PRESENTATION 7: RECORDING SYSTEMS AND AUDITING

PRESENTATION 7 OUTLINE

The following areas are covered in this presentation:

• Recording Systems

• Auditing

RECORDING SYSTEMS

Legislative Requirements

• There is a set of accounting standards that must be followed when

organisations prepare their financial statements. These accounting

standards are developed by the Australian Accounting Standards

Board (AASB) under section 334 of the Corporations Act 2001. The

AASB is an Australian government agency under the Australian

Securities and Investments Commission Act 2001.

• The accounting standards are there to ensure that general

purpose financial statements represent fairly the financial position,

financial performance and cash flows of a business.

RECORDING SYSTEMSAustralian Taxation Office Requirements

Paying tax on the profit of a business is different depending on the

business structure:

1. A sole trader has their net profit added to their income and taxed on

the total taxable income.

2. A partnership has to prepare a tax return but does not pay tax itself,

the tax is paid by each partner – their share of the profit is added to

their income and they pay tax on the total taxable income.

3. A company pays tax on profits at a fixed percentage (currently the

corporate tax rate is 29%)

Accounting profit can be different from taxable profit as the ATO may not

allow certain deductions that have been taken into account to calculate the

net profit of a business

RECORDING SYSTEMSThe Goods and Services Tax (GST)

• The GST is a value-added tax, not a sales tax. Understanding the difference

is useful to understanding how the GST works, and how it affects

businesses that collect and pay the tax

• A sales tax works relatively simply. In the past, Australian state

governments would introduce sales taxes on particular goods as a way of

raising revenue. For example, sales of fertiliser might be taxed at a rate of

15% of sales SUPERGROW FERTILISERS

Invoice 30/12/1999To: Farmer Joe 100kgs Fertiliser $200.00 PLUS Sales tax 15% $30.00 TOTAL $230.00

SUPERGROW FERTILISERS

Invoice 30/12/1999To: Farmer Joe 100kgs Fertiliser $200.00 PLUS Sales tax 15% $30.00 TOTAL $230.00

SUPERGROW FERTILISERS

ABN: 32 98 765 432Tax Invoice 1/01/2000

To: Farmer Joe 100kgs Fertiliser $200.00 GST (10%) $20.00 TOTAL 220.00*

*Total includes GST

SUPERGROW FERTILISERS

ABN: 32 98 765 432Tax Invoice 1/01/2000

To: Farmer Joe 100kgs Fertiliser $200.00 GST (10%) $20.00 TOTAL 220.00*

*Total includes GST

• A GST tax invoice looks very

much like an invoice with a

sales tax. Notice the

differences? But the GST is

a value-added tax and

works a little differently.

RECORDING SYSTEMSTHE GOODS AND SERVICES TAX (GST)

• All businesses sell some good or service to their customers. But they buy

supplies as well.

NIKKIE’S BOUTIQUE

Buys stock from VAGUE Australia and sells to customers on Bribie

Island…

VAGUE Australia

CUSTOMERS

RECORDING SYSTEMSThe Goods and Services Tax (GST)

• If these were simple sales taxes, the Government on an individual dress

basis would collect $4 + $8 = $12, but, that’s not how the GST works.

• When Nikkie calculates the GST she must pay to the government per dress,

she deducts the $4 GST she has paid to VAGUE Australia (i.e. $8 - $4 = $4)

and, pays the balance of $4 per dress to the government. The government

gets $4 from VAGUE plus $4 from NIKKIE, a total of $8.

• (Shown in following slide)

RECORDING SYSTEMSThe Goods and Services Tax (GST)

NIKKIE’S BOUTIQUE

Buys stock from VAGUE Australia and sells to customers on Bribie

Island…

VAGUE Australia

CUSTOMERS

VAGUEAustralia

TAX INVOICE

Ten black dress $400

Plus GST 10% $40

TOTAL $440

NIKKIE’S BOUTIQUE

TAX INVOICE

One little black dress

$80

Plus GST 10% $8

TOTAL $88

GST is added to both sets of transactions

RECORDING SYSTEMSThe Goods and Services Tax (GST)

• A business has to register for GST if their annual turnover is, or is expected to be,

$75,000 or over. A GST registered business has to charge GST on its sale of goods

and services and subsequently remits the GST to the ATO at regular intervals

(monthly or quarterly)

• Most small and medium sized businesses report their GST quarterly (every three

months). Large companies are required to report and pay GST every month

• On the BAS Statement, businesses are required to report a range of data for

statistical purposes:

− total sales

− export sales

− non-GST sales

− capital purchases (e.g. buildings and equipment),

− non-capital purchases (e.g. supplies, direct materials)

RECORDING SYSTEMSThe Goods and Services Tax (GST)

• Total Sales & Non-Capital Purchases are the items critical to calculating GST

owed.

• GST of 10% of the value of goods and services you have sold MINUS GST of

10% you have already paid on purchases of supplies.

• The BAS statement is also used to report and pay the pay-as-you-go (PAYG)

income tax that you have deducted from your employee’s wages and

salaries.

• The recording systems and documentation within an organisation will be

subject to internal scrutiny from auditors, as well as external scrutiny from

the Australian Taxation Office, ASIC (Australian Securities and Investments

Commission) and possibly the ASX (Australian Stock Exchange for publicly

traded companies).

