Sampling Strategies in Sales Tax Audits Sampling Strategies in Sales - - PowerPoint PPT Presentation

Presenting a live 110‐minute teleconference with interactive Q&A

Sampling Strategies in Sales Tax Audits Sampling Strategies in Sales Tax Audits

Selecting a Sampling Methodology and Negotiating With Auditors

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, NOVEMBER 17, 2011

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Roger Pfaffenberger Director of Audit Sampling Practice Ryan Dallas Roger Pfaffenberger, Director of Audit Sampling Practice, Ryan, Dallas David Leifer, Director of Sales and Property Taxes, InterContinental Hotels Group, Atlanta Kenneth Helms, Tax Consultant, Atlanta

For this program, attendees must listen to the audio over the telephone.

Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10.

Conference Materials

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the + sign next to “Conference Materials” in the middle of the left-

hand column on your screen hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

Continuing Education Credits

FOR LIVE EVENT ONLY

Attendees must listen to the audio over the telephone. Attendees can still view

the presentation slides online but there is no online audio for this program. Please refer to the instructions emailed to the registrant for additional

• information. If you have any questions, please contact Customer Service

at 1-800-926-7926 ext. 10. at 1 800 926 7926 ext. 10.

Tips for Optimal Quality

S d Q lit S

• und Qualit y

For this program, you must listen via the telephone by dialing 1-866-873-1442 and entering your PIN when prompted. There will be no sound over the web connection. co ect o . If you dialed in and have any difficulties during the call, press *0 for assistance. You may also send us a chat or e-mail sound@

straffordpub.com immediately so

we can address the problem.

Viewing Qualit y

To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again press the F11 key again.

S li St t i i S l T A dit Sampling Strategies in Sales Tax Audits Seminar

• Nov. 17, 2011

Roger Pfaffenberger, Ryan

roger.pfaffenberger@ ryanco.com

Kenneth Helms, Tax Consultant

ueliparent@ comcast.net

David Leifer, InterContinental Hotels Group

dave.leifer@ ihg.com

Today’s Program

Sampling Fundamentals

[Kennet h Helms]

Slide 7 – Slide 11 Example Of Audit Gone Bad Over Sampling

[Roger Pfaffenberger and David Leifer]

Slide 12 – Slide 24 Do's And Don'ts Of Sampling

[Roger Pfaffenberger and Kennet h Helms]

Assessing Various Sampling Methodologies Slide 35 – Slide 57 Slide 25 – Slide 34 Assessing Various Sampling Methodologies

[Roger Pfaffenberger]

Planning And Negotiating A Sample Slide 35 – Slide 57 Slide 58 – Slide 65

[David Leifer]

SAMPLING FUNDAMENTALS

Kenneth Helms, Tax Consultant

SAMPLING FUNDAMENTALS

I d i Introduction

I. Audit sampling Webinar objectives

• A. Provide information to assist you with sample audits

B A ti h b t dit li

• B. Answer questions you may have about audit sampling
• II. Challenge of confronting sample audits in light of:

A Limited resources

• A. Limited resources
• B. Juggling multiple audits
• C. Systems changes during audit period
• C. Systems changes during audit period
• D. Aggressive auditors who know where you may be

vulnerable

• E. Auditors with limited knowledge about audit sampling

8

Wh B h ? Why Bother?

The good

• Improved systems

I d

• Improved processes

The bad

• Lack of bandwidth
• Lack of bandwidth
• Speed for speed’s sake

The ugly The ugly

• “I did pretty well in my Stats class. How hard can this be?
• Forced from above

9

“Ten Commandments” Of Audit Sampling

1. Thou shall know thy data. 2. Thou shall know the rules, regulations, laws and court rulings i li f th t j i di ti concerning sampling for the tax jurisdiction. 3. Thou shall only include G/L codes that have indirect tax attributes in the audit population. 4. Thou shall never provide invoice data at kick-off meeting. 5. Thou shall always discuss procedures concerning “currently unavailable for review” invoices before beginning the audit unavailable for review invoices before beginning the audit.

