RIFT VALLEY UNIVESITY

SCHOOL OF POSTGRADUATE STUDIES

DEPARTMENT OF BUSINESS ADMINISTRATION (MBA)
FACTORS AFFECTING TAX AUDIT EFFECTIVENESS PARTICULARLY
CATEGORY “A” TAXPAYERS (CASE STUDY ON AKAKI-KALITY SUB-CITY
SMALL TAX PAYERS BRANCH OFFICE)

A Thesis Submitted to Rift Valley University, School of Graduate Studies Department of

Business Administration in Partial Fulfillment of the Requirements for the Award of the
Degree of Master of Business Administration

By: Neche Tamiru Edosa

RVKAMMBR/0016/19
Adviser Dr. Belay (pleaes ur father name)

July, 2021
Addis Ababa,Ethiopia
 Approval page

Rift Valley University

School of Post Graduate Studies
Department of Business Administration
Factors Affecting Tax Audit Effectiveness Particularly category “A”
taxpayers
(Case Study on Akaki-kality Sub-City Small tax Payers Branch office)

“A thesis submitted in partial fulfillment of the requirements for the Master of Business
Administration (MBA) degree.” By: Neche Tamiru
Advisor: Dr. Belay (Ph.D.)

APPROVED BY BOARD OF EXAMINERS

____________________________________ ___________________

Chairperson (Graduate Committee) Signature

____________________________ _______________
Chairperson (Graduate Committee) Signature

______________________________ _________________

Examiner Signature

________________________________ _________________

Examiner Signature

June, 2021
Addis Ababa, Ethiopia

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 Acknowledgements
First, I would like to thank almighty GOD, the Compassionate, the Most Merciful and Source of
Knowledge & Wisdom, who granted upon me the health, the power of communication and the
audacity to accomplish this thesis. I would like to sincerely thank my advisor Doctor Belay
(Ph.D.) for his constructive comments, valuable suggestions and good guidance. I equally thank
him for his kindness and necessary encouragement. Special thanks go to my best, dearest brother
Adisu Abera; this thesis would have not been a dream without your tireless assistance in sharing
ideas, economical support and morally construct throughout the paper you’re the one I have been
given from God . I also would like to thank more to my smart staff colleagues for your kindest
help for any assistance and support during the time of learning especially for their supporting and
covering of my duty during class hour.

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Table of Contents
Approval page.................................................................................................................................i

Acknowledgements........................................................................................................................ii

List of tables.................................................................................................................................. v

List of figure.................................................................................................................................. v

List of Abbreviations.................................................................................................................... vi

Abstract........................................................................................................................................ vii

CHAPTER ONE............................................................................................................................1

INTRODUCTION......................................................................................................................... 1

1.1 Background of the Study......................................................................................................... 1

1.2 Organizational Background..................................................................................................... 9

1.3 Statement of the Problem.......................................................................................................10

1.4 Objectives of the Study...................................................................................................... 12

1.4.1 General objective............................................................................................................ 12

1.4.2. Specific Objectives.........................................................................................................12

1.5. Significance of the Study......................................................................................................12

1.6. Scope of the Study................................................................................................................ 13

1.7. Operational Definition.......................................................................................................... 13

1.8 Organization of the Study......................................................................................................13

CHAPTER TWO......................................................................................................................... 14

REVIEW OF RELATED LITERATURE...................................................................................14

2.1. Meaning of Tax Audit...........................................................................................................14

2.2 Conceptual Framework of Tax Audit effectiveness...............................................................14

2.3. Determinants of Tax Audit effectiveness..............................................................................17

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 2.3.1 Audit quality................................................................................................................... 18

2.3.2 Management support.......................................................................................................26

2.3.3 Organizational setting..................................................................................................... 27

2.3.4 Auditee attributes............................................................................................................ 28

2.3.5 Organizational independence.......................................................................................... 28

2.4 Audit Functions..................................................................................................................... 29

2.5 The Role of Tax Audit program.............................................................................................34

2.6 Tax Audit Selection Process..................................................................................................35

2.6.1 Risk Based Audit Selection.............................................................................................36

2.6.2 The Use of Information Technology in Tax Audit Case Selection..................................37

2.7. Tax Audit Performance Measurement..................................................................................38

2.8 Tax Auditor’s Performance Monitoring and Evaluation........................................................39

2.9. Tax Auditors Capacity Improvements..................................................................................40

2.10. Formal statements of Taxpayers’ Rights and Responsibilities in Auditing.........................40

2.11. Tax Audit Effectiveness in Ethiopia...................................................................................40

CHAPTER THREE..................................................................................................................... 42

RESEARCH METHODOLOGY.................................................................................................42

3.1 Research Approach................................................................................................................42

3.2 Research Design.................................................................................................................. 43

3.3 Theoretical and Conceptual Frame Work..............................................................................44

3.4 Sampling Design....................................................................................................................45

3.4.1 Population and sampling strategies.................................................................................45

3.4.2 Sampling Techniques......................................................................................................46

3.4.3 Sampling Frame.............................................................................................................. 47

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 3.4.4. Sampling Unit................................................................................................................ 47

3.4.5 Sample Size.....................................................................................................................47

3.5 Source of Data....................................................................................................................... 48

3.5.1 Primary Data Sources......................................................................................................48

3.6. Data Collection Methods...................................................................................................... 48

3.6.1 Questionnaires.................................................................................................................49

3.7 Methods of Data Analysis and Interpretations.......................................................................49

3.7.1 Measures......................................................................................................................... 50

3.8 Reliability and validity...........................................................................................................50

3.9 Ethical Clearance of the Study...............................................................................................51

CHAPTER FOUR....................................................................................................................... 52

DATA PRESENTATION, ANALYSIS AND INTERPRETATION..........................................52

4.1 Descriptive statistics result for tax Auditor Staff’s Respondents...........................................53

4.1.1 Personal information....................................................................................................... 53

4.1.2. An investigation of organizational Tax Audit Function.................................................57

4.1.3 Descriptive statistics on tax auditors’ response...............................................................62

4.2 Descriptive result for taxpayers’ respondents........................................................................65

4.3 Reliability Tests of the Instrument.........................................................................................68

4.4 Normality Test....................................................................................................................... 69

4.5 Correlation............................................................................................................................. 71

4.6 Multi-colinearity.................................................................................................................... 72

4.7 Autocorrelations.................................................................................................................... 72

4.8 Multiple Regression Results.................................................................................................. 73

CHAPTER FIVE......................................................................................................................... 76

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SUMMARY, CONCLUSIONS AND RECOMMENDATIONS................................................76

5.1 Summary of Major Findings..................................................................................................76

5.2 Conclusions........................................................................................................................... 77

5.3 Recommendations..................................................................................................................78

5.4 Future Research Implications.................................................................................................79

References................................................................................................................................... 80

Appendix..................................................................................................................................... 84

List of tables

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Table 4.1 Profile of Akaki Kality Sub-City Small Taxpayers Branch Office Tax Auditor Staff’s
Respondents.................................................................................................................................53
Table 4.2 An investigation of organizational Tax Audit Function...............................................57
Table 4.3 descriptive statistics.....................................................................................................62
Table 4.4 Profile of Taxpayers Respondents...............................................................................65
Table 4. 5 Assessment on tax payers’ rights and responsibilities.................................................66
Table 4 6 reliability analysis of target variable............................................................................69
Table 4 7 Tests of Normality....................................................................................................... 70
Table 4 8 person’s correlations....................................................................................................71
Table 4.9 model summary of linear regression............................................................................73
Table 4 .10 ANOV A linear regression for significant of the model............................................73
Table 4.11 Coefficients of linear regression................................................................................74

List of figure
Figure 4 1 Histogram of normal test............................................................................................70

List of Abbreviations
TAE Tax audit effectiveness

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AA Auditee attributes
AQ Audit quality
IA Internal auditing
IIA Institute of internal audit
IRV Internal revenue service
OECD organization for economic co-operation and development
OI Organizational independence
OS Organizational setting
SPSS Statistical package for social science
TA Tax auditing
TOT Turn over tax
TMS Top management support
VAT Value added tax
VIF Variance inflation factor

Abstract
The purpose of this study is to investigate factors affecting tax audit effectiveness on category
“A” taxpayers’ and tax auditors. The study aims to examine the statistical significance between

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factors and tax audit effectiveness. Having this objective the study adopted quantitative method
of research approach. Specifically, the study used survey of questionnaire analysis of revenues
offices’ tax auditors and taxpayers’ response. Simple random sampling design was employed
based on nature of target population. Then tax auditors and taxpayers were selected based on
simple random sampling method of census and lottery method respectively. Consequently, the
study selected a sample of three hundred thirty three (333) individuals. The data was then
analyzed on quantitative basis using Pearson’s correlation, linear regression analysis and
descriptive statistics. The results showed that there is no statistical significance negative
relationship between auditee attributes and tax audit effectiveness. Besides, the results showed
that there is no statistical significance positive relationship among organizational setting, top
management support and tax audit effectiveness. The researcher found that there is strongly
significant positive relationship among audit quality, organizational independence and tax audit
effectiveness. The study has highlighted a number of researchable aspects that could be pursued
further by those are interested in this research title/area.
Keywords: Tax Audit Effectiveness, Audit Quality, Audit Attribute, Organizational Setting,
Organizational Independence, Top Management Support

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 CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Taxation is one of the important elements in managing national income, in both developed and
developing countries. Tax is defined as ‘a compulsory levy, imposed by government or other tax
raising body, on income, expenditure, or capital assets, for which the taxpayer receives nothing
specific in return’(Lymer and Oats, 2009). However, not all payments to government considered
is tax payments: for example, charges, and other levies are paid to obtain a specific service and
are not strictly tax payments (http://www.is.gov).
One of the main reasons why the government imposes taxes is to generate income to manage the
economy and redistribute resources. In 2007, tax collection as percentage of Gross Domestic
Products in developed countries like the United States of America and the United Kingdom were
28.33% and 36.6% respectively (average Organization for Economic Co-operation and
Development countries in 2006 were 35.9%). For developing countries, like Indonesia and
Malaysia in 2008, the tax collections as percentage of GDP were 13.35% and 15.3%
respectively.
Recently many poor countries have become preoccupied with improving tax systems. For
instance, Ethiopia amended the tax laws with new provisions and procedures to assist the
taxpayers in complying with self-assessment process to reduce tax evasion there by increasing
the revenue generated through tax, such as government replaced the sales tax with Value Added
Tax (VAT) and Turnover Tax (TOT) proclamation No. 587/2008. Furthermore, the Federal
Democratic Government of Ethiopia is trying to improve its tax administration capacity, which
encompasses tax audit as one of its component (Misrak, 2008 cited in Haile Mariam, 2011).
Tax administrations carry out audits to verify that the taxpayer has complied with provisions of
the tax legislation (OECD, 2006). A tax audit is an investigation made by the tax authority in
order to verify the accuracy of tax returns and attempt to detect non-compliance behavior and
activities (Kirchler, 2007). However, the role of an audit in a modern tax administration goes
beyond verifying a taxpayer’s reported obligations and detection of discrepancies between a
taxpayer’s declarations and supporting documentations as well. Tax audit in the context of

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ERCA is defined as an activity or a set of activities performed by tax auditors to determine the
taxpayer’s correct tax liabilities for a particular accounting or tax period. Tax auditors examine
taxpayers‟ organizational procedures and financial records in order to assess compliance with tax
laws and verify the true, fair, reliable, and accuracy of tax returns and financial statements
(ERCA 2010).
According to the East AFRITAC (undated), the audit program of a revenue body performs a
number of important roles that, when effectively carried out, can make a significant contribution
to improved administration of the tax system. The efficiency and effectiveness of a revenue
body’s audit activities depends critically on the nature and scope of powers in the underlying
legal framework in place, including the provision of adequate powers for obtaining information
and an appropriate regime of sanctions to deter and penalize non-compliance (Kirchler, 2007).
In other words, tax audit is one of the most effective policies to protect the behavior of tax
evasion. The level of tax audit is determined by two elements: one is how many taxpayers are
selected for audit and the second is how much intensive the audit is. The first element is easily
measured by the number of audited taxpayers divided by the total number of taxpayers.
However, the second element is so difficult to measure due to no published information about the
process of tax audit. It is commonly measured by the first element to indicate the level of tax
audit for practical comparison (Nicoleta BĂRBUŢĂMIŞU, 2011). Tax audit is the part of
compliance audit as well as compliance audit is conducted to determine whether the auditee is
following specific procedures, rules, or regulations set by some higher authority for private
business. According to the internal revenue service (IRV), under the direction of the
Commissioner of Internal Revenue, is responsible for enforcing the federal tax laws as they have
been defined by Congress and it’s interpreted by the courts. A major role and responsibility of
the internal revenue agent (tax auditors) is to audit taxpayers’ returns to determine whether they
have complied with the tax laws. These audits are solely compliance audits. Moreover, the
previous studies have reviewed the similarities between compliance audit and internal audit with
its role and responsibilities (Mark P. Ruppert, CPA, CIA, CISA, CHFP, 2006, Thomson Reuters,
undated and www.emeraldinsight.com/journals.htm?articleid=1653847&show=pdf). So based on
that concept I have taken some portion of literature review of internal audit. Some points of
similar role and responsibilities between compliance audit and internal audit is:

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  Report functionally to the organization’s board, typically through an audit or compliance
committee. This reporting relationship provides each function with the necessary
authority effectively address their responsibilities.
 Have access to the entire organization per board direction, typically identified in the
board approved program or charter. Compliance and internal audit professionals must
have open access to the records and personnel of the organization to ensure unbiased
results.
 Improved reporting throughout the organization.
 Improved business performance – risks explain performance gaps.
The tax audit program also plays an important part in clarifying the law and educating taxpayers
on appropriate compliance measures, such as filing and payment requirements, record keeping
practices, relevant interpretation of the law, and legislative changes. This can be done directly by
the auditors either interacting directly with taxpayers, or by influencing the taxpayer services
program in the development of strategies to address areas of non-compliance detected during
audits (OECD, 2006). Revenue bodies should aim to achieve a balanced program of audits—one
that balances ‘coverage’, ‘audit quality’, and ‘overall deterrent’ considerations. Audit policies
and procedures should be based on principles of accuracy, efficiency, fairness, objectivity,
transparency, completeness, consistency, and defensibility.
The efficiency and effectiveness of audit activities are greatly facilitated by a broad range of
support tools. Without competent staff, tax audit activities will not achieve their objectives.
Competency models and competency improvement activities help develop and manage the audit
workforce. Performance management is an important tool for shaping audit behavior and
contributes to the attainment of audit program objectives. Monitor change in taxpayer
compliance with record keeping, filing and payment obligations, as well as movements in
reported tax subsequent to audit activities, as measures of the effectiveness of audit programs.
Tax audit in America
The United States of America has separate federal, state, and local
governments with taxes imposed at each of these levels. Taxes are levied on income, payroll,
property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In
2010, taxes collected by federal, state, and municipal governments amounted to 24.8% of GDP.
In the OECD, only Chile and Mexico are taxed less as a share of their GDP. Taxes fall much

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more heavily on labor income than on capital income. Divergent taxes and subsidies for different
forms of income and spending can also constitute a form of indirect taxation of some activities
over others. For example, individual spending on higher education can be said to be "taxed" at a
high rate, compared to other forms of personal expenditure which are formally recognized as
investments.
Payroll:are imposed by the federal and all state governments. These include Social Security and
Medicare taxes imposed on both employers and employees, at a combined rate of 15.3% (13.3%
for 2011 and 2012). Social Security tax applies only to the first $132,900 of wages in
2019. There is an additional Medicare tax of 0.9% on wages above $200,000. Employers must
withhold income taxes on wages. An unemployment tax and certain other levies apply to
employers. Payroll taxes have dramatically increased as a share of federal revenue since the
1950s, while corporate income taxes have fallen as a share of revenue. (Corporate profits have
not fallen as a share of GDP).
Property taxes are imposed by most local governments and many special purpose authorities
based on the fair market value of property. School and other authorities are often separately
governed, and impose separate taxes. Property tax is generally imposed only on realty, though
some jurisdictions tax some forms of business property. Property tax rules and rates vary widely
with annual median rates ranging from 0.2% to 1.9% of a property's value depending on the
state.
Sales taxes are imposed by most states and some localities on the price at retail sale of many
goods and some services. Sales tax rates vary widely among jurisdictions, from 0% to 16%, and
may vary within a jurisdiction based on the particular goods or services taxed. Sales tax is
collected by the seller at the time of sale, or remitted as use tax by buyers of taxable items who
did not pay sales tax.
The United States imposes tariffs or customs duties on the import of many types of goods from
many jurisdictions. These tariffs or duties must be paid before the goods can be legally imported.
Rates of duty vary from 0% to more than 20%, based on the particular goods and country of
origin. Estate and gift taxes are imposed by the federal and some state governments on the
transfer of property inheritance, by will, or by lifetime donation. Similar to federal income taxes,
federal estate and gift taxes are imposed on worldwide property of citizens and residents and
allow a credit for foreign taxes.

