Assure the flow of information from accounting records

Procedure

Obtain the entity’s documented procedures for preparing the tax return (that is, book-to-tax process) and note:

• the staff members responsible for preparing and completing the tax return
• the systems and applications where data is sourced and processed automatically (Refer to MLC-4 for procedures relating to system and application controls)
• whether the process for preparing the tax return begins with the account profit or loss as per the entity’s financial statements (if not, document the entity’s approach for determining the taxable income)

If the entity’s book-to-tax process begins with the accounting profit or loss, document:

• the types of transactions (for example, depreciation) and circumstances (for example, depreciation rate for accounting differs from tax) that are added back to determine taxable income
• the types of transactions (for example, long service leave provisions) and circumstances that are deducted to determine taxable income
• any other tax specific items (for example, R&D offsets) that are generally considered and included in the tax return.

Obtain the entity’s documented procedures for reviewing the tax return and note:

• the staff member responsible for reviewing the tax return
• the procedures describing the reconciliation of the tax return figures back to the financial statements
• the requirement for providing a narrative to explain major variances from previous year
• the entity’s definition of major variance threshold that would require documented explanations.

If procedures performed by the reviewer as mentioned above for reviewing the tax return are absent or not documented, enquire of the entity's reasons, report their response (see note) and raise an observation.

Obtain the entity’s most recent review or reconciliation of tax return to the financial statements (also known as the book-to-tax reconciliation) and note:

• the starting point of the entity’s tax return calculation to process the accounting profit/loss
• whether the accounting profit/loss matches with the financial statements (if not, request the entity explain differences supported with detailed calculations)
• What are the items that were adjusted and the reasons for the adjustment (for example, elimination entries, permanent and timing differences, R&D offsets)? For adjustments are processed by software application, refer to MLC-4 for procedures relating to automatic adjustments processed by software applications.

Sample five manual adjustment line items (three items with the largest amounts adjusted and two other random line items) and perform a walkthrough of the calculation with the entity. Document their response; obtain screenshots of calculations and any supporting evidence. If the entity has less than five adjustments, sample all adjustment line items.

Enquire of the entity their processes and controls for completing other schedules relating to the tax return and report their response (for example, the Reportable Tax Position schedule).

Enquire of the entity if they have reviewed the frequencies of re-submission of their tax returns or BAS statement in the most recent financial year If so note:

• the number of tax returns re-submitted (all tax types, income tax, indirect tax, and so on)
• the common root causes for re-submissions
• any systemic impact to the entity's control framework
• any remediation of identified control breakdowns.

Note: Only relevant for entities that are required to have financial statements. If the entity does not have financial statements, document the entity’s approach for determining taxable income. The assumption is that most organisations will prepare financial statements for internal reporting purposes or for lodgment with ASIC if the organisation is a ‘reporting entity’.

Better practice report inclusions

• Documented control framework

Procedure

Obtain the entity’s documented procedures for preparing the BAS/excise return and note:

• the staff member/s responsible for preparing and completing the BAS/excise return
• the systems and applications where data is sourced and processed automatically (refer to MLC-4 for procedures relating to system and application controls)
• whether the process for preparing the BAS begins with the transaction data extracted from source systems (if yes, document the entity’s process for compiling the data for the BAS/or excise return)
• any system map (general process flow) showing how excise tax events are triggered
• the process in place to identify transactions that trigger an excise liability to be created or a movement of products without an excise liability or refund of an excise duty.

Ascertain how these following events flow through to an excise liability being generated and reported:

• purchase orders
• sales orders
• delivery advice
• goods receipts
• inventory adjustments and write offs
• order cancellations.

Enquire about the entity's data extraction process for the preparation of the BAS/excise return and document:

• the entity's process for ensuring that the extracted data is complete and reconciled to the general ledger/source systems
• whether the data extraction automated or the manual processes involved
• the reports that are run from systems
• the nature and types of manual adjustments/journals and the review process for ensuring these adjustments are valid and authorised
• the checks/reviews performed to ensure the accuracy of GST classification of transactions and excise classification of products?
• the reconciliation and review of GST general ledger accounts and relevant excise liability accounts and the approval process for journals/postings
• any periodic system/transaction testing undertaken to ensure calculations/classification of taxes are performed as required.

Obtain the entity’s documented procedures for reviewing the BAS/excise return and note:

• the staff member responsible for reviewing the BAS/excise return
• the procedures describing the reconciliation of BAS/excise data to the general ledger/source system
• any requirement for providing a narrative to explain major variances/deviations from previous periods or BASs/excise returns
• the entity’s definition of major variance threshold that would require documented explanations
• any requirement for ensuring that reported BAS/excise figures are consistent with the entity's business model and its operations (for example, increase in sales in a particular quarter or month is in trend with seasonality or a significant increase in acquisitions reported in BAS corresponds to a large capital purchase or for excise, the release of a new product line).