RECORDING SYSTEMS

The Goods and Services Tax (GST)

• The reporting of goods and services tax (GST) is mandatory as it is a

tax collected by companies on behalf of the Federal Government

• GST collected from your sales is off set by GST you have paid on

your purchases for legitimate business expenses.

• You must be able to demonstrate that all your sales and expenses

can be tracked for any GST charged or levied. Many business

expenses are also deductable from your taxable income thus

reducing your payable tax.

• Income or company tax is levied on the profit your company makes

after deducting any costs of doing business, Virtually all of the

expenses and costs you have incurred during the operations of your

company are tax deductable.

RECORDING SYSTEMS

The Goods and Services Tax (GST)

• The reporting of goods and services tax (GST) is mandatory as it is a

tax collected by companies on behalf of the Federal Government

• GST collected from your sales is off set by GST you have paid on

your purchases for legitimate business expenses

• You must be able to demonstrate that all your sales and expenses

can be tracked for any GST charged or levied. Many business

expenses are also deductable from your taxable income thus

reducing your payable tax

• Income or company tax is levied on the profit your company makes

after deducting any costs of doing business, virtually all of the

expenses and costs you have incurred during the operations of your

company are tax deductable.

RECORDING SYSTEMS

The Goods and Services Tax (GST)

• Any deductable expense must be shown to have a legitimate

purpose to be claimable so your documentation systems must be

able to be audited by an internal auditor

• Your records must be kept for up to five years for deductable

expenses. These are legal requirements, so make sure you do not

overlook them. Your department may be subject to an internal

audit to check on your expenses and other costs, but this is

preferable to a full ATO audit.

• All your paperwork must be maintained to allow someone other

than yourself to be able to find something in a straightforward

manner.

RECORDING SYSTEMS

The Goods and Services Tax (GST)

• Having poor paperwork and records and making it hard to

substantiate expenses and legitimate costs will not help you and

your department in achieving your budgetary goals let alone those

of the company.

• The company is responsible to provide you and your department

the resources to enable you to comply with your legal and

company obligations.

• If the company expects you to be able to report on budget and

financial performance it must provide the adequate resources. You

must be supported

RECORDING SYSTEMSBusiness Activity Statement

• Businesses operating in Australia are required to lodge a Business Activity

Statement (BAS) to the Australian Taxation Office (ATO) to make payments and

report their tax obligations. Certain individuals may also be required to lodge a

BAS.

• The BAS is personalised to each business (or individual). It can be lodged

electronically, by mail or in person. A BAS needs to be lodged monthly,

quarterly or annually depending on when instalments are due.

Financial reporting requirements

• The Australian Securities and Investments Commission (ASIC) is Australia’s

corporate, financial markets and financial services regulator.

• Companies operating in Australia are required to prepare and lodge financial

reports with ASIC, usually at the end of the financial year. Annual financial

reports are required to be audited. In some circumstances, companies may be

exempt from financial reporting.

RECORDING SYSTEMSAustralian Stock Exchange reporting requirements

• Companies listed on the Australian Securities Exchange (ASX) are bound by

continuous and periodic disclosure rules. The ASX provides information on

these requirements in its Listing Rules.

Australian Accounting Standards

• Australian Accounting Standards are set by the Australian Accounting

Standards Board (AASB), an independent Australian Government agency. The

standards are legislative requirements for corporations. They must also be

applied to all other general purpose financial reports of public and private

sector reporting entities.

• The Australian Accounting Standards meet the requirements of the

International Financial Reporting Standards (IFRS). Whilst much of the

standard-setting is the responsibility of the International Accounting

Standards Board (IASB), the AASB maintains standard-setting power over

matters specifically relating to Australia.

AUDITING• An audit is the examination of the financial report of an organisation -

as presented in the annual report - by someone independent of that

organisation.

• The financial report includes a balance sheet, an income statement, a

statement of changes in equity, a cash flow statement, and notes

comprising a summary of significant accounting policies and other

explanatory notes.

• The purpose of an audit is to form a view on whether the information

presented in the financial report, taken as a whole, reflects the

financial position of the organisation at a given date, for example:

− Are details of what is owned and what the organisation owes

properly recorded in the balance sheet?

− Are profits or losses properly assessed?

AUDITING

• When examining the financial report, auditors must follow auditing

standards which are set by a government body.

• Once auditors have completed their work, they write an audit

report, explaining what they have done and giving an opinion

drawn from their work.

• With some exceptions, all organisations subject to the

Corporations Act must have an audit each year. Other

organisations may require or request an audit depending on their

structure and ownership or for a special purpose.

AUDITING• Auditors discuss the scope of the audit work with the organisation – the directors or

management may request that additional procedures be performed. Auditors maintain

independence from management and directors so that tests and judgments are made

objectively. Auditors determine the type and extent of the audit procedures they will

perform, depending on the risks and controls they have identified. The procedures may

include:

− asking a range of questions - from formal written questions, to informal oral

questions - of a range of individuals at the organisation

− examining financial and accounting records, other documents, and tangible items

such as plant and equipment

− making judgments on significant estimates or assumptions that management

made when they prepared the financial report

− obtaining written confirmations of certain matters, for e.g. asking a debtor to

confirm the amount of their debt with the organisation

− testing some of the organisation's internal controls

− watching certain processes or procedures being performed

AUDITING