Auditing - PowerPoint PPT Presentation

1 / 46
About This Presentation
Title:

Auditing

Description:

Divert Professional / Compliance Staff How Long? ... Continuation of New Technologies. Become more efficient in our Audit Processes ... – PowerPoint PPT presentation

Number of Views:209
Avg rating:3.0/5.0
Slides: 47
Provided by: tomcz
Learn more at: https://www.michigan.gov
Category:

less

Transcript and Presenter's Notes

Title: Auditing


1
Auditing Statistical Sampling
  • Current Best Practices

2
  • Michigan Department of Treasury
  • Roslyn Branner
  • Mary Ann Nye
  • Stan Weber
  • Ryan
  • Joseph J. Tomczyk

3
Audit Goal
  • Determine the correct amount of tax
  • No More
  • No Less

4
Sampling Goal
  • Create a subset of the data population that
    mirrors the population activity
  • Acceptable to both parties

5
Factors
  • Transactional Data Availability
  • Consistent Activity Throughout The Audit Period
  • Acquisitions / Dispositions
  • Records
  • Number
  • Complexity
  • Adequacy
  • Sufficiency

6
Why Sample?
  • Cost / Benefit
  • Divert Professional / Compliance Staff How
    Long?
  • Engage Independent Consultant How Extensively?
  • Provide On-Site Resources to Auditor How Long?

7
Considerations
  • Audit Scope
  • Plan / Agreement
  • Data Validation
  • Sample Evaluation
  • Sample Projection
  • Post-Audit Use of Results

8
  • Communicate Before
  • Communicate During
  • Communicate After

9
Auditing Statistical Sampling Current Best
Practices
  • Michigan Department of Treasury
  • Tax Compliance Bureau - Audit

Presented by Roslyn Branner
10
Why Do We Sample?
  • Continuation of New Technologies
  • Become more efficient in our Audit Processes
  • A balance between accuracy and efficiency
  • Cost and effectiveness
  • Quality

11
Statutory Authority
  • To Sample
  • None available at this time
  • To Audit
  • Revenue Act Provides the Authority to Audit
  • Taxpayer is required by law to maintain records
    for a four year statutory period.
  • Records stored by taxpayer are subject to review
    regardless of the manner in which they are
    maintained.

12
Statutory Authority
  • Complete Records -- Mich. Comp. Laws Ann.
     205.28(3) Mich. Admin. Code R205.4103 
  • Conduct Examination -- Mich. Comp. Laws Ann.
     205.3(a) Mich. Admin. Code R205.4103 
  • Failure or refusal to file a return or pay the
    tax, or the Department's belief that a return
    does not give enough information to accurately
    determine tax due, triggers the Department's
    right to examine records, books, and so on, and
    to audit accounts so as to assess tax. Mich.
    Comp. Laws Ann.  205.21 .

13
Statutory Authority
  • Subpoena Authority -- Mich. Comp. Laws Ann.
     205.3(a)
  • Multi-State Cooperation -- Mich. Comp. Laws Ann.
     205.28(1)(d)

14
Records
  • Records Documents, books, electronic data,
    work papers, and/or any other information
    relevant to determine tax due, tax reported or
    tax collected.

15
Current Staffing Structure
  • All auditors have been trained on statistical
    sampling procedures and how to use the software
    (ACL).
  • Each auditor performs all steps required to
    complete a statistical sampling audit.
  • Each audit goes through at least two levels of
    management review.

16
Sampling Methods
  • Non-Statistical Sampling
  • Manual
  • Block or Judgmental Sampling
  • Simple Random Sampling
  • Statistical Sampling
  • Electronic
  • Stratified Random Sampling

17
Statistical Sampling
  • Pros
  • Improves Accuracy
  • More Efficient
  • Virtually eliminates Taxpayer/Auditor Bias
  • Cost / Benefit
  • Performed in accordance with Generally Accepted
    Auditing Standards
  • Reduces data entry errors
  • Equal chance for all items
  • Improved Quality
  • Cons
  • Inherent Sampling Risk
  • Data for specified audit period is unavailable
  • Repeated request for data due to auditor /
    taxpayer miscommunication
  • Taxpayer or its IT Department is resistant to
    providing the requested data
  • Not an exact science

18
Sampling Risk
  • Is assumed by all parties involved
  • Can occur when the sample does not reveal the
    true attributes of the population
  • The results of which can favor the Taxpayer or
    the Department or both.
  • Minimized with proper planning
  • Communication is a key factor

19
Pre-Audit Planning Considerations
  • Type of business
  • Multiple locations
  • Accounting Systems
  • Internal Controls
  • Decentralized or centralized accounting
  • Changes in business practices over time
  • Others

20
Acceptable Data File Formats
  • Excel
  • Access database
  • Dbase
  • Delimited Text (Tab)
  • Print Image (Report)
  • Others XML, ASCII, EBCDIC, etc.

21
Media Types to Receive Data
  • CDs
  • DVDs
  • Flash Drives
  • External Hard Drive
  • Email (not encouraged by The Department)

22
Handling of Negative Transactions
  • Ideally, all negatives would be matched with its
    corresponding positive transactions and removed
    from the sampling frame.
  • Remaining (I.e. unmatched) negatives are removed
    and given to taxpayer for review.
  • Remaining negatives will be used to offset any
    exceptions (I.e. errors) found in the sample.

23
Handling of Negative Transactions
  • Statistically, leaving the negatives in the
    sampling frame distorts the desired confidence
    and precision levels.

