The TAX process can often be one of the most complex processes, due to the inherent complexity of the various types of taxes that impact organizations. The amount of incomes taxes that corporations are required to pay is often a very significant dollar amount (often up to 40% of earnings depending on the type of corporation), and therefore it is very important to ensure that the tax calculations and reporting is correct. In the USA, income tax reporting was often cited as one of the areas that led to reporting problems, and it is not hard to understand how that could happen – very few people in any organization have sufficient tax knowledge to administer and review income tax calculations.
In Canada, there are Federal and Provincial Income taxes, and various sales taxes, including the valued added tax (GST), and provincial sales taxes. Tax laws and regulations can be complex and subject to change, and therefore require specialized accounting and tax professionals. As a result, it is very important to have key controls that provide sufficient oversight. In other words, due to the specialized nature of taxes, there must be appropriate review of tax calculations and reporting by other tax professionals, be they internal or external.
Every organization should have the following key controls for their Tax processes:
1. Income Taxes – tax calculations should be supported by appropriate detailed schedules, and the resultant financial reporting should be prepared by competent accounting professionals, and double checked by tax professionals. The CEO and CFO should also insist upon an overall understanding of the calculations, and ensuring that the evidence exists (signatures / dates) to support them. These are of particular importance at interim and fiscal year-end periods, because of the timing differences between the calculation of income tax liabilities, and the actual instalment payments.
2. Sales taxes – there is a plethora of sales tax rates and regulations in Canada and elsewhere, and these need to be fully understood and incorporated into the IT systems that generate invoices to customers. Typically there are numerous (possibly thousands) of transactions that occur each day, and the tax calculations included on the invoices are done automatically within the IT systems.
a. Tax tables within the IT system must be carefully reviewed and approved by tax professionals. This needs to be done on an ongoing basis, to ensure that any changes are implemented. The review should documented, be it with hard copy approvals, or whatever process that the organization has to support such reviews.
b. There needs to be system access controls, to ensure that changes to the tax tables within the IT systems, are restricted to authorized personnel.
The testing of these key controls would include, in the case of Income taxes, a review of the tax calculation approvals (evidence), as well as verifying some key elements of the calculations. In regards to Sales taxes, the system access controls should be reviewed, including a “re-performance” whereby someone not authorized to make tax changes, should attempt to do so, and the results documented. In addition, a sample of high volume / high dollar amount transactions should be reviewed to verify the accuracy of the tax calculations. Of course, as usual, document the test results.I hope this helps. Please contact Edelkoort Smethurst Schein CPA’s LLP if you have any questions or comments.
Edelkoort | Smethurst | Schein CPAs LLP is located in Burlington Ontario servicing the Golden Horseshoe and Greater Toronto Area and beyond. The firm is fully licensed with CPA Ontario to provide assurance, tax and accounting services as well as registered as tax preparers with the Canada Revenue Agency (CRA) & Internal Revenue Service (IRS). The firm is also registered as an IRS Certified Acceptance Agent.
All blog posts published on this site are for informational purposes only and do not constitute professional advice. Readers should contact a professional to discuss their individual situation. Neither the author or the accounting firm shall accept any liability for any reliance placed on the information posted.