10

“Ten Commandments” Of Audit Sampling

6. Thou shall always discuss how overpayments are calculated. 7. Thou shall never immediately sign a jurisdiction’s sampling t ( f Ohi ) agreement (even for Ohio). 8. Thou shall not give the auditor data without first reviewing. 9. Thou shall always review the auditor’s calculations. 9. Thou shall always review the auditor s calculations.

• 10. Thou shall establish an audit schedule with defined

milestones and work review (keep the “wheels on”).

11

R Pf ff b R

EXAMPLE OF AUDIT GONE

Roger Pfaffenberger, Ryan David Leifer, InterContinental Hotels Group

EXAMPLE OF AUDIT GONE BAD OVER SAMPLING

I d i Introduction

I. Does the phase, “wheels off sample audit” mean anything to you? A How did the wheels come off?

• A. How did the wheels come off?
• B. Why did the wheels come off?
• C. What can be done now to salvage the audit?

g

• D. What can be done to prevent this from happening in the

future?

• II. A case involving a sample audit gone badly is used to address

these questions these questions.

13

C S d Case Study

I. Case description

• A. Texas audit of sales and purchases

B Th dit i d

• B. Three-year audit period
• C. Firm operated several “outlets” during audit period.

D Several outlets were sold during audit period

• D. Several outlets were sold during audit period
• E. Most outlets were responsible for maintaining their

accounting records (invoices, exemption certificates, resale certificates)

• Do we see where this is going? One or two wheels off, and

counting! counting!

14

C S d (C ) Case Study (Cont.)

• II. Case chronology
• A. May 2005: Firm receives audit notification (audit period

Jan 1 2002 through Dec 31 2004)

• Jan. 1, 2002 through Dec. 31, 2004)
• B. June 2005 – August 2005: Initial discussions with auditor

focusing on use of block sampling for audits of purchases and sales

• C. August 2005 – January 2007: Little or no communication

with auditor during this period with auditor during this period

• D. February 2007: New auditor assigned to audit
• Another wheel off? Why?

15

C S d (C ) Case Study (Cont.)

• II. Case chronology (Cont.)
• A. March 2007: Auditor asks for and receives data files

required for audit

• B. April 2007: Tax director receives report from auditor

(“Here is what I have so far”) indicating seven exams were used in the audit (three for sales and four for purchases) and adding the following tidbits of information: i. Five exams have been completed. ii S i #1 A t tifi d d l t bl k

• ii. Surprise #1: A stratified random sample, not a block

sample, was used for the purchases audit.

• iii. Surprise #2: Initial assessment for the purchases audit

p p is $2 million-plus, due primarily to missing records.

16

C S d (C ) Case Study (Cont.)

• II. Case chronology (Cont.)
• A. May 2007: Auditor sends results for remaining exams to tax

director Essential tidbits from the auditor’s second

• director. Essential tidbits from the auditor s second

missive: i. Sales audit is based on a block sample of 12 “outlet/months,” placed in two groups of six “outlet/ months” each.

• ii. Auditor declares sales audit will be “estimated,” since
• ii. Auditor declares sales audit will be estimated, since

a minimum of 30 “outlet/months” are needed.

• iii. Auditor declares the purchases audit completed.
• Is something missing at this point in time?

17

C S d (C ) Case Study (Cont.)

• II. Case chronology (Cont.)
• A. May 3, 2007: Auditor issues Texas “notification of sampling

procedures” for the audit of purchases procedures for the audit of purchases.

• B. Important Texas Statute 111.0042(c): “Before using a

sampling technique to establish a tax liability, the comptroller or his designee must notify the taxpayer in writing of the sampling procedure to be used.”

• C. The notification of sampling procedures was sent to tax
• C. The notification of sampling procedures was sent to tax

director aft er the projected assessment was determined.

• Do we see an opportunity for challenging the audit results?

