VSME5690 - The Audit Process: report generators: when tests are completed the EF risk profile should be updated

The following are the most common in depth checks on common risk areas, but are not exhaustive, and officers are encouraged to be innovative in their approach:

• supplementary/alternative checks;
• retail scheme calculations;
• annual/cash accounting;
• second-hand schemes;
• partial exemption;
• property;
• option to tax;
• completeness of output;
• scrutiny of output invoices;
• credits of output tax;
• checks on zero-rating;
• exports;
• self-supply;
• checks on inputs- special risks;
• scrutiny of input invoices;
• imports and removals from warehouse;
• imports of goods not for business use;
• challenge of selected purchases;
• credits of input tax;
• checks on inputs - self-billing;
• check on inputs - expenses;
• gifts/applications to personal use;
• bad debts;
• suppression of inputs/outputs;
• mark ups;
• stock checks;
• cash book; and
• bank statements.

Credibility checks give a quick indication of the likelihood of a trader declaring the correct tax. Specific credibility checks for various trade classes are often suggested in V1-37 Control notes. Other techniques with more general application are also outlined in the Control Notes.

Credibility can be established by using basic records outside the recognised accounting system, for example delivery notes, job cards, diaries, and checking that the transactions are captured by the prime records, and ultimately, the VAT account.

Credibility is not tested by comparing invoices to Daybooks as, in essence, this only tests the credibility of the clerk transcribing the information. In addition, credibility is not established by generalised comments on mark ups in certain trade classes or sectors, when they have not been tested at the trader concerned. Ratios should be used with caution, as a credibility check on the base figure is often found to be understated, for example wages at hairdressers, fuel purchases at taxis and drinks and food at restaurants/takeaways.

Tax Performance Ratios (TPRs) can be calculated from the trader report if not provided by the sift process. These are a very crude guide, taking no account of overheads in the inputs and should not be used as the test of credibility. A trader suppressing 50% of purchases and 50% of sales will have the same TPR as an honest one!