Scope Of Audit

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In ancient period, there was limited scope of audit because there was no development of business. Generally, auditor used to check cash transactions if there were suspected frauds. But in the recent years, scope of audit has increased. Now-a-days auditing is related to the examination of books of account, evidence, bills, stock and its physical verification etc.

Now-a-days, it is not possible to go through the books of account. So, an auditor applies test check. But such test is possible in such organization where effective internal check system is applied. An auditor should analyse the suspected frauds so as to find out the fact but an auditor should depend on the information provided by the concerned officer.

An auditor should prepare and present report after the examination of profit and loss account and balance sheet. Auditor does not only check the books of account on the basis of evidence but also has to check the authenticity of documents. An auditor should set his mind in that area where he is not satisfied with the records. Despite having above facts, attention of audit can be set up as follows:
i. Checking of books of accounts so as to find out the truth and fairness.
ii. Verification of assets and liabilities after its detail checking.
iii. Checking of books of accounts on the basis of available evidence.
iv. Checking arithmetical accuracy of books of accounts.
v. Expressing independent opinion about the financial statements.
vi. Preparing and presenting fair report to the concerned officer or owners.

Related Topics
Concept And Meaning Of Auditing
Objectives Of Audit
Methods Of Detecting Errors While Auditing
Advantages Of Audit

Objectives Of Audit

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Basic objective of auditing is to prove true and fairness of results presented by profit and loss account and financial position presented by balance sheet. Its objectives are classified into two groups which are given below:

A. Primary Objectives Of Audit
The main objectives of audit are known as primary objectives of audit. They are as follows:
i. Examining the system of internal check.
ii. Checking arithmetical accuracy of books of accounts, verifying posting, costing, balancing etc.
iii. Verifying the authenticity and validity of transactions.
iv. Checking the proper distinction of capital and revenue nature of transactions.
v. Confirming the existence and value of assets and liabilities.
vi. Verifying whether all the statutory requirements are fulfilled or not.
vii. Proving true and fairness of operating results presented by income statement and financial position presented by balance sheet.

B. Subsidiary Objectives Of Audit
These are such objectives which are set up to help in attaining primary objectives. They are as follows:
i. Detection and prevention of errors
Errors are those mistakes which are committed due to carelessness or negligence or lack of knowledge or without having vested interest. Errors may be committed without or with any vested interest. So, they are to be checked carefully. Errors are of various types. Some of them are:
* Errors of principle
* Errors of omission
* Errors of commission
* Compensating errors

ii. Detection and prevention of frauds
Frauds are those mistakes which are committed knowingly with some vested interest on the direction of top level management. Management commits frauds to deceive tax, to show the effectiveness of management, to get more commission, to sell share in the market or to maintain market price of share etc. Detection of fraud is the main job of an auditor. Such frauds are as follows:
* Misappropriation of cash
* Misappropriation of goods
* Manipulation of accounts or falsification of accounts without any misappropriation

iii. Under or over valuation of stock
Normally such frauds are committed by the top level executives of the business. So, the explanation given to the auditor also remains false. So, an auditor should detect such frauds using skill, knowledge and facts.

iv. Other objectives
* To provide information to income tax authority.
* To satisfy the provision of company Act.

Concept And Meaning Of Auditing

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The word 'Audit' is derived from the Latin word 'Audire' which means 'to listen'. In the past , owner used to appoint auditor when he/she suspect fraud. Auditor used to listen the explanation given by persons responsible for financial transactions. At that time, auditing was conducted only to locate errors and frauds. But, after the development of double entry book-keeping system, the duty of an auditor was described at first. After that, scope of audit has been increased. After industrial revolution, scope, size and complexity of business have been increased and owner and management remain separate. So, now-a-days, auditing is the act of checking books of accounts by an independent person for the purpose of proving true and fairness of results of operation presented by income statement and financial position presented by balance sheet detecting and preventing errors and frauds. So, auditing is that act which checks whether all the personal and impersonal ledger balances are shown properly or not , accounting is maintained properly or not, whether the frauds and errors are committed in the books of accounts or not. An independent person who checks books of account is known as Auditor. Therefore, we can draw the following facts in connection to audit.

1. Checking of books of accounts and documents of evident on the basis of generally accepted principles and procedures.

2. Checking of works performed by the staffs whether they have been performed within the limitation of authority or not.

3. Checking the books of accounts whether the results presented by profit and loss account and financial position presented by balance sheet are true and fair or not.

4. Preparation of report based on the fact found during the course of audit.

Related Topics
Objectives Of Audit
Scope Of Audit
Methods Of Detecting Errors While Auditing
Advantages Of Audit

Principles Governing Value Added Tax (VAT)

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The following are the principles which govern value added tax (VAT):

1. Principle Of Transparency
VAT is transparent tax. It is an account based tax system. VAT has made tax system transparent. Tax evasion is not pervasive where accounting system is transparent.