18

C S d (C ) Case Study (Cont.)

• II. Case chronology (Cont.)
• A. May 2007 – August 2007: Tax director works diligently to

find missing invoices to reduce purchase audit assessment find missing invoices, to reduce purchase audit assessment.

• B. Texas S

ampling Manual: “Missing Invoices - Missing invoices

are taxed at 100%. Taxpayers are required to maintain books and records for the periods in statute.”

• Many states treat transactions with missing documentation as

100% taxable. What are ways to address this policy in order to 100% taxable. What are ways to address this policy in order to reduce the assessment on missing items?

19

C S d (C ) Case Study (Cont.)

• II. Case chronology (Cont.)
• A. August 2007: Auditor issues updated schedules for audit of

exempt sales exempt sales.

• B. September 2007: Auditor issues Texas “notification of

estimation procedures for state tax audit” for the sales audit, implying that the sales audit does not meet Texas requirements.

• C. September 2007: Tax director is given a 60-day notice to
• C. September 2007: Tax director is given a 60 day notice to

produce missing exemption certificates and resale certificates for the sales audit. D D b 2007 Off d i i h i !

• D. December 2007: Off to redetermination hearings we go!

20

C S d D b i fi Case Study Debriefing

I I D t li ti f d I. Issue: Decentralization of records

• A. Message: Maintain records or copies of records in a central

location

• II. Issue: Reactive response to audit
• A. Messages

i. Take a proactive role in managing audit

• ii. Stay on top of the audit from the beginning to the end
• iii. Don’t hope the audit will go away; it won’t.
• iv. Be engaged in every stage of the audit; don’t take

anything for granted anything for granted.

21

C S d D b i fi (C ) Case Study Debriefing (Cont.)

• III. Issue: Level of knowledge of Texas audit sampling policies and

procedures A Message: Know your opponent well! Study the state’s

• A. Message: Know your opponent well! Study the state s

sampling policies and procedures, and ask questions about things you do not understand.

• IV. Issue: Notification of sampling timing
• A. Message: Demand to be informed in a timely manner

about how the audit will be conducted and what sampling about how the audit will be conducted and what sampling procedures will be used. Demand clear and understandable explanations of the audit sampling methods by the auditor or by a state sampling specialist methods by the auditor or by a state sampling specialist.

22

C S d D b i fi (C ) Case Study Debriefing (Cont.)

• V. Issue: Surprises in the audit – missing documentation problem

and size of assessed amount A Messages

• A. Messages

i. Surprises in audits are generally not good! ii Investigate potential problems (e g missing records

• ii. Investigate potential problems (e.g., missing records,

procurement card exposure) early in the audit, and discuss how the problems can be approached in the audit with the auditor audit with the auditor.

23

C S d D b i fi (C ) Case Study Debriefing (Cont.)

• VI. Issue: Surprises in the audit – missing documentation problem

and size of assessed amount A Messages

• A. Messages

i. Don’t ignore problems and hope they will go away.

• ii. Do not attempt to hide problems from the auditor.

p p

• iii. Take an active role when the company is

buying/selling businesses, in order to ensure all parties know the tax issues parties know the tax issues.

24

Roger Pfaffenberger, Ryan

DO’S AND DON’TS OF

Roger Pfaffenberger, Ryan Kenneth Helms, Tax Consultant

SAMPLING

Th “D ’ ” Of A di S li The “Do’s” Of Audit Sampling

I. Treat the auditor with professional respect

• A. Develop rapport with auditor, in order to engender mutual

respect and trust respect and trust

• B. Provide quiet workspace for auditor
• C. Respond to reasonable requests from auditor

p q

• D. Assign one contact person to meet with auditor
• E. Never let discourse with auditor become personal

26

h “ ’ ” f d l ( ) The “Do’s” Of Audit Sampling (Cont.)

II. Take a proactive role in managing the audit

• A. Be prepared for initial meeting with auditor
• B. Stay on top of audit throughout its lifetime
• C. Close out the audit with notes for preparing for next audit

27

( ) The “Do’s” Of Audit Sampling (Cont.)

