KWARA STATE UNIVERSITY, MALETE, NIGERIA

SCHOOL OF POSTGRADUATE STUDIES (SPGS)

DETERMINANTS OF TAX AUDIT EFFECTIVENESS: EVIDENCE

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FROM KWARA STATE INTERNAL REVENUE SERVICES,
NIGERIA
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Mufutau, Oluwaseun ALAO

16/27/MAC010

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 APRIL, 2021

SCHOOL OF POSTGRADUATE STUDIES (SPGS)

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DETERMINANTS OF TAX AUDIT EFFECTIVENESS: EVIDENCE
FROM KWARA STATE INTERNAL REVENUE SERVICES,
IENIGERIA
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A M.Sc. THESIS SUBMITTED

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BY

Mufutau, Oluwaseun ALAO

16/27/MAC010

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF

MASTER OF SCIENCE (M.Sc.) DEGREE IN ACCOUNTING
DEPARTMENT OF ACCOUNTING AND FINANCE,
FACULTY OF HUMANITIES, MANAGEMENT AND SOCIAL SCIENCES,
KWARA STATE UNIVERSITY, MALETE
NIGERIA
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 April, 2021

DECLARATION

I hereby declare that this thesis titled (Determinants of Tax Audit Effectiveness: Evidence

from Kwara State Internal Revenue Services, Nigeria) is a record of my research. It has

neither been presented nor accepted in any previous application for higher degree.

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…………………………………… …………………….
Mufutau Oluwaseun ALAO Signature/ Date

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 APPROVAL PAGE

This is to certify that this thesis by (Mufutau Oluwaseun ALAO) has been read and approved as
meeting the requirements of the Department of Accounting for the award of the degree of Master
(M.Sc.) in Accounting.

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Dr. Olaniyi T.A ………………………
(Main Supervisor) Signature & Date

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Mubaraq Sanni (Ph.D, FCA, ACTI, MBA, FCDPM) ………………………
(Co-Project Supervisor) Signature & Date
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Mubaraq Sanni (Ph.D, FCA, ACTI, MBA, FCDPM) ………………………

(Head of Department) Signature & Date
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Dr. Ahmed Adekunle ………………………

(Internal Examiner) Signature & Date

Dr. A. Olagunju .......………………….

(External Examiner) Signature & Date

Prof. Hamza Abdulraheem ………………………

Dean, School of Postgraduate Studies (SPGS) Signature & Date

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 DEDICATION

This work is dedicated to the Almighty Allah, the ultimate source of wisdom and inspiration
to the accomplishment of this work.

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 ACKNOWLEDGEMENTS
First and foremost, all praises and adorations are due to Almighty Allah (SWT), the Lord

of the universe, the most merciful and the most gracious for giving me the strength to

complete this research work. I would also like to extend my deep indebtedness to my

supervisors Dr. Olaniyi T. A, who has played a major role in guiding me during this study,

encouraging me and offering invaluable comments from the initial stages of this work up

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to the final write up of the thesis.

I am deeply indebted to the Head of Department of Accounting and Finance, Dr. Mubaraq
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Sanni for his word of encouragement, inspiration and support during this programme and

the Coordinator of Department of Accounting Post Graduate Studies Dr. Oyedele O.

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Mutiba. My appreciation also goes to Mr. Usman Kamaldeen and Abubakar Taofeeq for

their generous support and assistance. My sincere gratitude also goes to my lecturers who
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taught and impacted knowledge on me during the programme; Dr. Mustapha Abdulrasaq,

Dr. Olubunmi Osemene, Dr. Rahmat Titilayo Salman, and Professor Muftau Ijaiya, I say

thanks to them all. My sincere appreciation also goes to my parent for their support in all

ways from the very beginning of my life up to this moment. Also, to my loving brothers

and sisters; Gbolahan, Jamiu, Sherifat, Mariam, Muinat, Illyas Aishat and Omolara for their

encouragement and support throughout my academic career. My gratitude also goes to my

wife Aishat Oyindamola for her support and constant prayers. Her care, support,

understanding and patience have helped me to get through the challenges i faced throughout

the period of this research work. I Thank her for her love and encouragement.

