Financial Management Using Financial Statements: Record-Keeping, Auditing, And Compliance Requirements

Record-Keeping Requirement for a business in Australia

Discuss about the Financial Management for Using Financial Statements.

Commercial entities operating in Australia are required to maintain book of accounts in an appropriate manner. It is required for managing the cash flow, for the purpose of tax obligations and to assess the performance of business. As per Law, the proper record shall be kept for all transactions at least for 5 years (Australian Government: Australian Taxation Office, 2016). It can maintain in either electronic form or paper form. The business is allowed to use any software as per its convenience. The use of software makes the record keeping job more accurate and faster. The language used shall be English or any other language which is easily convertible. Failure to maintain the records properly may lead to penalty imposition on the business.   

Business entities are required to maintain records for tax compliances. For Example, for GST compliance it needs to maintain the tax invoices provided by their suppliers, a calculation made for GST purposes, business activity statements etc. Suppose if the business employs workers higher than regulatory limit then another additional records are maintained such as tax file number (TFN) declarations and withholding declaration forms, wages, allowances and other payments vouchers. Further a summary record of tax should be maintained that withhold from payments and contributions to their superannuation etc. (Australian Government: Australian Taxation Office, 2016).

In accordance with tax office, audit can be defined as a study of the business financial affairs to check that the business filing correct income tax returns or not. Thus it can be called as an examination for tax confirmation purpose. An audit can be considered as Tax Office active compliance activities which help in ensuring the compliance of taxation laws (Tschida and Bjorklund, 2015). It leads to involvement of an interaction of Tax officers with the business or its representatives. This Audit activity leads to deterring, detecting and addressing non-compliance with the taxation laws.

An audit can further be defined as active compliance activity which ensures compliance with taxation obligations by the every taxpayer. It leads to an intensive interaction with the taxpayer by the Tax officer. This definition of Audit is very broad. It covers a broad range of activities which is to be taken into account from the perspective of Audit. For example Audit activities include visits to business premises, checking the documents, interviewing the Staff etc. Audits ensure that every taxpayer pays the right amount of tax (Australian Government: Australian Taxation Office, 2016). Completion of Audit varies as per nature of business. Basically, the time required for audit completion depends on upon the type and scope of the audit.

Audit Definition and Requirements in Australia

Audit leads to the additional compliance costs for responding to information requests activity and internally reassessing their taxation compliance. For example, the consultation to the professional for the help etc (Taylor and Richardson, 2013). This is more intrusive than other types of compliance activities.

Compliance and fulfilling of tax liability is a major cost for any business. Many businesses try to avoid the payment of their tax obligations and try to get competitive advantage in the market by evading the taxes (Taylor and Richardson, 2014). Such businesses accept Tax Office involvement into their affairs from time to time. Such businesses, when caught in Audit, will have to pay huge penalties and will bear the adverse impact of the audit, is excessive audit timeframe and its huge penalties.

If in audit, it is determined that business is liable to pay high tax liability then business will have to additionally incur a general interest charge for the shortfall of tax (McClure, Lanis and Govendir, 2016). This liability can be reduced for the delays caused by Tax Office.

The business administration cost also increases due to Audit Activities. This expenditure is incurred for responding to the queries of Tax officers, the advice of professionals etc (Tschida and Bjorklund, 2015). In addition to this, the regular business activities are also distracted.

The long Audit duration can also defame the position of business in the market.

After the completion of Audit, if the huge penalties are imposed, then business have to the immediate arrangement of Finance for the payment of this tax along general interest charges or penalties.

At times, business is also not able to resolve their issues with the treatment response of the tax officers. Such a situation may reduce the confidence of businesses in the administration.

The timeframe for the audit varies according to the requirement as per the various tax laws. For example, the Tax office may sometimes conduct various tax audits or reviews (Lewis, Richard and Corliss, 2014). When the Tax office first communication is received by the business can be considered as tax audit notification date. They can communicate over a call or by confirmation letter.