• III. Know your data well prior to the audit
• A. Understand the population data file, its attributes and

systems that produce it systems that produce it

• B. Check for data download errors (duplicate records,

missing transactions)

• C. Check for transactions outside audit period
• D. Reconcile population data file to ensure it is complete and

appropriate for audit

• E. Test data for missing documents, exemption certificates,

etc. etc.

28

( ) The “Do’s” Of Audit Sampling (Cont.)

• IV. Know the jurisdiction’s audit sampling guidelines, statutes

and regulations

• A. Research sampling guidelines and audit sampling cases in

jurisdiction

• B. Asked for explanations from auditor or computer audit
• B. Asked for explanations from auditor or computer audit

specialist if you do not understand guidelines completely

29

( ) The “Do’s” Of Audit Sampling (Cont.)

V. Be prepared to discuss data and sampling issues with the auditor A. Candidly and openly discuss any data deficiencies with the auditor B. Propose isolation of transactions with expected problems into separate group for sampling (e.g., procurement cards – missing documentation) C. Understand the life cycle of audit data

Reconcile Get Reconcile Data Define Sample Get Data Define Population Sample Design Results

30

( ) The “Do’s” Of Audit Sampling (Cont.)

• VI. Negotiate key issues with the auditor prior to starting the

audit A Develop an agreement that sets out road map for audit

• A. Develop an agreement that sets out road map for audit
• B. Decide on audit period
• C. Select accounts of interest
• D. Discuss groups for sample audit (e.g., assets, expenses,

utilities)

• E. Mutually agree on sampling methods
• F. Mutually agree on procedure for deriving target (i.e.,

audit) population for sample audit audit) population for sample audit

31

( ) The “Do’s” Of Audit Sampling (Cont.)

• VII. Review auditor’s proposed sampling plan and sample

procedures

• A. Confirm sampling plan is the agreed-upon plan
• B. Confirm agreements on treating missing documentation,

etc. etc.

32

( ) The “Do’s” Of Audit Sampling (Cont.)

• VIII. During the course of the audit:
• A. Keep all discussions, deliberations and negotiations at a

professional level professional level

• B. Mea culpa: Accept responsibility for problems or issues

that you created or for which you share responsibility with the auditor

• C. Promptly respond to auditor requests, and demand the

same from the auditor same from the auditor

33

Th “D ’ ” Of A di S li The “Don’ts” Of Audit Sampling

I. Do not do the following during interactions with the auditor: I. Do not do the following during interactions with the auditor:

• A. Allow the auditor to have unrestricted access to your

facility

• B. Allow the auditor access to any individual other than the

designated contact person C Allow the auditor access to your accounting systems

• C. Allow the auditor access to your accounting systems
• D. Provide the auditor with a complete national download of

your data files

• II. Do not take a reactive position with the management of the

audit III D ff i /fi i f i i

• III. Do not offer any accounting/finance information not pertinent

to the audit

34

ASSESSING VARIOUS

Roger Pfaffenberger, Ryan

SAMPLING METHODOLOGIES

T i F Thi S i Topics For This Section

I. Block sampling vs. statistical sampling

• II. Stratified random sampling
• III. Statistical sampling terminology
• IV. Sample size determination

V S li l ti d fi iti

• V. Sampling population definition
• VI. Refund claims based on samples

36

Bl k S li M h d Block Sampling Methods

I. Block sampling applications

• A. Typical blocks are time periods such as months within an

audit period (e g six months are selected in a 36-month audit period (e.g. six months are selected in a 36 month audit period, and all transactions are detailed for these months).

• B. Store-days in sales audits (or, store-day-hours for largest

retailers)

• C. Vendors (e.g., from list of all vendors; choose subset to
• C. Vendors (e.g., from list of all vendors; choose subset to

detail)

37

Bl k S li M h d (C ) Block Sampling Methods (Cont.)

