g10140-tx chapter 9.0 audit planning and preparation

1

Published May 2015

9.0 Audit planning and preparation

(Revised April 2015)

Disclaimer

Hyperlinks to external or unaffiliated websites are for information purposes only. The Canada

Revenue Agency (CRA) is not responsible for the content or practices of such websites. While

efforts are made to ensure that hyperlinks are current and up-to-date, it is not guaranteed.

9.1.0 Introduction

(Revised May 2014)

This chapter provides detailed information on how to prepare an Audit Plan, acquire and review

information available from sources within the CRA, and make initial contact with the taxpayer.

Auditors must use Windows Audit Laptop System (WinALS) software to prepare, conduct, and

complete the audit. Other information that relates to the audit is also available on the laptop.

The laptop computer includes Interactive Data Extraction and Analysis (IDEA) for Windows.

IDEA is a useful tool when the taxpayer's records are in electronic format.

The auditor has the support of the team leader and when necessary, may consult other auditors

who have experience in the industry being audited. Auditors should attempt to resolve audit

issues by completing their own research. If there are unresolved technical issues, the auditor

should discuss with the team leader, who may request technical assistance from Headquarters.

For guidelines on conducting audits under unusual circumstances, go to 4.6.0, Auditing under

unusual circumstances.

9.1.1 Topics in this chapter


The steps to plan and prepare for an audit include:

• overview to planning the audit;

• preliminary review;

• ratio analysis and review of financial statements;

• analytical review;

• unfiled returns;

• Audit Plan;

• audit tools;

• working papers;

• CRA mainframe as a source of information;

• determining the need for computer-assisted audit techniques (CAATs);

• audit scope;

• audit period policy;

• workload referral for GST/HST and Small and Medium Enterprises;

2

Published May 2015

• concurrent audits of related, associated, or affiliated corporations;

• continued risk assessment while the audit is in process;

• assessment of materiality; and

• contacting the taxpayer.

9.1.2 Overview to planning the audit

(Revised January 2013)

The most significant step at the beginning of an audit is to prepare an Audit Plan specific to each

audit. All auditors should be familiar with policies and procedures before beginning any audit.

It is important to have a good understanding of the CRA's systems and the data available to

prepare an Audit Plan.

The topics in this chapter are limited to preparing for the audit and contacting the taxpayer.

Conducting and completing the audit are discussed in subsequent chapters.

Team leaders should ensure that auditors are familiar with the information in this chapter and

that auditors prepare and use an Audit Plan for each audit.

9.2.0 Preliminary review


9.2.1 Introduction


The preliminary review is the first stage of preparing for an audit and provides the information

necessary to prepare an Audit Plan. Preparing for and planning the audit are essential to ensure

that the audit is completed efficiently and effectively. Complete the preliminary review,

including information in the Audit Plan, before contacting the taxpayer.

The preliminary review includes an analysis of the screener's comments. Review and note in the

Audit Plan, concerns that have been documented from previous contact with the taxpayer and

items from a previous audit that indicated that a follow up is necessary. Also review previous

forms T401 and T401A from Appeals, Report on Objection, and, Notice of Objection -

Negotiated Settlement Report, respectively.

Review historical information as well as any new information or changes to the taxpayer's

business operations. However, changes in operations may not become evident until visiting the

taxpayer's premises. The Audit Plan should be flexible to allow for these changes.

Initial contact with the taxpayer should confirm that the tombstone information is current and

accurate. If the taxpayer's business activities have changed or the information on file is

inaccurate or outdated, update the information as soon as possible. For updating business number

(BN) accounts, auditors complete the Audit BN Change - CRITICAL Report available in the

WinALS Reports template library. For more information, go to 9.18.0, , Contacting the taxpayer.

9.2.2 Sources of information


A list of sources for valuable information during the preliminary review of the audit includes

(this is not an exhaustive list):

3

Published May 2015

• permanent document (PD) folder and audit file;

• audit download information (tombstone information);

• screener's comments (reason for the audit, Form T133, Lead or Project Information);

• Forms T401 and T401A from Appeals, Report on Objection, and, Notice of Objection -

Negotiated Settlement Report, respectively;

• prior audit information;

• Collections information;

• historical information (log of action) available from various mainframe databases;

• filing history (income tax returns, GST/HST returns, excise tax returns, and financial

statements);

• legislation, amendments, and related publications;

• sector profiles; and

• specialist sections such as Real Estate Appraisals and Business Equity Valuations,

Employer Compliance Audit, Electronic Data Support specialists, and industry

specialists.

Note: If the taxpayer has outstanding returns, go to 9.5.0, Unfiled returns.

9.2.3 Permanent document folder and audit file – Under review

(Revised May 2014)

Permanent document (PD) folders were created to retain documents that may impact more than

one tax year and to separate these documents from the income tax returns. The PD folder will not

usually contain documents that relate to a single tax year.

PD folders are divided into two categories:

1. Category I – retain in excess of 5 years, including indeterminate life; and

2. Category II – retain 5 years or less.

When a document is placed in the PD folder, state the retention period on Form TX75 or

TX75A. For sample documents, go to forms:

• TX75, T1 and/or T3 permanent document filing; or

• TX75A, T2 permanent document filing slip.

The PD folder contains significant information about the taxpayer’s obligations and operations,

including the organizational structure, business operations, prior audits, and other information

useful to the planning of subsequent audits. The PD folder may also contain information on the

books and records (location, type of record keeping, software), prior Audit Reports, and Audit

Plans, correspondence (including rulings), and information on concerns that were noted during

other contact with the taxpayer that need follow up. For more information, go to 11.8.4,

Permanent documents.

http://infozone/english/r1713497/formpub/form-e.asp?formid=366085402408616


4

Published May 2015

PD folders and audit files are retained at the tax centre (TC) and can be requested from the TC

assigned to the tax services office (TSO). For more information, go to Appendix A-9.2.1, Tax

centres where returns are processed.

9.2.4 Audit download

(Revised May 2014)

The audit download contains tombstone information about the taxpayer such as their name,

address, telephone number, person to contact, major business activity, NAICS (North American

Industry Classification System) code, filing history, elections, and relevant information as to why

the file was selected for audit (screener’s package). Verify the tombstone information at the time

of initial contact and make changes as required.

T1 download

T1 download consists of:

• Audit Information Management System (AIMS) information;

• taxpayer profile; and

• return information.

T2 download

T2 download contains:

• AIMS information; and

• corporate account information. Taxpayer profile download

In addition to the above data, two subfolders containing return information include various

ratios, Payroll Deductions Accounting and Collections System (PAYDAC) information,

identified issues, and previous audit data.

9.2.5 Screener's comments


The screener's comments help to determine the scope of the audit based on the reason for

selection. It is a tool used to communicate the items of concern that require specific review and

comments by the auditor. The auditor uses this information to develop the Audit Plan. If the

audit is the result of a lead or referral, the reason is noted on the referral form. All screener's

comments must be addressed on Form T20, Audit Report. For more information, go to 9.11.0,

Audit scope.

9.2.6 Prior audits


If there has been a previous audit, review the information when preparing and planning the audit,

which helps develop the Audit Plan.

Information from prior audits is retained electronically or in paper copy audit files. Summary

information from a previous audit (Audit Report) is retained in the PD folder or audit file

(electronic or paper). The auditor uses the Random Access Personal Information Database

(RAPID) charge-out system to request the PD folder or the paper audit file. For prior audits that

5

Published May 2015

were completed using WinALS, request a copy of the prior audit file from the National Audit

Archives (NAA).

The auditor must review previous T401and T401A forms from Appeals, Report on Objection,

and, Notice of Objection - Negotiated Settlement Report, respectively.

9.2.7 Collections information

(Revised May 2014)

The auditor must review the taxpayer's account to check for outstanding balances payable to

CRA and to determine if a collection problem has been identified. Collection information is in

the Common Menu System, which is available in the Automated Collections and Source

Deductions Enforcement System (ACSES).

Review of collection information may indicate:

• a hold has been placed on the account;

• the taxpayer is in bankruptcy (previous, actual, or anticipated); or

• there are outstanding returns indicating non-compliance.

If a hold has been placed on the account, the auditor should determine the reason for the hold. If

there are refunds that have not been disbursed, the auditor should determine the reason before

contacting the taxpayer.

If Taxpayer Services and Debt Management has been in contact with the taxpayer, the auditor

should discuss the situation with the team leader and should contact the Collection officer before

contacting the taxpayer or starting the audit.

9.2.8 Historical information – Mainframe databases


The mainframe databases provide access to historical taxpayer filing information as well as to

audit processing functions that add completed audit results to the taxpayer information.

Mainframe access is restricted and monitored to ensure that information is retrieved only as

necessary. Specific mainframe applications are available to CRA employees and are based on

their job function.

9.2.9 Filing history


Income tax returns

Income tax returns that are filed using paper documents and forms are stored at the responsible

TC for several years. The charge-out menu on the RAPID mainframe indicates the documents

that are available. Use the Online Charge-out System to request documents from the TC.

The majority of T1 and T2 returns are electronically filed by taxpayers. In these cases, a paper

return is not available. However, all the relevant information is available on the mainframe or

through the WinALS download.Individuals and partnerships

Audits of individuals and partnerships must include a review of the spouse or common-law

partner's T1 and other related, associated, or affiliated persons, as appropriate.

Corporations

6

Published May 2015

Audits of corporations must include a review of the shareholders' income tax returns as well as

related, associated, or affiliated persons’ T1, T2, and T3 returns. Auditors may also review T4

slips issued by the taxpayer.

9.2.10 Sector Profiles

(Revised May 2014)

Chapter 40, Sector Profiles, provides information that applies to the industry or sector in general.

These profiles are an excellent source of information to establish the Audit Plan and to help

guide the auditor in aspects that require specific review for that industry.

The specific details that are available include:

• general overview;

• accounting practices;

• performance indicators;

• typical books and records; and

• specific audit checks.

9.2.11 Consultations with specialists


The CRA has specialists for many areas that are located in the TSO, the regional office, or

Headquarters (HQ). Auditors must research the application of a policy or of the law (technical

issue) relating to their files and discuss challenging issues with their team leaders. If the

application of a policy or law remains unclear, the team leader may request technical assistance

from HQ.

Examples of specialists or specialty sections include:

• Real Estate Appraisal and Business Equity Valuation (TSO);

• industry specialists for major industry sectors (TSO/HQ);

• International Tax (TSO);

• Electronic Data Support specialists (TSO);

• Scientific Research and Experimental Development (SR&ED) (TSO);

• Employer Compliance Audit (ECA) (TSO); and

• Aggressive Tax Planning (TSO).

9.2.12 Other sources of information

(Revised May 2014)

Real estate information

The real estate database provides the auditor with specific historical information on real property

transactions. The information includes values, dates, purchaser and vendor information, and

other data including type of property and type of transaction such as open market or non-arm’s

length. Current ownership and tenant information is also available through this database. For

more information, go to 10.11.4, Referrals for real estate appraisal or business equity valuation.

7

Published May 2015

Other regulatory bodies

Other regulatory bodies include provincial and municipal jurisdictions and professional

organizations. Depending on the nature of the audit, it may be necessary to search these sources

for additional information.

As an example, provincial vehicle registration may be searched to identify transactions that have

occurred between parties and to determine the current ownership of vehicles. Search by name,

plate number, and by vehicle identification number (VIN). This information is available for each

provincial jurisdiction.

