CAF-2 Tax Practices Test-6 Solution

Test 6 – Suggested Solution

Answer-1
1 No Cess paid to Government on the profits of business is called as income tax so not allowed.
2 No Donation is not allowed as deduction but a tax credit is allowed.
3 Yes Entertainment is not exceeding the limits so it is allowed as deduction.
4 No Salary expense exceeding Rs. 25,000 per month paid in cash is not allowed.
5 Yes It is not a tax paid to Government on the profits of business so it is allowed as deduction.
6 No Fine paid to Government is not allowed as deduction.
7 No Any expenditure of personal nature is not allowed as deduction.
8 No Commission paid by an association of persons to a member of the association is not allowed.
9 Yes Utilities can be paid in cash so allowed.
10 No Any expenditure paid of a capital nature is not allowed. However depreciation is allowed.
1 mark for each
Answer-2
a)
1) Tax return preparation
Providing tax return preparation services (to audit client) does not usually create a threat so these can be provided.

2) Tax Calculations for the Purpose of Preparing Accounting Entries

Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for accounting entries that
will be later on audited by the firm creates a self-review threat.
Factors for evaluating level of threats created by providing tax service to an audit client include:
 The characteristics of the engagement.
 The tax expertise of client’s employees.
 The system by which tax authorities assess and administer the tax and the role of the firm (or network
firm) in that process.
 The complexity of tax regime (and degree of judgment necessary in applying it).
 calculation might have a material effect on the financial statements on which the firm will express an
opinion.
Safeguards to address self-review threat when the audit client is not a public interest entity include:
 Using professionals who are not audit team members to perform the tax service.
 Having an appropriate reviewer who was not involved in:
o the service review
o the audit work or service performed

Answer-3

1. Canon of convenience;
2. Canon of flexibility;
3. Canon of productivity;
4. Canon of equity;