CHAPTER I

RISKS IN TAX AUDITING

1.1. CONCEPT OF TAX AUDIT

The Tax Audit is the systematic process of obtaining and objectively evaluating the
transactions and economic events that are directly related to taxes
generated by an economically active entity, and communicate the result to the parties
related.

1.2. TAX AUDIT OBJECTIVE

Check that the company has properly reflected the tax obligations in
function of accrued income, having correctly provisioned for the risks derived from
possible tax contingencies, and;
Check if your payment has been made according to the deadlines and in accordance with the
established formal requirements.

1.3. CONCEPT OF RISK AND ITS RELATIONSHIP WITH ACCOUNTING

The Royal Spanish Academy defines risk as: 'contingency or proximity of a'
damage

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 In 'The Institute of Internal Auditors' (The IIA) defines risk as: 'The possibility of
that an event occurs which has an impact on the achievement or attainment of the
Objectives. Risk is measured in terms of impact and probability.

It is said: Except on rare occasions, the auditor may be in a position to issue

a technical judgment with absolute certainty about the validity of the statements contained in
the financial statements. This lack of certainty generates the concept of audit risk.

Audit risk according to the ISA. In paragraph 23, audit risk is defined as
the risk that the auditor expresses an inappropriate audit opinion when the
financial statements are misrepresented.

1.4. RISK OF TAX AUDIT

The risk of not detecting errors, irregularities, and other illegal aspects that
have an important impact on the client's tax situation and could
to originate the payment of fines, negative determinations, and even imprisonment of the taxpayer.
1

Errors.- They are unintentional acts that include mistakes in obtaining information.
accounting with which financial statements are prepared and taxes are determined, for
omission or misinterpretation of facts.
Irregularities.- Distortions or omissions of amounts or presentations made in form
intentional in the financial statements, including fraudulent financial reports.

Legal aspects.- Violations by the entity, or by management or employees acting

in the name of the entity, of the laws, regulations, and rules that have jurisdiction
about the entity, or about one or more of its components.

1.5. TYPES OF TAX AUDIT RISK

The types of risk faced by the auditor can be classified into

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 1.5.1. INHERENT RISK
It is the susceptibility of the tax situation to the existence of errors or
significant irregularities, before considering the control systems. The risk
Inherent risk is totally outside the auditor's control, as it is inherent to the nature.
how the audited entity operates.

Examples of inherent risk are: The nature of the business activity and the
number of transactions. The source of inherent risk has many factors and
these can be divided into three groups:

a. General factors: Among the general factors that determine existence

from an inherent risk, we have:
The nature of the business.
The type and volume of operations.
• La clase y cantidad de productos.
The economic and financial situation of the entity.
The management structure and the quality of human resources.

[Link] factors: Among the external factors that determine the existence of
an inherent risk, the following can be mentioned:

The new products on the market.

Entry of other competitors into the market.
Legal provisions.
Government provisions and climatic factors.

c. Specific factors: Among the specific factors for each statement of the
financial statements, can be mentioned:
The number and importance of audit adjustments and differences
determined in previous managements.
The complexity of the calculations for determining the balances.
The existence of valuable and movable assets susceptible to theft.

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 The experience of the staff.
• The existence of balances that require a high degree of judgment for their determination or

estimation.
The mix and size of the batches that make up the different balances.
The antiquity of computer programs and the degree of intervention
manual in computerized systems

[Link]. FACTORS THAT DETERMINE INHERENT RISK.

The nature of the entity's business.
The inherent risk for certain accounts is affected by the
nature of the business of the entity. For example, there is a greater
probability of obsolete inventory for a manufacturer of
electronic equipment for a steel manufacturer.

Resultados de auditorías anteriores.

The errors found in the audits of previous years
they have a high probability of happening again in the
audit of the current year.

For example, if the auditor found a significant number of

errors in inventory prices, perhaps the inherent risk
it is high and the audit should be examined in greater depth
to determine whether the deficiency in the system of
the client has been corrected.

Initial commitment vs repeated commitment.

Auditors gain experience and knowledge regarding
the probability of detecting errors after examining a
client for several years.

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 Most auditors establish a high inherent risk.
in the first year of an audit and they reduce it
subsequently as they gain experience.

The type of operations that are carried out

The operations that are unusual for the customer have more
probability of being incorrectly registered by the
customer that routine operations because the customer lacks
experience in doing it. Examples include losses
for fires, important acquisitions of properties and
lease agreements.

The nature of their products and the volume of their

operations.
The inherent risk that an oil company has
exploration and exploitation, that of a company with operations
reduced and few products and a totally
transparently are definitely different.

