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LG Audit Guideline

Document Name: Audit Procedure Guideline Document Number: MP/OPS/PRC01/01 Revision Nr: 00

Effective Date: 1 May 2021

AUDIT PROCEDURE GUIDELINE

PART A – REVIEW

RECONCILIATION

1.1

Reconcile input and output VAT account as per financial system with SARS VAT201

1.2

Reconcile 100%

1.3

Investigate reasons for not reconciling (Obtain VAT Workings from Muninispality/Consultants or e-Filing)

1.3

Print summary of reconciliation

VAT LINK

2.1

Link the vote numbers that Client is using to the expenditure and income votes

2.2

Link all VAT Journals to the respective expense and income votes

2.3

Link any additional VAT that was not accounted for on the financial system

2.4

Link expense with Apportion Ratio if applicable

2.5

Reconcile VAT link with system VAT account and VAT201-returns

AUDIT - INPUT

3.1

Obtain copies of bank statements for periods of review (COMPULSORY)

3.2

Use only Audit Category numbers as per “Annexure A”

3.3

Obtain copies of ALL tax invoices to substantiate your claim

3.4

Final schedule of MaxProf input VAT claim MUST include the ACTUAL payment date as per bank statement

3.5

Create a reference indicating your final schedule of MaxProf input VAT claim on bank charges and debit orders to the actual transactions on the bank statements and the Debit Order Contracts and / or valid tax invoices

3.6

On claim sheet have a column with supplier VAT numbers (confirm VAT registration, that the number starts with 4 and that the number has 10 digits-note that the 4th digit should always be a 0)

3.7

Notional input tax credit on second-hand goods: auditors must be aware that a notional input on second-hand goods can be claimed from non-vendors. When pertaining to fixed-property, this notional input tax credit is no longer limited to the transfer duty paid as from 11 January 2012, but it will be the tax-fraction of the amount paid for the second-hand good property.

3.8

Section 16(3)(h) adjustments: auditors should be aware that when the municipality has a ratio, and fixed assets are sold in mixed departments, the municipality must declare full output tax on the sale of the goods, but the vendor can claim a section 16(3)(h) input deduction.

3.9

Goods / services for which VAT cannot be claimed (Exposures):

3.110.1

In respect of goods or services acquired by such vendor to the extent that such goods or services are acquired for the purposes of entertainment; If the entertainment relates to entertainment provided by the municipality for sporting, recreational facilities or public amenities, the VAT can be claimed by the municipality without there being a charge that covers the cost of such entertainment (Section 17(2)(v)). Entertainment for own consumption like coffee, tea, milk, can never be claimed;

3.13.2

In respect of any fees or subscriptions paid by the vendor in respect of membership of any club association or society of a sporting social or recreational nature;

3.13.3

In respect of any motor car supplied to or imported by the vendor;

3.13.4

Petrol and diesel purchases;

3.13.5

Non-taxable suppliers – exempt Sec12;

3.13.6

Staff refreshments;

3.13.7

Any type of passenger transport, or rental passenger vehicles;

3.13.8

Interest paid on loans

AUDIT - OUTPUT

4.1

Investigate Standard Rated Supplies

4.1.1

Supply of water, sewer, electricity, refuse

4.1.2

Enterprise activities listed in VAT 419

4.1.3

If not listed, refer to requirements of sections 1 of the VAT Act

Agency Income vs Total Income with Agency Fee. Municipality should only declare VAT on Agency Fee.

4.2

Certain deemed supplies

4.2.1

Payment to / on behalf of designated entities: 8(5)

4.2.2

Grant payments: 8(5A)

4.2.3

Re-organisation of municipalities: 8(6)

4.2.4

Disposal of a going concern: 8(7)

4.2.5

Insurance proceeds: 8(8)

4.2.6

Supply of goods where input tax was denied: 8(14)

4.2.7

Composite supplies (standard and zero-rated supplies): 8(15)

4.2.8

Supply of goods and services for mixed use: 8(16)

4.2.9

Proceeds on the expropriation of land: 8(21)

4.2.10

Low cost housing subsidies: 8(23)

4.2.11

Excess consideration received: 8(27)

4.2.12

Supply of fringe benefits: 18(3)

4.2.13

Imported services – S1, S14(3)

4.2.14

Investigate VAT on Indigents: obtain a sample of an invoice where the Indigent is relevant, determine how the system allocates it. Various reports can be used.

4.2.15

If the data is not sufficient to determine how tax was calculated, additional receipt reports must be pulled - ensure that receipt reports can be tied back to the General Ledger

4.3

Investigate Zero Standard Rated Supplies

4.3.1

Rates in terms of section 11(2)(w)

4.3.2

Grants received - section 11(2)(t): Draft Note 39 / Equitable Shares

4.3.3

Sale of going concern – section 11(1)(e) and SARS interpretation Note 57

4.3.4

"Grants" not from Government is taxable.

