Chapter one 1

Chapter one
1. Introduction
1.1 Background of the Study
In most countries whether it is developing or developed there are challenges of foreign direct investment, international trade, domestic trade growth and globalization and privatization has their own influence on that countries tax administration policy; some of this challenges are aggressive tax planning, tax Avoidances and evasion, and related party transaction. For most developing countries taxation is the main and crucial source of revenue for the government with regardless of the economic growth; if the tax revenue grows highly in ratio of Gross Domestic Product (GDP) the economy of the country also growth. This indicates that the economic growth and taxation are highly correlated because if the government has the power to collect its tax revenue efficiently and effectively by different mechanism the economy of that country will be increasing.

Ethiopia is one of the countries which have low rate of tax collection because of this our economy also increasing slowly. The Federal Government of Ethiopia has initiated so many reforms in the tax administration start from 2002 tax reform which produce change sales tax in to VAT, Income Tax Proclamation Number 286/2002, VAT Proclamation Number 285/2002 and different tax proclamations including Withholding Tax, Excise Tax. To increase the revenues from period to period and to give service that much with the current period business environment and global trade culture these Proclamations are amended; for example proclamation no 286/2002 to proclamation number 979/2016 and the newly introduce tax administration proclamation number 983/2016 which incorporates all tax administration issue in different proclamation like VAT, petroleum and gas Proclamations.

Focusing on domestic revenue base is much more important than depending on international trade duty and tax and other sources of revenue (loan, grant and other) for economic development. the domestic tax revenue depends on direct or indirect tax Some of direct tax are business income tax, employment income tax, capital gain tax, and the like some of indirect tax are Value Added Tax (VAT), Turnover Tax (ToT), Excise Tax, and the like.

In order to overcome or minimize the above challenges countries has their own tax administration policy rule and regulations, and different government agencies/departments that are responsible to these issues.

One of the organizations that is responsible for this is the Ethiopian Revenues and Customs Authority (ERCA) which administering the tax and customs issues of the country with cooperation with the Ministry of Finance and Economic Cooperative (MoFEC) which has the power to enact tax laws. ERCA has different departments out of which the most important department which has full power to control or minimize such challenges are tax audit departments of different branches by the means of different technique. Tax audit is the main tools or technique to control or minimize the above challenges as well as improving revenue growth of the country. But if these challenges are arisen in the country the revenue growth of the country will decrease.

Tax Audit is an attestation and assessment of accounting and other documentation evidence provide by taxpayer in the annual tax period or in special issue of the ERCA followed by reporting and opinion of auditor which gives an assessment result paper to taxpayer if they has unpaid tax or clear. Tax audit is one of the types of audit that assess and investigate financial statement of the taxpayers and gathering additional evidences from difference sources to cross-checking the results whether the taxpayers comply with stated rules and regulations of the tax administration and generally acceptable accounting and auditing principles and check if there is unpaid tax and violated tax laws.

In addition to raising revenue directly from audit activities by selecting the highest risk cases, tax audit efficiently detecting non-compliant taxpayers, applying appropriate sanctions, and publicizing results of audit activity (either generally or specifically) taxpayers get the message that any attempt to avoid tax presents a high risk of detection and the penalty for non-compliant taxpayers is substantial.

Tax audits therefore provide the tax administration with significant leverage across the community rather than only impacting on the taxpayer selected for audit and collecting the tax that should have been paid in the first place. Additionally, a tax system that is perceived to be fair and equitable and punishing taxpayers who don’t comply builds community confidence and encourages compliance from the broader population.

The efficiency and effectiveness of audit activities can be greatly facilitated by a broad range of support tools. Without competent staff tax audit activities will not achieve their objectives.

Competency models and competency improvement activities help develop and manage the audit workforce. Performance management is an important tool for shaping audit behavior and contributes to the attainment of audit program objectives.
Statement of the Problem
Tax is the main sources of revenue for the government and thus a government organization or department is concerned to collect the revenue; but the issue is does the government organ collect tax revenue in the right way and procedure? Many of the African countries rely on foreign sources of finance namely foreign loan and aid due to their poor tax administration capacity and collection ability this is directly or indirectly related with effectiveness of the tax audit. A tax audit is one of the most sensitive contacts between the taxpayer and a revenue body, the presence of an auditor in a taxpayer’s private dwelling or business premises, coupled with the exploration of private and business issues and the gathering of information from taxpayers’ books and records, or just the disruption of day-to-day workflow, represents a burden on the taxpayer (OECD, 2006)
Tax audits are ineffective, as argued by many previous studies that tax audits are ineffective because they fail to reduce loss of revenue to governments or to increase tax compliance (Biber, 2010; Kassera and Sserebe, 2007; Jayalakshmy et al., 2012; Zulkifl et al., 2014), hence creating the need to study the reasons behind their ineffectiveness (Rablen, 2014). Few studies have been conducted on tax audit effectiveness in developing countries (Al Frijat, 2014; Ayalew, 2014; Getie Mihret and Wondim Yismaw, 2007), we are not aware of any theory supported study conducted in Ethiopia for factor affecting tax audit effectivness. The extant literature suggests that tax audit effectiveness is a function of a number of factors, including information systems, tax legislation, taxpayer’s attitude and cooperation, tax audit unit positioning, types of businesses paying taxes, audit quality, top management support, as well as tax policies. However, these studies have not considered other factors, such as auditor’s capacity, internal control of taxpayers and auditor’s independency, which we consider to be relevant in the Ethiopian context.

The Ethiopian Revenues and Customs Authority, in short, (ERCA) has been using a tax audit programmes based on reform from an administrative assessment to a self-assessment system, which assumes that taxpayers have adequate knowledge and skills to fulfill their tax legal obligations. However, according to Okello (2014), tax audit is facing a number of challenges, such as using manually based risk analysis, limited access of information for third parties, dominance of examination of all tax returns, audit selection based on the judgments of senior officials, as well as having a national strategy and plan without a headquarters for the tax audit function.

The tax administration collects tax revenues through the procedures put in place and the rules and regulation set by the administration. The system must be monitored to control tax avoidance and evasion and wrong submissions of files by taxpayers. Thus this study is focuses on factor affecting tax audit effectiveness by taking Ethiopian Revenue and Customs Authority Eastern Addis Ababa Medium Taxpayer Branch Office to overcome the above problems, challenges and to give some additional points for the research gap.

Research objectives:
This study has one main objective which is factor affecting tax audit effectiveness and four specific objectives that categories factors affecting tax audit effectiveness.

Main objective
The main objective of this study is to examine factors affecting tax audit effectiveness in Ethiopian Revenues and Customs Authority Eastern Addis Ababa Medium Taxpayer Branch Office.

Specific objectives
Specifically, the study will evaluate whether tax audit effectiveness is influenced by:-
A. Organizational related factors such as audit quality, support from top management and use of computer assisted audit techniques (CAATs)
B. Tax auditor’s related factors such as auditor’s capacity and independency
C. Taxpayers related factors such as auditee attributes and strong internal control of taxpayer.

D. Regulation related factor such as tax regulations.

Research Hypotheses
In order to achieve the broad objective of the study, the researcher developed hypotheses that supported by different theories which is discussed in chapter two of this study are there is a significant and positive relationship between audit quality, greater support from top management, more auditee attributes, greater auditor’s independence, auditor’s capacity in the audit, use of computer assisted audit techniques (CAATs) Or use of technology, strong internal control of taxpayer and tax regulations and audit effectiveness.

Significance of the Study
The study will provide feedback to tax payers, tax authority and other stakeholder regarding tax audit and provide concrete feedback about the factor affecting tax audit effectiveness in Ethiopian revenue and customs authority in Eastern Addis Ababa Medium Taxpayers Branch Office.

The study will provide information to different users about the procedure to be conducted in tax audit and the importance of using accounting software and technology in tax audit. Finally, for those who are interested to make further study on the related issue may be used as indication.

