Kpmg Case Essay

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Rigorous or Not?: A Case of Auditor Judgment for Deferred Tax Issues Case Study

Rigorous or Not?: A Case of Auditor Judgment for Deferred Tax Issues
Jan Taylor Morris, PhD, CPA
Riggers Inc (“Riggers, “client, or “Company”) is audited by Stone LLC CPA firm (“Stone” or “auditor”). The Compa” ” ny builds and owns offshore drilling rigs. Riggers is a US-based corporation that recently expanded its operations into Brazil (the only foreign-based operations for Riggers). As a result of this expansion, the client has encountered two complex issues related to accounting for income taxes. During the 2012 year-end audit, the auditors must use professional judgment with regard to these two income tax accounting issues. The first issue relates to
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The client provided a copy of the 2011 signed, filed Brazil corporate income tax return as support for the NOL. For the valuation allowance, Riggers’ Tax Director provided a calculation, including long-term leasing contract information with projected profit margins for each rig operating in the Brazil. This document included forecast information provided by Riggers’ Planning Group. See Appendix 1 for the workpaper provided by the client. During the year-end audit, the engagement team audited and signed off on the clerical accuracy of the workpaper and met with Riggers’ Tax Director to discuss the decision-making process and the judgment applied. Industry averages and prior year margins used by Riggers would indicate the use of a 10% projected margin, however, the client is using 15%. The client is basing the 15% on the newness of its rigs, cost savings programs implemented including plans to leave the rigs in Brazil permanently rather than relocating periodically, and the time they will save in drilling processes, all allowing for lower well costs. The Tax Director indicates that Riggers is being conservative with this estimate due to all of the cost savings effected by these plans and processes. Uncertain Tax Position The client has an uncertain tax position in the United States related to its transfer pricing. Riggers is currently under audit by

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