4.3.5

"Grants" used for exempt supplies(bus services) is not zero-rated

4.4

Investigate Exempt Supplies

4.4.1

Interest earned on bank accounts: S12(a) Refer to BGR

4.4.2

Interest earned on investments: S12(a)

4.4.3

Rental income earned on the supply of a dwelling under a rental agreement: S12(c)

4.4.4

Supply of public passenger transport services in the Republic by bus or train: S12(g) (Expenses directly related to this cannot be claimed)

4.4.5

Be aware that where financial services qualify for zero-rated in terms of section 11 of the VAT Act, the exemption will not apply, i.e. the application of section 11 (zero-rating) takes precedent over section 12(a) exemption, e.g. foreign interest earned

4.5

Investigate Out of Scope Supplies (Supplies neither exempt nor taxable)

4.5.1

Example fines, e.g. traffic fines, library fines

4.5.2

Only Fines received in the bank account (Refer to BGR 4, Issue 3)

4.5.3

Donations received from individuals, charities

4.5.4

Grants received to make exempt supplies

4.6.4

Expenses directly linked to these supplies cannot ne claimed, e.g. the rental of traffic cameras

4.6

If municipality declared tax from bank statements, ensure that output VAT was not declared on VAT refunds, interest on debtors, inter-bank transfers.

APPORTIONMENT CALCULATION

The only approved method which may be used to apportion input tax in terms of section 17(1) of the VAT Act

without specific prior written approval from the Commissioner is the turnover-based method:

Formula:

y =

100

(a + b + c)

Where:

“y”' = the apportionment percentage;

“a” = the value of all taxable supplies (including deemed taxable supplies) made during the period;

“b” = the value of all exempt supplies made during the period, excluding interest earned on funds for day-to-day operations held in for example a current account at a bank; and

“c” = the sum of any other amounts not included in “a” or “b” in the formula, which were received or which accrued during the period (whether in respect of a supply or not)

Notes:

The term “value” excludes any VAT component.

In the Formula, “c” will typically include, but is not limited to, items such as statutory fines, penalties, dividends etc. However, traffic fines are only included in “c” to the extent that payment has actually been received by the municipality.

The apportionment percentage should be rounded off to 2 decimal places.

Where the formula yields a result of 95% or more, the full amount of VAT incurred on mixed expenses may be claimed (referred to as the de minimis rule).

Remember that this calculation is only required where the input tax incurred is for both taxable supplies and other non-taxable purposes such as exempt supplies or private use.

In other words, the calculation is required where the expense cannot be directly attributed to either taxable or non- taxable purposes, but is partially attributable to both types of supplies.

This is sometimes referred to as an expense which is incurred for making “mixed supplies” or for “mixed purposes”.

Note that if the expense is incurred wholly for taxable supplies, the full amount of input tax can be claimed, but if it is wholly for exempt supplies, no input tax can be claimed.

In practice, it is often difficult to accurately determine the apportionment percentage according to the turnover based method in each and every tax period.

It is therefore acceptable practice to calculate the estimated percentage using the turnover figures from the previous year’s financial statements and to apply that percentage for claiming input tax in each individual tax period for the current year.

Refer to old VAT 417 Guide for alternative Ratio Calculations

5.1

Recalculate apportionment ratio (refer turnover based method)

5.2

Print apportionment calculation ratio document for Report

5.3

Apply the recalculated apportionment ratio and identify possible saving

5.4

Create a claim sheet for the ratio adjustment

REPORT

6.1

Create claim sheets specifying claim numbers and indicating audit findings

6.2

Write the Reconciliation and Reducing of the Value Added Tax Liability Report

6.3

Reference numbers on the report MUST refer back to the claim schedules

6.4

Send report to HOD’s for proof reading and formatting

6.5

Sign off report upon approval by Audit Committee - No Report may be send to client without Audit Committee Approval

6.6

Arrange meeting with Chief Financial Officer to discuss findings OR send Report to Client with a link to download supporting invoices

6.7

Confirm that claim has been submitted by Client – must include copy of VAT201

6.8

Obtain SoA as proof of financial benefit received

6.9

Send invoice Request after financial benefit was received

6.10

Send Invoice to Client

ACCOUNTS PAYABLE (AP)

7.1

Submit schedule of invoices to be rectified (in prescribed format)

7.2

Send email with link of invoices to Rika for allocation

7.3

Once corrected invoices have been obtained, recheck rectified invoices

7.4

Download schedules with rectified invoices from AP System

7.5

Prepare a Section 20 Report for client

7.6

Submit Report to client after approval from HOD

7.7

Get proof of claim submission (Copy of VAT201 Return)

7.8

Send proof of VAT201-return and schedule of claim to AP department

7.9

Provide AP department with MaxProf invoices issued to client

7.10

Forward Proof of payment on MaxProf invoice to AP Manager

7.11

Review and include a List of problematic clients to discuss with HOD on future action to be taken.

