Accounting Project Topics

Effect of Tax Audit and Investigation on Revenue Generation in Nigeria

Effect of Tax Audit and Investigation on Revenue Generation in Nigeria

Effect of Tax Audit and Investigation on Revenue Generation in Nigeria

Chapter One


The main objective of this study is to assess the effects of tax audit and investigation on revenue generation in Federal Inland Revenue Service (Nigeria).

This study aims at achieving the following specific objectives:

  1. To investigate if there is any significant relationship between revenue base of the government and tax audit and investigation in Nigeria.
  2. To investigate, if tax audit and investigation can aid in resolving the problem of tax evasion in Nigeria.
  3. Identify specific methods FIRS uses to audit taxpayers.
  4. Determine the effect of Computer Aided Audit Tools ( CAAT)   on Revenue generation in FIRS.
  5. Ascertain the extent to which tax payers may have complied with the relevant statutory provisions of the tax law.




The taxpayer is a dodger when it comes to the issues of tax payment. He therefore needs to be motivated seductively or by force into paying what is expected from him. The taxpayer is always unwilling to pay his tax liability. The use of tax audit has however helped in the generation of revenue to the government. Adediran, Alade & Oshode (2013), opined that, 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.  

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).

According to Oremade (1988), Investigation is an inquiry commissioned by management for a specific purpose. It is an act of examining, searching and inquiring into a matter with adequate care and accuracy, usually undertaken to obtain information of particular or special nature. An investigating accountant may or may not be the auditor of the entity but it should be noted that any accountant/auditor undertaking an investigation assignment is seen as an expert and he must therefore exercise great care and skill in working towards achieving the defined purpose/objectives laid down in the client’s instructions. It should be noted that investigation may start as an internal matter that could eventually end up in the law court. Thus, great care and proper documentation is very important. This can no longer be termed ordinary Investigation but Forensic Investigation.

Bradford (2013) stated that traditional audits follow the accounting principle of materiality. Inaccuracies, omissions or apparent mistakes that are not of a sufficient dollar amount to impact the overall financial picture of a company are judged immaterial by auditors and not pursued. On the other hand, auditors involved in an independent audit may refer “red flag” observations for investigation by forensic Accounting specialists.

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 taxpayer’s records. It is usually triggered by suspicion of fraud, evasion and related offences (Okonkwo, 2014).  Audit, investigation, tax audit, and tax investigation, will no doubt utilize “examination” as a major tool, however they are not of the same scope.

The Audit unit of the Federal Inland revenue Service (FIRS) employed audit tools to identify tax evaders and to officially carry-out enforcement on any company. One of such audit tools is the risk engine tool for identification of tax evaders or non-compliant taxpayers. Companies flagged by such tools are either subject to tax audit or tax investigation. In line with its statutory mandate and the provisions of Sections 58 and 60 of the Companies’ Income Tax Act (Cap. 21 LFN 2004) and Sections 26 and 27 of the Federal Inland Revenue Service (Establishment) Act 2007 (Iheanyi, 2014).

In an effort by the FIRS to increase government revenue through taxation, reforms have been put in place by creating the following departments: Process Operations Department (POD), which had five units, including, (i) Information Communication and Technology Unit; (ii) Bank Collection Services Unit; (iii) The Return and Payment Processing Unit; (iv) Tax Refund Processing Unit; and, (v) Procurement and Due Process Unit. However, these new processes and units faced serious challenges in the light of the existence of fraud syndicates and the absence of a secured electronic system. Yet another department was established. This was the Audit Department, because the new leadership realised that tax audit and investigation were core operational priorities of a modern system of administration. The existing units and processes in the pre-reform era lacked the requisite funding, training, independence and spread to function optimally. The Investigation and Intelligence Division was created at the same time. It was later merged with the Audit Department in February 2006 to take over the operations of the Special Investigation Branch and the Intelligence Branch. The mandate of the new unit includes, (i) investigation of civil and criminal cases and violations of tax laws; (ii) installation of an effective database and efficient intelligence network; (iii) prosecution of violators of the tax laws to serve as deterrence; and,(iv) fostering closer working relationships with other government agencies. Other divisions established included the Values and Doctrines Division – which was built on the whistle blower unit. This unit had earlier been established in August 2005 in the Office of the Executive Chairman of FIRS to serve as a window through which stakeholders and the public at large could reach the Chairman with reports of corrupt practices involving the FIRS and its staff (FIRS, 2012).