Certain types of information owned by provincial and municipal jurisdictions may be useful in

conducting the audit. One example is the total of liquor purchases by the taxpayer from

provincially-owned liquor distributors. This information may be needed to complete a projection

of sales based on liquor purchases. To obtain these types of information, the auditor should

consult the team leader and also the TSO federal-provincial liaison before proceeding.

Intranet

Visit Small and Medium Enterprises Directorate to use the intranet for:

• reference material on CRA audit policy;

• best practices in conducting audit tests; and

• other more general information.

Internet

The Internet provides information for the auditor, including:

• information about the taxpayer's business activities;

• goods and services provided by the taxpayer; and

• third-party information regarding the taxpayer.

9.2.13 Knowledge of business

(Revised May 2014)

Auditors need to understand the way a business functions in order to conduct an effective audit

and to assess the taxpayer's compliance with the relevant acts. Chapter 40, Sector Profiles,

provides useful information that applies to the industry, including common types of records and

performance indicators.

Specific information is gathered during the audit, as each business is unique and may function

according to local requirements and customer base. During the audit, the auditor will obtain and

apply knowledge of the taxpayer's business activity. This knowledge will assist the auditor in

updating the Audit Plan and complete the audit effectively and efficiently.

Some knowledge of the taxpayer’s business is required to prepare questions for the initial

interview and to be able to understand the taxpayer's response to the questions. Auditors are not

permitted to use audio or video recorders to record interviews nor should they allow themselves

to be recorded. If an auditor becomes aware that they are being recorded, the interview should be

stopped, the reasons explained, and alternate arrangements made.

http://infozone/english/r6001000/audit/SMEDmain-e.html

8

Published May 2015

Information gathered during the audit will either verify the preliminary information obtained or

indicate that changes to the Audit Plan are necessary.

9.3.0 Ratio analysis and review of financial statements


Use ratios, such as gross profit and inventory turnover, to test information in the taxpayer's

financial statements, to determine the reasonableness of the amounts as stated, and to indicate

items that may require further verification. Compare ratios from year to year and also with ratios

of other taxpayers in the same industry.

Auditors should exercise caution when relying on any ratio analysis. When the ratio calculated

indicates a material variance from the norm or average for the taxpayer's type of business, further

testing may be warranted. However, a ratio is only a guide and any variance can have many

different explanations. Do not overlook the taxpayer's records and findings from the initial

interview and internal control review simply because a ratio analysis does not indicate a material

variance or immediate reason for concern. Ratios can return false results if the numerator and

denominator in the calculation have both been materially understated.

Ratios can provide measures of average performance and can serve as a basis for identifying

unusual financial relationships or issues that should be verified. Using projections can test the

taxpayer's reported revenues, gross profit, or net income.

However, projections based on industry ratios cannot be used as a basis for assessment. Only a

projection based on taxpayer-specific data (for example, units purchased versus units sold) may

be used as a basis to assess additional revenue under limited circumstances or to deny, based on

reasonableness, the purchases expensed.

The CRA's Computer-assisted Audit Selection (CAAS) System is built on models of industry

ratio analysis. This is often reflected in the identified audit issues in the summary printouts

provided.

Industry-based ratios are in copies of Dun and Bradstreet publications in the CRA libraries; get

more information from the sector profiles in Chapter 40.

9.4.0 Analytical review

(Revised November 2014)

9.4.1 Introduction


An analytical review of financial statements and returns as filed is often completed during the

preliminary review. To view financial statement information for prior years, access the T2

CORTAX menu in the Common Menu System when financial statements are not available until

visiting the taxpayer. The returns can be used to prepare a preliminary analysis. The CAAS

profile provides a multi-year comparison of financial data and is useful for analysis.

Perform an analytical review to help determine potential issues. Note unusual variances and

address them during the interview with the taxpayer; develop additional audit procedures if

necessary.

9.4.2 Review of returns as filed and ratio analysis

(Revised November 2014)

9

Published May 2015

Analytical review includes a detailed review of returns as filed, such as:

• an analysis of cost of goods sold;

• a comparison of gross profit to similar businesses; and

• a comparison of expenses and product mix from one year to the next.

For more information, go to 9.2.0, Preliminary review.

For an example of common ratio analysis (liquidity, debt to equity, coverage, and profit) of

financial statements, go to 13.1.8, Examples of computer-assisted audit techniques.

9.4.3 Reconciling the returns to the books and records


When conducting a factual audit, this mandatory reconciliation will include verifying that the

balances in the taxpayer’s general ledger and trial balance match the amounts reported in the

income tax returns. Any variances must be queried and resolved. Reconciliation of individual

balance sheet items may be conducted as necessary.

9.4.4 Changes in taxpayer’s accounting policies

(Revised May 2014)

Changes in the taxpayer's accounting policies are important aspects of the audit process to ensure

compliance. Changes in accounting policies that are made arbitrarily affect the degree of

assurance that may be placed on the financial statements. For a meaningful comparison of

figures from year to year, it is necessary that the figures be compiled on a consistent basis. If a

change in accounting policy is the result of changes in operations, the comparative figures may

not provide information that is useful for audit purposes.

If changes made to accounting policies appear arbitrary and affect the reporting of certain items,

the motivation of the taxpayer may be to limit the usefulness of comparative analysis. For

example, the taxpayer may have a significant increase in a certain expense and would prefer not

to have the item questioned. As a result, segregating certain costs to form two expense accounts

may alter the presentation of the expense account.

If a significant change is noted in the compilation of the financial statements, discuss with the

team leader. A significant change in accounting policy includes:

• change from accrual to cash accounting (or cash to accrual);

• change in the method of valuing inventory, including finished goods and work in

progress;

• the timing of recognition of profits of long-term contracts; or

• other changes that can have a significant effect on the determination of income.

Changes in the method of valuing finished goods and/or work in progress inventories are

frequent in the manufacturing industry. Thoroughly review these policy changes during the audit

to determine the tax effect.

While the results of the comparative analysis of the financial statements can be useful

information, other audit steps, tests, and procedures are required to determine the degree of the

10

Published May 2015

taxpayer's compliance. Interpret the ratios calculated and variances noted when comparing

amounts to determine their effect on the audit.

9.4.5 Gross profit ratio


A specific item to compare from year-to-year is the gross profit ratio, calculated as:

Gross income or gross sales – Cost of goods sold = Gross profit ratio

Gross income or gross sales

Compare the gross profit of individual items or product lines to the average gross profit ratio, as

well as to the average ratio for the industry. Compare the calculated ratio to the ratio as stated by

the taxpayer during the initial interview. A significant variance in the ratio may indicate

overstated cost of goods sold or understated sales.

Example 1 – Gross profit ratio

In this example, the auditor suspects that the gross profit may be understated.

Assume reported sales are correct.

Reported sales $320,000

Less: Cost of goods sold as reported 212,800

Gross profit $107,200

Gross profit as % of sales 33.5%

Gross profit industry ratio 43.5%

Projected gross profit ($320,000 x 43.5%) $139,200

Less: Reported gross profit 107,200

Estimated cost of goods sold overstated $32,000

Example 2 – Gross profit ratio

In Example 1, the sales figure was assumed to be correct. However, in this example assume

instead that the cost of goods sold figure is accurate. If sales were not verified, the potential

unreported sales could be as high as $56,600, as in the analysis below.

Reported cost of goods sold $212,800

Divide by (1 less the gross profit industry ratio

given in Example 1 above)

56.5%

Estimated sales $376,600

Less: Reported sales 320,000

11

Published May 2015

Estimated unreported sales $56,600

If the gross profit ratio analysis determines a discrepancy, a review of the taxpayer’s sales

invoices or other observations may determine the selling prices. From the purchase invoices and

freight bills, the auditor can determine the costs incurred. If the auditor does this for a

representative sample, the overall gross profit ratio can be roughly determined and the estimated

discrepancy revised.

The auditor should be aware that if both sales and cost of goods sold are misrepresented, the

gross profit ratio analysis provides a false projection. For more information, go to 9.16.0,

Continued risk assessment while the audit is in process.

9.4.6 Inventory turnover


A taxpayer's inventory turnover is determined as annual cost of goods sold divided by average

inventory.

Inventory turnover = Cost of goods sold

((Beginning inventory + Ending inventory) / 2)

Use an analysis of inventory turnover to calculate revised estimates of sales and purchases, based

on figures for reported inventory.

Example 1 – Inventory turnover

In this example, the auditor suspects that the sales may be understated.

Assume reported average inventory and cost of goods sold are accurate.

Taxpayer's reported average inventory $45,000

Taxpayer's reported gross profit margin 40.0%

Industry average inventory turnover (times per year) 3.0

Inventory turnover (in days) 121.6 days

Estimated cost of goods sold (3.0 x $45,000) $135,000

Add: Taxpayer's reported gross profit margin (40%) 90,000

Estimated sales $225,000

Less: Sales reported 193,000

Estimated unreported sales $32,000


In this example, the auditor suspects that the purchases may be overstated.

Assume reported ending inventory is accurate.

Taxpayer's reported average inventory $45,000

12

Published May 2015

Industry average inventory turnover (times per year) 3.0

Inventory turnover (in days) 121.6 days

Estimated cost of goods sold (3.0 x $45,000) $135,000

Less: Cost of goods sold reported 155,000

Estimated overstated cost of goods sold $20,000

Alternatively, if the taxpayer's reported purchases or sales are determined to be accurate, use an

analysis of inventory turnover to calculate revised estimates of ending inventory.


In this example, the auditor suspects that the ending inventory may be understated. The revised

estimate of ending inventory will be based on recorded purchases.

Taxpayer's reported ending inventory $62,000


Industry average inventory turnover (times per year) 3.0 121.6 days

Using inventory turnover, the taxpayer's ending inventory can be estimated by totalling

the purchases for the last 122 days (approximately 4 months) of the period.

September purchases $23,220 30 days

October purchases 22,710 31 days

November purchases 17,490 30 days

December purchases 15,580 31 days

Estimated ending inventory $79,000 122 days

Less: Reported ending inventory 62,000

Estimated understated ending inventory $17,000


In this example, the auditor suspects that the ending inventory may be understated. The revised

estimate of ending inventory will be based on recorded sales and the taxpayer's gross profit ratio.

Taxpayer's reported ending inventory $62,000


Industry average for inventory turnover 3.0 121.6 days

13

Published May 2015

Using inventory turnover, the auditor can estimate the taxpayer's ending inventory by

totalling sales for the first 122 days (approximately 4 months) of the subsequent period.

January sales $28,610 31 days

February sales 29,780 28 days

March sales 29,900 30 days

April sales 38,640 30 days

Total $126,930 119 days

Less: Gross profit (40% x $126,930) 50,772

Estimated ending inventory $76,158

Less: Reported ending inventory 62,000

Estimated understated ending inventory $14,158

If the analysis of inventory turnover determines a discrepancy, the auditor can verify the

taxpayer's inventory control procedures and year-end physical count. If no year-end physical

count of inventory was taken, the auditor may request that one be undertaken as part of the audit.

If the analysis concludes that the taxpayer's sales or gross profit may be understated, the auditor

should consider applying gross profit ratio analysis or in-depth direct testing of sales and cost of

goods sold.

