Deferred Taxation - Audit Process

Deferred Taxation results from the fact such the income tax department require different rules for calculating profits from those used through the accountant in the financial accounting, for instance, capital allowances vs. depreciation. These different rules usually result in a decreases profit for tax purposes in the short term, although they result in a potential payment of deferred taxation in the long term. The different rules may conclusion in accounts that would mislead the reader whether he tries to compare the tax charged based upon the accounting profits along with such based on the taxation profits. To resolve this problem the accounting profession has come up along with the use to give for deferred taxation. This can be a highly subjective area and the relevant authority is IAS 12-Income Taxes. Previous to we look at the audit work involved let us notice the ways whether a potential charge for deferred taxation can arise.

1. Short term timing differences: the tax authorities in the quite deal along with items on a payments and receipts basis, common provisions will not be allowed till they have actually been paid. Therefore differences must always be given against.

2. Tear and wear allowances vs. depreciation: tear and wear allowances regularly on a reducing basis are invariably dissimilar from depreciation.

3. As a result of trading losses, debit balances may result.

4. Permanent differences as a result of items of expenditure that will remain permanently disallowed through the Income Tax Department like depreciation on buildings and on the cost of saloon vehicles in excess of Shs.100,000/-.

IAS 12 needs that deferred taxation be given for on all timing differences on the liability way. Although, the following conditions are complied along with then provision is needless. However it will be reasonable to suppose that timing differences tax liabilities will not crystallize and will not reverse whether only if the company is a going concern and

a) The directors are capable to foresee on reasonable evidence such no liability is probable to arise as a result of reversal of timing differences for several considerable period ahead as at least three years and

b) There is no shown that after this duration the situation is probable to change then like to crystallize the liabilities.

Please notice there the onus of proof is directly on the directors, it is for them to confirm to the auditor such a provision for deferred tax is not essential and whether they cannot confirm, and then a provision must be created for all timing differences.