The Auditor uses methods to determine a client’s liability and what they use is they use different Testing methods. They’re going to take a data that you provide them and they going to run it through several tasks just to make sure that it all matches. One of the biggest and easiest tasks is they’re going to match the sales tax returns to the federal income tax returns the merchant account statements and any other data that they have on file to make sure that data sex.
That’s one of your very first tasks that you’ve to go through in presenting information is to make sure all that material matches. Now they might do some other tests during the course of the audit. The auditor can test the amount of cash deposits that are coming in the account versus what’s normally reported through those similar situations of business. They can do and now assess on your purchases and impute a market percentage based on that and do a market test to see if your markup is an adequate percentage for the type of business that you run. They can run what’s called an observation test where they may spend a day or two in the business calculating the frequency of cash sales and credit card sales and coming up with percentages and applying that across the audit care to see where those lands.
All those test usually yield different results to the extent you want to rely on actual data versus testing methods because testing methods if you use a marker percentage who’s to say your client data is going to match the guy down the street to the extent you possibly want to rely on actual data. Short of actual data when the auditor is going through your testing phase you need to be really sure that you control the flow of that data as little statistical variations can make huge differences in the audit liability.
The auditor is going to use a variance of tests and it’s important that you control not only the method of testing but also how the data is being tested and what is the end result. Ultimately by controlling the flow of information and controlling the ways that the data is being analyzed that’s the best method of how you’re going to control the audit and control the outcome to the extent possible you always want to be able to predict the outcome even before the auditor comes up with that.
You want to decide on the method of testing and then use your own method within line that say the auditor is going to take a two day observation test want to take a five day observation test based on the historical data and that way when the auditor comes back with the discrepancies. You’ve got your own testing method superior to the auditor and you can use that data to better argue your client’s position over the scope of the oath.
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