If both ending inventory and cost of goods sold are misrepresented, the inventory turnover

analysis will provide a false projection.

9.4.7 For future use

9.4.8 Comparative analysis of financial statements


Comparing current and prior years' line items in the taxpayer’s financial statements can highlight

unreasonable or questionable balances. For example:

• Does the trend of sales appear reasonable?

• Are there unusual changes in any assets or liabilities?

• Have asset and liability ratios remained constant or are there material changes?

• Have any expenses increased materially?

• Does any amount seem out of proportion when compared with other amounts for the

current year or with the corresponding item for other years (for example, sales to

advertising expenses)?

If there are significant items or changes, prepare a working paper listing items to review during

the audit and update the Audit Plan.

14

Published May 2015

Note: The CAAS profile provides an analysis of multi-year data and greatly facilitates this

aspect of audit planning.

In addition to comparing items from year-to-year, review the balance sheet to:

• ensure continuity of the capital cost allowance (CCA) schedule

• verify that the closing asset and liability account balances are equal to the opening

balances reported in the subsequent year (such as accounts receivable, inventory,

accounts payable, and surplus)

• review credits made directly to accounts that form part of the business equity

• determine if there are credits that the taxpayer has classified as capital receipts that may

actually be income

• review all reserves to ensure that no unauthorized reserves are being created and that

reserves claimed in a prior year are included in income in the subsequent year

Complete information is required to determine the continuity of balance sheet accounts. If the

information is incomplete, the situation should be discussed with the team leader to determine

appropriate action.

Discuss unusual items in a return outside the standard audit period with the team leader to

determine if the audit period should be extended to include those returns. For more information,

go to 9.12.3, The common audit period (one-plus-one).

Use the CCA schedule to ensure that acquisitions and dispositions of capital assets are correctly

recorded.

9.5.0 Unfiled returns


9.5.1 Introduction


Subsection 152(7) of the Income Tax Act (ITA) provides the minister with the authority to issue

an assessment regardless of the amounts already filed in a return or where no return has been

filed. This action is taken in certain situations if returns have not been filed voluntarily.

Assessments made under subsection 152(7) of the ITA are referred to as arbitrary assessments

and must be realistic and based on factual amounts. This term is for internal use only and for

notations on the mainframe systems. Subsection 152(7) assessments are raised by the Non-

filer/Non-registrant (NF/NR) Section of the Employer Services Unit in the TC, the NF/NR

Section, or the Delinquent Filer and Special Initiatives Section of Taxpayer Services and Debt

Management in the TSO.

Income tax audits are usually conducted on returns that have already been filed and assessed.

However, the auditor may encounter a taxpayer who has outstanding income tax returns outside

the assigned audit period.

If the taxpayer has an outstanding return, the auditor should contact the NF/NR Section in the

TSO to discuss the taxpayer's situation.

In certain circumstances, the NF/NR Section may find that the auditor is better suited to handle

the file, as the auditor has already established contact with the taxpayer during the audit. In such

15

Published May 2015

a case, the auditor should discuss the taxpayer's filing requirements with the team leader and if

necessary, with the taxpayer. If the taxpayer does not file the outstanding returns voluntarily,

then the auditor must refer the file to the NF/NR Section for their action.

The NF/NR Section will issue a demand for a return under subsection 150(2) of the ITA, a

requirement notice under paragraph 231.2(1)(a) of the ITA, or prepare an assessment under

subsection 152(7) of the ITA.

For more information, go to 11.5.3, Assessments under subsection 152(7) of the Income Tax Act.

In rare circumstances, an auditor may receive unfiled returns from the taxpayer. The auditor may

receive these returns as a result of audit effort. The auditor needs to ensure that these returns are

processed as soon as possible by the TC. This is necessary so that the auditor can obtain a

download from WinALS and enter the appropriate AIMS codes to recognize audit effort prior to

uploading. An AIMS file can only be closed through a WinALS upload; it is no longer possible

to close an AIMS file manually.


9.5.3 Pro-forma income tax returns

(Revised July 2013)

If the taxpayer has not voluntarily filed income tax returns, the minister can assess by preparing

pro-forma returns, also known as subsection 152(7) assessments or arbitrary assessments. For

more information, go to 11.5.3, Assessments under subsection 152(7) of the Income Tax Act.

9.6.0 Audit Plan


9.6.1 Preparing the Audit Plan

(Revised July 2013)

Prepare the Audit Plan after completing the preliminary review, as the Audit Plan is based on the

reason for the audit. Identify potential items of concern noted during the preliminary review and

the audit procedures that will address the concerns identified. For more information, go to 9.2.0,

Preliminary review.

Include workload referral procedures in the Audit Plan. For more information, go to 9.13.3,

Workload referral process. In certain situations, an auditor will receive a file from Workload

Development that has been classified as a consequential adjustment (CA). A CA is a non-

complex adjustment originating in a referral from GST/HST. An auditor can identify a CA by

noting that the audit action (“AUDIT ACT”) code = 03 and the work section source (“WORK

SOURCE”) = 210. In addition, Workload Development will have entered a notation in the

“SCREENER’S COMMENTS” that this is a CA.

Auditors who have received a CA must issue a proposal letter to the taxpayer using the

information from the GST/HST audit as the basis. Auditors are expected to spend 10 hours or

less in completing a CA. A specific Audit Report has been designed for CAs only.

If an auditor determines that the CA should be a full-scope audit, the auditor must discuss this

with the team leader. If the team leader agrees that a CA should be a full-scope audit, then

Workload Development will update the AIMS audit action code to 01. In this case, the auditor

must follow regular audit procedures.

16

Published May 2015

For more information, go to Appendix A-9.2.7, Sample Audit Plan.

9.6.2 Factors to consider and procedures to include in the Audit Plan


A well-prepared Audit Plan is essential for an effective and efficient audit. The Audit Plan must

address:

• reviewing the taxpayer file to:

• determine the type and extent of audit techniques to use to clear the screener's

comments;

• understand the type and size of operation;

• determine if there are any related and/or associated taxpayers;

• determine the type of accounting system in place;

• determine the extent of internal controls in place;

• note prior difficulties encountered in dealings with the taxpayer;

• determine the issues from a previous audit;

• note any outstanding issues from prior audit;

• determine the contact person;

• review industry specific data to determine potential audit issues unique to that

industry;

• determine the need for specialists (for example, real estate appraiser, Electronic Data

Support specialist, and Non-Resident or International auditor);

• include flexibility to address issues that arise during the audit;

• complete a comparison of the CAAS profile and the business profile (at the end of the

audit, variances should be adequately explained); and

• consider using assessing Indirect Verification of Income (IVI) techniques and the

Income Tax Assessing IVI Decision Tree.

• meeting with the team leader to discuss:

• expected length of audit;

• issues to be addressed;

• need for specialists; and

• technical or policy issues that need to be referred to Headquarters.

• contacting the taxpayer to:

• request financial statements;

• confirm type of accounting records;

• set date and time to start audit;

• ensure that space is available;

17

Published May 2015

• determine availability of employees to answer questions;

• schedule tour of premises; and

• request chart of accounts.

The Audit Plan is a mandatory document necessary to an effective and efficient audit. It is a

document that is continually updated for evolving audit issues, determination of the level of

internal controls, and the adequacy of books and records.

The audit programs within WinALS are useful references during the planning and auditing

stages.

Although template Audit Plans are useful guides, auditors must read each line and note when an

audit step is or is not necessary. If an auditor enters N/A (not applicable) beside a pre-printed

audit step, the auditor must include a sentence explaining why the step was not performed.

Auditors are encouraged to use template Audit Plans as guides only, and create additional,

relevant audit steps as necessary.

9.6.3 Team leader involvement in the Audit Plan

(Revised July 2014)

The team leader approval of the Audit Plan is required prior to meeting the taxpayer. If the team

leader sends a detailed email to the auditor approving the Audit Plan, a copy of that email,

imported into WinALS, is accepted as approval. Team leader approval is necessary at various

stages of the audit; note this approval on Form T2020, Memo for file.

The team leader must be actively involved in the planning phase of the audit, especially if the

auditor is inexperienced or unfamiliar with the type of business. The team leader must ensure

that the audit approach takes into consideration the nature of the business, the type of audit to be

conducted, and the income of the relevant individuals.

In T1 audits, relevant individuals include, at a minimum, the proprietor and the spouse or

common-law partner of the proprietor. Other relevant individuals may be included as the audit

progresses. In T2 audits, relevant individuals include all shareholders and their spouses or

common-law partners. If there is a series of holding corporations, the auditor must look to the

individuals that control the corporations and their spouses or common-law partners. Other

relevant individuals may be added as the audit progresses.

Significant changes to the Audit Plan must be discussed and approved by the team leader. For

example, during the audit, the auditor may determine that a net worth is required; in this case,

consult the team leader as soon as possible.

9.6.4 Time budget


The Audit Plan should include a preliminary time budget based on the information available. The

taxpayer will likely need an estimate of how long the audit will take to ensure space is available

for the auditor to work and employees are available to assist the auditor, if necessary.

The time budget may require adjusting as additional information becomes available and as the

audit progresses. Keep the team leader and the taxpayer informed of material changes in the

estimated time needed to complete the audit.

18

Published May 2015

9.7.0 Audit tools


9.7.1 Audit Laptop System

(Revised May 2014)

Introduction

The Windows Audit Laptop System (WinALS) is an integrated computer-based audit program

that allows for:

• automatic download of taxpayer information;

• electronically organized Audit Plans and procedures;

• search of various information databases and use of other computer applications;

• completion of working papers in electronic format;

• electronic storage of audit files; and

• automatic upload of audit results to the CRA mainframe computer system.

The case must be assigned to the auditor in AIMS before the auditor initiates the download of the

audit file to WinALS. The use of WinALS to complete audits in programs 17 and 18 is

mandatory.


9.7.3 WinALS templates


Audit applications

WinALS contains audit applications such as procedures, working papers, and forms used to

determine:

• vehicle benefits;

• net worth;

• leads (Forms T133, Lead or Project Information, and T134, Referral to the Criminal

Investigations Division) (referrals to the Criminal Investigations Division are under

review);

• capital cost allowance; and

• shareholder benefits.

The Audit Report

Form T20, Audit Report, provides all the information necessary for someone not familiar with

the specifics of the audit to become fully informed about the audit, including the findings,

conclusion, recommendations, significant issues, errors and omissions, and recommended follow

up. For more information, go to 11.6.1, Form T20, Audit Report.

Reassessment documents

Go to Appendix 11.2.0, Nationally used forms and instructions.

19

Published May 2015

Workload referral templates

The workload referral templates (WRT) are required for all audits, except for those excluded in

9.13.3 (b), to provide the other taxes with business intelligence that will enhance their risk

assessment. To access the WRTs and for more information, go to 9.13.0, Workload referral

procedures for GST/HST and Small and Medium Enterprises.

The audit table of contents

As the audit progresses, WinALS automatically updates the audit table of contents (ATOC),

stores the data in selected electronic forms, working papers, and other documents, and keeps

track of proposed audit adjustments. The ATOC is an organized listing of programs, procedures,

and working papers.

Working papers created outside of the WinALS environment can be imported to the ATOC. The

ATOC can be customized or tailored to the auditor's working style and may be saved in a library

for use in future audits or for sharing with other auditors.

