Discussions
Week 4
Discussion # 1
Post the financial and auditing aspects of your research topic.
Comment# 1
My selected research topic is directly associated with audit and includes financial and auditing aspects. Auditors' responsibilities include the examination of financial statements to support auditor’s opinion and determine the financial position of a client. Entities produce financial statements that can be used by a wide range of investors for support in making economic decisions.
To enhance the degree of confidence in the financial statements, a qualified external party (an auditor) is engaged to examine the financial statements, including related disclosures produced by management, to give their professional opinion on whether they fairly reflect, in all material respects, the company’s financial performance over a given period(s) (an income statement) and financial position as of a particular date(s) (a balance sheet) in accordance with relevant GAAP. In many cases, this is required by law (PWC, 2013, p. 3).
My selected research topic will cover concerns raised in the “2400 Audit procedure for specific aspects of the audit” of general auditing standards in the part of “2405: Illegal acts by clients”.
According to paragraph 4 of AS 2405 (2002),
Illegal acts vary considerably in their relation to the financial statements. Generally, the further removed an illegal act is from the events and transactions ordinarily reflected in financial statements, the less likely the auditor is to become aware of the act or to recognize its possible illegality (para. 4).
In the conduction of audit, the auditors should consider laws and regulations that can be applied to financial statements of a particular entity in the determination of direct or indirect material effect on financial statements. Auditors have the same responsibilities for detecting and reporting misstatements from illegal acts as for misstatements caused by error or fraud. Another financial aspect that will take place in my research will be the auditor's liability and a financial implication in case of failure to detect and/ or report misstatement caused by illegal acts when illegal acts occurred
Comment # 2
My research topic deals with the changes brought by the Tax Cuts and Jobs Act of 2017, one of the largest tax reforms in the past years. Tax reforms bring many changes not only to the accounting for tax purposes but also to financial reporting and auditing. Many new provisions and changes made to the tax law require modifications in the estimates and methods required to account for the tax consequences of transactions. Auditing plays an important role in making sure that the effects of the tax reform are being properly accounted for by public companies and that the financial statements presented reflect an accurate image of the companies’ financial position.
One of the changes brought by the TCJA that significantly affected financial statements of companies was the reduction of the corporate tax rate. The change in the tax rate resulted in the need to remeasure deferred tax assets and liabilities. Generally accepted accounting principles require deferred tax liabilities and assets to be adjusted for the effect of a change in tax rates or other tax law (FASB, 2018). In a survey conducted to 75 company of the Fortune 500, it was found that the mean impact of that remeasurement was a reduction of the net deferred tax account of $322.5 million (Honaker & Thomas, 2019). However, the impact on each company varied significantly with some experiencing a large reduction on the deferred tax account and others presenting a large increase.
The changes brought by the act, however, are expected to continue to impact the financial reporting of companies in the next years, especially those affected by foreign provisions of the act such as the GILTI, BEAT, and FDII that took effect in 2018 and will continue to have an effect in the continuing years (Honaker & Thomas, 2019). The complexity of the accounting of these changes resulted in challenges for companies that did not have the time and necessary information to complete the accounting by the reporting period. The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 allowing an extension of the time to complete the accounting for tax reform. The bulleting allowed the use of provisional amounts to reasonably estimate the effects of the tax reform or the use of old tax law when a reasonable estimate could not be made (Levin & Cherveny, 2018).
Discussion # 2
Post the tax accounting aspects of your research topic with a reference list with a minimum of 3 items
Comment# 1
The Tax Cuts and Jobs Act of 2017 had a great impact on the tax accounting of both businesses and individuals. The changes brought to the tax accounting for individuals include a reduction of tax rates, repeal of exemptions, modification of the child tax credit, increase in the standard deduction, change in the structure of several itemized deductions, introduction of a deduction for pass-through income, among many others (Gale et al. 2018). The changes brought to the tax accounting for businesses include a reduction in tax rates, repeal of the alternative minimum tax, 100 percent bonus depreciation for qualified property, limited deduction of losses, tax on Global Intangible Low-Taxed Income, base erosion, and anti-abuse tax, among others (Gale et al. 2018).
The tax accounting of individuals with pass-through business entities was significantly affected by the changes, although these changes are expected to be reversed once these provisions expire. This deduction provided smaller businesses such as sole proprietorships, partnerships, and S corporation with tax incentives to shift the form in which income is received (Page et al., 2020). The lower tax rates of pass-through income that result from the deduction serve as an incentive to reclassify wage and salary income as pass-through income (Page et al., 2020). Additionally, this provision can create an incentive for businesses to organize as pass-through entities instead of corporations (Page et al., 2020). Tax planning and accounting need to be carried out by these businesses and individuals to determine the most favorable treatment of income for tax purposes.
Change in corporate tax provisions need to be taken into account for tax planning and accounting purposes. Among the most significant changes in tax expenditures of businesses are a reduction of tax expenditures arising from a reduction in the tax rate on foreign-sourced income and reduction in expensing under section 179 due to the bonus depreciation for qualified property (Sammartino & Toder, 2020). The changes in tax provisions also resulted in large increases in tax expenditures resulting from the bonus depreciation for qualified property due to the full expensing of equipment and the increase in tax expense from qualified business income due to the deduction for qualified business income (Sammartino & Toder, 2020). Many of these provisions are permanent, however, businesses must plan and account for the changes expected to occur once some provisions start to phase out or expire.
Comment # 2
The tax accounting aspects of my research associated with the auditor’s consideration of tax laws that are recognized by auditors to have a direct and material effect on the determination of financial statement amounts. “For example, tax laws affect accruals and the amount recognized as an expense in the accounting period; applicable laws and regulations may affect the amount of revenue accrued under government contracts” (PCAOB, 2002, para. 5). Also, auditors are responsible to detect tax misstatements caused by illegal acts the same way as misstatements from fraud or errors.
If the auditor detected that the client engaged in illegal acts, the auditor is required to discuss the illegal or suspected acts with the appropriate level of client management. If the illegal act is significant and the client refuses to take appropriate steps in the matter, the auditor must consider withdrawal from the engagement or client relationship. Due to the obligation for confidentiality, the auditor cannot disclose this information or should consult with legal counsel.
Tax services are somewhat complicated since the preparation and filing of tax returns certainly involve the disclosure of confidential information to tax authorities. In some tax advisory engagements, for example, providing advice on aggressive tax positions, the CPA tax practitioner may also have direct reporting obligations to tax authorities (Tapajna, 2018, para. 10).
Taxpayers may be subject to criminal prosecution for felonies including tax fraud. “A client who has committed tax fraud may be able to avoid criminal liability by making a voluntary disclosure before the IRS has discovered the fraud” (Schlesser, 2011, para. 13). Since tax offense leads to criminal prosecution, such disclosure should be approached with caution and after obtaining the advice of legal counsel.