II. Randomization in block sampling

• A. Texas: Randomly select at least two months for each year

in audit period in audit period

• B. Randomly select store-days in retail sales audits
• C. Randomization is an insurance policy against bias in

p y g sampling.

38

Bl k S li M h d (C ) Block Sampling Methods (Cont.)

• III. Block sampling advantages
• A. Selection of records – all records in given month or all

sales receipts at a particular store for the day; easy to pull sales receipts at a particular store for the day; easy to pull sampled items

• B. Does not require understanding of statistical sampling

procedures

• C. Recent months can be selected, if missing documentation

is an issue for older months in audit period is an issue for older months in audit period

• IV. Block sampling disadvantages
• A. No mathematical basis for measuring sampling risk
• B. No information on periods or store-days not sampled

39

S i i l M h d Statistical Methods

I. Statistical sampling methods I. Statistical sampling methods

• A. Simple random sampling

i. Random sample taken from audit population

• B. Stratified random sampling

i. Population is subdivided into groups called “strata.”

• ii. Transactions have similar properties within each

group, but properties vary across groups. iii A simple random sample is taken from each stratum

• iii. A simple random sample is taken from each stratum.
• iv. Most frequently used statistical method in audits

C Sequential sampling

• C. Sequential sampling

i. Select every kth item (k > 1) in a list of items

40

S i i l M h d (C ) Statistical Methods (Cont.)

I. Statistical sampling advantages

• A. Efficient: Typically, a smaller sample size is required when

compared with block sampling compared with block sampling.

• B. Produces measures of sampling risk

i. Achieved relative precision p

• ii. Confidence interval
• iii. Confidence bound

41

S i i l M h d (C ) Statistical Methods (Cont.)

II. Statistical sampling disadvantages

• A. Requires knowledge of introductory statistics and sampling

methods

• B. Can be complicated, particularly if advanced estimation

methods are used (e.g., regression estimators) methods are used (e.g., regression estimators)

42

f d d l l Stratified Random Sample Example

Stratum Label Lower Bound (absolute l Upper Bound (absolute l l Population Base Dollars Population Base Items Sample Base Dollars Sample Base Items Projection Factor ($ population $ Tax Projection

• n Average

It Variance between Sample and P l ti value greater than) value less than or equal to) per $ sample) Item Population Means Group 1 - Expenses Group 1 Expenses 1A $0 $0.00 25 1B $0 $1,000 $5,000,000.00 20,000 $65,000.00 250 76.92 $1,650.00 4.00% 1C $1,000 $25,000 $15,000,000.00 2,000 $1,850,000.00 250 8.11 $4,950.00

• 1.33%

1D $25,000 $75,000 $25,000,000.00 625 $10,375,000.00 250 2.41 $8,250.00 3.75% 1E Detail $75,000 max $15,000,000.00 150 $15,000,000.00 150 1.00 Group 1 - Total $60,000,000.00 22,800 $27,290,000.00 900 Group 1 Total $60,000,000.00 22,800 $27,290,000.00 900 43

Stratified Random Sample Example (Cont.)

I. Detail threshold set at $75,000

• A. Try to set such that detail stratum contains at least 20% of

population base dollars population base dollars II Number of sample strata – three used in this plan

• II. Number of sample strata three used in this plan
• A. Use between two and seven sample strata

44

Stratified Random Sample Example (Cont.)

III. Lower exclusion threshold – not used in this plan

• A. Example: Do not sample or audit items with absolute

values less than some dollar amount (e g $10 $50 $100) values less than some dollar amount (e.g., $10, $50, $100)

• IV. Projection factor (separate ratio estimation method)

j ( p )

• A. Population base dollars/sample base dollars
• B. Example: Stratum 1B $5,000,000/$65,000 = $76.92
• C. Each $1 in tax error in sample projects to $76.92 in

Stratum 1B population

45

Stratified Random Sample Example (Cont.)

