What Constitutes an What Constitutes an Audit?Audit?

Presenters: Diane Robichaud-Cormier, NB Terry Hing, ON Michele Snow, ON

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What is an Audit?What is an Audit?

IFTA – R209 IFTA – R209 IRP – Article II – 262 Audit IRP – Article II – 262 Audit

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IFTA Audit DefinitionIFTA Audit Definition

IFTA Articles of Agreement R209 IFTA Articles of Agreement R209 Audit means:Audit means:

.100 The physical examination .100 The physical examination of of the source documentation of the the source documentation of the

licensee’s operations either in licensee’s operations either in detail or on a representative detail or on a representative sample basis;sample basis;

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IFTA Audit Definition (Cont’d)IFTA Audit Definition (Cont’d)

R209.200 R209.200 The evaluation of the internal The evaluation of the internal controls of the licensee’s accounting controls of the licensee’s accounting system and operations; andsystem and operations; and

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IFTA Audit Definition (Cont’d)IFTA Audit Definition (Cont’d)

R209.300R209.300The accumulation of sufficient competent The accumulation of sufficient competent evidential matter to afford a reasonable evidential matter to afford a reasonable basis for determining whether or not there basis for determining whether or not there are any material differences between are any material differences between actual and reported operations for each actual and reported operations for each affected jurisdiction in accordance with the affected jurisdiction in accordance with the provisions of the International Fuel Tax provisions of the International Fuel Tax Agreement and all affected jurisdictions’ Agreement and all affected jurisdictions’ fuel use tax laws.fuel use tax laws.

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IRP Audit DefinitionIRP Audit Definition

Article II – 262 AuditArticle II – 262 Audit““Audit” means a physical Audit” means a physical examination of a registrant’s examination of a registrant’s operational records including source operational records including source documentation to verify fleet documentation to verify fleet distance and accuracy of a distance and accuracy of a registrant’s record keeping system registrant’s record keeping system for that fleet.for that fleet.

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IRP Audit Definition (Cont’d)IRP Audit Definition (Cont’d)

Article II – 262 Audit ContinuedArticle II – 262 Audit ContinuedThe examination will be of the The examination will be of the records maintained for a fleet during records maintained for a fleet during the respective preceding year. The the respective preceding year. The purpose of the audit is to determine purpose of the audit is to determine the proper total distance traveled the proper total distance traveled and the percentage of distance and the percentage of distance traveled in each jurisdiction.traveled in each jurisdiction.

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Audit DefinitionAudit Definition

An audit is an examination of the An audit is an examination of the taxpayers records to determine if the taxpayers records to determine if the internal control system is reliable internal control system is reliable and the reported information is and the reported information is accurate.accurate.

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During the Audit, the Auditor will:During the Audit, the Auditor will:

ascertain the validity and reliability ascertain the validity and reliability of information reportedof information reported

assess the system’s internal control assess the system’s internal control mechanismsmechanisms

provide reasonable assurance that provide reasonable assurance that the information is materially accuratethe information is materially accurate

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UniformityUniformity Audits must be acceptable to all Audits must be acceptable to all

member jurisdictionsmember jurisdictions It must be conducted professionally It must be conducted professionally

and competentlyand competently The results must be clearly The results must be clearly

documented for all member documented for all member jurisdictions to be satisfiedjurisdictions to be satisfied

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The Audit ProcessThe Audit Process

1.1. Audit notificationAudit notification2.2. Audit communication between Audit communication between

jurisdictionsjurisdictions3.3. Opening conferenceOpening conference4.4. Evaluation of internal controlsEvaluation of internal controls5.5. Closing conferenceClosing conference6.6. Audit reportsAudit reports7.7. Audit documentationAudit documentation

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IRP Audit Process DifferencesIRP Audit Process Differences Pre-audit contactPre-audit contact Request for recordsRequest for records No pre-audit communication between No pre-audit communication between

jurisdictionsjurisdictions Initial audit proceduresInitial audit procedures Sampling and extrapolation Sampling and extrapolation

proceduresprocedures New operation / changes in New operation / changes in

operationsoperations Contents of audit reportsContents of audit reports

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Would Would YouYou Consider This An Consider This An Audit?Audit?

