To effectively ensure corporate tax compliance, it is essential to conduct an audit. In the UAE, Ministerial Decision 74 of 2023, issued by the Ministry of Finance, contains information on the procedure for conducting corporate tax audits. Audit primarily seeks to validate the information disclosed and to check the compliance of the organization with the tax legislation and norms.

This article explains audit procedures in the UAE.

Audited Financial Statements Are Mandatory for Entities

The UAE Cabinet has issued Ministerial Decision No. 82 of 2023 on the audit standards for tax purposes for corporate income tax in the UAE. Maintaining and preparing audited financial statements is mandatory for the following taxable persons categories:

An entity subject to tax with revenue of more than AED 50,000,000 in a particular tax year.
A Qualifying Free-Zone Person.

The necessity of audits depends on the type of company.

Also read: List of Top Audit Firms in UAE

Financial Audits Mainland Companies

Commercial Companies Federal Decree-Law No. 32/2021 declared it mandatory for all the companies established in the UAE mainland to get their financial audits.

Key points include:

Mandatory Audit: In Mainland firms, there is a legal requirement for external audit that involves checking the firm’s financial statements, activities, and conformity to accounting practices and laws.
Record Keeping: It was noted that to meet the legal requirements, companies must retain their financial records for at least 5 years.

Financial Audits Free Zone Companies

Free zones in the UAE have their own set of rules and regulations that govern the activities in these zones. Audit requirements for free zone companies include:

Not Necessarily Audited: Free zone companies do not have to automatically submit their audit report. Certain free entities require mandatory audits for instance “Free Zone Establishments (FZE): and “Free Zone Companies (FZCO) may require mandatory audits.
Internal Preparation: Nonetheless, even if it is not obligatory, free zone companies are advised to prepare audit reports in case they will be needed sometime in the future.

Mainland vs Free Zone

Mainland Companies (Onshore)

Not within the free zones.
Licenses issued by the competent authority and DED (Department of Economic Development).
Any other concerned department.
A foreigner is allowed to set up a business only with the help of a local partner who has to be a UAE national and the partnership has to be 51%.
To carry out Business activities is mandatory in the United Arab Emirates whether inside the country or outside the country).

Free Zone Companies

Some of the free zone jurisdictions that one can work within.

Some of the benefits include;

You can have 100% foreign ownership.
There are general and industry-specific free zones for business.
No legal requirement to present the audit reports to the authorities but must have proper accounting records.

Statutory Audit

A statutory audit is a process of examination of a company’s financial situation and its results as stated by its financial reports.

Purpose and Scope of Statutory Audit

Objective: Ensure the stakeholders are confident with the financial statements and that they are credible, consistent, and by the law.
Annual Basis: Usually, it is performed once a year, but the frequency of their conducting depends on the local legislation and the nature of the organization.
Entities Covered: Mandatory for certain subjects prescribed by legal acts, commonly, it concerns public interest entities and companies subject to regulation.

External Auditors

Independence: The external auditors carry out statutory audits to offer independent opinions of the financial health of the company.
Appointment: The regulatory authorities or shareholders.

List of Documents Required for Statutory Audit in UAE

To carry out a statutory audit, the auditors require certain documents among which are the following.

Basic Company Details: Details on the organization’s organizational and legal profile, and ownership structure.
Fixed Assets: Lists of depreciation schedules for tangible assets such as buildings, machinery, and equipment.
Bank Statements: Documentation of the financial activities of an organization such as the money that is coming in and the money going out.
Cash Transactions: Cash flow in and out of the business.
Business Contracts: Examples include tenancy and rental agreements, leasing, and other business undertakings.
Statutory Dues: Adherence to tax remittances, social security contributions, and other legal requirements concerning the company’s operations.
Inventory: Accounts for inventory items and their appraisal.
Transaction Details: Detailed records of all the company’s activities.
Credit, Loans, and Advances: Borrowings, loans, and advances account.
Payables and Receivables: Payables and receivables are on the liabilities and assets side of the company’s balance sheet.
Purchases (Local and Imported): Documentation of the items bought and/or received.
Overhead Costs: It included the business operating expenses for instance employees’ wages, electricity, and other administrative expenses.

Audit Timeframe and Extension

The limitation period is 5 years for audit from the conclusion of the tax period or from the tax declaration date. In case there is tax evasion or suspicion of fraud, the time limit can be extended up to more than five years by the Federal Tax Authority bringing the total to ten years. The FTA must provide at least five business days’ notice for the audit date, except when it suspects that the entity will interfere with the process.

