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Julie Butler FCA of Butler & Co provides a summary of common errors in the client files of accountancy practices in England and Wales.  

Introduction

Set out below is a summary of the common errors identified on file reviews by members of the Institute of Chartered Accountants in England and Wales' (ICAEW's) Quality Assurance Department (QAD). This list is based on the data contained in Audit News 44, published by the ICAEW in October 2008.

• Missing tax reconciliation and effective rate of tax charge
• Incorrect treatment of dividends, including accrual of proposed dividends in breach of FRS 21 or deduction of dividends at the foot of the profit and loss account.
• Omission of controlling party note
• Poor or missing disclosure of directors’ loans (especially where an overdrawn loan account was cleared by a bonus or dividend just before the year end.)

Payments to Directors 

The directors’ loans issues link closely to Budget 2009 when a “Higher rate of tax of 50%” was announced for those earning over £150,000 per annum.

There will have to be even greater attention paid to the interaction of how funds are withdrawn from the small owner-managed business with regard to:

• Directors' current accounts
• Salary
• Bonus
• Expenses
• Dividends
• Loans to directors

Key considerations will have to be disclosure and tax planning.

Tax Returns

For the task of the preparation of tax returns, the consideration of owner-managed company accounts has always been a source of reconciliation for the tax returns of directors and their close family, e.g., reconciling the remuneration in the accounts to the figures on the directors' tax returns.

Ideally the majority of the inclusions in the tax returns reconcile to the directors’ tax planning files and calculations associated therewith. However it is also useful to be able to reconcile with the final accounts.

2008 Financial Reporting Standard for Smaller Entities (FRSSE)

The 2008 FRSSE is to reflect the changes to accounting requirements under the Companies Act 2006. This is effective for accounting periods beginning on or after 6th April 2008. FRSSE 2008 was published on 12th June 2008, and detailed derivation tables showing how the Act and the FRSSE have been linked are located at FRSSE

Key changes to note in the latest version of FRSSE 2008 include:

• Revised disclosures for directors’ advances, credits and guarantees.
• Revised definitions for “directors family” to reflect the extension beyond marital or civil partnership arrangements

The giving of a guarantee is potentially a related party transaction and hence where directors have personally guaranteed the company’s overdraft this would fall for disclosure.

Summary

What is the extended definition of a “director’s family”? Close family are those family members, or members of the same household, who may be expected to influence, or be influenced by, that person in their dealings with the reporting entity.

The provision of finance can also be a related party transaction and hence directors' loan accounts would fall for disclosure. Aggregation could be used for similar transactions i.e., receipts and repayments.