If procedures performed by the reviewer as mentioned above for reviewing the BAS/excise return are absent or not documented, enquire of the entity's reasons, report their response and raise an observation.

Obtain the entity’s most recent BAS/excise return preparation work papers and note the following:

• as the starting point of the BAS/excise return preparation is the extracted data reconciled and verified to ensure data is complete and accurate
• manual adjustments/entries are processed, note the nature and reasons for adjustments. Were they reviewed and authorised? (refer to MLC-4 for procedures relating to automatic adjustments processed by software applications).

Sample five manual adjustment/journal line items (three with the largest amounts adjusted and two other random) and perform a walkthrough of how they are processed with the entity. Document their response, Obtain screenshots of adjustments/calculations and any supporting evidence. If the entity has less than five adjustments, sample all adjustment line items.

Perform a walkthrough of BAS /excise return preparation process starting from the relevant system batch reports run, related spreadsheets, and checklists completed, final review before submission to post submission general ledger reconciliation of GST accounts (payable and receivable accounts).

Enquire of the entity their processes and controls for ensuring reviewing the reasonableness of the reported figures in the BAS.

Enquire of the entity if they have reviewed the frequencies of re-submission/revisions or late lodgments of their BASs/excise returns in the most recent financial year If so, enquire the following:

• How many returns have been re-submitted/revised or lodged late
• What are the common root causes for re-submissions/revisions/late lodgments?
• Is there a systemic impact to the entity's control framework
• Is there any remediation of identified control breakdowns

Report their response.

Better practice report inclusions

• Documented control framework including the BAS/excise return preparation process
• GST/excise manual

Procedure

Refer to MLC-5a for requirements for retaining work papers detailing tax return calculations and the BAS/excise return

Better practice report inclusions

• Documented process for retaining tax return and the BAS/excise return work papers

Procedure

The ATO notes that external auditors will review tax balances and verify the reasonableness of calculations and reporting of the GST liability in the BAS and overall excise liability as part of their field work during the annual external audit. Organisations should take credit for external reviews such as this, noting that these reviews will be performed using the accounting materiality concept. Materiality for tax might be significantly lower than the materiality applied in a financial statement audit.

Enquire of the entity if there is review and approval processes in place to check the correct application of tax law to accounting transactions and accurate calculation of the tax return and BAS/excise return. Report their response.

If a review process is in place, list the specific items that a reviewer would look for when reviewing the working papers. For example, how the reviewer understands major movements or variances in the working papers have been made correctly for tax. If review or approval processes are in place, obtain copies of physical or electronic sign off (that is, via email) of the calculation prepared for the most recently submitted tax return and note:

• the tax return/BAS /excise reporting period
• the preparer (name and title)
• the reviewer (name and title)
• the approver (name and title).

If there was no review undertaken or the review was undertaken, enquire of the entity's other management controls to ensure the complete and accuracy of the work and document their response.

Enquire of the entity if the external auditor has reviewed the tax positions, calculations, balances and reported amounts in the BAS during the year-end audit process. Report their response. Where applicable, enquire if they have also reviewed the excise liability calculations.

Better practice report inclusions

• Work papers with signoff by reviewer/approver
• External audit plan which includes review of tax balances and GST/excise in the scope of work

Procedure

We suggest leveraging BLC-3c relating to briefings on the effective tax rate of the business for this procedure as well as information in Part A of the Tax Transparency Report or notes to the annual financial statements if applicable.

Enquire of the entity what methods they have in place to reconcile tax return calculations to the financial statements. This includes:

• reconciliation of income tax expense to profit (commonly called “book to tax”)
• reconciliation from income tax expense to income tax paid or payable. The reconciliation should include material temporary and non-temporary differences. This reconciliation relates to current tax reported as component of the income tax expense in the financial statements on a ‘like for like’ year basis to income tax payable for the same year.

Report their response.

If methods exist confirm if they are documented. If so, obtain a copy of the document and extract the procedures for reconciling tax calculations to the financial statements.

Enquire of the entity if they have a summary of the major book-to-tax differences. If so, obtain a copy, sample the top five largest line items and enquire how the differences arise. Report their response.

Obtain a copy of the following two calculations for the most recent financial year:

• the tax calculation (in spreadsheet format with embedded formulas) for determining income tax expense in the most recent financial statements
• the taxable income calculation (in spreadsheet format with embedded formulas) supporting the most recent income tax return for submission to the ATO and noting        
  • the financial statement period
  • the tax return period        
    • Does the tax consolidated group match with accounting consolidated group? If not, obtain listing of entities within the tax consolidated group, listing of entities within the accounting consolidated group; and identify and document the entities that are not included in both lists.
    • What is the tax calculation result for “income tax expense”? Does this match with the financial statements? What is the current tax amount? What is the deferred tax amount?
    • What is the tax calculation result for “taxable income” for the tax return? Does this match with the tax return?
     
