees who occupied key
positions but have left the company that the auditor may need to contact with
respect to obtaining information under the provisions of proclamation 286/2002
Article 102 and proclamation 285/2002 Article 30.
6.1.1.3. Banking Institutions
The ERCA auditor should obtain the names, locations and account numbers of the
financial institutions used by the taxpayer, including foreign overseas accounts. The
auditor should also obtain information about the taxpayer’s practices of transferring foreign
funds to the parent or subsidiary accounts or to private accounts..
6.1.1.4. Applicable Legislations
The auditor should mention the other tax legislations that are applicable to the taxpayer’s
operations. Information on the taxpayer’s Operations, Tax Accounting for all Applicable
Taxes Compliance with the other Tax Proclamations.
6.1.1.5. Review of Role of External Auditors
ERCA auditor relies on external auditor report but their report and opinions differ from the
ERCA auditor’s report because the position of the taxpayer’s representative can
legitimately differ from that of the tax authority. The ERCA auditors should not accept
without question the validity of an external auditor’s financial statements where judgments
may have been made favorable to the taxpayer on legal or accounting issues.
The ERCA auditor should obtain copies of the audited financial statements, supporting
opinion, notes and schedules and the letter of engagement. The latter is necessary to
determine if the taxpayer placed any limitations on the scope of the auditor’s assignment.
Sometimes the external auditor will make a disclaimer as to the accuracy of certain aspects
of the financial statements by indicating a reliance on the taxpayer representations rather
than conducting an independent verification. In such circumstances the ERCA auditor
should discuss with the external auditor on;
 matters for which the external auditor relied on management’s representations and
the supporting rationale;
 the scope of the external auditor’s test of assets (verification of inventories,
accounts receivable etc.), liabilities, revenues and expenditures and the supporting
systems of accounting and internal control;
 correspondence between the external accountant and the taxpayer regarding tax
legislative or accounting issues;
The Audit Checklist outlines the types of issues that the ERCA auditor should discuss with

30
the external auditor. In the event that the subsequent audit tests disclose, that the taxpayer
underpaid taxes, due to deliberate actions of tax evasion, negligence or the failure to
exercise due diligence, the ERCA auditor should make recommendations whether legal
action should also be taken against the external auditor.
6.1.1.6. Corporate legal records
Under the tax legislation, the ERCA has the right of access to any books, accounting
records or correspondence relevant to the tax affairs of the taxpayer. In the early stages of
the audit, the ERCA auditor should review the following records for resolutions or
decisions that may have tax or audit implications;
 minutes of meetings of the Board of Directors;
 minutes of share holders meetings;
 minutes of internal committee meetings, such as the company’s audit, finance and
tax committees.
Reviews of the above may provide the ERCA auditor with information such as the
following:-
 the scales of remuneration of key company officials if tied to the performance of
the company;
 The terms of loans or advances made to key shareholders in order to determine the
appropriate tax treatment.
 in the case of newly privatized corporations, the company’s business plan, tabled at
directors meeting, may give an insight to the profit expectations and the anticipated
return on the investment;
 decisions made on controversial tax issues that may contravene the intent of the
law;
 agreements for the personal use of the company’s assets, including vehicles
inventory or accommodation;
 Agreements or contracts with expatriate personnel with respect to the total
remuneration package, including payments to overseas accounts; benefits such as the
provision of accommodation or transportation; the payment of education fees for
children either in Ethiopia or overseas. Confirm that the deductions made for personal
income tax are calculated on the full amount of the remuneration package.
6.1.1.7. Taxpayer Books, Accounting records and system
The ERCA auditor should obtain an understanding of the books and accounting records
maintained by the taxpayer. In addition, the auditor should determine the extent to which
key shareholders or owners are directly involved in the maintenance of the accounting

31
records and in the banking of revenues.
In undertaking this task the auditor should make a list of the books and records maintained
and include them in his/her audit working papers. For example, the list could include the
following:
 General ledger
 Sales Journal
 Purchases (or expenditure) journal
 Cash receipt journal
 Cheque disbursement register
 Accounts payable subsidiary ledger
 General Journal
 Payroll records-summaries and individual employee records
 Accounts receivable subsidiary ledger
 Fixed asset subsidiary ledger
 Operating expense ledger
 Production records including transfers to finished goods warehouse
 Perpetual inventory records
 Contract work in progress-costs, completion status and sales invoicing information
 Contract agreements
 Internal operational manuals or instructions (i.e. particularly used by absentee
owners to control cash receipts & banking, inventory turnover etc.)
 Minute books (i.e. directors meetings)
The extent of the books and accounting records maintained will vary depending on the
size, type of ownership and nature of the taxpayer’s operations.
6.1.1.8. Review of Internal controls
The establishment of internal controls is the responsibility of management of the taxpayer
concern. The evaluation of internal controls is primarily the responsibility of the taxpayers
internal audit department and the external auditor. The tax authority can point out
weaknesses in internal controls which may have lead to an assessment for additional taxes
but usually cannot insist on the taxpayer introducing stronger control measures.
The tax auditor must review the systems of internal control and internal checks to
determine possible areas of weakness or to establish methods of determining if the
taxpayer is deliberately manipulating the records to minimize tax liabilities. The auditor
will conduct his verification activities in accordance with his/her findings. The Audit
Checklist and the Audit Working Papers dealing with the specific aspects of the taxpayer’s

32
operations include tests of the internal control system and internal checks.
However, the following are examples of the types of internal controls and checks that are
commonly maintained where weaknesses could indicate the possibility of inaccurate
financial disclosures by the taxpayer.
 Sequentially numbered sales invoices, shipping bills, inventory release documents,
with the appropriate cross references and requirements for signatures of authorized
staff. The date of the transactions will be indicated including the date of the receipt
of the goods by the customer. Similar documentation will be maintained covering
the authorized return of goods by a customer for credit;
 Pre-numbered purchase orders, retention of shipping bills (for receipt of the goods),
warehouse documents covering the receipt and requisition of goods;
 Controls over the movement of raw materials and components used in the
manufacturing process and the disposition of finished goods. The taxpayer will also
have documentation and controls over the disposition of waste arising from the
manufacturing process. Revenues from this source are occasionally not recorded in
the books of account.
 Documentation and controls over operating supplies and parts, such as vehicle or
machinery parts, consumables, maintenance supplies.
If the ERCA auditor does detect understatements of income by the taxpayer as a result of
the review, he/she should indicate the subsequent actions taken to establish the taxpayer’s
correct tax liabilities in the Audit Working Papers.
The ERCA auditor should verify the information directly with the third parties such as
banks, financial institutions, investment firms, brokerage firms, motor vehicle department,
or by having searches conducted at the registry office to determine the property holdings of
the taxpayer and family members, and information with respect to other companies or
bodies in which the taxpayer has an interest, direct or by proxy According to proclamation
286/2002 article 41.

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6.2. RISK, MATERIALITY AND SAMPLING
6.2.1.Audit Risk
Audit risk is defined as the risk that the auditor may unknowingly fail to appropriately
modify an opinion on financial statements that are materially misstated. Audit risk can be
thought of in terms of the following three component risks:
Inherent risk is the susceptibility of an assertion to a material misstatement, assuming that
there are no related internal controls.
Control risk is the risk that a material misstatement that could occur in an assertion will
not be prevented or detected and corrected on a timely basis by the entity's internal control.
Internal control consists of five components:
1. The control environment sets the tone of an organization, influencing the control
consciousness of its people. It is the foundation for all other components of internal
control, providing discipline and structure.
2. Risk assessment is the entity's identification and analysis of relevant risks to
achievement of its objectives, forming a basis for determining how the risks should
be managed.
3. Information and communication are the identification, capture, and exchange of
information in a form and time frame that enable employees to carry out their
responsibilities.
4. Monitoring is a process that assesses the quality of internal control performance
over time.
5. Control activities are the policies and procedures that help ensure that
management directives are carried out.
Detection risk is the risk that the auditor will not detect a material misstatement that exists
in an assertion.
Identification of Risk Factors
The auditor's consideration of inherent risk, fraud risk, control environment, risk
assessment, communication, and monitoring (parts of internal control) affects the nature,
timing, and extent of substantive and control tests. This section describes
(1) The impact of risk factors identified during this consideration on substantive and
control tests,
(2) The process for identifying these risk factors,

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 Impact on Substantive Testing
-Based on the level of audit risk and an assessment of the entity's inherent and control risk,
including the consideration of fraud risk, the auditor determines the nature, timing, and
extent of substantive audit procedures necessary to achieve the resultant detection risk. For
example, in response to a high level of inherent and control risk, the auditor may perform:
 additional audit procedures that provide more competent evidential matter (nature
of procedures);
 substantive tests at or closer to the financial statement date (timing of procedures);
or
 more extensive substantive tests (extent of procedures),
Control Assessment- Effectiveness and efficiency of operations. These controls include
policies and procedures to carry out organizational objectives, such as planning,
productivity, programmatic, quality, economy, efficiency, and effectiveness objectives.
Management uses these controls to provide reasonable assurance that the entity:-
(1) Achieves its mission,
(2) Maintains quality standards, and
(3) Does what management directs it to do. (Note that performance measures controls
(those designed to provide reasonable assurance about reliability of performance reporting
transactions and other data that support reported performance measures are properly
recorded, processed, and summarized to permit the preparation of performance information
in accordance with criteria stated by management) are included in operations controls.)
Some control policies and procedures belong in more than one category of control. For
example, financial reporting controls include controls over the completeness and accuracy
of inventory records. Such controls are also necessary to provide complete and accurate
inventory records to allow management to analyze and monitor inventory levels to better
control operations and make procurement decisions (operations controls).
The five components of internal control relate to objectives that an entity strives to achieve
in each of the three categories: financial reporting (including safeguarding), compliance,
and operations (including performance measures) controls.
In the planning phase, the auditor should
(1) Identify conditions that significantly increase inherent, control (based on identified
control environment, risk assessment, communication, or monitoring weaknesses) and
(2) Conclude whether any identified control risks preclude the effectiveness of specific
control activities in significant applications. The auditor identifies specific inherent risks
and control environment, risk assessment, communication, and monitoring weaknesses

35
based on information obtained earlier in the planning phase, primarily from understanding
the entity's operations and preliminary analytical procedures.
The auditor considers factors in identifying such risks and weaknesses. These factors are
general in nature and require the auditor's judgment in determining:
(1) The extent of procedures (testing) to identify the risks and weaknesses and
(2) The impact of such risks and weaknesses on the entity and its financial statements.
Because this risk consideration requires the exercise of significant audit judgment, it
should be performed by experienced audit team personnel.
The auditor considers the implications of these risk factors on related operations controls.
Therefore, the need for operations controls in a particular area or the awareness of
operations control weaknesses related to these risk factors should be identified and
considered for further review,
The auditor identifies and documents any significant risk factors after considering
(1) his/her knowledge of the entity (obtained in previous steps in the planning phase);
(2) The risk factors
(3) Other relevant factors.
These risks and weaknesses and their impact on proposed audit procedures should be
documented on the General Risk Analysis (GRA) or equivalent. The auditor also should
summarize and document any account-specific risks. For each risk factor identified, the
auditor documents the nature and extent of the risk or weakness; the condition(s) that gave
rise to that risk or weakness; and the specific cycles, accounts, line items, and related
assertions affected (if not pervasive). Also in an overall response, the nature, timing, and
extent of procedures related to certain accounts and assertions may be modified as follows:
 The nature may be changed to obtain more reliable evidence or further
corroboration, such as from independent sources outside the entity. For example,
physical observation of certain assets may become more important.
 The timing of substantive tests may be closer to or at year end.
 The extent of procedures may involve larger sample sizes or more extensive
analytical procedures.
The auditor may determine that a specific response is required due to the types of risk
factors identified and the accounts and assertions that may be affected.
6.2.2. Materiality
Materiality is one of several tools the auditor uses to determine that the planned nature,
timing, and extent of procedures are appropriate. As defined in Financial Accounting
Standards Board (FASB).

36
  Materiality represents the magnitude of an omission or misstatement of an item in
a financial report that, in light of surrounding circumstances, makes it probable that
the judgment of a reasonable person relying on the information would have been
changed or influenced by the inclusion or correction of the item.
 Materiality is based on the concept that items of little importance, which do not
affect the judgment or conduct of a reasonable user, do not require auditor
investigation. Materiality has both quantitative and qualitative aspects. Even
though quantitatively immaterial, certain types of misstatements could have a
material impact on or warrant disclosure in the financial statements for qualitative
reasons.
For example, intentional misstatements or omissions (fraud) usually are more critical to the
financial statement users than are unintentional errors of equal amounts. This is because
the users generally consider an intentional misstatement more serious than clerical errors of
the same amount.
Materiality is determined in the following stages:-
 Planning materiality is a preliminary estimate of materiality, in relation to the
financial statements taken as a whole, used to determine the nature, timing, and
extent of substantive audit procedures and to identify significant laws and
regulations for compliance testing.
 Design Materiality is the portion of planning materiality that has been allocated to
line items, accounts, or classes of transactions (such as disbursements).
 Test materiality is the materiality actually used by the auditor in testing a specific
line item, account, or class of transactions. Based on the auditor's judgment, test
materiality can be equal to or less than design materiality. Test materiality may be
different for different line items or accounts.
Generally, the materiality level will vary depending up on the level of audit risk assessed.
When the level of risk assessed is high the materiality level will be set at lower level, and
when the risk assessed is low, it will be set at a higher level.
6.2.3. Audit Sampling
Sampling is used to test the information and transactions to increase the efficiency and
effectiveness of the audit. Cost and time constraints do not usually permit 100%
verification of the taxpayer's information nor does the relative risk warrant 100%
verification. However, in rare situations 100% verification may be required.

37
Purpose of Audit Sampling
Sampling is performed because it is more efficient than testing 100% of a population. In
tax audits a representative sample can save both parties time and money.
When Not To Sample
There are many audit procedures which do not involve sampling.
 Inquiry and Observation:
• Reviewing records for the method of accounting and other information.
• Observing accounting procedures.
• Discussing methods of accounting and reporting with taxpayer.
• Scanning documents for possible issues.
 Analytical Review Procedures:
• Comparing records, reports and other information.
• Re-computing or estimating amounts.
• Reviewing trends in reporting.
• Comparing similar businesses.
 One-Hundred Percent Examination:
• Reviewing all fixed asset purchases, where appropriate.
• Examining all contracts, where there are a small number.
• Reconciling each year`s gross receipts to VAT/TOT declaration and Financial
statements.
• If the assessment of risk by the auditor is high.
 Zero Percent Examination:
• This occurs when the auditor determines that a type of receipt, deduction,
exemption or other item does not need to be tested.
Sampling Risk
Sampling risk-is the probability that the sample results are not representative of the entire
population.
Methods of Sampling
Sampling may be non-statistical or statistical
Non-statistical sampling
This is where the sample is not statistically based. The results of non-statistical
samples should never be extrapolated over the population, as the sample cannot be
proven to be representative of the population. Techniques include:

• Haphazard sampling - in which the sample is selected without following a

38
 structured technique, while avoiding any conscious bias or predictability.

• Judgmental sampling – in which a bias is placed on the sample (e.g. all

sampling units over a certain value). A judgmental sample is not probably
representative of the population. Indeed it is biased by whatever judgment was
used in order to select the sample.

Analysis of a haphazard or judgmental sample may not be relied upon to form a

conclusion on the population. The only conclusion that can be drawn from
errors detected by these techniques is that at least the detected errors exist in the
population and the value of errors is no less than the value detected in the
sample. This may lead the auditor to a legitimate and useful conclusion (e.g.
when considering a judgmental sample of invoices over a certain material value)
but it is essential that care is taken to avoid misleading conclusions when using
these techniques.

Statistical sampling
Statistical Sampling is a scientific method of estimating the value or other
characteristics of a large number of items from the examination of a small sample
drawn at random (i.e. all items in the population having an equal opportunity to be
selected) from those items.

Because of this, it is normally only practicable where the population is (like a file of
purchase ledger transactions) or can be (like a list of storage locations in a warehouse)
represented on computer media.

It works because a small sample is probably representative of the whole population,

within known limits.

Successful sampling depends on the auditor knowing the population, which must not be
too variable. The auditor must know the objectives of the exercise, and have planned the
sampling correctly. Because of its complexity and (relative to file interrogation) lower
accuracy, statistical sampling is a last resort for testing, and should only be considered
where file interrogation is not possible or appropriate.

The main requirement in the selection of the sample is that it is adequate to enable the
officer to make the required assessment or to form the required opinion in regard to the
total audit period.

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 Designing a Sampling Application
There are several steps in designing a sampling application for an audit. The steps are
Listed below:-
1 .Define the objectives of the test
2. Determine the type of test to be performed
3. Define the deviation conditions
4. Define the population
5. Determine the method of selecting the sample
6. Determine the sample size
7. Perform the sample
8. Evaluate the sample results
9. Document the sampling procedure
Documentation of each test should include the following:
 stating the audit objective of the test conducted
 description of the document(s) selected for examination
 disclosing the size of the population from which the sample will be selected
 determine the number of items selected for detailed examination from the
population
 disclosure of the method of selecting the sample
 disclosure of all exceptions to the expected results – where full disclosure is
required all items tested should be listed on the working paper and the test results of
each item noted – in most cases 'exceptions only' disclosure is adequate.
Generally, the materiality level and sample size will vary depending up on the level of
audit risk assessed. When the level of risk assessed is high the materiality level will be
set at lower level and sample size taken will be high, while the risk assessed is low,
materiality level will be set at a higher level and sample size will be taken low.
Audit Program
An Audit Program is a systematic and comprehensive outline of all the procedures to be
followed by auditors when conducting audits in order to arrive at a proper conclusion
concerning the degree of compliance and to ensure that audits are uniform, comprehensive,
efficient and effective. The purpose of an audit program is to establish the criteria or
overall framework for the purposeful, systematic and balanced steps or actions that an
auditor ought to follow. These will subsequently be used as parameters for compliance and
quality of audits. In order to reap the full benefits of auditing through well planned, well

40
executed and followed up activities, case management must be pursued as one of the
critical activities in the audit process. Reference can be made to Sample audit programs
attached as annex
Case Management
a) Case management involves the verification of critical audit activities to ensure quality.
Tax Audit Coordinators shall be responsible for overseeing the selection, planning,
execution and conclusion of every audit undertaken in their jurisdiction. It shall be a
requirement for an audit supervisor to approve every audit plan before such audits are
commenced. The team coordinator shall ensure that written plans are in place for every
audit. He/she shall assign tasks to different audit team members, guide them at all stages of
the audit and sign off all accomplished tasks.
b) Tax Audit Process Coordinator, Team Coordinator shall primarily be responsible for the
station audit performance and shall be responsible for the monthly, quarterly and annual
reports in respect of their areas of control. The team coordinator shall be responsible for
the performance of their teams and report directly to the audit Process coordinator.