The Australian Tax Office has stated the records to be kept by every business. As per the tax laws, any business operating in Australia has to keep a record of all its transactions. Maintained records must be able to provide explanation of all transactions. The record shall be made as soon as the transaction gets completed (Lopes and Ferreira, 2015). Hence the record shall be updated as soon as possible. The documents which relate to these transactions shall be maintained for the calculation of tax liability. Proper maintenance of all these transactions will be helpful in calculating appropriate liability of tax. This will further serve as an evidence and justification for the proper meeting of tax liability before the Australian Tax Office.

Adverse Effects of Audit

The records shall be kept for all the transactions which lead to raising of the tax liability of various taxes like income tax, goods and services tax, pay as you go taxes, capital gains tax, and fringe benefits tax etc. In addition to this record must be kept for proper election, determination, choice, or calculation which is made in the tax law. The record regarding the basis of this selection shall also be maintained. For the easy and proper record keeping, the Australian Tax Office has also recommended the Recordkeeping evaluation tool. This tool is available on their website. This tool helps the tax payer to keep and evaluate the record-keeping practices. It further ensures that the taxpayer is maintaining adequate record-keeping. A list of records which is tailored as per the requirement of taxpayer business is provided by this tool. In addition to this, if after evaluation the record keeping is found inappropriate then it has suggested the required improvements (Healy and Palepu, 2012).

The Australian Tax Office has issued the guidelines which state the major documents or the record that are to be kept by the Business. However, if Australian Tax Office demands audit then in that case they reach the premises, full records, documents etc. They haave obligation to allow full access to these documents.  They are hardly disallowed for the documents such as confidential documents between barrister, professional accountant etc for disclosure.

In situation where the Australian Tax Officer conducts an audit, he had right for search and seizure to justify whether the business has declared all the income received or not. For this aspect detail evaluation of the right claim of credits by the business, correct withholding of taxes, or documents relating to any other tax- related obligations is done. Thus the business shall keep the documents like receipts of expenses for which the credit is to be claimed, for a period of at least three and half years and preferably five years.

In the case of a business audit, Australian Tax Office compares the assets owned by the business and owner expenditure to judge the lifestyle. If the Australian Tax Office finds that expenditure is more than the income recorded, he may judge that there is an evasion of taxes.

The Australian Tax Office imposes a penalty as per the tax law if the business is not keeping the required records. The penalty amount is 20 penalty units. The current conversion rate of this unit is $180 per unit. i.e., 20 units equal $3,600. There is all the provision through which the Australian Tax Office can remit the penalty. The remission can be for a full penalty or it can be for a partial penalty. This remission is done by Australian Tax Office if the business can justify that they were doing the right thing (McGahan and Porter, 2012). However if the business could not be able to defend itself and when the Australian Tax Office finds that the business is avoiding to keep records, or deliberately destroy them, then, in that case, the business does not receive any remission from the penalty (Australian Government: Australian Taxation Office, 2016).

Records to be Maintained by a Business for Auditing Purposes

If any business is given an advice and an opportunity for improving the record-keeping behaviour and still the business has ignored the  advice and failed to maintain proper records, then, in that case, the penalties given below is imposed by the Australian Tax Office.

If the business is genuinely trying to improve record-keeping practices as per the advice by the Australian Tax Office, then the penalty of the business can remit up to 100%. Thus there will be no penalty payable by the business (Kaplan and Atkinson, 2015).

If the business is genuinely trying to improve record-keeping practices, however, the tax liability is still not readily determined by the records then in that case Australian Tax Office may remit the penalty up to 75%. The penalty in the amount is $900 which is to be paid by the business (Villiers and Walczak, 2013).

Even if after the getting the opportunity from the Australian Tax Office, if the business is a not making fair efforts for the improvement of record keeping practices, then it has to be given a remission up to 50% of the penalty only. Thus, in that case, the penalty amounts to $1,800, which is to be paid by the business.

Inspire of all the opportunity given by the Australian Tax Office, the business is not ready to make any effort for the improvement of record keeping practices, then in that case business is not given nay remission by the Australian Tax Office. Thus the business has to pay full $3,600 as a penalty for irresponsible record keeping behaviour (Australian Government: Australian Taxation Office, 2016).

In addition to the above, if there are serious cases of the non-compliance of record keeping, then they are referred to the Director of Public Prosecution (Parkinson and Chew, 2014). Such business will be penalised the Director of Public Prosecution. The penalty is very high in such cases. The penalty can amount up to $10,000.