24
Handling Missing Items
  • Meaning
  • A transaction where taxability can not be
    determined without reviewing the source
    document(s), however the source document(s) are
    unavailable and cannot be provided.
  • Are considered an exception (i.e. taxable)
  • Can not be replaced or substituted

25
Handling Duplicate Transactions
  • Should be identified and eliminated from the
    sampling frame prior to pulling the sample.
  • Similar characteristics within the data should be
    evident for the auditor to identify the
    duplicates if theyre unknown previously.
  • Control total verification may reveal duplicates.

26
Extraordinary Items
  • Generally, no item is considered an extraordinary
    item.
  • All items represent the activity in the normal
    course of business
  • If Identified, can be pulled out of the
    population prior to drawing the sample
  • If not identified before the sample is drawn,
    will remain in the sample as all other items

27
Factors in Determining Sample Size
  • ACL software
  • A customized module used in conjunction with ACL
    which automates the sampling process.
  • Sampling Criteria
  • Confidence Level
  • Relative Error Tolerated or Relative Precision
  • Minimal Sample items in each stratum
  • Samples can be reproduced without the module

28
Factors in Determining Sample Size
  • Optimal Strata Break Criteria
  • High Dollar Value
  • Low Dollar Value
  • Value of Pre-stratification Intervals
  • Number of Optimal Strata Breaks
  • Minimal Number of Items to be Selected
  • Cumulative Square Root of the Frequency

29
High Dollar Cut-off
  • Includes only the higher transaction amounts.
  • Detailed review only
  • Will not be projected to other years, when all
    data is available for the entire audit period.
  • Determined by auditor and agreed to by both
    auditor and taxpayer.

30
Low Dollar Cut-off
  • Referred to as the De-minimus area
  • Includes the lowest transaction amounts that are
    greater than zero.
  • Determined by auditor and agreed to by both
    auditor and taxpayer
  • Taxability is determined by projecting the
    adjacent stratums percentage of error.

31
Low Dollar Cut-off
  • Purpose is to improve efficiency
  • Taxpayer does not spend valuable time pulling
    documents
  • Auditor does not spend time reviewing documents
  • Not to be assumed as an area that will be
    ignored.
  • Alternative methods

32
Reviewing the Sample
  • Review source documents to determine taxability.
  • Opportunity for the taxpayer to review and
    provide additional information not previously
    made available.
  • Opportunity for the taxpayer to review remaining
    negatives to off-set any determined exceptions.

33
Projection Method
  • Ratio Estimation
  • Basic Formula
  • Sample Error in s
  • ------------------------- X Population Base in
    s
  • Sample Base in s

34
Evaluation Method
  • Performed by a Statistician
  • Performed on the largest statistical sampling
    audits

35
Performing a Sales Tax Audit
  • Detail review of transactions in an electronic
    environment
  • Statistical Sample
  • Non-Statistical Random Sample
  • Block Sample

36
Performing a Use Tax Audit
  • Statistical Sample of Accounts of Interest
  • Non-Statistical Random Sample
  • Block Sample
  • Detail Review

37
The Departments Responsibility to the Taxpayer
  • Perform Statistical Sampling Audits in accordance
    with Departmental policies and procedures.
  • Maintain communication with the Taxpayer
    throughout the entire audit process.
  • Provided supportive documentation that clearly
    communicate the results.
  • Maintain complete confidentiality of taxpayers
    data and information.

38
The Taxpayers Responsibility to the Department
  • Full cooperation from the taxpayer.
  • Provide records in a reasonable time frame.
  • Maintain records according to federal and state
    provisions.
  • Provide control totals
  • Provide a proper Audit Trail.

39
  • The previous content was intended for
    informational purposes only and is not to be
    interpreted as official statements of the
    Michigan Department of Treasury. The content,
    and/or statements made during the presentation,
    are not to be construed as promulgated rules,
    bulletins or rulings of the Department and are
    subject to revision pursuant to the effect of
    legislation, court decisions, regulations and
    official statements of the Department.

40
Sample Types
  • Statistical use of statistical formulas
  • To determine sample size
  • To measure sampling risk
  • Non-Statistical Can be anything else
  • Requires professional judgment
  • Generally, needs all parties consent

41
Negative Transactions
  • Generally increases the probability of selection.
  • Michigans uses a conventional approach, but not
    the only approach.
  • For example, Texas has a five step rule that they
    use to determine
  • If a negative transaction is going to be used in
    the sample.
  • How the negative transaction is going to be used
    in the sample.
  • Another approach is to treat all remaining
    negative transactions in a separate strata.

42
Missing Items
  • Michigans uses a conventional approach, but not
    the only approach.
  • Some states select replacement (additional)
    transactions at the time the sample is drawn to
    be reviewed if the source document for the
    original sample item is unavailable.
  • While the sample is drawn from a specific source
    document (such as an invoice), there is often
    alternative source information (such as a plant
    tour, discussion with plant manager, third party
    vendor, etc.) that can be a valid substitute in
    making a taxable / exempt decision.

43
Other Sampling Considerations
  • Stores
  • Utilities
  • Multiple populations / multiple samples

44
  • Communicate Before
  • Communicate During
  • Communicate After

45
Summary
  • Michigan Department of Treasury has published its
    Audit Sampling Manual in March 2007
  • When looking at using a sample to conduct a
    Michigan Tax Audit
  • Look at the Taxpayers and the Departments
    expectations.
  • Participate in the sample planning.
  • Understand how the results will be used to make
    audit determinations.
  • The sample and subsequent results are designed to
    reflect the Taxpayers activity.

46
  • QUESTIONS?
Write a Comment
User Comments (0)
About PowerShow.com