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The U.S. has an assortment of federal, state, local, and special-purpose governmental
jurisdictions. Each imposes taxes to fully or partly fund its operations. These taxes may be
imposed on the same income, property or activity, often without offset of one tax against
another. The types of tax imposed at each level of government vary, in part due to constitutional
restrictions. Income taxes are imposed at the federal and most state levels. Taxes on property are
typically imposed only at the local level, although there may be multiple local jurisdictions that
tax the same property.
Other excise taxes are imposed by the federal and some state governments. Sales taxes are
imposed by most states and many local governments. Customs duties or tariffs are only imposed
by the federal government. A wide variety of user fees or license fees are also imposed. A
federal wealth tax would be required by the U.S. Constitution to be distributed to the States
according to their populations, as this type of tax is considered a direct tax. State and local
government property taxes are wealth taxes on real estate.
Tax audit practice Africa
A very important challenge with regard to tax audits by their tax authorities is how to ensure
timely completion. Infarct very little exercise on a tax audit in Nigeria begins and ends within 12
months, most of them for many years before closing. Recommendations that cost and cost
analysis between the value of tax verification and tax receipt tax that are expanded to be
conducted before the tax authorizes. This is to ensure that the collection of taxes has been higher
than the costs improving compliance. Tax administrators should not concentrate only on desk tax
audit but also on field tax audit and back tax audit so as to block all leakages and increase the
level of tax payer’s compliance. Keywords: Tax Audit Practice, Tax Revenue Generation, Desk
Tax Audit, Personal Income Tax and Psychological Theory.
The issue of taxation is as old as the world itself. Tax audit has been known since the biblical
era. Yet, many are never comfortable discussing taxation, worse still tax audit practice. To deter
evasion and maximize compliance with tax laws is a key in governments’ revenue policy. One of
the aims of tax audit is to drive the taxpayer to comply with the outcome of tax audit and also to
make him become compliant with the provisions of tax laws in future. That is why the terms
have become synonymous with the efforts of government to generate revenue. Auditing
generally is an independent examination and expression of opinion on the financial statement of

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an enterprise by an appointed auditor in accordance with his terms of engagement and
compliance with statutory regulation and professional requirements (Daniel, 1999).
It is no records that no taxpayer is ready to open his/her books for examination by tax officers.
Not minding the concept of quid pro quo (something for something), it is still the duty of
taxpayers to declare their tax affairs in line with the available tax laws. Audit is said to be “an
evaluation of a person, organization, system, process, enterprise, project or product. Audits are
performed to ascertain the validity and reliability of information; also to provide an assessment
of a system's internal control”. The goal of an audit is to express an opinion of the
person/organization/system etc. in question, under evaluation based on work done on a test basis
(Zysman, 2004). Audit is “a systematic approach that follows a structured, documented plan
called audit plan”. In this, accounting records are examined by the auditors who use a variety of
generally accepted techniques. Financial audits are thorough review of a company's financial
records conducted by external auditors to verify that their financial statements are accurate and
reliable. Audits are also customarily conducted to assess the effectiveness of internal controls or
compliance with regulations (Bradford, 2013).
The first element is easily measured by the number of audited tax payers divided by the total
number of tax payers. However, the latter is so difficult to measure due to non-published
information about tax audit progress. It is commonly measured by the first element to indicate
the level of tax audit for practical comparison. In the word of Okonkwo (2014), tax audit is
“independent examination of accounts, tax returns, tax payments and other records of a taxpayer
to confirm compliance with tax laws, rules and regulations and accuracy and correctness of tax
paid and adhering to generally relevant accounting principles and standards. While tax
investigation and tax audit are often used interchangeably, however, in practice, tax investigation
is a more detailed and painstaking examination of the taxpayers records”. It is usually triggered
by suspicion of fraud, evasion and related offences (Okonkwo, 2014). A very significant
challenge around tax audits by relevant tax authority has been how to ensure timely completion.
In fact, very few tax audit exercises in Nigeria commence and get concluded within twelve
months as most span for years before closure. No doubt, tax authority has a duty to be thorough
in its review but this duty need to be balanced with the duty to ensure timely completion of
audits. Protracted tax audit exercise is neither in the interest of the Federation nor in the interest
of the taxpayer. They are not in the interest of the Federation because of time value of money in

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respect of potential additional tax liability locked up in unresolved tax audit portfolios. They are
not in the interest of the taxpayers who need to commit men and materials towards closure of the
tax audits as well as incur professional fees retaining tax advisors during the period. One major
factor contributing to the delay in timely completion of tax audits is the adoption of a vouching
approach in the examination of a company's accounting and financial records with the aim of
ascertaining the level of compliance with the provisions of the various tax laws.
Tax Audit Practice Taxes are considered as a source of revenue for economic growth and
development. Tax revenues and other revenues are central to the current economic development
agenda. They provide a stable flow of revenue to finance development priorities, such as
strengthening physical infrastructure, and are interwoven with numerous other policy areas, from
good governance and formalizing the economy, to spurring growth (Pfister, 2009). The Nigeria
tax system has failed on the area of it „administration. Personal and company income tax
administration in Nigeria today do not measure to the appropriate standard. The self-employed
persons earn more than those in paid employment. The self-employed earn four times than those
in paid employment but the bulk of personal income yield comes from those paid employment
whereas those who are self-employed earn most of the money. As a result of inadequacy in
monitoring taxes paid, lots of those who are self-employed evade tax. These thus call for the
need for a good and standard tax audit. Tax audit can be defined as “an examination of an
individual or organizations tax report by the relevant tax authorities in order to ascertain
compliance with applicable tax laws and regulations of state”. He further said that tax audit is a
process where the internal revenue service tries to confirm the numbers that you have put on
your tax return (Kircher 2008).
Tax audit in Nigeria are terms which embrace a variety of sectors. It simply means the advanced
part of auditing practice that involves examination of books of account in other to check if the
assessable profit showed by the tax payer is correct. Tax audit just like financial audit involves
the gathering of information and processing it for determining the level of compliance of an
organization with tax laws of the territory. For a successful audit, it is necessary that the auditor
organizes his work in such a way that the assignment is accomplished completely and efficiently.
The idea of tax audit became known through Lagos state where monitoring agents were
appointed to carry out tax audit on government behalf. These monitoring agents mostly
Chartered Accountants who are performing the function of carrying out tax audit of PAYE. The

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function of these monitoring agents however was taken over by tax consultant in 1996 and their
mode of operations different from that of monitoring agents. It has become fashionable for state
government to carry out tax audit exercise in order to fulfill all righteousness that the actual tax
due to the government have been deducted and remitted to the government account (Ojo, 1998).
This exercise has however received some credits which are:
 Making the taxpayer conversant with the applicable tax laws
 The rate at which the taxpayers comply with tax laws has been increased
 It has added depth to the Nigeria tax practice.
 The revenue of the government was increased.
Tax audit practice in Ethiopia
Currently, the government of Ethiopia like other governments seeks to raise revenue mainly
through taxation in order to pay its expenditures, on infrastructure development in particular.
According to the proclamation No. 587/2008, the responsibility to collect such revenue for the
federal government rests with ERCA in Ethiopia. ERCA came into existence in 2008, by the
merger of the Ministry of Revenue (MoR), Ethiopian Customs Authority (ECA) and Federal
Inland Revenue Authority (FIRA) (that formerly raise revenue for the federal government and
prevent contraband) with a vision to be a leading fair and modern tax and customs administration
in Africa. The reason for the merger was to diminish serious problems due to inefficient
organizational structure and unnecessary complicated procedures that permitted insufficient
service delivery, corruption within the administrations, and smuggling and tax evasion.
According to ERCA (2010), the authority is established with a mission to promote voluntary
compliance of taxpayers, ensure integrity and develop skills of the employees, support
modernization, facilitate trade and investment, harmonize taxes and customs administrating
system, broadening tax base and decreasing tax rate, and contribute to the economic
development and social welfare through effective tax revenue collection. Accordingly, ERCA
has made a wide range of organizational and institutional reforms with the aim of strengthening
revenue mobilization, enhancing operational efficiency, and improving voluntary compliance.
For instance, process improvement, integrating and modernizing revenue administration, tax
audit in particular, with new technology is ongoing.
Tax audit in the context of ERCA is defined as an activity or a set of activities performed by tax
auditors to determine the taxpayers correct tax liabilities for a particular accounting or tax period.

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Tax auditors examine taxpayers‟ organizational procedures and financial records in order to
assess compliance with tax laws and verify the true, fair, reliable, and accuracy of tax returns and
financial statements (ERCA 2010).
The government of Ethiopia has several options to finance its public expenditures and pursue its
fiscal policy. These options include imposing of taxes on businesses and persons, and non-tax
revenues such as service fees, money prints, loans (both domestic and foreign institutions),
property and investment income, privatization of public enterprises, and domestic and foreign
grants. Among others, tax along with customs collections is an important source of revenue for
every government, and is a heart to a country’s wellbeing (Damme et al. 2008). In Ethiopia,
however, total tax revenue performance has been relatively poor that accounts an average of 10.9
percent of gross domestic product (GDP) during 1990-94 and 12.9 percent of GDP during 2000-
06 (McKinley and Kyrili, 2009). The proper amount of tax must be collected on a timely manner
for successfully improving and maintaining steady economic progress of a nation. To do this, the
enforcement powers of the tax administration, including tax audit, must be applied judiciously
and in an evenhanded fashion (Baurer, 2005). A tax audit is an examination of whether a
taxpayer has correctly reported its tax liability and fulfilled other obligations. It is often more
detailed and extensive than other types of examination such as general desk checks, compliance
visits or document matching programs (OECD, 2006a).
1.2 Organizational Background
As a general principle, it’s believed that there should be a framework in which each tier of
government can levy or generate its own finance without conflict between them. The constitution
of Federal Democratic Republic of Ethiopia (EFDRE) 1994, Pursuant to decentralized
government structure, the power to levy and collect taxes from income is assigned to both the
Federal government and Regional States. The Ethiopian Revenue and Customs Authority
(ERCA) is responsible to levy and collect taxes at the Federal level While Addis Ababa City
Administration has a power to levy and collect taxes on individual traders carrying out a business
within its collective sub-cities revenue branch office and woredas revenue office as well.
The Akaki Kality Sub-City is one of Ababa City Administration Sub-City, it has 10 woredas, and
the Sub-City Revenue Branch Office has authorized by the law to collect tax and to make an
assessment the accuracy of declared tax liability by the taxpayers in respect to the stated tax laws
and regulations. If the taxpayer has submitted a declaration of income within the time and the

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manner as prescribed in the proclamation, the revenue office has power to amend the assessment.
Depending on the degree of the participants of the revenue office and a taxpayer in the
determination of tax liability, an assessment can be an official or self-assessment.
An assessment is an initial review by the tax official of the tax declarations and information
provided by the taxpayer and verification of arithmetic and technical accuracy of the declared tax
liability shortly after the submission of the declaration. An audit is selected verification of
taxpayers declared tax liabilities which always involves a review of taxpayers business related
transactions records system ,like books of accounts and its supporting documents, information
obtained from third party concerning purchases, sales, expenses which are backed with objective
evidence, general compliance pattern of the taxpayer the income tax law and etc.
The main vehicle used by tax audit section that gives effect to their audit plan is through the
application of the collective experience and knowledge of the process owner. An auditor will
assess the declarations of the taxpayers for all taxes and will select taxpayers for audit to test
compliance with the law. When the analysis of taxpayer’s compliance pattern justifies for the
audit and investigation of taxpayers’ file, the revenue office either applies spot or comprehensive
audit to test the reliability of the tax affairs dealt with. The choice and preference of the one to
another is dependent on the magnitude of tax risk associated with the case and the number and
qualification of the existing audit staff. Finally, the assessment made will be prepared in
assessment notification and delivered to the taxpayer. A taxpayer, who objects to an assessment,
may appeal to the tax appeal committee up on fulfilling certain requirements.
1.3 Statement of the Problem
Tax audit is a critical and significant component of the compliance activities of tax
administration by means of proper use of enforcing tax laws. It is the conduct by audit staff of
appropriate verification of selected tax payers whether he/she has been correctly declaring the
tax liabilities including a review of taxpayer’s systems, books of account and other related
information. It may include cross checks of taxpayer’s records with those of taxpayer’s suppliers
or with other government departments and agencies, source of information and its effectiveness
and efficiency must be guaranteed by means of proper procedures and application of modern
audit tools and techniques (OECD, 2006,pno17-23).

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A tax audit is one of the most sensitive contacts between the taxpayer and a revenue body. the
presence of an auditor in a taxpayer’s private dwelling or business premises, coupled with the
exploration of private and business issues and the gathering of information from taxpayers’
books and records, or just the disruption of day-to-day workflow, represents a burden on the
taxpayer Damme, L, T. Misrahi and S. Orel (2008),
Tax audit help revenue authority in achieving its objectives, and ensuring the fiscal health by
means of indirectly drive voluntary compliance and directly generate additional tax collections,
both of which help tax authorities to reduce the tax gap between the tax due and tax collected.
The revenue office audit Performance shows that From the Year 2009/10_2011/12 the number of
files submitted by the taxpayers are 540 and 720 and those by audited are 324 and 389
respectively, additionally their performance percentage is 60%, 54% respectively. Thus, we can
understand that the audit coverage performance is 40%. On the contrary, 46% of the files
remained un-audited (source: sub-city revenue office yearly Tax audit report).
Previous studies found that the major factors affecting internal audit effectiveness are
organizational setting, audit quality, top management support, auditee attributes and
organizational independence (Mihret and Yismaw, 2007; Aaron Cohen and Gabriel Sayag,
2010). However, empirical studies are lacking to identify factors affecting tax audit effectiveness
in our country Ethiopia. This study will, therefore, considers the above-mentioned variables as
independent and it verifies if they are influencing on tax audit effectiveness in Akaki Kality Sub-
City Small Tax Payers Branch office, tax audit effectiveness.
A well-designed tax audit needs a risk based audit program and application of standardized
technology to determine the type of audit, procedures and duration of audit to achieve its
objective. However, the sub-city revenue office has, a risk based on tax-audit assessment
program but it seemed low in implementing it as planned (source: sub-city revenue office yearly
Tax audit report and the researcher is the employee of the revenue office).
To the best of my knowledge lack of study has been carried out so far to verify the factors
affecting tax audit effectiveness specifically in category “A”. For this reason, the researcher
strongly believes that, this research would answer the question of what are the factors affecting
tax audit effectiveness. Hence, based on the problem area this study will try to address the
following research questions.

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 1. What are the factors that affect the organization’s tax audit effectiveness of category “A”
tax payers in Akaki Kality Sub-City Small Taxpayers Branch Office?
2. What are the practices of tax audit selection process to identify category “A” taxpayers in
a high tax risk areas?
3. How far these factors affect tax audit systems effectiveness of category “A” tax payers in
Akaki Kality Sub-City Small Taxpayers Branch Office?
1.4 Objectives of the Study
1.4.1 General objective
The main objective of this study is to examine factors Affecting Tax Audit Effectiveness of
category “A” Taxpayers: the case of Akaki Kality Sub-City Small tax Payers Branch office
1.4.2. Specific Objectives
Based on the general objective stated above, the study addressee the following specific
objectives:
 To investigate what are the practices of tax audit selection process to identify
category “A” taxpayers in a high tax risk areas?
 To examine what are the factors that affect the tax audit effectiveness of category
“A” tax payers in ….?
 To evaluate how far these factors affect tax audit systems effectiveness of
category “A” tax payers in…..
1.5. Significance of the Study
The results of this study expected to be significant in various respects. First, based on the study
findings, the report has some conclusions and forwards some recommendations that will enable
Akaki Kality Sub-City Small Tax Payers Office to identify the factors that affect tax audit
effectiveness and to take corrective remedies to keep the existing factors through tax audit
improvement. This study may help the tax policy makers at the Federal Addis Ababa City
Revenue Office and to all other sub-cities of Revenue office level to make use of out puts of the
study in addressing the factors affecting tax audit effectiveness by the revenue office. In addition,
it might help the revenue office tax-auditors to know their role in the tax system. Moreover, it
may serve as a source of reference and give some highlights for others who would like to know

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more about the issue and interested in undertaking further and detail studies in tax audit
effectiveness.

1.6. Scope of the Study

Even though wide ranges of variables are expected to be studied, this study was contemplated on
examination of tax audit effectiveness in terms of auditee attributes, audit quality, organizational
independence, organizational setting and top management support. The scope of this study were
limited to the examination of factors affecting tax audit effectiveness on business income
category “A” taxpayers’ and tax auditors in Akaki Kality Sub-City Small Tax Payers Branch
Office, beyond the above mentioned were not included in this study.
1.7. Operational Definition
Auditee attributes: is the co-operation or support of taxpayers at the time of auditing for tax
auditors.

Audit quality is the audit work has been performing based on general accepted auditing
standard.
Organizational independence: is the audit office has ethics of international profession in
addition to which is free from any corruption.
Organizational setting: is the structure of the organization and its profile.
Tax audit effectiveness
The tax auditors have performed the audit work effectively without any impact in the taxpayers.
Top management support
The audit findings are accepted or responsible by top management
1.8 Organization of the Study
The thesis is organized as follows; Chapter one deals with the introduction, which includes;
Background of the study, background of the organization, statement of the problem, objective of
the study, significance of the study and scope of the study; chapter two deals with the review of
the related literature; chapter three contains the research methodology; which describes about the
research approach, research methods, sampling design and sources of data, limitation of the
study. Chapter four discuss about data presentation, analysis and interpretation, different tables
and figures were used in this part to describe and analyze the quantitative data. Finally, the fifth

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chapter presents the major findings drawn from analysis and findings of the study and possible
recommendations for the identified problems also included.

CHAPTER TWO
REVIEW OF RELATED LITERATURE
The following part of the study reviews the relevant literature that is selectively reviewed the
meaning of tax audit, theoretical framework, determinants of tax audit effectiveness, the role of
tax audit program, audit selection process, tax audit performance measurement, tax-auditor’s
performance monitoring and evaluation, formal statements of taxpayers‘ rights and also,
responsibilities in auditing and other those relevant issues to the review literature focus the
factors that affect tax audit effectiveness of category “A” in Akaki Kality Sub-City Small Tax
Payers Office.
2.1. Meaning of Tax Audit
A tax audit is an examination of whether a taxpayer has correctly assessed and reported their tax
liability and fulfilled other obligations (OECD, 2006). On the other hand a tax audit is defined as
an activity or as set of activities performed by tax auditors to determine a taxpayer’s correct tax
liabilities for a particular accounting or tax period, by examine of a taxpayer’s organization
products and financial records in order to assess compliance to tax laws and verifying the true,
fair, reliable, and accuracy of tax returns and financial statements (ERCA, 2010).
Internal auditors play a key role in monitoring a company’s risk profile and identifying areas to
improve risk management (Dessalegn Getie & Mihret, 2013). The aim of internal auditing is to
improve organizational efficiency and effectiveness through constructive criticism. Control
mechanisms are those processes set up to monitor and to direct, promote or restrain the various
activities of an enterprise for the purpose of seeing that enterprise objectives are met.

2.2 Conceptual Framework of Tax Audit effectiveness

Tax audits are key characteristics of the voluntary compliance mechanism in the SAS regime
because higher audit rates are thought to increase tax compliance (Allingham & Sandmo, 1972).
Tax audits have a specific deterrent effect on those audited taxpayers, and more importantly,

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audits also have a general deterrent effect on taxpayers not actually audited (Khadijah Isa and
Jeff Pope, 2011).
The specific deterrent effect of tax audits refers to enhancement of voluntary compliance by
ensuring audited taxpayers comply with the provision of the current tax laws and regulations.
Moreover, tax audits allow tax auditors to educate taxpayers on the application of tax laws, to
identify improvements required for record keeping, and to identify areas of tax laws that
taxpayers need clarification (OECD, 2006). However, business taxpayers have a misconception
that tax audits are either aimed to detect tax, to recover more tax or to penalize noncompliance.
The general deterrent effect of tax audits refers to the additional revenue collection generated
from taxpayers who are not actually audited. Tax auditors also play a critical role in the
effectiveness of the SAS in many countries. In addition to their primary role of detecting and
deterring non-compliance, tax auditors are often required to interpret complex tax laws and carry
out extensive examinations of taxpayers’ books and records (OECD, 2006). The numerous roles
assigned to tax auditors require a recruitment and maintenance of competent tax auditors with
technical knowledge, audit skills, and tacit knowledge. Moreover, the attitudes of tax auditors
during the conduct of an audit may affect taxpayers’ compliance behavior. The way in which tax
auditors interact with taxpayers during an audit may influence their compliance behavior in the
future. For example, if taxpayers are treated with respect during the audit, taxpayers may have a
stronger incentive to comply voluntarily (Isa & Pope, 2011); arbitrary audit procedures leave
taxpayers feeling helpless and thus reduce their intrinsic motivation to comply (OECD, 2010).
Similarly, a responsive and fair administration of the tax audit may positively influence
compliance behavior. In addition, if taxpayers trust the tax auditors, taxpayers voluntarily
comply with audit requirements.

As noted above, only a few academic studies have examined the effectiveness of IA, and even
fewer have dealt with the issue empirically. As cited by (Aaron Cohen & Gabriel Sayag, 2010) in
one of the very few studies that examined the effect of internal auditing on organizational
performance, (Eden & Moriah, 1996) assigned 224 organizations to experimental conditions.
(Audited or not Audited) and monitored their performance for a year.