2. Principle Of Removing Cascading Effect
VAT removes cascading effect. Cascading effect means tax on tax i.e. tax is charged on the value including tax. But VAT has removed this effect by not including the VAT in the cost price to the second stage of the distribution channel. But under sales tax system, sales tax paid at one stage is included in the cost price for another stage.

3. Principle Of Neutrality
Neutrality means not to discriminate one to another. VAT does not discriminate one economic activity against others. Tax rate of goods or services to be taxed are not discriminate by VAT. So, in this regard, VAT is neutral.

4. Principle Of Destination And Zero Rating
Under this principle, goods and services are taxed at consumption point, bot based on production. Goods and services that are exported are taxed at zero rate(i.e the taxpayers get refund of VAT earlier paid in purchasing raw materials and interrelated goods but they should not pay tax on added value.)

Related Topics
Concept And Meaning Of Value Added Tax (VAT)
Characteristics Of Value Added Tax (VAT)
Advantages And Disadvantages Of VAT
Types Of Value Added Tax (VAT)

Types Of Value Added Tax (VAT)

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The types of VAT are determined on the basis of treatment of capital goods of a firm. Input tax paid for capital goods is allowed or not is the fundamental question in the study of types of VAT.
There are three types of VAT, they are:
* Consumption type
* Income type
* Gross National Product (GNP) type

1. Consumption Type VAT
Under consumption type VAT, all capital goods purchased from other firms, in the year of purchase, are excluded from the tax base while depreciation is not deducted from the tax base in subsequent years. The base of tax is consumption since investment is relieved from taxation under this type.

2. Income Type VAT
The income type VAT does not exclude capital goods purchased from other firms from the tax base in the year of purchase. This type, however, excludes depreciation from the tax base in subsequent years. The tax falls both on consumption and net investment. The tax base of this type is the net national income.

3. GNP Type VAT
Under this type, capital goods purchased by a firm from other firms are not deductible from the tax base in the year of purchase. It also does not allow the deduction of depreciation from the tax base in subsequent years. Tax is levied both on consumption and gross investment. The tax base of this type is gross domestic product.

Consumption type VAT is widely used. So, by the term 'VAT' we basically mean the consumption type VAT.

Related Topics
Concept And Meaning Of VAT
Characteristics Of VAT
Advantages And Disadvantages Of VAT
Principles Governing VAT

Advantages And Disadvantages Of Value Added Tax (VAT)

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Advantages Of Value Added Tax (VAT)
Following are the advantages of VAT:

1. As compared to other taxes, there is a less chance of tax evasion. VAT minimizes tax evasion due to its catch-up effect.

2. VAT is simple to administer as compared to other indirect tax.

3. VAT is transparent and has minimum burden to consumers as it is collected in small fragments at various stages of production and distribution.

4. VAT is based on value added not on total price. So, price does not increases as a result of VAT.

5. There is mass participation of taxpayers.

Disadvantages Of Value Added Tax (VAT)
Following are the disadvantages of VAT:

1. VAT is costly to implement as it is based on full billing system.

2. VAT is relatively complex to understand. The calculation of value added in every stage is not an easy task.

3. To implement the VAT successfully, customers, need to be conscious, otherwise tax evasion will be widespread.

Related Topics
Concept And Meaning Of VAT And Its Assumptions
Characteristics Of VAT
Types Of VAT
Principles Governing VAT

Characteristics Of Value Added Tax (VAT)

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The main characteristics of value added tax (VAT) are stated as follows:

1. VAT is a form of indirect taxation.

2. VAT is a broad-based tax as it covers the value added to each commodity by a firm during all stages of production and distribution.

3. VAT is based on value added principle. Value added can be obtained either by adding payments to factors of production (i.e. , wages+rent+interest+profit) or deducting cost of inputs from sales revenue.

4. VAT is a substitute for sales tax, hotel tax. contract tax and entertainment tax.

5. VAT is based on self-assessment system and provides the facility of tax credit and tax refund,

6. VAT avoids cascading effect existed in sales tax and contains catch-up effect.

In a nutshell, VAT is an indirect tax that is imposed on different goods and services on the basis of value added amount in different stages of production and distribution. It is not a genuinely new form of taxation but merely a sales tax administered in different form. Although it is borne by the final consumer, VAT is collected at each stage of production and distribution chain.

Related Topics
Concept And Meaning Of Vat And Its Assumptions
Advantages And Disadvantages Of VAT
Types Of Value Added Tax (VAT)
Principles Governing VAT

Concept And Meaning Of Value Added Accounting

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Value Added Accounting
There is no free lunch in this world. To generate income or to earn money, one has to sell some sort of product. A product is a tangible thing or an intangible service having some utility for the buyer. Hence, the product is a utility or value created over the crude material.