The economic and financial situation of the entity.

The audit risk of a major production company
with high levels of profits and a strong economic position–
the financial one will not be the same as that of a company with serious

financial problems and low economic profitability that

compromises the validity of the going concern principle.

The management organization and its human resources

materials, management integrity, and quality of
resources that the entity possesses.

The willingness of management levels to establish

adequate and formal control systems, their technical level and the

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 demonstrated capacity in key personnel, are elements
what should be evaluated when measuring inherent risk.

Determination of risk areas.

The conclusions about knowledge of the entity derived
in the determination of inherent risk.

Effect of inherent risk.

The inherent risk directly affects the amount of
audit evidence needed to achieve satisfaction
of sufficient audit to validate a statement. How much
the higher the level of inherent risk, the greater the amount will be
of necessary audit evidence.

1.5.2. CONTROL RISK

It is the risk that the control systems are unable to detect or
prevent significant errors or irregularities in a timely manner.

Management generally implements internal controls to protect against

errors or irregularities, however, no internal control system is
perfect. Therefore, due to incomplete and/or ineffective internal controls, there are
a risk that internal controls do not prevent or detect a material error
in business activities in the tax field.2

Esto se denomina riesgo de control.

Los factores que determinan el riesgo de control están directamente relacionados

with:
The information systems implemented by the institution,

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Audit [Link]
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 The effectiveness of the design of the implemented controls, and;

The ability to carry them out.

Therefore, it is important to carry out the following tasks by

auditor
Understand the current information, accounting, and control system in the
entity.
Identify your strengths and weaknesses.
Select, among the strong control points, those that grant
validate the statements contained in the financial statements.
Evaluate if it is efficient, in terms of cost-benefit ratio, to trust.
in the control test more than in the execution of another procedure
alternative audit.
To create, based on the controls in which trust is deposited,
tests that allow concluding that the functioning of the control is
adequate. This would provide the necessary audit evidence and satisfaction.
Evaluate the effect that the existence of weak control points has or the
absence of control.
The degree of confidence that the auditor places in the internal control.

[Link]. CONTROL RISK. CONTROL LIMIT.

Internal control must provide reasonable assurance that objectives are achieved.
the budgeted control objectives, without exceeding the following
limits.

Appropriate cost-benefit relationship of control. That is, the control

It should not be more expensive than what is being controlled.
The controls are oriented towards operational transactions of
repetitive character and not towards exceptional operations or
unique, which must be controlled by means of more
deep and created for the purpose.

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 Address the unintentional errors that cause frauds, thefts,
etc.

Yes, if the entity has a strong and well-structured internal control, greater
it must be the rigor that the Auditor must have at the moment of
carry out your audit.

Audit procedures must be better designed.

If the entity does not have a strong and well-structured internal control,
the rigor that the Auditor must have may be less
time to conduct your audit.

1.5.3. RISK OF DETECTION

It is the risk that tax audit procedures do not uncover
significant errors or irregularities that affect the financial statements.

The inherent and control risk is beyond the auditor's control, but not the
detection risk, which can indeed be managed.

The risk of detection is minimized as satisfaction is obtained from

audit through the application of analytical procedures, detailed tests
of transactions and balances and other audit procedures.

Among the factors that determine the risk of detection, we have:

Incorrect determination of the sample.
Do not examine the available evidence.
Errors in determining the audit procedures.
Incorrect definition of the levels of materiality.
Inadequate supervision.
Execution of insufficient procedures.
Inadequate interpretation of findings.

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 The ineffectiveness of an applied audit procedure.
The poor application of an audit procedure, whether it is effective or not.
Scope and opportunity definition issues in a procedure of
audit, whether it has been well or poorly applied.

1.6. IDENTIFICATIONS OF OPERATIONS THAT MAY GENERATE HIGHER RISK

Unlike financial auditing, in which all items are analyzed
they make up the financial statements (general and income), in the tax audit there
they review those accounts that have a direct or indirect impact on the generation of
taxes. Putting greater emphasis on those operations that have a higher risk
whether by the nature of the account or the business itself.

1.7. AUDIT RISK ASSESSMENT

It is the process by which, from the analysis of risk factors, the level of
risk in each case.

The audit of the financial statements involves, among other things, considering that in the
There may be significant errors or irregularities that were not detected.
by the control systems of the audited entity. The analysis, evaluation and consideration of
the significant risks, is one of the essential characteristics of this approach and
constitutes a challenge for the capacity and judgment of the auditor.

