FACTORS AFFECTING TAX AUDIT EFFECTIVENESS A STUDY ON CATEGORY
‘A’ TAXPAYERS IN BAHIR DAR CITY ADMINISTRATION REVENUE OFFICE By Elias Ayalew
A THESIS SUBMITTED TO THE COLLEGE OF BUSSINESS AND ECONOMICS OF
B/DAR UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS
FOR THE DEGREE OF MASTERS OF SCIENCE IN ACCOUNTING AND FINANCE
Advisor: Sewale Abate (Ph.D) BAHIR DAR UNVERSITY
COLLEGE OF BUSINESS & ECONOMICS
DEPARTMENT OF ACCOUNTING & FINANCE June, 2014 Bahir Dar, Ethiopia 0
APPROVED BY BOARD OF EXAMINERS
__________________________________ _____________________
Chairperson (Graduate Committee) Signature
__________________________________ ______________________ Advisor Signature
___________________________________ ____________________ Examiner Signature
___________________________________ ___________________ Examiner Signature 1
Statement of declaration
I, Elias Ayalew Geremew, have carried out independently a research work on “The factors
affecting tax audit effectiveness on category “A” taxpayers at Bahir Dar city administration
revenue office” in partial fulfillment of the requirement of the M.SC program in Accounting and
Finance with the guidance and support of the research advisor.
This study is my own work that has not been submitted for any degree or diploma program in this or any other institution. Elias Ayalew June, 2014 2 Acknowledgements
First and foremost, I want to thank the Almighty God for every blessing that He enrich me with in my whole life.
Next, I am deeply grateful to my advisor, Dr. Sewale Abate for his persistent help in all the steps
of the thesis, from title selection to writing the final report, my debts are innumerable. Besides,
his diligent, fascinating guide, good advice, constructive criticism, support, and flexibility are learnable.
In addition, I am so thankful to all my classmates for all the love that we shared together during
the two and half years stay in B/dar Dar. Life would be difficult without our unity, brotherhood
love and support to each other.
I am also thankful to my Friends Dereje Chanie, and Abirham Zerihun,Tilahun Zewdu with
supporting of the software technic. Thank you all for everything.
I feel honored to acknowledge here the overall support, advice and help I got from Dr. Temesgen
Belayneh and Aragaw Almaz for introducing me how to use the software packages and his
unrestricted technical supports. I owe you one!
Most important, this thesis would not have been possible without the support of the exceptional
people who are tax auditors and taxpayers of B/Dar city revenue office by giving me the response of questionnaire.
Lastly my heartfelt thanks go to my family: Tiru, Emebet, Ketema, Dawit, Yohhanse,
wondwosen, Etalem, Amare, Adane, Addis, Tsehay, Dilnessa without whom, I would not be the
person I am today. I love you all!