   

Better practice report inclusions

• Documented procedures for reconciling tax return calculations to the financial statements

Procedure

Enquire of the entity what processes they have in place to reconcile BAS/excise reported numbers to the source system, general ledger and financial statements if applicable

This includes:

• the entity's definition of what is considered a material or significant variance/write-offs
• the reports generated from source systems for the BAS/excise return preparation process? Obtain a list of reports and copies of these reports for one BAS/excise period
• reconciliation of BAS/excise data to the source system and the general ledger each month/BAS period/excise period
• reconciliation of annual BAS data to the financial statements that should include explanations for material variance between the reported BAS figures and the financial statements (for example, revenue reported in the financial statements may include items that are out of scope for GST).

If processes exist, are they documented? If so, obtain a copy and extract the procedures for reconciling BAS figures to general ledger and to the financial statements.

Obtain copies of the GST/excise general ledger account reconciliations for two months and enquire of the entity if there were major reconciling items or non-cleared items. If so, obtain a copy of the reconciliations and review top three reconciling items and trace how they were reconciled. Sight associated supporting documentation and explanations recorded. Report the findings.

Obtain copies of the BAS/excise working papers for a sample BAS/excise period and review the five largest manual adjustments posted to amend/modify extracted source systems data. Document the nature of the adjustments/journals and sight supporting documents.

Does the GST group match with accounting consolidated group? If not, obtain listing of entities within the GST group, listing of entities within the accounting consolidated group. Identify and document the entities if any, which are not included in both lists.

Stock control and reconciliation is critical in an excise environment. Enquire of the entity the following with respect to stock control and reconciliation and report their responses

• What are the procedures for receipting products into terminals/sites and delivery livery if products?
• What IT systems are used by sites/terminals?
• How often are the relevant systems calibrated and how are transactions entered into the systems as part of this process
• How do the site/terminal systems integrate /interact with entity's enterprise resources planning (ERP) and accounting systems
• What inventory checks are performed by inventory staff and what is the process in place to monitor losses?
• Is the tank or site reconciliation process of book to physical inventory documented? If yes, obtain a copy of the documented procedures
• What reports are used for the stock reconciliation process
• How is the tank balances closed off and how often does this occur?
• How are the losses or gains treated from the stock reconciliation process? How is the impact of the losses and gains assessed for excise?
• Who is authorised to make corrections or adjustments to book inventory and under which circumstances can they be made? Are these reviewed
• Are there any variations between product types?
• Are there differences in controls and processes between company owned sites and third party sites?

Better practice report inclusions

• Documented procedures for reconciling BAS reported numbers to accounting records and financial statements
• Documented procedures for reconciling reported figures in the excise return to the accounting records and source systems

Procedure

Enquire of the entity if they prepare deferred tax assets and liabilities calculations for the financial statements in accordance with AASB 112. Report their response. If process is documented, obtain a copy and extract the procedures.

Obtain a breakdown of the deferred tax assets and liabilities calculations, sampling five-line items (three items with the largest amount and two random) and reconcile the entity’s methods. In the event there are less than five items, sample all line items.

Procedure

Refer to MLC-3a for procedures relating to the entity’s process for business areas to identify and communicate significant transactions to the income tax and indirect tax teams.

Refer to MLC-3a for procedures relating to the entity’s process and threshold for seeking external advice

Refer to MLC-6a for the procedures relating to the entity’s overall tax return and the BAS/excise return preparation process. MLC-7 specifically addresses significant differences between accounting and tax.

When preparing the tax return calculations and the BAS/excise return, identify the entity’s process for:

• ensuring the correct application of income tax, excise and indirect tax laws to significant accounting transactions that were identified during the year (for example, if a major transaction requires clearance on tax and accounting treatment by internal specialists or advisers) (MLC-3a)
• retention of documents to evidence the reasons for difference in treatment for tax and accounting (for example, legal documents to evidence exempt income)

Where external tax advice has been sought during the year (MLC-3a), identify the entity’s process for correctly applying the advice in their tax return/BAS calculations

Report the entity’s response.

Better practice report inclusions

• Documented procedures for preparing tax calculations based on accounting transactions
• Documented procedures for determining classification and treatment of transactions for GST/excise

Procedure

We suggest leveraging BLC-3c relating to briefings on the effective tax rate of the business for this procedure as well as information in Part A of the Tax Transparency Report or notes to the annual financial statements if applicable.

Enquire of the entity if there is a practice in place to compare and report tax performance of the entity and accounting results by noting:

• any documentation of the practice
• any explanation provided for identified differences
• whether comparison analysis and explanations are reported to the board or governance body
• whether this a required item as part of annual reporting pack to the board or sub-committee.

If not, raise an observation.

