When reviewing by way of financial statement or even tax schedule, you could possibly note overprovision or underprovision for past years' tax. What will you do as being an auditor?
Initially let us fully grasp, what will lead to the accounting entries for overprovision or underprovision for tax:
Initially let us fully grasp, what will lead to the accounting entries for overprovision or underprovision for tax:
The over or under provision possibly resulted from:
- tax correspondences (i.e. notice of assessment) through tax authority displaying a revised tax payable
- tax agent or client a computation error in prior year tax computation
- tax agent or client turn out to be conscious of new evidences which might recommend that previous tax computation should be revised
- clarification of new ruling getting published not too long ago
Why it's important for an auditor to know the nature of overprovision or underprovision?
By knowing the nature of overprovision/ underprovision accounting, we are able to cross check to existing year tax computation to produce certain that the basis of computation has been corrected such that latest year tax computation is in line with proper ruling/ basis. As an illustration, throughout the year, tax authority might disagree with claiming professional fee as deductible expense. Therefore, it can lead to underprovision in respect of past year tax. In latest year tax computation, management need to deem the exact same nature of profession fee to become non-deductible expense. This will likely avoid the underprovision tax inside the future.
In brief, it's important to know the nature of any over or underprovision of tax, and check out that the basis of existing year tax computation has been updated such that it can be in accordance with most up-to-date tax ruling.
See also: How to account for the provision for reinstatement
By knowing the nature of overprovision/ underprovision accounting, we are able to cross check to existing year tax computation to produce certain that the basis of computation has been corrected such that latest year tax computation is in line with proper ruling/ basis. As an illustration, throughout the year, tax authority might disagree with claiming professional fee as deductible expense. Therefore, it can lead to underprovision in respect of past year tax. In latest year tax computation, management need to deem the exact same nature of profession fee to become non-deductible expense. This will likely avoid the underprovision tax inside the future.
In brief, it's important to know the nature of any over or underprovision of tax, and check out that the basis of existing year tax computation has been updated such that it can be in accordance with most up-to-date tax ruling.
See also: How to account for the provision for reinstatement
