Tag Archives: audits

SARS Audit Procedures and The Tax Administration Act(“TAA”)

Herewith a perfect example of the blatant disregard of South African Revenue Service to the rights of taxpayers, as enshrined in the PAJA Act, as well as the Constitution.
In this real example, we give you an excerpt of a real objection, to an audit from which we quote the relevant legislation.
The Tax Administration Act, is a vicious piece of Tax Legislation, and I do not in any way encourage falling foul of this act. But please be vigilant, and know your rights.
(Names and amounts not included.)

OBJECTION TO THE ASSESSMENT AND PENALTY IMPOSED ON XXXXXXXXX CC
CASE/REFERENCE XXXXXXXXXX

You are referred to Chapter 2.3 of the Tax Administration and PAJA. It relates:
“The right to administrative justice under the constititution is given effect to in the Promotion of Administrative Justice Act(PAJA). In short this regulation mandates in the context of tax administration, that tax administrative actions that materially and adversely affect taxpayers right must-give clear grounds for the decision.”
Various emails were send requesting clarity, and nothing has been forthcoming. Herewith an excerpt of one of the emails, with the relevance to this case;

Objectionable points;1. Deductible expenses(Rx) totally overlooked.
2. The Rx reversal and the Rx “ deduction” was may I respectfully point out to befuddle and confuse. Refer to(PAJA clause in Tax Administration Legislation), “ that tax administrative actions that materially and adversely affect taxpayers right must-give clear grounds for the decision.”
3. Section 11(a)”Expenditure and losses actually incurred in production of income, provided such expenses are not of a capital nature.”
a) Municipal charges to the value of Rx, overlooked/included somewhere in the calculation. Either way it is not debatable. The municipal expenses were incurred, to derive income for the “rent collection, property investment company.
b) Rental, Agents commission, deliberately overlooked, and “hidden” in findings.
c) Project and contractual expenses.Information was furnished in this regard, but excluded, or only a portion allowed. It was not of a ‘capital nature”,
4. Wear and tear(Section 11e) read together with Practice Note 19. Completely overlooked, and “depreciation’’ used to calculate wear and tear, in complete violation of the Practice Note 19 Prescription. Our wear and tear calculation was Rx.
5. Total deductible expenses Rx.We acknowledge that SARS could uncover other “non deductible” amounts, but the difference between Rx and X) is just too huge, and warrants serious attention.

Concluding remarks
Whilst we co operated fully with the audit procedure(that arrived at these questionable amounts) we are extremely concerned that this will be the trend of TAA.

Let SARS pay for consultation, Not YOU! Were you overtaxed, but your cash flow is low?Solution:  Service at No COST to You. We negotiate a % of Tax refund!Email: info@sgafc.co.za

 

 

If you ,the taxpayer, feel at any time, that your rights have been violated, or you aware of unfair practice, on the part of SARS. Kindly drop us a mail. info@sgafc.co.za

Avoiding The Costs of a Forensic Audit

From time to time the management of finances of a particular organization, or company raises suspicion. It could be a company that you hold shares in, or a public benefit organization that you part of or donate funds to.

The custodians of other people’s funds are always held in suspicion. Office bearers and treasurers are often subjected to harsh criticism by fellow office bearers or members of a particular club.

In many instances, the criticism leveled at a treasurer, is unfounded, and normally motivated by fellow members interest in a particular position.(Normal organization politics)

There are, however, serious cases of gross financial mis-management in organizations, ranging from churches, schools, companies and even government. It remains important for members of a club/organization to be vigilant, without being petty.

When suspicions about fraud or theft surface, in organizations, the members normally call for an audit or a forensic investigation into the financial affairs of the said organization. The costs of forensic audits, can be prohibitive. And even after fraud has been detected the legal costs can spiral out of control. If the auditor is not available to provide his expert testimony in court, the accused walk free.

Forensic accounting or auditing is considered to be a new specialized field in accounting. And accountants who want specialize in this field ,enhance their skills with additional studies in forensic accounting. Hence it is so costly. Investigations into amounts as small as $20 000.00 can cost an organization as much as $25 000.00 in audit and legal fees!

To save costs, internal investigations can be conducted * Ignore spreadsheets, financial statements provided by the accused(he/she will try to deflect your attention from the problem at hand. · Verify bank statements thoroughly · Reconcile receipts to cash banked · Add up all the totals of petty cash expenses, and compare to petty cash deposits advanced. · Most thefts/frauds occur at the cash management level of finances. So scrutinize cash payments carefully. · Establish if paid invoices are legitimate. Check the suppliers registration and address details, give them a call. Many fraudulent invoices appear valid, and are paid, but could be a “dummy company invoice”. · An invoice could look real, the payment made, but were goods delivered.? Common areas are quantities of inventory or stationery ordered, but far less than the original order could have been delivered. Check your inventories. · If findings lead to definite proof of theft or fraud, reporting the crime to the police should be your last resort.