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Their findings showed that performance significantly improved during the half year following
the audit in the experimental branches, while the control branches experienced a decline due to
poor general business conditions. It should be reiterated that Eden and Moriah are nearly alone in
developing and testing an explanatory model of IA effectiveness. While that study offers a useful
jumping-off point for understanding how good auditing can improve a company’s performance,
it does not go far enough in explaining when and why IA works, and the conditions that facilitate
or impede it. Helping to bridge this gap will be one of the main contributions of this study.
There are main approaches to the concept of IA effectiveness. According to the first approach,
the effectiveness of internal auditing is determined by the fit between the audit and some set of
universal standards extrapolated from the characteristics of audit. Such an approach was
presented by Aaron Cohen & Gabriel Sayag, (2010), who advanced five standards for internal
auditing: interdependence, professional proficiency, and the scope of work, the performance of
the audit and management of the internal audit department.
This approach requires the development of systematic and generally valid measures by which to
gauge IA effectiveness (Dittenhofer 2001). One of the early efforts in this regard is that of who
designed a questionnaire designed to elicit managerial feedback for each internal auditing
activity in an organization. The questionnaire covered four issues: planning and preparation; the
quality of the audit report; the timing of the audit; and the quality of communication between the
relevant actors. Based on managers’ responses, an average score was calculated for the
effectiveness of a given auditing task.
In a study sponsored by the Institute of internal Auditors (IIA), identified 15 criteria used by 13
large private organizations to evaluate the effectiveness of internal auditing. They concluded that
effectiveness is determined mainly by the fit between the auditing work and the goals set by
managers, the qualifications of the internal auditor, management support for the internal auditing
staff, and several characteristics of the internal auditing department. The previous study
identified 15 factors that contribute to an effective audit and categorized them into three stages of
the auditing process: planning, fieldwork, and reporting and review. They suggested
measurements they considered valid and reliable for these factors. More recently, (Ziegenfuss,
2000) developed a questionnaire that includes 84 criteria for effectiveness categorized into four
main areas: the environment of the internal audit, input into the audit, the auditing process and
the output of the audit.

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This brief review shows the need for a more comprehensive study of the issue of internal audit
effectiveness. The papers noted above may deal with the issue qualitatively (Dittenhofer, 2001).
To design a comprehensive scale that can be validated by examining its factor structure and
reliability, or by exploring its relationship to conceptual correlate. Yet even those studies did not
test their suggested scales empirically using valid and reliable scales. The current study takes this
line of research a step further by designing and testing such a scale. However, before moving on
to this goal, we must first present the explanatory model advanced later.

2.3. Determinants of Tax Audit effectiveness

Tax audit effectiveness, the extent to which a tax audit office meets arguably a result of the
interplay among five factors: audit quality; management support; organizational setting; and
attributes of the auditee, organizational independence. A tax audit function's capability to provide
useful audit findings and recommendations would help raise management's interest in its
recommendations. The management support with resources and commitment to implement the
tax audit recommendations is essential in attaining audit effectiveness. Also, the organizational
setting in which tax audit operates, i.e. the organizational status of the office, its internal
organization and the policies and procedures applying to each auditee, should enable smooth
audits that lead to reaching useful audit findings. Further, the capability, attitudes and level of
cooperation of the auditee impact on the effectiveness of audits. Therefore, tax audit
effectiveness should be viewed as a dynamic process that is continuously shaped by the
interactions among the five factors mentioned above. This study examined, using case study
analysis, the tax audit service of a large private sector organization.
Tax audit is effective if it meets the intended outcome it is supposed to bring about. Based on the
results of a consultative forum that focused on improving public sector internal audit, (Van
Gansberghe, 2005) identified perceptions and ownership; organization and governance
framework; legislation; improved professionalism; conceptual framework; and also resources as
factors influencing internal audit effectiveness. Effective internal audit undertakes an
independent evaluation of financial and operating information and of systems and procedures, to
provide useful recommendations for improvements as necessary.
Prior literature relating to internal audit effectiveness has either focused on the audit's ability to
plan, execute and objectively communicate useful findings (Dittenhofer, 2001; Mihret &

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Yismaw, 2007; Aaron Cohen & Gabriel Sayag, 2010); or taken a broader view and included
factors that transcend the boundary of a single organization (Van Gansberghe, 2005). This paper
attempts to introduce a new perspective for evaluation of audit effectiveness by identifying
factors within an organization that affect the internal audit effectiveness. A model, which
assumes that there is a common interest to achieve organizational goals for auditee management,
top management and internal audit, is used for analysis of this case study. Since, audit
effectiveness fosters the achievement of a common goal; there would be a natural incentive in an
organization to improve it. The model considers five potential factors –audit quality,
management support, and organizational setting, auditee attributes, and organizational
independence to explain audit effectiveness.
2.3.1 Audit quality
Audit quality to IA is considered as a determinant of IA effectiveness (Mihret & Yismaw, 2007
and Aaron Cohen & Gabriel Sayag, 2010).Audit quality, which is demonstrated by the office's
capability to provide useful audit findings and recommendations, is one of the most prominent
factors on which audit effectiveness is anchored. The performance standards of the IA require
the auditor to plan and perform the work such that he or she would be able to arrive at useful
audit findings and forward recommendations for improvement. The office's ability to properly
plan, perform and communicate the results of audits is a proxy for audit quality. Therefore, audit
quality is arguably a function of extensive staff expertise; reasonableness of the scope of service;
and effective planning, execution and communication of audits.
To evaluate these determinants of audit quality, evidence from questionnaire responses with the
Director of the Audit Office were used. To support the results, supplementary information was
collected through a review of relevant documents.
Standards for audits and audit-related services are published by the IIA and include attribute,
performance and implementation standards. In general, formal auditing standards recognize that
internal auditors also provide services regarding information other than financial reports. They
require auditors to carry out their role objectively and in compliance with accepted criteria for
professional practice, such that internal audit activity will evaluate and contribute to the
improvement of risk management, control and governance using a systematic and disciplined
approach. This is important not only for compliance with legal requirements, but because the
scope of an auditor’s duties could involve the evaluation of areas in which a high level of

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judgment is involved, and audit reports may have a direct impact on the decisions or the course
of action adopted by management (Bou-Raad2000). It can thus be argued that greater quality of
audit work – understood in terms of compliance with formal standards, as well as a high level of
efficiency in the audit’s planning and execution – will improve the audit’s effectiveness.
Staff expertise
Appropriate staffing of a audit department and good management of that staff are keys to the
effective operation of a tax audit. An audit requires a professional staff that collectively has the
necessary education, training, experience and professional qualifications to conduct the full
range of audits required by its mandate. Auditors must comply with minimum continuing
education requirements and professional standards published by their relevant professional
organizations. Bou-Raad (2000) argued that auditors must have a high level of education in order
to be considered a human resource. The diversity of skills required, according to Bou-Raad,
represents a major challenge to professional bodies, tertiary institutions and management.
The few studies that have looked into this issue have found that the greater the professional
qualifications of the internal auditors in a given department, defined by the length of their
professional training and educational level, the greater the effectiveness of this department found
that auditor experience had a positive effect on evaluations of internal accounting control. The
Appelgren(2008) argued that, internationally, the practice of staffing the tax audit department
with career auditors is becoming less common, with more organizations using the function as a
training ground for future management personnel. This practice is designed to help the
organization train well-rounded senior managers. Tax auditors perform a wide variety of
activities across different departments within the organization. They have opportunities to learn
how these departments function and how they are managed. Furthermore, managers who have
had experience in tax auditing should have a better understanding of the importance of internal
control. The ability to use tax audit roles as a stepping stone to managerial positions is seen as
one of the advantages of having an in-house tax audit function rather than outsourcing IA
activities. Determinants described so far – especially the professional proficiency of the auditors,
the quality of auditing work and the organizational independence of auditing departments –
represent instances where the auditor’s interests are those of the profession, rather than the
employing organization. The following two determinants represent the opposite case, where the

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interests of the organization take precedence. The first of these involves considerations of career
and advancement.
The degree to which tax auditing can lead to a managerial career in the organization may
influence the effectiveness of tax auditing. This is perhaps more true today than in the past, given
the trends described by Appelgren (2008). As noted, career auditors are becoming less common
than generalists who are interested in management careers (Appelgren, 2008). And who therefore
are more likely to take a local than a cosmopolitan point of view. It can be argued that under
these conditions, tax auditors who operate in settings with more organizational career
opportunities will invest more effort in their work in order to increase their promotion
opportunities. Those with fewer opportunities for organizational advancement will invest less
effort in their work, resulting in a lower performance level. This is likely to be true even if the
individuals working in such settings are cosmopolitans who place less value on an organizational
career, since – given current trends – they have fewer opportunities than in the past for career
growth as specialist tax auditors.
Planning
Planning is generally considered a vital audit activity and it includes preparing a strategic plan,
annual plans and programs for individual audit assignments. The Akaki Kality Sub-city Small
Tax Payers Branch office's tax audit office does develop a strategic plan, the exercise of which w
have enable the audit staff to evaluate risk and identify high-risk areas that deserve audit
attention. The head of tax audit ensures the appropriateness of resources by projecting
requirements in a timely fashion even though its application is not effective as it’s planned.
The tax Audit Office prepares annual plans for its operations. Nonetheless, an annual plan
prepared as a subset of a strategic plan would have been more useful. An effective tax audit
function requires the head of the tax audit office to periodically report to senior management on
the tax audit activity's purpose, authority, responsibility and performance relative to its plan.
There is such practice in the office and the tax audit Office communicates with top management
via monthly, quarterly, annual reports and at the time of different auditee's issue to be discussed
and tax audit decision has to be made.
Fieldwork and quality review
Fieldwork involves performing the tasks identified in the audit programs to collect evidence for
assessment of the auditee's current operations considering identified audit criteria. The fieldwork

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should be recorded in audit working papers in a consistent and standardized manner. The
Government of Ethiopia Performance standard No. 710 requires proper documentation of audit
work (Ministry of Finance and Economic Development, 2004). The audit team leaders undertake
a thorough quality review of the audit working papers and draft reports to ensure that the audit
work has been performed as planned and is documented properly. The review is done to ensure
that conclusions and findings are supported by sufficient appropriate evidence. After the review,
the audit director decides whether to make changes prior to issuance of the final report.
Audit communications
Though audit communication takes place throughout the period of fieldwork, written audit
reports are issued upon completion of audits. The auditors hold an exit conference with the
auditee to discuss the audit findings in the draft audit reports. Exit meetings provide an
opportunity to resolve questions or concerns of the auditee on audit findings before the final
audit report is released. The tax audit reports of the office include letters of transmittal, signed by
the director, that include a summary of findings and recommendations. It also includes the main
report signed by the auditors that comprises the introduction, the objectives of the audit, findings
of the study and recommendations.
The reports also highlight satisfactory achievements of the auditee. This helps improve the
auditees' image of the auditor (Van Gansberghe, 2005) and hence, contributes positively to audit
effectiveness. Since, there is a tendency for tax auditors to be seen as critics, auditors should
possess the ability to criticize wisely and motivate people to improve .Adding a perspective on
positive aspects of the auditee's operations in the audit reports, counter the tendency of auditees
to consider the tax auditors as critics. Actions following the tax audit reports. The lack of
common reference between the auditors and the auditee would also undermine the ease with
which tax auditors could undertake follow-up on the implementation of audit recommendations.
The tax audit office does not have formal follow-up procedures to ensure whether corrective
actions are taken as per the recommendations. This emphasizes that follow-up is critical to bring
about audit outcomes. If follow-up is weak or absent, the impetus gained by audit
recommendations will be lost and the credibility of tax audit will suffer. If follow-up is absent,
highlighting the status of unresolved past audit issues could minimize its effect.

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Audit Quality and Quality Audit
Audit quality encompasses the key elements that create an environment which maximizes the
likelihood that quality audits are performed on a consistent basis.
A quality audit is likely to have been achieved by an engagement team that:
 Exhibited appropriate values, ethics and attitudes;
 Was sufficiently knowledgeable, skilled, and experienced and had sufficient time
allocated to perform the audit work;
 Applied a rigorous audit process and quality control procedures that complied with law,
regulation and applicable standards;
 Provided useful and timely reports; and
 Interacted appropriately with relevant stakeholders.
The responsibility for performing quality audits of financial statements rests with auditors.
However, audit quality is best achieved in an environment where there is support from and
appropriate interactions among participants in the financial reporting supply chain.

Auditors are required to comply with relevant auditing standards and standards of quality control
within audit firms, as well as ethics and other regulatory requirements.

Focus on audits of financial statements, but can be used in a similar way for other types of
subject matter.
Applies to all audits of all entities regardless of their size, nature, and complexity
Framework for Audit Quality
The efficiency and effectiveness of a revenue body’s audit activities depends critically on the
nature and scope of powers in the underlying legal framework in place, including the provision
of adequate powers for obtaining information and an appropriate regime of sanctions to deter and
penalize non-compliance.
The efficient and effective conduct of audit activities requires that a revenue body ‘s audit and
investigation staff have appropriate powers of access to information held by the taxpayer and
other parties so that taxpayers liabilities reported in their returns can be properly verified or, in
the absence of returns, be accurately established. There should also be an appropriate regime of
sanctions to punish and deter non-compliance.

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For these reasons, revenue bodies require a set of powers and sanctions in the legal framework
supporting the conduct of tax administration activities that includes the provision of adequate
powers for obtaining information and an appropriate regime of sanctions covering the various
offences that may arise. In practice, this legal framework may be set out separately in the laws
governing each tax administered or, preferably for ease of legislative maintenance, in a single
comprehensive law on tax administration that provides a common set of provisions covering all
taxes.

A tax audit is one of the most sensitive contacts between the taxpayer and a revenue body. The
presence of an auditor in a taxpayer’s private dwelling or business premises, coupled with the
exploration of private and business issues and the gathering of information from taxpayers’
books and records, or just the disruption of day-to-day workflow, represents a burden on the
taxpayer and may be seen by some as an unwarranted intrusion into their affairs.
Notwithstanding this, tax audits remain the only effective method for ascertaining additional
facts or verifying provided information.
Legal frameworks are essential to provide integrity in the way tax administrations carry out
audits and to ensure that taxpayers’ rights are properly protected. As such, in many jurisdictions
the taxpayer may request a review of any proposed assessments or an explanation of the audits
techniques used and adjustments being proposed. This request may be made to the revenue body
or an independent third party body.
Inputs Quality audits involve auditors: • Exhibiting appropriate Values, Ethics and Attitudes •
Being sufficiently knowledgeable, skilled, and experienced and having sufficient time allocated
to them to perform the audit work.
Process Quality audits involve auditors applying a rigorous audit process and quality control
procedures that comply with laws, regulations and applicable standards.
Outputs Quality audits result in outputs that are useful and timely. They are described in relation
to the full reporting supply chain and include outputs from:
 The auditor
 The audit firm
 The entity
 Audit regulators

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Outputs include reports and information that are formally prepared and presented by one party
to another, as well as outputs that arise from the auditing process that are generally not visible to
those outside the audited organization.
Interactions
While the primary responsibility for performing quality audits rests with auditors, audit quality is
best achieved in an environment where there is support from other participants in the financial
reporting supply chain.
Contextual Factors
Collectively, the contextual factors – have the potential to impact the nature and quality of
financial reporting and, directly or indirectly, audit quality
Where appropriate, auditors respond to these factors when determining how best to obtain
sufficient appropriate audit evidence’
The roles of the taxpayer audit program
The audit programme of a revenue body performs a number of important roles that, effectively
carried out, can make a significant contribution to improved administration of the tax system.
These roles are described briefly hereunder:
 Promote voluntary compliance: The primary role of the audit program is to promote
voluntary compliance by taxpayers with the tax laws. It seeks to achieve this by
reminding taxpayers of the risks of noncompliance and by engendering confidence in the
broader community that serious abuses of the tax law will be detected and appropriately
penalized.
 Detect non-compliance at the individual taxpayer level: By concentrating on major areas
of risk (e.g. unreported cash income) and those individual taxpayers most likely to be
evading their responsibilities, audits may bring to light significant understatements of tax
liabilities, and additional tax revenue collections.
 Gather information on the “health” of the tax system (including patterns of taxpayers’
compliance behavior): The results of normal audit activity may provide information on
the general well-being of the tax system. Audits conducted on a random basis can assist
overall revenue administration by gathering critical information required to form
judgments on overall levels of tax compliance—that over time can be used to identify
trends in overall organizational effectiveness—and to gather more precise information

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 that can be used to inform decision-making on future compliance improvement strategies,
to refine automated risk-based case selection processes, and even support changes to tax
legislation.
 Gather intelligence: Audits may bring to light information on evasion and avoidance
schemes involving large numbers of taxpayers that can be used to mount major counter-
abuse projects.
 Educate taxpayers: Audits can assist clarify the application of the law for individual
taxpayers and to identify improvements required to recordkeeping and thus may
contribute to improved compliance by taxpayers in the future.
 Identify areas of the law that require clarification: Audits may bring to light areas of the
tax law that are causing confusion and problems to large numbers of taxpayers and thus
require further efforts by the revenue body to clarify the laws’ requirements and/or to
better educate taxpayers on what they must do to comply into the future.
Given the broad range of roles to be performed a revenue body’s audit program typically entails
the largest allocation of a revenue body’s total staff resources. From this perspective alone, the
audit program represents a sizeable strategic investment that dictates the need for sound
management policies and practices.
The scope of audit activities varies across member countries, in part as a result of the system of
assessment in place. There are two generally accepted systems of tax assessment applied by
OECD countries—administrative assessment and self-assessment. In around half of OECD
countries, administrative assessment is employed to varying degrees in the administration of
personal income tax and corporate profits/income tax. All countries administer VAT under self-
assessment principles.
Assessment systems operate on the principle that all tax returns should be subject to a degree of
technical scrutiny before a formal assessment is sent to the taxpayer. In practice, however, much
of the scrutiny previously undertaken by technical staff has been replaced in many countries by
the use of automated screening techniques to identify returns requiring scrutiny before a formal
assessment is issued. To the extent that there is some level of scrutiny carried out by technical
officers, it ranges in practice from a very cursory examination of some tax returns to a more in-
depth examination where further inquiries may be made with taxpayers (sometimes by
correspondence) before a formal assessment is issued. Even countries that operate administrative

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assessment regimes complement these arrangements with a formal program of post-assessment
audits. However, in practice such programs tend to be conducted on a smaller scale than is the
case in countries only applying self-assessment principles.
In countries where self-assessment principles are applied, returns are typically accepted as filed
in the first instance (with the exception of returns containing mathematical errors or clearly
erroneous deductions) and, for income tax, a formal assessment/ notice confirming/advising the
tax liability is sent to the taxpayer before any inquiry. A sample of returns is selected for post-
assessment audit, generally applying computer-based risk selection techniques and/or manual
screening processes. Large scale matching programs may also be mounted on a post –assessment
basis for the major categories of income (i.e. wages, interest, and dividends).
Organization and Management of The Taxpayer audit Function
Revenue bodies with effective tax audit programs pay close attention to the way the function is
organized, resourced, and managed.
There has been a trend for revenue bodies to take a more strategic “top down” view of all
compliance risks (including, but not limited to, the under-reporting of tax liabilities), using a
more structured and systematic process to identify, assess, and prioritize compliance risks, and to
determine appropriate treatment actions for the major risks identified. Revenue bodies should
aim to achieve a balanced program of audits—one that balances ‘coverage’, ‘audit quality’, and
‘overall deterrent’ considerations.
Audit operations should be underpinned by sound management practices including the use of a
comprehensive set of performance measures/indicators (output and, ideally, outcomes focused),
and with close monitoring of the results and quality of operations achieved in practice.
2.3.2 Management support
Management support to IA is considered as a determinant of IA effectiveness (Mihret &
Yismaw, 2007 and Aaron Cohen & Gabriel Sayag, 2010). The management literature offers
ample evidence for the key role of top management support in the success of almost all programs
and processes within an organization. Fernandez and Rainey (2006) argued, based on a thorough
literature review that top management support and commitment to change play a crucial role in
organizational renewal, as senior managers can mobilize the critical mass needed to follow
through on efforts launched by one or two visionary thinkers. A number of empirical studies
have found top management support for quality to be a key factor in its improvement. Top

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managers’ attitudes and behaviors have also been found to be related to quality management
practices survey of companies with high-quality performance found that 89% had CEOs who
regularly visited the factory floor, participated in training programs and attended company-wide
quality-improvement events.

