Tuesday, September 11, 2012

What do you do when you noted overprovision/underprovision for prior years' tax

While reviewing through financial statement or tax schedule, you may note overprovision/ underprovision for prior years' tax. What will you do as an auditor?

First let us understand, what will trigger the accounting entries for over / underprovision for tax:

The over / under provision maybe resulted from:
- tax correspondences (i.e. notice of assessment) from tax authority showing a revised tax payable
- tax agent / client a computation error in prior year tax computation
- tax agent/ client become aware of new evidences which may suggest that prior tax computation need to be revised
- clarification of new ruling being published recently
- etc

It is important for an auditor to understand the nature of overprovision/ underprovision. Why?

By understanding the nature of overprovision/ underprovision, we can cross-check to current year tax computation to make sure that the basis of computation has been rectified such that current year tax computation is in line with appropriate ruling/ basis. For instance, during the year, tax authority may disagree with claiming professional fee as deductible expense. As such, it will result in underprovision in respect of prior year tax. In current year tax computation, management should deem the same nature of professional fee to be non-deductible expense. This will prevent the underprovision of tax in the future.

In short, it is important to understand the nature of any over/underprovision of tax, and check that the basis of current year tax computation has been updated such that it is in accordance with latest tax ruling.

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