Confront the alleged perpetrator in a diplomatic fashion. I am in no way condoning the serious crimes of fraud and theft, but believe demanding a repayment of the stolen funds, plus interest, could be a better option. The frightened accused, would invariably be prepared to cooperate. Disciplinary steps should follow. Only if he refuses to cooperate, should legal steps be considered.

I concede, victims of a fraud or theft would feel hurt and betrayed, but my advice is borne out by numerous experiences where fraud cases have dragged on forever in courts, only to be thrown out after years by a judge, for “lack of evidence”.

Of course the approach would be different where millions are involved, but for frauds and thefts of a few thousand dollars, engaging an auditor or an attorney, is just not worth it.

 

 

 

 

 

Contact the Author
Sean Goss
sgafc@mweb.co.za

Uncovering Missing Income and Expenses

In many small businesses, proper accounting is overlooked. Fact is, many of the income and expense items, go undeclared due to a weak accounting system. Even with a good accounting package, expenses (and income) can be under reported.

 

How is this so? When the best accounting software is used to record all the transactions? Unfortunately for many businesses, manual inventory control, cash sales and cash purchases and expenses, will remain the norm.

 

It is with the cash transactions outside the computerised system, where much of this oversight occurs. Electronic bank transfers, be it payments or deposits are identified swiftly on the bank statements, or credit card records accessed via the Internet. These transactions can then be easily replicated on to an accounting software package, and produce accurate reports.

 

The transactions outside the electronic system, however, can proof to be problematic.

Let me illustrate by way of this example:


1) For certain months, the telephone bill is paid, using the owner’s credit card.

2) The owner pays for gas for the business vehicle.

3) Expenses paid out of the petty cash are not recorded, since a voucher or two was not furnished.

 

Cash sale proceeds are used to purchase additional inventory. The sales invoice and purchase invoice for this accounting transaction, is not reconciled, surplus cash is not declared. This will invariably lead to an understatement of sales purchases and expenses.

 

It is accepted, that the above scenario is totally unacceptable, the reality however, is that this occurs, in many small businesses around the globe. Due to this under reporting, businesses do not have a clear indication of their true performance.

 

  • Income

If uncertainty exists about the income figures for a month or period, check the cash sales journals. If unsuccessful with sales journal scrutinize the order books. Lastly, perform a verification with the customer, if they received goods ordered, and if they in possession of a receipt.

 

  • Expenses/ purchases

Check all available records. Contact suppliers for copies of cash expenses invoices. 

 

  • Cash control

Receipt book verification versus cash banked and utilized can assist in uncovering missing amounts from the accounts system.

 

All business expenses paid for by the owner should be recorded in the books of account of the business. Perusing the owner’s credit card or bank accounts would enable the bookkeeper to trace these expenses.

 

Vigilance, and control over all expenses and income flowing through the business is of utmost importance. Ideally, the business should refrain as much as possible from dealing with cash, if not possible, proper control should be exerted over the cash sales and cash expenses.

Recording and controlling cash income and expenses is not rocket science! It is the lack of discipline from both business owners and employees alike that creates accounting problems.

 

Author: Sean Goss  sgafc@mweb.co.za

 

 

Setting Daily Cash Collection Goals or Targets

Open any book on business, or surf the net, and you will find information on goal setting and its importance. I am 100% in agreement with the setting of goals, but sometimes find fault with the distant or long-term goals. We set goals for the end of the year, or the month. Effectively, deferring the goal.

 

Long-term goals absolve its creator, of any immediate responsibility. So he/she goes into a “dream-like” state, hoping to accomplish the goal at month-end. When the goal is not attained, frustration sets in, leading to no further goal setting, and leaves the business owner in a rudderless state.

 

Most businesses set sales targets for a year or month. The sales will be recorded in accounting books, and substantial amount of those sales could be credit sales. So hitting the monthly sales target is excellent, but sales driven by targets would invariably be “credit sales”, and our old problem rears its ugly head again, CASH FLOW!

 

The conventional accounting for sales should be outsourced. The owner should be more hands-on with “CASH ACCOUNTING”, and set cash collection goals.

Try this cash goal setting strategy. Break down that huge goal of R 50 000 sales for the month, into manageable  “bite-sized chunks”, of say R2500 PER DAY! (That is 20 working days; a month has about 22 to 23 working days).  It prompts you into action immediately. From the moment you wake up, you have to work towards hitting your R2500 target at end of day.