Table 1: Profit Statement of the Current Year

Question 1: Sales and COGS Statement for Current Year		(Amount in $)
Particulars	Price Per Unit	Qty	Annual	Avg. Quarterly	Avg. Monthly
Sales Revenue
Meals	10.50	54,600.00	5,73,300.00	1,43,325.00	47,775.00
Soft Drinks	2.50	20,000.00	50,000.00	12,500.00	4,166.67
Total Sales Revenue			6,23,300.00	1,55,825.00	51,941.67
COGS
Meals	4.60	54,600.00	2,51,160.00	62,790.00	20,930.00
Soft Drinks	0.80	20,000.00	16,000.00	4,000.00	1,333.33
Total COGS			2,67,160.00	66,790.00	22,263.33

Table 2: Budgeted Profit Statement for the Next Year

Question 2: Profit and Loss Budget for Next Year			(Amount in $)
Particulars	Price Per Unit	Qty	Annual	Avg. Quarterly	Avg. Monthly
Sales Revenue
Meals	13.00	60,060.00	7,80,780.00	1,95,195.00	65,065.00
Soft Drinks	1.50	30,000.00	45,000.00	11,250.00	3,750.00
Total Sales Revenue			8,25,780.00	2,06,445.00	68,815.00
COGS
Meals	5.06	54,600.00	2,76,276.00	69,069.00	23,023.00
Soft Drinks	0.50	30,000.00	15,000.00	3,750.00	1,250.00
Total COGS			2,91,276.00	72,819.00	24,273.00
Gross Profit			5,34,504.00	1,33,626.00	44,542.00
(-) Fixed Cost
Rent			24,000.00	6,000.00	2,000.00
Utilities			10,000.00	2,500.00	833.33
Wages			60,000.00	15,000.00	5,000.00
Miscellaneous			6,000.00	1,500.00	500.00
Profit			4,34,504.00	1,08,626.00	36,208.67

Table 3: Actual Profit Statement for the Q1 of next year

Question 3: Actual Trading Activities for Q1 of Next Year and Variance Statement
Particulars	Price Per Unit	Qty for Q1	Actual for Q1	Budget for Q1	Variance ($)	Variance Type
Sales Revenue
Meals	13.00	18,018.00	2,34,234.00	1,95,195.00	39,039.00	Favourable
Soft Drinks	1.50	15,000.00	22,500.00	11,250.00	11,250.00	Favourable
Total Sales Revenue			2,56,734.00	2,06,445.00	50,289.00	Favourable
COGS
Meals	6.58	18,018.00	1,18,522.40	69,069.00	-49,453.40	Adverse
Soft Drinks	0.50	15,000.00	7,500.00	3,750.00	-3,750.00	Adverse
Total COGS			1,26,022.40	72,819.00	-53,203.40	Adverse
Gross Profit			1,30,711.60	1,33,626.00
(-) Fixed Cost
Rent			6,500.00	6,000.00	-500.00	Adverse
Utilities			3,000.00	2,500.00	-500.00	Adverse
Wages			20,000.00	15,000.00	-5,000.00	Adverse
Miscellaneous			1,500.00	1,500.00
Profit			99,711.60	1,08,626.00	8,914.40	Adverse
Note: Due to lack of information, miscellaneous expenses
actually incurred are taken as budgeted miscellaneous expenses.

Table 4: Comparison of Actual Budgeted Profit Statement

Question 4: The Adjusted Budget for Q2, Q3 and Q4.	(Amount in $)
Particulars	Budget for Q1	Actual for Q1	Budget for Q2	Budget for Q3	Budget for Q4
Sales Revenue
Meals	1,95,195.00	2,34,234.00	1,95,195.00	1,95,195.00	1,95,195.00
Soft Drinks	11,250.00	22,500.00	22,500.00	22,500.00	22,500.00
Total Sales Revenue	2,06,445.00	2,56,734.00	2,17,695.00	2,17,695.00	2,17,695.00
COGS
Meals	69,069.00	1,18,522.40	69,069.00	69,069.00	69,069.00
Soft Drinks	3,750.00	7,500.00	7,500.00	7,500.00	7,500.00
Total COGS	72,819.00	1,26,022.40	76,569.00	76,569.00	76,569.00
Gross Profit	1,33,626.00	1,30,711.60	1,41,126.00	1,41,126.00	1,41,126.00
(-) Fixed Cost
Rent	6,000.00	6,500.00	5,833.33	5,833.33	5,833.33
Utilities	2,500.00	3,000.00	2,333.33	2,333.33	2,333.33
Wages	15,000.00	20,000.00	13,333.33	13,333.33	13,333.33
Miscellaneous	1,500.00	1,500.00	1,500.00	1,500.00	1,500.00
Profit	1,08,626.00	99,711.60	1,28,360.47	1,28,360.47	1,28,360.47