Hail Mary, mother of God, pray for us sinners now and at the hour of our death. Bless, protect and intercede for us. AMEN! Elias Ayalew 3 Table of Contents
APPROVED BY BOARD OF EXAMINERS ......................................................................................................... 1
Statement of declaration .............................................................................................................................. 2
Acknowledgements....................................................................................................................................... 3
List of tables and figures ............................................................................................................................... 7
List of abbreviations...................................................................................................................................... 8
Abstract......................................................................................................................................................... 8
CHAPTER ONE ............................................................................................................................................... 9
1. INTRODUCTION......................................................................................................................................... 9
1.1Background of the Study.......................................................................................................................... 9
1.2 Organizational Background...................................................................................................................12
1.3 Statement of the Problem ....................................................................................................................14
1.4 Objectives of the Study .........................................................................................................................16
1.4.1 General objective...........................................................................................................................16
1.4.2. Specific Objectives ........................................................................................................................ 16
1.5 Hypotheses of the study ....................................................................................................................... 16
1.6 Significance of the Study.......................................................................................................................17
1.7 Scope of the Study ................................................................................................................................17
1.8. Organization of the Study ....................................................................................................................18
1.9 Operational Definition .......................................................................................................................... 18
CHAPTER TWO ............................................................................................................................................ 19
2. REVIEW OF RELATED LITERATURE .......................................................................................................... 19
2.1. Meaning of Tax Audit........................................................................................................................... 19
2.2 Conceptual Framework of Tax Audit effectiveness ..............................................................................19
2.3. Determinants of Tax Audit effectiveness.............................................................................................22
2.3.1 Audit quality................................................................................................................................... 23
2.3.2 Management support ....................................................................................................................28
2.3.3 Organizational setting ....................................................................................................................29
2.3.4 Auditee attributes..........................................................................................................................30
2.3.5 Organizational independence........................................................................................................ 30
2.4 Audit Functions ..................................................................................................................................... 32 4
2.5 The Role of Tax Audit program .............................................................................................................36
2.6 Tax Audit Selection Process ..................................................................................................................39
2.6.1 Risk Based Audit Selection .............................................................................................................39
2.6.2 The Use of Information Technology in Tax Audit Case Selection .................................................. 41
2.7. Tax Audit Performance Measurement.................................................................................................42
2.8 Tax Auditor’s Performance Monitoring and Evaluation ....................................................................... 43
2.9. Tax Auditors Capacity Improvements .................................................................................................. 44
2.10. Formal statements of Taxpayers’ Rights and Responsibilities in Auditing ........................................ 44
CHAPTER THREE ..........................................................................................................................................46
3. RESEARCH DESIGN AND METHODOLOGY ...............................................................................................46
3.1 Research Approach ...............................................................................................................................46
3.1.1 Quantitative research approaches.................................................................................................46
3. 2 Research Methods ...............................................................................................................................47
3.3 Sampling Design....................................................................................................................................47
3.3.1 Target Population...........................................................................................................................47
3.3.2 Sampling Frame .............................................................................................................................48
3.3.3. Sampling Unit................................................................................................................................48
3.3.4 Sampling Techniques .....................................................................................................................48
3.3.5 Sample Size .................................................................................................................................... 48
3.4 Source of Data....................................................................................................................................... 49
3.4.1 Primary Data Sources..................................................................................................................... 49
3.5. Data Collection Methods .....................................................................................................................50
3.5.1 Questionnaires...............................................................................................................................50
3.6 Methods of Data Analysis and Interpretations..................................................................................... 51