• V. Tax projection on average item
• A. Sample average x projection factor x tax rate
• B. Example: Stratum 1B [$65,000/250] x 76.92 x 8.25% =

$1,650 C Expected tax error amount for each sampled item is

• C. Expected tax error amount for each sampled item is

$1,650

46

Stratified Random Sample Example (Cont.)

• VI. Variance between sample and population means
• A. [Sample mean – population mean]/[population mean] x

100% 100%

• B. Example: Stratum 1B

i Sample mean = $65 000/250 = $260 i. Sample mean $65,000/250 $260

• ii. Population mean = $5,000,000/20,000 = $250
• iii. Variance = [$260 - $250]/$250 x 100% = 4.00%

[$ $ ] $

47

S i i l S li T i l Statistical Sampling Terminology

I. Relative precision

• A. Percentage difference between estimate of tax error and

actual population tax error actual population tax error

• B. Common values in audit sampling: 10%, 25%
• II. Confidence level
• A. Confidence for which we want estimate to achieve stated

relative precision

• B. Common values in audit sampling: 75%, 80%, 90%

48

Statistical Sampling Terminology (Cont.)

III. Typical statement: “We want estimate to be within 10% of the actual value in population with 90% confidence.”

• A. Interpretation: If the sample is repeatedly drawn many

times, 90% of the samples will produce an estimate within plus or minus 10% of the actual population value.

49

S l Si D i i Sample Size Determination

I. Rational and reasonable cost/benefit analysis

• A. Benefit: The larger the sample, the better the estimation

precision precision.

• B. Cost: The larger the sample, the greater the auditing cost.

C Must achieve balance between cost and benefit

• C. Must achieve balance between cost and benefit

50

S l Si D i i (C ) Sample Size Determination (Cont.)

II. Fixed sample size

• A. Texas: At least 100 per stratum for stratified sampling; at

least 250 for simple random sampling least 250 for simple random sampling

• B. Stratified random sampling

i Multistate Tax Commission: At least 200 per stratum i. Multistate Tax Commission: At least 200 per stratum, absolute minimum of 100

• ii. California: At least 300 per stratum with invoice as

sampling unit

• iii. Many states use minimum of 200 or 250 per stratum.

51

l ( ) Sample Size Determination (Cont.)

• III. Sample size determination formulae
• A. Three inputs to formulae

i R l ti i i i. Relative precision

• ii. Confidence level

iii Standard deviation of tax error (tax error = correct tax

• iii. Standard deviation of tax error (tax error = correct tax

– actual tax paid)

52

l ( ) Sample Size Determination (Cont.)

III Sample size determination formulae

• III. Sample size determination formulae

B. Formula frequently misused i. Standard deviation of tax errors unknown – no estimate until sample is audited ii. Mistake often made: Standard deviation of invoice or line item amount used in place of standard deviation of tax errors

• iii. Statistical formulae available to approximate standard

deviation of tax errors C Preference: Fixed sample size not sample size determined by

• C. Preference: Fixed sample size, not sample size determined by

formula

• D. Expand sample if necessary, if audit work suggests sample not

t ti representative

53

S li P l i D fi i i Sampling Population Definition

I. Accounts of interest

• A. Mutually select accounts of interest with auditor

i. Educate auditor on accounts that do not need to be audited ii Include accounts that may be in your favor (e g

• ii. Include accounts that may be in your favor (e.g.,

accounts containing potential overpayments of tax)

54

Sampling Population Definition (Cont.)

II. Taxed vs. non-taxed purchase transactions

• A. Inclusion of tax paid and/or tax accrued transactions in

population population i. Include these in managed audits or in audits for states that permit projection of overpayments

• ii. Georgia: In sample strata, projected overpayment

cannot exceed projected underpayment. iii California: Ask auditor/computer audit specialist to

• iii. California: Ask auditor/computer audit specialist to

develop sampling plan for accruals.

