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(b) Discussing the implications of the questioned amounts including payment to Excel Plc and the likely principle tax liability if any. (25 marks) (c) Explaining the fraud indicators the commissioner had intimated to HML and the likely legal implications. clearly bringing out the fraudulent tendencies. (5 marks) (d) About forensic work to be done by Uganda Revenue Authority in a bid to prove tax fraud and successfully prosecute the culpable persons. (10 marks) (e) Explaining the ethical considerations Kaiza CTA should take into consideration before accepting to take on HML as their client. (5 marks) (Total 50 marks) SECTION B Attempt two of the three questions in this section Question 2 Jeriko Uganda Ltd (JUL).a distributor of car tyres in Uganda and the rest of the East African region, operates a warehouse in Jinja. JUL imports five (40ft) containers of MRF tyres per month from India. Intelligence sources show that. while stock ledgers reflect closing stock as approximately half of the imported goods during the last month of the year, JULs' accountant inflates the figure of closing stock by doubling the value of actual stock in order to reduce taxes payable. The source further asserts that, in the subsequent year, the value of non-existent stock is written off as obsolete and the new closing stock figure is inflated and the cycle continues. From preliminary review of the information within the Uganda Revenue Authority (URA)database, JUL has a running loss of Shsl.432 billion in their income tax return for the year ending 30June, 2018, and closing stock of Shs 1.5 billion as part of their current assets. The income tax return also reflected rent received under other incomes of Shs 50 million. According to the customs records, the company on average clears five containers of tyres per month. As part of evidence gathering. URA carried out a search on JUL business premises and the residence of the managing director, Mr. Jonah Samson Kaiso. and seized records from the warehouse among others: inventory books. delivery notes. cashbooks, and a copy of QuickBooks. the accounting systems software used by the company. From the residence, various records were recovered including copies of land titles. copies of land sale/purchase agreements and Question 4 You are a manager in ZackaryAssociates. a firm of auditors and tax advisors.has got one-third of the firm's clients as audit clients. and the remainder are clients for whom the firm performs tax advisory services. You are responsible for the audit of Peacock Designers Ltd (PDL). a company operating in the retail industry,forthe year ended June 2018. As this is the first year that your firm will be acting as tax advisors for PDL. you need to gain an understanding of the tax risks facing the new client. You have just received the following email from the tax engagement partner. To: Tax Manager From: Tax Partner Re: Peacock Designers Ltd (PDL) Tax Audit Planning Dear manager I need you to begin planning the tax health check of PDL for the year ended June 2018. I have iust attended a planning meeting with Dick the finance director of the company and I have provided you with the following attachments: Notes from the meeting Extracts from financial and non-financial information Regards Partner Zachary Associates Attachment 1: Notes from meeting with Dick Peacock Designers Ltd (PDL) sells clothing with a strategy of selling high fashion items under the Peacock brand name. A new range of clothes are introduced to stores every eight weeks. The company relies on a team of highly skilled designers to develop new fashion ranges. The designers must be able to anticipate and quickly respond to changes in consumer preferences. There is a high turnover in the design team. Most sales are made in store, but there is also a very popular catalogue, from which customers can place an order online, or over the phone (calls or whatsapp). The company has recently upgraded the computer system and improved the website at a significant cost. in order to integrate the website sales directly into the general ledger and to provide an easier interface for consumers Required: Based on the informationprovided in the email from and the related attachments. (a) Prepare briefing notes to be used at a planning meeting with your tax audit team. in which you evaluate the tax risks facing Peacock Designers Ltd to be considered when planning the audit for the year ended June 2018. (15 marks) (b) Explain the principal risks of material misstatementin the given scenario. (10 marks) (Total 25 marks) Question 1 Harry Marketers Ltd (HML) is a private company in the business of carrying out market research and executing the marketing function for various companies. The company employs over 100 employees that work in different departments. Recently. as a result of available good working conditions.the company has attracted several professional staff from competitors. The research department has a team of researchers who go out to the field on a daily basis to gather market information for analysis. There is a team of analysts who analyse the information gathered and produce reports for their clients. Another team of marketers are charged with the responsibility of handling the marketing function for their clients. Among other marketing activities. they organize promotions around the country. These involve staff travelling and staying upcountry for some days. HML has a finance and administration department comprising of 15 employees. headed by a finance and administration manager. Their duties involve delivering invoices to clients on a monthly basis. debt collection. purchasing equipment according to requisitions raised and other general accounts and administration work. The company's biggest expenditure is salaries. In 2017. the internal auditor went out to verify debts which had overstayed on the debtors' register. While in the field. they established that some of the clients on the debtors' register claim to have paid and had receipts issued to them by one of the staff. Upon examination of the receipts. it was established that they were not company receipts because they were missing key features. For instance. some clients had been issued with same receipts bearing similar serial numbers. 