Discuss about the Internal tax Departments in Corporate.
Cash Basis of Accounting and Accrual Basis of Accounting are the two most widely used method in accounting for the purpose of recording and recognizing accounting transactions. The methods are popular and recognized for recording of accounting treatments (Newberry 2014, p.283).
In cash basis of recording transactions, all entries are recognized on cash basis which means that as and when cash is received or paid, the transactions are recognized (Ibanichucka & Aca 2014, p.69). In the case of accrual basis of accounting, transactions are recorded when they actually take place such as when the income is actually earned or when the expenses are actually incurred even if there is no cash received or paid. In other words, accrual basis of accounting is not dependent on the cash received or cash paid for recognizing and recording of transactions. The main difference between cash basis accounting and accrual basis of accounting is that the timing of transaction under both the methods are different (Libby 2017, p.42). The difference is the timing of recognition of revenue is the main cause for the different value under cash basis and accrual basis of accounting. In general, large business firms use accrual basis of recording, for the methods recognize as and when the transactions take place and is necessary for the matching principle of accounting (Collier 2015). In addition to this, large businesses have to get their financial statements audited before the financial statements are published which can only happen if the financial statements are prepared following accrual basis of accounting (Biondi & Soverchia 2014, p.179). The auditor looks for the accrual system of auditing and whether the financial statement is prepared on the same basis or not. On the other hand, cash basis of accounting is used by small business who do not that much of a turnover and deal in small profits. This helps to maintain simplicity in the accounting process. In general, however most of the businesses nowadays use accrual basis of accounting even the smaller businesses.
The basic advantage of following cash basis of accounting is that the method of accounting is very simple and easy to implement and follow. In addition to this, it is convenient for the business to a keep a track of cash inflows and outflows of the business (Brusca, Caperchione, Cohen & Rossi 2015, p.235). The method also has an implication which is different for accrual system in the case of taxable income as tax is charged on the money which is banked. On the other hand, accrual system of accounting is followed on the principle of matching expenses and income as they occur which is the core advantage of following the accounting system. The application of this method allows businesses to have a clear idea as to how much profit or loss the business will be earning at the end of the year. The only limitation of following this method is that the method is complex and consumes a lot of time.
In the case study which is provided in the question, the services which is provided by Alpha ltd relates to online services to airline which is situated in New Zealand. The company follows accrual basis of accounting and recording of transactions and the difference which arises in the value which is obtained under cash basis and accrual basis is due to the difference in accounting treatment of depreciation which is shown as $ 96,000 and also due to the difference in treatment of unallocated revenue of $ 43,000. The main advantage due to which accrual basis of accounting is followed is because it helps in matching the expenses and revenues of the business (Penman 2016, p.106). The net profit of the company is calculated by following accrual basis of accounting and the cash generated from operations is calculated by following cash basis of accounting.
The primary responsibility of an external auditor is to investigate the financial statement of the company in order to form an opinion whether the financial statements is depicting true and fair view or not. The role of the financial statement is to provide financial information to the potential investors of the company on the basis of which investment decisions are to be taken. The role of auditor is to form an opinion on the annual reports of the company which will be based on effective presentation and preparation of financial statement and fairness of the items which are presented in the financial statement (Klassen, Lisowsky & Mescall 2015, p.179). The external auditor is also to comment on any frauds and errors which may be present in the financial statements which the auditor comes across while conducting the audit. It is the misconception of many companies that the primary role of an auditor is to detect frauds and errors. The auditor is responsible for only forming an opinion and inspecting whether the financial statement is showing true and fair view.
Therefore, from the above discussion it is clear that the auditor is responsible for providing an opinion on the financial statements on the basis of which the potential investors of the company decide whether or not to invest in the financial statements of the company (Hellmann 2016, p.39). The auditor is expected to act in the best interest of the company and potential investors of the company.
As per the case study provided, Air New Zealand’s Financial statements is provided on the basis of which analysis is to be conducted. The different questions which are given in the assignment is to done on the basis of the case study provided.
The financial report of Air New Zealand for the year 2016 is audited by the auditing firm of Deloitte which provides audit and other non-services to its client. As per Deloitte, the financial reports of the company are prepared fairly and the same has been presented in manner which is appropriate as per the requirements of the New Zealand relevant standards which is similar to the International Financial Reporting Standard and Financial Reporting Standard. The annual reports of Air New Zealand comprise of Statement of profit and loss, Statement showing financial position of the company, cash flow statement and a statement showing changes in equity of the company. The financial statements are showing true and fair view as per the opinion of the auditor. The auditor has issued unqualified report and as per the auditor the statements are showing true and fair view and is based on all relevant standards of accounting which is followed in New Zealand.
