Leadstar University College Faculty of Business and Leadership

Department of Business Leadership

Specialization: ACCOUNTING

TAX AUDIT PRACTICE AND ITS SIGNIFICANCE IN INCREASING REVENUE IN

ETHIOPIA THE CASE OF ARADA SUB CITY SMALL TAX PAYERS BRANCH OFFICE

By
Yitayeshe Biresaw Demeke
Id no --DE/Grd/BA/ 4505/09/04

Advisor: Teshale Getu (ASt.professor)

August 2019
Addis Ababa Ethiopia

Leadstar University College

 Faculty of Business and Leadership
Department of Business Leadership
Specialization: ACCOUNTING

TAX AUDIT PRACTICE AND ITS SIGNIFICANCE IN INCREASING

REVENUE IN ETHIOPIA THE CASE OF ARADA SUB CITY SMALL TAX
PAYERS BRANCH OFFICE

By
YITAYESHE BIRESAW DEMEKE

Submitted to:-

AThesis Submitted to Department of Business Leadership, Leadstar University

College School of graduate studies in partial Fulfillment of the Requirements for

the Award of a Masters Degree in Business Administration Specialization
Accounting

August 2019

Addis Ababa Ethiopia

DECLARATION
I, Yitayeshe biresaw declare that, this paper prepared for the partial fulfillment of the
requirements for MBA. Degree in Accounting entitled”Tax audit practice in Ethiopia and its
significance in increasing revenue the case of Arada Sub city Small tax Payers Branch office” is
prepared with my own effort. I have made it independently with the Close advice and guidance
of my advisor.

YITAYESHE BIRESAW DEMEKE

Signature –––––––––––––––––––––––

Date –––––––––––––––––––––––

The Thesis Has Been Submitted Examination with my Approval as University College
Supervisor

Name of Advisor ––––––––––––––––

Signature ––––––––––––––––

Date ––––––––––––––––––

Approval
The undersigned certify that they have read and hereby recommend to the Leadstar university
College to accept the thesis submitted by YITAYESHE BIRESAW DEMEKE and entitled ”Tax audit
practice in Ethiopia and its significance in increasing revenue the case of Arada Sub city Small
tax Payers Branch office in partial Fulfillment of the Requirements for the Award of a Masters
Degree in Business Administration Specialization Accounting

Name o advisor ----------------------------- signature --------------------

Date ------------------

Name of Internal Examiner ------------------ signature --------------------

Date ------------------

Name of External Examiner ------------------ signature --------------------

Date ------------------

Name of Head Department ------------------ signature --------------------

Date ------------------

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 Abstract

The prevalence of poverty in developing countries like Ethiopia demands improvising internal
revenue generating projects particularly the tax administration to reduce dependence on foreign
aid and borrowing. The goal of this study is to investigate tax audit practice and it’s significant in
revenue and the causes with regard to small tax payers found in Arada sub city. To achieve this
objective, the researcher used in-depth interview with selected tax officers of Arada sub city
Finance and Economic Development Bureau. The researcher also distributed self administered
semi structured questionnaires to book keeper taxpayers found in Arada sub city.
The information gathered witnessed that there exist inefficiency and insufficient number of tax
assessment and collection officers in the Arada sub city Finance and Economic Development
Bureau. Moreover, most taxpayers lack sufficient knowledge of tax assessment and collection
procedures. Thus, most of taxpayers do not know why they are paying taxes; what types of taxes
are expected from them; and the applicable rules and regulations. Due to this and other factors
mentioned in the analysis of this study, negligence, delay in tax payment and evasion are taken
by taxpayers as solution to escape from payment of taxes.

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 Acknowledgment
First and for most, I would like to praise almighty God for his forgiveness, charity and
Strength he has given to me.
Secondly, I would very happy to express my heartfelt deepest gratefulness to my advisor
Ast. Professor Teshale Getu for his priceless and unreserved support through his continuous
advice.
I am also greatly indebted to those, who are employees of Arada sub city small tax payer branch
office specially tax auditors and most book keeper taxpayers found in Arada sub city for their
invaluable cooperation.
My deepest thanks go to, for all my friends for their beyond price

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Abbreviation:

AA: Addis Ababa

AAA: American Accounting Association
AICPA: American Institute of Certified Public Accountants
BoFED: Bureau of Finance and Economic Development
COBAC: Committee on Basic Auditing Concepts
EFY : Ethiopian Fiscal Year
ERP : Economic Reform Program
FDRE: Federal Democratic Republic of Ethiopia
GAO: Government Accountability Office
GDP: Gross Domestic Product
OECD: Organization of Economic Cooperation and Development
HTT: Hard to tax
IFAC: International Federation of Accountants
INTOSAI: International Organization of Supreme Audit Institutions
ISA: International Standard on Auditing
IT: Information Technology
SME: Small and Medium Enterprises
SAI: Supreme Audit Institutions
TOT: Turn over tax
VAT: Value Added Tax
ERCA; Ethiopian Revenue and Custom Authority