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Special appreciation goes to my fellow M.Sc. students for supplying endless amounts of

ideas, laughter and friendship throughout the M.Sc. journey. The same appreciation goes

to the entire staff of Institute of Professional Studies especially Mr. Mubaraq, Mr. Lanre,

Mr. Ganiyu, to mention but view for their unending advice and prayers throughout the

period of this research work. Finally, I am grateful to all other people who assisted me in

one way or the other, whose name I was unable to mention in my acknowledgements.

Mufutau, Oluwaseun ALAO

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 TABLE OF CONTENTS

Pages

Cover Page i

Title Page ii

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Dedication iii

Approval Page IE iv

Declaration v
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Acknowledgments vi

Table of Contents vii

List of Tables viii

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List of Figures ix

Abstract x

CHAPTER ONE

1.1 Background to the Study 1

1.2 Statement of the Problem 3

1.3 Research Questions 6

1.4 Objectives of the Study 6

1.5 Research Hypotheses 7

1.6 Significance for the Study 7

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1.7 Scope of the Study 9

CHAPTER TWO: LITERATURE REVIEW

2.1.1 Concept of Effective Tax Audit 10

2.1.2 Determinants of Tax Audit Effectiveness 13

2.1.2.1Auditor’s Competency 14

2.1.2.2 Auditor’s Integrity 15

2.1.2.3 Information System and Tax Audit Effectiveness 16

2.1.2.4 Audit Program 17

2.2 Theoretical Review 18

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2.2.1 Deterrence Theory 18

2.2.2 Game Theory 21

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2.2.3 Theory of Economic Regulation 22

2.2.4 Contingency Theory 24

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2.3 Empirical Review 28

2.3.1 Studies on Developed Countries 28

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2.3.2 Studies on Developing Countries 30

2.3.3 Studies on Nigeria 35

2.4 Summary and Gaps identified in the Literature 38

2.5 Theoretical Framework 39

2.6 Conceptual Framework 41

CHAPTER THREE: METHODOLOGY

3.1 Research Design 43

3.2 Population of the Study 44

3.3 Sample Size and Sampling Technique 44

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3.4 Method of Data Collection 45

3.5 Method of Data Analysis and Technique 46

3.6 Measurement of variable 47

3.7 Model Specification 48

CHAPTER FOUR: Data Presentation, Analysis and Interpretation of Result

4.1 Preliminary Analysis of Data 50

4.2 Discussion of Findings 72

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary 76

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5.2 Conclusion 78

5.3 Recommendations IE 79

5.4 Contributions to Knowledge 80

5.5 Suggestions for Further Studies 80

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5.6 Limitation and Delimitation to the Study 81

References
Appendices
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 LIST OF TABLE

Table 3.1: Population of the Study 44

Table 3.2: Sample and Sampling Techniques 45

Table 3.3: Measurement of Variables 47

Table 4.1 Response Rate of the Questionnaire 50

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Table 4.2 Summary of the Respondents Demographics 51

Table 4.3 Tax Audit Effectiveness

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Table 4.4 Tax Auditor Competence 53

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Table 4.5 Auditor’s Integrity 54

Table 4.6 Application of Information System 55

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Table 4.7 Audit Program 56

Table 4.8 Mean and Standard Deviation of Variable 58

Table 4.9 Normality Test 59

Table 4.10 Person Correlation Analysis of Variable 62

Table 4.11 Collinearity Test 62

Table 4.12 Summary of the Measurement Model 65

Table 4.13 Cross Loading 66

Table 4.14 Discriminant Validity 68

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Table 4.15 Assessment of Structural Model for Tax Compliance 69

Table 4.16 Coefficient of Determination of R2 71

Table 4.17 Assessment of effect Size (F2) 72

Table 4.18 Predictive Relevant (Q2) 73

LIST OF FIGURES

Figure 2.1 Conceptual Model 48

Figure 4.1 Histogram Normality Graph 60

Figure 4.2 Linearity Graph: Normal P-Plot 60

Figure 4.3 Linearity Graph (Scatter Plot) 61

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Figure 4.4 Assessment of Measurement Model 63

Figure 4.5 Assessment of Structural Model

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 ABSTRACT

Contribution of income taxes to the total revenue in Nigeria is consistently fluctuating.