Templates

Forms, letters to the taxpayer, audit programs and procedures, working papers, applications and

reports, are located in the WinALS template library. Templates may be added, customized,

renamed, and removed from the ATOC. However, it is important that the templates for

requirements and compliance orders not be changed, for legal reasons. Once a template is added

to the ATOC and initialized, the template becomes a working paper.

Use the templates to automate and simplify many audit tasks. For letters and other reports, TSO

information and taxpayer information is automatically inserted, reducing the amount of keying

required and the potential for error.

Data change record

The data change record (DCR) is an application that records in a database the individual changes

made by an auditor in conducting an audit. Use this database to create all the forms required to

complete an audit.

Completing the audit

WinALS includes templates and forms required to process the completed audit, such as:

• Form T20, Audit Report;

• reassessment forms: Form T99, T1 and T3 Tax Calculation Information, and Form T99A,

T2 Tax Calculation Information;

• Form T7W-C, Explanation of Changes on Reassessment;

• AIMS audit results upload document (AARUD) and the Computerized Coding System

(CCS); and

• workload referral templates (WRT).

Archiving the audit file

After the team leader has approved the audit, the completed file is automatically archived in the

National Audit Archives (NAA). Auditors are able to retrieve completed audits from the NAA.

Access to the NAA is available from within WinALS when connected to the network.

20

Published May 2015

9.8.0 Working papers

(Revised July 2014)

9.8.1 Purpose and content of audit working papers

(Revised July 2014)

Working papers are essential to any audit, as they provide a record of the extent of the audit

work carried out, findings, calculations, application of legislation, rationale, and the final

adjustments. The working papers must not contain personal opinions or comments about the

taxpayer.

Copying of taxpayer's records or restructuring of financial statements should be documented in

the audit file. Use working papers to document the audit techniques and procedures followed

during the audit. Working papers:

• support items and issues that had to be verified but did not require any adjustments;

• describe problems encountered during the audit;

• provide audit evidence in support of avoidance, evasion, or suspected fraud;

• provide information about items that require follow up in a subsequent audit;

• provide audit evidence that material items of risk have been addressed;

• support conclusions and recommendations;

• provide a summary of communication with the taxpayer; and

• provide details of all meetings and discussion with the taxpayer, including who attended,

issues discussed, and agreements reached.

Audit procedures performed and any adjustments proposed detailed in the working papers must

provide sufficient information to ensure that subsequent users of the working papers come to the

same understanding and conclusion as the auditor who prepared them. All working papers must

be clear, concise, logical, and comprehensive.

The working papers should summarize the results of each audit procedure. For example, if the

audit procedure calls for an examination of a sample of sales invoices and no adjustment is

required, the working paper conclusion should state that no adjustment is necessary and the

reason. Copies of invoices tested are not required except when necessary to support an audit

adjustment.

Documentation on file must indicate that the auditor was reasonable in dealing with the taxpayer.

Working papers document:

• Was the taxpayer given the opportunity to provide additional information?

• If the circumstances warrant, was the taxpayer given additional time to provide

information?

• Were the proactive taxpayer relief provisions considered and applied if the circumstances

warranted (for example, waiving of interest for a specific period of time because of undue

delays in completing the audit)?

• Do letters and other documentation indicate that dealings were conducted courteously?

21

Published May 2015

• Is correspondence in the official language of choice of the taxpayer?

Meetings, including the initial and final interviews, held with taxpayers or their representatives,

must be documented. Disclose delays in scheduling meetings.

Documentation must relate only to the taxpayer under audit and not to other taxpayers.

Do not make markings of any kind, such as highlighting, underlining, or check marks, on any

original documents submitted by the taxpayer, including correspondence, financial statements,

CCA and other schedules.

Working papers – WinALS and NAA

It is mandatory to complete audits in programs 17 and 18 in a paperless format.

For more information, go to memorandum, Mandatory use of WinALS and use of scanners -

Small and Medium Audits and GST/HST Pre-Assessment Examinations, dated May 9, 2012.

To facilitate a paperless audit, certain documentation must be scanned and included in the

WinALS audit file.

For more information, go to memorandum, Documentation Requirements for Electronic Audits –

Small and Medium Business Income Tax Audits, dated November 19, 2012.

A WinALS file has a maximum size limit of 50 MB. If this size is exceeded, the file will not

upload. If the WinALS file will not upload, the auditor should:

• Delete any scanned document not used to support an audit adjustment.

• Ensure that the lowest possible resolution has been used when scanning documents, as

long as such a resolution does not result in a scan that is unreadable for audit evidence

purposes.

• Contact the WinALS coordinator in the TSO, if the previous two steps still do not reduce

the size below 50 MB. The WinALS coordinator in the TSO may contact the national

WinALS Helpdesk to resolve the size restriction.

The completion of audits outside of WinALS in programs 17 and 18 is only applicable to files

with Return Type = 3 or 5 (trusts or deceased taxpayers). Since it is no longer possible to

manually close AIMS, other than for Return Types 3 or 5, all audits in programs 17 or 18 must

be completed through WinALS.

The team leader must review the file online using WinALS. Once approved, the team leader

uploads the audit case. The audit file is then archived using NAA and stored on a centrally

located national archive. Completed audits can be retrieved from the NAA from within WinALS

while connected to the network.

The archived version can be retrieved as required, to prepare for a subsequent audit, access to

information requests, or follow-up action by, for example, Taxpayer Services and Debt

Management, Appeals, Criminal Investigations, and Aggressive Tax Planning.

The NAA files are usually stored for a period of six years; TSO management may extend this

period if warranted.

The only paper documents resulting from an audit will be:

• correspondence to be sent to external parties after approval by the team leader; and

http://infozone/english/r6001000/audit/memo/winals_mandatoryuseofscanners-e.html

http://infozone/english/r6001000/audit/memo/winals_mandatoryuseofscanners-e.html

http://infozone/english/r6001000/audit/memo/docreqelectaudits-e.html

http://infozone/english/r6001000/audit/memo/docreqelectaudits-e.html

22

Published May 2015

• Forms T99, T99A, T7W-C, and any other schedules necessary for reassessment by the

online RAP clerk or by the TC.

Permanent document folder – Under review

(Revised May 2014)

Although the audit file is completed electronically, certain documents must be printed and

stored in the permanent document (PD) folder. These documents include:

• internal reports, for example, Form T20, Audit Report, Penalty Recommendation Report,

and Income Tax Internal Taxpayer Relief Recommendation Form;

• special elections, agreements, and returns;

• prescribed forms and legal documents; and

• net worth statements and schedules (not the working papers).

For more information, go to Appendix A-11.2.16, Permanent document folder and retention

period.

9.8.2 Working paper specifications

(Revised May 2014)

Working paper consistency and standardization

WinALS contains many pre-defined working papers and letters to be used by the auditor in

carrying out an audit. WinALS also allows the auditor to create custom working papers and

letters. While templates may be customized, it is important that the requirement templates not be

changed, for legal reasons.

While WinALS provides for some standardization of audit working papers, there are no

standard working papers to which auditors must conform. Auditors have the flexibility to tailor

the working papers to meet the needs of the situation. The working papers must be clear and

meaningful to the auditor and understood by others. Auditors should prepare a working paper,

keeping in mind that such a document could be read by an individual who has no knowledge of

the file or even of details involved in a tax audit.

Working paper templates

Delete from the WinALS audit table of contents (ATOC), working paper templates and

individual audit steps that will not be used in a particular audit. The working papers and audit

steps include a brief description of the reason for the procedure and why the procedure was not

necessary or applicable. Checking the boxes, “Yes,” “No,” or “N/A," does not provide sufficient

information. A brief summary of the results or findings of the procedure or step can also be

useful.

Format of working papers

Prepare audit working papers and schedules if possible, in a consistent format. This assists the

team leader and others in their understanding of the contents and conclusions reached by the

auditor. Include in each working paper:

• a header with the taxpayer's name, audit period, date prepared, auditor's name, and the

subject (WinALS produces a header for each working paper, reducing the amount of

information that the auditor needs to enter);

23

Published May 2015

• the source of the information;

• the objective and description of any audit procedures carried out;

• a summary of the findings of the specific procedure, test, or other audit step;

• the conclusion reached by the auditor; and

• legislation, policies, and directives used for reference.

Attach and cross-reference as required, any calculations, schedules, and documentary audit

evidence in support of the conclusions reached. Narrative comments should have sufficient detail

to explain to the reader what was done and why; a simple comment such as “cleared – no

problem” is insufficient.

Indexing and numbering of working papers

Index, number, format, and arrange working papers according to the WinALS Working Paper

Index.

Cross-referencing of working papers

Clearly and completely cross-reference working papers to make it as easy as possible for another

person to follow the audit trail and findings that lead to the conclusions that have been drawn.

For example, electronic working paper cross-references can be shown as “to/from WP3100-2.”

In the case of a paper copy working paper produced manually, if information is carried forward:

• to another working paper, place the cross-reference below or to the right of the amount

carried forward; and

• from another working paper, place the cross-reference above or to the left of the amount

carried forward.

9.8.3 Working paper documentation

(Revised May 2014)

The working papers document the audit from beginning to end. Of particular importance are:

• the Audit Plan;

• changes made to the initial Audit Plan as a result of issues encountered during the audit;

• Form T2020, Memo for file, which must include discussions with the team leader, and

any decisions and conclusions reached relating to the taxpayer’s reassessment; a reviewer

uses Form T2020 to confirm that the team leader has approved decisions;

• the condition of the books and records recorded on Form T20, Audit Report;

• the extent of taxpayer co-operation recorded on Form T20, Audit Report;

• consultations with and referrals to specialists, formal or informal; this might include a

request for assistance in interpreting legislation, a request for a valuation, or a request to

the Non-Filer or International areas;

• the determination of risk and materiality recorded in the Audit Plan;

24

Published May 2015

• the consideration and application of penalties, due diligence, and the taxpayer relief

provisions recorded on Form T2020, Memo for file, Form T20, Audit Report, or the

Penalty Recommendation Report, as appropriate; if the auditor considered applying

penalties, working papers must:

• disclose the information reviewed in making the decision to apply penalties or

not;

• reference the approved Penalty Recommendation Report if a penalty is proposed;

• clearly explain, if a penalty was not proposed - a Penalty Recommendation Report

does not need to be prepared; however, the auditor must include sufficient details

from the facts of the case to support the reasons for not applying a penalty;

• document discussions with the team leader and others on Form T2020, Memo for

file; and

• reference any internal correspondence.

For more information, go to 11.6.0, Auditor’s reports.

• documenting workload referrals of the other taxes. For more information, go to 9.13.0,

Workload referral procedures for GST/HST and Small and Medium Enterprises; and

• the research of technical issues and reassessments; amounts reassessed must be supported

and fully documented in the working papers - include in the audit file, all sources of

information and technical references used to support the auditor's position, including

relevant court cases, CRA policies, income tax folios, income tax interpretation bulletins,

income tax information circulars, and references to the Income Tax Audit Manual.

Documentation of the audit's progress

Form T2020, Memo for file, must be used to:

• record the significant events that occurred during the audit;

• note discussions with the team leader and approvals of decisions by team leader;

• indicate whether there were undue delays in completing the audit;

• document the results of any meetings, telephone calls, or interviews with the taxpayer or

representative; and

• confirm if the audit was completed within an acceptable time, considering the complexity

and scope of the audit.

