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Tasks of economic examination of accounting, tax accounting and reporting

General Provisions

An economic examination is a documentary confirmation (study) of the laws of formation, reflection in the registers of accounting, and in reporting information on indicators of economic activity of enterprises; study of the correctness and completeness of the formation of income, expenses and results of activities, the formation of assets, liabilities and equity, bankruptcy and liquidation of enterprises, lease relations, the presence and amount of losses incurred, taxation, including transfer pricing, lending and other financial transactions related to cash flows.

The subject of economic examination is factual data (information) on committed offences of an economic nature: abuses in accounting and control, in the organization of production, and production-sharing; violation of methods and standards in planning, financing and lending to economic activities; causing material damage to entrepreneurial activity or preventing timely detection of facts that lead to inefficiency, unprofitability of production, violations in the field of taxation and transfer pricing.

The objects of forensic economic examination are primary documents confirming the implementation of a business transaction and containing basic information about it, accounting registers containing in a systematic form information on certain accounting objects, data on the formation of the object of taxation and determining the amount of taxes and fees payable to the budget, financial statements including descriptions of applicable accounting policies,  tax reporting, other documents containing reliable information related to the subject of research.

Types of economic examination are:

  • examination of accounting, tax accounting and reporting documents;
  • examination of documents on the economic activity of enterprises and organizations;
  • examination of documents of financial and credit transactions.

Tasks of economic examination

The tasks solved by economic examination should be divided separately into different subtypes of economic examination.

The peculiarity of the tasks and methods of economic examination in Ukraine is the instability of legislation in terms of accounting, taxation, instability of legislation that determines the general economic conditions for the functioning of business entities, which complicates the writing of methods, requires deepening their universality and ensuring insensitivity to changes in legislation, the need for constant review and adaptation of existing methods to changes in legislation and economic conditions.

According to the requirements of the Instruction on the appointment and conduct of forensic examinations and expert research, approved by the order of the Ministry of Justice of Ukraine No. 53/5 of 08.10.1998 (hereinafter – the Instruction No. 53/5), conducting audit actions (determination by experts-economists of any economic indicators without prior documentary inspections of financial and economic activities by the subject of control) does not belong to the tasks of economic examination.

Tasks of economic examination of accounting, tax accounting and reporting

Economic examination of accounting, tax accounting and reporting is the largest area of economic research in terms of the number and volume of research. Inside it can be distinguished subspecies: accounting examinations and taxation-related examinations.

Among the tasks that can be solved with the help of accounting examinations are:

  • documentary substantiation of business transactions for the supply of goods, works, and services, confirmation of the correctness of their reflection in accounting and financial statements, the correctness of their inclusion in the object of taxation in determining the corporate income tax and value-added tax;
  • documentary substantiation of the presence and size of shortage or surplus of inventory and cash, the period of their formation and the correctness of their reflection in accounting;
  • confirmation of the correctness of the formation in the accounting of income and expenses for certain types of activities, and separate contracts, depending on the accounting standards applied by the enterprise;
  • confirmation of the correctness of calculations and reflection in the accounting of transactions on accrual and payment of income to individuals.

This list of tasks is indicative and not exhaustive.

Additional explanations for specific tasks of economic examination on accounting issues:

Peculiarities of application of national Regulations (standards) of accounting and International Financial Reporting Standards for accounting and preparation of financial statements.

The tasks of accounting examination and ways to solve them significantly depend on what conceptual basis for accounting and preparation of financial statements the company uses – national accounting regulations (standards) (hereinafter – NAR) or international financial reporting standards (hereinafter – IFRS).

Today, a significant number of enterprises apply IFRS for accounting and financial reporting, which, in turn, affects the determination of the object of taxation by corporate income tax, since in accordance with Art. 134 of the Tax Code of Ukraine, the object of corporate income tax is based on the indicator of the financial result before tax, determined in accordance with the norms of the national NAR or IFRS.

Thus, when performing accounting examinations, it is important to take into account all specific rules and regulations provided for by IFRS for reflection in accounting and in the financial statements of certain accounting objects.

According to the current legislation, both conceptual approaches are applied in Ukraine. At the same time, in accordance with Article 121 of Ukraine “On Accounting and Financial Reporting and Ukraine” of 16.07. 1999. No. 996-XIV (hereinafter – Law No. 996), a list of enterprises for which the application of IFRS is mandatory was defined.

Discounting individual items of assets and liabilities to be reflected in the financial statements in present value the process of discounting and its application for the purpose of interpreting accounting information is becoming more common and increasingly comes to the attention of inspectors.

Discounting in basic cases refers to the effect of changes in the value of money over time on the value of long-term financial assets and long-term financial liabilities. The need for discounting financial assets and financial liabilities is determined by the rules of both NAR and IFRS. However, IFRS explains in more depth and detail the need to reflect such balance sheet items in the present value and the methodology for their recalculation.

The key standards defining the necessity and rules for discounting long-term financial instruments are: IFRS 9 Financial Instruments, IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 Financial Instruments: Disclosures.

In accordance with the requirements of IFRS, financial instruments after their initial recognition can be recorded in two ways:

  • at fair value (in each statement, the fair value of a financial instrument is determined and adjusted according to its previous value)
  • at amortized cost (application of the discount formula at the effective interest rate and a defined discount period).

Additional explanations for specific tasks of economic examination on tax accounting.

