COMPANY

SUBSTANTIVE TEST PROGRAM FOR DEFERRED TAX ASSETS

AND RELATED VALUATION ALLOWANCES AND DEFERRED TAX
LIABILITY
CUT-OFF DATE
YEAR END

AUDIT OBJECTIVES

To determine whether:

1. All deferred tax assets on the balance sheet represent deferred tax
consequences attributable to deductible temporary differences and
operating loss carry forward.

2. All deferred tax consequences attributable to deductible temporary

differences and operating loss carryforward at the balance sheet date are
included on the balance sheet.

3. Deferred tax assets are included on the balance sheet at the appropriate
amounts.

4. The entity is entitled, at the balance sheet date, to the future benefits
related to the deferred tax assets included on the balance sheet.

5. Deferred tax assets are properly classified, described, and disclosed in

the financial statements, including notes, in conformity with prescribed
accounting principles.

AUDIT PROCEDURES

Ref. PROCEDURES Ref. By/Date

By/Date

General Procedures

_____ 1. Identify the following:

 Types and amounts of existing

temporary differences:

a. Revenues recognized in the

income statement but not
________ ____________ _______
yet recognized in the income
tax return.

b. Revenues not yet recognized

PA 1099-26G
Ref. PROCEDURES Ref. By/Date
By/Date

in the income statement but

already included in taxable
income.

________ ____________ _______

c. Expenses recognized in the
income statement but not
yet recognized in the income
tax return. ________ ____________ _______

d. Expenses not yet recognized

in the income statement but
already recognized in the
_____ income tax return

 the amount of net operating loss ________ ____________ _______

carryforwards and the remaining
_____ length of the carryforward
period.

2. Measure the total deferred tax ________ ____________ _______

liability for taxable temporary
differences using the applicable
tax rate.

3. Measure the total deferred tax

asset for deductible temporary
differences and operating loss
carryforwards using the
applicable tax rates.
_____
4. Reduce the deferred tax assets
_____ by a valuation allowance if,
based on the weight of available
evidence, it is more likely than
not (a likelihood of more than
_____
50%) that some portion or all of
the deferred tax assets will not
be realized. The valuation
allowance should be sufficient to ________ ____________ _______
reduce the deferred tax asset to

PA 1099-26G 2
Ref. PROCEDURES Ref. By/Date
By/Date

_____ the amount that is more likely

than not to be realized. The ________ ____________ _______
following are some examples of
conditions or events considered
as negative evidences when
evaluating the need for valuation
allowance:

a. a history of operating loss or

_____ tax credit carryforwards
expiring unusued;

b. losses expected in early

future years (by a presently ________ ____________ _______
_____ profitable entity);

c.

d. unsettled circumstances
that, if resolved unfavorably,
would adversely affect
future operations and profit ________ ____________ _______
levels on a continuing basis
in future years;
_____
e. a carryback or carryforward
period that is so brief that it
would limit the realization of ________ ____________ _______
tax benefits if (1) a
significant deductible
temporary difference is
_____ expected to reverse in a
single year or (2) the entity
operates in a traditional
cyclical business

f. negative operating trends

(e.g., recurring operating
losses, working capital ________ ____________ _______
deficiencies, negative cash
flows from operating
activities, adverse key
financial ratios);

g. other financial indications of

possible financial difficulties

PA 1099-26G 3
Ref. PROCEDURES Ref. By/Date
By/Date

_____ (e.g., default on loan or

similar agreements, ________ ____________ _______
dividends in arrears, denial
of usual trade credit from
suppliers, restructuring of
debt, non-compliance with
statutory capital
requirements, need to seek
new sources or methods of
_____ financing or to dispose of
substantial assets);
________ ____________ _______
h. internal matters (e.g., work
stoppages or other labor
_____ difficulties, substantial
dependence on the success
of a particular project,
uneconomic long-term
commitments, need to
significantly revise
operations); and

i. external matters that have

occurred (e.g., legal
_____ proceedings, legislation, or
similar matters that might ________ ____________ _______
jeopardize an entity’s ability
to operate, loss o f a key
franchise, license, or patent,
loss of a principal customer
or supplier, uninsured or
underinsured catastrophe
such as a drought,
earthquake, or flood).

The following, on the other hand, ________ ____________ _______

are some examples of conditions
or events considered as positive
evidences when evaluating the
need for valuation allowance:

a. existing contracts or firm

sales backlog that will
produce more than enough
taxable income to realize the

PA 1099-26G 4
Ref. PROCEDURES Ref. By/Date
By/Date

deferred tax asset based on

existing sales prices and ________ ____________ _______
cost structures;

b. an excess of appreciated
asset value over the tax
basis of the entity’s net
assets in an amount ________ ____________ _______
sufficient to realize the
deferred tax asset; and

c. a strong earnings history

exclusive of the loss that
created the future
deductible amount (tax loss
carryforward or deductible
temporary difference)
coupled with evidence ________ ____________ _______
indicating that the loss (e.g.,
an unusual, infrequent, or
extraordinary item) is an
aberration rather than a
continuing condition.
________ ____________ _______
5. Use judgment in making an
assessment whether positive
evidence outweighs negative
evidence in determining the
need for and amount of a
valuation allowance.

PA 1099-26G 5
Ref. PROCEDURES Ref. By/Date
By/Date

Review and Conclusion

_____ 6. Prepare the relevant section of

the GAAP Disclosure Checklist. ________ ____________ _______
(Form PA 1099-37).
_____ ________ ____________ _______
6. Summarize management letter
_____ points. ________ ____________ _______

7. Clear all review notes.

PA 1099-26G 6