Audit plans must consider the risk of an audit, emphasizing the areas
of higher potential risk in order to distribute efforts in the most efficient way. The
risk assessment is also carried out 'top down'.
risks arising from the nature of the business or activity of the audited entity, of
context that surrounds it, of the goods or services produced and sold and/or provided, of
the situation of their clients, etc. The sources of information are determined, the
transactions and other areas of audit interest that have greater or lesser potential
to contain significant errors or irregularities. For each component,
they will identify and assess the specific associated risks, stopping when a
more detailed analysis would not result in a more effective audit (this is when what

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 finally, it was obtained as audit evidence that would not affect the opinion on the
financial statements.

Within the audit program, specific risks must be identified and justified.
why to emphasize or not in a specific area of the audit observation.

Similarly, the inherent risks will be differentiated from the control risks, depending on the
firstly fundamentally of the context that surrounds and in which unfolds the
audited company or entity, while the control issues will arise from weaknesses in the
own systems of the organization. All this analysis will ultimately be done to reduce
the third type of risk: detection risk, which means that the audit procedures do not
be sufficiently effective to detect significant errors or irregularities that
previously would not have been 'filtered' by the company's control systems.

The level of audit risk is usually measured in four possible degrees:

. Minimum
. Under
. Medium
. High

It can usually be said that risk assessment is a completely

subjective based on the professional criteria, experience, and capability of the auditor.

The evaluation task is present at two moments in the audit planning:

Strategic planning: In this stage, the overall audit risk is assessed.

related to the set of financial statements and furthermore, the risk is assessed
inherent and control of each particular component

Detailed planning: In this stage, the inherent and control risk is evaluated.
specific to each particular statement; within each component.

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 Level of Significance Risk factors Probability of
risk occurrence of
errors
Minimum Not significant They do not exist Remote
Under Significant There are some but few Unlikely
important.
Moderate Very significant There are some Possible
High Very significant There are several y son Probable
important

For example, fixed assets tend to be a clearly significant component for the
financial statements as a whole but, normally, does not present many factors of
the risk and the probability of the existence of errors is unlikely or remote.

On the other hand, the balances of salary advances can be very few.
significant but very poorly controlled, being the possibility of existence of
totally probable errors.

C.1: High inherent risk, minimal control risk: tests should be applied
compliance (due to the risk of control) that provides sufficient satisfaction of
audit (due to inherent risk).

C.2: High inherent and control risk: it is necessary to apply substantive tests.
(due to the risk of control) with an extensive scope (due to the inherent risk).

C.3: Minimal inherent and control risk: as both risks are minimal, it is
saying the probability of occurrence of errors is remote, it is not appropriate to assign
too many audit efforts on this case. Surely the
application of some analytical procedure.

C.4. Minimum inherent risk and high control risk: it is not necessary to apply
extensive tests (due to the inherent risk) but, since there are control issues,

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 it will be appropriate to practice some substantive procedure aimed at reducing the risk of
area that presents the problem.

1.8. RISK AUDIT RELATIONSHIP AND AUDIT APPROACH:

The assessment of audit risk is directly related to the nature,
opportunity and scope of the audit procedures to be applied. In other words,
The evaluation of risk levels depends on the quantity and quality of satisfaction.
of necessary audit.3

1.9. RISK OF DETECTION ASSESSMENT

The risk of detection is the possibility that the audit procedures do not
detect errors or existing irregularities in the financial statements. It is a risk
specific to the auditor and depends exclusively on him.

En la medida que se pretenda emitir una opinión correcta, deberán evaluarse los
necessary elements of judgment and audit procedures must detect all
existing errors or irregularities (or at least the significant ones)

There is no other possibility than to minimize the risk of detection to the lowest.
Evaluations of another kind could lead to situations of limitations in scope or,
simply, wrong opinions.

1.10. EFFECT OF RISK ON THE TAX AUDIT APPROACH

The nature, scope, and timing of the audit procedures to be applied are
directly related to the audit risk determined in the first stage,
since if there are greater risks, the auditor will have to:

Develop audit procedures aimed at detecting and evaluating errors,

irregularities or frauds.
Set a greater scope in your work, and;
Set the right time to apply the audit procedures.

All of this is aimed at minimizing the risk of issuing a distorted opinion. It is

It is essential for the auditor to establish a preliminary criterion on relative importance.

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Risks in the Audit Process
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 of significance, since the criterion of relative importance is the maximum amount that the
auditor believes that the financial economic situation in relation to the tax part is
see in the financial statements and they may be distorted, without this affecting the
decisions made by users of those financial statements.