Significant events include initial contact, meetings, interviews, telephone conversations, proposal

letters, representations, and extensions. If another working paper documents a significant event,

for example, the initial interview or a proposal letter, it is sufficient to note the date of the event

on Form T2020 and reference to the corresponding working paper. The purpose is not to

duplicate the content of working papers, but to provide a comprehensive timeline of the

significant events in addition to items that are not noted elsewhere in the audit (for example,

conversations with team leaders, representatives, or the taxpayer).

25

Published May 2015

By documenting the time spent during the audit, the auditor can readily account for the total

audit time. Documentation supports any significant time variances, as they may affect taxpayer

relief considerations and help explain delays in completing the audit.

Form T2020 contained in the downloaded WinALS file must be used as a record of events and

conversations.

9.8.4 Working papers as “government information holdings” - Under review

(Revised May 2014)

Government information holdings are defined by Treasury Board of Canada Secretariat (TBS)

to include “all information under the control of a government institution, regardless of physical

mode or medium in which such information may be stored. Without restricting the generality of

the foregoing, this may include correspondence, memoranda, books, plans, maps, drawings,

diagrams, pictorial or graphic works, photographs, films, microfilm, sound recordings,

videotapes, machine readable records, published material and any other documentary material.

Excluded from the definition are materials held by federal libraries that were not prepared or

produced by or for the government.”

These information holdings, that by definition include all audit working papers and reports in

paper or electronic format, are subject to the federal government's information management

policies developed by TBS. For more information, visit the TBS Policy on information

management, at www.tbs-sct.gc.ca/pubs_pol/ciopubs/TB_GIH/mgih-grdg_e.asp.

From an audit perspective, information holdings include:

• working papers prepared to test or analyze any account or document whether or not they

contain any changes to a taxpayer's tax position; and

• any working paper, schedule, report, memo, or other document used to initiate or

continue a CRA activity, provide comments on an activity in process that requires

administrative action, or request an opinion on an activity of interest to the CRA.

The CRA manages all its information holdings according to related federal legislation such as the

Access to Information Act, Privacy Act, National Archives of Canada Act, and Copyright Act and

program legislation such as the Income Tax Act and the Excise Tax Act, including any related

legislation of a provincial or territorial government. This includes any instrument made under

these acts or any part of such instrument. For more information, visit Canada Revenue Agency

Public Affairs and Communications Policy and CRA’s Information Management Policy.

Authority for managing information is included in several federal acts and legislation. The

relevant provisions of the legislation that relate to the management of information, and by which

the CRA is bound, are provided in the Finance and Administration Manual, Security Volume.

Access and privacy

The Access to Information Act gives Canadian citizens, as well as persons present in Canada, the

right to have access to information in federal government records. The Act ensures that a

taxpayer can ask for information and if it is not exempt or excluded, is entitled to see it or to be

provided with a copy. For more information, visit Access to Information Act, at http://laws-

lois.justice.gc.ca/eng/acts/A-1/.

http://www.tbs-sct.gc.ca/pubs_pol/ciopubs/TB_GIH/mgih-grdg_e.asp

http://infozone/english/r1713497/pa/governance/policy_pab_communications-e.html

http://infozone/english/r1713497/pa/governance/policy_pab_communications-e.html

http://infozone/english/r9999999/IMRC/tlr/plc-e.html

http://infozone/english/r2822200/fab-dgfa/fam-mfa/siad-dsai/index-e.asp

http://laws-lois.justice.gc.ca/eng/acts/A-1/

http://laws-lois.justice.gc.ca/eng/acts/A-1/

26

Published May 2015

The Privacy Act also gives Canadian citizens and persons present in Canada the right to have

access to information related to them that is held by the federal government and protects against

unauthorized disclosure of personal information. In addition, it strictly controls how the

government will collect, use, store, disclose, and dispose of any personal information. For more

information, visit Privacy Act, at http://laws-lois.justice.gc.ca/eng/acts/P-21/index.html.

TBS policies on access and privacy reinforce information management principles inherent in the

Management of Government Information Holdings Policy and the Security Policy. The policies

support the objectives of duty to inform, routine disclosure, and service to the public, which

are fundamental concepts within the Communications Policy.

Deputy ministers and heads of agencies are responsible to ensure that their organizations comply

with the Access to Information Act and Privacy Act. In addition, the minister of the treasury

board coordinates administration of the Acts by preparing and distributing policies and

guidelines to help institutions interpret the laws and to assist them in their application on high

profile issues. For more information, visit TBS Access to Information and Privacy, at www.tbs-

sct.gc.ca/atip-aiprp/index-eng.asp and 3.0, Taxpayer rights and taxpayer relief.

9.8.5 Transitory records and section 67.1 of the Access to Information Act - Under review

Government records (including draft records) must be retained under the authority of the Access

to Information Act. Section 67.1, adopted in 1998, creates an offence for destroying records to

obstruct the right of access under the Act. This provision usually should not be a concern to the

auditor respecting the regular working papers that are found on the audit file. However, the

interaction of section 67.1 and the disposal of transitory records raise a particular dilemma for

income tax auditors and for public servants in general.

The term transitory record is used in Canada to deal with records of a temporary nature of

short-term value found in both administrative and operational records created by a government

institution.

An interdepartmental access to information review task force was established by the federal

government on August 21, 2000, with a mandate to review all components of the access to

information framework, including the Act, Regulations, policies and procedures. A final report

analyzing the administrative and legislative aspects of access to information and providing

recommendations for improvement was released on June 12, 2002.

For more information, visit TBS Archived – Access to Information Guidelines – Requests, at

www.tbs-sct.gc.ca/pubs_pol/gospubs/tbm_121/chap2_4_e.html.

9.9.0 CRA mainframe as a source of information

(Revised May 2014)

9.9.1 Introduction

(Revised May 2014)

The CRA mainframe information systems are tools used to process taxpayer returns, as well as to

retain a filing history and other relevant information. Historical information is used to determine,

for example, industry trends, establish ratios, and assess audit risk. This information is also used

to select audits.

The CRA mainframe information systems can be used to provide information that may not be

available in the download when the case is assigned or the audit is in progress.

http://laws-lois.justice.gc.ca/eng/acts/P-21/index.html

http://www.tbs-sct.gc.ca/atip-aiprp/index-eng.asp

http://www.tbs-sct.gc.ca/atip-aiprp/index-eng.asp

http://www.tbs-sct.gc.ca/pubs_pol/gospubs/tbm_121/chap2_4_e.html

27

Published May 2015

Auditors have access to many databases, including RAPID (T1 and T2 income tax information),

the Common Menu System, and the Automated Collections and Source Deductions Enforcement

System (ACSES). These systems can provide details relating to an audit in progress that are not

available on the audit diskette.

9.9.2 The income tax mainframe

(Revised May 2014)

The main menu includes separate menus for T1 and T2 filers. Screens provide useful information

to:

• indicate an audit or other work in process on a related account - use the T1 or T2

charge-out menu;

• review the income and deductions of all related accounts;

• review the identification information screen;

• review the summary T1 data for the most recent eight years;

• determine if the taxpayer has a representative - use option M (Taxpayer Representative

Identification System (TRIS));

• search for other taxpayer deposits – view T5 information slips filed by financial

institutions ; and

• verify if employment income is reported – view T4 information slips filed by employers.

9.9.3 Income tax database (RAPID)


RAPID provides immediate access to up-to-date taxpayer and employer information for

authorized users in the TSO, TCs, and other operating areas of the CRA.

The data available through RAPID comes from many sources, including: PAYDAC, CINDAC,

CORPAC, ASSESSING, TAPMA, IPS, and ON_LINE CHARGE-OUT.

Access to RAPID information is restricted to holders of valid user identifications and passwords.

Auditors have a mainframe access profile to allow access to the required functions and

information.

Go to Appendices A-9.2.5, RAPID T1 menu, and A-9.2.6, RAPID T2 menu, for a sample of the

RAPID menus available.

9.9.4 CORTAX


For information on CORTAX, go to Appendix 12.4.0, T2 CORTAX.


9.9.6 Other systems

(Revised May 2014)

Other systems include:

GHRAPS - GST/HST Return and Adjustment Processing System;

28

Published May 2015

• ACSES – the Automated Collections and Source Deductions Enforcement System

provides information about taxpayer contact and collection information;

• PAYDAC – the Payroll Deductions Accounting and Collections System provides

information on the taxpayer’s employees and deductions at source;

• ECS – use the excise tax mainframe information system, Excise Commercial System, to

verify that the taxpayer is licensed for excise tax purposes and to review returns filed by

licensees;

• ERRS – use the Excise Refunds and Rebates System for N15 refund information;

• BN – the Business Number System provides one account number for all revenue lines,

legal entity information, and elections filed;

• SA - Standardized Accounting, based on the BN, establishes a single account for each

taxpayer, integrating all business revenue types into one accounting system;

• BCCS – the Business Client Communication System produces computer-generated

letters, notices of assessment (NOA), and notices; and

• CSAUV- the Case Audit Management System manages audit workload.

9.10.0 Determining the need for computer-assisted audit techniques


To determine if computer-assisted audit techniques (CAATs) need to be used during the

planning stage of the audit, evaluate:

• key audit objectives and items of concern;

• volume and depth of taxpayer information available in electronic format; and

• ease of downloading the available data.

The volume of data is a key factor to determine if the use of CAATs is appropriate. If the volume

of data is limited, it is unlikely that using CAATs will provide a significant benefit compared to

completing the audit manually.

The detail of the information available is important to determine the effectiveness of using

CAATs. If the taxpayer uses a batch processing system and consolidates transaction detail

(common procedure with Accpac accounting software), the electronic records do not usually

contain sufficient detail for computer-assisted audit purposes, as only the summary information

from each batch is available.

If the costs to obtain or convert the information for audit purposes to usable format are material,

the use of CAATs may not be desirable. Consider consulting with Electronic Data Support

specialists (EDSS) to help determine the cost to download taxpayer information. For more

information, go to 13.1.0, Computer-assisted audit techniques.

9.11.0 Audit scope


9.11.1 Introduction


29

Published May 2015

The Workload Development Section is responsible for selecting the audit scope based on issues

identified.

As the audit progresses and additional information becomes available, the Audit Plan may need

to be adjusted. The additional information must be evaluated to determine its impact on the audit

scope and if warranted, the audit scope is amended. Any change to audit scope must be approved

by the team leader. Rarely, the audit may be closed or deferred without completing all audit

steps. The auditor must document the rationale and obtain approval from the team leader for this

course of action on Form T2020, Memo for file.

AIMS audit action codes

Audit action codes are used in AIMS to identify the scope of the audit. For a list of codes, visit

Audit Information Management System online guide (AIMS) – Severed version.

Restricted audit scope

All audits of principal files are initiated by Workload Development as full-scope compliance

audits, unless a reduced or restricted scope is approved by HQ for specific purposes.

In rare situations, the scope of an audit may be changed from full-scope to restricted; such a

change must be approved by Workload Development.

9.11.2 Reliance on the books and records


Auditors must use their professional judgement to determine the scope of the audit. In files

where the subprogram code is Underground Economy (for programs 17 and 18), the auditor must

complete two supporting indirection verification of income (IVI) tests: a bank deposit analysis

and either a rough source and application of funds or a rough net worth. In regular audits in

program 17, the auditor’s choice of the second supporting IVI test expands to include the ratio

analysis and the drawings analysis (in addition to the rough source and application of funds or

the rough net worth).