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Case # 1Case # 1 100 qualified vehicles100 qualified vehicles travels in 20 different jurisdictionstravels in 20 different jurisdictions purchases fuel in 15 jurisdictions.purchases fuel in 15 jurisdictions. No quarter has travel in all 20 jurisdictionsNo quarter has travel in all 20 jurisdictions 10 vehicles are broker10 vehicles are broker 90 vehicles are company90 vehicles are company 5 company vehicles have limited travel5 company vehicles have limited travel Audit period is 3 yearsAudit period is 3 years

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Scenario - Case 1Scenario - Case 1

The auditor selected a quarter for The auditor selected a quarter for which travel was reported in 18 which travel was reported in 18 jurisdictions and fuel purchased in 14 jurisdictions and fuel purchased in 14 jurisdictions. No errors for both fuel jurisdictions. No errors for both fuel and distance were found. No error and distance were found. No error was projected to other quarters.was projected to other quarters.

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Questions – Case 1Questions – Case 1Was the sample size reflective of the company Was the sample size reflective of the company

operations? Why or Why not?operations? Why or Why not?

Is one quarter enough of a sample to draw Is one quarter enough of a sample to draw conclusions on the accuracy of the information conclusions on the accuracy of the information reported on the tax returns for the audit period?reported on the tax returns for the audit period?

As your jurisdiction’s representative responsible for As your jurisdiction’s representative responsible for reviewing this audit would you accept these audit reviewing this audit would you accept these audit findings?findings?

Would you consider this an audit?Would you consider this an audit?

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Case # 2Case # 2 10 qualified vehicles10 qualified vehicles Travels in 10 different jurisdictionsTravels in 10 different jurisdictions Purchases fuel in 5 jurisdictionsPurchases fuel in 5 jurisdictions 2 quarters have travel in all jurisdictions2 quarters have travel in all jurisdictions 8 vehicles are company owned8 vehicles are company owned 2 vehicles are brokers2 vehicles are brokers The audit period is 3 yearsThe audit period is 3 years During the first half of the audit period the During the first half of the audit period the

company prepared their own returns, the company prepared their own returns, the second half of the audit period an agent second half of the audit period an agent prepared the returns.prepared the returns.

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Scenario – Case 2Scenario – Case 2The auditor selected the two quarters that had The auditor selected the two quarters that had

travel in all jurisdictions for his sample. The travel in all jurisdictions for his sample. The sample consisted of two company owned sample consisted of two company owned vehicles. The sample periods were in the first vehicles. The sample periods were in the first half of the audit period. There were no errors half of the audit period. There were no errors found in the fuel reported. The auditor found in the fuel reported. The auditor discovered five trips in the first sample period discovered five trips in the first sample period that misallocated distance between the that misallocated distance between the jurisdictions. The auditor discovered two trips in jurisdictions. The auditor discovered two trips in the second sample period that misallocated the second sample period that misallocated distance between the jurisdictions. The auditor distance between the jurisdictions. The auditor projected the distance errors for the audit period.projected the distance errors for the audit period.

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Questions – Case 2Questions – Case 2Was the sample size reflective of the Was the sample size reflective of the

company operations? Was it company operations? Was it representative?representative?

Should the errors have been projected?Should the errors have been projected?

As your jurisdiction’s representative As your jurisdiction’s representative responsible for reviewing this audit would responsible for reviewing this audit would you accept these audit findings?you accept these audit findings?

Would you consider this an audit?Would you consider this an audit?

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Case # 3Case # 3 Farm OperationFarm Operation 20 licensed vehicles20 licensed vehicles 8 qualified vehicles8 qualified vehicles 12 licensed vehicles travel within the farm only 12 licensed vehicles travel within the farm only

per the taxpayerper the taxpayer Travels in 3 jurisdictionsTravels in 3 jurisdictions Majority of fuel is drawn from bulk storageMajority of fuel is drawn from bulk storage Qualified and unqualified vehicles are fuelled Qualified and unqualified vehicles are fuelled

from bulk storagefrom bulk storage No records kept for bulk storage disbursementsNo records kept for bulk storage disbursements The audit period is 3 years.The audit period is 3 years.

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Scenario – Case 3Scenario – Case 3

The auditor tested two sample The auditor tested two sample quarters for two trucks. No distance quarters for two trucks. No distance errors found. Fuel purchases errors found. Fuel purchases reviewed for the entire audit period reviewed for the entire audit period due to lack of disbursement records. due to lack of disbursement records. Auditor judgment to allow 75% of Auditor judgment to allow 75% of bulk fuel purchases to be attributed bulk fuel purchases to be attributed to qualified vehicles. KPL determined to qualified vehicles. KPL determined to be 2.4.to be 2.4.