Given this, it is not surprising that management acceptance of, and support for, the audit function
has long been seen as critical to the success of that function. Several recent studies have
demonstrated that support for internal auditing by top management is an important determinant
of its effectiveness (Schwartz, Dunfee & Kline 2005). Funding, of course, is an important
measure of such support: tax auditing departments must have the resources needed to hire the
right number of high-quality staff, to keep up-to-date in training and development, to acquire and
maintain physical resources like computers, and so on. They see themselves as a key part of the
management team, and believe they can influence decisions; maintain a sufficient level of
objectivity, integrity and competence in their jobs; and provide good support for their own staff.
More importantly, they view the support of upper management as a key factor in ensuring the
effectiveness of their role. Management support for IA is thus important both in the abstract
(managers must see the activity of the audit department as legitimate) and in ensuring that IA
departments have the resources needed to do their jobs.
2.3.3 Organizational setting
Organizational setting to IA is considered as a determinant of IA effectiveness (Mihret &
Yismaw, 2007). Organizational setting includes the status of tax audit in the organizational
structure; the probity of tax audit office's internal organization; budgetary status of the internal
audit office; and the existence of sound established criteria to evaluate auditees' practices.
Organizational status and internal organization
The tax audit function of an organization should be given a sufficiently high status in the
organizational structure to enable better communication with senior management and to ensure
independence of tax audit from the auditees. Independence is of paramount value in providing
effective tax audit service to the management, for it affords an atmosphere of objective and
uninhibited appraisal and reporting of findings without influence from the units being audited.
The tax audit function of the revenue office is operating as an office reporting to the director.
This provides the office with the requisite independence from the auditees.

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Proper internal organization is also vital to achieve audit effectiveness. In addition, independence
of individual auditors is essential to the effectiveness of the tax audit function. Independence of
individual auditors could be achieved, inter alia, by auditor rotation and not assigning auditors to
engagements with which they had executive or other relationships that are deemed to
compromise objectivity, e.g. consulting auditees in design and implementation of systems.
Organizational policies and procedures
In order to make tax auditing effective, there should exist clear policies and procedures against
which organizational practices are to be gauged. Also, the results of the tax audit services help
improve those policies and procedures. The policies and procedures for the organizational
practices in the institution studied are those applying to the public sector organizations in
Ethiopia. This component of the organizational settings factor rates fairly in terms of its
influence on audit effectiveness.
2.3.4 Auditee attributes
Auditee attributes to IA is considered as a determinant of IA effectiveness (Mihret & Yismaw,
2007). the auditee attributes relate to the capability of the auditee to meet its intended objectives.
Auditee attributes with implications on audit effectiveness include the auditees' proficiency to
efficiently and effectively meet organizational sub-goals; their attitude towards tax audit; and the
level of cooperation provided to the auditor. Audit quality and management support strongly
affects audit effectiveness.
Better audit effectiveness, in turn, has a positive bearing on these two factors. If tax audit
enhances quality to the extent it elicits management's interest, management support would be a
natural returning of favor because the management would realize the contribution of tax audit to
the achievement of organizational goals. This would positively reflect on audit quality and
enhance audit effectiveness. The management's commitment to implement audit
recommendations improves the operation of the auditee, as a result of which the auditee
attributes would improve to the benefit of audit effectiveness. Further, management retains the
authority to improve the organizational setting and influence the auditee towards a positive effect
on audit effectiveness, which in turn, benefits audit quality.
To achieve effective audit work, the auditors are required to have full and unrestricted access to
all activities, records and properties, and be provided with cooperation from the auditee. The

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ease of access to required records in the auditee varies among the units audited. The capability of
the auditees to meet their objectives also reflects on audit quality.
2.3.5 Organizational independence
Organizational independenceto IA is considered as a determinant of IA effectiveness (Aaron
Cohen & Gabriel Sayag, 2010). The role of IA in organizations is complex. Van Peursem (2004)
identifies strong potential for confusion in the relationship between internal auditors and
management: internal auditors are expected to aid managers in doing their jobs, and at the same
time to independently evaluate management’s effectiveness. Internal auditors are charged with
upholding the best interests of their employer, but they may be reluctant to counter management,
regardless of the consequences.
Bou-Raad (2000) argued that the strength of an IA department must be assessed with respect to
the level of independence it enjoys from management and from operating responsibilities. The
IIA, the American Institute of Certified Public Accountants (AICPA) and others have likewise
identified organizational independence as crucial to the viability of the internal audit function.
Auditors should be sufficiently independent from those they are required to audit that they can
both conduct their work without interference, and equally important to be seen to do so. Coupled
with objectivity, organizational independence contributes to the accuracy of the auditors’ work
and gives employers confidence that they can rely on the results and the report. Differentiate
among three dimensions of independence: programming independence, investigative
independence and reporting independence. They argue that organizational independence is more
crucial to the effectiveness of internal auditors, as it protects the auditor from pressure or
intimidation, and increases the objectivity of the auditing work.
Van Peursem (2004), based on interviews with Australian internal auditors, and concluded that
independence from management is a dominant feature of successful auditing programs. Those
auditors able to set their own agenda seem to be the most powerful in this respect because their
selection of what to audit and when they can include assessments of senior managers as well as
assessments for them. Similarly, found that the independence of the internal audit department
and the level of authority to which the audit staff report are the two most important criteria
influencing the objectivity of their work.
It can be argued that organizational independence will increase the internal auditor’s
effectiveness. This independence both lessens the conflict between loyalty to the employer and

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loyalty to specific managers, and gives auditors a supportive work environment in which they
can conduct their tasks objectively and without pressure.
2.4 Audit Functions
i. Legislative Frameworks
An audit program needs to be supported by a legislative framework that: (1) requires taxpayers
to maintain appropriate books and records, (2) provides the administration with adequate powers
to conduct wide ranging enquiries; (3) allows delegation of the powers to staff conducting audits;
(4) allows reconstruction of income and reassessments of tax using a range of methods and
techniques within a generous timeframe; (5) give taxpayers a right of appeal; (6) places a burden
of proof on the taxpayer; and, (7) applies sufficient penalties to deter non compliance.
Management needs to monitor the audits to ascertain if the legislation is deficient, not
understood, or inconsistently applied, in any of these areas, and develop plans to address such
deficiencies. Plans may include: proposing amendments to existing laws or developing a tax
procedure code; testing the law and establishing precedent before the courts; clarifying the law
through interpretive rulings and education; and improving the training of auditors (Edmund
Biber, 2010).
Some common principles of good practice around the conduct of individual tax audits, and
attempts to give a broad overview of the elements required within an effective and improving
audit regime (OECD, 2006).There key principles that apply to quality audits:
 Accurate -They identify non-compliance, entail a correct interpretation of the law,
andlead to a correct assessment of liability.
 Efficient - They minimize the compliance burden on the taxpayer and minimize the
useof the revenue body’s resources in terms of the outcome delivered.
 Objective - All decisions made are based on facts.
 Transparent - As issues are developed and fully documented in the work papers,
thesedevelopments are generally discussed with the taxpayer during the course of the
audit.
 Fair - Technically accurate and procedurally correct in accordance with domestic
lawsand policies.
 Complete - The audit has a defined start and end point and the taxpayer knows when
theaudit process is complete.

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  Defensible - The decisions made in the audit and the actual audit process can stand up
toexternal scrutiny.
 Consistent - The same taxpayer circumstances should produce the same result
regardlessof which auditor undertakes the audit.

iii. Audit Manuals

An audit manual is required to provide: (1) consolidation of policies and procedures; (2) a
reference guide for auditors; (3) a training tool; (4) consistency in; and (5) aid quality assurance,
governance and accountability. An audit manual should include: Audit policy and objectives;
organization of the audit program; rights and obligations of the taxpayer; case selection
guidelines; audit methods and techniques; audit planning, execution, and finalization; templates
of forms, letters, and checklists; legal and technical notes; and referral of cases for investigations
and Manuals should be easily accessible to staff (OECD, 2006).
iv. Strategic Audit planning
Relatively large amounts of staff resources available for audit work and the important roles that
audits can play, audits are a key element of a revenue body’s overall strategy for achieving
improved compliance with the laws. For this reason alone, the delivery of audit activities justifies
a high degree of planning, monitoring and evaluation to ensure that they are contributing in an
optimal way to the revenue body’s goal of improved overall compliance with the laws.
Audit strategies are principally an internal tool, aimed at maximizing the ability of any
administration to effectively tackle non-compliance. However, they can also be communicated to
stakeholders within government and the tax accounting industry as evidence in support of
requests for resource, and as part of a “leverage” strategy designed to enhance the wider
deterrent effect of the audit program. An audit strategy must also be supported by adequate
management information systems, and performance indicators, so that the outputs from the
activities can be related to the outcomes desired from the compliance strategy. Performance
indicators can also provide critical information for the purposes of funding, identification of
emerging issues, and the development of future programs.
Inevitably, a revenue body’s overall strategy for improving compliance will require specific
audit strategies. These give a context for decisions based on the research into compliance, and
the particular risks which audit staff should be asked to tackle. Without a strategic overview such

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decisions will be left to local management and the audit program may not be nationally
consistent and, ultimately, or sufficiently effective.
v. Scope and Intensity of Audits
According to Edmund Biber (2010), it is necessary to have a proper structure to define what type
of audit should be carried out on a case by case basis before the audits begin (full, aspect and
single issue). The scope of the audit required is defined by the risks identified within the case
selection process. But it is felt that there is an advantage in defining the scope of any audit prior
to the audit taking place.
Selecting the type of audit can occur at various levels of the tax administration (e.g. national,
regional or local). Some countries select the audit type during the return selection process;
Special teams can be created with expertise in the unique business categories of each taxpayer.
This upfront approach channels the necessary resources into the pre-contact stage by using
separate technical staff to select issues, prioritize issues and set the scope of the audit. Once the
separate team has set the scope of the audit, the local auditor can use limited discretion to alter
the scope during the audit.
The general rule though is to follow the road map provided by the separate unit. The advantage
of a separate approach is that it removes the issue selection process from the auditor who will
make decisions on how the issues develop. Revenue bodies should aim to achieve a balanced
program of audits one that balances ‘coverage’, ‘audit quality’, and ‘overall deterrent’
considerations. To achieve this in practice, audit officials need clear guidelines on a revenue
body’s routine examination philosophy and the circumstances in which an audit might be
expanded to cover additional issues of interest, periods of tax liability, and even other taxes.
vi. Audit Experience
Audit experience is an auditor' unique knowledge, competencies and capabilities that occur from
job practices in auditing profession. It enhances the auditor's abilities to process information,
make metal comparisons of alternative solutions, and initiate subsequent actions (Paithun
Intakhan, 2010). It explicitly has an effect on decision making efficiency and effectiveness
through a good memory of information necessary and an accurate judgment of audit tasks. It
helps them identify clients’ operational errors and search for their misstated accounts. Likewise,
auditors with great experience are likely to improve their judgments with more complete and
complex classifications of risk assessments.

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Audit experience definitely promotes them to build and develop the consistency and consensus
of risk judgments, assessments, and evaluations in auditing practices under other conditions,
situations, and circumstances. Thus, auditors with more experience tend to perform best audit
practices, achieve superior audit outcomes, and gain outstanding audit success. They respond
clients' needs, expectations, and requirements by being aware with auditing standards and
practice their audit jobs. Audit experience supports the auditors to serve clients having financial
difficulties and be made aware of such client situations and problems.
Similarly, experienced auditors seem to have no agreements with clients' preferred accounting
treatments and be concerned with retaining and pleasing auditing standards, procedures, and
processes. They explicitly propose audit judgments and qualified opinions by increasing
awareness of the potential adverse consequences of their audit practices. It definitely plays a
significant role in attending negative audit evidences and assessing negative control risks.
Experienced auditors tend to have more competencies for analyzing clients' evidences and
transactions, and interpreting them and presenting audit comments and reports efficiently and
effectively. It promotes auditors to have more audit knowledge and more meaningful
organizations of knowledge, which implemented their knowledge relating to misstatements by
submitting aggressive audit reports from the audit practices and activities.
Vii. Tax Education and Tax Knowledge
Tax education can constitute any informal or formal program organized by the tax authority by
which to facilitate taxpayers in completing tax returns correctly and also to cultivate awareness
of their responsibilities in respect of the tax system (OECD, 2013). Tax knowledge is very
essential in order to increase level of tax compliance (Mohd Rizal, 2013).Hence, it is very
important to have knowledgeable and competent taxpayers.
The above suggest that tax education is one of the effective tools to induce taxpayers to comply
more. In other word, taxpayers are more willing to comply if they understand basic concept of
taxation. For example, the level of tax compliance in Japan is very high. The main reason for the
high tax compliance in Japan is because of the efforts made by the Japanese National Tax
Administration. The Self Assessment System was introduced in 1947 plays an important role for
taxation learning process to taxpayers. To promote the principles of voluntary compliance, they
were done more activities such as public relation, tax education, tax consultation, guidance and
examinations (Rani, 2005) and tax knowledge will also reduce the potential of evasion.

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2.5 The Role of Tax Audit program
i. Role beyond Verification
The role of an audit program in a modern tax administration goes beyond verifying a taxpayer’s
reported obligations and detection of discrepancies between a taxpayer’s declaration and
supporting documentation. Audit can play a major role in improving tax administration and
overall taxpayer compliance by impacting on taxpayer behavior. In addition to raising revenue
directly from audit activities, by selecting the highest risk cases, efficiently detecting
noncompliant taxpayers, applying appropriate sanctions, and publicizing results of audit activity
(either generally or specifically), taxpayers get the message that any attempt to avoid tax presents
a high risk of detection and the penalty for non-compliant taxpayers is substantial.
Tax audits therefore provide the tax administration with significant leverage across the
community rather than only impacting on the taxpayer selected for audit and collecting the tax
that should have been paid in the first place. Additionally, a tax system that is perceived to be
fair and equitable, and punishing taxpayers who do not comply builds community confidence
and encourages compliance from the broader population.
The impact of an effective audit program should be seen in terms of the following effects:
 Corrective – Making adjustments to detected instances of non-compliance.
 Deterrent – Influencing the behavior of the audited taxpayer or sending warning signalsto
potential non-compliant taxpayers to be compliant in future.
 Preventive – The leverage effect of an efficient audit program on broader compliance. Ina
self assessment system, taxpayers should be induced to comply by being:
(1) provided with information and assistance to enable assesses them;
(2) Informed that not everyone will be audited but rather that cases will be selected for audit on
the basis of risk; (3) Convinced that if they understate their tax liability there is a high probability
that they will be audited; and (4) Convinced that if they do not meet their basic obligations they
will be penalized (OECD, 2004).
ii. Information and Intelligence
By having extensive access to the business community, the audit program is in a position to gain
a wide range of information and intelligence that can inform the tax administration of practices
that could be jeopardizing compliance and revenue collection. This information is critical to the
development of appropriate treatment strategies in other parts of the tax administration, for

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example, taxpayer service, policy and legislation, collection, filing and payment enforcement,
and informs the selection of future audit and investigation cases (Edmund, 2010).
iii. Addressing Deficiencies in the Law
Tax auditors detect, in their daily work, weaknesses in law that are being exploited by taxpayers,
and this information is normally escalated to the tax administration’s policy and legislation
program so as to address the loopholes through amending the tax legislation. If auditors observe
recurring patterns of avoidance, this may indicate, for example, that the penalty provisions are
inadequate and require amendment to provide sufficient deterrence (Edmund, 2010).
iv. Law Clarification and Education
The tax audit program also plays an important part in clarifying the law and educating taxpayers
on appropriate compliance measures, such as filing and payment requirements, record keeping
practices, relevant interpretation of the law, and legislative changes. This can be done directly by
the auditors either interacting directly with taxpayers, or by influencing the taxpayer services
program in the development of strategies to address areas of non-compliance detected during
audits (Edmund, 2010).
v. Resources for the Tax Audit Function
Revenue bodies typically have at their disposal a finite level of resources to conduct the day to
day business of revenue administration. Given the many tasks to be performed and the inevitable
decisions that must made on priorities, a process is required to determine how those resources are
to be allocated. In some member countries, revenue bodies have relatively limited discretion as
to how staff resources are to be spread across the various areas of work, while in others broad
discretion is given to senior management on how resources are to be allocated.
Regardless of how the overall budget of resources for audit work is arrived at, a key issue for the
audit function is how those resources will be spread over the various segments of taxpayers.
Determining how resources might best be allocated is a key element of a revenue body’s strategy
for compliance improvement. The significance of the roles played by the taxpayer audit function,
relatively large proportion of staff resources devoted to this function. In many member countries,
the proportion of the revenue body’s overall staff resources devoted to audit and other
verification activities exceeds over 30 % (OECD, 2006).

