EM2795 - Examining Accounts: Records Examination - Introduction

The credibility of the return and the supporting accounts can be challenged by showing that the books and records upon which they are based are inaccurate and incomplete.

It is not enough to simply show that the accounts are unreliable. For example, the fact that drawings have not been recorded and the accountant has had to incorporate a balancing adjustment does not prove that the figures are wrong. If the trader’s estimate of drawings is accurate and almost all sales have been recorded then the returned profits will be approximately correct. In order to overcome the taxpayer’s often plausible assertions that the declared profits are about right you will need to be able to point to

  • particular items in the records which have been wrongly dealt with, over-estimated or misdescribed, or
  • cash flow tests showing ‘negative cash’ EM2960+, or
  • a business model based on all the available facts which shows an apparently much greater level of profits EM3501+, or
  • a means test or capital statement which shows the taxpayer could not realistically have existed on the money available EM3570+, or
  • some other way of quantifying either the level of omissions or turnover.

If the taxpayer has made any attempt to maintain a structured record keeping system, your approach will be similar for all record examinations. It will be the extent and depth of examination which will differ. For guidance on

  • computerised records, EM2800+.
  • general approach and planning, see EM2905+
  • tests to apply, see EM2950+
  • particular records, EM3000+