Scope of the Study
The study analyses factor affecting the tax audit effectiveness of Ethiopian Revenue and Customs Authority of Eastern Addis Ababa Medium Taxpayer Branch Office. This study will focus category A taxpayers which is Private Limited Company (PLC) by default category A taxpayer which is stated in the proclamation number 286/2002 and in the new proclamation number 879/2016.the study also focuses on Ethiopian Revenue and Customs Authority Eastern Addis Ababa of Tax Audit department.

Description of the study area
The study is focus in Addis Ababa which is the capital city and biggest city of Ethiopia. It consists of a population of around 3,384,569 as per the 2007 population enumeration, with yearly growth rate of 3.8%. This number has been expanded from the initially published 2,738,248 figure and gives off an impression of being still to a great extent underestimated Talking about population, in order to check out the population of Addis Ababa in 2017, we need to have a look at the population of the past 5 years. They are as per the following:
2012 – 3.6 Million
2013 – 3.71 Million
2014 – 3.95 Million
2015 – 4.28 Million
2016 – 4.6 Million
Getting from the past data of Addis Ababa from the year 2012-16, it has been noticed that there has been an increase of 10 Million in the past 5 years. Therefore, it has been seen that every year the population increases by 2 Million. Hence, the population of Addis Ababa in 2017 is forecasted to be 4.6 Million + 2 Million = 6.6 Million. So, the population of Addis Ababa in the year 2017 as per estimated data = 6.6 Million.

Addis Ababa Population 2017 – 6.6 Million (Estimated)
http://populationof2017.com/population-of-addis-ababa-2017.htmlFigure 1.1
Addis Ababa City Map
Shola Gebeya

https://www.ethiovisit.com/addis-ababa/41/Addis Ababa has 10 different sub cities which are Bole, Yeka, Akaki kalit, Gulele, Nefas selek lafeto,Kolefe keraniyo,Ledeta, Kerkos, Addis Ketema and Arada sub cities. The Ethiopian Revenue and Customs Authority is organized the Medium Taxpayers of Privet Limited Company (PLC),Share company and NGO in addis ababa by dividing the 10 sub cities and different regional states which are close to the city. Thus Ethiopian Revenue and Customs Authority Eastern Addis Ababa Branch Office is located in yeka sub city woreda 01 around shoal gebeya.
Limitations of the Study
Some limitations this study are Information gathered for this study came mostly from the ERCA Eastern Addis Ababa Branch office, because of this there may not be proper documentation and system for capturing information needed for this study.
Additionally, some Tax auditor were unwilling to provide correct information about the study since most believed that the result may has impact on their job confidential and therefore were not very willing to provide all or the relevant information needed for the study.

Organization of the Paper
The study is categorized into five main chapters as follows. Chapter one focuses on the Introduction, background of the study, problem statement, objectives, scope, significance of the study, as well as limitations. Chapter two is devoted to the review of existing literature theoretical and Empirical study, conceptual frame work and research Gap. It provides information about the tax audit. The third chapter discusses research methodology including population, sampling techniques, methods of data collection and the research instruments employed. Chapter four is made up of detailed analysis of data collected and presentation of information with the aid of quantitative and statistical models. The fifth chapter covers the summary, conclusion and recommendations.

Chapter Two
Literature Review
Introduction
The chapter explains the conceptual Frame Work, theoretical Frame work and research Gap from various authors on tax factor affecting effectiveness of tax audit. It also gives contribution of various research studies as carried out by various authors and then concludes on the general view of the various authors.

Conceptual Framework
A conceptual framework is an analytical tool with several variations and contexts. It can be applied in different categories of work where an overall picture is needed. It is used to make conceptual distinctions and organize ideas. Strong conceptual frameworks capture something real and do this in a way that is easy to remember and apply.

2.2.1 What is auditing
Awe (2008) defines auditing as an independent examination of the books and accounts of an organization by a duly appointed person to enable that person give an opinion as to whether the accounts give a true and fair view and comply with relevant statutory guidelines. The American Accounting Association (2011) in its Statement of Basic Auditing Concepts in Hayes, Schilder, Daseen&Wallage (2009) described auditing as: a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users.

The American Accounting Association (AAA) has provided a broader definition of audit which refers to: a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

2.2.2 Meaning of Tax Audit
Different authors defines tax audit in different views for example Adesina O.O. (2005) 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.

A tax audit is an examination of whether a taxpayer has correctly reported its tax liability and fulfilled other obligations. It is often more detailed and extensive than other types of examination such as general desk checks, compliance visits or document matching programs (OECD 2006a).

From study made by Mesfin Gebeyehu (2008) a tax audit is one of the most sensitive contacts between the taxpayer and a revenue body. The presence of an auditor in a taxpayer’s private dwelling or business premises, coupled with the exploration of private and business issues and the gathering of information from taxpayers’ books and records, or just the disruption of day-to-day workflow, represents a burden on the taxpayer and may be seen by some as an unwarranted intrusion into their affairs. Notwithstanding this, tax audits remain the only effective method for ascertaining additional facts or verifying provided information.

In Ethiopian Revenue and customs authority the tax audit department and the auditor has their own factor on audit effectiveness this implies that the auditor ethics and responsibilities are highly sensitive in change the magnitude of revenue growth by increasing its effectiveness. Because the auditor may conducted the audit on the taxes payers business premises this may open the door for corruption, miss use of confidential information of the company and other issues.

Thus, tax audit comprises the following According to AAA, 1973, p. 14:
Accounts and other evidences are required to comply with the “tax basis of accounting”, i.e. as per requirement of tax laws;
Preparation of tax return, statement of computational working for items in the return and statements containing particulars of allowances and disallowance for deduction;
Giving audit report portraying the attest function whether the tax return and statements have been fairly prepared as per the regulatory requirement of tax laws.

2.2.3 Types of tax Audit
Tax audits can vary in their scope and the level of intensity to which they are performed. The nature of audits conducted should reflect the risks to be addressed and desired audit coverage of the taxpayer population. Based on the place of conducting audit tax audit can be categories as: desk audit and field audit Adesina O.O. (2005)
Desk (or Office) Audit
This is one which the whole activity of the audit takes place within the confines of the office of the tax officials.

In this situation the tax official may simply request the taxpayers to provide some additional documents to his office to enable him clear some issues in the returns submitted.

In this type of audit, no official notice is given to the taxpayer of the impending desk audit exercise. He only gets to know when letters are written to him requesting for certain documents or explanations. The essence is to ensure some level of compliance with tax laws, rules and regulations as well as performing the administrative checks on returns submitted.

Field Audit
By the nature and scope of their work, regular assessing officers can only carry out limited desk audit through examination of accounts and returns. It is in a bid to check this handicap as well as to improve on tax compliance that tax authorities carry out field audit exercise on taxpayers by physically conducting the exercise in the office of the taxpayer. The taxpayers are however formally notified of the arrival of the auditor prior to the commencement of the audit and the requirements of the auditors in terms of documents to be audited will also be requested for in advance. Field audit involves physical verification of documentary evidence and materials at the premises of a taxpayer so as to confirm the facts and figures of the tax returns filed by corporate taxpayers.

From the study conducted by Mesfin Gebeyehu(2008) Types of Tax audits:-
Audits can vary in their scope and the level of intensity to which they are conducted. For this reason, various terminologies have evolved to describe different types of audit activity.

Full Audits – The scope of a full audit is all-encompassing. It typically entails a comprehensive examination of all information relevant to the calculation of a taxpayer’s tax liability for a given period. The objective is to determine the correct tax liability for a tax return as a whole. In some countries full audits are carried out as part of random audit programs that are used to gather data on the extent, nature and specific features of tax compliance risks, for compliance research purposes and/or the development of computerized audit selection formulae. Given their broad scope, full audits are typically costly to undertake a substantial program of full audits will require considerable resources and reduce the rate coverage of taxpayers that could otherwise be achieved by a more varied mix of audit types.

Limited Scope Audits – Limited scope audits are confined to specific issues on the tax return and/or a particular tax scheme arrangement employed by the taxpayer. The objective is to examine key potential risk areas of noncompliance.

These audits consume relatively fewer resources than full audits and allow for an increased coverage of the taxpayer population.

