A sound internal control environment allows you to meet your operational and strategic objectives with integrity and reasonable assurance on the effectiveness and efficiency of your operations. Therefore, a breakdown in controls impairs your ability to place reliance on the results generated from your daily operations.
The following are internal control failures that directly impact your VAT:
- Manual intervention in processing transactions
The impact of this is two-fold:
- Being able to manually create journals in your environment; or
- Being able to assign tax codes manually to transactions
Most ERP systems allow for flexibility when GL accounts are setup, allowing the individual processing the transaction to choose the tax code they deem applicable to the transaction. Depending on the maturity of the VAT knowledge of the people within your organisation, this may have major implications on your VAT return.
- Processing VAT to the incorrect accounts
Best practice dictates that:
- All VAT transactions be posted to the VAT input or output account, as applicable.
- The VAT control account is used to clear these two accounts and determine the liability or asset position of the organisation.
If individuals within your organisation are posting to the incorrect accounts, for example, taking input VAT to the output VAT account or posting VAT transactions directly to the VAT control account, it will have an impact on your VAT management and ensuring accurate reporting to revenue authorities.
- Lack of knowledge or understanding of VAT rules
Most of the people within your organisation who are responsible for processing transactions on a daily basis don’t always have an appreciation of the VAT rules applicable to the transaction. This may result in errors in processing that goes undetected or only identified when audited.
The responsibility for keeping up to date with VAT legislative changes is the responsibility of a tax or financial manager. This is not always adequately shared throughout the organisation, mainly due to resource constraints in the tax team, which further exacerbates the problem.
- Lack of review by management
The quality of review of the VAT on transactions at approval stage is dependent on the level of understanding of VAT rules by the approving manager. This goes back to the VAT knowledge within the organisation. Depending on the tax manager to review the accuracy of the VAT implications on transactions prior to filing the return is not feasible due to the volume of transactions processed on a monthly basis.
- Spreadsheet dependencies for processing VAT
Most tax managers rely on their trusted Excel spreadsheet template to assist them in reviewing the transactions on a high level and generating the information needed to be inputted on the VAT return. Something as simple as version control is jeopardised by using Excel and in the event of an audit, the last thing you want are numbers not correlating to your submitted return. The integrity and versatility of that spreadsheet is entirely dependent on the user of that spreadsheet.