PART B – OBJECTIONS (ADR1) / NOTICE OF APPEALS (ADR2)

ADR1/ADR2

1.1

Additional assessments issued

1.2

SARS Letters of Assessments and all SARS correspondence for past 5 years

1.3

Investigate reasons for the issuing of additional assessment(s) by SARS.

1.4

The assessment or decision by SARS should be accompanied by reasons for the action taken.(Attach documentation as proof).

1.5

With reference to point 1.4 – If not provided with reasons, request the reasons from SARS prior to lodging an objection. (Attach letter of request).

1.6

Lodge of an objection(s) as prescribed by the TA-Act within 30 business days. “the date of the issue of the notice of assessment” (definition contained in the TA-Act, Section 1 of the TA-Act defines ‘date of assessment’ as follows: “(a) in the case of an assessment by SARS, the date of the issue of the notice of assessment”. (In the case of VAT, the assessment is done on a VAT217-form.)

1.7

ADR process must be concluded within 90 days from date of submissions of the ADR.(Attach documentation as proof).

1.8

Objection must be completed on e-Filing (ADR1 or ADR2).

1.9

Objections must always be accompanied by supporting documentation substantiating your reasons / grounds for lodging an objection and it must be submitted within 30 business days of the assessment being issued (attached documentation as proof).

1.10

If an objection / appeal is not submitted within pre-scribed timeframes, the objection / appeal must be accompanied by request for condonation of late submission (Refer to S218 of TAA)

1.11

Where the objection has been disallowed in full or partly, the taxpayer can still appeal against the decision within 21 business days of the date on the letter notifying the taxpayer of the outcome of the objection.

1.12

The appeal (ADR2 form) must be completed and submitted to SARS via e-Filing

1.13

SARS must resolve the matter within 90 business days after receiving the appeal

PART C – VAT201’s

VAT201

1.1

Obtain Data, Link data & Prepare Audit Sheet

1.2

If no data is availible, use Bank Statements.

1.3

If no data is availible, request income Reports

1.4

Obtain copies of bank statements for periods of review (COMPULSORY)

1.5

Use only Audit Category numbers as per “Annexure A”

1.6

Obtain copies of ALL tax invoices to substantiate your claim

1.7

Final schedule of MaxProf input VAT claim MUST include the ACTUAL payment date as per bank statement

1.8

Create a reference indicating your final schedule of Input VAT claim on bank charges and debit orders to the actual transactions on the bank statements and the Debit Order Contracts and / or valid tax invoices (Refer to BGR 27)

1.9

On claim sheet have a column with supplier VAT numbers (confirm VAT registration, that the number starts with 4 and that the number has 10 digits-note that the 4th digit should always be a 0)

1.10

1.11

1.12

Recalculate Output VAT and prepare the Output VAT Schedules

1.14

Prepare AP schedule and send to AP

1.15

Download new AP transactions from the System and include in VAT201 Return

1.13

Submit VAT201 on the 25th day after the end of the tax period

Reason for Late Submission:

MONTHLY JOURNALS

2.1

Prepare Input VAT Journals

2.2

Prepare Output VAT Journals

2.3

Provided Municipality with Movement Journals

2.4

Reconcile VAT Accounts plus Journals with VAT submitted on VAT201

YEAR END RECONCILIATION

The main purpose of preparing monthly / year end VAT reconciliations and journals, is to ensure that the VAT

control account as per GL / TB corresponds with the SARS system / Statement of Account

VAT Control Account has to balance with SARS information

(input + output + refunds + payments = VAT Control Account)

Ensure that you get latest TB(30 June) and GL for year end purposes

3.1

Obtain Input and Output tax figures from the General Ledger per tax period

3.2

Obtain copies of the VAT201-returns submitted to SARS

3.3

Obtain SARS Statement of Account

3.4

Compare the input and output figures from the General Ledger with the input and output figures reflected on the VAT201-returns to identify any variances ‘

3.5

Analyze and journalise variances

3.6

After journals have been posted, compare the new input and output VAT figures from the General Ledger to the VAT201 figures submitted to ensure the journals are correct.

3.7

Credit VAT Control Account with VAT refunds / debit VAT Control Account with amounts payable

3.8

Prepare journals for interest received / paid (if any)

3.9

Prepare assessment journals (if any)

3.10

Determine the closing balance at year end

3.11

Include prepared journals on file

3.12

Final review of all journals

3.13

Obtain written confirmation from client confirming that the client has processed the journals on their financial system

3.14

Obtain copy of AFS to confirm VAT Figure disclosed

AG QUERIES

Auditor General – When auditing a municipality, the Auditor General often queries the following:

4.1

Overstating / understating expenditure and income;

4.2

Fruitless expenditure not accounted for / disclosed;

4.3

Closing balance as per Trial Balance not in correspondence with SARS balance at year end (“SoA”);

4.4

Monthly VAT reconciliation;

4.5

Apportionment ratio – figures from the preceding year’s financial statements / to be used to compute the ration.

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