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2.6 Tax Audit Selection Process
Cases for audit are selected through the computer system based on risk analysis criteria.
However, the selection of audit cases is not confined to the selection by the computerized system
only, as cases can also be selected based on information received from various sources. Audit
cases are selected in the following manner: Selection based on risk analysis; Information
received from third party; Selection based on specific industries; Selection based on specific
issues for a certain group of taxpayers; and Selection based on location.
2.6.1 Risk Based Audit Selection
Most tax administrations have developed audit strategies focusing on taxpayer’s non compliance
risks (OECD, 2006). This experience has shown that an efficient audit selection strategy must
identify those taxpayers who are the most likely to be noncompliant. These techniques work as
follows: a score is given to each taxpayer, based on (a) certain attributes size, industry,
compliance history and (b) Knowledge acquired during previous audit campaigns (whatever the
selection strategy).
The techniques enable the tax administration to build several profiles of taxpayers and hence to
identify those most likely not to comply with tax rules. However, this can be true only when the
tax audit case selection process supported by tax auditing soft-ware and data mining technology.
The risk assessment has to make automatically via a new software module. Against this
background, the tax audit operation has to in place the following preconditions enable to select a
case that has high magnitude to revenue loss:
A. Accurate and Useable Information
The ability to capture and maintain data that can be usefully manipulated and cross-examined is
the foundation of a good case selection system. This, however, does not mean that time
consuming reporting requirements need to be imposed on taxpayers and other institutions. As
with any investment, the costs and benefits need to be considered. The challenge is to collect
data that can be related to risk indicators and be built into databases that can be used to support
analysis and development of inferences about non-compliance (CARTAC, 2008), Data is usually
readily available from taxpayers at various stages of tax administration, including: (1)
registration; (2) filing; (3) audit; and (4) collection enforcement. The data can be used to build
individual case histories or profiles, stratify the population into meaningful groups and develop

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business sector profiles. This enables the tax administration to “score” taxpayer characteristics as
well as relate the compliance history of one taxpayer to others in comparative circumstances.
B. Analysis and Assessment
Data alone does not make a good case selection system. It must be analyzed to facilitate
application of risk criteria to select audit cases. Analysis can take in the form of: Applying
objective risk factors across the data sets: Assessment of filing and paying compliance; level of
deviation in reported figures across periods and/or different revenue declarations from group
averages; relationship between sales and cost of sales, gross profit, expenses, payroll, net profit,
tax payable, and refunds claimed; etc. Automation allows the variables to be changed rapidly
processing of data across the risk indicators.
Review of files by experienced auditors: this is used where there is limited computerization. It
can also be utilized to supplement, or refine an automated case selection system by way of local
knowledge, which can provide credibility to the selection process. This is useful if the examiner
has knowledge of a particular sector (CARTAC, 2008). Data mining: once a risk is identified
and the characteristics of the risk can be described in terms of variables captured in a database, it
is possible to select all taxpayers meeting well-defined parameters. Audit results can be used to
model the characteristics of noncompliance and the resultant criteria can be used to identify tax
payers with similar characteristics. This is process of exploration and analysis, by automatic
means, of large quantities of data in order to discover meaningful patterns and rules.
2.6.2 The Use of Information Technology in Tax Audit Case Selection
Most of the developing countries of tax authority perform their tax audit by either random case
selection or criteria/information based selection system rather than using case sensitive data
mining model. Each of the former two audit selection system has its own drawback. The major
drawback of random selection is its equal treatment to honest and dishonest taxpayers, as
probability of selection is same for both. The criteria/information based selection system too has
a drawback that it pre-supposes certain symptoms of non-compliance, which may actually be
symptoms of other external factors such as change in economic situation or/and government
regulations in that particular trade.
It is not possible to identify the likely tax abusers by simple query and reporting tools. So, tax
departments have to have access to enormous amounts of taxpayer data. Given this reality, the
best cost effective option is to tease-out possible indications of fraudulent tax liabilities

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declarations from the available data using data mining software model. All the models developed
via data-mining technique were better than random selection.
Manish Gupta and Vishnuprasa Nagadevara (Undated) Audit Selection Strategy for Improving
Tax compliance- Application of Data mining Techniques Tax audit case leads identified and
evaluated using a number of analytical techniques including data matching, data mining, pattern
and statistical profiling.
Having the above premise, audit case selection via automation (mainly data-mining) has the role
of efficient delivery of tax services, transparency on tax administration, efficient and accessible
tax system. More specifically, it enables to integrate the tax audit plan to information from risk
management system, third party information, and directives from top-level management.
Moreover, the automated tax administration assists the audit staff to incorporate basic taxpayer’s
information and able to appropriately select the audit case by harmonizing with tax audit policy,
risk criterion, and strategic plan of audit function. As a result of these the taxpayers and the tax
office reduce the time, formalities and bureaucratic procedures and tax is being audit in a
standard and harmonized manner which is compatible with the authority regulations and
directives.
Automated tax audit system is critical, because tax related regulations are based mainly in part of
accurate corporate data coming from the tax audits of the authority. Thus, the audit should
include an appropriate examination of the system to provide reasonable assurance that
information produced by the system is valid and reliable. For example ERCA trying to introduce
some automation system such as SIGTAS, ASUCUDA++, Biometric TIN system and
application of sales register machine (ERCA, 2010) .which was cited by (Getaneh Mihret,2011)
To summarize, this automated selection process helps the tax authority tax audit operations
flexible to the nature of the cases, is also useful for reducing the discretion of tax authorities, it
reduce face to face contact tax auditors with taxpayers, facilitate information exchange between
regulatory authorities, facilitate information and taxpayers document security by reducing the
current accumulated filing and help to reach reasonable decision to audit effectiveness. The new
technologies revolutionize the work of auditors. Not only because of the access to better source
of information, which will also better planning of activities, but, during the audits, specific
software products will guide you interactively in the realization of the field work. The

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information you obtain and with which you feed the systems will be the best element to
guarantee the effectiveness of their activities and also allow measurements of performance.
2.7. Tax Audit Performance Measurement
The international best practice, although not very widespread, is to evaluate the tax authority’s
audit and its auditors by developing performance measurement systems. The measurement of the
tax audit function can involve a balanced scorecard approach. Tax audit functions are primarily
evaluated based on the quality of tax audit by the tax audit team leader and information provided
to the Tax Audit Committee and top management.
However, this is primarily qualitative and therefore not as easy as to measure. “Customer
satisfaction surveys” sent to key managers after each tax audit project or report can be used to
measure performance, with an annual survey to the Audit Committee. Scoring on dimensions
such as professionalism, quality of guidance, timeliness of work product, and convenience of
meetings are typical with such surveys. Understanding the expectations of audit policy statement
and the virtual audit committee represent important steps in developing a performance
measurement process, as well as how such measures help align the audit function with tax risk
priorities.
2.8 Tax Auditor’s Performance Monitoring and Evaluation
Most revenue bodies have a formal process for setting out and monitoring performance, either at
individual auditor level, or at the team level where team managers are responsible for ensuring
that expectations of team performance are met. Expectations are expressed as personal
performance agreements, critical job elements and performance standards. Where formal
performance agreements do not appear to be used, administrations use meetings and discussion
to ensure individual performance is satisfactory. Measurement criteria for auditor performance
include numbers of cases worked and casework quality.
Yield is not universally used as a performance indicator. Some administrations are deliberately
moving away from yield-based targets to focus more on targets based on quality.
Interventions used to manage staff that fail to meet the required competency levels, performance
outcomes and/or are disengaged typically includes: identifying why the person fails to meet the
capability standard or other benchmark, and applying learning interventions and additional
training (including monitoring if appropriate). Pay freezes, re-deployment to a more suitable role
and/or dismissal of the officer may occur where the above is ineffective.

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There are several different approaches to monitoring the time usage of individual auditors with a
variety of computer-based systems being widely used. Some administrations allocate cases on an
annual basis with the auditor being responsible for their own time management such as computer
programs based on individual input by staff. Others have closer supervision, with managers
inspecting timesheets/reports on a daily or weekly basis as its been recognized that self-inputted
data can lead to inaccuracies, which can be picked up through close monitoring of systems.
2.9. Tax Auditors Capacity Improvements
Responsibility and accountability for improving auditors appears to be influenced by the
organizational structure. Human resource departments often have joint responsibility and/or are
significant contributors to this process, together with tax auditing / training departments. The
common methods included building expectations regarding capability improvement, and learning
and development into the performance management system (often including annual and/or
biannual reviews). Individual performance agreement / job description. making staff and
managers mutually accountable to ensure development needs are met; including time for training
and other capability improvement activities in budgets and plans; allowing work time to be
allocated to these activities; funding training and development courses; and Offering a range of
capability improvement activities to ensure they are easily integrated into the normal course of
duties.
Feedback and observations regarding capability of gaps and issues are typically gathered from
the following sources. Considered at a corporate level, and used to improve training and
development activities and capability programs: results from quality assurance and other quality
management systems; Results from performance system interviews (often performed annually or
biannually); client professionalism, satisfaction and other similar surveys; and Training and
skilling program evaluations (OECD, 2006).
2.10. Formal statements of Taxpayers’ Rights and Responsibilities in Auditing
A major function of the revenue office is to help taxpayers understand their rights and
responsibilities at each step in the administration and collection of the state and local taxes
administered by the revenue office. Taxpayers’ awareness of these rights is essential to
maintaining by the efficiency and fairness of the state and local tax systems. According to
Andreoni, J. Erard, B. & Feinstein, J. (1998), the success of tax audit is the function of tax
auditor efforts and properly discharging of taxpayers’ obligation that provided by law. In the

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self-assessment tax system full participation of taxpayers is responsibilities to the success of tax
audit.
2.11. Tax Audit Effectiveness in Ethiopia
Currently, the government of Ethiopia like other governments seeks to raise revenue mainly
through taxation in order to pay its expenditures, on infrastructure development in particular.
According to the proclamation No. 587/2008, the responsibility to collect such revenue for the
federal government rests with ERCA in Ethiopia. ERCA came into existence in 2008, by the
merger of the Ministry of Revenue (MoR) , Ethiopian Customs Authority (ECA) and Federal
Inland Revenue Authority (FIRA) (that formerly raise revenue for the federal government and
prevent contraband) with a vision to be a leading fair and modern tax and customs administration
in Africa. The reason for the merger was to diminish serious problems due to inefficient
organizational structure and unnecessary complicated procedures that permitted insufficient
service delivery, corruption within the administrations, and smuggling and tax evasion.
According to ERCA (2010), the authority is established with a mission to promote voluntary
compliance of taxpayers, ensure integrity and develop skills of the employees, support
modernization, facilitate trade and investment, harmonize taxes and customs administrating
system, broadening tax base and decreasing tax rate, and contribute to the economic
development and social welfare through effective tax revenue collection. Accordingly, ERCA
has made a wide range of organizational and institutional reforms with the aim of strengthening
revenue mobilization, enhancing operational efficiency, and improving voluntary compliance.
For instance, process improvement, integrating and modernizing revenue administration, tax
audit in particular, with new technology is ongoing.

Tax audit in the context of ERCA is defined as an activity or a set of activities performed by tax
auditors to determine the taxpayer’s correct tax liabilities for a particular accounting or tax
period. Tax auditors examine taxpayers‟ organizational procedures and financial records in order
to assess compliance with tax laws and verify the true, fair, reliable, and accuracy of tax returns
and financial statements (ERCA 2010).

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 CHAPTER THREE
RESEARCH METHODOLOGY
The purpose of this chapter was to give the readers better understanding of the structure of the
thesis & description of the way in which the researcher would proceed with the study. It also
gives idea of how and why researcher formulates and identifies questions, and choice of the
specific case studies which illustrate the topic. And it includes research design, target
population, sample size, and sampling techniques, source of data, data collection tools and data
analysis method that the study were used.
3.1 Research Approach
The study applied quantitative research approach to describe and evaluate the factors affecting
tax audit effectiveness in Akaki Kality Sub-City Small tax Payers Office. Well-designed and
implemented quantitative research has the merit of being able to generalize, for a broader
population, based on findings from the sample. Moreover, the applications of this approach
enable the researcher to obtain adequate, relevant and reliable data to the issue under the study.
Quantitative research is used in the post-positivism knowledge claiming that primarily reflects
the scientific method of the natural sciences. The researcher gathers data from the real world
setting and then analyses the data statistically to support the objective (Robert K.Yin, 1994).
Researchers who adopt a more deductive approach use theory to guide the design of the study
and the interpretation of the results. In line with this, the overall objective of quantitative
research is to test or verify a theory, rather than to develop one. Therefore, the theory offers a
conceptual framework for the entire study, and it serves as an organizing model for the entire
data collection procedure. Quantitative techniques as an attempt to meet the objective by
incorporating it into the research design and responding to it by measuring its strength and
weaknesses that give numerical measurements to the data collected.
Therefore, pure experiment enables the researcher to manipulate an independent variable in order
to see the effect on the dependent variable with the random assignment of subjects to treatment
conditions. Whereas, survey research provides quantitative or numeric description of research
trends attitudes or opinions of a population by studying a sample of population. It includes cross
sectional (data were collected in one point in time) and longitudinal studies (data were collected
through time with different interval) using questionnaires, structured interviews and

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documentary reviews for data collection, with the intent of generalizing from the sample to the
population.
3.2 Research Design
The main objective of this study is to examine the factors affecting tax audit effectiveness in
Akaki Kality Sub-City Small Tax Payers office. Hence, the appropriate research method is
survey research type. A survey is a method of collecting data in a consistent way. Survey
research is useful for documenting existing community conditions, characteristics of a
population, and community opinion. In this chapter, you will find an outline of the steps needed
to conduct surveys using both the questionnaire and interview methods. Details on preparing
questionnaires and interview schedules are presented, along with a comparison of both methods
for different community-based situations. Survey data is not only useful for immediate
community development purposes, but it can also serve the future of a community efforts by
providing the baseline data needed later to demonstrate progress.
Surveys are one of the most common forms of research to reach native communities, to the point
that the common community reaction is "Not another survey!" Such a reaction is usually due to
the hundreds of surveys conducted by academic researchers and federal agencies, where the
results rarely came back to the community directly. In these times of change, many community
groups are conducting their own surveys and participating in the definition of the questions asked
by the surveys of other researchers. This type of cooperative survey effort can be a strong tool
for community development. More specifically, surveys can be useful for:
 Determining the characteristics of a population or a community
 Defining existing conditions in a community or region
 Documenting community opinion
 Comparing groups of communities

All of the above purposes for conducting surveys can be directly applied to the development and
management of community resources. More specifically, a survey is a method of collecting data
in a consistent, or systematic, way. This usually involves constructing a set of questions that are
either asked by means of a questionnaire or through an interview. In relation to the methods
presented in the previous chapter, needs assessments often use survey techniques. This chapter
will present a broader view of the uses and techniques of the survey.

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TYPES OF SURVEYS
There are several different approaches to conducting a survey. One very common approach is the
cross-sectional survey, where a set of information is collected for a sample at one point in time.
Data may be collected from a sample of the population or from the entire population or
community. When the data can be collected from an entire population, as may be the case in the
small community or tribe, then the survey is sometimes called a census. When the data are
analyzed from a cross-sectional survey, the results can vary from tabulations of answers on
single questions to a more complex analysis exploring the relationships between variables. Even
though the data are collected at one point in time with the cross-sectional survey there are
methods of comparing items or looking for change. For example, .the questions asked may be
time-ordered, referring to events in the past, present, or the future. The responses on such
questions can provide a basis for looking at change, but with the disadvantage that the person
answering the questions may distort impressions of an event over time. The longitudinal survey
provides another means of looking at changes over time.

In addition, enable the generalized knowledge to get the existing situations of audit selection, tax
audit function, audit staff monitoring and evaluating, and compliance of taxpayers during
auditing

3.3 Theoretical and Conceptual Frame Work

A conceptual framework represents the researcher’s synthesis of literature on how to explain a
phenomenon. It maps out the actions required in the course of the study given his previous
knowledge of other researchers’ point of view and his observations on the subject of research. In
other words, the conceptual framework is the researcher understands of how the
particular variables in his study connect with each other. Thus, it identifies the variables required
in the research investigation. It is the researcher’s “map” in pursuing the investigation. For this
research is used those below (1) dependent and (5) independent variables to meet my research
objectives.
The collect and analyze data were presented by using the following data presentation tools:
tables, histogram and regression, along with sufficient interpretations.
Factors (independent Variable)

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Therefore, the formula going to be used for the model is:
Y= β0 + β1X1 + β2X2 + β3 X3 + β4 X4+ β5 X5+ Є
Tax Audit Effectiveness =Factors Affecting (summation of all those factors)
TAE = β0 + β1 (AQ) + β2 (OS) + β3 (MS) + β4 (AA) + β5 (OI) + Є

Where:
TAE = tax audit effectiveness
AQ = audit quality
OS = organizational setting
MS = management support
AA = auditee attributes
OI = organizational independence
Where Y stands for the mean values of the Tax Audit Effectiveness whereas β0, X1, X2, X3, X4,
X5 and Є denote the intercept of the equation; mean values of audit quality, mean values of
organizational setting, mean values of management support, mean values of auditee attributes,
mean values of organizational independence and error term of the equation respectively. In
addition, β1, β2 β3 β4 and β5 are the parameters of the equation.
3.4 Sampling Design
3.4.1 Population and sampling strategies
The population of the study includes the entire set of all business income taxpayers particularly
category “A” and tax auditors operating in the Akaki Kality Sub-City Small Tax Payers office.

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Accordingly, the target groups for the study were 5,646 business income taxpayers, these
populations consist of business income taxpayers who are categorized based on their annual sales
volume and 26 tax auditors of revenue office.
3.4.2 Sampling Techniques
For this study the researcher used probability sampling techniques to identify the respondents
from taxpayers, even if there are different types of probability sampling techniques, the
appropriate one for this study is simple random sampling method of a lottery method in which
tickets are prepared for each unit of the population. The first advantage of this research approach
is the use of statistical data as a tool for saving time and resources. (Bryman, 2001, p20) argue
that quantitative research approach is the research that places emphasis on numbers and figures
in the collection and analysis of data. Imperatively, quantitative research approach can be seen as
being scientific in nature.
The use of statistical data for the research descriptions and analysis reduces the time and effort
which the researcher would have invested in describing his result. Data (numbers, percentages
and measurable figures) can be calculated and conducted by a computer through the use of a
statistical package for social science (SPSS) (Gorard, 2001, p3; Connolly, 2007, p2-34) which
save lot of energy and resources. Secondly, the use of scientific methods for data collection and
analysis make generalization possible with this type of approach. Interaction made with one
group can be generalized. Similarity, the interpretation of research findings need not be seen as a
mere coincidence (Williams and May 1998, p1-21). The study of problem-solving instruction in
secondary school science education within one particular area or zone can be reflective of the
wider society in terms of samples, contents and patterns (Shank and Brown, 2007, p28; Cohen
and Morrison, 2011, p243). Then the tickets are mixed up and the required number of tickets
(sample) will be drown from the tickets, because it improves the accuracy of the sample because
of the target population of the study has one stratum, based on their attributes that is income or
sales: category “A” taxpayers. On the other hand, the researcher will use census method to select
respondents form revenue office. That is, in Akaki Kality Sub-City Small Tax Payers office,
there are 26 tax auditors. Census method is the most reliable sampling techniques especially if
the number of population is small. Hence, the target population of tax auditors is small.
Census refers to the quantitative research method, in which all the members of the population
are enumerated. Under this technique, the enumeration is conducted about the population by

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considering the entire population. Census is best suited for the population of heterogeneous
nature. As opposed to sampling which is appropriate for homogeneous nature. All the members
of the population are taken into account instead of only a fraction.
3.4.3 Sampling Frame
For this study the sampling frame is the list of 5,646 target populations of category "A"
taxpayers, and 26 Revenue office staff tax auditors from which the required number of sample
size were drawn, which was available in the Akaki Kality Sub-City Small Tax Payers office
listed as of march,2020.
3.4.4. Sampling Unit
The sampling units for this study is the individual businesses income taxpayers, and the second
set of sampling unit comprises Akaki Kality Sub-City Small Tax Payers office tax auditors and
enforcement core process employees of tax audit depending on their responsibility and
experience in their office.
3.4.5 Sample Size
To ensure the validity of the findings, the study used adequate sample size. The researcher
determined to accept at 5% sampling error and wanted to be at 95% confidence with the findings
of this study. Having determined the accuracy and level of confidence, the sample size
determination adopted from (Glenn D. Israel, 2013).
The reason for 95% level of confidence based on the homogeneous characteristics of business
income taxpayers, that is, taxpayers pay their tax liability based on their annual transaction and
most taxpayers show unwillingness to tell their actual sells transaction due to this, error at five
percent did not affect the reliability and validity of the results. The target or the theoretical
population of the study constitutes two specific sets of units from which the sample is actually
drawn. The first set of sampling unit is comprised all registered business income taxpayers in
category “A” operating in Akaki Kality Sub-City Small Tax Payers office that are currently
about 5,646 the target group of samples are those taxpayers which are in audit process of audit
requested to be audited and found at risk assessed by the tax audit department and from the
annual plan of tax audit to cover auditing category A taxpayers which is 700 taxpayers to be
audited for the current year The second set of sampling unit comprised revenue office tax-
auditors and enforcement core process owner of staff members who are about 26 at the time of
data collection. Hence, business income taxpayers category “A”, of the total respondents of

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taxpayers in the Akaki Kality Sub-City Small Tax Payers office and 26 revenue office staff tax
auditors and enforcement core process are samples is selected to be respondents or participants
of this study.

