The Tax Audit Part 5 - The Audit Process

I will be explaining the process that should take place here so you can tell a good audit from a bad one.  The first thing a good auditor will do is try to understand your business.  Simply put, if they don’t understand what you do and how you do it, how can they assess the validity of your revenues and expenses.
A good auditor will then review your records (Balance Sheet, Income Statement, Trial Balance, and General Ledger) to confirm that the numbers correspond to the tax return. TIP – Make sure you have done this before giving your records to the auditor.
The next step is to determine what items (GL accounts) are going to be examined.  Quite often an auditor will have a list of issues before they ever see the records.  Based on what you say in the interview and what they see in the preliminary review of your records the items on that plan may change.  Some will be added and some may be removed.
The auditor will now start sampling individual receipts based on value and risk.  The auditor should not be concerned about the occasional receipt for the small coffee from Tim’s, unless you have a drinking problem.  If they are there is a good chance you have a bad auditor.  When I audited I concentrated on bigger amounts and areas where expenses were obviously personal in nature.  I didn’t care if you spent a few hundred dollars a year on coffee or donuts.  I was more concerned about the shareholder meeting that took place over Christmas in Hawaii and lasted for two weeks.
The auditor will now be preparing questions to ask you about various receipts and calculations.  For instance, all those meal receipts that you “forgot” to note who you met with and the nature of the business discussed, or the contract received as a result of the dinner out.  Another area will be vehicle usage.  Where is your log book?  Can you tell me what your percentage of use is for business purposes?
After the auditor has reviewed all the records they are interested in they will go back to the office and discuss their findings with their Team Leader, research the applicable legislation and Court cases and determine if they think an adjustment is warranted.  If the auditor thinks adjustments are warranted they will present them in written format to you in the Proposal Letter.