For regular audits in program 18, it is not mandatory to complete these two supporting IVI tests.

However, the audit approach taken depends on the reliance that can be placed on the internal

controls and the quality of the books and records. Therefore, even in regular audits in program 18

if the reliability of the accounting records is suspect or the apparent lifestyle of the taxpayer is

inconsistent with reported income, auditors must use assessing IVI techniques.

If the shareholder or taxpayer prepares the books and records, the auditor must consider internal

controls as non-existent and rely on supporting IVI tests to continue the audit.

For more information, go to 13.3.0, Indirect Verification of Income.

9.11.3 Types of audit adjustments


Auditors should consider both increases and decreases to taxable income for all audits. If the

adjustments are in favour of the taxpayer, the auditor must ask the taxpayer to provide complete

information to verify such a downward adjustment.

9.12.0 Audit period policy

(Revised May 2014)

http://devzone/english/r6010910/documents/public_access/Aims_Manual/english/r6001000/Manuals/AIMS/aimscontents_of_aims_online_guide.htm

http://devzone/english/r6010910/documents/public_access/Aims_Manual/english/r6001000/Manuals/AIMS/aimscontents_of_aims_online_guide.htm

30

Published May 2015

9.12.1 Purpose


The audit period policy for income tax audits came into effect December 4, 1996.

9.12.2 Legislation

The ITA provides specific limits to periods that may be reassessed. For more information, go to

11.3.0, Normal reassessment period.

9.12.3 The common audit period (one-plus-one)

(Revised May 2014)

The common audit period (also known as 1 + 1, one-plus-one, or one + one) includes the current

year being audited plus the immediately preceding twelve-month period. Audits should not

usually go beyond the current fiscal period and the immediately preceding twelve-month period.

However, some exceptions apply and must be discussed with the team leader.

For income tax purposes, the current year is defined as the most recent fiscal period for which an

income tax return has been filed, assessed, and is available for audit.

Rationale

The common audit period policy (often called the one-plus-one policy) was implemented to

make efficient use of limited audit resources while at the same time, to maximize the impact on

non-compliance. The policy also ensures a common and consistent audit period across all

business lines.

Extending the audit period

There will be circumstances that require the extension of the audit period beyond the current and

preceding twelve-month periods. For example, if payroll deductions (income tax, CPP/QPP, EI)

have been withheld and not remitted, the audit period should include all periods not

statute-barred because these amounts are funds held in trust. Errors in computation,

classification, or elections are not intended, in and of themselves, to be grounds to extend the

audit period.

Clearly document justification to extend the audit period on Form T20, Audit Report, approved

by the team leader.

Situations where the audit period may be extended

Situations that may warrant extending the audit period beyond two years include:

• circumstances involving penalties;

• cases that involve restricted farm losses (RFL); for more information, go to Communiqué

AD-02-05, Reasonable Expectation of Profit;

• cases to determine if a business could be the taxpayer’s personal endeavor and is

operating without the pursuit of profit; for more information, go to Communiqué

AD-02-05, Reasonable Expectation of Profit;

• if assessing Indirect Verification of Income (IVI) techniques are used; for more

information, go to 13.3.0, Indirect Verification of Income;

http://infozone/english/r6001000/audit/Communiques/2002/AD-02-05%20English.pdf

http://infozone/english/r6001000/audit/Communiques/2002/AD-02-05%20English.pdf

31

Published May 2015

• isolated but significant items; a high rate of errors that involve material amounts noted in

the common audit period;

• retroactive legislative changes;

• if the taxpayer makes a voluntary disclosure;

• if there are concerns about issues such as legislative changes, changes to the computer

system, or large refunds outside the common audit period, the audit period should be

adjusted to include the items of concern provided that the period is not statute-barred; and

• if after a full-scope audit or a restricted audit, a taxpayer was advised that an issue was

still open and would be completed after review of the CRA's position on that issue.

Note: If a recurring or system problem is noted that was present in prior years, extend the audit

period to include periods that are not statute-barred. Audit procedures for periods outside the

common audit period should only be directed to these items of concern.

Other factors particular to a file, such as a series of transactions covering several years, may

require reassessment of prior years as part of the process to correct the overall misstatement.

Team leader approval

Extending the audit period beyond the normal two-year period is a matter of professional

judgement based on the facts of the case, and requires the team leader’s approval. The decision

will be based on the circumstances, the significance of the potential adjustment, and the

effectiveness of expanding the audit period for each case. The additional time needed for the

expanded audit period should be minimal, if the auditor properly limits the review to the problem

items. Audit prior years only if significant items are uncovered that give cause for such action.

Auditors must include the reasons for extending the audit period on Form T20, Audit Report.

9.12.4 Re-auditing a previously audited period


There are certain circumstances when it may be necessary to conduct an audit of a previously

audited period. This usually happens because misrepresentation, attributed to neglect,

carelessness, or suspected fraud, is subsequently discovered. More examples where a second

audit may be warranted include:

• The previous audit or review was restricted or limited in nature and scope and the

taxpayer was advised at the time of the audit that there could be a second audit.

• There is new information, not disclosed or made available by the taxpayer at the time of

the previous audit, and the failure to identify this information was not because of the lack

of due diligence on the part of the CRA.

• The taxpayer requests an adjustment to correct an error that was not noted during an

earlier audit.

• The taxpayer makes a voluntary disclosure.

• A retroactive change in legislation has taken place.

9.13.0 Workload referral procedures for GST/HST and Small and Medium Enterprises

(Revised May 2014)

32

Published May 2015

9.13.1 Introduction

The goal of the workload referral (WR) is for one tax to provide the other taxes with business

intelligence that will enhance risk assessment of the other taxes.

9.13.2 Applicable programs

(Revised May 2014)

Effective April 1, 2011, the WR process applies to the following audit programs in the Small and

Medium Enterprises Directorate and the GST/HST Directorate:

Income tax

• Small and Medium Business programs;

• Specialty Audit (income tax audits of trusts, flow-through shares, and non-profit

organizations); and

• Non-resident Audit, International Waivers and Non-resident Dispositions Program.

GST/HST

• Small and Medium Business Audit programs;

• Excise Tax; and

• Air Travellers Security Charge (ATSC).

The WR process also applies to the Film Advisory Services programs in the Scientific Research

and Experimental Development Directorate for changes to income and/or expenses and/or if the

auditor recognizes an issue for GST/HST.

9.13.3 Workload referral process

(Revised May 2014)

A WR is required when:

• an audit resulted in audit adjustments;

• a significant issue or situation that may affect the other taxes is identified;

• the answer to any of the questions in the workload referral template is “Yes”; or

• an early referral is necessary.

Exclusions from the WR procedures:

• audits started as a result of a WR;

• joint audits;

• income tax audits where the business' physical location is in the province of Quebec;

• audits of basic files, large files, or GST/HST audits of businesses with gross income over

PROTECTED (Note: WR procedures for audits in the PROTECTED range will be

issued at a later date);

• cost recovery programs (includes charities); and

• Office Audit Program.

33

Published May 2015

9.13.4 Completing the workload referral templates


Complete the Small and Medium Workload Referral Template (WRT) for all audits except for

those excluded in 9.13.3, Workload referral process. Until the WRT is included in WinALS, go

to Workload referral procedures for GST/HST and Small and Medium Enterprises and use the

WRT listed as Appendix 1: Small and Medium Workload Referral Template.

9.13.5 Workload referral package

(Revised May 2014)

The workload referral package (WRP) includes:

• a copy of the workload referral template (WRT) for each case;

• Form T20, Audit Report; and

• any other information or documents that may be beneficial to risk assess the other tax.

Making an early workload referral:

• If a significant risk is identified during the audit, the auditor must discuss with the team

leader as soon as possible.

• If the team leader agrees that the risk is significant, the auditor will complete the WRT

immediately.

• The audit issues identified and the rationale for making an early workload referral must

be clearly documented in the Additional Comments area of the WRT.

9.13.6 AIMS reporting for workload referrals


Three fields are available on AIMS screen 5 (audit work completed section) to capture

information related to a workload referral to GST/HST by an income tax auditor.

1. The first field, Compliance Review, requires a “yes” or “no” response to indicate if a

workload referral template (WRT) was prepared.

2. The second field, Referral Done, requires a “yes” or “no” to indicate if a complete WRT

package was forwarded to GST/HST.

3. The third field, At Risk Amount, captures the estimated amount of GST/HST at-risk.

For more information, go to Workload Referral procedures.

9.13.7 Referrals to excise tax


If applicable, when an audit is completed, the auditor must send the excise WRT in an encrypted

email, with the applicable excise standard naming convention format in the subject line, to their

team leader, with a c.c. to the workload area of the tax audited.


9.15.0 Concurrent audits of related, associated, or affiliated corporations


http://infozone/english/r6001000/gsthstauditexam/smed_gsthstworkloadrefproc-e.html

http://infozone/English/r6001000/audit/communications/wrkldrefproc-e.html

34

Published May 2015

In certain situations it is more efficient to expand the audit of the principal corporation to include

related, associated, or affiliated corporations.

9.15.1 Situations that may warrant concurrent audits

(Revised May 2014)

Concurrent audits can be particularly efficient if:

• there are material inter-company transactions (material includes number and dollar

amount);

• a subsidiary is dependent on the parent corporation;

• the records of all corporations are standardized and at the same location;

• the subsidiary's operations are similar in nature; compare different operating results to

determine unusual trends (complete more detailed audit procedures, if necessary); or

• several corporations effectively operate as divisions.

9.15.2 Specialists


For additional information on referrals and consultations with specialists, go to 9.2.11,

Consultations with specialists, and 10.11.0, Referrals and consultations.

9.15.3 Restricting the audit scope


In some cases, the audit scope of the related, associated, or affiliated corporation’s operations is

restricted to a review and verification of only specific inter-company transactions, for example,

transfers of assets. When the secondary file is initiated in AIMS, the audit action code should not

be 01 (full-scope). Audit action should only be 01, if a full-scope audit was completed of the

related, associated, or affiliated corporation.

Adding related, associated, or affiliated corporations to the audit in progress

During an audit of a principal corporation, the auditor may determine through AIMS that a

related, associated, or affiliated corporation is under audit. Depending on the circumstances, it

may be more effective and efficient to complete the related, associated, or affiliated corporate

audit at the same time as the principal corporation. The auditor should discuss this with the team

leader, outlining why the audits should be completed at the same time. If the team leader is in

agreement, then the auditor should take steps to ensure that the related, associated, or affiliated

corporations are audited concurrently.

If the related, associated, or affiliated file is unassigned in the Workload Development inventory,

the auditor of the principal corporation should prepare a referral to Workload Development to

obtain the audit. The referral should outline why the audit of the related, associated, or affiliated

corporation should be completed at the same as the principal. The referral would note the team

leader’s approval.

If the related, associated, or affiliated corporation is under audit by a different auditor, depending

on the circumstances, it may be necessary for the two auditors and their respective team leaders

to determine how to proceed.