Better practice report inclusions

• Documented procedures for comparing tax performance of the entity and accounting results
• Documented requirement for management reporting to compare and explain tax performance of the entity and accounting results
• Disclosures in a Tax Transparency Report

Procedure

Enquire of the entity if there is a practice in place to analyse the figures reported in the BAS/excise returns consistent with the business operations noting. Report entity's response.

If so, enquire of the following:

• is the practice documented?
• Are documented explanation/commercial reasons provided for identified differences and inconsistencies of trends?
• Is the comparison analysis and explanations reported to the board or governance body?
• Is this a required item as part of annual reporting pack to the board or sub-committee? (for example, trend analysis and aggregate monthly comparisons of GST payable/receivable in the BAS compared to the position reported in financial statements).

If not, raise an observation.

Better practice report inclusions

• Documented procedures for analysing the reasonableness of the reported figures in the BAS(s)/excise returns compared to the financial results and operations of the business
• Documented requirement for management reporting of significant variances and trends in BAS reported figures or excise liability reported and paid compared to the financial results

Procedure

We suggest leveraging BLC-3c relating to briefings on the effective tax rate of the business for this procedure as well as information in Part A of the Tax Transparency Report or notes to the annual financial statements if applicable.

Enquire of the entity if there is a practice in place to compare and report tax performance of the entity and accounting results including variances between tax expense for the financial statements and the tax paid/payable as per the completed tax return noting:

• any documentation of the practice
• any documented explanation for identified differences
• the type of variances considered material
• whether the comparison analysis and explanations are reported to the board or governance body
• whether this a required item as part of annual reporting pack to the board or sub-committee.

If not, raise an observation.

Better practice report inclusions

• Documented procedures for comparing tax performance of the entity and accounting results
• Documented requirement for management reporting to compare and explain tax performance of the entity and accounting results
• Disclosures in a Tax Transparency Report.

Procedure

Enquire of the entity if there is a process in place to analyse and explain variances between the BAS/excise reported figures and the accounting records. If so, enquire the following:

• Is the practice documented?
• Are variances explained and documented
• What variances are considered material.

Does the entity performs trend/variance analysis to understand significant deviations in BAS/excise reported figures to previous comparable periods?

Are BAS/excise figures reviewed for reasonableness to ensure if they are consistent with commercial operations and the business model of the entity?

If not, raise an observation.

Better practice report inclusions

• Documented requirement to retain narratives to explain variances between reported BAS/excise figures and the accounting records and prior comparable BAS/excise periods

Procedure

Note that while the guide contemplates all taxes, ATO officers considering tax risk management and governance as part of PCR, ACA or similar products, should focus on income tax elements. ATO officers should consider work of other business lines such as an annual compliance arrangement and key taxpayer reviews for GST to ensure credit is given where the requirement has been tested in a related process/product.

Enquire of the entity their process for reviewing and signing off on the tax, BAS and excise return to ensure that tax return or statement review has occurred prior to lodgment. If there is no process to review and signoff the return prior to lodgment, note an observation and report entity's response.

Regarding tax amendments/corrections/revisions, enquire of the entity as to:

• the process for determining when a tax amendment/correction/revision is required
• the process for calculating the tax amendment/correction/revision
• the process to identify the errors / control breakdown that results in amendments/corrections and revisions
• the process to rectify identified errors / control breakdowns for future tax returns excise returns and the BAS.

If there is no process to review and signoff amendments/corrections to the return, note an observation and report the entity's response.

Better practice report inclusions

• Assurance report of tax return or statement review

Procedure

Note that while the guide contemplates all taxes ATO officers considering tax risk management and governance as part of PCR, ACA or similar products should focus on income tax elements. ATO officers should consider work of other business lines such as an annual compliance arrangement for GST to ensure credit is given where the requirement has been tested in a related process/product.

Enquire of the entity if there are controls to review compliance risk for other types of taxes and report the response. If controls to review compliance risk are absent, raise as an observation.

Note if compliance risks and key controls have been identified by the entity for:

• fringe benefits tax (FBT)
• the super guarantee charge (SCG)
• pay as you go (PAYG) - instalments and withholding
• employee mobility (who bears and claims the labour costs)
• customs and excise duty
• fuel tax credits (FTC)
• wine equalisation tax (WET)
• luxury car tax (LCT)
• state-based payroll taxes
• stamp duty.

For items in the above list where no compliance risks or key controls have been identified, enquire of the entity's reasons for its absence and report their response.

Note that for most organisations FBT, PAYG, super guarantee and other payroll taxes and related controls will be administered by the payroll function, stamp duty legal departments, and customs and excise taxes by customs agents.

Better practice report inclusions

• Documented compliance risks and key controls for employee taxes (including FBT, etc.)
• Documented compliance risks and key controls for state taxes ( stamp duty, payroll tax)