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 CHAPTER SEVEN
7. CONDUCTING THE AUDIT
For best results, an audit should be:-
 focused on the targeted risks
 conducted technically and procedurally
 referenced comprehensively and accurately
 Completed on time.
Audit includes items/accounts in the financial statement, mostly those accounts which are
highly risky from the view point of tax.
7.1. Auditing the Balance Sheet
The balance sheet audit is required to determine whether the taxpayer has properly
disclosed all assets, liabilities and equity regardless of the type of audit.
 Adjustments to either reported assets or liabilities may lead to adjustments in
revenue and expenses, resulting in a change to net income, income tax, and other
payable tax.
 Adjustments that affect income are likely to have both VAT/TOT and income tax
consequences and to result in an assessment.
 Adjustments to the balance sheet that impact VAT/TOT include those related to
disposals of capital assets (including trade-ins) and adjustments that increase or
decrease income or expenses.
7.1.1. Auditing Asset Accounts
Certain assets that are often used to calculate income must be verified regardless of
whether the taxpayer prepares a balance sheet. These assets include fixed assets, inventory,
accounts receivable etc. Any change in either of these accounts would result in a change to
net income and income tax payable as well as VAT/TOT where the supplies are taxable
supplies.
If the taxpayers are entitled to a full input tax credit /ITC/ when acquiring a capital asset
the acquisition will likely be disclosed unless the equipment is being used to earn
unreported income.
7.1.1.1. Audit of fixed assets
The cost of additions to fixed assets includes all direct expenditure incurred on acquiring
the asset up to the time that it is completed or installed and is ready for operational use in
the business. Additions to fixed assets affected by the company itself comprise the actual
material and labor cost directly incurred on the additions. A reasonable allocation of
42
administrative and supervisory costs may also be included but not any element of profit.
Interest paid on loans obtained specifically to finance the cost of construction or
acquisition of fixed asset for the period until the asset become operational, may be
capitalized as part of the cost of such assets. However interest on loans for fixed assets that
are in use or suppliers or installment credit is financing charges and should not be
capitalized but charged to revenue in the year in which they are incurred.
Where fixed assets are constructed over a period, or machinery is in transit or under
installation, the total cost of such asset should be recorded in separate capital work in
progress accounts or machinery in transit accounts until such time as the item concerned is
completed and becomes operational when the accumulated cost will be transferred to the
appropriate fixed asset account.
Scope of examination
The scope and extent of the audit tests for each particular assignment will be determined
after the system and related controls have been reviewed and evaluated. The work to be
undertaken is set out in the asset audit programs.
The essential characteristics of fixed assets are that they are acquired for use in the
operation of the company and that usefulness extends over a number of years. The cost of
fixed assets is accordingly not charged as an expense in the year of acquisition, but is
spread over the year of their expected use.
Depreciation, calculated at rates designed to affect this spread, is charged against the
revenue of each accounting period as part of the cost of earning such revenue derived from
the use of the fixed assets. Thus the net book value will be matched against future revenue.
Expenditure incurred in the purchase or improvement of fixed assets is capital expenditure
and is not charged to revenue as incurred but over the period of use. However, expenditure
incurred in the maintenance of fixed assets to the extent limited by tax law (amendment
income tax proclamation 608/08 Article 11) is revenue expenditure and can be written-off
as incurred.
Fixed assets whose original cost and book value is unknown, may be valued and the
valuation incorporated in the accounting record as cost. For example, on the takeover of a
business by another business. Where fixed assets are sold or scrapped, their cost and
accumulated depreciation should be eliminated from the accounting records and
appropriate taxes charged as tax proclamations.
Depreciation may be defined as the measure of the wearing out, consumption or other loss
in value of a fixed asset whether arising from use, efflux ion of time, or obsolescence
through technology and market changes.

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Depreciation methods and rates
Various methods and rates may be applied by companies but should be adjusted for tax
purposes as per the income tax proclamation number 286/2002 article 23.
 Buildings: - The acquisition or construction cost, and the cost of improvement,
renewal and reconstruction, of buildings and constructions shall be depreciated
individually on a straight-line basis at five per cent (5%).
 Intangible assets: - The acquisition or construction cost, and the cost of
improvement, renewal and reconstruction, of intangible assets shall be depreciated
individually on a straight-line basis at ten percent (10%).
• Land lease will be amortized over the lease period as proclamation No.286/2002,
article 61.
The following two categories of business assets shall be depreciated according to a pooling
system at the following rates:
 Computers, information systems, software products and data storage
equipment: twenty five (25%).
 All other business assets: twenty percent (20%).
In each category, the rate of depreciation specified shall be applied to the depreciation base
of the category.
The depreciation base shall be the book value of the category as recorded in the opening
balance sheet of the tax period:
(a) Increased by the cost of assets acquired or created and the cost of improvement,
renewal and reconstruction of assets in the category during the -tax period.
(b) Decreased by the sales price of assets disposed of and the compensation received for
the loss of assets due to natural calamities or other involuntary conversion during the
tax period.
If the depreciation base is a negative amount, that amount shall be added to taxable profit
and the depreciation base shall become zero.
 If the depreciation base does not exceed Birr 1,000 the entire depreciation base
shall be a deductible business expense.
 If a revaluation of business assets takes place, no depreciation shall be allowed for
the amount of the revaluation.
In determination of taxable business income a deduction is permitted in respect of each
category of business assets for the maintenance and improvement expenses of business
assets belonging to that category for the actual amount of the expenses. Where the actual
amount of expense is in excess of twenty percent (20%) of the depreciation base of the

44
asset, the whole expense shall increase the depreciation base of that category.
Audit objectives
The audit objectives in the validation/verification of fixed assets are to determine whether:
 The cost or other base of recording fixed asset is appropriate and has been
consistently applied.
 Additions to fixed assets are valid
 Items have been properly classified between capital and revenue expenses.
 The fixed assets recorded in the accounts, for which depreciation has charged, exist
and are the property of the tax payer.
 Gain/Loss calculations are appropriate or as per the tax proclamation 286/2002
article 23, up on disposal of fixed assets.
 Depreciation rates and methods are appropriately done as per income tax
proclamation.
Audit procedures
Reliance on internal control- in determining the nature and extent of the validation
procedures for fixed assets, the auditor will assess the efficacy of the system of internal
control and thus the degree of reliance that may be placed on it.
Testing and evaluation of the recording and control system in operation will be undertaken
from a review of the system notes and completion of the internal control questionnaire.
Verification of Fixed Asset
 Agreement with ledger accounts - compare the taxpayer’s lists of assets (cost and
depreciated value) with the subsidiary fixed asset ledger and the financial
statements.
 Physical verification- physically observes the existence of some of the major assets
on a test basis;
 Additions - review acquisitions for the correct costing, for example including
installation and correct classification for depreciation purposes. Collectable VAT
should be excluded the value of fixed assets that are used for taxable operations.
 Examine supporting documentation such as title certificates, purchase agreements,
construction contracts, architects certificates, and suppliers’ invoices.
 determine the source of funds for new acquisitions;
 review the treatment of disposals with respect to any recapture of depreciation;
 review insurance policies and loan agreements to determine the location and value
of fixed assets covered or pledged;

45
  establish the existence of any agreements between the taxpayer and its key
personnel for the provision of the personal use of assets;
 test purchase invoices and delivery slips for exclusion of (directors, shareholders)
personal assets or house repairs.
 Review the taxpayer’s accounting practices with repairs, equipment rebuilding, etc,
with respect to outlays and the application of income tax proclamation amendment
608/2008, Art.11.
 Ensure that proper distinction has been made between capital and revenue
expenditures.
 Ensure that the full cost of capital projects during the period under audit has been
transferred to fixed asset accounts with effect from the date the asset become
operational.
 Obtain explanations for open capital projects, in the balance sheet, not apparently
completed within a reasonable time.
 Obtain explanation in respect of any capital projects whether completed during the
year or still open, where expenditure is greater than planned expenditure.
 With respect to disposals, examine supporting documentation, such as sales
agreements and invoices and also appropriate VAT/TOT is collected from disposal
if it is a taxable property.
 Check that the profit or loss on disposal has been correctly calculated and reflected
in the accounting records or it is accounted as per income tax proclamation
286/2002 article 23.
Land development expenditure
It is the cost to a farming enterprise or company of clearing and leveling new land. Those
expenditures are accumulated as deferred expenditure which will be amortized. The
amount capitalized should include only the expenditure incurred up to the point where the
land is ready for use and it should not include the ploughing and seeding expenses for the
first crop which are expensed against revenue.
Investments
The auditor should review cash disbursements and cash receipts for the following:
 payments to brokerage or investment firms
 certificates issued by brokerage or investment firms where no income is reported
 unexplained deposits to bank accounts
 unexplained sources of capital
 dividends that were received regularly that cease

46
  statements and other correspondence from brokerage or investment firms
 personal investments pledged as security for business loans
Land lease and Buildings
The valuation of land lease and buildings reported on the balance sheet may be of concern
where the purchaser and the seller are not dealing at arm’s-length. Consider the fair market
value. Where the parties are dealing at arm’s-length, the consideration is considered
reasonable. Where the parties are not dealing at arm’s-length and the purchaser is not
entitled to a full ITC on the acquisition of the property, the value may be understated to
decrease the VAT payable. If the value is understated, the maximum
amortization/depreciation is decreased as a result. Audit procedures should verify that
VAT has been paid on the fair market value of the property.
Gains or losses on disposal of land lease or buildings may be treated as either capital gains
or losses or as business income. Audit procedures should verify that disposals have been in
accordance with legislation.
Audit procedures should include verification that all land lease and buildings are reported
on the balance sheet. Use property tax bills and utility bills to ensure that the taxpayer has
reported all assets.
Goodwill
Goodwill is eligible Capital Property. Only purchased goodwill is recognized and
internally generated goodwill is not. However, where deductions exceed the additions at
the end of the fiscal year, the negative balance is included in income or deemed a taxable
capital gain. Goodwill attributed to an investment in property that is not used for business
does not qualify.
Audit procedures should ensure that the allocation of cost to goodwill is reasonable and
supported by valuable documents in accordance with generally accepted accounting
principles.
Other Intangible Assets
Patent, permits, trade mark and franchises are forms of intangible assets that are similar to
goodwill with respect to amortization of costs. Costs of acquisition are amortized over the
useful life of such intangible asset. However, where deductions exceed the additions at the
end of the fiscal year, the negative balance is included in income or deemed a taxable
capital gain.
Audit procedures should ensure that the allocation of cost to quotas, trade mark and
franchises is reasonable and in accordance with generally accepted accounting principles.

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7.1.1.2. Auditing Current Asset
Stock/Inventory
Stock/Inventory includes the following:
 Goods purchased for resale by a trading company.
 Raw materials waiting processing by a manufacturing company.
 Work in process that is incomplete finished products still under process in a
manufacturing company.
 Finished products or produce awaiting sale in a manufacturing or farming
company.
 Consumable materials i.e. packaging, spare parts, etc.
 Goods in transit, goods ordered but not received at the year end.
Audit objective
The main objective of the audit of stock is:
 To ensure that stock valuations are appropriate.
 To ensure that stock reported in the balance sheet at the end of the year were
actually existed.
The auditor must verify that the taxpayer has complied with provisions of income tax
proclamation 286/2002 Article 22 of Trading Stock with respect to applying the method of
valuing inventories.
Inventory of Goods Purchased for Resale
In verifying the method used by the taxpayer to value inventory and to establish its
consistency of application the auditor should conduct a number of tests including the
following;
 Determine the extent of verification of inventory values performed by the external
accountant/auditor.
 determine the locations of the inventories maintained by the taxpayer;
 verify the value of the inventories used for the purposes of insurance coverage,
 review loan agreements where inventories may be pledged as security;
 Determine the date and process followed by the taxpayer in taking the physical
inventory. If the date of the physical inventory differs from the fiscal year-end date
verify the adjustments for sales and purchases during the intervening period;
 compare the physical inventory value with the perpetual inventory records
maintained by the taxpayer and examine any adjustments made by the taxpayer;
 test the values used for items of significant value to the perpetual inventory value

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 Review the taxpayer’s valuations of goods at less than cost, and sales or movement
of the goods subsequent to the year end. Test any independent appraisals of the
goods, for example by insurers of sales agents;
 note the values of goods returned to suppliers for credit after the year-end.
 If practical, for example in the case of a retailer, visit the business premises of the
taxpayer before the commencement of the audit and observe the taxpayers practices
with respect to inventory management, invoicing, and cash management.
 Determine the extent of the verification performed by the independent external
auditor;
 Compare the taxpayer’s inventory records (or year-end inventory list) with the
books of account, financial statements and tax declaration. Note the locations,
costing method and any provisions made for obsolescence.
 Test the costs from the suppliers invoices, import entries etc., for the items that
comprise the majority of the reported inventory.
 Determine the inventory valuation method used by the taxpayer and its
acceptability in relation to Article 22 of the Income Tax Proclamation 286/2002 of-
Trading Stock.
 If the taxpayer maintains perpetual inventory records, compare the physical
inventory: stock taking record, on a test basis, and review any adjustments made by
the taxpayer with respect to shortages, values and the like.
 Review the taxpayer’s accounting system and internal controls related to the
movement and storage of finished goods, particularly with respect to goods stored
at the premises of company officials.
 Determine if the taxpayer takes periodic inventories, maintains formal or temporary
inventory records and a stock level/recorder process.
 In the event that the auditor suspects that the taxpayer may be suppressing sales or
income, identify the personnel who have knowledge of the taxpayers inventory
management practices and procedures for the purposes of obtaining information
under the provisions of Article 38 and Article 79, or taking enforcement action
under the Provisions of Articles 97 and Article 98 of the Income Tax Proclamation
286/2002.
 Compare the regular selling price of the major items in inventory to the invoiced
cost to determine if the indicated profit margins are reasonable and consistent with
the financial statements and the tax declaration.

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  Estimate the retail value of the inventory of goods for sale, the gross trading margin
and the frequency of the annual inventory turnover in order to determine the
reasonableness of the inventory value.
 Visit the taxpayer’s premises where goods are stored and identify the types of
goods that the auditor suspects may be contraband or counterfeit and request the tax
payer to provide supporting documentation. Advice the audit superior if there is
reason to believe that the taxpayer is evading taxes and customs duties for direction
on the course of action to be taken.
 Test the values of inventories of imported goods to the supplier’s invoice, custom
evaluations and entries
 Depending on the date the tax payer took the physical inventory, test the tax payers’
system and procedures with respect to making adjustments for sales and purchases
in order to arrive at an accurate inventory on the closing date of the taxation year.
 Review any loan agreements to determine the description, quantities, value and
location of inventories pledged by the taxpayer as security. The lender may have a
floating charge on all inventories and the borrower may be required to provide
updates of inventory levels. In addition, the lender may insist on insurance
coverage and the auditor should review the insurance policies for details and the
supporting independent inventory valuations.
 Determine the composition of the inventory that may have been supplied by the
foreign parent or associated company for subsequent investigation with respect to
transfer pricing or fair market issues.
Inventory of Manufactured goods
Goods of the taxpayer’s own manufacture should be valued on the basis of the aggregated
cost of materials, direct labor and overhead.
The auditor will need to verify the costs used by the taxpayer by testing;
 Production, inventory and costing methods employed, including periodic
adjustments to standard costs comparing established selling prices of the products to
manufacturing costs and subsequently to the financial statements. The gross profit
margins should be reasonably consistent.
 the method and basis used to value manufactured product at less than cost-obsolete
or faulty products.
 Match the physical inventory records with the perpetual inventory or warehousing
records (if maintained) to the general ledger, financial statements and tax
declaration;

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  Determine the extent of the verification conducted by the independent external
auditor;
 Review the costing methods used by the taxpayer to value closing inventories, work
goods made by the taxpayer to update standard costs and the adjustments made to
the values of inventories and cost of goods sold. Ensure that the excise tax is treated
as part of the cost of production and not as an operating expense. Ensure that custom
work provided by third parties, such as specialized machining of the product, are
include in the production costs and not as an expense;
 Review the method and basis used by the taxpayer to value goods below cost due to
such matters as product obsolescence, faulty production runs and the like.
Determine if some of these products have been sold subsequent to the year-end and
the sale value thereof.
 Determine if the inventory has been pledged as security for loans and review the
insurance coverage.
 Determine the raw materials and components that may be supplied by the foreign
parent for subsequent review under the transfer pricing considerations.
 Compare the established selling prices of the major items in the inventory to the
manufacturing costs, and subsequently to the financial statements and tax
declaration for reasonableness and consistency.
In many cases, the taxpayer does not maintain detailed inventory records. The taxpayers
may estimate inventory for year-end purposes or calculate ending inventory based on
beginning inventory, sales and purchases to arrive at an ending inventory value.
The auditor should limit the time spent auditing the reported inventory unless a material
discrepancy is apparent. Where the inventory value reported is incorrect, a single
adjustment to correct the value may be made.
In some cases, the taxpayers may adjust ending inventory to reduce reported income by
increasing the cost of goods sold. This may become apparent where the calculated gross
margin is lower than expected and there is no reasonable explanation.
Verification of Inventory
The following techniques may be helpful in verifying inventory when records are not
available:
 Review insurance coverage. If the insurance coverage is greater than reported
inventory, verify the variance to determine whether there are significant seasonal
fluctuations. Review total insurance costs to ensure that the taxpayers has made all
insurance policies available for review.

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  Consider the location of inventory on hand to determine whether the reported
inventory includes all locations.
 Review the method used to value the inventory. If a change in the method is
required the situation should be discussed with the team coordinator.
 Review property tax and utility expenses. Address and service locations may
indicate additional storage facilities that the taxpayers did not disclose.
 Review purchase orders and delivery slips attached to receipt of goods
documentation. Goods delivered to other addresses may indicate off-premise
storage facilities, or additional business or storage locations.
 Calculate the inventory turnover ratio. Compare the calculated ratio to that of other
businesses in the industry. Unusually high turnover may indicate an understated
inventory.
 Estimate ending inventory by using the inventory turnover rate in days and
reviewing the purchases for the same period of time. Adjustments may be required
for seasonal fluctuations.
 The taxpayers may provide a balance sheet to the bank. The reported inventory
can be compared to the amount reported to the bank.
 Where individual inventory items can be identified, the ending inventory can be
verified by testing a sample of the reported items. The sample of the physical
inventory on hand can be compared to the reported inventory. The automotive
industry is an example of a field where this might be helpful, as each item can be
separately identified by the vehicle identification number (VIN).
 Determine whether the taxpayers has inventory at other locations on consignment.
Indicators of consignment inventory include the following:
• receipts for product from taxpayers in similar businesses
• delivery slips indicating other locations
• purchase orders with different delivery addresses
• evidence that the taxpayers has inventory on hand that belongs to someone
else
• a volume or number of units purchased that seems unusual for the space
available
If any of the above techniques indicate that inventory may be understated, discuss the
matter with the taxpayers. The taxpayer’s comments can be used to establish a reasonable
inventory value. Where an adjustment is required based on the best available information,
the burden of proof of the value of the inventory reverts to the taxpayers.

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The income tax proclamation does not recognize a standard write-down percentage for
obsolete inventory. Where the taxpayer is making adjustments for obsolete inventory, the
amounts must be confirmed during the course of the audit.
Operating supplies
Where the taxpayer maintains an inventory of operation supplies, such as machine parts or
other consumables, the actual inventory on hand at the year-end must be reported as an
asset and valued at cost. The purchase of the supplies cannot be claimed as an immediate
expense.
Cash on Hand and at bank
Audit objective
The objective of cash audit (both at hand and at bank) is to ensure that all cash collected
from sales is recognized as income in the financial statement and the associated VAT/TOT
from all such sales for taxable ones is paid.
The amount of cash on hand depends on the taxpayer’s business activity. In some
industries, cash on hand is in fact the “float” in the cash register(s) used to make change on
cash sales and to provide refunds for returns. Usually, the amount of the float does not
change.
Some businesses deal mainly in cash and the amount may vary significantly during the
audit period. Tests may be done throughout the audit period to determine the accuracy of
the cash tally. Audit procedures should include a review of all journal entries to the cash on
hand account during the audit period. Unusual entries should be queried.
Tests for Cash on Hand
The following procedures should be included in the audit steps to determine the
reasonableness of cash on hand:-
 Review cash sales as recorded on sales invoices from the last deposit before year
end to the end of the tax year. Deduct cash expenses from the cash sales. This
amount should equal to cash on hand at year-end.
 If the taxpayers records accounts receivable, add the amounts collected to the cash
sales noted on sales invoices less cash expenses.
 Include credit card sales in the total sales from the time of the last deposit.
 The taxpayers may buy fixed assets using cash on hand. If so, the amount used for
asset purchases must be added to the cash expenditures.
 Cash on hand must be adjusted for proceeds from disposals of fixed assets.
 Where the balance sheet does not separate cash on hand from the cash in the bank
balance, the bank reconciliation must be reviewed. The cash on hand must be added

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 to the balance in the bank account(s).
Discuss material variances in cash on hand with the appropriate personnel and conduct
additional audit steps if the explanation is unsatisfactory.
Bank Accounts
A review of the bank account(s) is usually included in the audit plan. If revenue is
adjusted because other bank accounts are located during the course of the audit or expenses
are adjusted because the taxpayer has issued cheques that have been outstanding for long
periods of time, there may also be VAT/TOT consequences. Review cheques for material
amounts that have been outstanding longer than usual. A third-party check may be required
to confirm that the expense was in fact incurred.
It is important to recognize clues that may indicate undisclosed bank accounts. The
taxpayers may divert funds from the business to an unknown bank account for personal
use. As a result, the taxpayers may understate revenue, VAT and proprietors’ or
shareholders’ draw or income and claim input tax credit on personal expenses.
Accounts Receivable
Audit objectives
The audit objectives in respect to the audit of receivable accounts are:
 To ensure that sales on account or credit sales by the tax payer are all recognized.
 To ensure that VAT is collected on advance collections.
 To ensure that input VAT receivables recorded and claimed by the tax payer are
correct and eligible for claim within the time prescribed by law.
Accounts receivable that remain fairly constant from year to year do not generally indicate
a cause for concern. However, where there has been a significant change in sales or the
economy, there will often be a corresponding change in receivables. The account should
also be scanned to determine whether there are any unusual entries.
Adjusting entries should be examined and unusual fluctuations without explanation may
warrant further audit steps.
Verification of Receivables
The auditor can use various methods to verify the accounts receivable control account,
including the following:-
 The taxpayers may make a notation on sales invoices indicating the date the
taxpayers received payment from the customer. Review sales invoices that do not
indicate receipt of payment and compare them to the outstanding accounts
receivable.
 Duplicate deposit slips may contain sufficient detail to allow the auditor to review

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 deposits during the early part of the new fiscal year. A list can be prepared and
compared to the sales journal.
 Review journal entries and other material adjusting entries. The taxpayers may
have written off material amounts considered uncollectible.
 Calculate the accounts receivable balance as a percentage of annual sales and
compare it to previous years. Unusual variances may indicate a change in credit
policy.
 Review the company credit policy. Calculate the average collection period of
accounts receivable and compare it to the credit policy and to periods in previous
years. Review unusual changes or variances.
 Taxpayers may provide the bank with a copy of the balance sheet and use accounts
receivable as security for loans. These documents can be compared to the
information the taxpayer provides during the audit. However, the taxpayer may
inflate the accounts receivable for presentation to the bank and the bank may not
retain a detailed listing of the accounts receivable.
7.1.2. Auditing Liability Accounts
Objective of the audit
The objective of auditing liability accounts are:
 To ensure that balances shown under liability accounts are really debts of the
company and do not include sales transactions (sales transactions were not recorded
as a credit entry to payables).
 To ensure that all taxes applicable to the company are un-paid accurately and
properly.
Bank Overdrafts
Where the bank account is overdrawn, the amount is recorded in the liability section of the
balance sheet. Review the bank reconciliation to determine whether any cheques have been
outstanding longer than normal. Cheques that have been outstanding for more than six
months should be brought to the taxpayer attention. Where cheques have been outstanding
for unusually long periods, review is required to ensure that the cheque was in fact issued
and that the expense was not fictitious.
Bank Loans
The taxpayer will normally disclose all bank loans to permit deduction of the interest
expense. Verify the purpose of the loan to ensure that the taxpayers used the proceeds to
purchase an income-producing asset.