3.6.1 Measures........................................................................................................................................ 53
3.7. Limitation of the Study.........................................................................................................................54
CHAPTER FOUR ...........................................................................................................................................55
4. DATA PRESENTATION, ANALYSIS AND INTERPRETATION ....................................................................... 55
4.1 Descriptive statistics result for tax Auditor Staff’s Respondents..........................................................56
4.1.1 Personal information .....................................................................................................................56
4.1.3 Questionnaire result for likert scale ..............................................................................................62
4.2 Descriptive result for taxpayers’ respondents ...................................................................................... 65 5
4.3 Reliability Tests of the Instrument........................................................................................................68
4.4 Normality Test....................................................................................................................................... 69
4.5 Correlation ............................................................................................................................................71
4.6 Multicolinearity.....................................................................................................................................72
4.7 Autocorrelations ................................................................................................................................... 72
4.8 Multiple Regression Results..................................................................................................................73
4.9 Hypothesis Test..................................................................................................................................... 75
CHAPTER FIVE ............................................................................................................................................. 77
5. SUMMARY, CONCLUSION AND RECOMMENDATION ............................................................................. 77
5.1 Summary ............................................................................................................................................... 77
5.2 Conclusions ...........................................................................................................................................77
5.3 Recommendations ................................................................................................................................78
5.4 Future Research Implications ...............................................................................................................79
Appendix 1 .................................................................................................................................................. 84
Appendix 2 .................................................................................................................................................. 94 6
List of tables and figures
Table 1: Profile of Bahir Dar city revenue office tax auditor -----------------------------------------54
Table 2: An investigation of organizational tax audit function----------------------------------------57
Table 3: Descriptive statistics -----------------------------------------------------------------------------61
Table 4: Profile of Bahir Dar city taxpayers -------------------------------------------------------------63
Table 5: Assessment on tax payers rights and responsibilities----------------------------------------64
Table 6: Reliability analysis of target variables ---------------------------------------------------------67
Table 7: Tests of normality---------------------------------------------------------------------------------68
Table 8: Pearson’s correlation------------------------------------------------------------------------------69
Table 9: Model summary of linear regression-----------------------------------------------------------71
Table 10: ANOVA linear regression for significant of the model------------------------------------71
Table 11: Coefficients of linear regression---------------------------------------------------------------71
Figure 4.1: Histogram of normally test-------------------------------------------------------------------68 7 List of abbreviations
TAE: Tax audit effectiveness AA: Auditee attributes AQ: Audit quality
OI: Organizational independence
OS: Organizational setting
TMS: Top management support TA: Tax auditing IA: Internal auditing
SPSS: Statistical package for social science
VIF: Variance inflation factor VAT: Value added tax TOT: Turn over tax
IRV: Internal revenue service
IIA: Institute of internal audit
SAS: Self assessment system Abstract 8
The purpose of this study is to investigate factors affecting tax audit effectiveness on category
“A” taxpayers’ and tax auditors. The study aims to examine the statistical significance between
factors and tax audit effectiveness. In light of this objective the study adopted quantitative
method of research approaches to test a series research hypothesis. Specifically, the study used
survey of questionnaire analysis of revenues offices’ tax auditors and taxpayers’ response.
Simple random sampling design was employed based on nature of target population. Then tax
auditors and taxpayers were selected based on simple random sampling method of census and
lottery method respectively. Consequently, the study selected a sample of three hundred thirty
three (333) individuals with the total of 1518 observations. Data was then analyzed on
quantitative basis using Pearson’s correlation, linear regression analysis and descriptive
statistics. The results showed that there is no statistical significance negative relationship
between auditee attributes and tax audit effectiveness. Besides, the results showed that there is
no statistical significance positive relationship among organizational setting, top management
support and tax audit effectiveness. The researcher found that there is strongly significant
positive relationship among audit quality, organizational independence and tax audit effectiveness. CHAPTER ONE 1. INTRODUCTION
1.1Background of the Study 9
Taxation is one of the important elements in managing national income, in both developed and
developing countries. Tax is defined as ‘a compulsory levy, imposed by government or other tax
raising body, on income, expenditure, or capital assets, for which the taxpayer receives nothing
specific in return’(Lymer and Oats, 2009). However, not all payments to government are
considered tax payments: for example, charges, and other levies are paid to obtain a specific
service and are not strictly tax payments.
One of the main reasons why the government imposes taxes is to generate income to manage the
economy and redistribute resources. In 2007, tax collection as percentage of Gross Domestic
Products in developed countries like the United States of America and the United Kingdom were
28.33% and 36.6% respectively (average Organization for Economic Co-operation and
Development countries in 2006 were 35.9%). For developing countries, like Indonesia and
Malaysia in 2008, the tax collections as percentage of GDP were 13.35% and 15.3%
respectively. According to Allingham and Sandmo (1972), the importance of tax systems as a
major revenue source in a country is undeniable, these statistics have evidenced that tax revenues
are one of the main income source for many governments throughout the world but to maximize
tax collection and minimize tax evasion taxpayers are difficult to achieve in practice.