 

And why not shift the focus away from a sales target of R 2500.00 to a Cash Target of R2500! Sometimes your cash and sales target would converge (Cash Sales), but as any good accounting student will tell you, it’s not the same thing.

 

Your cash target now becomes that debtor’s age analysis, not clients,(unless they cash clients off course) with outstanding payments, to your business. Plan your day, with only cash in mind, and embark on shrewd methods to extract cash from your debtors. Opt for a cash sale, rather than a credit one. Insist on a deposit, for a major job. If you have a credit card utility machine, go ahead and swipe that card!

Your deposits, credit card sales settled by bank that day, cash sales and cash collected, constitute your daily cash takings for the day.

 

Follow through by creating a spreadsheet with the following columnar sections

  • Checks Collected
  • Cash Collected
  • Credit Card payments settled
  • Direct transfers to the bank

 Another header in bold on your spreadsheet, should be your daily target. Provide columns for dates, and an important comments section. On the” comments section”, notes are made as to whether the target was attained or not. Be disciplined. You either hit a daily cash target or not. No “ifs” “nearly” or “buts” here.

 

SET YOUR ANNUAL CASH TARGET, and divide your annual target by twelve, and then by 22 to 23 working days, and you arrive at your daily cash target. Working

 

pro-actively on a daily target and attaining it everyday, equates to a monthly and annual target accomplished.

 

If you exceed your daily target by an amount equal to your daily target, you cannot relax the following day, and regard the excess amount as the next day’s target. It is another day, with a new target.

 

Implement this method, and see your cash inflow go through the roof! On a cautionary note, all cash should be banked, and don’t forget to save some of the cash!

 

Author: Sean Goss  sgafc@mweb.co.za

 

 

Working Papers-The Building Blocks Of Financial Statements

The organizations financial statements are the final report card after a certain period (mostly twelve months). Your bank or other third parties will evaluate this highly important document, to reach certain conclusions about your business. The numbers on financial statements can mean the difference between securing finance, and struggling financially.

 

Weak preparation and negligence can cost business substantial sums, if that loan is turned down. Consult expert accountants, when financial statements are required. Rather pay higher fees, than to settle for a cheap accountant. Cheap accountants, produce poor financial reports.

 

Clients should request an inspection of their working files, before taking delivery of their financial statements. The accountant remains the owner of the working file, but should share all his findings with his client. Do not enlist accountants who fail to back up their financial statements with professionally prepared working documents. It is in your own best interest to verify this fact!

 

Please note that working files are not client admin/permanent files. The working file will contain the relevant information (working papers) used, to construct the financial statements. The working file connects all the voluminous data in the books of account with the financial statements.

 

Any accountant worth his salt will follow these procedures below, to prepare working papers (building blocks):

  • Finalize all written up accounting information.
  • Verify the veracity of transactions, i.e. the books could reflect rent at $ 11 000, ($1000 per month) which means one months rent is not paid or reflected, the accountant will correct the information to agree with the true state of affairs.
  • Open an indexed working file.
  • Print a first trial balance, and general ledger.
  • The trial balance and ledger is examined and compared to important data and source documents.
  • At each level of the examination, notes are made about the information. Fixed assets will be compared to the fixed assets register; the cashbook is reconciled back to bank statements (if not done). Copies of original bank statements and asset invoices will be attached to the working papers.
  • Revenue and expense items are reviewed, and compared to sample source documents.
  • Adjustments are made to the first trial balance.
  • Lead schedules are prepared. Lead schedules are summaries of the assets and liabilities, and income and expense items.
  • From the lead schedules, draft financial statements are prepared.
  • Notes are made on accounting policies, GAAP and IFRS, and a final financial statement is prepared.
  • A final review is performed and the financial statements are printed.
A copy of financial statements is placed in the working file, and all other working papers are cross-referenced to the trial balance and ledgers.

 

  • file is closed and archived. A properly prepared working file can go a long way in addressing concerns by owners of the business or IRS. It contains extremely valuable information.

 

This is a very simplified guideline, and more extensive working papers could be prepared. Inaccurate financial statements can be disastrous. Business owners should equip themselves with a basic knowledge of financial statement preparation. If multinational corporations accountants can get away with fraudulent financial statements (until they were caught out), due to stockholder apathy, imagine how serious this situation could be for unskilled, small business owners.

 

Author: Sean Goss  sgafc@mweb.co.za

 

IFRS and Fair Financial Statement Presentation

Many accountants believe that they are doing an excellent job when preparing financial statements. Many financial statements however, fall far short of the requirements of generally accepted accounting practice, as well as the new International Standards For Financial Reporting (IFRS).