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Verification of Bank Overdraft and Bank Loans
The following procedures can be used to ensure that loans reported in the financial
statement are actually bank loans on the balance sheet:-
 review all documentation, including the loan agreement, promissory note or chattel
mortgage that covers security and any other correspondence or financial
information that the taxpayers may have submitted to secure the loan
 review collateral pledged as security and check it against reported assets
 trace the proceeds of the loan through the bank account and look for loan payments
in subsequent months
 reconcile interest expense to loans outstanding to ensure that the expense is
reasonable based on the reported loans outstanding
 Ensure that borrowing rate is as per proclamation 286/2002 article 21.
Accounts Payable
Ask for a list of current and prior year accounts payable. Amounts that have been
outstanding for long periods may indicate fictitious liabilities and overstated expenses.
Overstated liabilities could also be unreported revenue.
Verification of Accounts Payable
Use the following procedures to verify outstanding accounts payable:-
 Trace large amounts to the original purchase invoice and delivery receipt.
 Trace purchase invoices through the cash disbursement journal. Where a cheque is
outstanding for an unusual period, the liability may be fictitious.
 Reconcile any significant shipments of product or supplies received before yearend
to inventory and sales invoices.
 Amounts outstanding for extended periods may indicate fictitious liabilities,
overstated expenses, or unreported revenue.
 Where amounts payable are outstanding to persons with whom the taxpayers is not
dealing at arm’s-length.
Accrued Liabilities
The procedures for verifying accounts payable are also applicable to accrued liabilities.
Additional audit procedures should ensure that accrued liabilities do not include amounts
that must be paid in the year incurred to be deductible. Amounts that must be paid in the
year incurred include:-
 convention expenses
 landscaping
 investment counsel fees

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  representation expenses
 investigation of sites
 utility connection charges
Deferred/unearned Revenue and Reserves
Audit procedures should include a review of the working papers the taxpayers used to
calculate deferred revenue and reserves. Ensure that the reserve or deferral is allowable
under the income tax proclamation.
Revenue may be deferred where:-
 goods are not to be delivered to the customer until after year-end
 services are not rendered until after year-end
 Proceeds from the sales of property are made on a deferred payment basis, for
which the property to be sold is to be delivered in the future.
 The amount deferred has been included in income in the future when the item is
delivered.
7.1.3. Auditing Equity Accounts
Audit procedures should include a review of the equity account(s). The taxpayers may
make adjusting entries directly to the equity account. Query any unusual entries (journal
entries or entries from unusual source journals).
Equity increments shall be verified to ensure that the source of fund is from sources for
which applicable taxes are paid. A decrease in accumulated profit is required for
verification to ensure that withdrawal of profit is subjected to dividend tax.

7.2. Auditing profit and loss account

Audit objectives
The audit objectives in the audit of the profit and loss account are to determine whether:-
 The net profit or loss of the year in the individual item of revenue and expenses that
are disclosed in the profit and loss account are properly stated.
 All item of revenue expenditures that are required to give a proper appreciation of
the results have been identified.
The relevant factors in the validation of the figures in the profit and loss account will be
based up on the evaluation and testing of internal controls, the specific validation of the
particular larger and unusual items and the review of performance indicators for
confirmation of the overall correctness.
Degree of reliance on internal control:
The extent to which the auditor will perform validation procedures on the detailed profit
and loss account items will depend primarily up on the degree to which he/she has placed

57
reliance on the tax payers’ system of internal control.
The auditor will have tested and evaluated the internal control and accounts recording
relative to the profit and loss account during transaction test on sales, purchase, stock
recording, payroll and cash & check payments.
Validation procedures
Where reliance placed on internal control
The detailed scrutiny of the accounting records for apparent correctness is a key validation
procedure which should be undertaken.
In relation to the detailed profit and loss account, the auditor should:-
 Check the additions.
 Check the items in the detailed profit and loss account with the accounting records.
 Review the items in the detailed profit and loss account for:-
• Reasonableness
• Consistency with previous years any obvious omissions based on his/her
understanding of the clients business.
 Ensure that all material categories of income and expenses have been subject to
appropriate audit examination.
 Identify any extraordinary items, exceptional items, prior year adjustments and
individual items of income and expenses that should be disclosed in the notes of
financial statements.
Where reliance not placed on internal control
Where the auditors’ evaluation or transaction tests on internal control have shown that little
reliance can be placed up on it, then he/she will only be able to obtain assurance as to the
accuracy and completeness of the transactions recorded in the tax payer’s accounting
records by undertaking extended validation procedures of both profit and loss statement
and balance sheet items.
Performance indicators
The auditor should consider whether the performance indicators appear reasonable having
regard to the business circumstances of the tax payer. Special attention should be paid to
any area where the evaluation or testing of controls has revealed weakness in internal
control.
Examples of performance indicators which may be examined in connection in the profit
and loss account are:
 Ratio of gross profit to cost of goods sold
 Ratio of raw materials consumed to sales

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  Ratio of direct wage to sales
 Ratio of net profit to capital and/ or accumulated profit/loss.
 Ratio of net profit to sales
 Ratio of production, distribution and administration expenses to sales.
The particular audit considerations in relation to the audit of sales, CGS, other income, and
expenses are reviewed as follows.
7.2.1. Sales and other income
Audit objective
The objective of the audit of sales is that all income relating to the year under audit has
been recorded as income, i.e to ensure that sales are not understated. Other income could
contain only miscellaneous items of income which do not result directly from the business
operation, such as transport charges, scrape sales and profit on sale of fixed assets.
The auditor is concerned to check the balance on the subsidiary sales ledger accounts and
agree the total with the control account balance, to ensure that proper cut-off procedures
were applied and that sales are reflected in accordance with the accounting policies of the
tax payer. Sales should be reconciled with the total of sales declared on the VAT/TOT and
turnover tax declarations as well to income tax declaration of the year as this provides
evidence the correctness of the accounts recording.
The sales ledger accounts should be scrutinized for apparent correctness and any
adjustment entries verified to ensure that they are not manipulations to decrease the
disclosed turnover.
Cut-off
Sales cut-off is defined as the procedure instituted to ensure that sales made during the year
are reflected in the accounts for that year. Because of the close relationship that exists
between sales and stock, the auditor will usually find it convenient to combine sales cut-off
validation procedures with the delivery element of stock cut-off.
Cut-off validation procedures should include an examination of:
 Records of goods delivered and related sales invoices of both before and after the
year end to ensure that sales are recorded in the period in which delivery was
effected.
 Records of good returns and claims from customers and related credit notes issued
(VAT Proclamation No. 285/2002 article13) both before and after the year end to
ensure that returns were recorded in the period in which the goods were taken back
in to stock and appropriate provision made for claims. Such examination will also
disclose any attempt at “window dressing” where by goods are delivered in one

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 year but not invoiced so as to decrease total turnover and the associated income tax
and VAT/TOT.
Sales invoiced but not delivered (advance collection)
There may be instances where sales have been invoiced before the year-end but the goods
concerned were still on hand. Whether such sales should be recognized, or whether they
should be reversed and the cost of the goods concerned included in the ending stock will
depend up on the individual circumstances. The types of tests include the following:
 Account for the numerical sequence of all invoices and credit notes and test the
recording in the Sales Register with particular attention to the year-end cut-off.
 Sampling the shipping and/or inventory records for goods shipped for the periods
immediately prior to and after the year-end to the sales invoices and records for
correct reporting. The date of receipt by the customer should be verified.
 test credit notes for returned goods issued immediately after the year-end in
relation to normal monthly patterns and seasonal business patterns;
 review bank deposit patterns for the period prior to and after the year end in
relation to normal monthly patterns and seasonal business patterns;
 review contracts that provide for progress billings with respect to the work
completed, work accepted, terms of invoicing and actual invoices issued and
recorded
 Review the transactions with customers who have accounts receivable credit
balances at the year-end for the subsequent disposition.
References shall be done to the sample audit program attached to annex….
Auditing income requires that auditors use various techniques depending on the specific
circumstances of the case. This often means going beyond the documented records to
determine the reasonableness of reported sales information. Analysis and observation are
useful to ensure that income from all sources has been reported.
During the preliminary phase of the audit determine the types of sales and the method of
reporting these sales.
Auditing Using the Detailed Analytical Approach
The detailed analytical approach involves obtaining a general understanding of the
business operations of the taxpayers. The preliminary interview and observation of day-to-
day functions are useful tools that help determine areas where errors are most likely to
occur.
The detailed analytical approach uses information obtained through observation,
discussion, documents or records obtained from either the taxpayers or from other sources.

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Techniques used by auditors to complete audits include the following:
 using judgment
 using an imaginative approach and adapting the audit plan to meet the objectives
and identified risks of the audit in progress
 using information outside the accounting records to perform the audit
Analysis and Observation
Analysis and observation are of primary importance to provide evidence of potential
problems with income and expenses as reported. Analysis of financial statements or the
income tax return may provide information that determines areas that require further audit
action. Some typical areas of analysis and observation include:
 analysis of gross and net profit margins
 analysis of the taxpayer's drawings
 analysis of assets (an increase in assets without corresponding source of funds may
indicate suppressed revenue)
 review of the list of suppliers and the timing of purchases can provide assurance
that the purchases relate to the reported income
 evidence that the taxpayer's residence and standard of living is not compatible with
reported income
Testing and Sample Selection
The degree of testing required is determined by the auditor's assessment of risk based on
internal controls, review of the accounting system, analysis of the returns and financial
statements, previous experience with the taxpayers, the type of business and the scope of
the audit.
Various methods may be used to select a sample of items for testing. Some common
criteria of selecting a sample are as follows:
 a selection of amounts over a certain limit
 all large items
 by supplier or customer
 by month
 to select a certain percentage of transactions (either percentage of Birr value or
percentage of the number of entries)
Third Party Information
Valuable information can be obtained during the course of an audit from third parties but
there should be sufficient evidence that indicates that third party verification is warranted.
Some examples where third party information is useful include:-

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  Where the audit was initiated as the result of a lead, there may be enough
information to narrow the scope of the audit thereby reducing the time required to
complete the audit.
 Information may be gathered during the course of the audit that warrants
verification of income from customers. This method should only be used when no
other method is available to verify sales due to the ramifications that may result.
 Local authorities such as registry offices and government agencies can be used to
obtain information such as lists of permits obtained for work sites or a listing of
revenue from auto insurance claims.
Auditing Cash vs. Accrual Method of Reporting Income
The preliminary interview with the taxpayers should confirm the method of reporting sales.
Virtually all company taxpayers are required to use the accrual method of reporting sales.
Where the taxpayer does not record revenue on the accrual basis, the remittance of
VAT/TOT on sales and the reporting of income may not be in accordance with legislative
requirements. Audit procedures should verify that VAT/TOT is remitted at the time of sale.
Cut-off procedures should be reviewed for purposes of remittance of VAT/TOT, claiming
input tax credits, reporting income and expenses.
Adjusting from the Cash Method to the Accrual Method
The taxpayer's method of reporting income during the year may require adjusting at year-
end for income tax purposes. Accounts receivable and accounts payable must be adjusted
to convert the taxpayer's records from the cash method to the accrual method.
Opening receivables and payables are subtracted from the reported amounts while ending
receivables and payables are added to the reported revenue and expenses. Inventory on
hand at the beginning of the year is added to cost of goods sold while inventory on hand at
year-end is subtracted from cost of goods sold.
Auditing the Various Types of Sales
The nature of the taxpayer's business often determines the primary types of sales. In the
retail industry, most sales are considered cash sales (payment made by credit card is
included in cash sales) while in manufacturing or wholesaling most suppliers have a credit
policy and customers have an established credit limit.
Electronic commerce is now a common method of conducting business. The transactions
are handled entirely on-line through various Internet sites and there may be limited
documentation for use in verifying the accounts. The adequacy of books and records must
be considered.

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 Sales on Account
Sales made on account can be recorded in many ways. The sale may be entered in a cash
register or a sales invoice may be prepared and entered in a sales journal. Usually the
taxpayers will have some form of credit policy and credit limits based on past experience
with the customer.
Suggested Audit Procedures
The following should be considered when reviewing sales made on account:-
 review the sales recording system
 determine whether there are reliable system based controls
 verify that controls are functioning as described
 test a sample of customer accounts to ensure that the sales are posted to an income
account
 if the taxpayers uses a double entry journal system, test a sample of posting entries
 review the sales summaries – test a sample of monthly summaries to ensure that
sales are posted to income accounts
 in many journal systems a column is used to post amounts to infrequently used
accounts – review these amounts to ensure that sales are not recorded in balance
sheet accounts
Cash Sales
Where a significant portion of the taxpayer's sales are cash sales, the method of recording
sales is of primary importance. A cash register, counter sales book, cash box, or cash
drawer may be used to record sales.
Where a cash box or cash drawer is used, the taxpayers may "pocket" the receipts without
issuing an invoice or providing any record of the sales. Usually bank deposits are the
method used to record sales. Control of cash is important to ensure that the reported sales
are free from material understatement. The method of reporting cash sales must be
determined with an overview of the controls in place to prevent loss. Unfortunately there is
often limited segregation of duties in smaller organizations where the majority of sales are
cash sales and therefore the risk that sales are understated is high. Other methods are often
necessary to determine the reasonableness of reported income.
Auditing Conditional, Installment and Lay Away Sales
Conditional sales are sales of tangible property where possession of property is transferred
but ownership passes only after certain conditions are fulfilled. Installment sales are sales
of tangible where ownership of the property transfers immediately but payment is effected
for in installments. In the case of lay away sales, possession and ownership transfers only

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after the recipient makes full payment to the supplier.
The impact of these types of sales is significant for both VAT/TOT and income tax
depending on when the revenue is recognized. The impact may be greater for VAT/TOT
due to the more frequent filing of returns.
Conditional and Installment Sales
Conditional and installment transactions are subject to the tax laws and legislation that
applies to sales of tangible personal property and determines when VAT/TOT is payable.
Where all or any part of the consideration for the supply has not been paid or become due
by the end of the calendar month following the calendar month during which ownership or
possession of the property was transferred to the recipient, tax will be payable on that day.
Lay Away Sales
Payments for lay away sales are usually made over a relatively short period of time. The
supplier treats each payment as a deposit. VAT/TOT does not become due on these
payments until such time as the property is delivered to the recipient and ownership
transfers to the recipient or the deposit is forfeited.
Auditing Construction Contracts, Progress Payments and Holdbacks
The reporting of revenue and VAT/TOT on long-term contracts is determined by the
contract for service between the supplier and the recipient, provincial laws that govern the
contracts and the timing of payments made to the supplier. Progress payments are
generally made based on a percentage of completion of the contract less any prescribed
holdback.
Reporting revenue for income tax purposes is only an issue when the contract straddles the
supplier's year-end. Large contracts may straddle more than one year-end. In this case,
reporting of revenue is based on the percentage of completion, as provided in the income
tax proclamation 286/2002 Article (63). VAT/TOT must be remitted on each progress
payment in the reporting period that the payment is due. Many contractors are required to
file returns monthly. As a result the impact of this type of contract is greater for VAT/TOT
purposes than for income tax due to the more frequent filing of returns. When progress
payments are made net off retention /hold back/ VAT/TOT should be paid on the gross
amounts payable to the contractor.
Auditing the Sales Recording System
Various methods are used by taxpayers to record sales. The sophistication of the system
depends to a certain extent on the size and type of business. During the preliminary phase
of the audit, all methods of recording income must be obtained. Some common methods of
recording sales include:-

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  cash registers
 sales invoices prepared either manually or by a computerized system
 bank deposits
Where the taxpayer is suppressing sales there will often be a secondary sales recording
system such as a separate sales invoice sequence or a diversion of certain forms of payment
to a separate bank account.
Sales Invoices
Sales invoices may be prepared manually or by a computerized sales system. A processing
system may be used to prepare invoices that appear to be computer generated but are
effectively manually prepared based on operator input. A computerized sales system that is
fully integrated from purchases and inventory through to the financial statements usually
provides the most effective system based controls. Where the system is not integrated the
taxpayers may use various methods to summarize sales.
Manually prepared Sales Invoices
Sales invoices that are prepared manually should be on pre-numbered forms to provide a
control of the invoices issued. Where the invoices are not pre-numbered, there is no control
of the invoices issued and verifying the numerical sequence does not provide assurance of
the completeness of sales. As a result, other methods are necessary to verify the
completeness of sales.
Audit procedures should include the following:-
 Where sales invoices are pre-numbered or system generated the sequence of the
recorded sales invoices should be verified. If the review indicates that there are
gaps in the numerical sequence, procedures are required to determine the reason for
the missing invoices
 The numerical continuity of invoice books should be verified.
 Where missing invoices are noted they may be marked as cancelled. A sample of
cancelled invoices should be tested to ensure that the invoice was in fact cancelled.
Where there is evidence that goods were shipped the cancelled invoice should
include a notation of the replacement invoice.
 Ensure that sales are recorded for each business day.
Where sales invoices are prepared manually the audit procedures should include
verification of the following:-
 the calculations on the sales invoices should be verified
 a sample of daily sales should be tested to ensure that the daily summaries agree to
the total sales invoices issued

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  deposits should be reconciled to sales and accounts receivable
 the procedure of refunds and credit notes should be reviewed
 the controls of returned goods should be queried
 the method of issuing refunds to the customer should be reviewed
Sales Summary
Where the sales invoices are prepared manually, there are essentially two methods of
preparing sales summary. One method includes the use of a cash register the second
method uses a journal system.
Regardless of the method used to summarize sales, the audit procedures should include
testing a sample of posting entries to ensure that the entries are free from material error.
Cash Register Sales Summary
Sales invoices are entered to a cash register that summarizes daily sales. The till tapes are
used to prepare sales summary that are usually in the form of journals.
Sales Journal
The sales invoices are entered to a journal that can be in the form of a simple ledger
(manual or electronic spreadsheet) or a one-write system. A one-write system also permits
recording of sales made on account by using individual customer ledger cards. The
journals are usually totaled at the end of each month.
Sales Invoices prepared by a Computer System
Where a computer system is used to generate sales invoices, the system review should
determine whether the invoice number is system generated or based on operator input.
Where the invoice number is based on operator input, verifying the numerical sequence
will not provide assurance of completeness of sales. Other procedures will be required to
ensure that all sales are invoiced and recorded.
Bank Deposits
In many small business operations the bank deposits are used to record sales. The receipts
are deposited to the bank account daily, weekly or as considered prudent by the owner,
manager. In many cases the deposit books are not summarized in a ledger and are the only
record of sales.
Where bank deposits are used to record sales, there may not be sufficient evidence to
support the VAT collected/remitted. Unless supporting information is available, VAT
should be remitted on the tax-included amounts of 15%. For income tax purposes the VAT
remitted is deducted from the deposited amounts to determine income.
Weaknesses of this method of recording sales include:-
 the taxpayers may not provide the customer with a voucher to support the expense