Recently many poor countries have become preoccupied with improving tax systems. For
instance, Ethiopia amended the tax laws with new provisions and procedures to assist the
taxpayers in complying with self assessment process so as to reduce tax evasion there by
increasing the revenue generated through tax, such as government replaced the sales tax with
Value Added Tax (VAT) and Turnover Tax (TOT). Furthermore, the Federal Democratic
Government of Ethiopia is trying to improve its tax administration capacity which encompasses
tax audit as one of its component (Misrak, 2008 cited in Hailemariam, 2011).
Tax administrations carry out audits so as to verify that the taxpayer has complied with
provisions of the tax legislation (OECD, 2006). A tax audit is an investigation made by the tax
authority in order to verify the accuracy of tax returns and attempt to detect non-compliance
behavior and activities (Kirchler, 2007).However, the role of an audit in a modern tax
administration goes beyond verifying a taxpayer’s reported obligations and detection of
discrepancies between a taxpayer’s declarations and supporting documentation. 10
According to the East AFRITAC (undated), the audit program of a revenue body performs a
number of important roles that, when effectively carried out, can make a significant contribution
to improved administration of the tax system. The efficiency and effectiveness of a revenue
body’s audit activities depends critically on the nature and scope of powers in the underlying
legal framework in place, including the provision of adequate powers for obtaining information
and an appropriate regime of sanctions to deter and penalize non-compliance.
In other words tax audit is one of the most effective policies to protect the behavior of tax
evasion. The level of tax audit can be determined by two elements: one is how many taxpayers
are selected for audit and the second is how much intensive the audit is. The first element is
easily measured by the number of audited taxpayers divided by the total number of taxpayers.
However, the second element is so difficult to measure due to no published information about the
process of tax audit. It is commonly measured by the first element to indicate the level of tax
audit for practical comparison (Nicoleta BĂRBUŢĂMIŞU, 2011). Tax audit is the part of
compliance audit as well as compliance audit is conducted to determine whether the auditee is
following specific procedures, rules, or regulations set by some higher authority for private
business. The internal revenue service (IRV), under the direction of the Commissioner of
Internal Revenue, is responsible for enforcing the federal tax laws as they have been defined by
Congress and interpreted by the courts. A major role and responsibility of the internal revenue
agent (tax auditors) is to audit taxpayers’ returns to determine whether they have complied with
the tax laws. These audits are solely compliance audits. Moreover, the previous studies have
reviewed the similarities between compliance audit and internal audit with its role and
responsibilities (Mark P. Ruppert, CPA, CIA, CISA, CHFP, 2006, Thomson Reuters, undated and
www.emeraldinsight.com/journals.htm?articleid=1653847&show=pdf). So based on that concept
I have taken some portion of literature review of internal audit.
Some points of similar role and responsibilities between compliance audit and internal audit is: 11
Report functionally to the organization’s board, typically through an audit or compliance
committee . This reporting relationship provides each function with the necessary authority to
effectively address their responsibilities.
Have access to the entire organization per board direction, typically identified in the board
approved program or charter. Compliance and internal audit professionals must have open access
to the records and personnel of the organization to ensure unbiased results.
 Improved reporting throughout the organization.
 Improved business performance – risks explain performance gaps.
The tax audit program also plays an important part in clarifying the law and educating taxpayers
on appropriate compliance measures, such as filing and payment requirements, record keeping
practices, relevant interpretation of the law, and legislative changes. This can be done directly by
the auditors either interacting directly with taxpayers, or by influencing the taxpayer services
program in the development of strategies to address areas of non-compliance detected during audits (OECD, 2006).
Revenue bodies should aim to achieve a balanced program of audits—one that balances
‘coverage’, ‘audit quality’, and ‘overall deterrent’ considerations. Audit policies and procedures
should be based on principles of accuracy, efficiency, fairness, objectivity, transparency,
completeness, consistency, and defensibility.
The efficiency and effectiveness of audit activities can be greatly facilitated by a broad range of
support tools. Without competent staff tax audit activities will not achieve their objectives.