A qualified audit report is issued by an auditor when there is a presence of material misstatement in the financial statements of the company. In addition to this, an auditor can also issue a qualified report if there is any restriction imposed on the auditor by the management of the company. Such restrictions may be not allowing the auditor to have access to books of accounts or certain ledger books, not providing management representation even when the auditors ask for the same (Dao & Pham 2014, p.490). Such types of audit opinions are issued to inform the investors that the financial statements contain some material misstatements or there has been some restriction on the part of the management.
The net profit as per the financial statement of Air New Zealand show that it earned a figure of $ 463 million. The cash from operations of the company is shown at $ 1074 million as per the cash flow statement as on 2016. The cash from operation is more than the net profit of the company as per the cash flow statement and profit and loss statement. The cause for the difference between cash generated from operations and net profit is due to the different treatments which is carried out in case of calculations of actual cash inflows of the company. In the computation of net profit, various non-cash expenses are also deducted from total revenue to arrive at the results. Such non- cash expenses are added back to the net profit to obtain actual cash inflows of the company. an example of such a non-cash expenses is depreciation, gain or loss from sale of assets and impairment losses.
As per the financial Statement of the Air New Zealand, the directors who are members of the audit committee are Tony Crater, Jan Dawson and Jonathan Mason. The role of the audit committee is to look after the financial and reporting disclosures of the company. The committee also looks after the whole of the audit process and ensures whether relevant standards and norms are being followed or not by the auditor of the company. the role of an audit committee is considered to be crucial for the overall management of the company. The primary responsibility of an audit committee is supervision of the audit process, financial reporting, internal controls and laws and regulations system of the company.
The directors of the company have recognized a contingent liability which is shown at a combined amount of $ 33 million. Such contingent liability comprises of Letter of credit and performance of bonds (Lubbe, Modack & Watson 2014, p.283). The definition of contingent liability states that any liability which can happen due to future uncertain events from either occurring or non-occurring and which cannot be measured effectively.
As per the case of Interwood, the current assets are made up of cash balance, receivables, expenses which are prepaid in nature and also office supplies which is shown at a combined figure of $ 62,417. The current liabilities of the company show a break up of account payables, accured expenses and Goods and Service tax amount which the company needs to pay. The current liabilities in total show a figure of $ 12,065. The working capital can be obtained by deducting the current assets and current liabilities of the company. The working capital of the company is favorable and shows that the company can meet its current expenses with ease and also show that the operational efficiency of the company is also favorable.
Reference
Biondi, Y & Soverchia, M 2014. Accounting rules for the European Communities: A theoretical analysis. Accounting, Economics and Law, 4(3), pp.179-214.
Brusca, I, Caperchione, E, Cohen, S & Rossi, FM 2015. Comparing accounting systems in Europe. In Public Sector Accounting and Auditing in Europe (pp. 235-251). Palgrave Macmillan, London.
Collier, PM 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
Dao, M & Pham, T 2014. Audit tenure, auditor specialization and audit report lag. Managerial Auditing Journal, 29(6), pp.490-512.
Hellmann, A 2016. The role of accounting in behavioral finance. Journal of Behavioral and Experimental Finance, 9, pp.39-42.
Ibanichucka, EAL & Aca, OKJ 2014. A critique on cash basis of accounting and budget implementation in Nigeria. Eur J Acc Auditing Financ Res, 2(3), pp.69-83.
Klassen, KJ, Lisowsky, P & Mescall, D 2015. The role of auditors, non-auditors, and internal tax departments in corporate tax aggressiveness. The Accounting Review, 91(1), pp.179-205.
Libby, R 2017. Accounting and human information processing. In The Routledge Companion to Behavioural Accounting Research. Routledge, pp. 42-54
Lubbe, I, Modack, G & Watson, A 2014. Financial accounting GAAP principles. OUP Catalogue.
Newberry, S 2014. The use of accrual accounting in New Zealand’s central government: Second thoughts. Accounting, Economics and Law, 4(3), pp.283-297.
Penman, S 2016. Valuation: accounting for risk and the expected return. Abacus, 52(1), pp.106-130.
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