Formula for determining sample size n= N

1+N (e) 2
n= 700
1+700 (0.05)2 = 254.54
Where

n = sample size

N = study population

e = level of significance (0.05)

3.5 Source of Data
3.5.1 Primary Data Sources
The main base for the study is primary data only which will be collected through field-work
survey in order to get information on the issue of factors affecting tax audit effectiveness through
questionnaire. The structured questionnaire consists of closed ended questions to collect
quantitative data from the respondents.
Along with some of the closed ended questions are four score likert scales to provide
respondents a wider range of alternative with end points where “4” the level of agreements are
represent by 1 to 4. Strongly agree 4, agree 3, disagree 2, and strongly disagree represented by 1
and also includes Yes/No questions on the matter related tax audit.
Subsequently, these are: (i) questionnaire was filled by tax auditors and its enforcement core
process owner, to reflect their work to the issue under study and (ii) questionnaire prepared in
Amharic Language is only for taxpayers and were filled by taxpayer and translated into English
by the researcher later.
3.6. Data Collection Methods
In conducting the research data that are going to be used are primary data. Among the different
primary data collection methods questionnaires are the main that have been most usually going

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to be applied in this study. And also, a likert scale (used an SPSS software application ) is
applied to present the data output and discuss the result.
3.6.1 Questionnaires: were used to collect primary data form respondents and its advantage
iscovering a large number of respondents easily and quickly. To gather the necessary data close
ended questions were used and translated in to the local language, which is Amharic for
taxpayers. The researcher has developed two types of questionnaires, for taxpayers and revenue
tax auditors and their enforcement process owner’s staffs.
Questionnaires were distributed to the selected respondents to get primary data on the factors
affecting tax audit effectiveness. The questionnaires consists of two sets: The first set of the
questionnaire is provided to the tax auditors and their enforcement core process staff and it has a
total of 64 questions; with three parts, each part having 7, 10, and 47 questions for the first,
second, and third part respectively. The second set of the questionnaire were provided to
taxpayers and a total of 10 questions; with two parts, each part having 4, and 6 questions again
for the first, and second part respectively.
3.7 Methods of Data Analysis and Interpretations
Before presenting the data analysis methods adopted, the study tried to specify the variables and
models used under the study. Accordingly, the study identifies a total of six (6) variables
including one dependent, and five independent variables based on the previews studies on
different countries on similar topics namely, (Mihret and Yismaw, 2007 and Aaron Cohen &
Gabriel Sayag, 2010).
In this research, raw data is changed into a data structure that enables to generate meaningful and
useful bits of information. The major part of the analysis was done based on the descriptive
statistics and multiple regression analysis for quantitative data to examine the study to indicate
the factors affecting tax audit effectiveness in Akaki Kality Sub-City Small Tax Payers office.
Descriptive analysis is used to describe the basic features of the data in the study. They provide
simple summaries about the sample and the measures. Together with simple graphical analysis,
they form the basic virtual of any quantitative analysis of data. With descriptive analysis, one
simply describes what is or what the data shows.
Description of data is needed to determine the normality of the distribution, description of the
data is necessary as the nature of the techniques to be applied for inferential analysis of the data
depends on the characteristics of the data. Once the data are grouped, different statistical

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measures are used to analyze data and draw conclusions. For the present study, the following
statistical measures of descriptive analysis were used to using SPSS (Jason mason, 2018). The
study used multiple regression analysis and descriptive statistics to estimate the causal
relationships between tax audit effectiveness variable, and independent variables.
3.7.1 Measures
Effectiveness of tax auditing
Given the lack of academic work on the effectiveness of tax auditing, we found scales in the
literature that were tested for their reliability which met the requirements of this study. We used
the 47 internal auditing effectiveness items advanced by (Aaron Cohen & Gabriel Sayag, 2010)
as a starting point and I have test for their reliability (Cronbach’s Alpha) for all items with SPSS
(Jason mason, 2018).
Dependent variables
Tax audit effectiveness- This variable was measured eight items (numbers 33, 34, 35, 36, 37,
38, 39, and 40). The majority of these items dealt with the tax audit effectiveness.
Independent variables
It should be noted that the data for the five independent variables were collected from the tax
auditor in Akaki Kality Sub-City Small Tax Payers office. Therefore, the independent variables
represent the perceptions of the tax auditors regarding these concepts.
Auditee attributes: fifteen items was measured this variable (numbers 18, 19, 20, 21, 22, 23, 24,
25, 26, 27, 28, 29, 30, 31, and 32). The majority of these items dealt with the auditee attribute.
Audit quality: Six items was measured this variable (numbers 41, 42, 43, 44, 45, and 46). The
majority of these items dealt with the audit quality. Organizational independence: This variable
will measure eleven items (numbers 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, and 57). The majority
of these items dealt with the organizational independence.
Organizational setting: Three items was measured this variable (numbers 58, 59, and 60). The
majority of these items dealt with the organizational setting. Top management support: Four
items will measure this variable (numbers 61, 62, 63, and 64). The majority of these items dealt
with the top management support.
3.8 Reliability and validity
Reliability is replication which emphasizes the capacity of replication to the research (Bryman &
Bell, 2011, p.41). It needs us “spell out” our research procedure in a great detail so that allowing

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replication becomes impossible for someone else (Bryman & Bell, 2011, p.41). In this research,
we will discuss our research process in detail and try to present a clear and reasonable procedure
for readers. Thereby it is possible to replicate our research and obtain the same results.
Measurement validity concerns whether or not a measure the capacity of results which can be
generalized beyond the specific research context (Bryman & Bell, 2011, p.43). In other words, it
means whether the sample of the research can represent the whole population. In our research,
the main concepts are Factors that Affect Tax Audit Effectiveness. We used Tax Audit
Effectiveness as (dependent variable) and Audit Quality (AQ), Audit Attribute (AA),
Organizational setting (OS), Top Management Support (TMS), and Organizational Independence
(OI) as independent variables to investigate their relation on tax audit Effectiveness and used
likert-scale to measure reliability also used survey questionnaire to collect and analyze the data.
Having extensive access to the business community, the audit program is in a position to gain a
wide range of information and intelligence that can inform the tax administration of practices
that could be jeopardizing compliance and revenue collection. Moreover, the applications of this
approach enable the researcher to obtain adequate, relevant and reliable data to the issue under
the study.

3.9 Ethical Clearance of the Study

Research clearance typically involves an ethical clearance committee looking at the research
aims and methodologies of the researcher to make sure that the research will be conducted in the
way that protects, the dignity, rights and designs is ethically sound and is likely to render the
anticipated results. Ethical approval of the research project also helps to increases the legitimacy
of the research findings. This is important for those making decision based on the research
findings.
In this study, the necessary ethical rules including voluntary participation; the right to privacy;
freedom; and anonymity and confidentiality was encountered. Ethical conduct of the research
such as respecting human rights, human dignity and morality of individuals and the whole
community with hospitality approach were considered. Over all activities, legality and legal
procedures were applied by the researcher. The organization was requested to permit the
researcher during the working hours of the organization and their employee.

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 CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
The primary focus of this study is to examine the factors affecting tax audit effectiveness with
regarding to auditing practice of the revenue office and the taxpayers in Akaki Kality Sub-City
Small Taxpayers Branch Office’. Two different types of questionnaires were prepared and
distributed to collect primary data from the two groups of the respondents: tax auditors and
taxpayers. The target population for this study was tax auditors and taxpayers from Akaki Kality
Sub-City Small Taxpayers Branch Office that conduct tax audits. Questionnaires were sent to
300 participants that met this criterion, based on list compiled by the revenue office. The
questionnaire for the tax auditor and taxpayers dealt with the effectiveness of the revenue office
tax auditing processes, and covered the independent variables. The data collection process took
about 1(one) months, with numerous reminders sent to each of the participant. At the end of the
collection process, 281 questionnaires were returned back. This shows that the response rate was
93.6%. This response rate of 80% is typical for a sent survey in general and quite good for more
complex data collection as was requested in this study of the 251 individuals that participated in
the study, 26 were tax auditors and 225 were taxpayers.
In this study both descriptive statistic and regression analysis were used to analyze the data. The
descriptive statistics utilized in this research used to analyze the demographic data included
frequency, percentages. Inferential analysis is concerned with the various test of significance for
testing hypothesis, normality, autocorrelation, multi-colinearity in order to determine with what
validity data can be said to indicate some conclusion(s). The data collected from the returned
questionnaire were entered into SPSS (Statistical package for social science software) version
2016 release for analysis. The data was sorted to group questions according to applicable
constructs under test. Finally correlation and regression analysis were performed. In this study, a
multiple regression analysis was performed by using all the discrete variables (dependent and
independent) variables available in the dataset. The location of the study was Akaki Kality Sub-
City Small Taxpayers Branch Office. Down below there is a reliability test was carried out using
convenient sampling method.

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4.1 Descriptive statistics result for tax Auditor Staff’s Respondents
4.1.1 Personal information
This section provides a profile of respondents who involved in the study and data collected on
basic characteristics. Accordingly, the following variables about the respondents were
summarized and described in the following table 1. These variables include: educational level,
field of study, current position, years of experience, special training received, time taken of the
special work related training, and level of satisfaction on their current salary.
Table 4.1 Profile of Akaki Kality Sub-City Small Taxpayers Branch Office Tax Auditor Staff’s
Respondents
Level of education Frequency Valid Percent Cumulative Percent

Degree 24 92.3 92.3

Master’s Degree or Above 2 7.0 100

Total 26 100

Field of Study Frequency Valid Percent Cumulative Percent

Accounting 13 50 50

Management 6 23.07 73.07

Economics 7 26.09 100.0

Total 26 100

Current position in the Frequency Valid Percent Cumulative Percent

office

process owners 4 15.38 15.38

Auditors 18 69.23 84.61

Others 4 15.38 100.0

Total 26 100

have you been working Frequency Valid Percent Cumulative Percent

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experience in this position

0less than two years 0 0 0

2-5 years 4 15.38 15.38

greater or equal to six years 22 84.62 100.0

Total 26 100

Source: SPSS output from profile of tax auditor staff respondents, 2021

you attend any special Frequency Valid Percent Cumulative Percent

training with your current
position

investigation and intelligence 8 30.77 30.77

preparation of audit findings 14 53.85 84.62

audit selection techniques 4 15.38 100

Total 26 100

have you been taking in Frequency Valid Percent Cumulative Percent

training

less than 16 days 2 7.69 7.69

16-30 days 18 69.23 76.92

31-60 days 4 15.38 92.3

more 60 days 2 7.69 100.0

Total 26 100

you satisfy with your Frequency Valid Percent Cumulative Percent

current salary

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 No 20 76.92 76.92

Yes 6 23.07 100.0

Total 26 100

Source: SPSS output from profile of tax auditor staff respondents, 2016
As shown in table 4.1, it is clearly visible that to the level of education, 24(92.3%) of the
respondents are bachelor degree holders, whereas 2 of them (7.0%) are master’s degree or above
holders, this figure revealed that the tax auditors’ educational qualification is seem to be
adequate to perform audit tasks. As international standards almost 70% of auditors should have a
university and college graduated, therefore it concluded that educational qualification is
important on individual’s attitude for knowing the tax laws and regulation and other international
business transactions, the consequence of this is that an organization will be achieved it audit
objective. Although, most of the audit staffs are bachelor degree holders, not only this but also
auditors should have more professionalism to do best audit practices, activities and
responsibilities in order to enhance audit efficiency, gain audit effectiveness, receive audit
performance, and audit success. Thus, this shows that the tax audit is effective in audit quality.

Based on this, 13(50.0%) of the respondents are having accounting field of study, 7(23.09% are
having management field of study and the remaining 6(26.09%) has Economics field of study.
Most of them are accounting and management graduated, to be an auditor a person has deep
knowledge of accounting and management theory and principles therefore, the findings indicated
that an organization audit staff almost may have sufficient knowledge of their field of study.
Then I concluded that educational level attainment of respondents is excellent and which may be
related to their profession. Audit quality encompasses the key elements that create an
environment which maximizes the likelihood that quality audits are performed on a consistent
basis this implies the audit qualities of tax audit efficiencies are attained through the level of
education that tax auditors of the revenue office have. Up on the finding the tax audit
effectiveness is attained through Audit quality.

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Even though educational qualifications are fundamental, it should be supported with the
appropriate experience in order to be more effective with in a relatively shorter period of time.
Based on this fact the respondents who are employed, 15.38% having from 2 to 5 years’
experience and the remaining 84.62% has greater than or equal to 6 years of worked experience.
As International standard shows that a good auditor should have two and above years of
experience, there is any employee with less than two years of work experience therefore, the
most of the revenue office auditor staffs fulfill the international standards. Hence, tax auditors
with more experience tend to perform best audit practices, achieve superior audit outcomes, and
gain outstanding audit success. Then it is possible to conclude that revenue’s office auditors’
experiences may have a good positions and audit experience is a positive effect on audit.
The respondents were also asked to assert the tax auditor staff special training(s) attended
relevant to current positions, majority (53..85%) of the respondents had been attended in the
preparation of audit findings, 30.77% in investigation and intelligence and 15.38% in audit
selection techniques. As mentioned in the above statement auditors might have good position in
audit experience and educational qualification but without training, auditors’ audit results would
be lower than expected. Hence, continuing professional development is important to tax audit
department as a means to ensure that auditor’s skills are kept up to date. All bodies in and
outside of the organization offer training activity to address specific business needs such as the
introduction of new software, legislation or practices, and to address the general training needs of
individual auditors to make them more effective in their posts.
In order to perform their tasks very well, an organization should be build a capacity of
employees through training for a short period of time, based on this idea the respondents of this
survey have been replied that, 7.69% of the respondents have attended less than 16 days,
(69.23%) of the respondents have attended from 16 to 30 days training and those respondents has
got relatively longer time period, 15.38% of the respondent have attended a period from 31 to 60
and 7.69% of more 60 days of work related trainings. From the above data it can be concluded
that, the revenue office tax auditor staff members have qualified, educated, short term training
and experienced the employees did get satisfactory training.
In order to encourage staff to self-develop and participate in the competency improvement and
retain the turn over experienced tax auditors an organization should have been increase the audit
staffs salaries based on this, as it can be observed from the table, 76.92% of the respondents were

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unsatisfied with their current salary while 23.01% of the respondents were satisfied with their
current salary. Then it concluded that the audit staffs do not satisfied with their current salary the
experienced auditors might be turnover increased and them towards illegal activities such as
corruption, finally it may have a negative impact on audit effectiveness of an organization.
4.1.2. An investigation of organizational Tax Audit Function
Table 4.2 An investigation of organizational Tax Audit Function
Any legal obligation to Frequency Valid Percent Percent
maintain the tax payers'
recording

No 7 26.92 26.92

Yes 19 73.08 100.0

Total 26 100

Staff motivation scheme Frequency Valid Percent Percent

level is high

No 22 84.62 84.62

Yes 4 15.38 100.0

Total 26 100

Audit manual can give detail Frequency Valid Percent Percent

explanation of tax laws

No 20 76.92 76.92

Yes 6 23.08 100.0

Total 26 100

Source: SPSS output from an investigation of The Revenue Office Tax Audit Function
respondent, 2021
Individual auditor selecting Frequency Valid Percent Cumulative Percent

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 the cases

No 24 92.30 92.3

Yes 2 7.7 100.0

Total 26 100

You are performing the audit Frequency Valid Percent Cumulative Percent
work as per general audit

No 6 23.08 23.08

Yes 20 76.92 100.0

Total 26 100

Auditor have appropriate Frequency Valid Percent Cumulative Percent

powers of access to get
information

No 6 23.08 23.08

Yes 20 76.92 100.0

Total 26 100

Source: SPSS output from an investigation of The Revenue Office Tax Audit Function
respondent, 2021

The examination techniques Frequency Valid Percent Cumulative Percent

are effective in detecting
fraud

No 7 26.92 26.92

Yes 19 73.08 100.0

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 Total 26 100

Tax audit function have Frequency Valid Percent Cumulative Percent

adequate resources

No 23 88.46 88.46

Yes 3 11.54 100.0

Total 26 100

You believe that your office Frequency Valid Percent Cumulative Percent
has sufficient employees in
tax audit

No 26 100 100.0

Total 100 100

The respective government Frequency Valid Percent Cumulative Percent

officials give attention for tax
audit

No 6 23.08 23.08

Yes 20 76.92 100.0

Total 26 100

Source: SPSS output from an investigation of The Revenue Office Tax Audit Function
respondent, 2021
As indicated in the tables 4.2 shows (26.92%) of the respondents are not agreed that those in
category “A” taxpayers should maintain books of accounts. But under Ethiopian tax
proclamation No.286/2002 category “A” tax payers shall maintain their own book of accounting
records and at the end of the year shall submit to the tax authority a balance sheet and a profit
and loss statement supported by appropriate vouchers and document. Based on results, (73.08%)
of the respondents are agreed that those in category A taxpayers should maintain books of
accounts. It is possible to conclude that those taxpayers maintain books of accounts with the

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support of appropriate vouchers and documents have a positive impact for organizations audit
effectiveness.
Even though auditors have good working experience and professionalism without motivation
scheme the revenue office do not achieve its targets, because of low level of motivation more
experienced and professional auditor leave from the organization. Hence majority of the
respondents (84.62%) replied that the existing motivation scheme is low and only 15.38%
replied positively this indicated, audit staffs are unsatisfied with their motivation scheme.
Therefore the consequents’ of this is that the audit affects the organization audit performance.
For more efficient and effective tax audit not only need professional and educational persons but
also need audit support tools. Among those audit manual is one of the determinant factors for
audit effectiveness, because it is detailed explanation and interpretation of tax laws and
regulations, based on this majority of the respondents (76.92%) are replied that an organization
audit manual is not well detailed explanation and interpretation tax laws and regulation, on the
other hand 23.08% of the respondents is agreed. This research finding that, an organization has
an audit manual not well designed. I concluded that the organization auditors’ not fully
implemented according to the tax rules and regulations and lastly it may be a critical factor for
effective tax audit.
Most of the respondents (92.03%) said that an individual auditor can’t select the taxpayers audit
cases. This idea can be supported by the tax audit and enforcement process owner said that
taxpayers audit case selection can take place by team committee members. Team committee
members will select the declarations of taxpayers for all taxes to test with law. After reviewing a
taxpayer’s declaration, considering information about the taxpayer’s compliance history, the
team committee will apply appropriate risk criteria in selecting a taxpayer for audit using manual
based selection system. This finding indicated that the taxpayers audit case selection is
performed with a committee rather than an individual auditor’s for the purpose of fair and
transparent audit case selection.
A per the result, more than 76.92%(20) of the respondents agreed that tax auditors perform their
duties and responsibilities based on the generally accepted auditing standard and about
23.08%(6) of the respondents were disagreed on the same issue. At some noticeable level the
respondents are disagreed, it clearly revealed the absence of standards; because of lack of clear
auditing standards every auditor decide by his own standards for their clients due to this auditors

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are inconsistent in their comments and do not comply with tax legislation, and not fully applied
generally auditing standards as a result it might be effects on the quality and effectiveness of
audit results.
The survey data has shown that majority (76.92%) of the respondents agreed that an auditor has
an appropriate powers to get accesses information regarding to audit purpose while 23.08% of
the respondents not accepted this issue. To strengthen the majority of the responses in income tax
proclamation No 286/2002 stated, auditors are required to contact as much research on the
taxpayers’ operation and all the procedures to be taken at the taxpayer’s premises and can also
obtain information from third parties like financial institutions, from the customers or sales
partners of other sub city branch revenue office data base information , from regional revenue
authority data base, and customers and supplies of the taxpayers. Therefore it can be conclude
that an auditor power has useful to make reliable decision of audit results and also positive
impact for smooth and effective functioning of auditing.
Furthermore, with respect to the examination techniques are effective in detecting fraud and
determine the accurate tax liability, about 26.92% of the respondents said that the organization
examination techniques are ineffective in detecting fraud and determine the accurate tax
liabilities while the majority of the respondents replied with73.08% agreement on the same issue.
The analysis of the response indicates that the existing examination techniques is effective at
higher level proportionality in detecting fraud and determine the accurate tax liability.
The sub city Revenue office typically has at its disposal a finite level of resources to conduct the
day to day business of revenue administration; hence from the above table 2 it is clearly visible
that, about 88.46% of the respondents said that audit section has inadequate resources while
11.54% of them are agreed on the issues. According to the respondent, then it can be concluded
that there is lack of resources in the organization that can inhabit the smooth functioning of audit.
For the effective and efficient tax audit not only the skilled and qualified of tax auditors but also
adequate numbers of tax auditors may have great impact. Regarding this, most of 100% of the
respondents replied that in the sub city revenue office audit section has insufficient employees of
auditors which means currently only 26 auditor serves for 700 audit plan for year auditing
coverage of taxpayers, which may be fails below compared with the international standards
(auditors are 30% of the total administrative staffs). Therefore the findings indicated that the sub
city revenue office has low performance of audit.

