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INTRODUCTION
INTRODUCTION
A tax audit goes beyond a routine review of financial records. It is a detailed examination by tax authorities to determine whether a taxpayer’s reported income, deductions, and overall tax position accurately reflect their actual business activities in accordance with applicable tax laws.
In Malaysia, this function is carried out by Lembaga Hasil Dalam Negeri Malaysia (LHDN) @ Inland Revenue Board of Malaysia under the Income Tax Act 1967 and related legislation. Under the self-assessment system, the responsibility for accurate reporting lies with the taxpayer, while LHDN’s role is to verify, challenge, and where necessary, adjust any inaccuracies identified during the audit process (Malaysia, 1967; Inland Revenue Board of Malaysia, 2019).
Among all components reviewed during a tax audit, expenses transactions represent one of the most critical areas of scrutiny. This is because every expense claimed directly reduces taxable income. As a result, any improper treatment—whether due to error, misclassification, or lack of supporting evidence—can lead to adjustments, additional tax assessments, and potential penalties.
From an audit perspective, expenses are inherently exposed to higher levels of judgement and estimation compared to revenue. While income is typically supported by external evidence such as sales invoices, expenses often rely on internal documentation, discretionary spending decisions, and complex classification between allowable and non-allowable items. This significantly increases the risk of misstatement.
Given these challenges, LHDN places considerable emphasis on verifying the legitimacy, accuracy, and deductibility of expenses during a tax audit. A structured, risk-based audit approach is therefore essential to ensure that all claimed expenses are properly supported, accurately recorded, and compliant with the relevant tax legislation (Inland Revenue Board of Malaysia, 2019; Messier, Glover, & Prawitt, 2017).
Purpose of This Section
Purpose of This Section
This section provides a focused analysis of how expenses are evaluated during a tax audit within the Malaysian context. It highlights the key risks commonly identified in practice and serves as a foundation for understanding the audit techniques used to assess the validity and deductibility of expenses transactions.
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