3103 Involvement of tax specialists

Oct-2012

OAG Guidance

If during the completion of the Engagement Team Competency and Resource Assessment template, the engagement leader determines that tax is considered a complex area, the engagement leader should ensure the involvement of tax specialists in the audit of tax. Refer to OAG Audit 3061 for further guidance on assessing engagement team competency and capability, and on assigning roles and responsibilities.

OAG Guidance

Some indicators of complex tax situations include the following, but the list is not necessarily exhaustive, and whether in the circumstances tax is considered a complex area is a matter of professional judgment:

• multilocations with significant foreign operations;
• entities where there have been business combinations and/or subsidiary disposals;
• entities with material unresolved disputes with tax authorities or a history of disputes with the tax authorities;
• entities where there are significant changes in ownership, business activities, or tax status;
• first year audit engagements;
• entities whose industries are exposed to significant tax regulations;
• entities operating in jurisdictions where there are frequent or recent changes in tax regulations requiring proper interpretation;
• start up entities;
• entities with potentially material tax matters on which they have obtained written opinions or analyses from tax advisors;
• entities whose tax returns are not file up-to-date;
• entities who have recently negotiated written rulings with tax authorities covering potentially material tax matters;
• entities showing a particularly low or high effective rate of income tax relative to the statutory or expected tax rate;
• entities who maintain tax driven structures or arrangements (e.g., offshore financing, offshore licensing);
• significant changes in tax staff or other staffing concerns relating to taxes or tax reporting;
• entities who lack internal tax expertise or internal controls over the tax function;
• entities with significant amounts of deferred tax assets;
• companies with a significant amount of inter–company transactions;
• entities who maintain a material amount of reserves for tax exposures;
• entities with a history of audit adjustments relating to taxes;
• entities involved in significant tax planning activities.

Our assessment of audit risk considers other risk indicators such as whether the entity is categorized as high risk. Whether these additional indicators affect our assessment of whether tax is a complex area is also a matter of professional judgment.

The audit planning documentation and the planning sign off in the audit file reflect the extent to which tax specialists will be involved in the audit. The assignment of tax specialists takes into account the risks and complexity of the issues, the relevant tax (e.g., corporate tax, sales tax, employee tax), and the resulting capabilities and competence required.

When the involvement of tax specialists in the audit is in their capacity as auditor’s internal experts, for example when tax specialists are involved in the analysis of complex or unusual tax compliance issues, instead of in a tax accounting or tax auditing field, apply the guidance included in OAG Audit 3090 relating to the use of auditor’s experts.

OAG Guidance

We ordinarily perform a tax risk assessment as part of the overall risk assessment for the audit, in order to identify the significant taxes relevant to the entity, including direct and indirect taxes (e.g., customs duties, payroll taxes, value added tax, withholding taxes, stamp duty, etc.), and to consider tax risk in respect of each. This determination of the specific taxes to be covered in the tax risk assessment is based on the information gathered:

• from our understanding of the entity and its environment, and the applicable financial reporting framework (OAG Audit 5020), and

• from our understanding of the business gained in prior years and on the significance of specific taxes to the entity’s industry, business, and its financial statements.

As part of this assessment process, we identify significant tax risks, if any. Evidence of this assessment is included in the audit file.

It is not required to involve tax specialists in the risk assessment or have them sign off on the results, but the core assurance personnel are expected to use professional judgment and consider whether this involvement will be helpful, taking into account the circumstances of the engagement, the different taxes that may be relevant to the entity, and the knowledge and experience of the core assurance team. It may help to consult tax specialists as to whether they need to be involved in the risk assessment or review the assessment performed by the core assurance team. Where tax specialists have reviewed the core assurance team’s risk assessment in accordance with the agreed split of responsibilities, include evidence in the file of their review.

