The African Tax Administration Forum (ATAF)

Online Course on Introduction to Tax Audit

2019 Written Exam

Part 1: Multiple Choice – 40 marks (compulsory)

Part 2: discussive and computational – 60 mark(compulsory)

The final assessment for this course consists of two parts, Multiple choice, discussion and computation
questions.All questions are therefore compulsory:

A final result of 50% or more for the combined result of multiple choice and the written assignment is
required in order to obtain a certificate of completion.

The final assignment will require students to apply the knowledge they have acquired throughout the
course. A final result of 50% or more for the final exam is required in order to obtain a certificate of
completion.

Please make use of the Online Course Portal to submit the Assignment,
Please refer to the exam guide for instructions.

Instructions: Please read carefully and answer all Questions

2019 TAO EXAM

Section B – (3) discussion and (1) computational questions (15 marks each)

Question 1 – 15 marks
State and briefly discuss at least five challenges that an auditor may come across in the
course of auditing Small Medium Enterprises.

Question 2 – 15 marks
Before the audit begins, the auditor should notify the taxpayer about the planned audit and
make an appointment for an entry meeting which comprise various members. Identify whom
and explain why the entry meeting should so constitute.

Question 3 – 15 marks
Briefly discuss the importance of pre-audit analysis in relation to Auditor’s planning process

Question 4 – 15 marks
Following the start of the audit cycle at the Kenya Revenue Authority, You have been selected
to conduct a tax audit on Strong fabrics limited. The company owned by Mr. Paul Owino a rich
business man with the business located in the prime area of Westlands in Nairobi, Kenya. Mr.
Paul started business on 1st June 2012, and registered for taxes with the Kenya Revenue
Authority. At the start of 2015, Paul acquired and registered with the tax body, a state of the
art pickup to use equally for both personal and business work from operational cash flows
worthy 6 million Kshs.
Through a risk based computer aided analysis, his company has been recently selected for
audit. As the team leader, your audit supervisor has assigned you the case responsibility.
Strong fabrics mainly deals in purchase, colouring and tailoring of cotton fabric into high end
African design clothing dressing from Dubai. He has had a stable supplier at 2600ksh per
meter.
Below are Strong Fabrics Limited’s extracts of Profit and Loss Account for 2 years 2014 and
2015:
2014 2015
Revenue from Garments sale 5,500,000.00 6,900,000.00

Material utilized (COS) 3,900,000.00 5,970,000.00

Gross Profit 1,600,000.00 930,000.00
Expenses
utilities (500,000.00) (600,000.00)
staff costs (250,000.00) (180,000.00)
rent (100,000.00) (150,000.00)

2019 TAO EXAM

 Stock wastes cost (850,000.00) (100,000.00)
Depreciation on Pick up (1,500,000.00)
Net profit/(loss) (100,000)

Part A: Identify the six likely risks detected by the system

- Changes in gross profit not consistent
- Staff costs drop when materials and revenue is increasing
- Percentage of stock costs in 2014
- Reduction in stock wastage
- Consistent losses when acquiring assets
- Change in materials utilised not similar to changes in revenue
- Depreciation of motor vehicle

(Max 6 points)

At the Start of 2016, January, Paul got a loan of 40 million Kenya Shillings, Using 15 million
for his home and 25m for the purchase of textile dying and colour toning equipment. He started
making loan repayments that month.
Below is an extract of his Income statement for the year ending December 2016

2016
Revenue from Garments sale 10,500,000.00

Material utilized (COS) (7,900,000.00)

Gross Profit 2,600,000.00
Expenses
utilities (600,000.00)
staff costs (180,000.00)
rent (150,000.00)
Depreciation on Pick up (1,500,000.00)
Interest on loan (2,500,000.00)
Net profit/(loss) (2,330,000.00)

Notes:
During audit you discover the following:
1. Paul imported 3500 metres of fabric at his consistent price. Of each metre, he requires 1.5
metres to make a dress and 0.9 metres to make a shirt. He made 1200 dresses and 1800
shirts on order. During the year each shirt sold for 3000 kshs while dresses were sold at 6500
kshs each. All dresses and shirts are made on order and payment is made fully before work
starts. Some clients have paid in advance worth 1.45 million kshs.

2019 TAO EXAM

2. No material losses of material is made. Paul has declared an opening stock of 100 metres
and a closing stock of 600 metres which was verified by the customs officials during a post
importation audit.

Part B: Was Mr. Paul's declaration correct? If not, recalculate his taxable income for 2016.
No (1 mark)
2016
Revenue from Garments sale 13,200,000.00

Material utilized (7,800,000.00)

Gross Profit 5,402,016
Expenses
utilities (600,000.00)
staff costs (180,000.00)
rent (150,000.00)
Depreciation on Pick up (750,000.00)
(1500,000/2
Interest on loan (1,562,500.00)
(2.5/4)* 2,500,000
Net profit/(loss) (1,409,516.00)
(7 marks max)

2019 TAO EXAM