Specifically, from all tax types, individual income tax of Kwara State is relatively shrinking
due to low tax compliance and tax audit is an effective tools for tax compliance. Thus, this
study empirically investigates determinants of tax audit effectiveness in Kwara State
Internal Revenue Service’s (KWIRS). The specific objectives are to: (i) examine the
relationship between tax auditor competence and tax audit effectiveness in Kwara State;
(ii) determine the extent to which tax auditor’s integrity influences tax audit effectiveness
in Kwara State; (iii) investigate the degree of influence that information sysytem have on
tax audit effectiveness in Kwara State; and (iv) examine the relationship between audit

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program and tax audit effectiveness in Kwara State.Mixed research approach with
explanatory research design is used inthe study by employing survey method to select the
participants with the population consisting of Nine hundred and fifty (950) and Two hundred and
seventy-four (274) out of the population were chosen as the sample size using Krejcie and Morgan
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(1970) sample size determination table. Primary data which were collected through self-
administered questionnaires were analyzed using PLS-SEM, correlation and regression
analysis to identify the determinants of tax audit effectiveness. The findings of the study
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revealed that: tax auditor competence had significant positive relationship with tax audit
(β = 0.173, p-value< 0.017) at 0.05% level of significance as agreeed by the respondents; that
tax auditor’s integrity had a significant positive impact on tax audit effectiveness in kwara
state with (β = 0.138, p-value< 0.000) at 0.05% level of significant as agreed by the
respondents; that information system significantly positive related with (β = 0.675, p-
value< 0.000) at 0.05% level of significant to the tax audit effectiveness agreed by the
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respondents and audit program has positive relationship but has insignificant effect on tax
audit effectiveness as disagreed by the respondents. In line with these findings, the study
concluded that tax auditor competence, tax auditor’s integrity and information system had
strong positive and significant relationship withtax audit effectiveness while audit program
is related but insignificant to the study. The study recommended that; government should
therefore increase public awareness on tax matters; there should be practical
implementation of tax audit program while the management should continuously give
support to the tax process and tax knowledge by giving adequate tax training and education
to taxpayer’s.Finally the study suggested that the office should establish audit center of
Excellency, hire competentstaff, educate and reward taxpayers to improve the level of tax
audit effectiveness and policies should be directed towards strengthening these
determinants to reawaken the culture of tax audit effectiveness in Kwara State.

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 CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

States need income sources for the expenditures incurred to deliver and maintain public

services. The most important of these income sources are the taxes (Isik, Gelen, &

Sonsuzoglu, 2017). Tax is a mandatory charge imposed by the government without any

expectation of quid pro quo. In other words, tax is a compulsory payment by the people to

the government for which there is no direct return to the taxpayers. Tax imposes a personal

obligation on the people to pay the tax if they are liable to pay it. Taxpayers should be taxed

according to their ability to pay, and the people in the same financial position should be

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taxed in the same way (Parameswaren, 2005).
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According to the federal income tax proclamation No.979/2016, business income taxpayers

are categorized into three categories, namely category “A”, “B”, and “C” based on their
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volume of sales and form of business. Category “A” tax payer being a body or any other

person having annual gross income of Birr 1,000,000 and more. Those who are categorized

under category “A” have to maintain all records and accounts which will enable them to
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submit a balance sheet and profit & loss account disclosing the gross profit, general and

administrative expenses, depreciation, and provisions and reserves together with

supporting vouchers. Category ‘‘B’’ taxpayer being a person other than a body having

annual gross income of Birr 500,000 or more but less than 1,000,000. This category of

taxpayers must submit profit and loss statement at the end of the year. The law requires all

entries in the records and accounts to be supported by appropriate vouchers. Category ‘‘C’’

unless already classified in categories ‘‘A’’ and ‘‘B’’ include those taxpayers whose annual

turnover is estimated by the Tax Authority at Birr 500,000 or less.

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Taxes have been acknowledged as a major source of public revenue (Beza, 2014). For that

reason, states have been trying to implement and establish dynamic tax systems that will

not only ensure the public revenues, necessary for the economic state functioning, but will

also enhance citizens’ trust towards governments in terms of fairness in the distribution of

income tax burdens. Building on the above, tax compliance and tax accounting have been

radically changing in most countries worldwide (Colon & Swagerman, 2015), while tax

audit is currently at a crucial stage, because the overall economic growth and increasing

regulation all stand to contribute to the ongoing need for audit services ( Karagiorgos,

Drogalas, Pazarskis, & Christodoulou, 2006).