Our focus in this chapter is to critically examine relevant literatures that would assist in explaining the research problem and furthermore recognize the efforts of scholars who had previously contributed immensely to similar research. The chapter intends to deepen the understanding of the study and close the perceived gaps.

Precisely, the chapter will be considered in three sub-headings:

  • Conceptual Framework
  • Theoretical Framework and
  • Empirical Review




Area of Study

The Federal Inland Revenue Service (FIRS) is the agency responsible for assessing, collecting and accounting for tax and revenue accruing to the Federal Republic of Nigeria, Formed in the year !943.

Research Design

Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled.

Population of the study

According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitute of individuals or elements that are homogeneous in description.

This study was carried out to examine the effect of tax audit and investigation on revenue generation in Nigeria a case study of the FIRS. The members of FIRS, Lagos State form the population of the study. All together about 200 members of this legal tax Body were involved in this research work.




Table 4.1: Demographic data of respondents





The increase in tax evasion and actual tax revenue collected but not fully remitted to the government necessitated this study on tax audit. An average Nigerian has no faith in the government and will not want to entrust their resources to the government as such payment of taxes will be ranked among the least obligation they owe to the government at all levels. This study explores the effect of tax audit and investigation on revenue generation in Nigeria and to determine the relationship between the tax audit and revenue generation in Federal Inland Revenue Service.

Tax audits and tax investigations are considered to be complex and tasking processes, and Bitrus (2014) asserts that tax authorities and their consultants must understand the ‘rules of the game’.

Tax payers and their consultants in the same manner should understand their civic responsibility under the law and the need to declare their income appropriately. They should be ready for further enquiries by the tax man should there be a reasonable doubt as to the affairs of the taxpayers’ vis-a vis their tax returns.

Audit exercise aims at expression an opinion as to the true and fair view of the financial statement examined. Audit is statutorily required while investigation process would only be activated when the situation is beclouded. Investigation is tailored towards a particular cause of event which could be financial or non-financial in nature. There are both local and international standards on auditing; there is no convergence of standards on investigation. In the same vein, tax audit is considered as additional statutory audit (Bitrus, 2014), though it is being carried out by the tax officials from relevant authorities and not from a firm of Chartered Accountants.


The study revealed that tax audit and investigation has significant effects on revenue generation in Federal Inland Revenue Service. This implies that tax audit and investigation ensures arithmetic accuracy of all figures in account and computation in taxpayers records; tax audit ensures compliance with tax laws, rules and regulations by the taxpayers.

The study also revealed that there is a significant relationship between the increase in the revenue base of the government and tax audit and investigations in  Nigeria. However, tax audit has a positive relationship with the revenue generation in Federal Inland Revenue Service. This means that an increase in tax audit increases revenue generation from taxes; an increase in tax audit increases tax bases for the government and an increase in tax audit reduce tax fraud in the tax system. This is in part in agreement with Yongzhi (2005) who concluded that, there is a positive relationship between the audit and the voluntary compliance.

Lastly the results show that  tax audit and investigation aid resolving of the problem of tax evasion in Nigeria and there are positive effects of Computer Aided Audit Tools (CAAT)   on Revenue generation in FIRS.


Tax audit department should be given autonomy to carry-out their responsibility effectively as specified in Federal Inland Revenue Service Establishment Act 2007.

Relevant tax authority, tax auditors, and FIRS staff should have full knowledge of modern audit tools like, Computer Aided Audit Tools (CAATs) to enhance performance and maximum tax revenue generation. The importance of tax revenue to the government cannot be over emphasized especially now that government over dependence on oil revenue is failing due to global drop in crude oil prices. All relevant authority should encourage tax audit for increase in tax revenue, in order for government to keep up with its obligation to her citizen.

Tax audit should be carried out on a routine basis to ensure that actual revenue collected is what the relevant tax authority remits to the government. Tax audit prevents tax evasion by the tax evaders and avoiders. Internal mechanism to check and monitor the staff of the tax audit department should be put in place to minimize the level of corruption and enhance effectiveness of the tax audit.


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