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 incurred or the amount of VAT paid
 income may be understated as a result of using cash received to pay for purchases
or expenses
 income may be understated as a result of cash withdrawn for personal expenses
Audit of cash registers
The information in this section serves as a general guideline for an auditor who is auditing
a taxpayer using a cash register to record sales.
Retail business operations including restaurants, grocery stores, convenience stores,
hardware, and department stores generally use some type of point of sale equipment such
as cash registers to record sales. Cash registers are used to record and compile data, and to
produce reports for business management. Where the taxpayer uses a cash register to
record sales, there are numerous areas of concern including the possibility of suppressed
revenues, manipulating or altering information, and internal control considerations.
Many industries have systems that produce numerous accounting reports and have system
controls in place to prevent the manipulation of information. In a small business the lack of
internal controls and the lack of segregation of duties increase the risk of sales being
altered. Cash transactions pose an even higher risk because usually there is no audit trail
for cash transactions. The auditor must determine the recording method for sales and
calculation of VAT/TOT. When a cash register calculates the applicable VAT/TOT, ensure
that there are controls in place to apply the proper percentage of tax and that the calculation
complies with legislative provisions regarding the rounding. The income reported for
income tax purposes must not include VAT/TOT.
Understanding How a Cash Register Works
To effectively complete the audit where a cash register is used to record sales, it is essential
that the auditor understand how the cash register works. Observing the cash register while
in operation, interviewing the appropriate personnel, obtaining and reviewing the operating
manual are various methods that provide useful information the auditor may:-
 Ask the taxpayers to explain how the cash register or cash register system and the
accounting system works.
 Obtain a reading of audit journal or of the Sales Summary (without a zero reset).
The taxpayers can then provide explanations regarding the information contained in
the report.
 Ask the taxpayers to explain how cash is balanced.
 Ask the taxpayers for the user manual of the cash register or cash register software,
for consultation. If the taxpayer does not have the user manual, the auditor may

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 contact the cash register supplier or software designer.
 Ask that the taxpayers or any other person present, to answer all relevant
questions by completing the relevant questionnaires.
Balancing the Cash Register
Most businesses directly use the information generated from the cash register to report the
sales for accounting purposes. Therefore, it is essential for the auditor to seek explanations
on how cash registers are balanced and to obtain the documents used for it. Cash registers
are balanced based on the cash register or based on the cashier. In some businesses, each
cashier balances their cash register or cash drawer and the head cashier, manager, or owner
intervenes only if there is a problem. In other businesses, the head cashier, manager, or
owner conducts the balancing, not the cashier.
7.2.2. Cost of goods sold
The composition of cost of sales which is, known as “cost of goods sold” in the case of
manufacturing companies will depend up on the nature of the company. In a trading
company it will be the opening stock of goods for resale, plus the purchase during the year
and less the ending stock. In a manufacturing company, it will comprise the total cost of
goods produced, i.e raw materials consumed and production expenses plus opening work
in process and less ending work in process, as adjusted for the difference between opening
and ending stock of finished products.
Purchase
The auditor will verify the amount of opening stock and work in process with the year’s
working papers and agree the closing/ending stock with the stock schedules. Purchase
accounts should be carefully scrutinized and material adjustments or other unusual entries
vouched and the total of the purchases accounts agreed with the nominal ledger control
account balance.
Cut-off procedures should be examined to ensure that purchases include the cost of all
goods received and taken in to stock. This will involve an examination of the goods
receiving note (GRN) of both before and after the year end to ensure the integrity of the
numerical sequences and that all have been matched with a suppliers invoice or transfer
from goods in transit, recorded in the correct financial period. Attention must be paid to
import purchases to verify that cost build up is as per VAT proclamation No. 285/2002
article 15.
The overall correctness of purchases and materials consumed may be substantiated by
applying performance indicators and overall reconciliations.
The following are examples of the basic audit tests that the auditor should conduct that are

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expanded upon in the Audit Program:-
 Compare the financial statements and income tax declaration for the current year
with those of the two preceding years, in order to determine significant changes in
gross trading margins, significant variances in labor, overhead and other
expenditures that will require examination;
 Reconcile the purchases and expenses record in the general ledger, subsidiary
ledger, financial statement and income tax return.
Examine long-outstanding 1iabilities which could indicate taxpayer financial difficulty,
legal disputes, returned goods not recorded, purchases from non-existent suppliers to evade
income tax and VAT/TOT;
Review the taxpayers system of internal controls and internal checks that exist with respect
to the ordering, receipt, storage, payment, withdrawal from stores, to the eventual
sale/disposition and the recording in the books of account, subsidiary ledgers and general
ledger.
 Obtain a summary of the taxpayer’s importation for the period from ASYCUDA++.
The information is also required to verify the taxpayer’s claim for the payment of
business income tax on imports and to ascertain if the taxpayer may be marketing
contraband goods;
 Confirm that the taxpayer is accruing expenses in, the correct taxation year with
respect to the purchases of services that apply to more than one taxation year;
 Confirm that the taxpayer is correctly accounting for VAT input tax credits and is
not duplicating deductions through the Customs Duty Drawback Scheme;
 Review the taxpayer’s accounting treatment for expenditures for repairs,
renovations or restoration with respect to capitalizing or expensing the outlays-
proclamation 608/2008 Article11;
 Review the diversion of products for sale to personal use or consumption of the
owner/shareholders that may have income tax and VAT/TOT implications;
 Test the delivery slips to confirm the locations to which goods for resale were
shipped by suppliers (also for vehicle and building repairs for personal purposes
rather than business);
 Confirm the validity and reasonableness of year-end accruals, by way of general
journal entry, such as additional wage bonuses, management fees or services
rendered but not invoiced. Wages should be taxed at the personal level to be
allowable. Services must have been rendered equal to the value accrued and be
justified. Accruals to the related party are subject to withholding.

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  Test the taxpayers arrangements for the payment of commissions on sales to
employees and agents, including year-end accruals, in relation to the sales revenue
reported;
 Test credit notes given by major suppliers for annual volume discounts. The
discount should reduce the value of purchases reported by the taxpayer;
 Review the taxpayer’s claims for commissions paid, often in cash, to secure
contracts. These claims should be disallowed unless the recipient is identified. The
revenue authority should follow up on the recipient’s subsequent declaration for
personal income tax purposes.
 Test the timing and recording of purchases for the periods immediately preceding
and following the year-end date to confirm the accurate accounting and tax
treatment for the correct taxation years
Production or manufacturing expenses
The detailed ledger accounts should be scrutinized for apparent correctness and any large
or unusual entries specifically validated as necessary.
The reconciliation, if any, of the total charge for direct wages with the monthly payroll
totals, should be reviewed and attention paid to expenses such as repairs & maintenance to
ensure that capital expenditure has not been wrongly charged to annual expenses as per
Income tax proclamation number 608/2002 article11.
The following are examples of the types of tests that the auditor could conduct that are
expanded upon in the Audit Checklist:
 Review the taxpayer’s costing methods, policies and procedures with respect to the
determination of the manufacturing cost and inventory valuations;
 Review the taxpayer’s adjustments made during the year and/or at year-end to
standard costs for price adjustments, revised labor rates, charges for custom work
and overhead rates;
 Reconcile the costs of goods manufactured and the related inventories for the year
to the production records, general ledger, financial statements and the Business
Income Tax Declaration;
 Confirm that the taxpayer has valued inventories in accordance with Article 22 of
the Income Tax Proclamation Trading Stock;
 Confirm that the taxpayer has not established reserves to reduce the value of
finished goods, for such matters as obsolescence or unsubstantiated losses that are
not deductible for the purpose of calculating the business income tax liability;
 Test the taxpayer’s system of internal control and internal check with respect to the

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 movement of the product through the manufacturing process to finished goods
inventories and the eventual sale or other disposition.
7.2.3. Administration and distribution expenses
Expenses are those incurred and contributed for the generation of income for the year
under audit. Those expenses incurred but will contribute generating income in the future
years shall be capitalized as deferred expenditures and amortized then after such expenses
start generating income.
The auditor should check the schedules of expenses with the subsidiary ledger accounts,
carefully scrutinizing such accounts for apparent correctness and for large and unusual
entries which should be vouched /checked as necessary. When reviewing expense
accounts, the auditor should determine that a charge only for the year (twelve months) has
been included for those expenses which accrue on a time basis such as salaries, rent,
interest, telephone and utilities.
The totals of the subsidiary ledger should be agreed with the control ledger account
balances and there to the financial statement amounts.
Comparisons with budget and comparative figures can show for the reasonableness of such
expenses and any major variations shall be justified. Audit tests on expenses can be
referred under purchases tests above.

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 CHAPTER EIGHT
8. AUDIT WORKING PAPERS
8.1.Definition of Audit Working Papers
The term “audit working papers” means the worksheets compiled by the auditor in the
course of making audit, together with other pertinent material. “Other pertinent material”
may include letters, faxes, memoranda compiled by the taxpayer, photocopies of letters,
reproduced copies of pertinent schedules, information from prior audit working papers, etc.
8.2.Purpose Of Working Paper
Audit working papers serve four major purposes:-
 They constitute a permanent record of the objectives and scope of the audit, as well
as the work performed during the audit. Work papers organize and coordinate all
phases of the audit.
 They contain the back-up material in support of the audit findings, conclusions,
recommendations, and comments.
 They contain the basic material from which the audit report is prepared.
 They reflect the quality and reliability of the work performed by the auditor and
substantiates and explains in detail the conclusions and findings presented to the
management.
8.3.General Guidelines For Working Papers
Working papers serve as the connecting link between the auditor’s work and the audit
report. As such, working papers should contain the evidence accumulated in support of the
conclusions and recommendations included in the audit report.
General guidelines for the preparation of working papers include:
A) Completeness and accuracy -Working papers should be complete and accurate in
order to provide proper support for findings, conclusions, and recommendations.
Working papers also document the nature and scope of the examination performed.
The test of completeness is whether a third party can review the schedule,
understand its purpose, and make use of it, without consulting with the auditor who
prepared it. Working papers will be examined by the auditor’s supervisor, and by
the reviewing auditors, and may be used by appeal committee, management and as
evidence in courts of law. They are the basis for recommended determinations and
usually serve as a measure of an auditor‘s experience and judgment.

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B) Clarity and understandability- Working papers should be clear and understandable
without supplementary oral explanations. The information they reveal should be clear,
complete, and concise. Anyone using the working papers should be able to readily
determine their purpose, the nature and scope of the work done, and the auditor’s
conclusions. Conciseness is important, but clarity and completeness should not be
sacrificed just to save time or paper.
C) Legibility and neatness— Working papers should be legible and as neat as practicable.
Sloppy working papers may lose their worth as evidence. Crowding and writing between
lines should be avoided by anticipating space needs and arranging the working papers
before writing. Some simple guides to follow in this respect are:
 Use careful handwriting
 Use of captions to separate subjects
 Separate subject matter properly
D) Pertinence— the information contained in working papers should be restricted to
matters that are material, pertinent, and useful with reference to the audit assignment. The
auditor should not copy figures from the taxpayer’s books without good reason, but should
consider the audit procedure and method of verification so that only necessary data will be
recorded.
8.4. Content of Working Papers
The content, quantity and type of working papers will be based on the auditors’
professional judgment. Factors entering into the judgment include:
 Objective
 Scope
 Degree of reliance on internal controls
 Extent of reliance on the work of others
 Condition of the auditee’s records
 Nature of the financial statements, schedules or other information which the auditor
is reviewing
Heading - The heading on each working paper can be limited to the Code Identification
Number /CIN/ for the review or it may be expanded to a more descriptive heading as
follows:
 Name of the Auditee
 Location of the Auditee
 Program audited
 Audit period

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Title - Each working paper should generally contain a concise, descriptive title of the
information contained in the working paper.
Date of Preparation and the Identity of the Auditor – Both should be included on each
working paper. If the date is not critical to the purpose of the working paper, then either the
date the working paper was started or the date it was completed is acceptable. However, if
the date is critical, then the date that the information is actually entered on the working
paper should be used.
Notes and Other Symbols - Whenever notes or symbols are used (numbers, letters, stars,
check marks, etc.), they should be explained in the working papers. Any tick marks used
should be explained in the working papers. (Tick mark is needed)
Index - The index (letter/number) should be included on each working paper
Review - Computations of key data can be of critical importance in a review. Therefore,
they should be independently verified by someone other than the preparer of the working
paper. Generally, team members can verify each other’s working papers. On each working
paper, the team member performing the verification should identify the computations
verified, indicate the date the computations were verified, and identify himself or herself as
the verifier.
Evidence of review should be documented in the working papers. Other information is also
essential to understand individual working papers.
The following information should be included on each working paper, or series of working
papers, whenever applicable:
Source of Information - Where did the auditors obtain the information for the working
paper? This applies to schedules prepared by the Auditee and furnished to the audit team as
well as to data compiled by audit team members. Where appropriate, include the name,
title or position, and telephone number of the individual providing the information. Source
citations should be definitive enough to ensure easy reference for the purpose of
independent verification, tracing and review.
Scope of the Examination - What did the auditors’ examination include? This is
particularly important when determining the volume of the transactions involved, the
number examined, what part of the total volume the audit test represents, why these
transactions were selected, what the examination consisted of, and the period covered by
the auditors’ review. When the analysis is based on a sample of transactions, information
should be included to describe the sampling plan. When external factors restrict the audit
or interfere with the auditors’ ability to form objective conclusions, the factors should be
explained in the working papers.

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Results/Findings - The results/findings section of the working paper summarizes in
objective terms what the auditors found. It does not contain the auditors’ conclusions.
Conclusion - A conclusion is the auditor’s opinion drawn from analysis and interpretation
of the facts contained in a working paper. When the conclusions recorded on one working
paper are based in part on information in other working papers, this fact should be noted
and appropriately cross-referenced. The conclusion should bear a relationship to the
purpose or objective for which the working paper was prepared, and it should not be based
on the audit as a whole. While maximum use should be made of schedules, analyses,
reports and other documents prepared by the Auditee, the working papers must clearly
state the conclusions that are drawn from the auditee’s documents.
Whenever an analysis or test involves repetitive working papers having the same attribute,
purpose, source, scope, results and conclusion, the detailed citations need be stated only on
the first or last working paper in the series.
8.5.Electronic Working Papers
Working papers developed on computers generally should be printed and, along with any
relevant backup, retained in the working paper files. Automated working papers should be
sufficiently documented to permit a reviewer to:-
 Identify the data processing procedures used.
 Determine how the data processing procedures were utilized.
 Ascertain that the data processing steps, procedures and logic were proper.
Documentation requirements for manually prepared records should equally apply for
computerized records.
Cross-Referencing
Cross-referencing is defined as a notation at one place in the working papers to related
information at another place. Cross-referencing may consist of an index page number,
line/column of a schedule, reference to a paragraph of a narrative document or any other
unique identifier which will pinpoint the location of data in the working papers.
No audit should be considered complete until the working papers are cross-referenced. It
should enable the reviewer to more quickly find supporting working papers and recognize
the relationship between working papers. It also facilitates post audit review. This may be
particularly important because the relationship of one set of facts to another may not be
known or readily apparent to the next person who uses the working papers without the
benefit of cross-referencing.
In a typical review, the following items should be cross-referenced:
 Working papers to each other, when appropriate

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  Audit program to the working papers
 Draft report to the working papers
 Final report to the working papers
8.6.Safeguarding Working Papers
Audit process is responsible for safeguarding working papers in their custody. Working
papers frequently contain information about Auditee operations that are of a confidential
nature. To protect Auditee information that may be confidential, working papers and data
should not be left open to the view of others who may not have a right to examine it.
Working papers should also be protected from theft, damage or loss at all times, including
during work breaks and overnight or weekend absences of the auditor. This may require
the use of file cabinets, desk drawers or briefcases with secure locks.
8.7.Review Of Working Papers
The most effective way to ensure the quality and expedite the progress of an audit is for
audit team members to review and comment on the working papers of the audit from the
start of planning to the completion of audit work and reporting. Participation by all team
members in the review of working papers adds fresh insight, assures quality products and
seasoned judgment to the work performed by less experienced staff. The depth of the
working paper reviews will vary. Reviews by on-site team members should be
accomplished frequently during the audit and are expected to be more detailed than those
made by higher-level, off-site audit team members. However, reviews at all levels should
be performed on an ongoing basis and documented in the working papers.

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 CHAPTER NINE
9. AUDIT REPORT
The preparation of reports is a very important step in the audit finalization process. The
Report is a summary of the work performed and any resulting assessment actions. In most
cases, the reports should satisfy the users’ needs without having to examine the detailed
working papers.
There are many potential users of audit reports. They include team coordinators, technical
advisors, other auditors, Appeals officers, Quality Assurance reviewers, etc. The reports
may also be made available to the taxpayer through a formal request for information.
Reports are a means of communication. They should be clear, complete, and concise. Each
audit report should present the facts objectively. The tone and style should reflect the
professional nature of the document and be free from personal opinions, comments, or
information concerning other taxpayers.
Generally, it is not necessary to prepare separate reports for each year assessed, unless the
case deals with a one year audit or investigative issues warranted. However, preparing
reports for individual years may be considered if the adjustments are complex and where
separate reports would help to clarify the adjustments. Sometimes more than one taxpayer
will be assessed as a result of the same audit (e.g. associated or secondary files). Separate
reports containing all the information pertaining to the assessment(s) must be prepared for
each taxpayer. The reader of the report should not have to refer to other files for
information regarding the assessment.
The following are the most commonly prepared audit reports:
• Auditor’s Report.
• Audit findings and recommendations letter.
• Reassessment notice.
The Auditor’s Report
The Auditor’s Report provides the reader with vital information about the audit, including:
 Who was audited?
 Who performed the audit?
 Nature and extent of audit procedures.
 Basis for any audit adjustments and how they were calculated.
A template is available that can be used for audits such as Income Tax and VAT audits.

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An Auditor’s Report must be prepared for every audit regardless of the nature and scope of
the audit. Use of the template provided helps achieve consistency as well as ensuring that
pertinent points are covered. Where other information not included in the standard template
should be included to enhance the team coordinators or other reader’s understanding of the
audit results, that information should be added.
Contents of the Auditor’s Report
The following sections describe completion of the Auditor’s Report using the template
available.
Section A: General Information
Indicate the tax audited (Income Tax, VAT, or Excise….), the audit scope (compliance,
restricted…), and for VAT audits, the audit type. The VAT audit type together with the
return type provides some T
Enter the following information:
 Taxpayer’s name
 Taxpayer’s address
 Period covered by the report
 Tax period
 Case and file numbers.
 auditor’s name
 team coordinator’s name
 date report completed
When a case is copied in, some information is filled in automatically but should be
reviewed to ensure its accuracy.
9.1. Auditor’s Report Authorization
The Auditor’s Report must be signed and dated by each person who prepared, examined,
or approved it. The signature of the team coordinator signifies approval of the extent and
quality of the audit work performed, as well as the results obtained.
Section B: Background/Overview of Taxpayer
A brief description of the taxpayer including commencement and nature of business,
activities conducted under the business, directorship and ownership of the business, related
companies or businesses, significant changes over the years and salient issues arising from
the initial interview.
Indicate whether the taxpayer being audited is the head office or a branch or Division, or
Subsidiary of the company. If appropriate and available, include an organization chart to
help readers understand the company’s capital structure. If the taxpayer is a partnership,

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indicate the number of partners, the types of partners (e.g. silent partner) and the
relationship of the partners.
Section C Scope of the Audit
A brief description of the audit objectives, the activities conducted prior and during the
audit (planning), list the records availed by the taxpayer during the audit, specify which
particular records were examined, and to what extent set objectives were met in accordance
with the audit plan, including limitations and deviations.
For a comprehensive audit, state the audit procedures followed and the files examined. For
a limited scope audit, state the reason for the audit. Make observations based on analyses
of the records examined, including:
 the type of records maintained by the taxpayer (i.e. electronic or manual)
 the completeness and accuracy of the records and books of account
 the accounting methods used, including the type of computer software if applicable
 Details of analyses made, including computer audit techniques used in analyzing
the accounts.
 the extent of reliance on internal controls
 tests performed (i.e. substantive and compliance tests)
 the ledger accounts audited
 areas of concern and areas where improvement is required
Discuss the evaluation of the records and any shortcomings with the taxpayer and suggest
corrective action where appropriate.
Section D. Findings, Adjustments and Justification
 Briefly summaries the audit findings that are of relevance to whatever
adjustments or recommendations you may come up with.
 Concisely state the adjustments you have made as a result of the audit and
justify whatever action you have taken.
 In a table format, provide a summary of your adjustments and the tax
implications of those adjustments in terms of chargeable income, tax assessed,
penalties imposed, tax paid and tax payable.