Tax audit involves an examination of taxpayers’ business records and financial affairs to

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ensure taxpayers have computed their tax payable in accordance with the current tax laws
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and regulations (Isa & Pope, 2011). Moreover, in a lecture on 24th November, 2016, to 100

medium sized entrepreneurs, Richard said “tax audit is an examination of a taxpayer’s

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business records and financial affairs to ascertain that the right amount of income should

be declared and the right amount of tax should be calculated and paid in accordance with

tax laws and regulations/ tax compliance”.

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Many countries have adopted the self-assessment system (SAS) in order to simplify the tax

assessment system and encourage voluntary compliance. Self-assessment system helps to

encourage voluntary compliance, reduce tax evasion and make taxpayers more responsible.

Under this system, taxpayers are expected to render tax returns based on their income,

determine their tax liabilities and pay within the time stipulated by law. In order to sustain

the credibility of this system, it is subject to verification by the relevant tax authorities

(Ojonta, 2011). In Nigeria, SAS was recently introduced in 1992 (Niway & Wondwossen,

2015). During self-assessment tax system (SAS), enforcement activities, in particular tax

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audit is regarded as the primary strategy taken in ensuring high level of tax compliance

(Singh, 2005).

According to Tadesse & Goitom (2014), like other developing countries, Nigeria faces

vaults in raising revenue to the required level in order to scale up the development

endeavors. Nigeria has experienced a steadfast expenditure surplus over revenue for a long

period of time. Therefore effective tax audit program of revenue body performs a number

of important roles and can make a significant contribution to improved administration of

the tax system.

According to Ketema (2013), Millions (billions) of Naira are lost through tax evasion every

year which leads to excess of public expenditure over public revenues resulting deficit. In

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addition, taxpayer grievances related to tax audit works result in long delays in collecting
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the government revenue that is expected to be collected because of the judicial appeal

processes. Therefore, it is of great importance to identify the factors affecting tax audit
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effectiveness in order to achieve tax authority’s objectives and to facilitate the tax

administration aim of getting" the right tax at the right time." This is the issue that motivates

this study to do so.

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Based on this, the study examines the determinants of tax audit effectiveness of Kwara

State Internal Revenue Service (KWIRS) in Kwara State, Nigeria.

1.2 Statement of the Problem

Global economic crisis coupled with uncertainty and instability of aid flows has given due

attention for governments to look for stable and sustainable modes of development finance

(Bhushan & Samy, 2012). In addition, excessive reliance on foreign financing may in the

long run lead to problems of debt sustainability, which together insist on least developed

countries to rely substantially on domestic revenue mobilization (Gupta, 2007). One of the

best ways which the government can use as a source of revenue is taxation. As in all other

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countries, one of the purposes of taxation in Nigeria is the raising of as much revenue as

possible to meet the ever-expanding public expenditure for the supply of public goods and

services (Nigerian Chamber of Commerce & Nigerian Business Development Services

Network, 2005).

A properly designed and administered taxation system is very essential in generating

revenue as well as increasing the tax base to the government of developed, developing, and

transitional economies. In contrary, deficient (inadequate) tax administration including

insufficient and ineffective audit program, the potential amount of tax revenue in

developing and transitional countries has not been collected in a proper and equitable

manner. Further, weak tax administration may make the tax system unfair in that honest

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taxpayers would bear heavier and disproportional burden. It, in turn, may have impact on
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the efficiency of tax operation, and also may encourage businesses to work in the illegal

economy (Edmiston & Bird, 2004).

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According to Mesfin (2008), Weaknesses in revenue administration lead to inadequate tax

collections. Revenue shortfalls shrink the budgetary resource envelope, thus, affecting the

government’s ability to implement its policies and programs and provide public services.
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Unexpected decline in revenue collections also cause budget cuts that result in major

inefficiencies in the public expenditure management. In addition the quality of revenue

administration influences the investment climate and private sector development.

