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

Rigorous or Not?: A Case of Auditor Judgment for Deferred Tax Issues
Jan Taylor Morris, PhD, CPA
Riggers Inc (“Riggers, “client, or “Company”) is audited by Stone LLC CPA firm (“Stone” or “auditor”). The Compa” ” ny builds and owns offshore drilling rigs. Riggers is a US-based corporation that recently expanded its operations into Brazil (the only foreign-based operations for Riggers). As a result of this expansion, the client has encountered two complex issues related to accounting for income taxes. During the 2012 year-end audit, the auditors must use professional judgment with regard to these two income tax accounting issues. The first issue relates to the client’s valuation allowance against a net operating loss (“NOL deferred ”) tax asset (“DTA”) in Brazil. The second matter is the Company’s uncertain tax position resulting from transfer pricing in the United States. These two items require judgment on the part of management, thus the audit engagement team must apply the professional judgment framework during its year-end audit. Valuation Allowance As of December 31, 2012, Riggers has a $59+ million NOL carryforward on its Brazilian corporate income tax return. In 2011, Riggers had booked a $86,956 valuation allowance against the DTA established in recognition of the future tax benefit of the NOL, as the client believed it was not more likely than not (>50%) that that portion of the NOL future tax benefit would be utilized. In 2012, Riggers estimates that it will have enough future income in Brazil to offset the NOL and, as a result, is not reporting any valuation allowance as an offset to its $20+ million DTA. Note: a DTA for NOL carryforwards is recognized (not fully offset by a valuation allowance) as the company believes it is more than 50% likely that it will have