Competency models and competency improvement activities help develop and manage the audit
workforce. Performance management is an important tool for shaping audit behavior and
contributes to the attainment of audit program objectives. Monitor change in taxpayer
compliance with record keeping, filing and payment obligations, as well as movements in
reported tax subsequent to audit activities, as measures of the effectiveness of audit programs.
1.2 Organizational Background 12
As a general principle, it is believed that there should be a framework in which each tier of
government can levy or generate its own finance without conflict between them. The constitution
of Federal Democratic Republic of Ethiopia (EFDRE) 1994, Pursuant to decentralized
government structure, the power to levy and collect taxes from income is assigned to both the
Federal government and Regional States. The Ethiopian Revenue and Customs Authority
(ERCA) is responsible to levy and collect taxes at the Federal level While Amhara Regional
State has a power to levy and collect taxes on individual traders carrying out a business within its territory.
Bahir Dar City Administration Revenue Office (BCARO) is one of the public sectors under the
city administration providing tax administration services. On January 2011, onwards the
Revenue Office has reorganized itself in five core process and three supporting processes as
result of Business Process Reengineering (BPR) study. The five core processes namely: Audit &
Enforcement, Revenue Assessment & Collection, Tax Education and Communication,
Information Technology and Human Resource Management and the three supporting process are
financing & Procurement, Planning &Budgeting and Internal Audit.
The Bahir Dar City Revenue Office is authorized by the law to collect tax and to make an
assessment the accuracy of declared tax liability by the taxpayers in respect to the stated tax laws
and regulations. If the taxpayer has submitted a declaration of income within the time and the
manner as prescribed in the proclamation, the revenue office has power to amend the assessment.
Depending on the degree of the participants of the revenue office and a taxpayer in the
determination of tax liability, an assessment can be an official or self assessment. An assessment
is basically an initial review by the tax official of the tax declarations and information provided
by the taxpayer and verification of arithmetic and technical accuracy of the declared tax liability
shortly after the submission of the declaration.
An audit is selected verification of taxpayers declared tax liabilities which always involves a
review of taxpayers business related transactions records system ,like books of accounts and its
supporting documents, information obtained from third party concerning purchases, sales, 13
expenses which are backed with objective evidence, general compliance pattern of the taxpayer the income tax law and etc.
The main vehicle used by tax audit section that gives effect to their audit plan is through the
application of the collective experience and knowledge of the process owner. An auditor will
assess the declarations of the taxpayers for all taxes and will select taxpayers for audit to test
compliance with the law. When the analysis of taxpayer’s compliance pattern justifies for the
audit and investigation of taxpayers’ file, the revenue office either applies spot or comprehensive
audit to test the reliability of the tax affairs dealt with. The choice and preference of the one to
another is dependent on the magnitude of tax risk associated with the case and the number and
qualification of the existing audit staff. Finally, the assessment made will be prepared in
assessment notification and be delivered to the taxpayer. A taxpayer, who objects to an
assessment, may appeal to the tax appeal committee up on fulfilling certain requirements.
1.3 Statement of the Problem
Tax audit is a critical and significant component of the compliance activities of tax
administration by means of proper use of enforcing tax laws, it is the conduct by audit staff of
appropriate verification of selected tax payers whether he/she has been correctly declaring the
tax liabilities including a review of taxpayer’s systems, books of account and other related
information. It may include cross checks of taxpayer’s records with those of taxpayer’s suppliers
or with other government departments and agencies source of information and its effectiveness
and efficiency must be guaranteed by means of proper procedures and application of modern
audit tools and techniques (OECD, 2006).