In most African countries, the domestic tax bases are undermined by widespread tax

avoidance and evasion (IMF, 2011). According to Abreha & Kahase (2014), tax evasion

and avoidance are problems faced by every tax system and the tax system of Amhara

National Regional State is not an exception that taxpayers exploit loopholes of tax

provisions to minimize or escape tax liability.

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According to the Nigerian Herald interview with scholars, “the tax to GDP ratio of Nigeria

is far below the Sub-Saharan average despite many tax reforms” ( Central intelligence

agency world fact book and other sources, 2017). This may be as a result of evasion or

fraud by the taxpayers which includes; underreporting profits and turnover, underreporting

employee wages, failure to register or file tax declarations, dearth of willingness to operate

in accordance with tax laws. Netsanet (2014) revealed that like many other jurisdictions,

Ethiopia’s tax system is fraught with evasion. One factor that significantly contributes to

tax evasion is lack of intensive audits and absence of predetermined audit criteria.

There are few researches done on tax audit in Nigeria, developed and developing countries.

For example Badara (2012) tries to assess the effect of tax audit on tax compliance in

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Nigeria a case of Bauchi State Board of Internal Revenue. Olaoye and Ekundayo (2018)
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examined the effects of tax audit on tax compliance in Ekiti State, Nigeria. A study by Elias

(2014) tries to investigate the factors affecting tax audit effectiveness in Bahirdar city
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revenue office considering audit quality, organizational setting, support from top

management, auditee attributes, and organizational independence as determinant factors by

adopting quantitative research approach; thus further mixed methods studies by

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incorporating other factors are needed. Another study conducted by Samuel (2016) tries to

assess tax audit practice and its challenges-a case study of Ethopian revenue and customs

authority large taxpayers’ office. Recently, Melat (2016) tries to identify factors affecting

tax audit effectiveness evidence from large taxpayer’s office of Itallian revenue and

customs authority on auditors’ perception.

This study is different from previous researches by the type of research design and approach

it adopts as well as by consideration of other determinant factors of tax audit effectiveness.

As to the best knowledge, enough studies have not been carried out on factors that

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determine tax audit effectiveness in Kwara State Internal Revenue Service in particular and

Nigeria in general.

This study is done by considering factors like tax auditors’ competency, tax auditors’

integrity, information system and audit program. Therefore the purpose of this study is to

identify factors that affect tax audit effectiveness in Kwara State Internal Revenue Service

(KWIRS) in Kwara State, Nigeria by employing mixed research approach to fill the above

gap.

1.3 Research Questions

Based on the problem highlighted earlier, the following questions became relevant:

i.

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To what extent does tax auditor’s competence influence tax audit effectiveness of

Kwara Internal Revenue Service?

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ii. What is the degree of relationship between auditor’s integrity and tax audit
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effectiveness of Kwara Internal Revenue Service?

iii. How does information system affect tax audit effectiveness of Kwara Internal
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Revenue Service?

iv. To what extent does audit program affect tax audit effectiveness of Kwara Internal

Revenue Service?

1.4 Research Objectives

The general objective of this study is to examine the determinants of tax audit effectiveness

of Kwara State Internal Revenue Service in Kwara State. The specific objectives are to:

i. Examine the influence of tax auditor’s competence on tax audit effectiveness of Kwara

Internal Revenue Service.

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ii. Determine the degree of relationship between auditor’s integrity and tax audit

effectiveness of Kwara Internal Revenue Service.

iii. Investigate the extent to which information system affect tax audit effectiveness of

Kwara Internal Revenue Service

iv. Ascertain the extent to which audit program has effect on tax audit effectiveness of

Kwara Internal Revenue Service

1.5 Research Hypotheses

To provide answers to the research questions raised earlier, the following hypotheses were

formulated in null form.

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H01: Tax auditor competence does not have significant relationship with tax audit
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effectiveness of Kwara Internal Revenue Service.

H02: There is no significant effect of auditor’s integrity on tax audit effectiveness of

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Kwara Internal Revenue Service.

H03: Information system has no significant influence on tax audit effectiveness of Kwara
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Internal Revenue Service.

H04: There is no significant effect between audit program and tax audit effectiveness of

Kwara Internal Revenue Service.

