Investigation Matters

Critical Review

When a business has been selected for investigation, the inspector will make a critical review of the accounts and tax returns. From this he will identify the extent of the apparent irregularities and the amount of the potential omitted income. This will enable him to plan the investigation and prepare his interview brief. The Practitioner should mirror the inspector's critical review to prepare for the questions the inspector will wish to raise at interview and, if those questions cannot be satisfactorily answered at the outset, to prepare his own Interview brief and investigation plan.

To critically review the business results, the Practitioner should prepare a spread sheet showing the figures from the accounts for the last six years (if the business has existed for that long) listed side by side. A year on year comparison of the expenditure under each head should be made to identify large fluctuations or other apparent anomalies. In particular, he should:

• plot the turnover in the accounts against the turnover trends for the hairdressing trade sector (see Sector overview: Turnover trends and Statistics: Table 5)
• compare the ratio of purchases to takings from one year to another to identify fluctuations, and with the purchases:takings ratio norm for the hairdressing trade sector, to highlight abnormally good or bad results (see Performance indicators: Main performance indicator)
• calculate the other key ratios shown by the accounts and compare these with the key ratios for the hairdressing trade sector (see Performance indicators: Other key ratios)

The business records should also be reviewed critically by:

• preparing a cash flow test to ensure that there is never 'minus cash'
• checking for evidence of obvious irregularities, such as private items included in Purchases, details on stylists' commission slips not reflected in the record of takings, etc

To critically review the private side, project forward the figure of Drawings from the first year under review by applying the RPI to it (see Means Test). Identify years where Drawings have not kept up with inflation or where they have fluctuated significantly. Drawings should also be compared with the wages of the highest paid employee to see if the Proprietor takes less.

Check the private use adjustments and, taking these into account, prepare a Means Test to test the adequacy of the net available means.

If cash was introduced into the business, the immediate source and where it was held previously should be established.