Consideration of tax risk and whether the involvement of tax specialists in the audit is required, and the nature of that involvement, is ordinarily carried out each year during the mobilization phase of the audit. On a continuing engagement, such consideration may take the form of updating the prior year’s assessment and planning documentation. For example, this can be achieved by focusing on changes to the entity’s business and activity in order to identify new, or changes in, tax complexity or risk or other planning circumstances. Where information is carried forward from previous years and updated, we include in the current year audit file, as evidence, the updated assessment of tax risk and the conclusion on whether tax specialist involvement is required.

OAG Guidance

The risk assessment and involvement of tax specialists in the audit of tax can be considered on an overall group, or individual entity, or component basis, following the same reporting hierarchy as is used in the group audit. Some component work programs may benefit from tax specialist involvement and others not.

Group engagement teams

In considering the scope of the group audit and in issuing group reporting instructions to component auditors, the group engagement team may determine that the involvement of tax specialists is required for a particular component. In performing this assessment, the group engagement team takes into account any factors arising at the head office and the consideration of component issues in a group context.

Component auditors

If the group engagement team does not require tax specialist involvement, a component auditor responsible for local reporting considers if such involvement is needed for local reporting purposes. The involvement of tax specialists in the audit of tax on a component may be determined at a component audit team or at the group engagement team level.

OAG Guidance

When tax specialists are involved in the audit of tax, the role of the tax specialists varies depending both on the audit circumstances and the risks, and on whether they are involved in a consulting, coaching, or completing role (OAG Audit 3101).

It is possible that the involvement of the tax specialist in a particular audit could cover any or all of the completing, coaching, or consulting roles. For example, the tax specialist could be involved in a completion role in relation to auditing the entity’s effective tax rate reconciliation; a coaching role in relation to reviewing the computation of taxable profit, and in a consulting role in relation to who will perform the assessment of tax risk or test controls over significant tax risks. Similarly, different tax specialists may be involved in different roles, e.g., corporate tax specialists may be involved in a completing role, while sales tax specialists are involved in a consulting role.

The following are examples of the involvement of tax specialists in each of the roles:

Formal consulting with tax specialists requires that those consulted be given all the relevant facts that will enable them to provide informed advice on technical, ethical, or other matters. See OAG Audit 3081 for detailed guidance on such consultations.

The engagement leader has overall responsibility for determining the role of specialists in accounting or auditing, including tax specialists, on the audit. However, if the engagement tax leader has a difference of opinion with the decision of the engagement leader as to the level of tax specialist participation in the audit of tax, follow the guidance in OAG Audit 3082 for resolving the difference in opinion.

Documentation

Document tax specialists’ work in accordance with CAS 230 Audit Documentation and OAG Audit 3101 for guidance on documentation of work performed by specialists in accounting or auditing, including the use of technology tools, as part of an audit.

When Tax specialists are involved in a completing role, the audit work performed will be documented by the tax specialist either:

• directly in the corresponding audit areas in the audit file, or
• by preparing a tax memo that is then attached in the audit file by the core assurance team.

Although both documentation methods are acceptable, the preferred method is for the tax specialists to document his or her work directly in the audit file.

Where the work performed by the tax specialists is documented in a tax memo, include:

• references to the planned approach agreed during the planning phase of the audit, including reference to the significant risk areas;
• description of work performed or references to the areas completed (Procedure steps or steps), which set out the nature, timing, and extent of the audit evidence gathered to support the audit of tax conclusions;
• results of work performed (including details of exceptions found, how they were addressed, details of significant matters that arose including judgmental issues and their conclusions, a summary of uncorrected misstatements, and any significant matters where applicable);
• nature of review procedures performed by tax specialists in relation to the audit work performed by other tax specialists; and
• references to or copies of the entity’s working papers related to the tax amounts and disclosures audited, to the extent we need to retain them.

OAG Guidance

Auditors are required to be independent of their audit clients at all times. Tax specialists perform their role in the audit of tax in their capacity as audit team members and, as such, tax specialists cannot provide any tax services or non-audit services to the entity that would compromise their independence in performing their roles as auditors.

Refer to OAG Audit 3031 for further guidance on independence.