I went to see a new sole trader client yesterday. I had a look at the records and saw that he had been using QB incorrectly resulting in a much higher COGS than it should be. It looks like this has been happening for a few years now and the previous accountant didn't notice it. He has disappeared off the face of the earth so is out of the picture. The client has agreed to start this year again from scratch. But what should I do about the previous few years? I have a feeling he owes quite a bit of tax because of the errors and he probably wouldn't have the money to pay the tax bill. How would you approach this situation?
What makes you think COGS is overstated, what's been put there? Will it actually affect taxable profit. Is it necessary to re-start the whole year? Can you be a bit more specific?
They have been using Stock items in quickbooks and had set it up so that whenever they sold something it would add a cost to COGS. They were also entering invoices from suppliers when they bought something. The price added to COGS was a random figure they had input seemingly. Their COGS was higher than their profit so it definitely wasn't right! We are restarting the whole of this year to correct that, my concern is that it goes back several more years as well. I can take a previous balance sheet and start with that but what if they get an investigation for a previous year? Their accounts for the current year will look quite different from the last one which may trigger something. Should I have the attitude that I should focus on getting the current year right as that is when I started with them and not look at the previous year? If not, how would you approach the situation? thanks.
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