Single Issue Audits – Single issue audits are confined to one item of potential non-compliance that may be apparent from examination of a taxpayer’s return. Given their narrow scope, single issue audits typically take less time to perform and can be used to review large numbers of taxpayers involved in similar schemes to conceal non-compliance.

From the study conducted by Getaneh Mihret (2011) Types of Tax audits:- as Ebrill et al. (2001),, Harrison and Krelove (2005), OECD (2006a) and Biber (2010) noted, tax audit program in a function based administration includes desk audit or verification, field audit, registration check, advisory audit, record keeping audit, refund audit, issue-oriented audit, comprehensive or full audit and fraud investigation. The following briefly reviews these tax audit types.
Desk Audit or Verification: This type of audit usually carried out annually and primarily based on: (1) a review of income tax and VAT returns, or basic ratios comparing with previous periods or other taxpayers in similar industries, and (2) the crosschecking of information included in the taxpayer files. It involves basic checks conducted at the tax office when the auditor is confident that all necessary information can be ascertained through in-office examination. Information technology (IT) systems should provide strong support for these verifications.
Field Audit: It is a detailed examination of taxpayers? books and records to determine whether the correct amounts were reported on the tax returns. The auditor may also obtain information from other sources such as banks, creditors and suppliers, to confirm items on returns. A field audit usually includes one or more of the following taxes: income, franchise, sales and use, withholding, and excise taxes. The audit is conducted at taxpayers? place of business, home, or at the office of their accountant, attorney, or other person who may represent them. The auditor tries to select the place that is most appropriate under the circumstances and most convenient for them.
Registration Check: This takes the form of unannounced visits to taxpayer’s premises for new enterprises (mainly small and medium sized) to detect businesses operating outside the tax system. As Ebrill et al. (2001) stated, during this visit, the tax officer ensures that the taxpayer: (1) has a basic understanding of their obligations; (2) keeps appropriate records (book keeping review should be mandatory in case of voluntary compliance when the turnover of the taxpayer is below the registration threshold); and (3) issues proper invoices when required by law. This type of visit is a quick check on businesses to establish that they are correctly registered. It should not take more than half a day.
Advisory Audits: It involves the auditor?s visit to newly established businesses. They advise them regarding tax types, filing of returns, payment of amounts due, record keeping to be maintained, refund claims, risk of audit and sanctions of noncompliance. These visits are very appropriate when introducing new tax laws.
Record Keeping Audit: It is unannounced visits to the taxpayers? business premises to check whether the appropriate records are kept and VAT invoices are issued.
Refund Audit: A pre-refund audit should be undertaken to verify the taxpayer’s entitlement to a refund prior to processing a first refund claim particularly for new registrants. It is also carried out where the refund claim varies significantly from established patterns and trends. Audits of further claims should be carried out selectively. Refund audit should focus only on the period covered by the claim.

Issue-Oriented Audit: It should be directed at verifying items for which errors have been detected in the returns (atypical ratios, gross revenues, comparison of gross sales to imports). It should focus on a single tax type and covers no more than one or two reporting periods. Single-issue audits are confined to one item of potential noncompliance that may be apparent from examination of a taxpayer?s return. Given their narrow scope, single-issue audits typically take less time to conduct and can be used to review large numbers of taxpayers involved in similar schemes to conceal noncompliance.

Comprehensive or Full Audit: All cases where serious underreporting or evasion has been detected under any of other audits should be forwarded to a unit responsible for undertaking comprehensive audits of all tax liabilities. It typically entails a comprehensive examination of all information relevant to the calculation of a taxpayer’s tax liability for a given period. This audit may cover all tax obligations over a number of tax periods, or extended to several years up to the limit provided for in the law. The objective is to determine the correct tax liability for a tax return as a whole. As this audit is usually time consuming and costly to undertake, it should only be applied to those taxpayers if there is an indication of under reporting that may impact across taxes. It requires considerable resources and reduces the rate coverage of taxpayers that could otherwise be achieved by a more varied mix of audit types.
Fraud Investigation: It is criminal investigation that arises where the most serious cases of noncompliance that have criminal implication- fraud, evasion, and criminal activity- are detected. Such investigation requires special skill including meeting evidentiary requirements, seizure of evidences or records, testimony from key witnesses and preparing briefs for courts. Hence, it should be undertaken in accordance with criminal procedure laws. As OECD (2004a) stated, tax authorities should maintain a dedicated organizational unit responsible for the handling of serious cases of tax fraud or evasion.

2.2.4. Location of Audits
Tax audits can be conducted in different locations. Sometimes there is a need to carry out the audit at a taxpayer’s business premises. In other situations, the books and records required to complete an audit can be collected by, or sent to, the revenue body and the audit work performed in the office. Tax audits can be categorized as ‘field audits’ or ‘office or desk audits’ on this basis.

2.2.5 The Role and Responsibility of Auditor and Taxpayer in Tax Audit
Tax auditors analyze financial data to determine the correct amount of taxable income, applicable deductions, and nontaxable expenses. Tax auditors interpret federal, state, and city tax laws and regulations, and apply them to auditing procedures. They also explain these codes and regulations to taxpayers and clients. So both tax payers and tax auditors have their own roles and responsibility set by law and standards.
The Role and Responsibility of Tax Auditor
According to the tax proclamation the tax authority has the power to check the financial statement and other documents of the tax payer with 5 years period this is conducted by the tax audit departments of Ethiopian revenue and customs authority different branches. In conducting this audit the auditors or audit teams has some of the following role and responsibility:-
A. Ethics and Professionalism:-the auditor or audit team which conducts the audit in the office or on business premises must be ethical and perform its audit with a professional way. this means the auditor conduct with integrity, objectivity, independency, confidentiality, professional competency and due care, technical standard and other professional ethics and the code of conduct of the organization. The audit team of the organization must clear from any corruption themselves and protect other team members from this activate.

B. checking of Compliance:-the auditor or audit teams which conduct the audit must check the financial statement and other supporting documents of the tax payer whether they complied with the existing tax proclamation, regulation and directives of the country as well as the auditor itself are complied with the rule and principle auditors’ profession.
C. Generation of additional Revenue:- the auditor or audit teams which conduct the audit also focusing on the generation of additional revenue that are not declared to the authority in the tax declaration and payment period with support of tax rules and auditing and accounting standards.
D. Detection of tax Evasion and fraud:- the auditor or audit teams which conduct the audit clearly investigate whether the taxpayers participate in tax evasion and fraudulent activities, and if the auditor see documents or activities of tax evasion and fraudulent activities then transfer to investigation department or to criminal investigation of the organization.
E. Entrance and exist Conference:-the audit team or auditor which conducts the audit must start with entrance interview which is question of internal control and understanding the industry and end with exit conference which has a question of final finding of audit with the tax payers or its representative.

The Role and Responsibility of Taxpayers
According to the tax proclamation the taxpayers has a responsibility of giving relevant financial and other documents to the audit team that are appointed by tax authority. In conducting the audit taxpayers has some of the following role and responsibility:-
A. Evidence and Supporting Documents:-taxpayer has responsibility in presenting of financial statement, supporting documents and other evidences when the audit team wants to verify and giving proper information in any way that is reliable or unbiased to the auditor.
B. Good behavior and Audit work interruption:-taxpayers are responsible in the audit work from bingeing to end must contributes its effort which fast the audit work by facilitating what is important facilities and office (if the audit is conducted in taxpayers premises) but it is not mean that giving an incentive to auditors.
C. Control and report to the authority unethical condition:-if the auditors appointed by tax authority to conduct the audit in the office as well as on taxpayer premises can show unethical activities related to the audit the taxpayers must report this unethical issue to the organization manager starting from the immediate boss of the auditor and ethics department.
D. Relationship with audit team:-the relationship between the audit team and taxpayer s very important in fasting the audit work as well as controlling the un ethical behavior of the auditor.
2.2.6 Approaches and Standards of Tax Audit
According to the study conducted by Mesfin Gebeyehu (2008), in conducting a tax audit the audit should apply the generally accepted practices of auditing as one would do in the case of other audits, e.g. an audit of a company under the companies act. The generally accepted auditing practices are communicated in the various pronouncements of the respective country. The auditor should get the financial statements as well as the statement of particulars authenticated by the assessed before he verifies them. The auditor can apply the technique of selective verification (statistical sampling/ test-checking), depending on his evaluation of the internal control system prevalent in the entity under audit and the materiality of transactions.

