Auditing &

Investigations II

Audit of liabilities, Capital and

Reserves II
Key issues

 Audits of Tax payables

 Audit of Dividend

 Auditof VAT and Others taxes

payable

 Audit of Capital

 Audit of Reserves
1. Audit of Tax Payables
Audit Objectives

 Liability for taxation is fairly stated

by being properly classified and
presented;
 Provision for the deferred tax liability
is adequate and is computed on an
acceptable and consistent basis;
 All contingent liabilities relating to
tax are adequately described by way
of note.
Audit Procedures

 Review of tax information

questionnaire Check list
(collect tax background
information)
 Review current year’s working
papers. Extract expenditure
not allowable as deductions
against income for tax
purposes.
Continued…..
 Examine the draft
computation with the
available data and compare
with the computation and
correspondence for
previous years.

 Check the calculation of the

tax liability.
Continued……………

 Reviewthe charge to the income

statement in respect of tax to
ensure that it is fairly computed
and note any transfers to or
from the deferred tax account.

 Payments to the tax authorities

in respect of tax liabilities
should be vouched by reference
to tax correspondence,
assessment notices and paid
cheques.
2. Audit of dividend

 Key issues for audit attention:

 Authority for paying a dividend

(company constitution
authorisation)

 Legality of Dividend (companies

act provisions. Dividend can
only be paid from realised
profits)
Audit procedures
 Read the directors’ minute
authorising the interim
dividend or the entry in the
members’ minute book
validating the final dividend.

 Vouch the journal entries in

respect of setting up the
liability for the dividend.
Continued…….

 Vouchthe transfer of the

dividend from the main bank
account to the dividend bank
account.

 Review the dividend bank

account reconciliation for earlier
periods and vouch the authority
for write back of unclaimed
dividends.
3. Audit of VAT payable

VAT liability is
obtained from the
audit of purchases
and sales.
Audit Procedures on VAT
 Examine a sample of VAT and
tax returns and re-perform
calculations thereon.
 Scan any large or unusual items
and note that the VAT has been
treated correctly.
 Review official handbooks in
relation to the company’s trade
and verify that the system
accounts for input tax and
output tax properly.
Continued

 Review payments to and

correspondence with the tax
authorities to ensure that the
liability is being properly
discharged.

 Vouch payments from the tax

authorities where input tax
exceeds output tax with returns
and supporting evidence.
Continued…..

Review sales figures with

output tax calculations
and assess the
reasonableness of the
balance.
4. Audit of Capital

Audit objective:

The auditor must be

satisfied that the
amount of share capital
is properly stated.
Audit Procedures over Capital

 Confirm opening balance with

working papers and State of
Financial Position;
 Vouch any issues during the
year with directors’ minute
book and monies received;
 Verify postings to share
premium account;
 Confirm year-end balance with
share register.
5. Audit of Reserves
Audit Approach:
 The auditor should obtain a schedule
of reserves showing opening
balances, closing balances and
movements.
 Where a revaluation reserve is
created, the auditor should satisfy
himself that there is an objective
basis of valuation and that all the
individual movements (by asset
class) are properly identified and
disclosed.
Validation of Movements

Statutory books –
directors’ and
members’ minute
books, share register
etc;
Resolutions to
redeem, purchase,
issue or forfeit shares.
 End

Thank you for

your attention