 

Unfortunately, there is no escaping fair presentation, even for small business. All businesses, be it a huge corporation, or a small business is compelled by laws to present proper financial statements.

 

Currently, for small and medium sized business, a financial reporting model has been published by IFRS, for discussion, by its affiliate members within the global accounting community. In as much, as this format will be a refined to a less complex guideline, fair presentation will not be done away with.

 

Fair presentation is even more important in the small business environment than in the bigger corporate market. GAAP, as it was always understood was meant to draft financial statements in such a manner that it could be understood and interpreted by lay people on the street.

 

GAAP has further been enhanced by additional prescriptions coming from IFRS, so as to ensure that financial statements are a) reasonable and b) uniform with applicable standards internationally.

 

Ironically GAAP is not enforced at final financial statement preparation, but at initial entries into the books of account. If proper accounting standards are not applied at this level, all subsequent reports will result in an inadequate disclosure in the financial statements. A perfect example would be cash advances received, for work/projects to be completed.

Wrong                                                              Dr                              Cr

Bank                                                              XXXXX                                                                                        

Income                                                                                          XXXXXX

 

Correct

Bank                                                              XXXXXX

Received in Advance (creditor)                                                  XXXXXXX 

 

If the project in question is not finalized at financial statement preparation date, and it was wrongly entered, the GAAP becomes questionable.

 

 

During the entire accounting process, vigilance is necessary, to ensure that entries are written up in a manner, to enable application of GAAP.

 

Another minefield is fixed assets and liabilities.

Fixed assets are depreciated according to useful or economic life, not tax rates. Assets should also be revalued from time to time (which rarely happens in small business), the importance of a fixed assets register, can therefore not be overlooked.

Long term Liabilities should clearly define whether they interest bearing or non-interest bearing. Interest bearing borrowings should be split between interest and capital charges, clearly disclosed on the notes of financial statements.

Yet again, proper bookkeeping is essential, with an amortization schedule throughout, specifically for the interest and capital portions of the loan. 

 

This article barely scrapes the surface of fair presentation and all the amendments being issued, but hopefully some light can be shed on some of the most salient points.

 

Final financial statements, complying with GAAP and IFRS, is very neat in appearance, and makes it much easier for the users (shareholders, owners, banks), to traverse the complicated information presented therein

Finding The Ideal Accounting Firm For Your Business

The services of accountants are becoming more expensive and scarce. Many medium to large accounting firms around the globe have collapsed due to disciplinary procedures and blatant corruption. Innocent businesses lost their accounting firms due to investigations from authorities into malfeasance related to other corporations.

 

The admission to the industry is becoming tighter, with rigid exams, and even harsher requirements for practicing accountants and auditors. The pool of available practicing accountants is becoming smaller as a consequence of   regulation.

 

It is nevertheless, not impossible to find the ideal   firm. I emphasize, firm, not an individual accountant. Respective bodies stringently control an accountants advertising, but most of them are not precluded from advertising in the Yellow Pages or newspapers.  A website for an accountant is the most viable form of advertising. So if you search through your Yellow Pages, newspapers or a search engine on the web, you will find a number of firms offering their services to the public.

 

Follow this guideline when selecting your firm.

  • If you a small to medium business, identify a small to medium firm.
  • Opt for a firm or company that is registered. The number of partners is immaterial.
  • Professional Practice/office. Offices with proper infrastructure, such as modern computer equipment, software, fax machines, telephones, and Internet and e-mail facilities.
  • Library. Does not have to be a huge library, even a bookcase with relevant reading material on tax, GAAP, labor, will suffice. This  indicates that the firm keeps up to date with legal developments.
  • Archiving. Proper storage facilities for your documents and files.
  • Working, permanent and operational files, is a good yardstick to gauge professionalism.
  • Skills. Are the partners indeed skilled and qualified to render the services advertised?
  • Scope of services. Accounting, tax, business advice, valuations, investments, auditing, negotiation and other financial services under one roof.
  • References. Check references with existing or previous clients of the firm.
  • Pricing. Fees   vary, but compare fees to the quality of service  and swiftness in delivery of assignments and projects. If you happy with the service levels be prepared to pay the fees, excellent service, comes at a price. Rather negotiate rates, than to opt for a cheaper firm.

 

A professional firm will prepare an engagement letter(“agreement”). Insist on such an agreement before mandating the firm for work. Such an agreement should clearly stipulate the kind of services offered, the rate and terms. This agreement can also address potential disputes.