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Table of Contents Page No

Declaration statement .........................................................................................................i

Approval ----------------------------------------------------------------------------------------------------- ii
Abstract ..............................................................................................................................iii
Acknowledgment ............................................................................................................... IV
List of abbreviations ........................................................................................................ V
Table of contents ................................................................................................................ vi
List of tables ...................................................................................................................... vii
Chapter one ........................................................................................................................1
Introduction ........................................................................................................................1

1.1 back ground the study ------------------------------------------------------------------------------1

1.2. Statement of the Problem .............................................................. 3
1.3 Research Questions ------------------------------------------------------ 4
1.4. Objectives of the Study. ...................................................................... 4
1.5. Significance of the Study ....................................................................... 5
1.6. Scope and Limitation of the Study ........................................................ 5
1.7. Research Design and Methods ............................................................ 5
CHAPTER TWO ....................................................................................................6
REVIEW OF RELATED LITERATURE .................................................................6
2.1. Meaning of tax audit ......................................................................................6
2.2. Audit of government revenues.. ....................................................................7
2.3. The roles of the taxpayer audit program.. ......................................................9
2.4. Government Revenues scope and extent ...................................................10
2.5. Key audit characteristics. ...............................................................................11
2.6. Need for tax audit ......... .................................................................................11
2.7. Types of Tax audits .......................................................................................13
2.7.1. Full audits .....................................................................................................13
2.7.2. Limited scope audits ....................................................................................13
2.7.3. Single issue audits .......................................................................................13
2.8. Resources for the tax audit function .................................................................14
2.9. Location of audits ..............................................................................................14
2.10. Approaches & standards of Tax Audit ---------------------------------------------------------------15
2.11. The efficiency and effectiveness Tax audit ..................................................15
2.12 Legal Framework of Revenue Authority -----------------------------------------------------------16
2.13. Tax payers Record Keeping Obligations -----------------------------------------------------------------17
2.14. Giving Tax Officials Access to Taxpayers’ Books and Records ---------------------------------------17
2.15. Giving Tax Officials Access to Third Party Information -------------------------------------------------18
2.16. Audit Case Selection Methods ------------------------------------------------------------------------------18
2.17. Audit Work Force Management ------------------------------------------------------------------------19
2.12. Significance of Tax audit in fighting corruption .............................................21
CHAPTER THREE ...........................................................................................21
3.1. Research Design and Methods ------------------------------------------------------ 21
3.2.. Data Collection Methods. ...................................................................21
3.3.. Questionnaire Design. .............................................................................21
3.4 Sampling Technique -------------------------------------------------------------------------23
3.4.1 Target Population ---------------------------------------------------------------------------23
3.4.2 Sampling Techniques -----------------------------------------------------------------------23
1.6.3. Data Analysis ..............................................................................................23
CHAPTER FOUR -------------------------------------------------24
Analysis and Discussions of the Study --------------------------------------------------------------24
4.1. Historical back ground ------------------------------------------------------------
24
4.2. The Current Tax Administration System in Ethiopia --------------------------------------------25

4.3 Major Components of Government Revenue ------------------------------------------------------29

4.4 Contribution tax audit to other revenue -------------------------------------------------------------30

4.5. Tax administration in Addis Ababa City Administration -------------------------------------------30

4.6 Revenue performance of the branch office ------------------------------------------------------------31

4.7. Declaration of Income and Assessment of Taxes -------------------------------------------------------32

4.8. Record Keeping Requirement ----------------------------------------------------------------------------33

4.9. Prevailing extent of assessment & Audit in the branch office ------------------------------------34
4.10. Coverage and types of tax audit in Ethiopian context ---------------------------------------------------
36

4.11. Corruption vs. Tax Audit in Ethiopia -------------------------------------------------------------------36

4.12. Efficiency and Effectiveness of Tax Audit ----------------------------------------------------------------37

4.13 Measure of efficiency and effectiveness ----------------------------------------------------38

CHAPTER FIVE ---------------------------------------------------------------------40
CONCLUSION AND RECOMMENDATION --------------------------------------------------------------40

5.1 CONCLUSION -----------------------------------------------------------------------------------40

5.2 Recommendations -------------------------------------------------------------------------------------------42

BIBILOGRAPHY -------------------------------------------------------------------------------------------------44

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List of Tables Page No.

Table4.1 The Share of Domestic Indirect Taxes from Total Revenue For selected Countries. --------26
Table 4.2 Government Finance .................................................................. 28
Table 4.3 Five years financial report of tax audit .............................. 30
Table 4.4. Types of Assessment ..................... 56
Table 4.5 Tax Assessment and audit performance of Arada Sub city small tax payer branch office
................................................................................................................. 35
Table 4.6. Employees of Arada Sub city small tax payer branch office
Qualification............................................................................................................................................38

Table 3.7 Table 4.7 Question: How do you measure the effectiveness of tax audit operation? -----------

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