Cost vs. benefit

35

Published May 2015

Determine the benefits of conducting concurrent audits before the audit is expanded to include

the related, associated, or affiliated corporations. The primary consideration must be whether

there is any significant advantage. For example, an audit of a group of corporations helps to

obtain a complete picture of the operations, but carefully consider the additional audit time and

the potential benefits.

Often an Electronic Data Support specialist is needed because of the complexity and size of the

electronic records.

Referrals of related, associated, or affiliated corporations between TSOs

During an audit of a principal file, the auditor may determine that an audit of a related,

associated, or affiliated corporation is necessary. If the books and records of that corporation are

located in another TSO’s area of responsibility, the auditor of the principal file must prepare

Form T133, Lead or Project Information, signed by their team leader, and forward to the

originating section manager or assistant director of Audit (ADA) for approval. The memo should

then be sent to the ADA of the TSO where the books and records of that corporation are located.

9.16.0 Continued risk assessment while the audit is in process

(Revised May 2014)

9.16.1 Introduction


During the audit selection process, Workload Development uses a combination of computerized

and manual risk assessment techniques to review and identify those files with the greatest risk of

non-compliance and potential revenue loss.

The auditor must continue to risk assess during the many stages of the audit, including

preparation, continual updating, and implementation of the Audit Plan. The preliminary risk

assessment was based on information available at the time. During the audit, changes to the

preliminary risk assessment may be required because the information used to draw conclusions

changes. For example:

• The team leader or the auditor obtains information that was not available to the screener.

• The information used in the computerized audit selection process was incomplete or

inaccurate, possibly due to incomplete or inaccurate information submitted by the

taxpayer.

• Additional information becomes available as the audit progresses.

An effective Audit Plan uses risk assessment techniques to identify the areas of concern and to

design the most appropriate audit tests to address those concerns. The Audit Plan must provide

for periodic reviews and adjustments to reflect new information and changing conditions.

Without continual risk assessment during the audit, the risk of performing unnecessary audit

procedures or missing areas of non-compliance increases.

9.16.2 Risk assessment during preliminary review

(Revised May 2014)

During the preliminary review, the auditor reviews the information provided. It should not be

assumed that every assigned audit would be carried out according to the screener's

recommendations. The auditor prepares to make changes to the recommendations or to suggest

36

Published May 2015

downscreening the audit, if the risk is limited. Document reasons for the changes to the risk

assessment and discuss with the team leader.

Risk assessment procedures during the preliminary review include:

• obtaining input from the team leader.

• reviewing the screening criteria to determine why the file was selected for audit. What

areas of concern were identified? What information was available at the time of

recommending an audit (ARGO and COMPASS reports, gross profit analysis,

shareholder transactions, third-party leads, and internal referrals)?

• reviewing the information used during the screening process. Determine if information

should be updated. Have returns been filed or amended recently? Has one of the other

taxes been audited since the file was screened for audit?

• determining if there is any additional information available. Does the auditor have

personal knowledge of the industry or the taxpayer?

Based on review of additional information, the auditor evaluates the original risk assessment and

proceeds with one, or a combination, of these actions:

• proceeds with no changes;

• deletes areas of concern;

• adds areas of concern;

• changes the audit scope;

• recommends downscreening the audit.

9.16.3 Risk assessment during audit planning


After identifying the areas of concern, the nature and extent of audit tests to address these

concerns must be determined and are based on risk assessment. The nature of the tests depends

on the nature of the potential errors and the taxpayer's accounting system, or lack thereof.

Audit policy is to obtain reasonable assurance that significant errors are detected and corrected.

It is not policy to audit all of a taxpayer's transactions and audit tests should only be carried out

to the extent necessary to ensure compliance. An in-depth analysis is required for those

transactions with errors or if other non-compliance is detected or suspected.

The concept of reasonable assurance may result in the possibility that a significant error is not

detected. However, a well-executed Audit Plan will uncover most significant errors and issues of

non-compliance that require attention.

9.16.4 Components of risk

(Revised May 2014)

These three components combine to make up total risk:

1. inherent risk;

2. control risk; and

3. audit or detection risk.

37

Published May 2015

For more information, go to the CICA Handbook – Assurance (section 5130).

An important aspect of risk assessment is the evaluation of internal controls. For more

information, go to 10.1.6, Evaluation of internal controls.

9.16.5 Reviewing risk while the audit is in process

(Revised May 2014)

As the audit progresses, update the assessment of risk based on the result of audit procedures and

testing completed to determine if changes to the Audit Plan are necessary.

Evaluate the risk with respect to each area of concern, as well as to the audit as a whole. It is

important to remember:

• Every audit procedure is designed to lower the detection risk of an identified area of

concern.

• If the concern that was identified no longer exists (procedures have indicated that the

concern is not relevant), further testing is not required.

• When all of the concerns have been adequately addressed, conclude the audit.

As audit procedures are performed, the auditor is always mindful of the concern being addressed.

When a predetermined number of the tests directed at a particular concern are completed, the

auditor reviews the results to ensure that the audit procedure addresses the concern or issue to

ensure that testing is not done unnecessarily or that additional items are not required for testing.

Example

Audit concern identified:

Sales may be under-stated.

Planned audit procedures:

1. Reconcile amounts recorded in the books and records to the returns filed. It is also

possible to reconcile to GST/HST returns as well.

2. Review all sales invoices greater than a material limit. This should be done to understand

how the accounting system works and where cash is deposited.

Audit results:

Step 1: Completed. No errors or exceptions noted.

Step 2: After testing approximately 50% of the items selected for review for Step 2, the auditor

reviews the audit results and asks these questions:

• Were there any errors?

• Were the errors material with respect to loss of revenue to the CRA?

• If possible, determine the cause of the errors.

• Were the errors isolated or recurring?

• Were the errors the result of system failure or human error?

38

Published May 2015

• Based on these results and any other relevant information available, what assumptions

may be made regarding the invoices that have not been examined?

• What is the potential tax recovery?

• How much audit effort is required?

• How does the potential tax recovery compare with the cost of the audit effort?

• What changes, if any, to the planned audit procedures are appropriate?

It is important to review audit procedures before completing the actual testing of items selected

to ensure that the test addresses the concern identified.

Professional judgement plays an important role in assessing risk during the audit. The assessment

of risk differs from audit to audit. Generally, if after testing 50% of the selected sample, no

material errors are found, it is reasonable to conclude that the results are representative of the

population as a whole. The risk assessment may be revised, resulting in a decrease in audit

procedures. In this example, the auditor may consider adjusting the selection criteria to review

only those invoices greater than $2,000. If no errors are noted, the procedure can be aborted. The

auditor then proceeds to the next audit concern and repeats the process.

When approximately 60% of the budgeted hours for an audit have elapsed, the auditor should

review the audit results. Based on the findings of the audit procedures completed:

• update the audit risk assessment, if necessary;

• assess the potential tax recovery;

• determine the most effective and efficient approach to conclude the audit; and

• update the time budget.

The questions to consider are similar to the questions asked to ensure that the individual audit

procedures meet their objective.

• What was the nature and extent of errors found?

• Should the assessment of risk be revised?

• What assumptions may be made about the likelihood of significant errors in the reported

taxes payable?

• Given the potential tax recovery, how much audit effort is appropriate?

• What changes to the original Audit Plan are necessary?

The auditor's observations, conclusions, and recommendations should be documented and

discussed with the team leader. The team leader should ensure that the audit is meeting the

objectives and addressing any concerns noted. The degree of the team leader’s involvement

during the review and decision making process depends on the auditor’s experience and

confidence.

Summary

Continually assessing risk during the audit will result in a more effective and efficient audit. The

auditor uses a systematic and rational approach to evaluate audit procedures against the

anticipated benefits, such as taxpayer compliance and revenue recovery.

39

Published May 2015

A review of audit results ensures that procedures that do not address identified concerns are

aborted. Continual risk assessment ensures that the Audit Plan is updated to reflect any changes

in circumstances.

9.16.6 Downscreening audits by Business Intelligence

(Revised October 2013)

An audit can only be downscreened by a Business Intelligence officer, if the time charged on the

audit case does not exceed 7.5 hours. Usually, if the taxpayer has been contacted, the audit may

not be downscreened. Contact has been made if:

• the auditor informs the taxpayer, in writing or by telephone, that they have been selected

for audit, and

• the auditor considers it is reasonable to assume that the taxpayer knows they are subject

to audit, or

• the auditor has made enquiries to third parties with respect to certain transactions.

However, if the auditor obtains information after contacting the taxpayer that indicates there is

low or no potential risk, the audit may be downscreened by Business Intelligence, if the time

charged does not exceed 7.5 hours.

9.17.0 Assessment of materiality


9.17.1 Introduction


Consider audit risk and materiality to efficiently complete an audit and to determine the audit

effort in any given area.

What is materiality?

The concept of materiality recognizes that some transactions have a greater impact in a given

situation and therefore warrant greater scrutiny. Material amounts or transactions have an effect

on the outcome of the audit. Limited time and effort is spent on insignificant transactions

because they do not compromise the objectives of the audit or have an impact on the audit

results. Preliminary planning is based on the screener's comments and/or information provided in

a referral (Form T133, Lead or Project Information). For more information, go to 9.2.0,

Preliminary review, and 9.11.0, Audit scope.

Materiality for income tax audits is generally related to the size of the business. For example, a

$2,000 increase in taxable income may be material in a small business, but may not be material

in a large corporate entity. The CRA uses a concept of materiality similar to the one used in

public accounting, in that it is not cost effective to adjust for a small error (or a few small errors)

in very large accounts.

Materiality is dependent on three factors:

1. the monetary size of the transaction in relation to the size of the business;

2. the implication of the legislation on the transaction; and

3. the nature or status of the item.

40

Published May 2015

To determine materiality guidelines for an audit, the auditor establishes a threshold, or a dividing

line between significant and less significant transactions. This allows the auditor to focus audit

efforts in areas of non-compliance where it is most likely there is significant revenue loss.

Materiality guidelines are usually expressed in terms of dollar values, as a specific amount or as

a range. The initial determination is made during the planning stage of the audit at the same time

as assessing risk. As the audit progresses and additional information is gathered, changes may be

warranted.

For more information, go to CICA Handbook - Accounting, Part II – Accounting Standards for

Private Enterprises, Sections 1000 to 1800.

9.17.2 Determining materiality

(Revised May 2014)

The concept of determining materiality is not an exact science. Determine materiality on a

case-by-case basis; it is a matter of professional judgement to discuss with the team leader.

In some cases, the same guideline may be used for the entire audit while in other cases, it may be

more appropriate to establish different guidelines for different sections of the audit.

Factors to consider when determining materiality include:

• the taxpayer's operations;

• cost vs. benefits;

• inherent and control risk;

• reason for the audit; and

• consistency.

9.17.3 Materiality and the taxpayer's operations


An amount that is considered material for one taxpayer may not be considered material for

another. For example, a $1,000 transaction may be material if the taxpayer's annual revenues are

$30,000 (3.3% of annual sales), while the same amount may not likely be considered material

when sales are $3,000,000 (.03% of annual sales), unless the amount is recurring. Materiality is

often determined by relating the amount to annual sales or total expenses. When all other factors

are equal, this approach results in higher materiality guidelines for taxpayers with greater sales.

If the treatment of transactions results in non-compliance with the legislation, smaller amounts

are usually considered material.

9.17.4 Costs vs. benefits

Regardless of the size of a taxpayer's business operation, it is not economical to audit

transactions of small amounts due to the costs involved in carrying out any audit procedure.