Location of Audit and Compliance Functions

It is possible to conduct the audits at the FTA office, the taxable enterprise’s place of business, or any other place where the entity does business. The taxable entity has to provide the FTA with the information, documents, records, or data that have been requested by the FTA within the stipulated time and work in hand with the FTA for proper assessment.

Assessment of Tax Liability and Audit Findings Reporting

Specifically, the FTA issues an audit report to the taxpayer that includes all findings, observations, recommendations, and any amount of tax that the taxpayer owes or is due a refund for or overpaid. According to the audit report, the FTA comes up with the tax amount to be paid by the taxpayer and if the taxpayer disagrees with the amount, they can appeal within 30 days by submitting an objection form with supporting documents to the FTA.

Also Know About – Excise Tax Registration

Objection Process and Appeals

The objection can be taken by the taxpayer in case no agreement with the assessment or audit. The Federal Tax Authority considers the objection and makes its decision within 30 days either accepting the objection, rejecting it, or amending it. The decision is brought to the attention of the taxable person who in turn has the right to challenge the decision of the FTA within 30 days before the relevant court in case he or she disagrees with the decision.

Consequences of Non-compliance and Non-adherence to the Set Guidelines

Failure to observe the corporate tax laws is punishable by the FTA through fines or penalties such as late filing or payment, presenting false information, failure to keep books and records, obstructing the audit process, or tax evasion. The taxable entity can appeal for penalties or fines within 20 days by completing an appeal form and including supporting documents to the FTA. The FTA decides on the appeal within the next 20 days and such a decision is communicated to the taxable person.

Tips to Follow When Under a Tax Audit

The audit of the internal control system involves certain components, and the name of the customer has to be provided. This entails identifying the risks that are associated with these systems and the structure of these systems.

Analytical Scrutiny: According to the assessment of audit risk and internal control, the auditor chooses the type, schedule, and level of the audit.
Evaluation of Audit Results: As mentioned earlier, after conducting the audit, the auditor comes up with findings, and conclusions are then made. The auditor’s report contains a brief of the audit work done and the emphasis of the findings on the financial statements of the company.
Follow-up: About six months after the issue of the audit report, a follow-up audit is done to ascertain if corrective measures have been taken.
Financial instruments appraisal and assessment: Outsiders review the accounting records done by the employees to confirm they are correct. Internal audit companies in Dubai are involved in the examination of financial statements and their integrity.
Establishing Credibility: One such component is credibility which is rather valuable in terms of a company’s growth and development. Thus, a credible company has investors and the government and customers’ confidence, which contributes to its growth.
Recognizing and Correcting Errors: The internal auditors review all the books of accounts in a bid to detect mistakes and or omissions. These errors are corrected to avoid inaccuracies in the financial records.
Reducing Fraud Risk: Such external audits assist in the fight against fraud since they review the accounts of an organization. This minimizes the chance of fraud which might not be discovered for a longer period and harm the company’s reputation as well as its finances.
Gaining an Impartial and Unbiased Opinion: External auditors help the company to present a true and fair view of financial information about the company, and this goes a long way in giving a clear picture of the company’s performance.

The Benefits of A Tax Audit For A Business

Increased Authenticity of Financial Statements
Management’s Attention
Compliance Requirements
Access to Loans and Credit

To effectively ensure tax compliance, conducting an audit is essential. This encompasses scrutinizing financial reports, tax returns, and other accompanying documents to ensure legal compliance with corporate tax laws. The process results in an audit report and a determination or re-determination of the taxpayer’s liability which may be challenged.

Consult With Top Tax Auditor in Dubai, UAE

Farhat and Co is an audit firm that focuses on delivering quality audit services to clients in Dubai. This includes; assessing documents, revising numbers, dispatching questionnaires and checklists, and assessing control and system data. Auditing services provided by audit firms in Dubai are diverse and Farhat and Co is a reputable firm that encompasses broadly Tax and Non-Tax Audit services. Tax audit in the UAE is a rather extensive process that implies several stages and factors to consider.

Thus, tax audits contribute to the preparation of accurate and fair financial statements, corporations’ compliance with legal requirements, strategic planning, and risk reduction. Thus, businesses are advised to seek the expert services of reputable Audit Firms in the UAE, such as Farahat & Co.

Therefore, contact us today and we shall be glad to assist you.