Value added,therefore, is a created utility in the product of the business. Without creating value, one can not sell the product for a profitable price. A firm charges some extra price over the materials and services used for the value creation over the product. For example, if one buys some materials and services at $ 100 and sells them at $ 300 , then the added value is $200.
Therefore, Net value = Revenues - The price paid for materials and services.

Value does not come by itself. It needs some changes over the bought-in materials. Change in the utility of product is brought about by labor, capital, government services etc. Therefore, the added value is to be distributed to the stakeholders of business in the ratio of the service rendered by each of the stakeholders. Added value is paid in the form of wages and salaries to labor, taxes and duties to government, interest and dividends on the capital and residual fund is retained in the business.

Therefore, the value added is the increase in the market value created by a change in the form,location or availability of product or service,excluding the cost of bought-in materials or services used in that product or service.

Related Topics
Preparation Of Value Added Statement
Concept And Meaning Of Tax
Objectives Of Tax
Classification Of Taxes, Their Advantages And Disadvantages

Concept And Meaning Of Value Added Tax (VAT) And Its Computation

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Value added tax (VAT) is known as the most recent and effective innovation in the taxation field. It is levied on the value added of the goods and services. Theoretically, the tax is broad based as it covers the value added to each commodity by a firm during all stages of production and distribution.
Value added tax (VAT) is considered as one form of sales taxation. VAT is a multiple stage tax which has grown as a hybrid of turnover tax and retail level sales tax. Value added tax (VAT), however, differs from turnover tax as the turn over tax is imposed on the total value at each while VAT is imposed only on value added at that stage. VAT varies from sales tax in the sense that VAT is imposed at each stage of production and distribution whereas retail sales tax is imposed only at one stage, the final stage. VAT helps to minimize many problems related with tax evasion. Therefore, value added tax (VAT) is more productive and less destructive than retail sales tax.

Computation of VAT at different stages of distribution channel (VAT rate 10%)

Stage...................Sales........Purchase price.......Net added value..........VAT
Farmer...............$ 500.......Nil...............................500..........................50-0 = 50
Manufacturer.......700.......500.............................200..........................70-50=20
Wholesaler............800.......700.............................100..........................80-70=10
Retailer..................1000....800.............................200........................100-80=20
Final.......................-----.....1000..........................1000.................200-100=100

Related Topics
Characteristics Of Value Added Tax (VAT)
Advantages And Disadvantages Of VAT
Types Of Value Added Tax (VAT)
Principles Governing Value Added Tax (VAT)

Preparation Of Value Added Statement Or Approaches Of Value Added Statement

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There are two approaches for preparing value added statement:

1.Subtractive Approach

Under this method, value added is determined as net turnover (revenue) which is obtained by subtracting the cost of materials from the sales proceeds.

For example,

A) Revenues (sales and other incomes) .....xxx
B) Less: Consumption of materials......... .(xxx)
C) Less: Utilities and supplies...................(xxx)
D) Less: Services.......................................(xxx)
Net Added Value(A-B-C-D)..................... .xxx

2. Additive Approach
Under this method, the net added value is computed by adding the distribution of added value made to the stakeholders of the output employed to turn out the product,such as wages, salaries, taxes, interest, dividends,and retained funds.

In fact,these two approaches are not the mutually exclusive methods of value added statements. However, the value added statements includes both to show how much value was added and how it was distributed to the stakeholders of production.

Related Topics
Concept And Meaning Of Value Added Accounting
Concept And Meaning Of Tax
Objectives Of Tax
Classification Of Taxes, Their Advantages And Disadvantages

Classification Of Taxes, Their Advantages And Disadvantages

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Basically, tax can be classified into two broad categories:

1. Direct Tax
2. Indirect Tax

1. Direct Tax
A direct tax is a tax paid by a person on whom it is legally imposed. In direct tax, the person paying and bearing tax is the same. It is the tax on income and property. Examples of direct taxes are:

* Income Tax
* Vehicle Tax
* Expenditure Tax
* property Tax
* Interest Tax
* Gift Tax etc.

Advantages Of Direct Tax

* Direct tax is equitable as it is imposed on person as per the property or income.

* Time, procedure and amount of tax paid to be paid is known with certainty.

* Direct tax is elastic. The government can change tax rate with the change in the level of property or income.

* Direct tax enhances the consciousness of the citizens. Taxpayers feel burden of tax and so they can insist the government to spend their contributions for the welfare of the community.

Disadvantages Of Direct Tax

* Direct tax gives mental pinch to the taxpayers as they have to curtail their income to pay to the government.

* Taxpayers feel inconvenience as the government impose tax progressively.