Based on the financial data given by the organisation, the above tables were made. Each table reflects the financial analysis regarding the revenue, cost and ultimately profit. Based on the estimates by the organisation, Budget for the coming year is also made . In addition to this, after making the budget, the management has also given the assumed data about the actual achievement by considering budgeted performance. Thus the table for the comparison of the actual and the budgeted figures has also been made. By comparing the company’s actual and budgeted performance, it can be noticed that there is variance in budgeted and the actual performance. Thus the further analysis has been done to check that whether the variance reported is adverse or favourable.

It has been noticed that the variance in the budgeted and the actual figures, both the favourable and adverse variance is found. The favourable variance is welcomed but the management needs to take actions for avoiding the adverse variance. This adverse variance has affected the profitability negatively. Thus the management shall be focused on its processes and activities from avoiding such adverse variance.

The below observations are made referring to the above-given tables.

Referring to the Table no.3, it can be seen that the variance in sales revenue for the meal and soft drinks is favourable The actual figures of sales revenue have increased in meals because of increase in quantity of meal takeaways. Same reason for the increase in Soft drinks sales revenue has been reported. Soft drinks sales revenue has also gone higher due to increasing in the quantity sold out. Since the overall increase in sales revenue is reported and the company has got additional revenue of $50,289, it is a favourable variance.

Referring to the Table no.3, it can be seen that the variance in COGS for the meal and soft drinks is adverse variance. The actual cost of Meals has gone up due to increase in the cost price per unit of the meal. It has gone up to $6.58 per unit from budgeted figure of $5.06 per unit. This has led to an overall adverse variance in the Q1 equal to $49,453.40. The overall variance in the COGS of soft drinks also has been reported as an adverse variance of $3,750; however, it has been accounted for the increases in quantity sold out. The cost price per unit of soft drink has gone down. Thus it can be seen that the net total of the favourable and adverse variance of soft drink is net favourable variance only. The rest behind this can easily see by comparing the $11,250 favourable variance with $3,750 adverse variance. The net is $7,500 favourable

The table also shows the adverse variance for the fixed cost, which is indirect in nature, i.e., Rent, Utilities, Wages and Miscellaneous cost. Each of these costs has increased resulting in an adverse variance. The rent and utilities for the quarter have been gone up by $500, while wages have been gone up $5000. All these have summed up to an adverse variance of $6000.

Thus the overall variance for the quarter is $8914.40 adverse. Management should take corrective actions for the next quarters to avoid such adverse variances and further adjust the budget for the Q2, Q3 and Q4 for the improvement in overall year’s performance.

The actual cost for the soft drink bottle per unit was reported before the contract was $0.80. The contract states that the cost price per unit of soft drink will be $0.50. However, the main condition of this contract states that the restaurant must purchase 2000 bottles per month. Thus the restaurant shall make a mandatory purchase of 2000 bottles per month. Thus the purchase for the quarter is 6000 bottles and for the year is 24000 bottles. As per the information give by the management, the restaurant has sold 20,000 bottles in the current year with a selling price of $2.5 per unit. The cost per unit was reported as $0.80 before the contract. This has led to a net profit of $34,000 from the sales of soft drinks section. However, after the contract for purchasing the bottle at cost price of $0.5, the management had decided to revise the sale price from $ 2.5 to $1.5. This has increased the sales in units by 50%. This has led to an increase in the sales revenue by $22,500 for Q1. This has led to increasing the budgeted net profit from the sale of soft drinks by 7500$. In addition to this, after comparing the actual figures from the budgeted figures it can be seen that the actual net profit for the next quarter is, in fact, higher than budgeted net profit. The actual net profit from the sale of the bottle has been reported to $15000 for the quarter.