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Giving attentions by the respective government officials are very essential, due to this reason
majority of the respondents (76.92%) are agreed that the respective government official give
attention for tax audit section. On the other hand 23.08% of the respondents did not agree on the
same statement. The majority of the response agreed that the government officials give attention
for the revenue office especially for audit section. The result indicated that may be low level of
governmental attention for tax administration particularly in tax audit.
4.1.3 Descriptive statistics on tax auditors’ response
A total of 26 copies of questionnaires were sent to tax auditor respondents. From the auditor
respondents, 26 usable questionnaires were obtained (100 percent response rate). Descriptive
measures of responses are presented in Table 4.3
Table 4.3 descriptive statistics
Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

AA 26 1.00 4.00 2.5495 1.00036

TAE 26 1.00 4.00 2.8462 .84136

AQ 26 1.00 4.00 2.6731 .87874

OI 26 1.00 3.82 2.6853 .78339

OS 26 1.00 4.00 2.8590 .88530

TMS 26 1.00 4.00 2.6769 .85056

Valid N (list wise) 26

Source: SPSS output from scale questionnaire respondent of tax auditors, 2021
Where: AA= auditee attributes, TAE= tax audit effectiveness, AQ= audit quality, OI=
organizational independence, OS= organizational setting, TMS= top management support.

Auditee attributes

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Auditors mean responses for all Question18-32 were 2.54 and the standard deviations were 1.00
the standard deviations 100% for tax auditors suggest that there existed variability in ratings of
the respondents. The auditors' mean responses were greater than 2.00 (average) in fifteen of the
questions indicating that tax auditors of respondents viewed the auditee as high level of support
or contribution for tax auditors and there is a good relationship between tax payers and auditors.
Tax audit effectiveness
Q33 – Q40 in the questionnaires distributed to tax auditors relate to the tax audit effectiveness
parameter. Auditors mean responses for all Question was 2.84 and the standard deviations were
0.5442.The mean responses to those questions in auditors groups were greater than 2.00
(average) and the standard deviations (84.136%)were indicated for tax auditors suggest that there
existed variability in ratings of the respondents. The questionnaire mean responses revealed that
the tax audit effectiveness is more than 50% and its desired to attain a tax audit department so
which indicates that still there is a gap between tax audit.
Audit quality
Q41 – Q46 (6 items) in the questionnaires distributed to tax auditors relate to the audit quality
parameter. Auditors mean responses for all Questions were 2.67and the standard deviations were
87.87% The mean responses of the auditors to the six questions under audit quality were
generally agree or strong agree ,the six questions obtained mean responses of greater than
2.00(average) for auditors. The standard deviations of the responses were 82.40%, which
indicates that the respondents' perceptions were differing to one another. The mean result implies
that there is the audit quality between the tax auditors and they have a sufficient skill for them as
well as attractive tax audit plan preparation.
Organizational independence
A Q47 – Q57 (11 items) in the questionnaires distributed to tax auditors relate to the
organizational independence parameter. Auditors mean responses for all Questions were 2.68
and the standard deviations were 0.78339.The mean responses of the auditors to the eleven
questions under organizational independence were generally agree or strong agree ,the eleven
questions obtained mean responses of greater than 2.00(average) for auditors. The standard
deviations of the responses were 78.33%, it means that value of the organizational independence
can deviate from its mean to both sides by 78.33 percent .The majority of respondents mean
indicated their agree or strongly agree to the questions provided on the overall organizational

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independence in the revenue office. The mean responses of the auditors to the questions
implying high independency and to those questions which referred to as the tax auditors are free
from other influence.
Organizational setting
The results of the questionnaires distributed to auditors, indicated a mean response of 2.85 for
Q58-Q60 (3items), and the standard deviation was 0.8853. The mean responses to all the other
questions that would suggest were greater than 2.00(average). These results would suggest that
the organizational structure and budget status were more appropriate for audit focus in the tax
audit department. The standard deviations (88.53%) for tax auditors suggest that there existed
variability in ratings of the respondents.
Top management support
Q61-Q64 (4 items) in the questionnaires distributed to tax auditors referred to the management
support parameter. Auditors mean responses for all Questions were 2.67 and the standard
deviations were 0.85056.The mean responses of the auditors to the four questions under top
management support were generally agree or strong agree ,the four questions obtained mean
responses of greater than 2.00(average) for auditors. The standard deviations of the responses
were 85.05%, it means that value of the top management support can deviate from its mean to
both sides by 85.05 percent .The majority of respondents mean indicated their agree or strongly
agree to the questions provided on the overall management support in the revenue office. The
mean responses of the auditors to the questions implying high management support and to those
questions which referred to as the tax auditors findings are accepted by management.

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4.2 Descriptive result for taxpayers’ respondents
Table 4.4 Profile of Taxpayers Respondents

Sex Frequency Valid Percent Cumulative Percent

Female 65 25.5 25.5
Male 190 74.50 100.0
Level of education Frequency Valid Percent Cumulative Percent
1-10 grade 11 4.31 4.31
Certificate 23 9.02 13.33
Diploma 72 28.24 41.57
first degree 149 58.43 100.0
master and above 0 0
Your business is Frequency Valid Percent Cumulative Percent
sole proprietorship 124 48.63 48.63
Partnership 18 7.06 55.69
private limited company 82 32.16 87.85
Others 31 12.15 100.0
Main business activity Frequency Valid Percent Cumulative Percent
Manufacturing 10 3.92 3.92
Trade 86 33.73 37.65
Agriculture 9 3.53 41.18
Services 91 35.69 76.87
Constructions 47 18.43 95.3
Others 12 4.70 100.0

Source: SPSS output from tax payers respondent, 2021

From the above table 4 it is clearly visible that item reveals that relatively large number of
taxpayers respondents 190 (74.5%) are male however, the small number of taxpayers
respondents 65(25.5%) are female. The majority of the male taxpayers are more than female so
that they might have influence to cooperate the tax audit process of the revenue office.
Assessment of respondents’ education status portrays that 4.31%, 9.02%, 28.84%, 49.80%, and
8.63% are 1 to 10th grade level, certificates, diploma, first degree and masters and above holders

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respectively. Thus, most taxpayers are educated and capable enough to understand about their
duties and responsibilities as a taxpayer. Regarding the issue of the taxpayer’s business type,
48.363%, 7.06%, 32.16%, and 12.15% are sole proprietorship, partnership, private limited
company and others respectively.
According to the result the majority (49.8%) of the respondents are sole proprietors. In these
figure strengths by the constitution of the Federal Democratic Republic of Ethiopia states that the
sub city revenue office has a power to assess and collect from the sole proprietor taxpayers. That
is why more of the respondents are sole proprietor. They might have no sufficient recording
system for transaction in the case of lack of manpower so that they might have influence on tax
audit function.
The other issue presented to the respondents about the business activities, 3.92% from the total
respondents are engaged on manufacturing type of business activities, 33.73% of them replied on
trade activities, agriculture (3.53%), service (35.69%), construction (18.43 %), and the remaining
(4.7%) of the respondents are engaged on others types of activities .The figure clearly shows a
fair distribution of taxpayers the sample. This implies that those business organizations have
different categories of business activities and tax audit experience that may provide more reliable
research findings in tax audit effectiveness.
Table 4. 5 Assessment on tax payers’ rights and responsibilities

Available information to tax auditors Frequency Valid Percent Cumulative Percent

during auditing
No 98 38.43 38.43
Yes 157 61.57 100.0
Total 255 100
Good communication to tax auditors Frequency Valid Percent Cumulative Percent
based on tax laws
No 112 43.92 43.92
Yes 143 56.08 100.0
Total 255 100
Enough knowledge about the tax laws Frequency Valid Percent Cumulative Percent
and regulations
No 164 64.3 64.3

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 Yes 91 35.70 100.0
Total 255 100
Employees of independent accountant Frequency Valid Percent Cumulative Percent
and managers
No 115 45.0 45.0
Yes 140 55.0 100.0
Total 255 100
Business transaction based on general Frequency Valid Percent Cumulative Percent
accepted accounting
No 45 17.65 17.65
Yes 210 82.35 100.0
Total 255 100
Sufficient benefit from your income Frequency Valid Percent Cumulative Percent
No 132 51.76 57.76
Yes 123 48.24 100.0
Total 255 100
Source: SPSS output from tax payers respondent, 2021
The above table 4.5 shows the respondents asked to assert the taxpayers’ give adequate
information to tax auditors at the time of auditing is no(38.43%) and yes(61.57%), majority of
the respondents are agree on the issue that means most taxpayers’ give documents such as sales
invoices, vouchers , financial statements, and any necessary information. This research finding is
that auditors have got necessary information for auditing purpose. From the analysis we can
conclude that the taxpayers’ knowledge is good at the required level.
As shown the above table 4.5, majority of the respondents (64.3%) replied that the taxpayers
have low level of knowledge towards the tax laws and regulations. This is due to the inadequacy
of education gives to the taxpayers by the organization; on the other hand a few (35.7%)
members of them replied as taxpayers have knowledge about their duties and responsibilities.
However, the federal government revenue authority with the collaboration of each sub city
revenue office was providing education to the taxpayers using both printed and electronic media:
newspapers, magazines, brochures, radios, televisions, conferences and exhibitions. These
findings indicated that, the taxpayers’ knowledge toward the tax laws and regulations is at its

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lower point. Then it concluded that the taxpayers’ have low level compliance or agree to do the
tax laws. The consequence of low level compliance may be affect tax audit.
As shown from the above table, the respondents asked to assert the taxpayers’ have independent
accountant and managers is no (45.0%) and yes(55.0%), majority of the respondents are agree on
the issue that means most taxpayers’ have employees of accountant and managers . This research
found that auditors may have got necessary information and the internal control system may be
well for auditing purpose.
The other issue presented to the respondents about the recording of business transaction based on
general accepted accounting principles (GAAP/IFRS), no (17.65%) from the total respondents
are not agree, yes (82.35%) respondents are agree .The figure clearly shown that the taxpayers
have followed the GAAP but, most recent declaration tax audit that Category A taxpayers has to
provide financial statement must presented in accordance with IFRS rules. Moreover, which
might be available to tax audit function.
According to the above table, the respondents (48.24%) replied that the taxpayers have a
sufficient benefit from their income and 51.76% respondents have no sufficient benefit. This is
due to that indicating the relative level of taxpayers may have knowledge about their duties and
responsibilities. The findings indicated that, the taxpayers’ knowledge toward the tax laws and
regulations is at its proportional point the sub city revenue branch office might need to work on
more on taxpayers’ knowledge to enhance the level tax laws understanding and provide a record
as per tax audit regulations

4.3 Reliability Tests of the Instrument

Pilot study (preliminary test) was carried out using convenient sampling method in the Akaki
Kality Sub city Small taxpayers’ office having the same characteristics with the participants of
the main study. The advantage of doing a pilot study include; it helps to detect potential defects
in the measurement procedures, it assists in identifying ambiguous items, and it allows the
researcher to become aware of non-verbal behavior that may occur due to the wording question.
Therefore, the researcher tried to insures the reliability and validity of the questionnaire.
To measure the reliability of the questionnaire, the researcher applied a preliminary reliability
test from 26 tax auditors. According to different statistic book a reliability coefficient exceeding
0.5 for any test or scale was acceptable reliability coefficient. Therefore, as we can see the

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(cronbach’s alpha) indicates that the questionnaire administered in this study, seven items are
reliable and the remaining items are highly reliable.
Table 4 6 reliability analysis of target variable
Reliability test (47)
Variables No. Of items Cronbach’s alpha
Auditee attributes 14 .987
Tax audit effectiveness 8 .975
Audit quality 6 .972
Organizational independence 11 .967
Organizational setting 3 .964
Top management support 5 .979
Total 47

Source: researcher’s computation with SPSS, 2021

From the above table 6, it is seen that the reliability value was estimated to be α = 0.964-
0.987between the scale. If the above calculated reliability values are compared with the standard
value alpha of 0.5 advocated by Cronbach’s, then it can be safely assumed that the scales used by
the research are reliable for data analysis.
4.4 Normality Test
Distribution of the data is another issue in this research, whether it is normal/or not. To check the
distribution of score is normal, we need to look at the values of skewness in the SPSS output.
Positive value of skewness indicates too many low scores in the distribution, whereas negative
values indicate a build-up of high scores (Field, 2009).
Skewness measures the degree to which cases are clustered towards one end of an asymmetry
distribution. In general, the further the value of skewness is from zero, the more likely it is that
the data are not normally distributed (Field, 2009).
In a normal distribution, the values of skewness are 0. If a distribution has values of skew above
or below 0 then this indicates a deviation from normal (Field, 2009). As we have seen from the
following table 7, the skewness approaches or around to Zero and it is almost normal. All
variables were found to be normal.

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 Table 4 7 Tests of Normality
Normality test
TAE AQ OS OI TMS AA

Skewness -.658 -.378 -.391 -.456 -.810 -.051

Std. Error of Skewness .456 .456 .456 .456 .456 .456

Frequency distributions come in many different shapes and sizes. It is quite important, therefore,
to have some general descriptions for common types of distributions. In an ideal world our data
would be distributed symmetrically around the center of all scores. As such, if we drew a vertical
line through the center of the distribution then it should look the same on both sides. This is
known as a normal distribution and is characterized by the bell-shaped curve. This shape
basically implies that the majority of scores lie around at the center of the distribution (so the
largest bars on the histogram are all around the central value). This graphical representation is
used for the indication of tabulated result shown in table above.

Figure 4 1 Histogram of normal test

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4.5 Correlation
Table 4 8 person’s correlations

Correlations
TAE AA AQ OI OS TMS
TAE Pearson Correlation 1
Sig. (1-tailed)
N 26
AA Pearson Correlation .951** 1
Sig. (1-tailed) .000
N 26 26
AQ Pearson Correlation .981** .946** 1
Sig. (1-tailed) .000 .000
N 26 26 26
OI Pearson Correlation .990** .962** .987** 1
Sig. (1-tailed) .000 .000 .000
N 26 26 26 26
OS Pearson Correlation .972** .948** .967** .979** 1
Sig. (1-tailed) .000 .000 .000 .000
N 26 26 26 26 26
TMS Pearson Correlation .962** .903** .970** .959** .929** 1
Sig. (1-tailed) .000 .000 .000 .000 .000
N 26 26 26 26 26 26
**. Correlation is significant at the 0.01 level (1-tailed).
Pearson product moment correlation coefficient (r) was used to determine the strength of
relationship between the dependent (TAE) and independent variables (AA, AQ, OI, OS, &TMS).
It is a parametric technique which gives a measure of the strength of association between two
variables.

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As it can be shown in the above correlation matrix, each variable is perfectly correlated with
itself and so r=1 along the diagonal of the table. Tax audit effectiveness is positively and
significantly related to auditee attributes with a Pearson correlation coefficient of r = .951,
p<0.01 audit quality with r=.981, p≤ 0.01, organizational independence with r= .990, p <0.01
however tax audit effectiveness is positively and significantly related to organizational setting
with r = 0.972, p > 0.01 the previous study is also supported that variable is significantly related
to dependent variables (Mihret and Yismaw, 2007) and top management support with r= 0.962, p
> 0.01which is positively and significantly related to it.
4.6 Multi-colinearity
Multi-colinearity exists when there is a strong correlation between two or more predictors in a
regression model. Multi-colinearity poses a problem only for multiple regressions because it
involves more than two predictors. Perfect Co-linearity exists when at least one predictor is a
Perfect linear combination of the others. According to different statistical books, one way of
identifying multi-colinearity is to scan the correlation matrix of all of the predictor variables and
see if any correlate very highly (correlation of above 0.80 or 0.90).
Another method is to produce a Co-linearity diagnostics with the use of SPSS, and one of which
is the variance inflating factor (VIF). The VIF indicates whether a predictor has strong linear
relationship with the other predictor(s). Although there are no hard and fast rules about what
value of the VIF should be a cause for concern, Field (2000) suggests that value of 10 is good
value at which to worry. Field (2000), and suggest that if the average VIF is greater than 1, then
multi-colinearity may be biasing the regression model. Related to the VIF is the tolerance
statistics, which is a reciprocal of VIF (1/VIF). Such values below 0.2 are worthy of concern.
Considering the regression model for this study correlation matrix of all of the predictor
variables less than or equal to 0.80 or 0.90 and the tolerance statistics values are all below 1 (see
tables 8 and11) as such no multi-colinearity is observed in this model.
4.7 Autocorrelations
Autocorrelation is adjacent residuals of any two observations not being independent of each
other or correlated. For any two observations the residual terms should be uncorrelated (or
independent). This eventually is sometimes described as a lack of autocorrelation. This
assumption can be tested with the Durbin-Watson test, which tests for social correlation between

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errors. Specifically, it tests whether adjacent residuals are uncorrelated. The test statistics for this
can vary between 0 and 4 with a value of 2 meaning that the residuals are uncorrelated (Field,
2009). In our model the value of the test is closer to 2 (1.872). So it can be safely assumed that
there is no problem of autocorrelation (see tables 9).
4.8 Multiple Regression Results
In this research, multiple regression analysis was carried out to get the predictive value of the
constructs considered. Since the model is developed in such a way that each construct is being
affected by other constructs, it is necessary to carry out a separate regression analysis against
each variable which are considered to be affected by other variables. This was basically made to
determine the linear combination of the constructs.
“Regression of tax audit Effectiveness (TAE) on auditee attributes (AA), audit quality (AQ),
organizational independence (OI), organizational setting (OS) and top management support
(TMS)”
Table 4.9 model summary of linear regression
Model Summaryb
Adjusted R Std. Error of Durbin-
Model R R Square Square the Estimate Watson

1 .992a .983 .979 .12150 1.872

a. Predictors: (Constant), AA, TMS, OS, AQ, OI

b. Dependent Variable: TAE

Table 4 .10 ANOV A linear regression for significant of the model

ANOVAa

Sum of
Model Squares df Mean Square F Sig.

