AA syllabus

Description and Response to Audit Risk 8

Audit Risk 8

During the year, Esk Co was informed by the tax authorities that it was under investigation for a breach of legislation relating to sales tax.

Esk Co has appointed a tax consultant who has advised that there does appear to have been a breach of tax legislation and has estimated that a fine and penalty totalling $0.6m will be payable.

The directors do not intend to record anything in the financial statements until final notification is provided by the tax authority, which is due to be received on 31 January 20X6.

Identify and Explain the Audit Risk

Esk Co is under a tax investigation relating to sales tax and it is likely that the company will be required to pay a penalty and fine of $0·6m.

Therefore a provision should be recognised as there is a probable outflow of resources as a result of a past event.

Esk Co has not recognised a provision nor has any disclosure been made.

There is a risk that provisions are understated and that disclosures are inadequate

Auditor Response 8

Explain the Auditors Response

The audit team should obtain a copy of the letter from the tax authorities and discuss the matter with the directors.

They should obtain and review documentation from the tax consultant to assess the likelihood and amount of any penalties and fines to be paid