Preparing for a Tax Audit: Which Records Does a Financial and Fiscal Check Up Prioritise

Preparation Prior to a Tax Audit

A tax audit is a review of a company's records for specific periods within the framework of tax legislation. When an audit notice arrives, the accounting team, the external accountant and senior management may need to gather a large number of documents within a short time. In companies whose records are kept in good order throughout the year, this process usually proceeds as a planned piece of work and is completed without disrupting management's regular agenda.

Preparation is not limited to the moment an audit begins. Keeping records consistently during the period, completing reconciliations on time and storing documents in an accessible structure are the main elements of audit readiness. Some of these elements are part of day-to-day accounting; others call for an independent review carried out at regular intervals.

A financial and fiscal check up gives the company a structured way to carry out this review. The consistency between the financial statements, the statutory ledgers and the tax returns is assessed from an external perspective and in a defined sequence. The purpose is not to rehearse an audit. The purpose is to identify gaps in record-keeping at an early stage, to prioritise the items that need correction and to establish an order in which the company can manage an audit with confidence.

Preparation also benefits the company beyond the audit itself. When records are in good order, management can rely on its financial statements, plan cash with current data and be confident in the consistency of the information it provides to lenders. For this reason, preparing for a tax audit can also be seen as an opportunity to strengthen the company's overall financial discipline.

This article looks at the scope of a financial and fiscal check up in tax audit preparation, the records that receive priority during the work and how the findings can be turned into a lasting routine.

The Scope of a Financial and Fiscal Check Up in Tax Audit Preparation

A financial and fiscal check up carried out in preparation for a tax audit can be designed as a three-stage piece of work. In the first stage, the consistency between the company's financial statements and its statutory ledgers is checked. In the second stage, the tax returns are reviewed together with the accounting records. In the third stage, the existence and accessibility of the documents supporting those records are assessed.

The first stage focuses on the accuracy of period-end balances. Cash, bank, receivable, payable and inventory balances are considered reliable to the extent that they are supported by bank statements, account reconciliations and stock count reports. Balances accumulated in the cash account and in shareholder current accounts are often among the items that receive separate attention in tax audits. When movements in these accounts during the period can be clearly explained, the company gains room to manoeuvre during the audit.

In the second stage, VAT returns, withholding and social security returns and the corporate tax return are reviewed alongside the accounting records. The main topics at this stage are whether the declared tax bases match the ledgers, whether input VAT is supported by documents and whether payroll records are consistent with the withholding returns. With the spread of e-invoice, e-archive and e-ledger systems, the tax administration can now review its own data together with company records quickly. This development increases the importance of keeping records consistent throughout the period.

The third stage concerns document management. Alongside the accuracy of the records, the ability to present the supporting document quickly when requested is also important. Contracts, expense documents, import and export files, fixed asset purchase documents and correspondence on related party transactions are reviewed in this context. Storing documents digitally, classified by period and account, simplifies the audit process.

When the scope of the financial and fiscal check up is defined, the periods likely to draw attention in an audit are also taken into account. Years still within the statute of limitations, periods with high-value transactions and periods for which a refund was claimed can be treated as priorities. Years in which events such as a merger, a transfer, a change in the shareholder structure or a significant investment took place may also be included. This approach allows the work to produce meaningful results within a limited time.

In companies that claim VAT refunds, it is useful to review the refund files separately. When the invoices, customs declarations and payment documents underlying the refund amount are brought together file by file, questions about the refund process can be answered quickly. The documentation of refunds received in previous periods can also be included in the scope. Well-organised refund files also help future refund claims to be concluded within the planned timeline.

The timing of the work is also important. A review carried out before the corporate tax return is prepared makes it possible to address any corrections before filing. A shorter review in the middle of the year helps monitor record-keeping during the period. Timing that fits the company's operating calendar allows the work to proceed without clashing with the accounting team's regular workload.

The output of a financial and fiscal check up is an assessment report that management can read easily. The report sets out the periods reviewed, the accounts examined, the findings identified and a recommended step for each finding. When findings are ranked by significance, management can clearly see which matters are a priority and which can be handled in the normal course of business. The report also serves as a starting point for subsequent reviews.

It is also useful to carry out the work together with the company's external accountant. A financial and fiscal check up does not replace the company's existing accounting services. It provides, alongside those services, an independent assessment that supports management's decisions. When the accountant's knowledge of the period is combined with the findings of the independent review, corrective steps can usually be planned quickly and in a coordinated way.

Records Prioritised During a Financial and Fiscal Check Up

Every company's record structure varies according to its sector, size and transaction volume. Even so, certain records are usually treated as priorities in a financial and fiscal check up carried out in preparation for a tax audit. What these records have in common is that they may draw attention during an audit both because of their amounts and because they require explanation.

→ Shareholder current accounts: Payables and receivables between the company and its shareholders can build up into significant balances at period end. The review assesses whether interest has been calculated on these balances and whether the transactions are supported by documents.

→ Cash account: The consistency of cash movements with daily records and supporting documents is checked. A cash balance supported by a physical count gives the company clarity during an audit.

→  Inventory records: Year-end count results, the costing method and wastage records are reviewed together. The consistency of stock movements with purchase and sales invoices is the focus of this item.

→  Related party transactions: The arm's length nature of prices applied in transactions with group companies, shareholders and executives, and the existence of supporting documents, are assessed. Timely preparation of transfer pricing reports also falls within this scope.