In conducting the audit the auditor should keep in mind that the basic objective behind is to assist the authorities in assessing the collect income of the assessed.

For conducting the tax audit effectively an auditor needs to develop an approach which is a synthesis of taxation laws and auditing principles. The nature of tax audit is such that an auditor has to rely on various legal pronouncements in the field of taxation.

2.2.7 Measurements of Tax Audit Effectiveness
Measuring tax audit effectiveness is complicated by the lack of consensus on the indicators/dimension of effectiveness and the methodology for assessing it. In some cases, subjective dimensions have been used, for example, Drogalas et al. (2015) used indicators measured on a five-point Likert scale as per tax infringements, tracking form in Greece. The subjective questions captured items such as the difference between turnover submitted and that given on financial statements, differences in expenses, in stock quantity, as well as differences in the inventory valuation methods. Moreover, it included tracking fake invoices, differences in customer and supply records, differences in net profits, differences in value-added tax (VAT) values, differences in transfer amounts, differences in bad debt provision, differences in expenses, which are not deducted from the total turnover and differences in other current taxes. Kastlunger et al. (2009) measured tax audit effectiveness in terms of influencing taxpayers’ behaviour towards tax compliance. They recognized that there are debates about the effect of tax audit on deterring tax evasion, with some studies suggesting that tax audit can deter evasion, while others show only a weak relationship. From this perspective, Kastlunger et al. (2009) considered compliance (no tax evasion) as an indicator of tax audit effectiveness. Kastlunger et al. (2009) are supported by views provided by Devos (2014) that in a self-assessment tax system, it is important for tax audits to operate effectively because they are drivers of compliance behaviour of taxpayers. Tax audits are believed to convince taxpayers to be more careful in the preparation of returns and to reduce risks (Devos, 2014). Devos (2014), then, argued that an effective tax audit is one which can improve deterrence measures by increasing the probability of apprehension, rather than imposing sanctions.

Ayalew (2014) argued that one measurement of tax audit effectiveness has sufficient specific deterrent effect to enhance voluntary compliance. For Ayalew (2014), an effective tax audit is one which can not only allow tax auditors to educate taxpayers on the application of tax laws as well as improving record keeping, but also detect tax, recover more tax and penalize noncompliance. Isa and Pope (2011) conducted a study to examine the extent of taxpayers’ perceptions of the tax audit experience and argued that if a tax audit is carried out effectively, it can improve the administration of a tax system, hence increasing voluntary compliance.

Isa and Pope (2011) argued that effective tax audit can be measured in terms of enhanced voluntary compliance, by ensuring that tax payers comply with current tax laws and regulations, allowing tax conditions to educate tax payers, as well as identifying areas of improvement for record-keeping, and tax laws needing clarification. However, based on Isa and Pope’s (2011) arguments, it can be observed that tax audit effectiveness can be measured by correct perceptions possessed by taxpayers. This can be considered to be psychological and economical because the taxpayers’ perceptions are influenced by both psychological and economic factors. The views provided by Isa and Pope (2011) complement the earlier views provided by Hasseldine and Bebbington (1991). According to Hasseldine and Bebbington (1991), many tax administrators review their tax audit procedures in areas such as case selection and improved information systems (in this study, these two can be considered as factors), to examine a taxpayer’s propensity to evade tax due to personal characteristics.

Hasseldine and Bebbington (1991) investigated whether, if tax audit is effective, undetected evasion should decline, that is to say, the “ripple effect” may occur and compliance may increase. This effectiveness on tax compliance will be a function of a carefully designed tax audit for specific taxpaying groups. While Hasseldine and Bebbington (1991) looked at psychological measurement of tax audit effectiveness, Beron et al. (1988) expressed effective tax audit in terms of accurate reporting of deductions reflecting proper matching principles, as well as checking for errors. Using taxpayers’ financial statements as a measure of effective tax audit is also seen in the study conducted by Samuel and De Dieu (2014), which assessed the impact of financial statements audit on tax revenue growth in Rwanda. They found that tax audit helped to increase revenue in the country.

Based on the reviewed literature, it can be argued that although measuring the effectiveness of tax auditing may be considered to be a simple task, there is little consensus about which type of measurements to apply. In this study, we used different types of measurements to express tax audit effectiveness. As such, we combined items such as transparency in the tax audit to minimize complaints from tax payers, promotion of voluntary tax compliance, proper documentation of tax audit findings, a decline in the number of taxpayers evading tax, as well as producing reports which are clear, concise and well presented.

2.3 Theoretical Frame work
Based on the extant literature about factors influencing tax audit effectiveness, it can be observed that there are mixed results and different variables which express factors for tax audit effectiveness. Therefore, the factors are separated into four categories, namely, organizational, tax auditor, and taxpayer and regulatory.

As argued by Hansen and Wernerfelt (1989), organizational factors which are internal to organizations are major determinants of organizational success. Hansen and Wernerfelt (1989) considered that, for the organization to succeed, there is a need to match organizational factors to the organizational environment. In this aspect, the organizational factors are linked to contingency theory, which states that there is no universal way to manage organizations, and that an effective organization must have a proper fit between its environment and its subsystems (Emmanuel et al., 1990; Galbraith, 1973; Lawrence and Lorsch, 1967). The application of contingency theory in this study assumed that, for tax authorities to be successful in conducting a tax audit, there would be some internal and external factors which have to be taken into consideration. However, one limitation of contingency theory is the availability of many variables, hence reducing consistency (Weill and Olson, 1989). Tax authorities, when designing and developing tax audit functions, need to consider the relationship between internal and external organizational variables. As such, contingency theory regards a tax audit as task-oriented and loosely structured, depending on a number of factors, such as an adequate financial budget for the tax audit unit, top management giving significant importance to the audit function, as well as providing support in terms of training, clear division of labour, sufficient manuals and so on.

According to contingency theory, the influencing factors can originate from culture, technology, environment, size and technology (Emmanuel et al., 1990). Consistent with the contingency perspective, we reviewed studies, such as that by Drogalas et al. (2015), to include the contingent variable of technology when it was found that information systems help to improve tax audit effectiveness, while complexity and constant changes in tax legislation, which were found to reduce tax audit effectiveness, can be grouped under environmental variables. In addition, Drogalas et al. (2015) found other variables, such as education, experience and training, to have significant relationships with tax audit effectiveness. In our view, these variables are more consistent with the strategy component of contingency theory because they reflect strategic decisions and the direction of the tax audit function in the tax authorities. While Drogalas et al. (2015) results on organizational factors are relevant and consistent with other studies, such as Ayalew (2014), they have not used the contingent perspective. Their study combines internal organizational factors (i.e. information systems) and tax legislation at the same level without considering the level of influence. Combining them, in our view, reduces the identification of related regulatory factors, which are covered later in this study. In other words, an effective information system may fail to exert a positive influence if there is no appropriate tax legislation. In this study, we consider legislation to be part of regulatory factors and it was included in regulatory-related factors. Al Frijat (2014) found that accounting information systems used by tax authorities were positively related to tax audit effectiveness, but this depended on the existence of qualified human resources personnel and the application of advanced computer, and control, systems. The consideration of human resources by Al Frijat (2014) is consistent with the importance of management support on effectiveness of information system as well as effectiveness of any organizational function. The management support factor has been ignored by Drogalas et al. (2015) despite dealing with contingent factors. As argued by Ayalew (2014), management support is important for tax audit effectiveness because it goes with resources and the commitment by management to implement tax audit recommendations to attain tax audit effectiveness. A study by Mihret (2011) also focused on organizational factors and concentrated on those variables associated with tax audit function. These variables include appropriateness of the type of audit used, audit rate, the aptness of audit case selection methods, the audit examination techniques used, as well as the experience and capability of the tax auditing staff. Likewise, Melat (2016), on factors influencing the effectiveness of tax audit for large companies in Ethiopia, found that organizational factors (i.e. the audit quality of the department, management support) had a significant influence on the effectiveness of tax audit. Melat (2016) found the organizational factors to be associated with settings, structures, roles and responsibilities, to ensure that the tax audit was conducted as expected and produced the required results. This included providing support to the tax audit unit as well as increasing its status. As such, we expect organizational factors to make a positive contribution towards tax audit effectiveness. Hence, based on the theoretical foundation and the empirical evidence, the following hypotheses are expectations for organizational factors:
H1.Audit quality has significantly and positively influences tax audit effectiveness.

