Analysis of the return is essential to an effective audit.
Preliminary analysis is used to identify potential issues which will be developed further after contacting the taxpayer. All information contained in any attachment to the tax return should be thoroughly and completely scrutinized to ascertain whether or not all of the information is adequately reflected in the tax return.
Before contacting the taxpayer, the Revenue Officer should familiarize himself with the following:
- The business organization of the taxpayer and whether it has business establishments other than its main or head office;
- The location of the business and its branches as this has a relation to the volume of business;
- The economic activity in which the taxpayer is engaged in;
- The accounting books and records that would ordinarily be kept;
- The accounting methods and policies and the degree of internal control;
- The overall composition of the tax return;
- The types of income reported;
- The reasonableness of deductions;
- Unusual or unfamiliar items;
- Apparently questionable unallowable items;
- Gross profit and selling expense percentage as well as significant variations between prior and current years;
- Inconsistencies between items and also in the treatment with respect to bad debts, inventory valuation methods, depreciation rates and methods, etc.;
- Prior year’s entries in the reconciliation schedules of retained earnings in a corporate return and of a partner’s capital account in a partnership return which affect the year under examination;
- The status of the retained earnings account as well.as the basis of assets and depreciation allowed or allowable; and
- The report of the tax liabilities of the taxpayer for the immediately preceding period in order to be aware of the deficiencies that were reported. Review of prior year’s examination records will clarify some doubts or questions in the Revenue Officer’s mind regarding certain items or bring light to situation that otherwise would have remained concealed on the basis of the return alone.