The tasks of economic examination on tax accounting issues are determined by the norms of the Tax Code of Ukraine, the practice of tax audits and judicial practice on tax issues.

Among the tasks that can be solved with the help of tax accounting examinations are:

  • confirmation of correctness, and compliance with the requirements of current legislation/violations regarding the calculation and payment by the taxpayer of corporate income tax, value-added tax and other taxes (fees), including in part:
  • determination of income for income tax purposes;
  • determination of expenses for income tax purposes;
  • peculiarities of application of certain UAS or IFRS rules in the formation of taxable profit included in the corporate income tax base;
  • application of differences determined by the Tax Code of Ukraine, for which the financial result before tax is adjusted when calculating the object of taxation by corporate income tax;
  • compliance with the requirements of the current legislation on the accrual of VAT payable to the budget or declared for budget refund;
  • confirmation of the legitimacy of the formation of a VAT tax credit by enterprises;
  • confirmation of the correctness of accrual and timeliness of payment of tax liabilities arising from the import of goods/services into the customs territory of Ukraine;
  • confirmation of the correctness of the payer’s determination of the transaction price that corresponds to the arm’s length principle and the correctness in choosing the method of calculating the compliance of the transaction price with the price determined by the arm’s length principle when preparing transfer pricing documentation and generating reports on controlled transactions;
  • correctness of declaration of the object of taxation and timeliness of payment of taxes by individual entrepreneurs who: are single taxpayers of groups 1, 2, 3 and 4, or apply the general taxation system;
  • confirmation of the correctness and completeness of declaration by individuals of income subject to taxation;
  • confirmation of the correctness of accrual and timeliness of payment of excise tax.

This list is not exclusive, it can be expanded and sensitive to changes in legislation. Similar tasks can be solved for other types of taxes and mandatory payments.

Additional explanations for specific tasks of economic examination on tax accounting

The most common areas of examination on taxation issues are examinations related to the need to confirm compliance with the legislation when calculating and paying corporate income tax, value-added tax, personal income taxes (personal income tax, military tax, single social contribution, excise tax), and transfer pricing.

Income tax.  The main contradictions arising during tax audits of the correctness of accrual and payment of corporate income tax are in the plane:

  • determination of the object of taxation;
  • determination of the correctness of the application of adjustments;
  • withholding and payment to the budget of income tax of non-residents with a source of origin on the territory of Ukraine.

Value-added tax.  The complexity of VAT audits and confirmation of their results is often in the plane of the peculiarities of the functioning of the electronic VAT administration system, as defined by Art. 2001 TCU and a number of bylaws under it. VAT invoices and adjustment calculations exist exclusively in electronic form.

VAT payable is calculated in Ukraine using a credit mechanism that provides:

•             determination of VAT payable to the budget as the difference between tax liabilities and tax credit for the reporting period;

•             application of the principle of the first event in determining the date of occurrence of tax liabilities/tax credit (they arise on the date that occurred earlier: either on the date of receipt/transfer of the subscription, or on the date of receipt/shipment of goods (services)).

Transfer pricing

General norms. Transfer pricing, establishing special rules for controlling pricing in controlled transactions, defines separate additional actions for enterprises that have such controlled transactions (the need to submit a report on controlled transactions and prepare transfer pricing documentation), as well as affects the income tax of such enterprises in terms of applying adjustments to increase the object of taxation in case of price discrepancy in controlled transactions to prices determined at arm’s length.

General norms of application of transfer pricing are defined by Art. 39 of the Tax Code of Ukraine and the Guidelines of the Organization for Economic Cooperation on Transfer Pricing for Transnational Companies and Tax Services dated 22.07.2010.

Methods for determining the compliance of prices in controlled transactions with prices determined according to the “arm’s length principle”. Compliance with the terms of a controlled transaction with the arm’s length principle is established by one of the following methods:

  • comparative uncontrolled price;
  • resale prices;
  • costs plus;
  • net profit;
  • profit distribution.

The compliance of the terms of a controlled transaction with the arm’s length principle is determined by applying the transfer pricing method that is most appropriate to the facts and circumstances of a controlled transaction.

Features of the appointment of economic examination

Together with the document on the appointment of the examination (involvement of an expert), the expert should provide accounting and tax accounting documents that contain initial data to resolve the issues posed. Such documents may include receipt and expense invoices, tax invoices, warrants, reports of materially responsible persons, warehouse accounting cards, cash books, inventory materials, audit reports, timesheets, work orders, acts of acceptance of work performed, employment contracts, payroll, bank statements, payment orders and requirements, liability agreements, accumulative (negotiable) statements, journals-orders, memorial orders on balance sheet accounts,  general ledgers, registers of tax invoices, tax returns, balance sheets and other primary and consolidated documents of accounting and tax accounting and reporting.

If accounting is carried out electronically using specialized software, the expert is provided with registers of accounting and tax accounting in printed form, necessarily certified in the prescribed manner. Additionally, they can be provided at the request of an expert on electronic media.

If the examination is appointed to verify the conclusions of the documentary audit, the document on the appointment of the examination (involvement of an expert) indicates which conclusions and for what reasons raise doubts (contradict other case materials, unconvincingly substantiated by financial inspectors, etc.).

If necessary, to determine which documents should be provided to the expert for research in each particular case, it is advisable to consult an expert economist. To conduct the study, it is necessary to provide original documents or duly certified high-quality copies.

Documents should be systematized in chronological order (by relevant periods), filed, laced and numbered.