A VAT audit is the FTA’s assessment of a company about its responsibility as a taxable person. The audit ensures that a company has fully captured the input and output tax on its all vatable transactions. This audit is conducted to ensure that the tax liability is calculated correctly and paid in full within the stipulated timeframe. The FTA also assesses a company whether they are fulfilling all responsibilities that apply to its business as per the VAT law. The FTA can conduct the audit within 5 years for any business, but in some circumstances, the FTA has the right to extend the time frame for the audit and record-keeping.

1. (1/7)
Ahmad Tariq Bhatti, FCMA (Pak), ACMA (UK), CGMA
1. Introduction
A VAT audit is the FTA’s assessment of a company about its responsibility as a taxable
person. The audit ensures that a company has fully captured the input and output tax on
its all vatable transactions. This audit is conducted to ensure that the tax liability is
calculated correctly and paid in full within the stipulated timeframe. The FTA also
assesses a company whether they are fulfilling all responsibilities that apply to its
business as per the VAT law.
The FTA can conduct the audit within 5 years for any business, but in some
circumstances, the FTA has the right to extend the time frame for the audit and record-
keeping.
2. VAT Audit
A VAT audit is a formal examination conducted by the FTA auditors to verify information,
uncover fraud and inaccurate tax returns. The FTA can select tax returns for audit on a
random basis.
Tax Procedures Law (Federal Decree-Law
No. 07 of 2017), issued by the Ministry of
Finance defines tax audit as a procedure
undertaken by the authority to inspect the
commercial records or any information or data
related to a person conducting the business.
The FTA may perform the tax audit at their office, at the premises of the business of the
taxable person or any other place where such taxable person conducts the business,
stores goods or keeps records.
3. Scope of a VAT Audit
VAT audit is limited to accounting records related to sales and purchases of all goods and
services. However, the auditors have full authority to check anything from the other

2. (2/7)
records to achieve the objectives of their audit. The auditee company cannot make any
objection as to why other records have been requested by the VAT auditors. Sometimes,
cross-examination of the one account with the other helps in achieving the objectives of
the tax audit. The auditors after completing the initial compliance procedures may
increase or decrease the scope of their work.
4. VAT Audit Risk
All audit risks are summed up in the following two risks:
 Risk of overstatement of input tax
 Risk of understatement of output tax
5. Rights of a Tax Auditor
Tax Procedures Law says, the tax auditor has the right of entry to business premises and
can temporarily close the business to perform the VAT or tax audit for a period not
exceeding 72 hours without prior notice if:
 Under Article 78 of Federal Decree-Law, the FTA auditors have enough grounds
to believe that the person subject to the tax audit is participating or involved in tax
evasion.
 The FTA auditors have enough reasons to believe that not temporarily closing the
place where the tax audit is carried out will hinder the conduct of the tax audit.
During a tax audit, the authority will have the right to obtain any record (original or copy
or a soft copy), verify stocks (inventory) or assets of the business where the audit is
proceeding or even seize them for audit.
It is the duty of the person who is subject to a tax audit and its tax agent or legal
representative to facilitate and offer assistance to the tax auditor to enable him/her to
perform his/her duties.
6. VAT Records Under Audit
Article 78 of Federal Decree-Law states that a registrant shall maintain the following
records and provide these records to the FTA auditors when asked:
 Records of all supplies and import of goods and services
 All tax invoices and alternative documents related to receiving goods or services
 All tax credit notes and alternative documents received
 All tax invoices and alternative documents issued
 All tax credit notes and alternative documents issued

3. (3/7)
 Records of goods and services that have been disposed of or used for matters not
related to business, showing taxes paid for the same
 Records of goods and services purchased and for which the input tax was not
deducted
 Records of exported goods and services
 Records of adjustments or corrections made to accounts or Tax Invoices
 Details of goods imported to the state along with Customs Declarations and
supplier invoices
This list is not an exhaustive one, the FTA auditors can request any document, as they
need it during the course of the audit.
7. FTA Audit File (FAF)
FAF contains all records that are necessary to carry out a VAT audit. This file may be
requested by the FTA auditors during the audit of a company’s accounts to ensure that
tax returns have been prepared accurately. The file includes ledgers, documents and
records that are pertinent to VAT audit work.
It is strongly recommended to companies to check with
their software vendors if they can produce FAF.
Otherwise, it would be a time-consuming exercise to do it
when requested.
It is possible that your software can produce data in FAF,
but your accounting partner failed to implement and
monitor the documenting of the transactions as per the
FTA requirements and you only realize when FAF is
requested at which point it could take weeks to rectify.
Key contents of a FAF may include the following information:
I. Company Information such as company name and TRN.
II. Master Files
a) Supplier File
• Name of all suppliers
• Location of all suppliers in each emirate
• TRN of each supplier
b) Customer File
• Name of all customers