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 CHAPTER TEN
10. COMPUTER ASSISTED AUDIT TECHNIQUES (CAAT)
The auditor’s responsibility is to examine a taxpayer’s records to ensure compliance with
the applicable legislation. The increased use and availability of personal computers has
resulted in the majority of taxpayers maintaining some form of computer-based accounting
system and the need for auditors to be able to analyze the electronic records of the
taxpayers. Various software packages and techniques are used to analyze taxpayers files
maintained in electronic format.
The use of CAATs does not replace the need for the auditor to use professional judgment
in determining which audit procedures are required for each particular audit or in drawing
conclusions based on the findings of the procedures performed.
During the preliminary review of the file, a determination is made about whether a
Computer Assisted Audit (CAA) approaches will be used and if assistance from the
computer audit section will be required. While a CAA generally increases the efficiency
and effectiveness of an audit, there are situations where a manual audit may be required.
These situations include the following:
 the taxpayers does not maintain books and records in electronic format.
 there are insufficient trained IT Audit Specialists personnel available and the
auditor is not sufficiently trained to complete a computerized audit without
assistance.
 costs of converting the files are excessive and outweigh the benefits
 the electronic files retained by the taxpayers are not suitable for audit purposes.
The use of software should not be confused with performing an audit using CAAT. A
software package that allows the auditor to complete the working papers in an electronic
format, electronic storage of the audit file and automated upload of the audit results to the
mainframe computer system.
10.1. Advantages of Computer-Assisted Audit Techniques
Computer Assisted Audit Techniques (CAATs) are used to independently process the
taxpayer's electronic records, perform inquiries on the records to determine if the
information contained in the records accurately reflects the business operations and
perform various audit tests and analysis.
The specific advantages of using CAATs include the following:-
 Increasing the scope of audit by conducting tests that are not feasible manually.
 Increasing coverage by verifying a significantly greater number of transactions or

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 items than manually feasible.
 Providing better information through the use of more analysis and data profiling.
 A large number of detailed transactions can be balanced to totals reported by the
taxpayers.
 Selected customers, products, or specific items may be extracted from the total
population of items contained in the file quickly and efficiently.
 selected transaction types such as credit notes, consignment sales and purchases
from specific vendors may be extracted from the file
 exception reports showing transactions with errors can be reviewed
 the reliability of the sample of the population selected for manual review is
improved by using various sampling tools available
 calculations made by the taxpayers can be verified
 pertinent data can be classified into relevant categories
 specific items selected for review can be printed
 fragmented files can be combined
 Refund claims can be verified promptly.
 computerized tools can scrutinize the entire electronic file and apply a consistent
level of review to each record contained in the file
 Where errors are found within the selected sample, necessary statistics, tools, or
listings of the transactions with errors can be obtained or extracted from the file.
10.2. The Computer Assisted Audit Process (CAAP)
The Computer Assisted Audit process is quite detailed and requires a good knowledge of
systems, auditing experience and knowledge of programs used to manipulate data from the
taxpayer`s electronic files.
Procedures Using Computer Assisted Audit Techniques (CAATs)
The following audit procedures are often completed using CAATs:-
 analysis – calculating such things as ratios, margins, comparisons and frequency of
occurrence
 extraction – selection of specific items for sampling or analysis based on
established criteria
 summarization of transactions with a common element
 stratification of a population for sampling purposes
 sampling of data
 consolidation of information or data segregated by the taxpayers
 matching of separate files to determine a common element

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  duplicate detection
 detection of gaps in a numerical or chronological sequence
10.3. CAAT Software
Auditors with adequate training can use IDEA to conduct their own CAAT techniques.
However if assistance is required, the auditor can request the assistance of IT audit
specialists who have received in-depth training in CAAT.
In determining the software package to be used, the volume of information and ease of
download are important considerations. Other factors to consider include the availability of
hardware and software required by the various software packages, the auditor’s knowledge
of the software and time constraints. It audit specialists will usually determine which
software package is most suited to the taxpayer’s system and the specific audit
requirements.
Note; however the use of CAAT has a resource implication to ERCA both material
and skilled man power trained in various accounting soft-ware utilized by tax payers
in Ethiopia.

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 CHAPTER ELEVEN
11. REVIEW OF AUDIT
Review of audit work is a key aspect of quality control. All audit work should be reviewed,
ideally by an auditor with a higher level of competency and experience than the audit team
member who performed the audit work.
The Purpose of Review Procedures:
There are two main purposes of review procedures:-
 To ensure that audit procedures carried out were sufficient and appropriate to
reduce the risk of material misstatement to an acceptable level.
 To ensure that the financial statements are in agreement with the known facts and
comply with the relevant reporting framework and applicable tax laws.

11.1. Different levels of review

Quality assurance review

Final review

Detailed review

The principle of review is that ``one to do it, one to review it’’ is a good way of practicing
quality and avoiding silly errors.
For all audits not carried out by someone working alone, at least two levels of review
should be expected, before which the audit report and reassessment notice is released/
issued.
 The detailed review of the working papers carried out by the team coordinator.
 The final review conducted by the team coordinator or process owner with
responsibility for committing the audit by signing on the audit report.
These reviews are conducted as part of individual audit engagements.
 Quality assurance review- It is common for there to be further stages in the
review process after which the audit report and reassessment notice is released/
issued.

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  As part of the authority’s quality control process, reviews may be conducted on a
selection of files by the quality assurance team.
11.1.1 Detailed Review
 Carried out by the audit team coordinators on auditors’ work.
 Concerned with quality control
The fundamental issues to be raised at this stage are:
 Are working papers properly prepared?
 proper heading dates, identity of preparer, cross reference, definition of audit tick
marks etc
 Has the right work been done in accordance with the audit plan, audit program and
audit objective(s)?
 Is the amount of work sufficient but not excessive?
 are there any unresolved issues that can and should be resolved by the person
carrying out of the work- incomplete tests, carries not followed up etc
 Assessment of matters arising, ensuring that errors found and other issues
uncovered are summarized so that they can be brought to the process owner’s
attention.
11.1.2. Final Review
 Will not be a review of every piece of paper or electronic document or file that`s
the detailed reviewer`s job.
 Some quality control aspects:
• General review to ensure that working papers are properly prepared as per the
standard.
• Checklists and programs completed properly
• No obvious omissions or gaps occurred.
• Has the detailed review been conducted properly?
 What matters are arising?
• Are the issues raised fully understood?
• Can they be resolved by the process owner?
• What course of action does the process owner recommend?
11.1.3. Quality assurance review
 Takes place after the audit is finished and the audit report is signed.
 Is not concerned with detecting misstatements in the financial statements because
it is too late, but with ensuring that the authority`s procedures where applied
properly.
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11.2. How the Review Process Works
Review procedures operate like a series of filters.
 The “lower’’ down the triangle, the more detailed the review.
 ‘Lower‘’ reviews are expected to eliminate procedural problems.
 Lower reviews checked and refined the authority’s thinking on the substantive
issues.
 “Higher’’ reviews check that ‘lower’ reviews have been carried out properly.
 The final review, therefore, should really be about taking decisions on the audit
conclusion and about procedural matters.
11.3. The Role of Review procedures in detecting material misstatements
There are some fundamental truths about the role of review in the audit process:-
 If the audit is badly planned, there is only a limited amount the review process can
do to review the situation so good planning is key to a satisfactory audit.
 If audit procedure are badly performed, the process of review cannot change
this(good supervision, however can)
 If audit procedure is badly documented again, the review process cannot change
things.
 It is the review process which enables the decision to be taken ultimately by the
audit team coordinator/process owner, whether:
 The plan was satisfactory in the light of the audit evidence raised.
 If not, whether the plan was properly flexed to meet the new circumstances.
 Whether the audit work was carried out properly and stapes were taken to correct
any short comings
 Whether the evidence gathered has reduced the risk of material misstatement to
satisfactory level.
 Whether the audit conclusion on the financial statements is supported by the audit
evidence gathered.

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 CHAPTER TWELVE
12. FRAUD
Definition of tax fraud
Tax fraud occurs when an individual or business entity willfully and intentionally falsifies
information on a tax return in order to limit the amount of tax liability. Tax fraud
essentially entails cheating on a tax return in an attempt to avoid paying the tax obligation.
Tax fraud involves the deliberate misrepresentation or omission of data on a tax return. In
ERCA, taxpayers are bound by a legal duty to voluntarily file a tax return and to pay the
correct amount of income, employment, VAT and excise taxes. Failure to do so by
falsifying or withholding information is against the law and constitutes tax fraud. Tax fraud
is audited by Investigation Audit.
The following are indicators of fraud which the auditor may consider during the audit:-

A. Indicators of Fraud -- Income

 Unexplained failure to report substantial amounts of income determined to have

been received.

 Substantial unexplained increases in net worth, especially over a period of years.

 Substantial excess of personal expenditures over available resources.

 Bank deposits from unexplained sources substantially exceeding reported income.

 Inadequate explanation for dealing in large sums of currency

B. Indicator of Fraud -- Expenses or Deductions.

 Claiming fictitious deductions.

C. Indicators of Fraud -- Books and Records

 Keeping two sets of books.

 False entries or alterations made on the books and records, backdated or post dated
documents, false invoices, false applications, statements, other false documents, or
applications.
 Invoices are irregularly numbered, unnumbered or altered.
 Checks made payables to third parties are endorsed back to the taxpayer. Checks
made payable to vendors and other business payees are cashed by the taxpayer.
 Failure to keep adequate records, concealment of records, or refusal to make certain
records available.

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Those indicators which require further audit work shall be refer to the investigation audit
while on those indicators the tax auditor can assess the tax but require only further
criminal action shall be referred to the criminal investigation. The communication
regarding thus teams should be carried out in a written form and with the approval of the
tax audit team coordinator.

87
 REFERENCES
1. Ethiopian Revenue and Customs Authority, Domestic Tax Audit Manual.( Prepared
by coffeey, which is unpublished material)
2. Ethiopian federal Inland Revenue authority, Tax audit manual.
3. California franchise tax board, (internal procedures manual, multi state audit
techniques manual,).
4. Malaysia Audit manual (3rd Edition).
5. Rwanda Revenue Authority Domestic Taxes Department, Tax Audit Manual (3rd
Edition).
6. Employment Development Department State of California Tax Audit guidelines.
7. Guide for Tax Auditors in the Domestic Taxes Department, Uganda Revenue
Authority.
8. Preparation of Field Audit Report Audit Manual (Sales and Use Tax Department
California State Board Of Equalization).
9. Audit Manual under Value Added Tax Law (Commissioner ate Of Taxes
Government of Meghalaya).

I
ANNEXES
 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

13.1. PLANNING PHASE

DTA/WP/001
13.1.1. AUDIT PLAN FORM

TAX AUDIT PLAN

CASE NUMBER:-------------------------- AUDIT TYPES

TAXPAYER’S IDENTIFICATION AND ADRESS : Issue Audit
Taxpayer’s name:----------------------------- Comprehensive Audit
Tin:----------------------------- Refund Audit
Location:------------------------ ACTIVITIES
Telephone:------------------------ Main Business Activity:
Mobile:------------------------ Secondary Business Activity:
P.o box:------------------------ Date of commencement of audit:-----------------------------
RELATED PARTIES: Estimated days of audit:-----------------------------
Branches and locations:------------------------------ Estimated completion date:-----------------------------
Subsidiary/associated co’s and locations:--------------- TAX AUDITORS NAMES:
Other related businesses/co’s:--------------- 1. ---------------------------
PERSON TO CONTACT AND PERIOD TO BE AUDITED: 2. ---------------------------
Accountant’s name and addresses:--------------- TEAM COORDINATOR NAME:
Tax type(s) under review:-------------------------- 1. ---------------------------
Tax period to be audited:--------------------------
Previous periods audited:-------------------------
REASONS FOR SELECTION:-----------------

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

No. ACTION PLAN Esti. Actual Variatio Remark

Day/ Day/ n
Time Time

1. Review the tax payer`s business activity and financial statements, and document findings.
2. Interview the tax payer about the business activity and its Internal Control System.
3. Obtain a summary of Revenue and verify its correctness.
4. Confirm Expenses are accounted using appropriate reliable supporting documents
5. Verifications of Purchase & COGS
6. Check the Income Tax Computation On payroll Sheet And other allowances are treated as per
the P/ tax Proclamation And its regulation.
7. Check for deductions of withholding Tax for entitled expenditures.
8. Obtain Fixed Asset Summary and supporting schedules containing additions, disposals and
depreciations
9. Test the depreciation calculations on the group of individual assets; compare the results
within the depreciation expenses .on the F/S
10 Obtain any Bank Loan agreements and check for Interest expenses and repayment of loan to
source of Cash.
11. Obtain list of Collateral for the bank loan both from the company and outside; Inspect the
inclusion of properties into the financial records
12. Reconcile the Balances to the General Ledger entries to the FS.
13. Examine the General Ledger for any unusual entries and trace back to the source document.
14. Check accrued liabilities to journal entries to source documents for their appropriateness.
15. Discuss findings with the T/ Leader and Conduct additional Examinations and make
corrections based on the T/. Leader comment.

16. Organize Findings and conduct Exit-Conference with Team Leader

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
17. Prepare and submit Draft Assessment report and when approved by Team Leader Capture
Final Report to SIGTAS.

18.
Prepare Final Report and Assessment Notice.

Total Time To be Taken

Tax Auditors Name Signature Tax Audit Team Coordinator signature

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
13.1.2. NOTICE OF INTENTION TO AUDIT
DTA/WP/002

Comp /Tax payer Name ____________ TIN _____________

Address: Region _______Sub City _________ Woreda ____
House No._____ Telephone No.______

Subject: - Notice of Intention to audit under:

Income tax proclamation 286/2002 article 38 sub article 2(b)
VAT proclamation 285/2002 article 30 sub article 2(b)
Turnover tax proclamation 308/2002 article 12 sub article 2(b)
Excise tax proclamation 307/2002 article 9 sub article 2
Notice is hereby given under the above legislations of an intention to carry out an audit on your
operations for the years of ……………...

The audit will cover Accounts, Business income tax, VAT, Payee, Withholding tax, Excise tax.

You are therefore required to avail for examination the records, books of accounts and other
documents on or before ……………………. If this is not done, the authority will assess the tax
based on the available information.

The required books/ records/ documents should include, but are not limited to the following:-
Sales and Purchases invoices, Receipts, Credit Notes, Debit Notes
Sales and Purchases Journals
Ledgers
Cash Books
VAT Records and Returns
Excise Records and Returns

The audit will be conducted at your business premises. In order to perform the audit, the under
named auditors are assigned.
1. Ato/W/r…..
2. Ato/W/r…..

With regards

Notice received by: Name__________________

Position/title_____________
Date___________________

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
DTA/WP/003

13.1.3. ENTRANCE INTERVIEW QUESTIONNAIRE - FIELD AUDIT

1. Comp/Tax payer Name: ………………TIN No.…………………

Address: …………………………………………………..
2. Name and position of those present at interview:
On behalf of the tax payer on behalf of the tax authority
1. ______________ 1. ____________________
2. ______________ 2. ____________________

Date and time of interview ………………… Place...………………….

3. Explain Scope of Audit: ……………………………

Reasons for interview: …...………………………………….

4. Agenda-----------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
------------------------------------------------
5. Business Activities:
A. Income cash – How are cash receipts reconciled?
• Who is responsible for reconciling them?
• What supporting records are available?
• Are receipts banked entire? If not what records are kept of gross takings and payments
made?
• How was the sales figure in the accounts arrived at? Is same agreed with above records?
B. Payments – Are all payments made by cheque?. Who draws cheque?
• If there are cash payments including private items how are these recorded dealt with in
the accounts? Are invoices and receipts available for verification?
C. Debtors – Are there credit sales?

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

• What records are kept?

• Is a debtors control account maintained?
• Is a list of balances available?
• If not how is end-of-year figure arrived at
D. Creditors – End of year figure
• How arrived at. What records? Obtain copy.
E. Stock-Is there any stock or works in progress.
• What stock records are kept?
• Obtain copy of stock sheets
• What is the basis of valuation?
F. Private Use – Goods and cash taken for private use.
• What adjustments are made?
• How are they computed?
• Are they regularly reviewed?
• What supporting documents are available?
• How are they recorded in the accounts?
• Motor Vehicles and private premises
• Is adjustments made?
• How is it calculated?
• What justification for business portion is there evidence to support this?
G. Obtain authorities for all business bank accounts, and solicitor trust Accounts.
• Full list of all bank accounts (including Savings Banks).
• Current Accounts_________________
• Fixed Accounts____________________
• Term Deposits______________
• Investment Accounts_________________
• Savings Accounts______________________
• Treasury Bills_______________________
• Treasury Bonds._______________________

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
H. Internal check – Enquire as to the allocation, of staff duties and employees relationship
to proprietor, in particular.
I. Income Cash – What is system for recording cash sales?
• Who receipts debtors’ remittances?
• Who reconciles the cash taken with the total of cash sales and debtors’ remittances and
what record of such reconciliation are available?
• Who banks the cash and at what intervals?
II. Debtors – What is the system for ensuring that all goods dispatched are invoiced?
• How is debtors’ cash posted?
• Who controls credit note issue?
• Who balances Debtors’ Control Account?
• Creditors – How is the receipt of goods verified and recorded and by whom?
• Who draws cheque in payments of suppliers’?
• Who codes payments and what is coded? cheque butts, invoiced
III. Wage payments – from what base data are wages calculated?
• Is same available for inspection?
• Who calculates wages?
• Who draws wages cheques?
• Who makes up pay packets?
• Who actually pays the employees?
• Are wages paid from cash and if so are the wages and
• PAYE correctly recorded?

5. What are the major customers of the company?

__________________
__________________
6. What are the major suppliers of the company?
_______________________________
_______________________________
7. Are there related parties with transactions under the definition of related party under income
tax proclamation 286/2002 article 2(4)? If yes, state the names, nature of relationship and
amounts of transactions.

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
13.2. EXECUTION PHASE
13.2.1. Audit programs
EDTA/WP/004

AUDIT PROGRAM FOR CASH /BANK BALANCES

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

Audit Objectives F/st. Assertions

Cash collected or deposited is recognized as income or Revenue of the company.
 Cash receipts and cash disbursements are recorded correctly as to account, amount, and
period.
 Cash balances include funds at all locations, funds with custodians and deposits in transit.
Completeness
 Cash is properly classified and presented in the financial statements, and adequate
disclosures are made with respect to restricted cash.

Prepared by Working
paper
Audit Steps: (Document audit steps taken or to be taken.) Reference

Cash
1. Review the internal controls and systems with respect to the reconciliation of daily cash
receipts and banking.
2. Compare the balances indicated in the books of account, general ledger, and financial
statements.
3. Determine the roles played by the key shareholder/officials are involved in the
maintenance of records and in the banking of revenues.
4. Determine if cash collected is used for petty cash operational requirements, wage
payments, remuneration of official and non-business expenditures.
5. Test the daily deposits to the cashbook, bank deposit and bank statements.
6. Determine if the company employees are bonded by an insurance company and the
requirements placed by the insurer with respect to controls, reporting etc. Check if the
taxpayer has lodged claims with the insurer for the loss or theft of funds.
7. If the auditor has reason to suspect that the controlling shareholders or executives of the
company may be suppressing income and siphoning funds, review the details of their
personal bank accounts and request explanations of deposits which are inconsistent with
the remuneration made;
8. As a follow up to the above, conduct a net worth assessment of the major shareholders or
company executives to establish the changes in net assets in relation to the salaries and

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
compensation paid by the taxpayer. The taxpayer will be required to disclose the sources
of income;
9. Determine if the taxpayer has taken police or legal action with respect to funds, which
have been misappropriated.
10. Consider attending the cash reconciliation process at the end of the day to ascertain the
reliability of the reconciliation process.
11. Verify the role of the external or internal auditors with respect to surprise and year-end
cash counts.