→  Expense records: The link between expenses and the company's operations, the formal validity of documents and the correct separation of non-deductible expenses are checked.

→  Foreign exchange differences and foreign currency transactions: The period-end valuation of foreign currency receivables, payables and bank accounts, together with the related exchange difference entries, is reviewed. Using exchange rates for valuation that comply with the legislation is the main topic here.

→ Fixed assets and depreciation: The consistency between the fixed asset register and the ledgers, the depreciation rates applied and expenditures that should be capitalised are assessed.

It is not necessary to cover all of these records in a single review. Depending on the company's operating structure, certain items stand out. In a company that imports and exports, foreign currency transactions and exchange differences may be a priority; in a manufacturing company, inventory and cost records; and in a group structure, related party transactions. Foreign currency transactions also have a decision-making dimension alongside the accounting one, which is discussed separately in our article on balancing foreign currency revenue and TL costs from a financial strategy perspective.

Two criteria can be used together when setting priorities: The amount of the item and how well the entry can be explained. An item with a high amount that is fully supported by documents is usually regarded as an orderly record. Items with limited amounts but incomplete support may be added to the list of matters requiring correction. Using both criteria together helps the work deliver substantial value with limited resources.

Findings identified during the work can be classified into three groups. The first group covers matters that can be resolved with a correcting entry. The second group covers matters that require missing documents to be completed. The third group covers matters that require assessment under tax legislation and are best addressed together with the external accountant or a tax adviser. This classification allows management to see clearly which step should be taken for each matter.

For some matters that require correction, the correction and voluntary disclosure options provided by tax legislation may also be considered. Assessing these options in good time preserves the company's ability to make corrections on its own initiative. For this reason, addressing the findings of a financial and fiscal check up without waiting for the next filing period usually works in the company's favour.

Electronic record-keeping can also be reviewed separately at this stage. Obtaining e-ledger approvals on time, matching e-invoice and e-archive records with the accounting records and correctly processing cancelled or disputed invoices support the consistency of electronic data. Carrying out these checks monthly makes it possible to resolve differences that might otherwise surface at period end.

Another benefit of the preparation is the ability to respond quickly to information requests during the audit. Auditors commonly request account ledgers, contracts and correspondence for certain transactions, and explanations of account movements. Gathering these documents in advance during the financial and fiscal check up allows requests to be met quickly and completely. Preparing short explanatory notes on account movements during the period also simplifies the process. In this way, the audit becomes a piece of work in which the company can present its records clearly and in good order.

The financial check up approach can be used not only in tax preparation but also at important decision points for the company. We discussed which questions this approach answers ahead of an investment decision in our article on the financial check up carried out before a new capacity investment. What the two pieces of work have in common is that the decision rests on reliable and up-to-date records.

Turning Financial and Fiscal Check Up Findings into a Lasting Routine

When tax audit preparation is treated as a one-off exercise, it brings order to the records of a specific period. Reflecting the findings in the company's day-to-day operations ensures that records for subsequent periods are kept in the same order. The lasting value of a financial and fiscal check up usually emerges at this stage.

The first element of a lasting routine is a monthly closing calendar. When bank reconciliations, account reconciliations, cash counts and the valuation of foreign currency accounts are completed on a set date each month, the workload that builds up at period end is reduced and records stay current. Putting the closing calendar in writing together with the responsible persons helps the process run independently of individuals. Staff changes in the accounting team then have no effect on the quality of record-keeping.

The second element is document management. Archiving invoices, contracts and correspondence digitally, classified by period and account, allows the company to respond quickly when documents are requested. Linking the accounting software to the document archive can simplify this process. Restructuring accounting systems can significantly reduce the company's workload at this stage and improve the traceability of records.

The third element is periodic review. A short financial and fiscal check up carried out once or twice a year helps monitor whether the record-keeping routine is being maintained. Scheduling this review before the corporate tax return and in the middle of the year allows corrections to be addressed before the filing period. Whether the findings of the previous review have been closed is also on the agenda of each review.

The fourth element is reporting. Presenting the findings and actions taken to management in a short report moves the subject from the accounting team's agenda to management's agenda. When the report shows the responsible person, the target date and the current status for each finding, management can follow the process in a few minutes of reading. Tax compliance thus becomes one of the items monitored within the company's overall risk management framework.

The fifth element is clarifying responsibilities. When it is defined in writing who performs each reconciliation, which unit keeps which documents and on what schedule information flows between the company and its external accountant, the process becomes predictable. This definition helps keep record-keeping to the same standard across all companies, particularly in multi-company groups.

The sixth element is informing the wider team. Documents issued or received by the purchasing, sales and human resources units form the basis of the accounting records. Informing these units about the main rules of document management helps prevent missing or incorrect documents at the source. A short internal guideline and an annual briefing session are often sufficient for this purpose. Extending the record-keeping routine across the whole company also allows future financial and fiscal check up reviews to be completed quickly.

Once this routine is in place, a tax audit can be managed as an ordinary process. A company with orderly records, accessible documents and up-to-date reconciliations can respond to requests on time during an audit and keep management's attention on its core activities. A well-kept record structure also gives the company credibility in discussions with banks and lenders, and in investor and partnership processes.

At NT Finans Partners, we assess your company's record-keeping through a financial and fiscal check up approach in preparation for a tax audit, identify priority items and support the establishment of a lasting closing and reporting routine. To review your records through a planned piece of work, you can contact us.