0n investigation. the staff involved was terminated. As a result. the staff turned into a whistle blower to Uganda Revenue Authority (URA) with allegations that HML does not charge PAYE on 40% of their employee earnings. That only 60% goes through the payroll. charged Pay As You Earn (PAYE) andNational Social Security Fund (NSSF) contributions and paid through the bank while the 40% is expensed as other staff costs and paid through the bank. URA carried out further intelligence and confirmed the informer's allegations. A full investigation was therefore sanctioned and a search and seizure carried out on HML premises. Information obtained was in form of physical documents and data from their Tally- accounting system. Required: (a) Discuss the procedures you would perform to determine whether there is fraud taking place and compute the tax loss suffered by URA. (20 marks) (b) Advise Jonah Samson Kaiso as to whether he is liable to any tax in his personal capacity and compute the tax payable by him. if any. (5 marks) (Total 25 marks) Question 3 Report writing is a fundamental task of all investigation officers. The process begins with initial documentation of the crime facts and identifying the victim. witnesses and other pertinent facts surrounding the case. All the investigative efforts may prove meaningless at trial if the facts are not adequately reported. The ability to prepare a comprehensive report that contains all facts and details is a skill required by all investigation officers. Documenting results is a particularly important function in fraud examinations. In many instances, the written report is the only evidence that the work was performed. Cases can be won or lost on the strength of the written report. It conveys to the litigator all the evidence and provides credence to the investigation. A good investigation report always answers the questions to the 5 w's; who, what, when. where and why. to help establish the elements of the crime and give necessary information to the investigator. Your firm of certified tax advisors has recruited a team of young professionals. You are the partner in charge of training and you are preparing training for new staff,about writing reports for the various assignments to be given. Required: (a) Analyse the difference between tax audit and tax investigation. (10 marks) (b) Discuss the 5 w's of investigation bringing out what is entailed in each during investigation report writing. (15marks) (Total 25 marks) 0n analysis. it was established that some of the invoices for purchase of assets claimed for input Value Added Tax (VAT) in the monthly VAT returns could not be tracked to the asset register, but were reflected in the wear and tear schedule in the corporation tax return. The same applied to expense invoices that were reflected in the VAT and corporation tax returns but not in the payments in the Tally system. All the above invoices had been correspondingly declared in the returns of the suppliers. Upon circularization to authenticate whether the questioned documents support the purchase of assets. the alleged five suppliers disowned all the invoices and provided their corresponding serial numbers issued with different amounts to different customers who had also declared them in their VAT returns. The alleged suppliers were also found to be dealing in items that were different from what HML had allegedly purchased from them. The directors of HML were interrogated over how these invoices found their way to their VAT returns.They all expressed ignorance but referred URA to their tax agent who is responsible for filing all their monthly and annualreturns. Availablewere fee notes issued to them by their tax agent clearly reflecting the activity as "filing returns\Invoice amount (VAT Inc.)' Other staff costs _Period_ _ _ _ (Shs) _ _ (Shs) $2015 _ 150,000,000 113,500,000 2017 237,004,000 155,003,000 2013 325,005,000 153,004,500 NotezAll staff earn more than Shs 410,000 per month. It should again be noted that 35% of the invoice amounts above, reflect computers and computer software in 2017 and 2018 while 50% of the invoice amounts reflect office furniture in the years 2015 and 2016. The rest represent recurrent expenditure. According to the HML's corporation tax returns. there was a running loss of Shs 89, 765,342 for the year ending 30June, 2018, while there was no chargeable income for the year 2016 and 2017. Established among payments in Tally was a payment of USD 10,000(at an exchange rate of 1USD =Shs 3700) to Excel Plc, a firm of computer experts incorporated in Mauritius.The owners are however resident in South Africa where most of their work is done.The firm was contracted by HMLto upgrade their computer system to enable them analyse large quantities of data easily and