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Questions – Case 3Questions – Case 3Was the sample size reflective of the company operations?Was the sample size reflective of the company operations?

Should the auditor have used the IFTA agreement stipulated Should the auditor have used the IFTA agreement stipulated 1.7KPL/4.0MPG?1.7KPL/4.0MPG?

Would you deny or grant tax paid purchases credit for Would you deny or grant tax paid purchases credit for disbursements from bulk storage? Why or why not? disbursements from bulk storage? Why or why not?

As your jurisdiction’s representative responsible for reviewing As your jurisdiction’s representative responsible for reviewing this audit would you accept these findings?this audit would you accept these findings?

Would you consider this an audit?Would you consider this an audit?

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Case # 4Case # 4 30 qualified vehicles30 qualified vehicles 15 vehicles are company owned15 vehicles are company owned 15 vehicles are brokers15 vehicles are brokers Travels in 20 jurisdictionsTravels in 20 jurisdictions Purchases fuel in 15 jurisdictionsPurchases fuel in 15 jurisdictions Jurisdictional distance assigned using Jurisdictional distance assigned using

mileage softwaremileage software The audit period is 3 years.The audit period is 3 years.

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Scenario – Case 4Scenario – Case 4The auditor tested all vehicles for one The auditor tested all vehicles for one

quarter. No fuel errors found. The review quarter. No fuel errors found. The review of the distance records for the sample of the distance records for the sample period indicated that for certain trips the period indicated that for certain trips the mileage software used the practical route mileage software used the practical route which routed the trucks through two which routed the trucks through two jurisdictions. Supporting documents jurisdictions. Supporting documents indicated that the trucks used a different indicated that the trucks used a different route which caused them to travel through route which caused them to travel through three jurisdictions and increased the total three jurisdictions and increased the total distance traveled. A distance error rate distance traveled. A distance error rate was calculated and projected over the was calculated and projected over the audit period.audit period.

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Questions – Case 4Questions – Case 4

Was the sample size reflective of the Was the sample size reflective of the company operations?company operations?

Should the errors have been projected?Should the errors have been projected?

As your jurisdiction’s representative As your jurisdiction’s representative responsible for reviewing this audit would responsible for reviewing this audit would you accept these findings?you accept these findings?

Would you consider this an audit?Would you consider this an audit?

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Case # 5Case # 5 IRP auditIRP audit 4 qualified vehicles4 qualified vehicles Reported actual travel in 15 Reported actual travel in 15

jurisdictionsjurisdictions Only traveled in 13 jurisdictionsOnly traveled in 13 jurisdictions Purchase fuel in 10 jurisdictionsPurchase fuel in 10 jurisdictions

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Scenario – Case 5Scenario – Case 5The auditor tested all vehicles for one quarter. No The auditor tested all vehicles for one quarter. No

fuel errors found. The carrier declared distance in fuel errors found. The carrier declared distance in two jurisdictions on its application. However, the two jurisdictions on its application. However, the carrier did not travel in those jurisdictions in the carrier did not travel in those jurisdictions in the record year reporting period. The taxpayer had record year reporting period. The taxpayer had under reported distance in three jurisdictions and under reported distance in three jurisdictions and over reported distance in two jurisdictions.over reported distance in two jurisdictions.

The auditor reduced the reported distance (on the The auditor reduced the reported distance (on the application) in the two jurisdictions to zero and application) in the two jurisdictions to zero and projected the distance error rate over the other projected the distance error rate over the other jurisdictions in which there was travel.jurisdictions in which there was travel.

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Questions – Case 5Questions – Case 5Was the sample size reflective of the company Was the sample size reflective of the company

operations?operations?

Should the errors have been projected?Should the errors have been projected?

Should the reported distance have been zeroed out?Should the reported distance have been zeroed out?

As your jurisdiction’s representative responsible for As your jurisdiction’s representative responsible for reviewing this audit would you accept these reviewing this audit would you accept these findings?findings?

Would you consider this an audit?Would you consider this an audit?

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Thank YouThank You

Questions?Questions?

Comments?Comments?