A tax audit is one of the most sensitive contacts between the taxpayer and a revenue body, the
presence of an auditor in a taxpayer’s private dwelling or business premises, coupled with the
exploration of private and business issues and the gathering of information from taxpayers’
books and records, or just the disruption of day-to-day workflow, represents a burden on the taxpayer (OECD, 2006). 14
Tax audit help revenue authority achieving its objectives, and ensuring the fiscal health by means
of indirectly drive voluntary compliance and directly generate additional tax collections, both of
which help tax authorities to reduce the tax gap between the tax due and tax collected. Although
the Council of the Amhara National Regional State issued proclamations, regulations and
directives in a different period to improve tax administration in general and the tax audit in
particular the B/dar City Administration Revenue Office tax audit performance is very low by the following factors:
From the Year 2009/10_2011/12 audit Performance of the revenue office shown that the number
of files submitted by the taxpayers are 219,267 and 330 and those by audited are 94, 108 and 75
respectively, additionally their performance percentage is 43%, 40% and 22% respectively. Thus
we can understand that the organization audit coverage performance is 34%. On the contrary,
66% of the files remained unaudited. Previous studies found that the major factors affecting
internal audit effectiveness are organizational setting, audit quality, top management support,
auditee attributes and organizational independence (Mihret and Yismaw, 2007 and Aaron Cohen
& Gabriel Sayag, 2010). However, empirical studies are lacking to identify factors affecting tax
audit effectiveness in our country Ethiopia. This study, therefore, considers the above mentioned
variables as independent and it verifies if they are influencing on tax audit effectiveness in Bahir
Dar city administration revenue office tax audit effectiveness.
A well designed tax audit needs a risk based audit program and application of standardized
technology to determine the type of audit, procedures and duration of audit so as to achieve its
objective. However, according to regional revenue authority’s tax audit strategies review result
indicate well designed risk based tax audit is not in place.
To the best of the knowledge lack of study has been carried out so far to verify the factors
affecting tax audit effectiveness in terms sufficient and qualified tax auditors, sufficient resource
allocation, well designed audit selection systems, audit strategies and audit manuals, audit scope,
sufficient monitoring and performance evaluation system, motivation schemes, information
technology, integrity of audit staff, and taxpayers attitude and knowledge about tax audits. For
this reason, the researcher strongly believes that, this research would answer the question of what 15
are the factors affecting tax audit effectiveness. Hence, on the basis of the problem area this
study tried to address the following research questions.
1. What are the factors affecting the organization’s tax audit effectiveness?
2. How effectively does tax audit selection process to identify taxpayers in a high tax risk
areas with the help of information technology?
3. How far the revenue office tax audit systems and auditors are monitored and evaluated?
4. How far the organization’s tax audit performance towards tax audit effectiveness?
5. What are the compliance issues associated with taxpayers’ responsibilities during tax auditing?
1.4 Objectives of the Study 1.4.1 General objective
The main objective of this study is to examine factors affecting tax audit effectiveness of the Bahir Dar city revenue office.
1.4.2. Specific Objectives
Based on the general objective stated above, the study addressee the following specific objectives:
1. To investigate factors affecting tax audit effectiveness.
2. To examine the revenue office’s tax audit selection process by the help of information technology.
3. To evaluate the organization’s tax audit systems and auditors monitoring and evaluating.
4. To evaluate organizational tax audit performance towards tax audit effectiveness.
5. To investigate the taxpayers’ responsibilities during the tax auditing.
1.5 Hypotheses of the study
Several statements of supposition can be made in view of the factors affecting tax audit
effectiveness at Bahir Dar City Administration Revenue Office’s Business Income taxpayers, 16
particularly those in category A and tax auditors. In light of the above research objective the
following discussion covers the hypotheses (HP) this study attempted to test.
H 1: Greater audit quality is positively related to tax audit effectiveness.
H 2: the organizational setting is positively related to the tax audit effectiveness.
H 3: Greater support from top management is positively related to tax audit effectiveness.
H 4: More auditee attributes for tax auditors in the organization is positively related to auditing effectiveness.
H5: Greater organizational independence is positively related to auditing effectiveness.
