# Audit Adjustments and Your Tax Computation

> Why a late audit adjustment moves the tax number as well as the accounts, how the CP204 revision windows close before the audit finishes, and how the section 107C(10) penalty is actually computed.

- Category: audit
- Language: en
- Status: published
- Updated: 2026-07-20
- Canonical: https://negaraku.md/en/audit/audit-adjustments-tax

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Nobody in the clearance meeting is thinking about tax. The discussion is about a
stock provision, a cut-off error and whether the director's account movement is
income. Then the adjustments get booked, the audited profit changes, and a number
nobody in the room owns changes with it.

Audited profit before tax is the first line of the Form C computation. Every
adjustment agreed at the end of the audit lands there.

## The timing problem

| Event | When it happens (31 December year end) |
| --- | --- |
| CP204 furnished | 30 days before the basis period begins |
| CP204 revision windows | Sixth, ninth and eleventh months only — June, September, November |
| Basis period ends | 31 December |
| Audit fieldwork and clearance | February to March |
| Adjustments known | March |
| Form C due | 31 July, plus one month e-Filing grace |

The audit produces its adjustments **four months after the last revision window
closed**. There is no mechanism to revise the estimate retrospectively. Whatever
the adjustments do to chargeable income, the estimate is already fixed.

That is the structural link no audit page makes, and it is the reason a company
with a well-run audit can still be penalised for a badly-timed one.

## How the under-estimation penalty actually works

This is the part that is stated wrongly almost everywhere.

Section 107C(10) of the Income Tax Act 1967 does **not** charge 10% of the
shortfall. Where the tax payable under an assessment exceeds the revised estimate —
or the original estimate where none was revised — by **more than 30% of the tax
payable**, the 10% increase is imposed on the amount by which that difference
**exceeds the 30% margin**.

Worked through:

- Final tax payable: **RM500,000**
- 30% margin: **RM150,000**
- Estimate furnished: **RM300,000**
- Difference: RM200,000
- Excess over the margin: RM200,000 − RM150,000 = **RM50,000**
- Increase at 10%: **RM5,000**

Ten percent of the shortfall would have been RM20,000. The safe harbour is
therefore an estimate of at least **70% of the final tax** — anything at or above
that attracts nothing at all.

The worse provision is **s.107C(10A)**, which applies where no estimate was
furnished and no assessment raised. It charges **10% of the whole tax payable**,
not 10% of an excess, and for most companies it is far larger than s.107C(10). A
company that simply did not file CP204 is in a different and heavier regime from
one that filed a poor estimate.

## Which adjustments move tax, and which do not

Not every audit adjustment changes chargeable income.

**Moves it:** cut-off corrections to revenue and purchases, a write-off that is
deductible, a reclassification between repairs and capital expenditure (which moves
the capital allowance claim), errors in accrued expenses, and corrections to
directors remuneration.

**Does not move it directly:** general provisions that were never deductible,
impairment of non-qualifying assets, unrealised exchange differences on capital
items, and reclassifications within the balance sheet. These change the accounts
without changing the computation — but they change the deferred tax note.

**Moves it in a way people miss:** a correction to the fixed asset register.
Capital allowances are computed off it, so an addition reclassified or a disposal
picked up in the audit changes the allowance claim and the balancing charge.

## What to do about it

**Estimate off a real forecast, not last year plus a margin.** The 70% safe harbour
is generous if the forecast is honest and useless if the number was picked to
manage cash flow.

**Use the eleventh month deliberately.** By November a December year-end company
knows eleven months of results. That is the last chance to correct the estimate,
and it is the window most commonly wasted.

**Run a draft tax computation during fieldwork, not after.** If the computation is
prepared alongside the audit, the tax effect of a proposed adjustment is visible at
the clearance meeting while there is still a decision to make about whether to book
it.

**Book last year's adjustments.** Adjustments agreed and never posted reappear as
prior-year differences and distort the following year's estimate as well.

## Common mistakes

- **Computing the s.107C(10) increase as 10% of the shortfall**, which overstates
  it substantially.
- **Confusing s.107C(10) with s.107C(10A).** The second is 10% of the whole tax and
  applies where no estimate was furnished.
- **Assuming CP204 can be revised once the audit is done.** The windows are the
  sixth, ninth and eleventh months of the basis period.
- **Treating the audit and the tax computation as sequential.** They should run in
  parallel, because the second depends on the first.
- **Ignoring the capital allowance effect** of fixed asset adjustments.
- **Assuming audit exemption removes the tax substance.** It removes the audit, not
  the requirement for a defensible computation.

## What's next

If the adjustments cannot be agreed at all, the disagreement stops being a tax
question and becomes a reporting one — which is where the four opinion types come
in.

## Sources

- Income Tax Act 1967 (Act 53), reprint as at 21 May 2024 — https://www.hasil.gov.my/wp-content/uploads/20240521-akta-cukai-pendapatan-1967-akta-53.pdf (LHDN)
- Companies Act 2016 (Act 777), reprint as at 1 August 2022 — https://www.ssm.com.my/Pages/Legal_Framework/Document/Companies%20Act%202016_Akta%20777_BI%20(1.8.2022).pdf (SSM)
- FAQs on Companies Act 2016 and Transitional Issues — Part Q, Audit Exemption — https://www.ssm.com.my/Pages/Legal_Framework/Document/FAQ-AUDIT-EXEMPTION.pdf (SSM)

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Source of truth: https://github.com/negaraku-md/NegaraKu.md
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