H2.Top management support has significantly and positively influences tax audit effectiveness.

H3.Use of computer assisted audit technique or information technology has significantly and positively influences tax audit effectiveness.

The second category of factors in this study was related to tax auditors. The tax-auditor-related factors were grounded under agency theory, as recognized by Jackson and Milliron (1986). According to Jackson and Milliron (1986), tax preparers may be viewed as agents of the government, with the goal of maximizing revenue while minimizing effort. At the same time, taxpayers are considered to have the wish to minimize tax costs in terms of tax paid, the cost of time spent in record-keeping, the amount of preparation fees paid and the costs associated with tax audit. It is not easy to directly identify the tax auditors’ and taxpayers’ relationship in terms of agency theory (Pentland and Carlile, 1996) because agency theory is concerned with the principal–agent relationship, with reference to a management–owner relationship. However, using the traditional auditing perspective, agency theory can be useful to understanding the influence of tax auditor-related factors on tax audit effectiveness.

From the auditing perspective, agency relationship exists when one or more principals engage another person as their agent to perform a service on their behalf (ICAEW, 2005). This is necessitated by information asymmetries and self-interest because the principals will have limited trust in their agents, hence putting in some mechanisms to align their interests and reduce the scope of information asymmetries and opportunistic behaviour (ICAEW, 2005; Watts and Zimmerman, 1983). This brings in auditors as agents of the principals to ensure supply of reliable and relevant information. This situation is comparable to that of tax auditors, who are used as agents of the government to monitor the operation of taxpayers, who may have an incentive not to disclose the full information about their operations, to reduce tax liability. Based on the preceding arguments, this study theorized that tax auditors can improve the effectiveness of tax audits and, hence, we further theorized that tax auditor-related factors would have a positive influence on tax audit effectiveness, so we proposed the following hypotheses:
H4.Auditor’s capacity has significantly and positively influences tax audit effectiveness.

H5.Auditor’s independency in the audit work has significantly and positively influences tax audit effectiveness.

The third category of factors was related to taxpayers. Taxpayers are crucial for tax audit effectiveness because they are supposed to comply with tax laws and regulations. Al Frijat (2014) argued that if taxpayers provide accurate and correct information, it will help build and restore bridges of trust between taxpayers and tax authorities. The factors that Al Frijat (2014) identified to help taxpayers contribute positively towards improved effectiveness of the tax audit included expanding and increasing the support for group in charge of collecting information about taxpayers, and consolidating cooperation between tax authorities and other institutions. In our view, this can be achieved if tax auditors are able to understand the taxpayers’ perspective, as well as the nature of their business operations, including their accounting systems (Muhammad, 2013).

Understanding the taxpayers’ perspective will help tax authorities to understand those factors relating to taxpayers that may influence the effectiveness of the tax audit. We believe that understanding taxpayer-related factors for tax audit effectiveness can be appropriately achieved by using deterrence theory. The basic assumption of deterrence theory is that people choose to obey, or to violate, the law, based on the gains and consequences of their actions. In other words, deterrence theory assumes that people comply with laws after finding that the benefits of complying outweigh those of not complying. While this view has been supported by a number of proponents, there are others who have opposed it on the basis that it is not about the severity of punishment which forces people to comply, but the certainty of punishment when it is reasonably guaranteed (Onwudiwe et al., 2005). While Onwudiwe et al. (2005) argued that the certainty of punishment is more effective than its severity, Earnhart and Friesen (2014), as well as Githige et al. (2014), found that the effectiveness of both severity and certainty depended on the enforcement mechanisms.

Tax audit in this situation is considered to be a mechanism to deter tax evasion and avoidance, thus increasing voluntary compliance (Birskyte, 2013). In this case, tax audit is considered to have all the measures of certainty, severity, enforcement and the probability of detection. However, studies using deterrence theory have assessed the influence of tax audit on compliance, and not on the influence of taxpayers’ behaviour on tax audit effectiveness. As such, rather than using tax compliance as a measure of tax audit effectiveness, it has been treated as a dependent variable of the tax audit. In other words, tax compliance is one of the indicators of an effective tax auditing process; hence, using tax compliance as a dependent variable may create a problem in assessing the causal and effect relationships. Gemmell and Ratto (2012) found that random audit programmes provided taxpayers with information that altered their subsequent reporting (i.e. deterrent spill over effect). As such, we theorized that taxpayer-related factors were very crucial for tax audit effectiveness and, hence, the following hypotheses were tested:
H6.More auditee attributes for tax auditors has significantly and positively influences tax audit effectiveness.

H7.Strong internal control of taxpayer’s has significantly and positively influences tax audit effectiveness.

The fourth, and final, category of factors in this study was regulatory-related factors based on the laws and regulatory frameworks for tax auditing. In our view, this category could be based on game theory and the theory of economic regulation. According to game theory, tax auditing has two types of players: tax authorities and taxpayers. Satpathi et al. (2013) argued that the players in tax auditing are the government and taxpayers, whereby the government has two options: to audit or not to audit. At the same time, the taxpayers have two options as well: to be honest or to cheat. Game theory helps in understanding the strategic interactions between the taxpayers and tax auditors (representing the tax authorities), as argued by Allen and Morris (2002), that game theory allows asymmetric information and strategic interaction to be used in the analysis. While the asymmetric information can be captured by agency theory, as we have seen in relation to tax auditors, in this case it is not about the information flow between the principal and the agent, or possession of it; rather, it is about the nature of interaction between the principal and the agent, given the information asymmetric settings. As put by Kanodia (2014), using a game theoretical perspective in accounting data helps us understand that the data affects, and is also affected by, the strategic interactions of organizations.

In this study, we believed that using a game theoretical perspective would help to understand how a tax audit represents the interactions between tax authorities and taxpayers, with both parties affecting each other and, at the same time, affecting the auditing process. Pentland and Carlile (1996) considered the tax auditing process to be like the generic tools which tax auditors and tax payers use to negotiate facts and to come up with results. While Pentland and Carlile (1996) were interested in the interaction between tax auditors and taxpayers per se, in this study the focus was more on the rules of the game which ensure that the negotiation between tax auditors and taxpayers is fair. This is consistent with Pentland and Carlile’s (1996) argument that uniform applications of laws during the auditing process, for tax authorities to catch cheaters, is considered to be essential. Hence, the focus here was the rules and standards for tax auditing to regulate the interactions. The study theorized that having appropriate laws and regulations to govern the interaction between tax auditors and taxpayers, the effectiveness of tax audit will be improved. As such, we tested the following hypothesis:
H8.Tax regulations have significantly and positively influences tax audit effectiveness.

2.4 Empirical literature review
This section reviews the empirical evidence on tax audit effectiveness and factors affecting it.

(Eden and Moriah, 1996) assigned 224 organizations to experimental conditions (audited or not audited) and monitored their performance for a year. Their findings showed that performance significantly improved during the half year following the audit in the experimental branches, while the control branches experienced a decline due to poor general business conditions. It should be reiterated that Eden and Moriah are nearly alone in developing and testing an explanatory model of IA effectiveness. While that study offers a useful jumping-off point for understanding how good auditing can improve a company’s performance, it does not go far enough in explaining when and why IA works, and the conditions that facilitate or impede it. Helping to bridge this gap will be one of the main contributions of this study.