After assessing the inherent, control, and detection risks, and knowing the
audit risk, various combinations of procedures must be evaluated and established
What are the procedures that meet the objectives of the audit.

Among the audit objectives we have:

Integrity: It refers to whether all transactions have been included in the

financial statements.

• Existencia:Si todas las operaciones registradas por el sistema realmente existen.

That is, if the assets and liabilities exist on a given date and if the transactions
occurred over a specific period of time.

• Property: It refers to whether the assets are owned by the entity and if the
Debts are real obligations.

• Accuracy: If all the details are duly and timely recorded.

each operation.

Valuation: If all operations are valued correctly.

• Exposure: It refers to whether the items included in the financial statements are
adequately classified, described and displayed, in accordance with the principles
and general acceptance practices.

When we talk about minimizing audit risk, it is important to mention that there is
that it should be noted that some of the procedures may relate to more than
a goal and in some cases it will be necessary to use a combination of
procedures for achieving a single audit objective.

It is also important to consider the characteristics of audit evidence.

which must be the following:
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 • Reliability and relevance: Audit evidence must be valid and relevant,
validity is influenced by:

[Link] information obtained from independent sources outside the entity

provides greater security than that obtained within the same entity, for
for example, the balance confirmations.
b. The knowledge obtained directly by the auditor through tests of
physical check, observation, calculations and inspection, is more convenient than
the information obtained indirectly.

Sufficiency: The amount and type of evidence that the auditor carries out during the
audit process must support their opinion.

• Relevance: It refers to the existing relationship between the obtained evidence and its use.
it can be given.

Economy: The choice of audit evidence will depend on a cost-analysis.

benefit.

• Availability and opportunity: When considering the available evidence we must

consider whether the necessary information to reach a conclusion can be obtained
within the scheduled time.

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 CONCLUSIONS

The tax audit is a systematic process that uses a set of techniques and
procedures aimed at verifying compliance with formal obligations and
substantial rights of the taxpayers, as well as determining the tax rights
in their favor. It is carried out taking into account the tax regulations in force during the period to

to oversee and the PCGA to establish a reconciliation between legal aspects and
taxable and thus determine the taxable base and the taxes that affect the taxpayer
audited. This audit is important because it allows us to recognize in a more
the exact tax situation of the company and of the possible potential contingencies.

Audit risk is the possibility of issuing an incorrect audit report due to not
having detected errors or significant irregularities that would change the meaning of the
opinion expressed in the report.

Three types of risk have been identified which are: Inherent risk, It is the
susceptibility of financial statements to the existence of errors or irregularities
significant, before considering the effectiveness of control systems. The risk
inherent is completely out of control by the auditor. Control risk, it is the
risk that the control systems are unable to detect or prevent errors or
significant irregularities in a timely manner. This type of risk is also outside of the
control of auditors. Detection risk, It is the risk that the procedures
selected audits do not detect existing errors or irregularities in the
Financial statements. The detection risk is controllable by the auditor's work.

The assessment of the level of risk is a completely subjective process and depends
exclusively based on the auditor's judgment, ability, and experience. Therefore, it must be a
careful process carried out by those with the greatest capability and experience in
a work team.

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 RECOMMENDATIONS

Audit tests must be conducted in order to detect errors.

irregularities and other illegal aspects that have a significant impact on the
tax situation of the client and what could lead to the payment of fines determinations
negative and even pressure from the taxpayer.

It is essential for the auditor to establish a preliminary criterion regarding significance.

relative to significance, since the criterion of relative importance is the maximum amount
that the auditor believes that the financial economic situation in relation to the part
taxation is reflected in the financial statements and may be distorted, without this
affect the decisions made by the users of those financial statements.

It is recommended to analyze those accounts that have a direct or indirect impact on the
generation of taxes. The auditor must focus on those operations that have a
greater risk is either due to the nature of the account or the business itself.

To minimize the risk of audit, it is important to recommend that one must have in
it accounts that some of the procedures can relate to more than one objective and
in some cases it will be necessary to use a combination of procedures for the
achievement of a single audit objective. It is also important to keep in mind the
characteristics of audit evidence,

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 BIBLIOGRAPHIC REFERENCES

[Link]
THESIS AUDITOR_CPA [Link]

[Link]
TIVAS AND ECONOMIC/ADMINISTRATION CAREER
N%20DE%20EMPRESAS/07/AUDITORIA/HOBER%20ESTRELLA-Auditoria%[Link]

[Link]
audit process

[Link]
tax-audit-to-be-applied-in-service-companies/

[Link]
audit-risk-assessment-a-strategic-objective-of-organizations

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