1.6 Significance for the Study

This study contributes to the existing body of knowledge on tax audit effectiveness from

the conceptual and empirical point of view. Conceptually, the study investigates

determinants of tax audit effectiveness focusing on four factors which are tax auditor’s

competence, auditor’s integrity, information system and audit program. To the best of

literature researched on Nigeria studies, there is a scanty study on the four variables as

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determinants of audit effectiveness but rather used organizational factors, auditing

attributes, organizational independence, organizational setting.

Empirically, to the extent of literature researched in Nigeria such as, Ayalew, (2014);

Azhar, Mohd and Zarinah, (216); Fabrigar et al., (2016); Gberegbe and Umoren, (2017);

Barta, (2018), there are no empirical findings on the tax auditor’s competence, auditor’s

integrity, information system and audit program as determinants of tax audit effectiveness.

Therefore, this study add to the scanty literatures of tax audit effectiveness in Nigeria.

The results of this study are expected to be significant in various respects. First, on the basis

of the study findings, the report has some conclusions and forwards some recommendations

that will enable KWIRS office to identify the determinants of effective tax audit and to take

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corrective remedies to keep the existing factors through tax audit improvement. This study
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may help the tax policy makers at the Regional and National level to make use of out-puts

of the study in addressing the determinants of tax audit effectiveness by the revenue office.
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In addition, it helps 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 more about the issue and interested in undertaking further and detail
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studies in tax audit effectiveness as a research interest.

In view of the foregoing, further attempt to provide empirical evidence is not out of place

particularly in Kwara State. This study employed a Partial Least Square Structural Equation

Modeling (PLS-SEM) to achieve its objectives by looking at both determinant of tax audit

and audit effectiveness of kwara state internal revenue service in kwara state.

In the area of academic field of knowledge, finding on the effectiveness of what determine

tax audit of kwara state internal revenue service in kwara state become source of knowledge

for both teaching and research advancement. Information coming from these findings will

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be useful as a framework to the Board of Internal Revenue in Kwara State and it will be as

reference point to other states internal revenue service in Nigeria.

The study will assist regulators and policy makers in formulating effective policies for the

transformation of Nigeria tax system in general and specifically Kwara State internal

revenue service. Private sector may find the result of this study useful in the area of research

sponsorship.

1.7 Scope of the Study

This study examined the determinants of effective tax audit of KWIRS in Kwara State. The

study covers the activities of KWIRS office tax auditors, tax assessment officials and tax

collection officials in Kwara State, Nigeria. This is solely because of the fact that tax audit

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has been quietly ignored, despite the importance of tax for government service provision.
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One explanation of this is that tax audits are ineffective, as argued by many studies that tax

audits are ineffective because they fail to reduce loss of revenue to governments or to
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increase tax compliance (Biber, 2010; Kassera and Sserebe, 2007; Jayalakshmy et al., 2012;

Zulkifl et al., 2014), hence creating the need to study the reasons behind their

ineffectiveness (Rablen, 2014).

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Therefore, KWIRS was established by the state government to play a major role in the

accountability of all taxable businesses as well as individuals (Government workers). The

study concentrated on auditor’s integrity, auditor’s competence, information system and

audit program.

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 CHAPTER TWO

LITERATURE REVIEW

The chapter summarizes the existing literature on effective tax audit and its determinants.

This covers the conceptual issues, theoretical framework, empirical review as well as the

summary and gap identified in the reviewed literatures.

2.1 Conceptual Review

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The conceptual review serves to identify in-depth analysis of the concepts under study.
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2.1.1 Effective Tax Audit

A tax audit is an examination of whether a taxpayer has correctly assessed and reported
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their tax liability and fulfilled other obligations (OECD, 2006). In another development, a

tax audit is defined as an activity or a set of activities performed by tax auditors to determine

a taxpayer’s correct tax liabilities for a particular accounting or tax period, by examining
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the 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).

Tax audits are key characteristics of the voluntary compliance mechanism in the Statements

on Auditing Standards (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, audits also have a general deterrent effect

on taxpayers not actually audited (Isa &Pope, 2011).

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 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, 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

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detecting and deterring non-compliance, tax auditors are often required to interpret
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complex tax laws and carryout extensive examinations of taxpayers’ books and records

(OECD, 2006).
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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’
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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). However, 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.

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