4. (4/7)
• Location of all customers in each emirate
• TRN of each customer
c) Source Documents
• Purchase invoices, imports, credit notes (with all details)
• Sales invoices,
d) Credit Notes Issued to Customers (with all details)
• Payments
• Transaction date
• Payment date
III. General Ledger
IV. Product File
In a nutshell, your accounting software must be able to produce all or any of the above if
requested by the FTA auditors during an audit of your company’s VAT Return. If a
company does not have advanced accounting software or ERP, the information kept in
an audit file is acceptable.
8. Review of the Accounting Information System
Given the volume of work-related to VAT, every standard information system has a
separate module for VAT, named as a VAT module. Make sure, you have a VAT module
installed in your system. This would help auditors in ensuring that all information is coming
through a system and there is nothing manually processed related to VAT. This would
surely give a positive impression to the auditors about the system in place. The system
generated reports have more integrity and accuracy than the ones produced manually.
VAT transactions must be updated in the accounting information system before the arrival
of the auditors in the company. The system should be thoroughly complying with the VAT
laws. A review of the system will ensure that there is no inconsistency with the recorded
transactions. The system should be able to provide all the ledgers that are required in
connection with the audit of the company. The records should be updated as of the date
of the audit. The related supporting documents should be in proper files.
The auditors may check original documents on selection at random basis or a thorough
check may be done on the original documents. If the auditors require original documents,
you are unable to provide the original documents and give assurance to provide the
original documents within the agreed time frame. This may indicate that a company’s
internal control systems are not robust enough to provide the evidence to the auditors
timely and cast doubt on the reliability of the evidence related to the transactions that are
selected for the examination.
9. VAT Audit Procedure
The FTA auditors will check the returns and all underlying workings. There may or may
not be a specific reason for the FTA to conduct an audit of a company. They can select a

5. (5/7)
company for any reason or without any reason. A notice will be served upon the company
at least five days before the scheduled audit date. It will contain details, such as the audit
schedule, place, involved parties, reason (if anything particular), etc.
The auditors and the company will meet at the agreed place at the scheduled time and
the audit process will begin. If the audit of a company is to be done outside the premises
(possibly in the office of the FTA), the presence of the relevant person from the company
is mandatory during the audit. The auditor may ask for VAT related records, in original
and/or copies or electronic form, and take samples from those records.
The VAT audit is conducted during the official FTA working hours unless the Director-
General decides to conduct the audit of a company after regular hours. The company
subject to a VAT audit, along with their legal representatives and tax agent, is required to
provide full assistance to the auditors in the performance of their duty. If anything
erroneous or a non-compliance is found in the records, the authority may order a re-audit
for a detailed examination of the VAT records.
A tax consultant can assist you in organizing the VAT records in such a manner that would
be helpful in the audit performance.
The auditee company may check the identity of the auditors before the start of the work,
such as professional identification cards from the authority. The auditee company has the
right to ask for the notification copy and related documents for being present during the
auditing procedures are conducted outside of the official places.
10. Review of Tax Calculations and Net Tax Liability
Companies must ensure that they
are complying with the laws by
checking that the calculation of both
output and input taxes are correct.
As a basic rule, the tax rate is at
5%. All goods and services that fall
under the zero-rate and exempt
supplies should be reflected in the
system correctly.
11. Review of VAT Returns
A tax consultant reviews the VAT returns that are filed by companies to ensure that
returns are prepared correctly with the values properly recorded in the right boxes and
the required information are filled in. He/she ensures that the returns are filed within the
allowed timeframe by the FTA.

6. (6/7)
12. Review of Payment of Tax Due
The correct amount of tax due should be paid on or before the due date. A tax consultant
will make sure that all tax obligations are honored on time. Missing the timeframe of tax
payment to the government will attract further penalties and a consultant may challenge
the levies of these penalties on behalf of the client.
To ensure the smoothness of the VAT audit, the services of a VAT agent can be solicited.
13. Audit Report by the FTA
After the completion of the audit process. The auditors will issue an audit report on the
VAT compliance of a taxable person or entity. The report will highlight the compliance
deviations in the VAT records of a company. The report will also include the penalties and
fines on such deviations and violations. The timeframe for payment of fines and penalties
may also be given in the audit report. Further, the FTA may order the re-audit of a
company if strong indications exist for more deviations in the VAT records of the company.
14. Fines and Penalties
After completion of the audit process by the
FTA auditors, instances of non-compliance
and violations are identified, discussed and
recorded and accordingly, penalties for
non-compliance with and violations of the
VAT law are imposed on the auditee
company.
Fines for non-compliance and incorrect tax
returns may range from 5% to 100%,
depending upon the materiality of the
errors.
 Not applying for the mandatory registration within the allowed timeframe
 Not submitting a tax return within the specified period
 Not settling the tax liability as per the tax return within the allowed time
 Wrong classifications of the supplies, e.g. standard rated supply is erroneously
classified as a zero-rated or exempt rated supply
 Submitting an erroneous VAT return
 The registrant not able to pay tax on behalf of another person when it is obligated
 Reporting less VAT as a result of a tax evasion
 Reporting no tax as a result of a tax fraud

7. (7/7)
Specifically, following are the penalties that can be imposed upon finding the non-
compliance of the VAT law:
 A penalty of AED 10,000 will be implemented for not maintaining financial records.
 Submission of an incorrect tax return by a registrant will be AED 3,000 for the
first time and then AED 5,000 in case of repetition.
 Failure of the person conducting business to facilitate the work of the tax auditor
will be AED 20,000.
 Failure of the taxable person to submit a registration application within the time
frame specified in the tax law will be AED 20,000.
 Tax violations in the UAE may also lead to shutting down of business entirely and
the cancellation of the trade license.
15. VAT Accounting and Reporting Manual
VAT manual is not required by the VAT law. If a
company is not having a VAT manual, there is no
fine or penalty from the FTA. However, it is highly
recommended that a company should develop its
VAT manual. It helps accountants in applying the
correct treatment for every vatable transaction. It is
just like the operations or audit manual. The
manual provides details of every treatment under
the VAT law.
The company must provide the manual to all
accountants who are in the process of book-
keeping and transactional accounting. Especially,
all new hired accountants and book-keepers
should be advised to read the manual several
times before starting the work in a company.
The cost of preparing a manual will be much lower
than the fines or penalties due to errors or omission
found during the audit by the FTA.