* Tendency to evade tax may increase to avoid tax burden.

* It is expensive for the government to collect tax individually.

2. Indirect Tax
An indirect tax is a tax imposed on one person but partly or wholly paid by another. In indirect tax, the person paying and bearing tax is different. It is the tax on consumption or expenditures. Examples of indirect taxes are:
* VAT
*Entertainment Tax
* Excise Duty
* Sales Tax
* Hotel Tax
* Import And Export Duty etc.

Advantages Of Indirect Tax

* Indirect tax is convenient as the taxpayer does not have to pay a lump sum amount for tax.

* There is mass participation. Each and every person getting goods or services has to pay tax.

* There is a less chance of tax evasion as the taxpayers pay the tax collected from consumers.

* The government can check on the consumption of harmful goods by imposing higher taxes.

Disadvantages Of Indirect Tax

* Indirect tax is uncertain. As demand fluctuates, tax will also fluctuate.

* It is regretful as the tax burden to the rich and poor is same.

* Indirect tax has bad effect on consumption, production and employment. Higher taxes will reduce all of them.

* Most of the taxes are included in the price of goods or services. As result, taxpayers do not know how much tax they are paying to the government.

Related Topics
Concept And Meaning Of Tax
Objectives Of Tax
Concept And Meaning Of Value Added Accounting
Preparation Of Value Added Statement

Objectives Of Tax

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Tax is permanent instrument for collecting revenues. It is a major source of revenue in the developed world and has been appearing as an important source of revenue in the developing world as well. It has been an instrument of social and economic policy for the government. The main objectives of tax are as follows:

1. Raise More Revenue
The fundamental objective of taxation is to finance government expenditure. The government requires carrying out various development and welfare activities in the country. For this, it needs a huge amount of funds. The government collects funds by imposing taxes. So, raising more and more revenues has been an important objective of tax.

2. Prevent Concentration Of Wealth In A Few Hands
Tax is imposed on persons according to their income level. High earners are imposed on high tax through progressive tax system. This prevents wealth being concentrated in a few hands of the rich. So, narrowing the gap between rich and poor is another objective of tax.

3. Redistribute Wealth For Common Good
Tax collected by the government is expended for carrying out various welfare activities. In this way, the wealth of the rich is redistributed to the whole community.

4. Boost Up The Economy
Tax serves as an instrument for promoting economic growth, stability and efficiency. The government controls or expands the economic activities of the country by providing various concessions, rebates and other facilities. The effective tax system can boost up the economy. Similarly, taxes can correct for externalities and other forms of market failure (such as monopoly). Import taxes may control imports and therefore help the country's international balance of payments and protect industries from overseas competition.

5. Reduce Unemployment
The government can reduce the unemployment problem in the country by promoting various employment generating activities. Industries established in remote parts or industries providing more employment are given more facilities. As a result, the unemployment problem can be reduced to a great extent through liberal tax policy.

6. Remove Regional Disparities
Regional disparity has been a chronic problem to the developing countries. Tax is one of the ways through which regional disparities can be minimized. The government provides tax exemptions or concessions for industries established or activities carried out in backward areas. This will help increase economic activities in those areas and ultimately regional disparity reduces to minimum.

Related Topics
Concept And Meaning Of Tax
Classification Of Taxes, Their Advantages And Disadvantages
Concept And Meaning Of Value Added Accounting
Preparation Of Value Added Statement

Concept And Meaning Of Tax

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A nation requires sufficient funds to carry out development plans, handle day to day administration, maintain peace and security and launch other public welfare activities. The funds required by the government are normally collected from two sources: debt and revenues. The debt can be collected either from internal sources or external sources. The debt collected within the country is know as internal debt while the debt collected from outside the country is called external debt. The debt financing of government is also known as deficit financing. The revenues of the government come basically from two sources: tax and non-tax. Non-tax sources include different revenues like gifts, grants, revenues from public enterprises, administrative revenues such as registration fees, fines and penalties. Tax sources include customers, excise duty, VAT and income tax.

Tax is any compulsory levy from individuals, households and firms to central or local government. It is simply a liability to pay an amount to the government. It is a compulsory contribution from the taxpayers. Tax is computed and paid as prescribed in the law.
It can be concluded that:

* Tax is a compulsory levy imposed by the government

* Tax is levied on persons as per the prevailing laws.

* Those who pay tax do not get corresponding benefits from the government.

* Tax is spent for common interest of the people.

* Tax is collected from haves and spent for the interest of have-not in the society.

Therefore, we can define tax as a compulsory contribution made by taxpayer to the government without having any direct personal benefits.

Related Topics
Objectives Of Tax
Classification Of Taxes, Their Advantages And Disadvantages
Concept And Meaning Of Value Added Accounting
Preparation Of Value Added Statement