Bank Balances
1. Review the internal controls and systems with respect to the banking of deposits and
disbursements.
2. Determine the policies and procedures with respect to the maintenance of foreign
currency accounts, payments and transfers, particularly to overseas accounts.
3. Confirm the agreement of the bank balances indicated in the books of account and
financial statements with the banks’ statements, including foreign accounts;
4. Ascertain if the independent auditor confirmed the account balances directly with all of
the banking institutions, including foreign banks;
5. Test the monthly banking transactions, paying particular attention to cheques made out to
“Cash”, Bearer” or company officials that are supposedly used for business purposes.
Check the endorsements on cheques that seem to be out of the ordinary.
6. Test the transfers to foreign accounts to the bank’s transmittal advice notice.
7. Determine the source of deposits that are from non-operational sources, such as bank
loans, shareholder capital contributions etc.;
8. Consider requesting the confirmation of bank balances directly with the banking
institution if there are doubts as to the validity or accuracy of the taxpayer’s records.

Cash/Bank Balances
Tax Period Per Return Per Exam Adjustment

Conclusion: (Reflects the final determination on the issue.)

Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit
program have been achieved.
Performed by Date
Reviewed and approved by Date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

DTA/WP/005

AUDIT PROGRAM FOR ACCOUNTS RECEIVABLE

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

Audit Objectives F/st. Assertions



 Completeness

Prepared by Working
paper
Audit Steps: (Document audit steps taken or to be taken.) Reference

1. Reconcile Accounts Receivable per return to general ledger (schedule: General Ledger
account number, account description, & amount). Explain any differences. Secure an
analysis of the receivable by class that is, by note or open account status, and by
obligors, such as customers, affiliated companies, stockholders, officers, employees
and others.
2. Compare beginning general ledger balance to ending general ledger balance.
Investigate significant changes.
3. Review the subsidiary receivable ledgers or a trial balance based on these ledgers.
They should agree in total with the control accounts. Any unusual credit entries, in real
amount; by source (posting reference), in nature (descriptions), or a credit balance
should be investigated. Credit entries may indicate deposits or overpayments which
could be considered as additional income or unrecorded sales. Accounts Receivable
postings are usually from sales journal & cash receipts journal. Unusual entry would
be credit entry not from cash receipts journal.
4. Obtain Trial Balance of accounts receivable & compare total to the controlling
accounts receivable general ledger account. Investigate any differences e.g. diversion
of funds, large credit balances. Income ? e.g. deposits, overpayments received.
5. Sample debit entries in accounts receivable subsidiary ledger (individual customers)
and trace to sales journal for unreported sales in accounts receivable ledger & trace to
cash receipts journal. If no entry in cash receipts journal did company write off as bad
debt? Debit Sales? Diversion of funds?
6. In cash receipts journal, sample credit entries to accounts receivable where Debit is to
cash & verify sale was previously recorded.
7. Ask company what percentage of sales represents cash (vs. sales on account). Then
review cash receipts journal for a month or two & compare total cash sales to sales for
same two months in sales journal (sales on account).
8. Verification of the list of receivables with the subsidiary ledger general ledger and

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
financial statements;
9. The inclusion of non-trade accounts on the list, for example, advances to shareholders
that may represent a form of remuneration which should be taxed at the personal
income level;
10. Notation of credit balances on individual customers' accounts for further examination.
The credit could represent a bona-fide credit for goods returned, an advance payment, a
misclassified loan or a payment for goods purchased by the customer for which the
sale has not been recorded in the records;
11. Discussions with the external auditor to determine the extent of his/her independent
verification of receivables;
12. Review of agreements covering loans payable to determine the value of accounts
receivable pledged as security by the taxpayer. Direct verification with the lender may
be necessary.
13. For bad debts the auditor will have to satisfy himself that the taxpayer has complied
with Article 25 of the Income Tax Proclamation and consider the following;
 The transactions which gave rise to the debt to confirm validity as a trade
debt, age of debt etc.
 Efforts by the taxpayer to collect the debt (i.e. has taken all steps reasonably
necessary to recover the debt)
 Correspondence between the taxpayer and his customer payments, if any, by
the customer subsequent to the year-end
 The taxpayer's practice of continuing to sell to the customer despite the
doubtful collection status
 If possible, determine the financial status of the customer i.e. bankrupt, non-
operating, etc.
 The existence of security or guarantees pledged by the customer to secure the
debt.

ACCOUNTS RECEIVABLE
Tax Period Per Return Per Exam Adjustment

Conclusion: (Reflects the final determination on the issue.)

Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit
program have been achieved.
Performed by Date
Reviewed and approved by Date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

DTA/WP/006

AUDIT PROGRAM FOR INVENTORY

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

Audit Objectives F/st. Assertions



 Completeness

Prepared by Working
paper
Audit Steps: (Document audit steps taken or to be taken.) Reference

Inventory for merchandise

1. If practical, for example in the case of a retailer, visit the business premises of the taxpayer
before the commencement of the audit and observe the taxpayer’s practices with respect to
inventory management, invoicing, and cash management.
2. Determine the extent of the verification performed by the independent external auditor;
3. Compare the taxpayer’s inventory records (or year-end inventory list) with the books of
account, financial statements and tax declaration. Note the locations, costing method and
any provisions made for obsolescence. Test the costs from the suppliers invoices, import
entries etc. for the items that comprise the majority of the reported inventory. Determine
the inventory valuation method used by the taxpayer and its acceptability in relation to
Article 22 of the Income Tax Proclamation-Trading Stock.
4. If the taxpayer maintains perpetual inventory records, compare the physical inventory stock
taking record, on a test basis, and review any adjustments made by the taxpayer with
respect to shortages, values and the like;
5. Review the taxpayer’s accounting system and internal controls related to the movement and
storage of finished goods, particularly with respect to goods stored at the premises of
company officials. Determine if the taxpayer takes periodic inventories; maintains formal
or temporary inventory records and a stock level/recorder process;
6. In the event that the auditor suspects that the taxpayer may be suppressing sales or income,
identify the personnel who have knowledge of the taxpayers inventory management
practices and procedures for the purposes of obtaining information under the provisions of
Article 38 and Article 79, or taking enforcement action under the provisions of Articles 97

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
and Article 98 of the Income Tax Proclamation;
7. Compare the regular selling price of the major items in inventory to the invoiced cost to
determine if the indicated profit margins are reasonable and consistent with the financial
statements and the tax declaration;
8.Estimate the retail value of the inventory of goods for sale, the gross trading margin, and the
frequency of the annual inventory turnover in order to determine the reasonableness of the
inventory value;
9. Visit the taxpayer’s premises where goods are stored and identify the types of goods that
the auditor suspects may be contraband or counterfeit and request the taxpayer to provide
supporting documentation. Inform the audit superior if there is reason to believe that the
taxpayer is evading taxes and customs duties for direction on the course of action to be
taken.
10. Test the values of inventories of imported goods to the supplier’s invoice, ERCAs
evaluations and entries.
11. Depending on the date the taxpayer took the physical inventory, test the taxpayer’s system
and procedures with respect to making adjustments for sales and purchases in order to
arrive at an accurate inventory on the closing date of the taxation year;
12. Review any loan agreements to determine the description, quantities, value and location of
inventories pledged by the taxpayer as security. The lender may have a floating charge on
all inventories and the borrower may be required to provide updates of inventory levels. In
addition, the lender may insist on insurance coverage and the auditor should review the
insurance policies for details and the supporting independent inventory valuations.
13. Determine the composition of the inventory that may have been supplied by the foreign
parent or associated company for subsequent investigation with respect to transfer pricing
or fair market issues.

Inventory for manufacturing

Goods of the taxpayer’s own manufacture should be valued on the basis of the aggregate of
the cost of material, direct labor and overhead.
1. Match the physical inventory records with the perpetual inventory or warehousing records
(if maintained) to the general ledger, financial statements and tax declaration;
2. Determine the extent of the verification conducted by the independent external auditor;
3. Review the costing methods used by the taxpayer to value closing inventories, work in
process and sales of finished goods. Review the periodic or annual adjustments made by
the taxpayer to update standard costs and the adjustments made to the values of
inventories and cost of goods sold. Ensure that the excise tax is treated as part of the cost
of production and not as an operating expense. Ensure that custom work provided by
third parties, such as specialized machining of the product, are include in the production
costs and not as an expense;
4. Review the method and basis used by the taxpayer to value goods below cost, due to such
matters as product obsolescence, faulty production runs and the like. Determine if some
of these products have been sold subsequent to the year-end and the sale value thereof;
5. Determine if the inventories have been pledged as security for loans and review the
insurance coverage.
6. Determine the raw materials and components that may be supplied by the foreign parent
for subsequent review under the transfer pricing considerations;
7. Compare the established selling prices of the major items in the inventory to the
manufacturing costs, and subsequently to the financial statements and tax declaration for
reasonableness and consistency;

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

COST OF INVENTORY
Tax Period Per Return Per Exam Adjustment

Conclusion: (Reflects the final determination on the issue.)

Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit
program have been achieved.
Performed by Date
Reviewed and approved by Date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

DTA/WP/007

AUDIT PROGRAM FOR FIXED ASSETS

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

Audit Objectives F/st. Assertions

 Completeness


Audit Steps: (Document audit steps taken or to be taken.)

Prepared by Working
paper
reference
1. Review general ledger accounts- Insure that ending balance reconciles to tax return. Determine that
any book & tax differences are reflected in separate schedules.
2. Reconcile additions and/or deletions to other gain or loss entries.
3. Independently trace selected debits from depreciation reserve to verify removal from reserve & possible
omitted sale of depreciable assets.
4. Scan depreciation schedule for proper lives, methods, etc.
5. Examine asset additions (basis in fixed assets or depreciation schedule:
• Verify that tax basis included all related costs to place the asset in service; e.g. transportation,
installation, taxes, legal fees, etc. Verify ownership; review invoices paid, review contracts,
property tax, and physical inspection.
• Analyze lump sum acquisition for allocation of basis.
• Analyze land/building allocation.
• When an asset acquisition occurs via tax-free exchange? Verify correct basis cost of assets traded
plus other cash or consideration given.
• Verify value of assets acquired from related parties. In addition to purchase documents, verify
values from third party sources for comparisons.
• Verify property transferred as capital; proper value and actually transferred.

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
6. Verify proper costs being charged to asset account of self constructed assets. Review internal costing
practices on self constructed assets to ensure all costs from all active expense accounts are properly
included in basis of self constructed asset. Inspect asset for further ideas on which expense areas may
have related costs.
7. Where acquisition consideration is other than cash, review method used in arriving at basis. In these
acquisitions, the basis of the property or properties traded must be verified and properly allocated to the
new property.
8. Corporate acquisition? Is there a stepped up basis? You will need purchase documents, appraisals,
allocation schedules, and any other documents related to the purchase.

9. Check company policy on capitalization of minor items. Inquire into change to the company’s
accounting for major repairs, additions, deletions etc. Inquire if remodeling/renovation done.

10. Did new asset replace old? Gain/Loss correctly computed? If old asset traded in on new asset, was gain
or loss on old asset correctly adjusting basis of new asset.
11. Dispositions of obsolete assets or obsolete repairs parts: verify that they are actually disposed - sold,
junked, etc. If they remain under company control, lack of use does not justify recording the possible or
estimated loss.
Depreciation

1. Reconcile the amount(s) per return to Taxpayer’s records.

2. Check depreciation method to determine compliance with tax law and consistency with prior years.
3. Determine assets included in depreciation deduction (proper classification).
4. Ensure items depreciated are depreciable (land not depreciable) and are ordinary and necessary to
taxpayer business.

5. Examine purchase invoices, receipts, etc. to verify ownership of assets.

Examine purchase invoices, receipts, etc. to verify cost of assets and date assets were
6. placed in service.
7. Determine appropriate cost basis for depreciation (consider capital improvements, prior depreciation,
adjust the cost basis of a depreciable automobile by the trade-in value of a prior automobile, etc.).

8. Determine if any assets were sold by comparing with prior year depreciation schedules. Recapture any
depreciation from sale of assets if applicable (balancing charge).

9. Examine logbooks and other records to determine percent business use of assets depreciated.
10. Determine if proper useful life of the asset is utilized.
11. Calculate depreciation deduction. Check the mathematical calculations.

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

FIXED ASSETS
Tax Period Per Return Per Exam Adjustment

Conclusion: (Reflects the final determination on the issue.)

Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit
program have been achieved.
Performed by Date
Reviewed and approved by Date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
DTA/WP/008

AUDIT PROGRAM FOR COST OF GOODS SOLD

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

Audit Objectives F/st. Assertions

 





Prepared by Working
paper
Audit Steps: (Document audit steps taken or to be taken.) Reference

Action Required-Confirm that the taxpayer’s claim for expenses deducted in computing
taxable business income comply with the provisions of Articles 20 and 21 of the Income Tax
Proclamation and the supporting Regulations 9 to 11 inclusive.

1. Compare the financial statements and tax declaration for the current year with those of the
two preceding years, in order to determine significant changes in gross trading margins,
significant variances in labor, overhead and other expenditures that will require
examination;
2. Reconcile the purchases and expenses recorded in the books of account, general ledger
and financial statements with the income tax declaration;
3. Reconcile the list of accounts payable with the general ledger, subsidiary ledger, financial
statements and tax declaration. Test the statements of the major creditors for agreement.
Identify liabilities which may be trade accounts payable, such as loans or advances made
by shareholders or company officials, which will require further review in relation to
interest charges and the application of Article 21 (3) and supporting Regulation 10;
4. Review long-outstanding debts to suppliers, which may be indication of goods returned
but not recorded to offset the debt; disputes between the taxpayer and supplier; false

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
purchase transactions intended to overstate costs and, possibly, VAT input tax credits;
5. Determine the degree to which the independent external auditor verified the trade
accounts payable;
6. Review and test the accounting system and internal controls/checks that exist over the
ordering, receipt, storage, payment and withdrawal of goods and the recording in the
Purchase Journal, subsidiary ledger, and general ledger.

7. Test the taxpayer’s recording of the purchase invoices to the purchase Journal, subsidiary
accounts payable ledger, and subsidiary asset or expense ledgers and to the general ledger.
Pay particular attention to cash purchase and consider disallowance if the expenses can
not be substantiated by the taxpayer;
8. Obtain a summary of the taxpayer’s importations for the year form the ECuA, analyzed
by tariff item or other criteria, for comparison to the books of account. This information
is required also for the purposes of verifying business income tax paid on imports and to
ascertain if there is reason to believe that the taxpayer is also marketing smuggled goods.
The latter situation would be indicated by the taxpayer’s sales, or inventory levels of a
specific product being inconsistent with the recorded value of the importations;
9. Test the taxpayer’s purchases that involve claims for VAT input tax credit to confirm that
the supplier is a VAT registrant; the purchase is for VAT taxable operations;
10. Confirm that the taxpayer pro-rates purchases/overheads are pro-rated where the taxpayer
is engaged in VAT taxable and VAT exempt operations;
11. Confirm that the taxpayer is not claiming duplicate input tax credit on the importation of
goods that are also subject to Duty Drawback Claims in relation to Article 21(7) of the
VAT Proclamation;
12. Test purchase of goods and service where VAT has not been charged by the supplier and
the suppliers of imported services, the latter to ensure that the taxpayer has withheld and
paid VAT and Income Tax;
13. List (in the working papers) the suppliers of good/services who are not registered for
VAT for which follow-up action by the ERCA is warranted;
14. List the major foreign and domestic suppliers, by transaction volume, for subsequent
testing of product costs, trading margins on sales in order to test the reasonableness of the
reported gross profit margin in the financial statements;

COST OF MANUFACTURING

Action Required-Confirm that the taxpayer is accurately accounting for the costs of
manufacturing and inventories of raw materials/components, work in progress, finished goods
and operating supplies.

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
1. Review the taxpayers costing method, policies and procedures with respect to the
determination of manufacturing cost and inventory valuations. Review the adjustments
made during the year and/or at year-end to standard costs for price adjustments, revise
labor rates, charges for custom work and overhead rates.
2. Reconcile the costs of goods manufactured and the related inventories for the year to the
production records, general ledger, financial statements and the excise tax and income tax
declarations. Confirm that inventories have been valued in accordance with Article 22 of
the Income Tax Proclamation –Trading Stock. Confirm that the taxpayer has included the
appropriate cost items in the overhead computation. Determine the extent of Verification
made by the independent external auditor.
3. Test the taxpayer’s actual systems of accounting and internal controls with respect to the
manufacturing process with respect to:
• Raw materials and components – purchases transfer to stores, withdrawals from
stores, wastage or unauthorized diversions, completed production runs, unit cost
component, foreign exchange and cost adjustments;
• Contracted services, such as machining for which the taxpayer does not have the
facility or the capacity and the taxpayer’s treatment as a direct cost or as overhead;
• Labor-rate differentials according to personnel skills and experience, wage and
benefit packages, union agreements, treatment of employee termination payment’s
overtime payments, temporary employees and other matters;
• Overhead-inclusion of all overhead costs, cross-reference to the books of account
and tests of suppliers to confirm the costs incurred;
• Inclusion of the excise tax in the costs;
• Finished goods-transfers to finished goods inventories, unit costing and cross-
reference to sales, valuation adjustments and the like;
• Work in progress – production runs completed, reasonableness of the value of goods
transferred to the finished goods inventory during the period immediately following
the year-end date.
4. Compare the financial statements and tax declaration for the current year with those of the
two preceding years, in order to determine significant changes in gross trading margins,
significant variances in labor, overhead and other expenditures that will require
examination;
5. Reconcile the purchases and expenses recorded in the books of account, general ledger
and financial statements with the income tax declaration;
6. Reconcile the list of accounts payable with the general ledger, subsidiary ledger, financial
statements and tax declaration. Test the statements of the major creditors for agreement.
Identify liabilities which may be trade accounts payable, such as loans or advances made

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
by shareholders or company officials, which will require further review in relation to
interest charges and the application of Article 21 (3) and supporting Regulation 10;
7. Review long-outstanding debts to suppliers, which may be n indication of goods returned
but not recorded to offset the debt; disputes between the taxpayer and supplier; false
purchase transactions intended to overstate costs and, possibly, VAT input tax credits;
8. Determine the degree to which the independent external auditor verified the trade
accounts payable;
9. Review and test the accounting system and internal controls/checks that exist over the
ordering, receipt, storage, payment and withdrawal of goods and the recording in the
Purchase Journal, subsidiary ledger, and general ledger.
10. Test the taxpayer’s recording of the purchase invoices to the purchase Journal, subsidiary
accounts payable ledger, and subsidiary asset or expense ledgers and to the general ledger.
Pay particular attention to cash purchase and consider disallowance if the expenses cannot
be substantiated by the taxpayer;
11. Obtain a summary of the taxpayer’s importations for the year form the ASYCUDA++,
analyzed by tariff item or other criteria, for comparison to the books of account. This
information is required also for the purposes of verifying business income tax paid on
imports and to ascertain if there is reason to believe that the taxpayer is also marketing
smuggled goods. The latter situation would be indicated by the taxpayer’s sales, or
inventory levels of a specific product being inconsistent with the recorded value of the
importations;
12. Test the taxpayer’s purchases that involve claims for VAT input tax credit to confirm that
the supplier is a VAT registrant; the purchase is for VAT taxable operations;
13. Confirm that the taxpayer pro-rates purchases/overheads are pro-rated where the taxpayer
is engaged in VAT taxable and VAT exempt operations;
14. Confirm that the taxpayer is not claiming duplicate input tax credit on the importation of
goods that are also subject to Duty Drawback Claims in relation to Article 21(7) of the
VAT Proclamation;
15. Test purchase of goods and service where VAT has not been charged by the supplier and
the suppliers of imported services, the latter to ensure that the taxpayer has withheld and
paid VAT and Income Tax;
16. List (in the working papers) the suppliers of good/services who are not registered for
VAT for which follow-up action by the ERCA is warranted;
17. List the major foreign and domestic suppliers, by transaction volume, for subsequent
testing of product costs, trading margins on sales in order to test the reasonableness of the
reported gross profit margin in the financial statements;

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

COST OF GOODS SOLD

Tax Period Per Return Per Exam Adjustment

Conclusion: (Reflects the final determination on the issue.)

Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit
program have been achieved.
Performed by Date
Reviewed and approved by Date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

DTA/WP/009

AUDIT PROGRAM FOR ACCOUNTS PAYABLE & OTHER LIABILITIES

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

Audit Objectives F/st. Assertions

 
 
 
 


Prepared by Workin
g paper
Audit Steps: (Document audit steps taken or to be taken.) Referen
ce
ACCOUNTS PAYABLE & OTHER LIABILITIES
1. Reconcile the taxpayer’s list of accounts payable with the subsidiary ledger, general ledger,
financial statements and tax declaration.
2. Compare beginning & ending balances and investigate significant changes.
3. Review general ledger for unusual entries.
4. Accrued expenses:
• Determine how accruals were computed; ask company; review amortization schedule where
applicable; review agreements/contracts if necessary.
• Determine if accruals are deductible. E.g. Related parties - accrued bonuses not deductible until
paid.
• Test subsequent year for payments
• Were reversing entries properly made?
5. Check for Inter-company Loans
6. Review Deferred Income Taxes
7. Deferred Credits- investigate all significant credit balances. Deferred income?
8. Contingent & estimated liabilities:
• Determine if estimated, contingent, disputed liabilities are present.
• Determine if company is deducting.

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
• Determine nature & purpose of contingent liabilities, how amount determined, how long
liability outstanding, & subsequent payment
9. Other liabilities: Any liability that is not included in the above categories.
• Examine any large/unusual accounts or entries within account.
• Look for items that should be included/brought back into income such as, deposits, unclaimed
wages (longer than 12 Mo.), unclaimed sales allowances, and rebate to customers who can’t be
located.
10. Determine the degree of verification of the balances by the independent external auditor;
11. Confirm the balances of the major individual creditor accounts, either to monthly statements of
account or directly with the supplier;
12. Review the long outstanding balances owing to specific creditors, and supporting correspondence
between the taxpayer and the creditor, to determine the validity and reason for non-payment (i.e.
goods returned for credit but not recorded, payment dispute etc.). Pay particular attention to these
accounts if the creditor is a VAT supplier. Confirm with the ERCA VAT system that the creditor
is a valid VAT registrant).
13. Identify the trade accounts for the parent or associated company which will require subsequent
examination during the tests of purchases and expenses;
14. Identify non-trade debts that may represent advances to shareholders and, if so, review the terms,
accounting treatment, business and personal income tax implications etc;
LOANS PAYABLE
1. Verify the transactions that have given rise to new loan liabilities during the period under audit, or
previous periods if warranted. State the source of the funds, purpose of the loan, actual utilization
of the funds, terms of repayment and security pledged;
2. Confirm the accuracy of the deduction for interest paid in accordance with Article 21(e) of the
Income Tax Proclamation and supporting Regulation 10. Confirm that the agreement does not
include other charges that are designed to circumvent the limitation on interest deductibility.
3. With respect to interest paid on loans from shareholders, confirm those taxpayers has compiled
with the provisions of Article 21(3).
4. Review the details of loan agreements to determine if there are provisions related to share
acquisitions, transfer of management or voting control, and related business transactions at
preferential prices which may have income tax or VAT implications.

OTHER LIABILITIES

1. The auditor should test other liabilities indicated in the books of account, financial statements and
tax declaration that may lead to further audit tests, such as the following:
• Reserves set up to cover such matters as the expected costs of services to be provided

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
under product warranties or completed contracts; disputes with customer over product
quality; legal actions lodged against the taxpayer, returnable packaging expected not to be
returned;
• Accrued wages or bonuses to key shareholders and management personnel for which
expenses deductions have been claimed. Confirm that the withholding tax on employment
income has been deducted. Since the recipient will need to declare the income in the
current year, even if not actually paid, the auditor should notify the respective
City/Regional tax authority for consideration of the income aggregating provision.

ACCOUNTS PAYABLE & OTHER LIABILITIES

Tax Period Per Return Per Exam Adjustment

Conclusion: (Reflects the final determination on the issue.)

Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit
program have been achieved.
Performed by Date
Reviewed and approved by Date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

DTA/WP/010

AUDIT PROGRAM FOR EXPENSE

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

Audit Objectives F/st. Assertions

 
 
 
  Completeness
Prepared by Work
ing
paper
Audit Steps: (Document audit steps taken or to be taken.)
Refer
ence
Action Required-Confirm that the taxpayer’s claim for expenses deducted in computing taxable business
income comply with the provisions of Articles 20 and 21 of the Income Tax Proclamation and the supporting
Regulations 9 to 11 inclusive.
1. Identify large expenditures for repairs, rebuilding, renovations, refurbishment and other expenditures
that may require review as to classification as expenditure or as capital asset item;
2. Examine the wage records for payments to company shareholders, officials and family members,
including accrued bonuses to determine if disallowance of a portion of the expenses are warranted in
accordance with Regulation 8 (6),(7) and (8). Regulation 8(6) relates to the transaction with the foreign
parent, which is also referred to in the separate Audit Inter-Company Transactions and Tax Accounting
Treatment;
3. Confirm that the taxpayer is accruing expenses in the correct taxation year with respect to purchases of
service that apply to more than one taxation year-i.e. Insurance converge; contracts for services etc;
4. Confirm that the taxpayer’s expense claim for commission paid for services are deductible in
accordance with Regulation 8(5);
5. Confirm that expense deduction for “Representation Allowance” are allowable within the interpretation
of Article 21 (1) (i), Regulation 9(2) and the directive issue by the Ministry of Revenue.
6. Identify the purchases of goods or services that could be for the personal benefit of the shareholders or
officials of the company, such as building materials, furniture, items of personal adornment etc. Test the

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

AUDIT PROGRAM FOR EXPENSE

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

delivery slips to support the purchase and physically inspect the goods where warranted;
7. Confirm that the taxpayer has taken all of the actions required to collect accounts receivable that are
being written-off as bad debts, in accordance with Article 25 of the Income Tax Proclamation;
8. Analyze the expenses incurred for legal costs to determine the nature of the case; establish the relation
to reserves established to provide for possible losses which have been deducted for tax purposes;
identify lawsuits that are not business-related and therefore not deductible; losses which will be covered
by insurance for which the expected realization should be offset against the legal costs/loss provisions;
identify cases which have been settled in the taxpayer’s favors and the accounting for the proceeds for
income declaration purposes etc;
9. With respect to payments made in cash to suppliers, not supported by invoices, request the taxpayer to
provide full information with respect to the name and address of the supplier, the nature and total value
of goods and/or services supplied. If the taxpayer fails to comply, as required by the tax Proclamations,
advise the taxpayer of the criminal offence for obstruction of an officer and the penalties provided for by
Article 98 of the Income Tax Proclamation;
10. Determine if the taxpayer has received an insurance settlement for goods lost, stolen or for other reasons
and confirm that VAT has been paid on the proceeds (if VAT taxable goods) and that the proceeds have
been included in the calculation of taxable income.

Advertisement expense

1. Reconcile account to return

2. If account contains expenditures for gifts/entertainment review for compliance.

3. Scrutinize account for evidence of advertising in political journals, magazines etc.

4. Determine if account contains items of a capital nature such as catalogues that are used over period of
years.

5. Scrutinize the account and note any large or unusual items.

6. Test check vouchers on a selected basis depending upon materiality of account and amount. Test check
should be expanded dependent upon initial results.

7. Journal entries of a significant nature should be noted and their correctness established.

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

AUDIT PROGRAM FOR EXPENSE

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

8. A review should be made of the account to determine that all monthly entries are posted.

9. Review account for reversal of prior year accruals and correctness of current year accruals.

10. Follow up adjustments that originate as a result of prior examiner’s report.

BAD DEBT EXPENSE

1. Obtain schedule or list of company’s actual bad debt write-off

2. Trace entries on this schedule to debit entries in general ledger account.

3. Ask the company what factors are used to determine when an account is uncollectible.

4. Request and review customers’ files; what are the indications of an uncollectible
account? What steps did the company take to collect the debt?

5. Request and review account receivable subsidiary ledger; Is there a credit entry to
write-off? Have subsequent sales been made to the same customer? How long was
the debt outstanding before it was written off?

6. Verify that amount was previously included in sales. Trace accounts receivable in
customer ledger from accounts receivable ledger to sales journal.

7. If bad debt originated from loan (vs. sale) verify that company loaned the money.
Trace to cancelled check or receipt for cash. Determine the business purpose for the
loan.

8. Was there subsequent collection? Ask company about reviewing credit entries in the
allowance account. Was it brought back into income? Frequent recoveries means
write-off of bad debt happened too fast.

9. If the bad debt allowance method is used, verify the allowance by comparing it with
past historical percentages of actual writer-offs.

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

AUDIT PROGRAM FOR EXPENSE

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

Prepaid Expenses
1. Confirm that the taxpayer accounts for the inventories of operating supplies, repair parts, consumables
and other articles as assets rather than treating the total expenditure as deductible expenses for the year;
2. Confirm that the taxpayer’s accounting for expenditures which cover a period longer than the taxation
year, such as insurance, provide for prorating over the periods;
3. Confirm that refundable security deposits (utilities) or retainers for services (legal, computer maintenance
etc.) are treated as assets for accounting and tax purposes.
Rent Expense
1. Reconcile account to return.
2. Review account & determine reason for fluctuations
3. Review originals and obtain copies of lease agreement and pertinent information.
4. Examine Lease-Purchase agreements & determine if correctly reflected.
5. Review account for cancellation of lease agreement.
6. Determine the reasonableness of rent paid to related entities.
7. Determine the accuracy of accruals.
8. Scrutinize the account and note any large or unusual items.
9. Test check vouchers on a selected basis depending upon maturity of account and amount. Test check
should be expanded dependent upon initial results.
10. Journal entries of a significant nature should be noted & their correctness established.
11. A review should be made of the account to determine that all monthly entries are
posted.
12. Review account for reversal of prior year accruals and correctness of current year
accruals.
Follow up adjustments that originate as a result of prior auditor’s report

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

AUDIT PROGRAM FOR EXPENSE

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

COST OF EXPENSE
Tax Period Per Return Per Exam Adjustment

Conclusion: (Reflects the final determination on the issue.)

Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit
program have been achieved.
Performed by Date
Reviewed and approved by Date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

DTA/WP/011

AUDIT PROGRAM FOR INVESTMENT

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

Audit Objectives F/st. Assertions

 
 
 
  Completeness


Prepared by Working
paper
Audit Steps: (Document audit steps taken or to be taken.) Reference
The auditor should verify the taxpayers accounting practices with respect to investments,
particularly with respect to:

1. The treatment of profits or losses on disposals;

2. Management or ownership control of a subsidiary or branch for which operating results
should be consolidated for tax purposes or for which non-arms length transactions should be
audited for tax implications. Determine the extent of the shareholdings in other companies
and ascertain if the taxpayer exercises management or voting control. Review minutes of
director/shareholders meetings and contractual agreements with respect to the acquisition.
Determine the extent of inter-company business transactions, including the provision for
management fees that may need to be accrued as income if payment is not made;
3. Reconcile the values of investments recorded in the books of account/general ledger with the
financial statements and the tax declaration. Not if the taxpayer has claimed deduction for
reserves or write-downs in the realizable value of the investment, which would be disallowed
as a deduction for tax purposes;
4. Determine the extent of verification of the investments by the independent external auditor;
5. The timing of the recognition of income. Review the investment instruments with respect to
dividends, interest to ensure that the income has been taken in to account, either on a cash or
accrual basis by the taxpayer;
6. Ascertain if the investments have been pledged as security for loans to the taxpayer’s
business or for personal loans of the executives. The latter may be a factor if the ERCA
wishes to attach or seize assets to effect the payment of tax arrears and to pursue the
executives for payment equivalent to the value of the investments pledged.

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

Investment
Tax Period Per Return Per Exam Adjustment

Conclusion: (Reflects the final determination on the issue.)

Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit
program have been achieved.
Performed by Date
Reviewed and approved by Date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

DTA/WP/012

AUDIT PROGRAM FOR SHAREHOLDER’S EQUITY

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

Audit Objectives F/st. Assertions






Prepared by Working
paper
Audit Steps: (Document audit steps taken or to be taken.) Reference

1. Review the Articles of Incorporation and subsequent amendments to determine the scope
of the authorized activities of the company, authorized capital stock from the standpoint
of classification, number authorized, voting rights, preference as to dividend payment or
distribution on wind-up, convertibility of preference shares, voting trusts and the like.
2. Confirm the accuracy of the Capital Stock Authorized and Issued reported in the books of
account, financial statements and tax declarations;
3. Determine the ownership control of the corporation and holdings by related companies.
4. If the ownership control has changes during the period, review the transaction to
determine if the Loss Carry Forward provisions of Article 28 of the Income Tax
Proclamation have been correctly applied;
5. Determine if the major shareholders have pledged personal shareholdings as security for
loans, which could affect ownership control or dissolution of the business in the event of
default, leaving unpaid tax liabilities;
6. With respect to the issuance of new capital stock, determine the names of the investors,
address and, if warranted the source of the funds used for investment; with respect to
investment from overseas, confirm that foreign exchange regulations have been complied
with and the source of the funds;
7. Determine if the investors are nominees of other parties, identify the latter, and determine
if subsequent business transactions give rise possible income tax implications (transfer
pricing, money laundering etc.)
8. Determine if the funds have been invested in the firm, as contributed surplus, rather than
stock issues, by the controlling members of a family-owned PLC. Determine the source of
the funds;
9. Determine if contributed surplus actually represent business transactions that should be
taken into taxable income and taxed accordingly;
10. Confirm that the taxpayer has withheld 10% tax on dividend payments, and has remitted
the amounts to the ERCA, in accordance with Articles 34 and Article 67 of the Income
Tax Proclamation. Confirm that the taxpayer treats the dividends as non-deductible

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
expenses in accordance with Article 21 (d) of the Proclamation.
11. Review any adjustments to the Retained Earnings that could indicate income that has not
been included in the calculation of taxable income. Conversely, if the charge to Retained
Earnings has not been deducted in the calculation of taxable income, confirm the correct
accounting and tax treatment.

SHAREHOLDER’S EQUITY
Tax Period Per Return Per Exam Adjustment

Conclusion: (Reflects the final determination on the issue.)

Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit
program have been achieved.
Performed by Date
Reviewed and approved by Date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

DTA/WP/013

AUDIT PROGRAM FOR INCOME/REVENUE

Tax Payer Name: Auditor:

TIN:
Tax Year Date:

Audit Objectives F/st. Assertions

 
 
 
  Completeness


Prepared by Workin
g paper
Audit Steps: (Document audit steps taken or to be taken.) Refere
nce
Audit steps to be taken
1. Confirm that the taxpayer has accurately disclosed all sales and income for the
purposes of determining the taxable income
2. Confirm that the taxpayer has correctly declared Schedule B income, and
accounted for tax in accordance with Articles 14 to 16 of the Income Tax
Proclamation and Regulation 5 to 7, inclusive.
3. Confirm that the taxpayer has declared Schedule D Income and accounted for tax
in accordance with Articles 31 to 37 inclusive and Regulation 15 to 17 inclusive.
Confirm that tax was paid in accordance with Article 54.
4. Agree the sales and income reported on the Business Income Tax Declaration with
the financial statements, general ledger and books of account, Determine the
degree of Verification by the external independent auditor of the taxpayer’s
reported income and in the evaluation of internal controls and checks.
5. Analyze the Other Income to determine the source; identify income, which could
be subject to VAT such as commercial rental income or services; determine the
reasonableness of interest income in relation to the terms of the investment
instruments etc. Test the bank deposits for indication of other sources of revenue
or investment.
6. Prior to the commencement of the audit, if possible and practical, visit the
taxpayer’s business premises and informally observe the taxpayer’s sales, cash
and inventory management practices and procedures. Obtain the taxpayers
operating manuals, if maintained, with respect to sales and returns. Determine the

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

internal controls and checks that exist over the recording of sales transactions i.e.
pre-numbered, sequential invoices and credit notes approved by the ERCA cash
register tapes, computer print outs and programming specifications; shipping bills;
credit controls; authorized returned goods; clearly defined employee
responsibilities. Determine the involvement of the key shareholders in the sales
function and the opportunities from suppressing sales and income, particularly on
a cash basis.
7. Compare the sales and gross trading margins, to the individual major product level
if possible and applicable, for the current taxation year with the preceding two
years to determine unusual changes in patterns. Obtain explanations from the
taxpayer and conduct tests to confirm the validity of the representations made on
the matter.
8. Select a representative sample of invoices and credit, for various periods in the
taxation year, to evaluate the reliability of the taxpayer’s accounting system and
internal controls/checks. Pay particular attention to the periods in which changes
in personnel or systems occurred.
9. Test the accuracy of the recording of sales and credit notes; classification of VAT
taxable and exempt transactions; recording of the VAT liability and credit
adjustments; for a sequence of sales invoices to the Sales journal or Cash Book for
the cash sales;
10. Check the postings from the sales Journal to the General Ledger, subsidiary
accounts receivable ledger;
11. Test the sales transactions to perpetual inventory records for deletion and cross-
reference to warehouse documents for releases;
12. Check removals indicated in the warehousing records that are not supported by
references to the sales invoice;
13. Test that goods returned by customers for credit are indicated in the inventory and
warehousing records and reflect the correct transaction date;
14. Test that copies shipping bills are retained and accounted for and are cross-
referenced to sales invoices and warehouse requisitions;
15. If the taxpayer uses independent transporters, test the volume of transactions
indicated throughout the year, by reference to the carrier’s accounts payable
account and invoices. Determine if the taxpayer also uses independent carriers for
the transport if purchases of goods, supplies as part of around trip services (i.e.
goods transported for export and return with imported or domestic goods) and test
the taxpayer’s records for the receipt of the incoming products;
16. Request the taxpayer to account for all sales invoices or credit notes that are
missing from the test. Advise the taxpayer of the requirement to keep the original
and all copies of invoices and credit notes that are cancelled, or otherwise not
used, in accordance with Article 89. Test the taxpayer’s inventory of unused sales
invoices and credit notes to ensure that the sequences of numbers have not been
broken and used for unrecorded sales.
17. If the taxpayer also maintains “informal records”, such as sales work sheets or

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

inventory workbooks, ascertain the names of the employee’s (or family members
of the shareholders) who may be involved in the retention of the records for
interview. Obtain the records and test to the actual books of account maintained
and presented by the taxpayer. Interview the independent external auditor to
determine his awareness of the taxpayer’s practice of maintaining these informal
records and the verification actions taken. Make all parties aware of their
responsibilities to provide information and cooperation with the ERCA auditor
and the criminal offences and penalties provided by Articles 97, 98, 101 and 102
of the Income tax Proclamation, among others.
18. Test the sales invoices and shipping bills, paying particular attention to the
transactions that are close to the month-end or year –end, to determine if the
taxpayer is correctly complying with the Article 11 of the VAT Proclamation-
Time of Supply. Confirm that the taxpayer is recording the timing of sales for
income tax purposes in the current taxation year, (where ownership or title to the
goods have been transferred to the customer, or the taxable services have been
rendered), even though the VAT liability may correctly be accounted for in the
next taxation year. Test the inventory records of finished goods and cross-
reference to sales invoices and shipping bills for transactions straddling the year-
end date (i.e. three days before and after the year-end date) to ensure that the
income has been reported in the appropriate taxation year.
19. In cases where the suppression of sales is suspected and the taxpayer stores goods
for resale offsite, determine the records maintained to record the movement of the
goods from storage to the sales outlet, or to the customer, and the taxpayer’s
personnel involved in the process. Estimate the volumes of the sales volume
recorded in the books of account and the sale value of the estimated inventory on
hand in the sales outlet. Request the taxpayer to provide the advertised sale price,
supplier’s cost supported by invoices/import entries and to explain variances.
20. In cases where the suppression of sales is suspected, identify a representative
number of domestic suppliers and discuss, with the team leader, the possibility of
verifying the volume of business transaction by direct review of the supplier’s
records. If the latter action proceeds, review the supplier’s records for other
indications of the volume of transactions and the eventual sales value. (For
example, producers of beer, alcohol, tobacco, electronic and clothing products
maintain extensive records of transactions by their customers, and of volumes in
the general marketplace, in view of the completion form contraband goods.). The
information can also be used to determine average mark-ups in the marketplace in
the event the ERCA auditor has to prepare an estimated assessment on the
taxpayer.
21. If the suspected suppression of sales by the taxpayer involves imported goods,
obtain summary of the taxpayer’s imports from the Ethiopian Customs Authority
If the Imported goods are of a nature that the taxpayer contends that the VAT paid
on the import value exceeds or approximates the VAT liability on sales, due to
ERCA valuations:
• Identify the types of specific goods and the tariff classification;
• Obtain the value of importations, the differences in valuation and the

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

VAT assessed from asiycuda++

• Request the taxpayer to justify the quantities and values of goods in the
opening and closing and the sales made during the period under review;
• Confirm the invoiced price from the foreign suppliers involved, and
review foreign exchange transaction documentation;
• Determine the volume of the goods subject to ERCA valuation uplift in
relation to the total sales of domestic and imported goods by the taxpayer;
• confirm the average mark-up made by the taxpayer on sales of the goods
subject to the ERCA valuation uplift and of the other goods sold by the
taxpayer;
• Determine the reasonableness of the sales volume, trading profit and VAT
liabilities/credits declared by the taxpayer.
22. Review the accounts receivable subsidiary ledger to identify customers with credit
balances, which may indicate sales or services rendered that have not been
invoiced; installment sales not correctly recorded; income from other sources,
such as rental income, customer deposits for large orders that are subject to
progress billings etc.
23. For large contracts involving the supply of goods/services over a period of time,
and multiple payments, review the contract for payment arrangements; confirm
the work completed and in progress indicated in the taxpayer’s records and the
certifications by an independent party. Confirm that the taxpayer has correctly
recognized come in accordance with Article 63 of the Income Tax Proclamation
and VAT in accordance with Article 11 of the VAT Proclamation.
24. With respect to the losses incurred by the taxpayers on long-term contract,
confirm that the income tax accounting complies with the provisions of Article 28
and Article 63 of the Income Tax Proclamation and supporting Regulation 12.
25. Reconcile books to the return.
26. Determine that nontaxable income is excluded is correct.
27. Verify year-end accruals.
28. Review subsidiary records and detail trial balance for interest bearing accounts.
• Trace to interest income-assure for proper accruals.
• Compare to notes; if any
• Determine that nontaxable income excluded is correct.
• Cross-reference with investment account.
29. Consider possibility of interest on foreign bank accounts, foreign securities, tax
refunds escrow accounts, etc.
30. Cross reference income accounts with investment accounts. Inquire into any
investments for existence of dividends, rate of return, dispositions etc. and trace
back to the return.
31. Consider whether company is properly reporting all miscellaneous income: scrap
sales, sales to employees.

