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 …show more content…
The client calculates its transfer pricing adjustment using the profit split method at 75/25 for operator/owner and the IRS NOPA suggests the Company should utilize a 50/50 profit split
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Rigorous or Not?: A Case of Auditor Judgment for Deferred Tax Issues

Case Study

between operator/owner. The Company continues to believe that it is more likely than not to prevail on its current transfer pricing position. During Stone audit team’s second meeting with Rigger’s Tax Director to discuss the uncertain tax position, the Tax Director provides the auditor a copy of Val-Nation (a US based law firm specializing in transfer pricing laws and regulations) transfer pricing study and the Company’s Advance Pricing Agreement (“APA”) in Brazil. The Val-Nation transfer pricing study concludes that a 75/25 profit split is appropriate for Riggers. The Tax Director explained this study is the support for the position taken on the 2011 filed tax return. Additionally, he provided a signed APA in Brazil which approves a