1.6 Significance of the Study
The results of this study are expected to be significant in various respects. First, on the basis of
the study findings, the report has some conclusions and forwards some recommendations that
will enable City Administration Revenue Office to identify the factors that affect tax audit
effectiveness and to take corrective remedies to keep the existing factors through tax audit
improvement. This study may help the tax policy makers at the Regional and National level to
make use of out puts of the study in addressing the factors affecting tax audit effectiveness by the
revenue office. In addition, it helps the revenue office tax auditors to know their role in the tax
system. Moreover, it may serve as a source of reference and give some highlights for others who
would like to know more about the issue and interested in undertaking further and detail studies
in tax audit effectiveness as a research title. 1.7 Scope of the Study
Even though wide ranges of variables were expected to be studied, this study contemplates on
examination of tax audit effectiveness, auditee attributes, audit quality, organizational
independence, organizational setting and top management support. The scope of this study would
be limited to the examination of factors affecting tax audit effectiveness on business income 17
category “A” taxpayers’ and tax auditors in Bahir Dar City Administration Revenue Office,
beyond the above mentioned were not included in this study.
1.8. Organization of the Study
The thesis is organized as follows. Chapter one is deals with introduction, which includes:
Background of the study, background of the organization, statement of the problem, objective of
the study, hypotheses of the study, significance of the study, and scope of the study; chapter two
deals with the review of the related literature; chapter three contains the research methodology;
which describes about the research approach, research methods, sampling design and sources of
data, limitation of the study. Chapter four discuss about data presentation, analysis and
interpretation, different tables and figures are used in this part to describe and analyze the
quantitative data. Finally the fifth chapter presents the major conclusion drawn from analysis and
findings of the study and possible recommendation for the identified problems also included.
1.9 Operational Definition Tax audit effectiveness
The tax auditors have performed the audit work effectively without any impact in the taxpayers. Auditee attributes
The co-operation or support of taxpayers at the time of auditing for tax auditor. Audit quality
The audit work has been performing based on general accepted auditing standard.
Organizational independence
The audit office has ethics of international profession in addition to which is free from any corruption. Organizational setting
The structure of organization, and its profile. Top management support
The audit findings are accepted or responsible by top management 18 CHAPTER TWO
2. REVIEW OF RELATED LITERATURE
The following part of this study reviews the relevant literature that is selectively reviewed
meaning of tax audit, theoretical framework, determinants of tax audit effectiveness, the role of
tax audit program, audit selection process, tax audit performance measurement, tax auditor’s
performance monitoring and evaluation, formal statements of taxpayers’ rights and
responsibilities in auditing and other those relevant issues to the review literature focus the
factors that affect tax audit effectiveness in Bahir Dar City Administration Revenue Office.
2.1. Meaning of Tax Audit
A tax audit is an examination of whether a taxpayer has correctly assessed and reported their tax
liability and fulfilled other obligations (OECD, 2006). On the other hand a tax audit is defined as
an activity or a set of activities performed by tax auditors to determine a taxpayer’s correct tax
liabilities for a particular accounting or tax period, by examine of a taxpayer’s organization
products and financial records in order to assess compliance to tax laws and verifying the true,
fair, reliable, and accuracy of tax returns and financial statements (ERCA, 2010).
Internal auditors play a key role in monitoring a company’s risk profile and identifying areas to
improve risk management (Dessalegn Getie Mihret, 2013). The aim of internal auditing is to
improve organizational efficiency and effectiveness through constructive criticism. Control
mechanisms are those processes set up to monitor and to direct, promote or restrain the various
activities of an enterprise for the purpose of seeing that enterprise objectives are met.
2.2 Conceptual Framework of Tax Audit effectiveness
Tax audits are key characteristics of the voluntary compliance mechanism in the SAS regime
because higher audit rates are thought to increase tax compliance (Allingham and Sandmo,
1972). Tax audits have a specific deterrent effect on those audited taxpayers, and more 19