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

INCOME/REVENUE
Tax Period Per Return Per Exam Adjustment

Conclusion: (Reflects the final determination on the issue.)

Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit
program have been achieved.
Performed by Date
Reviewed and approved by Date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
DTA/WP/014
13.2.2. STOCK SHEET
Company/Tax payer name
Stock Count.
As at 21/04/03 E.C

Quantity
as per as per
Serial unit of physical stock Unit Total
No. Item Description measure count card shortage/overage cost cost Remark

Total

Store keeper(custodian) Counted by Witnesses

Name/sig/date Name/sig/date Name/sig/date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
DTA/WP/015

13.2.3. QUERY SHEET

Tax payer Name:-----------------------------------------

TIN No.-----------------------------------
Audit year(s)-------------------------------- Prepared by: ----------------------------
Date:------------------------

No. Queries Dispositions Initials & Date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
DTA/WP/016

13.2.4. TIME SHEET

Tax payer Name:---------------------------------------------------
TIN No.-----------------------------------
Audit year(s)--------------------------------
Month_____________________

Days Total
Work done 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Audit preparation
Audit planning
Interview

Total

Prepared by_______________ Date___________ Approved by__________________ Date________________

Days Total
Work done 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Total

Prepared by_______________ Date___________ Approved by__________________ Date________________

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
DTA/WP/017

13.2.5. INDIVIDUAL ACCOUNTS WORKING PAPERS

Taxpayer Name: Auditor:

TIN:
Date:
Tax Year:

ACCOUNT NAME- ACCOUNT NO.-

Amount
Description
Date Reference
document No Dr. Cr. Remark

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

ACCOUNT NAME- ACCOUNT NO.-

Findings:

Conclusion

Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit
program have been achieved.
Performed by Date
Reviewed and approved by Date

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
13.3. REPORTING PHASE
DTA/WP/018

13.3.1. REPORT FORMAT (BIT)

COMPANY/TAX PAYER NAME

BUSINESS PROFIT TAX AUDIT REPORT
FOR THE YEARS 20XX - 20XY E.C

TIN: ____________________
VAT No._________________
Address: _____________ Region: _________
Sub city/Woreda/_____________ House No ____________ Tele.No____________

Background
X-PLC has been established on ____________E.C with a register paid up capital of birr
____________ consisting of _______shares with par contributed by _____________ share
holders. Later on Sep 30, 19xx the company increase its capital to ___________ and still the
company engaged in the _______________________.The Company has been registered for
VAT on December 23, 1995 E.C.
Audit Objective
The audit objective is to verify the company’s book of accounts, records and other related
documents so as to ascertain the taxpayer’s compliance with existing tax laws and regulations.
Audit Scope
The audit covers from 20xx to 20xy tax periods only.
Methodology
As the taxpayer’s business transaction is wide and bulky and making a detail examination of all
accounts is infeasible, we conduct our audit on a test basis. We used ___________________
sampling methods when selecting accounts for test and determining our sample size.
Documents Verified
We have examined the company’s book of accounts, records and other documents that we
considered relevant to the assessment of tax returns. Below are some of documents we have
verified in the course of audit.
 VAT and profit tax declarations

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
 Financial statements
 General ledger, Accounts Receivable ledger, fixed asset Subsidiary ledger etc….
 General Journal, Sales Journal, Cash receipt Journal, Purchase/or expenditure/ Journal
etc…
 Other source documents that support those financial statements.
Findings, Adjustments and Justification
During our audit engagement we have observed that the taxpayer has maintained its financial and
other aspects in line with Ethiopian tax laws except the adjustments listed below. We have added
back the adjustments to the taxpayer’s taxable income to determine its tax liability
1. Undeclared sales: - It is an Income recorded as unearned but service is delivered to
customer, debit balance of unearned income that must be credited by sales unless
otherwise the sales agreement is canceled, un posted sales to the general ledger,
understated sales based on undeclared purchase and understated purchase is adjusted to
taxable income of Birr _______, _______, and ______ for the tax years of ______, ____
and _____ respectively.
2. Over stated Cost of goods sold:- the Company over states the cost of goods sold by
recording of overage of stock, unofficial receipt, double and over recording of cost is as
adjusted to taxable income of Birr _______, _______, and ______ for the tax years of
______ , ____ and _____ respectively.
3. No source document: when we are examining the company’s disbursements & cost, we
come across with entries that are not properly backed with reliable evidence, and we are
not sure it is really incurred then finally adjusted to taxable income of Birr _______,
_______, and ______ for the tax years of ______ , ____ and _____ respectively.
4. Unofficial receipt: - It is transaction entries supported with illegal invoices as per directive
no.12/1996 and 28/2001 expense incurred without official receipt is adjusted to taxable
income of Birr _______, _______, and ______ for the tax years of ______ , ____ and
_____ respectively.

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

Summary of Findings, Adjustment

COMPANY/TAX PAYER NAME
BUSINESS PROFIT TAX COMPUTATION
FOR THE YEARS FROM HAMLE, 20xx – 20xz

COMPANY NAME
BUSINESS PROFIT TAX COMPUTATION

Prepared by-_______________ FOR THE by-

Verified YEARS -20xz E.C
FROM 20xxApproved
____________ by-______________
DESCRIPTIONS 20xx 20xy 20xz TOTAL
Declare taxable income as per F/Statement
Add:-Adjustments
Undeclare income/Sales
Disallowed overstated cost
No source Document
Unofficial Receipts
Tota Adjustments
Total Adjusted taxable income
Tax(30%)
Payments: - by Receipt (a)
- Withholding tax claimed (b)
- Refund /c/
Total Payments (a+b-c)
Balance due
Interest
Penalties
Total Tax, Interest and Penalties

Prepared by-_______________ Verified by- ___________ Approved by-_______________

Signature _______________ Signature _____________ Signature ________________
Date __________________ Date _____________ Date __________________

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
DTA/WP/019

REPORT FORMAT (VAT)

COMPANY/TAX PAYER NAME

VALUE ADDED TAX AUDIT REPORT
FOR THE YEARS 20XX - 20XY E.C
TIN: ____________________
VAT No._________________
Address: _____________ Region: _________
Sub city/Woreda/_____________ House No ____________ Tell .No____________

Background
X-PLC has been established on ____________E.C with a register paid up capital of birr
____________ consisting of _______shares with par contributed by _____________ share
holders. Later on Sep 30, 19xx the company increase its capital to ___________ and still the
company engaged in the _______________________.The Company has been registered for
VAT on December 23, 1995 E.C.
Audit Objective
The audit objective is to verify the company’s book of accounts, records and other related
documents so as to ascertain the taxpayer’s compliance with existing tax laws and regulations.
Audit Scope
The audit covers from 20xx to 20xy tax periods only.
Methodology
As the taxpayer’s business transaction is wide and bulky and making a detail examination of all
accounts is infeasible, we conduct our audit on a test basis. We used ___________________
sampling methods when selecting accounts for test and determining our sample size.

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

Documents Verified
We have examined the company’s book of accounts, records and other documents that we
considered relevant to the assessment of tax returns. Below are some of documents we have
verified in the course of audit.
 VAT and profit tax declarations
 Financial statements
 General ledger and
 All source documents that support those VAT declarations.

Findings, Adjustments and Justification

During our audit engagement we have observed that the taxpayer has maintained its financial
aspects in line with Ethiopian tax laws except the adjustments listed below. We have made
adjustments to output and input amounts to determine its tax liability.
1. Undeclared income:- when we are comparing the financial statement and General ledger,
agreement of the taxpayer with different customers and foreign purchase, we have got
undeclared income recorded as unearned income and under stated sales . As a result we
adjusted to taxable output of Birr ________, _________, and ________ for the years of
20xx, 20xy and 20xz respectively.
2. Undeclared commission income:- When we verify the company’s sales the company is not
collected vat on commission income as a result we adjusted to taxable output of Birr
________ , _________ , ________ for the years of 20xx, 20xy and 20xz respectively.
3. Rejected input: - Input tax incurred without sufficient supporting document like custom
declaration and declaration not invoice in the name of the company is rejected and as a result
we adjusted to taxable output of Birr ________, _________, and ________ for the years of
20xx, 20xy and 20xz respectively.

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

Summary of Findings, Adjustment

COMPANY/TAX PAYER NAME
VALUE ADDED TAX COMPUTATION
FOR THE YEARS FROM HAMLE, 20xx – 20xz

Description 20xx 20xy 20xz TOTAL

Declared Vatablesales as per VAT
Declaration
Add:- Undeclared income

Undeclare vatable commision income

Assessed output
Output VAT(15%)
Declared input
Less: - Rejected Input
Assessed input
Input VAT(15%)
Add: - Credit brought from previous
period
Less: - Credit carried forward
Adjusted Input VAT for the period
VAT to be paid
Less:- Payment
Balance due
Penality (Art.45 B)
Interest(Art. 47)
Total tax, interest and penalty

Prepared by-_______________ Verified by- ___________ Approved by-_______________

Signature _______________ Signature _____________ Signature ________________
Date __________________ Date _____________ Date __________________

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
DTA/WP/020

13.3.2. EXIT CONFERENCE FORMAT

ETHIOPIA REVENUE AND CUSTOM AUTHORITY

BRANCH
AUDIT EXIT CONFERENCE
DATE______________
Place of meeting __________________________________________
Tax payers/company name ________________________________
TIN ______________
VAT No. ______________________
Company’s phone No. _______________________
Business type __________________________________________
Audit coverage from _________to_______________
Reason why the company selected for audit ______________________________
Audited tax type __________________________________
Auditors name ________________________
Team coordinator name _____________________________________
Name of participant Position signature
1.______________________ _______________ ______
2.______________________ _______________ ______
3.______________________ _______________ ______
4.______________________ _______________ ______
5.______________________ _______________ ______

Discussion Agenda
1. Discuss on how the company’s financial statement audited & its methodology.
2. Discuss on findings with the taxpayer and
3. Others

1. Audit Methodology for

 Revenue/sales/
__________________________________________________________________________________
__________________________________________________________________________________
________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
________________________________________________________________

 cost of good sales/purchase

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
__________________________________________________________________________________
_______

 Expenses
__________________________________________________________________________________
__________________________________________________________________________________
________________________________________________________________

2. Findings on
 Revenue/sales

__________________________________________________________________________________
__________________________________________________________________________________
________________________________________________________________

 Reason of findings

__________________________________________________________________________________
__________________________________________________________________________________
________________________________________________________________

 Cost of good sales

__________________________________________________________________________________
__________________________________________________________________________________
________________________________________________________________

 Reason of findings

__________________________________________________________________________________
__________________________________________________________________________________
________________________________________________________________

 Expenses
__________________________________________________________________________________
__________________________________________________________________________________
________________________________________________________________

 Reason of findings

__________________________________________________________________________________
__________________________________________________________________________________
________________________________________________________________

3. Total due for the period

No. Description Amount in birr

1 Tax
2 penalty
3 interest
Total due

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

4. Taxpayers response on audit methodology and findings

4.1. According to tax regulation points/issues/findings that taxpayers agreed

4.1.1 ----------------------------------------------------------------------------------------
4.1.2 ----------------------------------------------------------------------------------------
4.1.3 ----------------------------------------------------------------------------------------
4.1.4 ----------------------------------------------------------------------------------------
4.2. Findings that Taxpayers disagree
4.2.1. __________________________________________
4.2.2. __________________________________________
4.2.3. __________________________________________
4.3. Reason of disagreement
__________________________________________________________________________________
__________________________________________________________________________________
________________________________________________________________

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
DTA/WP/021
13.3.3. ASSESSMENT NOTIFICATION FORMAT (BIT)

THE FEDRAL DEMOCRATIC REPUBLIC OF ETHIOPIA

ETHIOPIAN REVENUE AND CUSTOMS AUTHORITY
BUSINESS INCOME TAX ASSESSMENT
Ref.No. ________________
Date_________________
TIN _________________
Assessment No._________________

To_______________________
Address: Sub City____________ Woreda__________ House No ____________ Tel.
No_______________________
Business Sector _______________
Audit Coverage Period ____________
Tax type ________________________
The tax authority examined your books of accounts and produced this reassessment in
accordance with the provision of the Income Tax Proclamation No.286/2002 article 66. Therefore,
the authority notifies you to pay additional tax of Birr__________________ in word /
_______________________________________________ /.
Payment Summary
[[[[[[

Description A m ou n t Du e i n B i r r
Tax to be paid
Less:- Total Paid tax
Outstanding tax
Interest
Penalty
Total Due for the Period
(Tax + Penalties + Interest)

With regard
Received by ____________________
Signature ___________________
Date___________________
Title ___________________
Delivered by ___________________
CC ፡-
 tax assessment and collection process
________________ Branch office
(the tax computation is in the reverse side)

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

Tax Computation
Tax years
Descriptions 20xx 20xy 20xz Tot al

Declared Income/Loss

Adjustments:-

Total Adjustments

Total Taxable Income

Tax /30%/

Less:-Tax paid

Witholding

Refund

Total deductions

Total Tax due

Interest

Penalties- latepayement

Understatement

other

Total Penalities

Note:-
1. We examined your Books of Accounts and produced this reassessment in accordance with the provision of the Income Tax
Proclamation No.286/2002 article 66. Therefore you must pay the said amount within thirty (30) days of the issuance of this
assessment notification.
2. The Tax Office is authorized by law to demand additional Tax with penalty upon further information.
3. If necessary, you can get further explanation on the assessment at our office.
4. If you have any objection to the assessment, you have the right to appeal to the Review Committee of the Tax Authority within
ten (10) days or to the Tax Appeal Commission within thirty (30) days of receiving the Assessment Notice as per Article 105
and 107 of the Income Tax Proclamation No. 286/2002.
5. As per Income Tax Proclamation No. 286/2002 Articles 75, 86, 87, 88 and 89, the Taxpayer is required to pay penalty and
interest on Late Declaration, Late Payment and failure to maintain Books of Accounts..

DTA/WP/022

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY
ASSESSMENT NOTIFICATION FORMAT (VAT)
THE FEDRAL DEMOCRATIC REPUBLIC OF ETHIOPIA
ETHIOPIAN REVENUE AND CUSTOMS AUTHORITY
VAT ASSESSMENT
Ref.No. ________________
Date_________________
TIN _________________
Assessment No._________________

To ____________ Plc/S.Co
Address: Sub City____________ Woreda__________ House No ____________ Tele.
No_______________________
Business Sector _______________
Audit Coverage Period ____________
Tax type ________________________
The tax authority examined your books of accounts and produced this reassessment in
accordance with the provision of the Value Added Tax Proclamation No.285/2002 article 29.
Therefore, the authority notifies you to pay additional tax of Birr__________________ in word
/ _______________________________________________ /.
Payment Summary
Description A m ou n t Du e i n B i r r
Out Put Tax
Input tax
Tax to be paid
Less:- Paid tax
Outstanding tax
Interest
Penalty
Total Due for the Period
(Tax + Penalties + Interest)

With regard
Received by ____________________
Signature ___________________
Date___________________
Title ___________________
Delivered by ___________________
CC ፡-
 tax assessment and collection process
________________ Branch office
(the tax computation is in the reverse side)

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 ETHIOPIAN REVENUES & CUSTOMS AUTHORITY

Tax Computation
Description 1999 E.c 2000 E.c 2001 E.c Total
Declared as per declaration
Undeclared Income
Undeclared Commission Income
Adjusted Taxable Income
VAT (15%)
Purchases ('Inputs)
Rejected Purchases (Inputs)
Adjusted Input
Input tax (15%)
Credit Brought Forward
Credit Carried Forward
Total Adjusted Input tax
Tax to be paid
Less:-Paid tax
Total outs tanding Tax/Credit
Interest (Art. 47)
Penalty(Art. 45B)
Total Tax,Interest and Penalty

Note:-
(1) We examined your books of accounts and produced this reassessment in accordance with the provision of the
Value Added Tax Proclamation No.285/2002 article 29. Therefore you must pay the said amount within 30 days
of the issuance of this assessment notification.
(2) The Tax Office is authorized by law to demand additional tax with penalty upon further information. If
necessary, you can get further explanation on the assessment at our office.
(3) If you have any objection to the tax assessment, you have the right to appeal to the Review Committee of the
Tax Authority within ten (10) days or to the Tax Appeal Committee within thirty (30) days of receiving the
assessment notice as per Article 41 or 43 of the Value Added Tax Proclamation No.285/2002.

(4) As per Income Tax Proclamation No. 286/2002 Articles 75, 86, 87, 88 and 89, the Taxpayer is required to pay
penalty and interest on Late Declaration, Late Payment and failure to maintain Books of Accounts.

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DTA/WP/023

13.3.4. AUDIT FINDING AND RECOMMENDATIONS

(MANAGEMENT) LETTER FORMAT

Comp/Tax payer Name ______ TIN No. _____________
Address: Region _______S/City _________ Woreda ____

House No._____ Telephone No.______

Dear sir/madam,

The audit, covering periods of ...........................................................................has now been

completed.

Attached is a schedule detailing the findings of the audit and associated recommendations? It
should be noted, however, that not all of the taxable events relating to the system were
examined and, therefore, the results should not be seen as a complete assessment of the integrity
of the system.

Please advise us as to whether any changes have been, or will be, made to the system as a result
of our audit and also whether any of the recommendations have been or are to be adopted.

We identified the following controls, which appear to be in place and which are seen as critical
to the accurate reporting of revenue. Every effort should be made to ensure these controls
continue to operate correctly [list the controls].

Please acknowledge receipt of this letter. If you have any queries regarding the content of this
letter, please do not hesitate to contact us.

Finally, we would like to take this opportunity to thank you and your staff for the assistance and
co-operation we received during the course of this audit.

With regards

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DTA/WP/024

13.3.5. CRIMINAL CASE TRANSFERRING FORM

Branch office
Domestic Tax Audit
1. Tax payers name Tin No
2. Tax payers address Tel. Mob.
3. Name of the company
4. Company address
5. Indicator of evasion or criminal case
• Undeclared income
• Not issuing receipt
• Over or under invoicing
• Transfer of price between related party
• Administrative expense
• Others

6. If others, indicate the case

7. Expressed the case and attach all the necessary document

8. The case forward to domestic investigation audit by,

Name
Position
Signature
Date
Team coordinator name
Signature
Date

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Process coordinator name

Signature
Date
Case received
Investigation Audit team coordinator
Signature
Date
The case is assigned to
Name
Position
Signature
Date

Decision given date

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