Drogalas et al. (2015), study changes in tax auditing procedures, tax administration and generally in tax policy have attracted the attention of researchers in recent years. The aim of this study is to examine the relationship between tax audit effectiveness, tax legislation and the use of specialized information system tools. We use the ability of public tax auditors to track tax infringements as a measure of tax audit effectiveness. Over two hundred structured questionnaires were constructed and distributed to tax auditors, who work in Greek public taxation agencies. Factor Analysis and multiple regression analysis were employed in order to examine our hypotheses. The results demonstrate that the use of information system tools can enable tax auditors to track properly tax infringements, thereby contributing to increased tax audit effectiveness. It is also suggested that constant changes in tax legislation inhibit tax auditors from being effective in their work. Our results call for direct policy intervention, including simplification of tax legislation and better training of tax auditors in the use of information systems.

Ayalew, E.(2014) study aims to examine the statistical significance between factors and tax audit effectiveness. In light of this objective the study adopted quantitative method of research approaches to test a series research hypothesis. The results showed that there is no statistical significance negative relationship between auditee attributes and tax audit effectiveness. Besides, the results showed that there is no statistical significance positive relationship among organizational setting, top management support and tax audit effectiveness. The researcher found that there is strongly significant positive relationship among audit quality, organizational independence and tax audit effectiveness.

Melat, A.(2016) study is to investigate factors affecting tax audit effectiveness on large tax payer’s office. The study stands to answer the following research question “How do audit quality, management support, organizational setting, auditee attributes, organizational independence and the interplay among them, influence audit effectiveness in LTO?” In light of this objective the study adopted mixed research method of research approaches to test a series research hypothesis. The results showed that there is no statistical significance negative relationship between auditee attributes and tax audit effectiveness. Besides, the results showed that Tax Audit Effectiveness of Large tax payer’s office is highly affected by audit quality of the department, managements support and the organizations independence from unethical practices. While as auditors perception it doesn’t be affected by organizational setting and auditees attribute.

There are main approaches to the concept of IA effectiveness. According to the first approach, the effectiveness of internal auditing is determined by the fit between the audit and some set of universal standards extrapolated from the characteristics of audit. Such an approach was presented by (Sayag, 2010) who advanced five standards for internal auditing: interdependence, professional proficiency, and the scope of work, the performance of the audit and management of the internal audit department.

This approach requires the development of systematic and generally valid measures by which to gauge IA effectiveness (Dittenhofer, 2001).One of the early efforts in this regard is that of who designed a questionnaire designed to elicit managerial feedback for each internal auditing activity in an organization. The questionnaire covered four issues: planning and preparation; the quality of the audit report; the timing of the audit; and the quality of communication between the relevant actors. Based on managers’ responses, an average score was calculated for the effectiveness of a given auditing task.

In a study sponsored by the Institute of internal auditors (IIA), identified 15 criteria used by13 large private organizations to evaluate the effectiveness of internal auditing. They concluded that effectiveness is determined mainly by the fit between the auditing work and the goals set by managers, the qualifications of the internal auditor, management support for the internal auditing staff, and several characteristics of the i n tern al auditin g department. The previous study identified 15 factors that contribute to an effective audit and categorized them into three stages of the auditing process: planning, fieldwork, and reporting and review. They suggested measurements they considered valid and reliable for these factors. Moreover, (Ziegenfuss, 2000) developed a questionnaire that includes 84 criteria for effectiveness categorized into four main areas: the environment of the internal audit, input into the audit, the auditing process and the output of the audit.

Appelgren (2008) studied the effect of information regarding different audit strategies on taxpayers? compliance behavior in Sweden. The study was conducted with the intent of examining whether the taxpayers in reality behave as expected by theory of tax audit. Experimental design was used to test the effect of information regarding different audit strategies on taxpayers? compliance behavior. The experiment was measured as the change in declared income between years, and was conducted in 2003-04 on approximately 900 sole proprietors which are divided in to three groups (rational group, random group and control group) each with around 300 firms. The rational group members were informed that audit would focus on taxpayers declaring lowest income. The random group was told that audit would be at random whereas the control group 36 members received no information. Further, the sample was limited to men below the age of 55 in order to concentrate on a high-risk group (younger men are more fraudulent than women and older men).

(Sayag, 2010) The objective of the study was to show the importance and relevance of a scientific examination of internal audit’s effectiveness and its determinants. It is exploratory factor analysis and uses conceptual model of research. The target population was all Israeli organizations. From these questionnaires’ were mailed to 292 organizations, only 108 were returned the questionnaire.

Correlation analysis was applied first to determine the interrelationships among the research variables and to examine the possibility of multi-co linearity. Regression analysis was used to test the other hypotheses. The finding of the study shows that auditee’s evaluations and the added contribution of internal audit were positive in the private sector, there is no significant correlations were found between the variables of professional proficiency and career advancement and auditing effectiveness, greater quality of audit work and greater organizational independence were positively related to audit quality and auditee’s evaluations.(the correlation is stronger in the case of organizational independence and perceived top management support was the only variable that was strongly and consistently related to three auditing effectiveness dimensions.

2.5 Gap in Literature
Even though plenty of studies discuss audit effectiveness in different countries worldwide, the researcher have got access to studies held on Saudi Arabia, Israel, Nigeria , Tanzania ,Jordan and other few countries .in Ethiopia the study of (Gebeyehu,2008) ,( Getaneh,2011) and (BIBISSO, 2014) discuss tax audit practice of Addis Ababa city administration ,Federal government and Hawassa city administration respectively .on the other hand the study of (Yismaw, 2007) measures internal audit effectiveness by focusing on public sector organizations. While recently the study of (Leilina, 2015) discuss external audit quality by focusing on manufacturing share companies and (Ayalew, 2014) measures tax audit effectiveness of Bahirdar city administration revenue office.

Those studies examine issues regarding tax audit effectiveness using different variables. But the researcher wants to focus only on Easter Addis Ababa Medium taxpayer’s. The main reason for selection of such category of taxpayers for audit purpose is their higher compliance risk and large tax potential .and also is highly influential in investment and other economic activities.
How do audit quality, management support, auditee attributes, auditors capacity, auditor’s independence, use of CAATs, strong internal control of taxpayers and the inter play among them, influence audit effectiveness in Eastern Addis Ababa Medium Taxpayers Branch office?
2.6 Conceptual Frame Work
On the basis of the hypotheses that developed from the literature part and the regression model of the study, the following conceptual frame work was developed
Figure 1.2

2.6 Summary
The review of related literate above is conducted from different journal articles and researches in different period and has different theories and definitions. the above reviewed literate has organized in Introduction, Conceptual and Theoretical frame work the meaning of audit and tax audit as well as the types of audit by different authors and audit location, the role and responsibility of taxpayer and audit team (personal idea for experience in ERCA), Approaches; standards of Tax Audit, Measuring effectiveness of Tax audit, theories that support the hypotheses and Empirical study and research Gap.

Generally the above reviewed articles, research papers and personal knowledge of the audit ideas can be used in study conducted in futures, in formulation of hypothesis and for methods of data analysis and collection.

Chapter Three
Research Methodology
Introduction
This proposal discusses on the research hypothesis, approach and techniques adopted for the study with the aim of achieving the research objectives. The process of research usually entails problem identification, making hypothetical statements, collecting relevant data and then analyzing the data using the relevant and appropriate statistical tools. The study will discusses about research design and provides details regarding the population, sampling and sampling technique, the research instruments used in collecting data for the study and the data collection and data analysis methods as well as variable definition and model specification.

Research Design
The research design for this study was an explanatory one, in the sense that it was intended to explain the cause-and-effect relationship between different factors and tax audit effectiveness. This research design is consistent with a number of studies conducted on tax audit effectiveness, such as Drogalas et al. (2015), Kastlunger et al. (2009), as well as Chan and Lan Mo (2000).
Research Approaches
This study will use both qualitative and quantitative case study approaches. The main aim of the study is to identify the role of tax auditing in terms of extent, efficiency and effectiveness of tax auditing. To achieve these objectives the study focused on obtaining some qualitative and quantitative data to facilitate a conclusion about factor affecting tax audit effectiveness. For this study, the researcher applied quantitative (questioner) and qualitative (interview and document analysis).