Conclusion:

Thus based on the above analysis, it can be said that the contract for purchasing the soft drink bottles is a viable decision. The restaurant shall proceed to execute the contract.

By doing the variance analysis as shown above in the table, it has been reported that the Quarter has performed poorly in Q1. The restaurant has reported an overall adverse variance of profitability of $8914.40 in Q1 against the budget of Q1. Thus after the assessment, it becomes mandatory for the restaurant to improve its performance. Thus the management shall take the corrective steps for the coming quarters so that the loss from this quarter can offset in the coming quarters. This will help the restaurant to maintain its profitability by the end of the year.

The adverse variance of quarter one is adjusted overcoming 3 quarters. The revised budgeted profitability statement for Q2, Q3 and Q4 is given in table 4. The comparison has been made by referring to the Q1 figures and the budget of Q1.

The revenue of sales from the sale of meal shall be maintained as per the budgeted figure of Q1 as it will lead to higher Gross profit while the sales revenue from the sale of soft drinks can be continued as per the actual sale of Q1 as the gross profit from the actual sale is higher in the Soft drinks section.

The fixed cost budgeted in the Q1 is lesser than the actual cost incurred in Q1. Thus man agent shall take corrective actions for the reduction in the fixed indirect cost. As per the original budget, the cost of rent was $6000 for the Q1. However, it has been revised for the Q2, Q3 and Q4 as $5833.33.

Same as rent, the revision has also been made in the budget for utilities. As per the original budget, the cost of utilities was $2500 for the Q1. However, it has been revised for the Q2, Q3 and Q4 as $2333.33. Thus man agent shall take corrective actions for the reduction in the fixed indirect cost of utilities.

The Same adjustment has also been made for Wages. As per the original budget, the cost of utilities was $15,000 for the Q1. However, it has been revised for the Q2, Q3 and Q4 as $13,333.33. Thus man agent shall take corrective actions for the reduction in the wages. The direct cost reduction in wages is not possible as labour will not accept the wage per day. Thus management can make the changes in the mix of labour and can reduce the number of inefficient labour and increase the efficient labour. Thus management will be able to increase the turnover in sales while reduce the labour cost on an overall

For further analysis, the excel report has been provided along with this report.

References

Books and Journals

Borrego, A.C., Loo, E.C., Lopes, C.M.M. and Ferreira, C.M.S., 2015. Tax professionals’ perception of tax system complexity: Some preliminary empirical evidence from Portugal. eJournal of Tax Research.

Healy, P.M. and Palepu, K.G., 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning.

Hsu, K.W., Pathak, N., Srivastava, J., Tschida, G. and Bjorklund, E., 2015. Data mining based tax audit selection: a case study of a pilot project at the Minnesota department of revenue. In Real world data mining applications. Springer International Publishing.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Lewis, P., Richard, A. and Corliss, M., 2014. Compliance Costs of Regulation for Small Business. Journal of Business Systems, Governance & Ethics.

McClure, R., Landis, R. and Govendir, B., 2016. Analysis of Tax Avoidance Strategies of Top Foreign Multinationals Operating in Australia: An Expose.

McGahan, A.M. and Porter, M.E., 2012. What do we know about variance in accounting profitability?. Management Science.

Parkinson, A. and Chew, L., 2014, January. Making budget management work: perceptions of UK higher education managers regarding the theory and reality of budget management experiences. In Global Conference on Business & Finance Proceedings. Institute for Business & Finance Research.

Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalised tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation. 22(1). Pp.12-25.

Taylor, G. and Richardson, G., 2014. Incentives for corporate tax planning and reporting: Empirical evidence from Australia. Journal of Contemporary Accounting & Economics. 10(1). Pp.1-15.

Zerzucha, P., de Villiers, A. and Walczak, B., 2013. A new concept for variance analysis of hyphenated chromatographic data avoiding signal warping. Journal of Chromatography A.

Online

Australian Government: Australian Taxation Office. 2016. [Online]. Available through <https://www.ato.gov.au/Business/>. [Accessed on 30^th July 2016].