55

R f d Cl i B d O S l Refund Claims Based On Samples

I. States permitting refund claims based on samples p g p

• A. Texas: Statue 151.430

B. Several states permit refund claims based on samples provided, th i t t i l t i d l i th li l d/ there is state involvement in developing the sampling plan and/or generating the sample (e.g., Alabama, California, Florida, Iowa, Kansas, Maryland, New York, Washington).

• C. States not permitting refund claims based on samples

i. Pursue the issue with the auditor to permit refund based on sample ii. Ryan initiative: Working with these states in developing statutes and/or modifying sampling guidelines to permit refund based on sample p

• iii. Matter of equity and taxpayer fairness

56

Refund Claims Based On Samples (Cont.)

• II. Crafting a proposal for using a sample as a basis for a refund

claim A Texas: Follow guidelines in Texas S

ampling Manual which

• A. Texas: Follow guidelines in Texas S

ampling Manual, which

is available on the Comptroller’s Office Web site.

• B. Other states

i. Notify state of intention to file claim based on sample

• ii. Seek advice on process for submitting claim
• iii. Follow state’s sampling guidelines in developing a

block sample or a stratified sample C Except for Texas states will want to approve sampling plan

• C. Except for Texas, states will want to approve sampling plan

and generate the samples according to the plan.

57

PLANNING AND

David Leifer, InterContinental Hotels Group

NEGOTIATING A SAMPLE

Planning And Negotiating A Sample Audit

I. Know your data well prior to the audit

• A. Research changes in accounting system or in chart of

accounts during the audit period accounts during the audit period

• B. Determine frequency and nature of transactions in holding
• r suspense accounts
• C. Determine the extent of electronic transactions such as

procurement cards or evaluated receipts settlements

59

Planning And Negotiating A Sample Audit (Cont.)

• II. Know your data well prior to the audit (Cont.)
• A. Examine prior audits and refund claims

i. What problems arose?

• ii. Is there potential for overlap?

B R h di t it d l ti

• B. Research direct pay permits and resale exemption

certificates

• C. Ascertain extent of purchases from out-of-state vendors

p

60

Planning And Negotiating A Sample Audit (Cont.)

• III. Know your data well prior to the audit (Cont.)
• A. Consider the extent to which use tax accruals can be tied

to tax returns to tax returns

• B. Determine what is necessary to get from a record in the

data file to a physical invoice

• C. Describe any patterns of high or low error rates among

types of transactions

61

Planning And Negotiating A Sample Audit (Cont.)

I. Discuss data and sampling issues with the auditor

• A. Process of downloading data for the audit
• B. Reconciliation of download to GL/tax returns
• C. Sampling unit (line item, invoice, other)

D R l f i l t t i f t fil

• D. Removal of irrelevant entries from taxpayer file
• E. Explanation of negatively valued items and $0 amount

items

62

Planning And Negotiating A Sample Audit (Cont.)

I. Issues to negotiate prior to the audit

• A. Division of population into sub-populations

i Required by law – e g by legal entity i. Required by law – e.g., by legal entity

• ii. To manage risk – e.g., group for items likely to have

missing documentation iii To partition error rates e g assets and e penses

• iii. To partition error rates – e.g., assets and expenses
• B. Controlling date field

i. Which date? Invoice date?

• ii. Is it user-entered?

63

Planning And Negotiating A Sample Audit (Cont.)

• II. Issues to negotiate prior to the audit (Cont.)
• A. Treatment of negatively valued transactions
• B. Treatment of missing records in the audit
• C. Sampling method selected for the audit

D T t ti ti t bl f dit

• D. Tentative timetable for audit

64

Planning And Negotiating A Sample Audit (Cont.)

I. Review proposed sampling plan and sampling procedures

• A. Ensure that the sampling plan used to draw the sample is

the plan that was originally agreed to the plan that was originally agreed to

• B. Confirm agreements on the treatment of negatively valued

transactions and transactions with missing documentation

• C. Confirm the definitions, descriptions and specifications of

the population and the sample

65