Sampling Design
Target Population
The population of the study includes the entire set tax auditors in Eastern Addis Ababa Medium Taxpayer’s Branch Office. Accordingly, the target groups for the study were 120 tax auditors of Easter Addis Ababa Branch Office there are 2 audit processes which is led by 10 team leaders who coordinate 120 audit experts
Sampling Techniques
To achieve the objective of the study the researcher will use Census method to select the survey respondents. Because Census method is most reliable sampling techniques especially if the number of population is small, so the eastern Addis Ababa branch office have only 120 tax auditor.

Sources of Data and Methods of Collection
The source of the data collected from branch through primary data (questioner, interviews and other) and secondary data that are (annual report, published news paper and other sources).

Primary Data
The main base for the study is primary data only which was collected through field work survey in order to get information on the issue of factors affecting tax audit effectiveness through questionnaire. The structured questionnaire consists of closed ended questions to collect quantitative data from the respondents. These statements required respondents to rank them on a five-point Likert Scale. The Likert scale was both positively and negatively worded, ranging from 1, “strongly disagree”, to 5, “strongly agree”. The use of both positively and negatively worded questions, aimed at reducing errors (Colosi, 2005), forced the attention of the respondents, as well as reducing acquiescence bias (Sauro and Lewis, 2011; Little et al., 2002). The use of the Likert scale was considered to be appropriate because the study was analysing the perceptions of tax auditors and it has been widely used for both tax compliance and tax audit effectiveness (Oladipupo and Obazee, 2016; Drogalas et al., 2015; Engida and Baisa, 2014; Niemirowski et al., 2003).

Questioner
Questioners were used to collect primary data form respondents and its advantage is covering a small number of respondents easily and quickly. Questionnaires were distributed to the selected respondents to get primary data on the factors affecting tax audit effectiveness. The questionnaires have provided to the tax auditors and have a total of 65 questions; with five parts, the first part related to respondent’s profile questions, the second part related to organizational factors questions thirdly part auditor’s related factors questions fourth part taxpayer’s related factors questions and lastly regulation related factors question.

Interview:-
An interview is a purposeful discussion and/or conversation with two or more people, and helps the researcher to gather valid and reliable data that are relevant to achieve research questions and objectives. This study applied in-depth interview to explore the data that is unclear for the researcher on its questioners that explains its variables and the information that have not been collected through questioner and document analysis by allowing the interview to remain flexible. The reason for the use of interview with team leaders and process owners is summarized reports are prepared by them and also they are involved on the risk selection, supervision and monitoring and in some case they participate of the audit process.

Secondary Data Sources
Documentary analysis: the purpose of using quantitative aspect of the research is to support the study by making documentary analysis on tax audit process performance on the last 4 years to measure the audit effectiveness based on audit coverage, number of company’s during the year and the amount of audit adjustment. Data collected from document review and interview was interpreted qualitatively. This study used multiple sources of data including document review, interview and questionnaire that helps to cross validate the data.

Method of data analysis
After the data were collected, for the study two type of statistical analysis was use to test the proposed hypotheses. These are descriptive statistics and inferential statistics/multiple regression analysis to see the effect (relationship) of explanatory or independent variables on the dependent variable. Descriptive statistics, which were measures of central tendency and dispersion in this study, were used to describe the demographic details of the respondents, as well as the perceptions of respondents about individual items for both factors and tax audit effectiveness.

The inferential statics is done by multiple regression analysis has the objective of predicting changes in the dependent variable in response to changes in the independent variables. Before multiple regressions analysis was performed, reliability and validity tests were tested. For reliability and validity, Cronbach’s alpha and correlation analysis were performed. To assess multicollinearity, two measures, tolerance, which is a direct measure, and Variance Inflation Factor (VIF) (Hair et al., 2010; Ho, 2006), were also performed. The data analysis of this study will be conducted using support of statistical tools SPSS or Stata
Variable Definition
This study is focus on to identify factor affecting tax audit effectiveness in Ethiopian Revenue Customs Authority Eastern Addis Ababa Branch Office through testing the hypotheses regarding to the relationships between Tax audit effectiveness specific and macroeconomic factors affecting it. It is apparent that the most significant task is to select the appropriate explanatory variables.

Dependent Variable
The dependent variable of the study is tax audit effectiveness this can indicate that the tax audit effectiveness is more important for one country economy growth and to satisfy what citizen want and need from the government. Because of this if tax audit is conducted in accordance with the accounting and auditing principle, and the tax rule and regulation of the country its effectiveness will be increase directly by collection of additional tax or indirectly by increasing taxpayer’s compliance. So the dependent variable which is tax audit effectiveness has its own impact on the government revenue and administration issues.
Independent Variable
The independent (explanatory) variable are those variable which is directly affect the tax audit effectiveness as discuses in literature review part by theory and empirical study of different journals and researches papers. So the study will identify different factors that affects tax audit effectiveness in Ethiopian Revenues and Customs Authority Eastern Addis Ababa Medium Taxpayer Branch Office.

Model specification
Quantitative data are described through multiple regression technique the dependent variable (tax audit effectiveness), regressed with the independent variables are:-
Audit quality:- Audit quality to IA is considered as a determinant of IA effectiveness (Ayalew, 2014), (Sayag, 2010) and (Yismaw, 2007). A quality audit is one that: – is focused on identified risks, applies the correct law and technical interpretation, Follows consistent procedures, is properly documented, and is properly communicated. (Ayalew, 2014) The performance standards of the IA require the auditor to plan and perform the work such that he or she would be able to arrive at useful audit findings and forward recommendations for improvement. The office’s ability to properly plan, perform and communicate the results of audits is a proxy for audit quality. Therefore, audit quality is arguably a function of extensive staff expertise; reasonableness of the scope of service; and effective planning, execution and communication of audits. To evaluate these determinants of audit quality, evidence from questionnaire responses with the Director of the Audit Office were used. To support the results, supplementary information was collected through a review of relevant documents.

(Ayalew, 2014) Standards for audits and audit-related services are published by the IIA and include attribute, performance and implementation standards. In general, formal auditing standards recognize that internal auditors also provide services regarding information other than financial reports. They require auditors to carry out their role objectively and in compliance with accepted criteria for professional practice, such that internal audit activity will evaluate and contribute to the improvement of risk management, control and governance using a systematic and disciplined approach. This is important not only for compliance with legal requirements, but because the scope of an auditor’s duties could involve the evaluation of areas in which a high level of judgment is involved, and audit reports may have a direct impact on the decisions or the course of action adopted by management (Bou-Raad2000). It can thus be argued that greater quality of audit work – understood in terms of compliance with formal standards, as well as a high level of efficiency in the audit’s planning and execution – will improve the audit’s effectiveness.

(Melat, 2016; Ayalew, 2014) indicates that there is strong positive correlation between tax audit effectiveness and audit quality.

Greater Support from Top Management:- The management support factor has been ignored by Drogalas et al. (2015) despite dealing with contingent factors. As argued by Ayalew (2014), management support is important for tax audit effectiveness because it goes with resources and the commitment by management to implement tax audit recommendations to attain tax audit effectiveness. A study by Mihret (2011) also focused on organizational factors and concentrated on those variables associated with tax audit function. These variables include appropriateness of the type of audit used, audit rate, the aptness of audit case selection methods, the audit examination techniques used, as well as the experience and capability of the tax auditing staff. Likewise, Melat (2016), on factors influencing the effectiveness of tax audit for large companies in Ethiopia, found that organizational factors (i.e. the audit quality of the department, management support) had a significant influence on the effectiveness of tax audit. Melat (2016) found the organizational factors to be associated with settings, structures, roles and responsibilities, to ensure that the tax audit was conducted as expected and produced the required results. This included providing support to the tax audit unit as well as increasing its status. As such, we expect organizational factors to make a positive contribution towards tax audit effectiveness.
More Auditee attributes for tax auditors in the organization:-
Taxpayers are crucial for tax audit effectiveness because they are supposed to comply with tax laws and regulations. Al Frijat (2014) argued that if taxpayers provide accurate and correct information, it will help build and restore bridges of trust between taxpayers and tax authorities. The factors that Al Frijat (2014) identified to help taxpayers contribute positively towards improved effectiveness of the tax audit included expanding and increasing the support for group in charge of collecting information about taxpayers, and consolidating cooperation between tax authorities and other institutions. In our view, this can be achieved if tax auditors are able to understand the taxpayers’ perspective, as well as the nature of their business operations, including their accounting systems (Muhammad, 2013).