efficiently. This work was done by Excel Plc remotely thus there was no tax paid as a result of this transaction. In a meeting with URA, the commissioner tax investigations explained to the management of HML that their team had established fraud indicators during the course of their preliminary work and that if confirmed by the investigations, the company directors would be held criminally liable for tax fraud. The managing director of HML has come to your firm, Kaiza Certified Tax Advisors (GTA), disappointed that first and foremost, URA staff came without notice and entered their business premises and picked his records including extracting information from computers without his consent. He is considering suing URA for trespass. Required: Prepare an advisory report to the managing director of HML: (a) Considering the commissioner's remarks and the taxpayer's complaints.highlighting the difference between civil tax investigation and criminal tax investigation bringing outin each case the investigator's responsibility. (Smarks) to use when ordering and entering their payment method details. The new online sales system has allowed overseas sales for the first time. The system for the phone ordering has recently been outsourced. The contract for outsourcing went out to tender and PDL awarded the contract to the company offering the least cost. The company providing the service uses an overseas call centre where staff costs are very low. PDL has recently joined the ethical trading initiative. This is a fair trade initiative, which means that any products bearing the Peacock brand name must have been produced in a manner which is clean and safe for employees and minimises the environment impact of the manufacturing process. A significant advertising campaign promoting PDL's involvement with the initiative has recently taken place. The Peacock brand name was purchased a number of years ago and is recognized at cost as an intangible asset, which is not amortized. The brand represents 12% of the total assets recognized on the statement of financial position. The company owns numerous distribution centres. some of which operate close to residential areas. A licence to operate the distribution centres is issued by each local government authority in which a centre is located. One of the conditions of the licence is that deliveries must only take place between 8 am and 6 pm. The local authority also monitors the noise level of each centre, and can revoke the operating licence if a certain noise limit is breached. Two licences were revoked for a period of three months during the year 2018. Attachment 2: Extract of financial and nonfinancial information Year ending June 30 E2018 Draft 2017 Actual EShs (million) EShs (million) E Revenue from sales outlets E 1.030 E 1.140 E . Phone and online sales E 425 E_ 395 E Total revenue ' 1,455 1,535 _ _ Operating profit _ 245 _ 275 _ E Finance costs (25) E {22) E Profit before tax 220 253E Additional Information: Number of stores 210 208 E EAverage number of orders per store 4,905E 5_.4_80 Number of phone contacts 680,000 790,000 _' Number of online orders E 1,020,000 526,667 Average cost per order Shs 250 Shs 300 receipt books in the names of the JUL while bank statements were in the names of JonahSamson Kaiso. It was confirmed from the QuickBooks ledgers that the landing cost of each container is SthOO million. The selling price of tyres is cost plus a markup of 20%. Closing stock for the year ended 30 June.2018 is reflected in the audited financial statements as Shs750 million which was tracked to the inventory book. During the review, the receipt books from the managing director's residence reflected receipt of rent for shops along Iganga road quoting pay slip numbers. These names and amounts on the receipts were traced to the bank statement in the names of Jonah Samson Kaiso totaling to Shs 585 million. The [and titles. confirmation from the lands office and approved plans for buildings along Iganga road were in the names of JUL. Copies of tenancy agreements had a condition that \"each tenant is required to deposit monthly rent intothe company Centenary bank account and submit a pay in slip to obtain a rent receipt\". Also established during the year, were repairs of a septic tank and painting of the said building reflected in a payment voucher amounting to Shs35.8 million. The estate manager.who maintains and manages the building located along Iganga road. earns a gross salary of Shs 1.2 million per monthwhich is reflected on the company payroll. Another document identified was a pay slip from Pearl University reflecting that he earns salary there. Kaiso does not file income tax returns but pay as you earn (PAYE) is withheld from his salary through the payroll. During an interview with Mr. Kaiso. he admitted that he works in JUL as the managing director and earns ShsB.5 million per month consolidated. In addition. he supervises research for masters' students at Pearl University where he is paid a monthly allowance of 8th million. On the issue of land. he explained that it was given to him by his late father as his inheritance and that according to him there was no tax accrued to URA. As a manager in the UFiA investigations department, you have identified the above discrepancies between inventory records that were tracked to the audited financial statements and tax returns the company submits to the tax body. Your suspicion has been heightened by the fact that the discrepancy always relates to the same tyre size which is normally used for commercial vehicles