1 Regression 17.402 5 3.480 235.766 .000b

Residual .295 20 .015

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 Total 17.697 25

a. Dependent Variable: TAE

b. Predictors: (Constant), AA, TMS, OS, AQ, OI

Table 4.11 Coefficients of linear regression

Coefficients

Standardized
Unstandardized Coefficients Coefficients 95.0% Confidence Interval for B

Upper
Model B Std. Error Beta T Sig. Lower Bound Bound

1 (Constant) .017 .124 .139 .891 -.240 .275

TMS .176 .123 .178 1.439 .166 -.079 .432

AQ -.043 .204 -.045 -.213 .834 -.469 .383

OS .102 .137 .107 .746 .464 -.183 .387

OI .802 .273 .746 2.939 .008 .233 1.371

AA .011 .092 .013 .122 .905 -.180 .202

a. Dependent Variable: TAE

From Table 4.9, it can be seen that the multiple R(correlation) value of 0.992(99.2%) indicates a
highly positive relationship between the dependent and independent variables and R Square
value for the model showed that 98.3% of the dependent variable in the model can be predicted
by the independent variables. The remaining 1.7% of the dependent variable is explained by
other variables which are not depicted in the model. Moreover, adjusted R square value for the
model shows that 97.9% of goodness of fit of the model is moderate.
Table 4.10 presents the ANOVA report on the general significance of the model. As p is less
than 0.05, the model is significant. Thus, the combination of the independent variables (auditee
attributes, audit quality, organizational independence, organizational setting and top management
support) significantly predicts the dependent variable (tax audit effectiveness) (F=2.35; p <
0.05).

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Table 4.11 shows the Beta Coefficients that present the contributions or positive or negative
relationship of each variable to the model. The t and p values showed the influence of the
independent variables on the dependent variable. From this, it is clear that the audit quality and
organizational independence had the highest affecting on tax audit effectiveness with comparing
auditee attributes, organizational setting and top management support constructs. According to
coefficient results, all predictors, except auditee attributes are positively related to dependent
variables and audit quality and organizational independence are significant however auditee
attributes, organizational settings and top management support is not significant as individually.
The previous study is also reviewed auditee attributes and organizational settings are not
significant (Mihret and Yismaw, 2007). Thus, the model for predicting perceived tax audit
effectiveness becomes:
TAE = 0.017 – 0.011aa + 0.043aq + 0.802oi + 0.101os + 0.176tms Where: TAE= tax audit
effectiveness, AA= auditee attributes, AQ= audit quality, OI= organizational independence, OS=
organizational setting, TMS= top management support
The b-values (beta coefficient) tell us about the relationship between the outcome and each
predictor. If the value is positive we can tell that there is a positive relationship between the
predictor and the outcome, whereas a negative coefficient represents a negative relationship. For
these data all predictors, except auditee attributes have positive b-values indicating positive
relationships. So, there is a positive relationship between the predictors (audit quality,
organizational independence, organizational setting, and top management support) and an
outcome (tax audit effectiveness) since the value of beta coefficient is positive. As audit quality,
organizational independence, organizational setting, and top management support is good, tax
audit effectiveness is also improved; whereas, auditee attributes has a negative b-values
indicating negative relationships to the outcome. As auditee attributes is good, tax audit
effectiveness is not improved.

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 CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
This chapter provides a summary of the major findings or results of this study, then, the drawn
conclusions are discussed based on researcher insights and study findings. In addition, two sets
of recommendations are presented. The first set of recommendations is directed toward
practitioners in the field, described in this study as program directors. Finally, a set of
recommendations is presented for professionals interested in pursuing additional research to
exceed the scope and findings of this study.
5.1 Summary of Major Findings
The purpose of this study was to examine the factors affecting tax audit effectiveness using
statistical analysis; both descriptive and inferential statistics. The research instruments were
survey questionnaires developed with censes and lottery method of applicable constructs. A total
of 300 copies of questionnaire were distributed to tax auditors and taxpayers of Akaki Kality Sub
city revenue branch office. However, only 255 copies from tax payers and 26 from tax auditors
were found to be returned and used for analysis. By using reliability 47 items were tested and
which have a good loading value and reliability scale was treated for analysis. Since each
construct was affected by other constructs, regression analysis was conducted by the models,
using tax audit effectiveness as dependent variables; this was basically done to get the best linear
combinations of the constructs as well.
A tax audit is an investigation made by the tax authority in order to verify the accuracy of tax
returns and attempt to detect non-compliance behavior and activities. The study applied
quantitative approach to describe and evaluate the factors affecting tax audit effectiveness. In the
chapter four, the primary data has been analyzed and interpreted in relation with the statement of
the problem and objectives of the study. Then in this chapter the major weakness/gaps that affect
the effectiveness of the tax audit are presented.

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5.2 Conclusions
The aim of this chapter is to present the conclusions drawn from the results of the analysis of the
questionnaires, and then make recommendations for further research. The results of the study
enable us to conclude that audit quality, organizational setting, organizational independence,
auditee attributes as well as top management support as a linear combination significantly
influence tax audit effectiveness in the organization studied.
However, as individual predictors: organizational setting, auditee attributes and top management
support are not significant enough to undermine tax audit effectiveness, this shows that the
examination of factors affecting tax audit effectiveness achieved and its one the specific
objective to meet. The findings of the present study are also in conformity (consistent) with the
observations of this study on organizational setting, and auditee attributes are not significant
influence on tax audit effectiveness(Mihret and Yismaw, 2007).
The top management support is low in explaining the model of tax audit effectiveness.
Organizational independence is a dominant factor in predicting tax audit effectiveness whereas,
organizational setting, and auditee attributes and audit quality are predict as medium the
outcome. Thus, Organizational independence; in comparison to top management support,
organizational setting, auditee attributes, and audit quality is greater influence on tax audit
effectiveness. These finding shows that organization risky areas are identified the top
management needs to considering those factors to enhance the level tax audit effectiveness.
The results of study demonstrated that perceived adequacy or inadequacy of both organizational
independence and audit quality, extends noticeable influence on perception of tax audit
effectiveness. The influence of organizational independence on tax audit effectiveness may be
attributed to the audit quality. Tax audit effectiveness and their perception come from the
independence; tax auditors’ positive attitude towards various components and their professional
proficiency.
The research examines the taxpayers’ cooperation with the tax systems and auditors during
auditing. Findings of the research indicated that majority of the respondents replied that, most
taxpayers may not cooperate to the tax system and the tax auditors without knowledge of
sufficient tax laws and regulations, according to this perception, auditors penalize taxpayers
instead of educating them, low level encourage honest taxpayers, and also deliberately some
taxpayers do not support the tax auditors during the audit.

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It can be concluded that most taxpayers are noncompliance as result they impeded the tax audit
effectiveness. In this research objective i have mentioned as one my specific objective in
evaluation of tax payer’s perception toward the credibility of having general knowledge to
incorporate tax audit effectiveness at the time audit to maintain records and give further
cooperation with the auditor.
5.3 Recommendations
The whole idea of a recommendation is to provide a beneficial guide that will not only resolve
certain issues, but result in a beneficial outcome. Recommendations can be different and are
heavily dependent on the situation that arose. On the base of the findings/conclusion derived; the
following recommendation was made by the researcher. In order to improve the tax audit
effectiveness, Akaki Kality Sub City Small Taxpayers Branch office should consider the
following points:

 As it was explained organizational independence play significant role on tax audit

effectiveness; Akaki Kality Sub City Small Taxpayers Branch office should emphasis on
that predictor, except auditee attributes, organizational setting and top management
support. Audit quality has also positive influence on tax audit effectiveness and the
revenue office management should consider it.
 Make the Akaki Kality Sub City Small Taxpayers Branch office independence and audit
quality by paying attention to the needs and desires of tax auditor, reducing the
corruption, the management attention to audit findings (since they are important assets
owned by the revenue office) to perform their tax audit work effectively and efficiently.
 Create a good work environment by encouraging relationship among tax auditors and
taxpayers, with colleagues, and immediate supervisors so that they are motivated in
performing Audit tasks/activities as per the rules and regulation of the tax Audit laws in
the office.
 The Akaki Kality Sub City Small Taxpayers Branch office should consider on the
convenient tax audit system as well as making brief tax law, policies, rules and
regulations in the office.

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  The sub city revenue office should consider in employing more experienced tax auditors
to enhance the flow and knowledge sharing between Staff auditors in order to upgrade the
audit coverage areas and lower work burden.
 The Akaki Kality Sub City Small Taxpayers Branch office should consider in presenting
adequate tools for proper audit task performance and give more relevant training to both
Tax Audit staffs and for the Taxpayers in order to fight corruption.
5.4 Future Research Implications
The results will have important implications and is believed to be helpful for all revenue office in
The Akaki Kality Sub City Small Taxpayers Branch office in particular and in Addis Ababa City
Administration Revenue Office and for those Sub city revenue branch offices under the City
Administration. While this study has revealed some interesting results, one should be careful of
its limitations related essentially to its sample size and scope of the study.
Although, the researcher believes that this study is deep, it is still believed that it can be further
extended to include more respondents from externals to make it more realistic and more reliable.
Finally, due to different factors and due to the current our country and world situation we faced I
couldn’t touch other dimensions of tax audit effectiveness. Thus, further research needs to
contain more desirable dimensions, in order to gain better insight.

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https://www.irs.gov/businesses/small-businesses-self-employed/what-is-taxable-and-nontaxable-
income

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Appendix 1 - Business tax payers of category “A” and Akaki kality Sub-City
Small Tax Payers Branch office tax auditor staffs survey instrument (English
version)
Rift Valley University
School of Post Graduate Studies
Department of Business Administration

Survey Questionnaire (Business Taxpayers of Category “A” and Akaki kality Sub-City
Small tax Payers Branch Office Tax auditor Staffs)

Dear Participant
My name is Neche Tamiru. I am a postgraduate student in Rift Valley University. I am
conducting this research for the partial fulfillment of the degree of Masters of Science in
Business Administration at Rift Valley University. The objective of this study is to examine
“factors affecting tax audit effectiveness, particularly Business tax payers’ Category A in Akaki
Kality Sub-City Small tax Payers Branch office”. Thus, you are selected as a valuable and
knowledgeable participant regarding tax audit effectiveness specifically business tax payers.
To supplement the data obtained from selected business tax payers and official staffs by means
of questionnaire, the investigator seeks to gather relevant information from randomly selected
business tax payers and staffs in The Sub-City Revenue office using a self-administered
questionnaire. Participation in this study is completely voluntary. Survey results will be recorded
anonymously and strict confidentiality will be maintained. Individual responses will not be
identified in the Investigator’s MSc thesis.
Therefore, I would like to thank you very much for devoting your time and cooperation in
advance. Once again, I would like appreciate your openness and taking the time to complete the
questionnaires. For any further clarifications and comments you can contact me through Tel:
+251-942231952, Email: [email protected]
With Regards,
Neche Tamiru

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 General Directions
Please do not write your name on the questionnaire
(Put “” in the box of your choice.)
Questions to be answered by taxpayers and staffs auditors.
Part I: Demographic Data of Respondents (Branch office tax auditor staffs)
1. Gender:
a) Male 1  b) Female 0 

2. Level of education
Diploma 1  Degree 2  Master’s degree or above 3 

3. Education level
Accounting 1  Management 2  Economics 3 
4. What is your current position in the office?
Process owner’s 1
Auditor’s 2 
Others 3 
5. How long have you been working in this position
Less than two years 1 
2-5 years 2 

Greater or equal to six years 3

6. Did you attend any special training with your current position?
Investigation & intelligence 1 
Preparation of audit findings 2 
Audit selection techniques 3 
7. How long have you been taking in training?
Less than 16 days  1 16-30 days 2 31-60 days 3  more 60 days 4 
8. Do you satisfy with your current salary?
Yes 1 
No 0 

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Part II: Questions related to an investigation of organizational tax audit function

9. Is there any legal obligation to maintain the tax payers’ recording keeping?
Yes 1
No 0
10. Does existing staff motivation scheme level is high?
Yes 1
No 0
11. Is audit manual can give detailed explanation the interpretation of tax laws and
regulations?
Yes 1
No 0
12. Is only one individual auditor selecting the cases?
Yes 1
No 0
13. Do you think that you are performing the audit work as per general audit standards
procedure?
Yes 1
No 0
14. Does an auditor have appropriate powers of access to get information to make decision
in audit activity?
Yes 1
No 0
15. Does the examination techniques are effective in detecting fraud and determining the
accurate tax liabilities?
Yes 1
No 0
16. Does tax audit function have adequate resources?
Yes 1
No 0

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17. Do you believe that your office has sufficient employees in tax audit?
Yes 1
No 0
18. Do the respective government officials give attention for tax audit department?
Yes 1
No 0

Part III: Questions related to Measure Audit Effectiveness.

19. Akaki Kality Sub-City Small Tax Payers Branch office audit system is sufficiently
promoting voluntary compliance tax payers.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
20. In Akaki Kality Sub-City Small Tax Payers Branch office, there is transparent audit
procedure and audit decisions are made based on facts.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
21. Taxpayers have a good attitude and cooperation with the tax system and auditors.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
22. The current working capacity of audit staff is well aware of the tax laws and
regulations.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree -4
23. Tax payer knows when the auditing process is completing from starting to ending.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
24. The Akaki Kality Sub-City Small Tax Payers Branch office tax audit manual and
procedure minimizes the compliance burden on the tax payer.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4

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25. Tax audits are finalized according to consistent process and assurance a level of
customer satisfaction.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
26. Audit procedure is transparent and clear to the tax payers during the course of the
audit.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
27. The existing audit program is promoting voluntary compliance there builds public
confidence.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
28. The Akaki Kality Sub-City Small Tax Payers Branch office has an effective motivation
scheme to
the compliance taxpayers.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
29. The audit program enables to differentiate deliberate and non deliberate misreporting
of taxpayers and applies penalty.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
30. The audit manual procedure identifies the tax liability of non compliance.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
31. Auditors give sufficient education to the taxpayers about the tax laws and regulations
during auditing.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
32. The organization auditor accepts taxpayers’ suggestion to improve the tax function.
Strongly disagree 1 Disagree 2

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Agree 3 strongly agree 4
33. There is a good work relationship between the taxpayers and tax auditors.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
34. The evaluation of tax auditing reports made by individuals in managerial positions who
were audited is positive.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
35. Tax auditing gets the attention of top management and focuses it on issues audited by
tax auditing.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
36. The issues to be audited are decided after identifying risks, quantifying them and determining
appropriate risk levels.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
37. The tax auditing department is valued by management and makes valuable contributions
during meetings.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
38. The number of complaints about the tax auditing department is very low.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
39. Those who are audited demonstrate a high level of satisfaction with the work of the tax
auditing department.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
40. The findings of tax audits are always based on documents and reliable data.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4

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41. The tax auditing reports are clear and well presented.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
42. The annual audit plan is determined completely by the tax auditor.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
43. The areas audited are very significant to the organization.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
44. The Tax Auditor is able to cover all organizational units and all issues.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
45. The response of auditees to the audit is submitted in writing and is relevant and
comprehensive.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
46. There is regular follow-up by the TA staff to examine actions taken to correct the problems
found.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
47. The tax auditor also performs other activities such as developing procedures and conducting
economic and financial audits.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
48. I have regular and direct working relations with the head of the TA committee.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
49. I have regular and direct working relations with the general manager and the managerial
team.
Strongly disagree 1 Disagree 2

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Agree 3 strongly agree 4
50. Terminating the work of the TA requires the approval of the TA committee, and/or the board
of directors, and/or the Civil Service Commission.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
51. The TA staff has free access to information and data about the organization, and unrestricted
access to its site.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
52. All organizational data pools are accessible to the TA.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4

53. All organizational data pools can be downloaded and examined by the TA.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
54. Detailed budget proposals and information on staffing are included in the annual work plan
of the TA.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
55. I rotate the TA staff so that they all cover a variety of assignments.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
56. The TA also performs other activities even if they are not defined as its direct responsibility.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4
57. The TA sometimes takes part in designing systems in the organization and in developing
procedures for regulating their operations.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree 4

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58. The TA operates totally independently, can audit any issue it considers in need of auditing,
and can access any necessary information even if it is classified.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree4
59. TA is one stage in training and preparing employees in the organization.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree4
60. TA is one stage in the promotion process of employees in the organization.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree4
61. TA is considered a stage in the organizational independence of employees in the
organization.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree4
62. Top management does not provide me with the support I expect to have.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree4
63. The number of employees in TA is limited given the amount of auditing work planned and
needing to be done in the near future.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree4
64. Management is not sufficiently aware of the needs of TA, as demonstrated by the small
budget assigned to this department.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree4
65. Management does not provide enough support and encouragement for training and
developing the TA staff – another indication that it does not recognize the importance of this
issue.
Strongly disagree 1 Disagree 2
Agree 3 strongly agree4

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 Appendix 2
General Directions
Please do not write your name on the questionnaire
(Put “” in the box of your choice.)
Questions to be answered by taxpayers and staffs auditors.
Part IV: Questions related to profile of tax payers

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66. sex-----------------------male=1  female=0
67. What is your level of education?
1-10 grade 1 Certificate 2 Diploma 3
First degree 4 Masters and above 5
68. Your business is:
Sole proprietorship 1 Partnership 2 corporation3
Private limited company 4 others 5
69. What is your main business activity?
Manufacturing 1 Trade 2 Agriculture 3
Services 4 Constructions 5 others 6

Part V: Questions related to assessment on tax payers rights and responsibilities

70. Do you give available information to tax auditors during auditing?

Yes 1 No 0
71. Do you have a good communication to tax auditors based on tax laws at the time of
auditing?
Yes 1 No 0
72. Do you have enough knowledge about the tax laws and regulations?
Yes 1 No 0
73. Do you have employees of independent accountant and managers?
Yes 1 No 0
74. Do you record all your business transaction based on general accepted accounting
principle?
Yes 1 No 0
75. Do you have sufficient benefit from your income?
Yes 1 No 0

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