The tax audit is conducted in place where in taxpayers premises or in Branch office. If the tax audit is conducted in taxpayer business premises the auditee attribute is very important for both tax authority and the auditor. Because of the auditor is not closely supervised by the tax authority the control is under the taxpayers, so the taxpayer has more responsibility to control the auditor from illegal act and by not participating on the act doing by tax auditor.
To address the challenges and costs of tax audit, the taxpayers may seek assistance of services from tax professionals to prepare tax returns and to represent them for the tax audit (Fatt and Ling, 2009; McKerchar, 2005). These efforts by taxpayers will contribute towards achieving an effective tax audit and promote voluntary tax compliance, which are considered as essential features of the modern taxation systems depended on by most tax authorities (Alm and McKee, 2006; Reinganum and Wilde, 1985; Snow and Warren, 2005). In addition to helping taxpayers in the preparation of returns and understanding the tax laws, the tax professionals also may help the taxpayers to have a positive attitude towards the tax audit, which can help them respond promptly to the audit query (Ayalew, 2014; OECD, 2006; Saad, 2014; Stalans and Lind, 1997).

Greater independence for Auditor:-
According to Jackson and Milliron (1986), on the one hand, tax auditors are the primary agents of the government because they have a relationship with the government but, on the other hand, responsibilities also exist between tax auditors and tax payers. While this double relationship may seem to complicate the role of tax auditors in terms of independence and trust, in this study we have argued that this relationship can be strengthened to increase tax compliance by increasing the professionalism of tax auditors. It is our view that if tax auditors use professional scepticism, they can plan their auditing properly to ensure that they detect significant malpractices and deter future non-compliance. Muhammad (2013) stated that tax auditors need to understand taxpayers’ businesses and use appropriate audit strategies to ensure that the correct amount of tax is paid by taxpayers. These views are also consistent with traditional auditing practices, as provided by the International Auditing and Assurance Standards Board (IFAC, 2015).
Capacity of Auditor: –
International Standard on Assurance Engagements (ISAE) 3000 states that professional judgment is concerned with the application of relevant training, knowledge and experience to provide assurance in making informed decisions. There are a number of tax auditing studies which have used these variables (i.e. education, experience and training) as factors for tax audit effectiveness (Drogalas et al., 2015), as well as communication and independence (Ayalew, 2014; Devos, 2014). Chalu, H., & Mzee, H. (2018) assert that the tax auditor-related factors of education, experience, communication, independence, as well as training are required to improve the auditing process and overall deterrence of tax non-compliance. This will help to increase government confidence and, hence, solidify the principal–agent relationship between the tax auditors and the government, which expects more revenue to be collected. Despite the connections between government as principal and tax auditors as agents, very few studies have utilized agency theory as basis of their findings. Based on the preceding arguments, we theorized that tax auditors can improve the effectiveness of tax audits and, hence, we further theorized that tax auditor-related factors would have a positive influence on tax audit effectiveness
The IIA’s standard 1210 refers to that auditor’s proficiency requires the internal auditors to be with high skills, knowledge and other competencies to better perform their responsibilities (IIA, 2011). Auditing general experience is related to audit’s years of experience, training, knowledge, skills and expertise that can be applied to any client (Wright and Wright 1997). Prawittet et al. (2008) showed that while experience should be reflected by the average number of internal ijbm.ccsenet.org International Journal of Business and Management Vol. 12, No. 10; 2017 auditing experience years that the internal auditors have spent in internal audit function, it cannot be a function for job’s years. Instead, experience is related to the suitable training environment that could provide a practice with feedback (Carpenter et al., 2002).
Many studies indicate that gaining such experience means that auditors know more about errors, occasional errors, their cause and the ways that provide more specific knowledge about them (Intakhan & Ussahawanitchakit, 2010; Gaballa & Ning, 2011).

Use of Computer Assisted Audit Technique Or Use of Technology:-
There are different packages that facilitate the audit process. These packages are used for quality, speedy and to identify the errors simply this can increase the tax audit effectiveness. Different software used by auditors has two effects this are positively affect the effectiveness of audit and negative effect if the authority doesn’t have that type of software or in the case of converting to Excel.

CAATs were the audit technology that internal and external auditors use in auditing an organization’s information system (Lowe & Bierstaker, 2009). CAATs were essential tools in auditing profession to achieve audit’s test of controls and substantive testing tasks. The audit tools support in efficiency and effectiveness of audit work by automating manual audit activities (Braun ; Davis, 2003; Curtis ; Payne, 2008). CAATs also were defined as “any use of technology to assist in the completion of an audit”. It can be referred from basic spread sheet and statistical analysis software used in audit work to a more advanced and specialized databases and business intelligence audit software applications such as Generalized Audit Software (GAS). CAATs also comprise of tools and techniques that are used to extract, analyze and review logic of processed data. CAATs can reduce audit cost incurred and improve audit quality and productivity. Additionally, CAATs help audit firms to satisfy client’s demand for fast audit result and reliable audit procedure.

Strong Internal control of Taxpayer’s
According to Daniel B. Thornton 2017 in developed countries, large corporations are subject to frequent scrutiny by tax authorities. “Tax” includes not just income taxes but also value-added taxes, commodity taxes, royalty payments and other government levies. All of these categories are subject to tax audits. 
Because their transactions are so numerous and complicated, both the companies and the tax auditors must rely on strong internal controls to ensure that information is classified and recorded properly for tax purposes. When internal control is strong, tax audits can be done efficiently, without undue disruption to the companies’ operations. When internal control is weak, the auditors must seek additional information. The companies bear the costs of producing this information in a credible format. Such costs can be huge if the internal control system is in disarray; indeed, a tax audit may be so invasive as to threaten a company’s continuing existence. 
So investing in strong internal control is efficient for both operational purposes and for tax reporting purposes. For operational purposes, strong internal control ensures that resources are obtained and used efficiently and effectively in accomplishing organizational objectives. For tax purposes, strong internal control ensures that information is classified and recorded properly in fulfilling the organization’s obligation to government bodies. 
Tax regulation: the study focused on the laws guiding the interactions between tax auditors and taxpayers which may prompt the tax auditors to opt for a certain enforcement regulatory style. We thought that the regulatory related factors would take both aspects of legalistic (deterrence) and conciliatory (cooperation) styles, as found by Muhammad (2013). As such, our regulatory related factors were based on the obligations and responsibilities of taxpayers, tax auditors and tax authorities. Taxpayers are required to provide access to documents and explanations to tax auditors. Tax auditors are provided with the legal power to access documents and to determine the correct amount of tax; as such they have an obligation to conduct an audit in a professional manner, based on international standards. Tax authorities have an obligation to ensure that the audit is conducted in a transparent and consist manner, by providing appropriate policies and procedures. We theorized that having appropriate laws, standards and regulations to govern the interaction between tax auditors and taxpayers, the effectiveness of tax audit will be improved.

Thus quantitative data are described through multiple regression technique the dependent variable (tax audit), regressed with the above independent variables.

Dependent and independent Variable
Figure 1.3

Y = ? + ?1×1+ ?2×2 + ?3×3 …+ ?kxk + ?i…………………………… …………………….(1)
Therefore the general models which incorporate all of the variables to test the hypotheses are:
TAE=?o+?1AQ+?2GSTM+?3MAAA+?4GAI+?5CA+?6UCAATs+?7SICT+?8TR+?i
Where,
TAE=TAX AUDIT EFFECTIVENESS
QA=AUDIT QUALITY
GSTM=GREATER SUPPORT FROM TOP MANAGEMENT
MAAA=MORE AUDITEE ATTRIBUTION FOR AUDITOR
GAI=GREATER AUDITOR’S INDEPENDENCY
CA=CAPACITY OF AUDITOR’S
UCAAT=USE OF COMPUTER ASSISTED AUDIT TECHNIQUES
SICT=STRONG INTERNAL CONTROL OF TAXPAYERS
TR=TAX REGULATION