However, if a systematic error is discovered, small amounts can become material if the error is

recurring and there are a large number of transactions affected.

9.17.5 Reason for the audit


41

Published May 2015

If an audit is initiated due to suspected non-compliance, smaller amounts are considered

material.

Consistency

Apply materiality guidelines consistently for taxpayers whose business operations are similar.

Applying materiality

Do not regard materiality as a fixed formula to be applied mechanically throughout an audit.

Auditors should always be alert to circumstances that can change an otherwise immaterial item

into a material item and vice versa. This becomes increasingly relevant as transaction amounts

approach the amount considered material. If the population of transactions is high, it may be

useful to stratify the population to include a sample of all transactions in the audit procedure.

Suspicion of fraud or non-compliance - Under review

An amount that may otherwise be immaterial is considered material if fraud or non-compliance

is suspected. For example, a taxpayer has reported total revenues of $2,000,000, including

miscellaneous revenue of $2,000. The $2,000 would usually be immaterial. However, if the

auditor suspects that only a portion of the miscellaneous income has been reported and the

amount might be much higher, undertake audit procedures to ensure the completeness of the

miscellaneous revenue.

Take care to ensure that the audit does not proceed if suspected fraud has been detected, so as not

to jeopardize the case if a criminal investigation is required. The auditor consults with the team

leader immediately for further instructions. For more information, go to 10.11.8, Referrals to the

Criminal Investigations Division (Referrals to the Criminal Investigations Division are under

review).

9.17.6 Tax status of the item

(Revised May 2014)

Consider the implications

An item that may be considered immaterial may become material as a result of potential

implications. For example, rental charges paid to a storage facility could mean hidden assets

exist or that expenses of a personal nature have been charged to the business.

Non-monetary factors to consider

If the auditor has identified material errors, consider these non-monetary factors before

proceeding to an adjustment:

• taxpayer’s filing history;

• taxpayer’s compliance history;

• effect of assessing or not assessing on future compliance; and

• effect on related and/or associated persons.

Materiality and evaluating the audit test results

Evaluate the results of the audit tests conducted to determine the next course of action for the

audit in process. The auditor must decide if adjustments are warranted based on the findings of

the audit procedure by reviewing the type of errors, the effect of the errors, and the reason for the

42

Published May 2015

audit. In some cases, further testing is required and may include adjusting the established

guideline of materiality.

Adjustments to net income

If adjustments or errors noted are below the established materiality guideline, the auditor

discloses the rationale applied and the circumstances used to determine that no adjustment is

required to net income.

If the auditor determines that errors are material and an adjustment to net income is warranted,

complete the appropriate documents. For procedures to complete and assess the file, go to 11.5.0,

Assessments.

9.18.0 Contacting the taxpayer


It is important to plan the initial contact and subsequent interview with the taxpayer or their

representative to ensure the highest degree of cooperation and to obtain as much information as

possible. Auditors are not permitted to use audio or video recorders to record interviews nor

should they allow themselves to be recorded. If an auditor becomes aware that they are being

recorded, the interview should be stopped, the reasons explained, and alternate arrangements

made.

Record details of all communication with the taxpayer on Form T2020, Memo for file, or a

similar working paper.

For more information, go to 10.1.0, Interviewing the taxpayer.

Who should be contacted

In the case of a T1 audit, initial telephone contact should be made with the individual whose

income tax returns are under audit. In the case of a T2 audit, initial telephone contact should be

made with the controlling shareholder. If it is not immediately identifiable which individual

controls the corporation or more than one individual controls the corporation, use the authorized

representative screen in the BN System. The auditor must confirm verbally that that the

individual contacted has the authority to provide the necessary information before discussing any

details of the audit.

Audits of partnerships

If a partnership is being audited, identify the individual who is the general partner or most active

partner and contact the person.

Representatives

Correspondence in the audit file may indicate that a representative (attorney or accountant) be

contacted for all financial matters. The auditor advises the taxpayer that the account has been

selected for audit, confirms the name of the representative as indicated in the file, and advises

that the representative will be contacted to arrange for the audit to take place.

Authorization

If the taxpayer indicates there is a representative and there is no authorization in the file, an

authorization must be obtained from the taxpayer before contacting the representative.

9.18.1 Initial contact


43

Published May 2015


Initial contact with the taxpayer may be made by telephone. From the initial contact and

throughout the audit, the auditor must ensure that the taxpayer knows what to expect.

Purpose of the call

As a representative of the CRA, the auditor explains that the account has been selected for an

income tax audit and briefly explains the audit procedures. Also establish an appointment at a

mutually convenient time to begin the audit.

A letter confirming the details of the telephone discussion may be sent to the taxpayer. For more

information, go to 9.18.3, Communicating with the taxpayer by letter.

What should be asked

Discuss these details during the initial contact with the taxpayer:

• location of the business;

• business activities;

• location of the books and records;

• type of accounting software currently used and if any changes have recently been made;

• names of persons that will provide assistance during the audit other than the primary; and

contact person

• mutually acceptable time and place for the meeting.

The audit procedure

The auditor discusses the audit procedure during the initial contact, including:

• audit period;

• estimated time to complete the audit;

• taxpayer's office hours; and

• list of information, documents, and reports required to complete the audit.

Provide the taxpayer with the CRA webpage address or a copy of Pamphlet RC4188, What you

should know about audits, if one has not yet been made available. It is mandatory to distribute

this pamphlet for all audits in the small business ranges. The purpose of the pamphlet is to

improve compliance through taxpayer education. To this end, the pamphlet is designed to

provide small businesses with an overview of the audit process as well as an explanation of their

rights and obligations with respect to an audit. The auditor briefly reviews the contents of the

pamphlet with the taxpayer and provides further explanations or clarifications as required.

In an effort to ensure that taxpayers are aware of their obligations, their entitlements, and their

rights, the CRA has published the Taxpayer Bill of Rights on its website. For more information,

go to www.cra-arc.gc.ca/E/pub/tg/rc4417/README.html.

The Taxpayer Bill of Rights is a set of 16 rights confirming the CRA will serve taxpayers with

a high degree of accuracy, professionalism, courtesy, and fairness. Taxpayers have the right to

http://www.cra-arc.gc.ca/E/pub/tg/rc4417/README.html

44

Published May 2015

privacy and confidentiality and they also have the right to complete, accurate, clear, and timely

information. Taxpayers have the right to have the law applied consistently.

The Taxpayer Bill of Rights includes the Commitment to Small Business, a five-part CRA

pledge to support the competitiveness of the Canadian business community by ensuring that

interaction with the CRA is as effective and efficient as possible.

For more information, go to www.cra-arc.gc.ca/gncy/txpyrbllrghts/rghts-eng.html.

Books and records

During the initial contact, the auditor determines if the taxpayer has computerized records and

the location of the records. If the records are computerized, obtain the names of the resource

persons and the type of accounting software used.

Assess the need for assistance from Electronic Data Support specialists at this time. For more

information, go to 13.1.3, Assistance from Electronic Data Support Division specialists.

Borrowing records

In some cases, it is not possible to conduct the audit at the taxpayer's premises. Consequently, it

may be necessary to borrow the records to conduct the audit at the office or at another location.

Use Form T2213, Receipt for Borrowed Books, Records, and Documents, to give the taxpayer a

receipt for the borrowed records. For more information, go to 10.2.6, Borrowing books and

records from a taxpayer.

9.18.2 Taking the necessary steps to begin the audit

(Revised May 2014)

After contacting the taxpayer, the auditor may change the Audit Plan based on the information

provided by the taxpayer. Additional research may be required if the auditor is not familiar with

the taxpayer’s accounting software. For more information, go to 9.2.0, Preliminary review.

Determining the need for assistance

The auditor may request the assistance of other auditors, specialists, or other offices, in these

circumstances:

• the volume of information cannot be reviewed in a reasonable period of time;

• the records are not all kept at the same location (another TSO may be contacted);

• the taxpayer uses complex computer systems; or

• the main operations of the taxpayer are located elsewhere.

For more information, go to 10.11.0, Referrals and consultations.

9.18.3 Communicating with the taxpayer by letter


It is best to make initial contact with the taxpayer by telephone. However, in some cases, initial

contact with the taxpayer may be in writing.

The letter advises the taxpayer that the account has been selected for audit and proposes a

starting date for the audit. To ensure that taxpayers are aware of their obligations, their

entitlements, and their rights, the letter informs the taxpayer about the Taxpayer Bill of Rights,

http://www.cra-arc.gc.ca/gncy/txpyrbllrghts/rghts-eng.html


45

Published May 2015

available on the CRA website. For a letter template, go to Appendix A-9.1.1, Audit Contact, or

WinALS Letter A-9.1.1.

Correspondence that is intended to be printed, either for internal or external audiences, including

correspondence to taxpayers, must always be printed on pre-printed CRA letterhead and follow

the Writing guidelines at the CRA. Note that all external correspondence needs team leader

approval before being sent out.

Confirming the audit

It is advisable to confirm the details of the audit in writing after the telephone conversation. To

ensure that there is no misunderstanding as to the responsibilities of the auditor and the taxpayer,

the letter includes:

• the tax that is being audited;

• the audit period;

• the account number being audited, only give the last three numbers of the social

insurance number and use XXX XXX for the first six numbers;

• confirmation of the start date of the audit;

• confirmation that space is available for the auditor to work, including other requirements

such as electrical outlets, telephone, photocopier;

• a list of the books and records required; and

• the auditor's name and telephone number and the team leader’s name and telephone

number.

For more information, go to letter template Appendix A-9.1.2, Audit Confirmation, or WinALS

Letter A-9.1.2.

Difficulty in contacting the taxpayer

In some cases, it may be difficult to contact the taxpayer selected for audit or the taxpayer may

not respond to a letter requesting that they contact the auditor. The auditor should attempt to

contact the taxpayer by telephone several times over a two-week period at different times of the

day. Maintain a detailed Form T2020, Memo for file, or a similar working paper, indicating the

date and time of each call and if a message was left.

Unable to contact the taxpayer by telephone

If the taxpayer cannot be contacted by telephone, send a letter requesting that they contact the

auditor within 30 days to arrange for the audit start (go to letter template Appendix A-9.1.4, No

Contact, or WinALS Letter A-9.1.4).

If the taxpayer does not establish contact, determine if another section, such as Collections, has

made recent contact with the taxpayer.

No contact

If attempts at contacting the taxpayer are unsuccessful:

• Enter a note on the mainframe regarding attempted contact with the taxpayer.

• Place a refund hold on the account.

http://infozone/english/r1713497/writerstoolbox/writing_guidelines/menu-e.html


46

Published May 2015

• Determine if the situation warrants a referral to Criminal Investigations (referrals to

Criminal Investigations are under review).

Visits to the taxpayer that are not pre-arranged

Although most audits take place by appointment, sometimes surprise visits are made. Discuss

with the team leader and depending on the circumstances, ask another auditor or the team leader

to attend the initial interview.

Drawbacks to surprise visits include:

• the taxpayer is not ready to receive the auditor;

• the auditor may inconvenience the taxpayer;

• the taxpayer may be absent; and

• the records, documents, and files may be located elsewhere.

9.18.4 Scheduling


Before contacting the taxpayer, review work in progress and other commitments, such as

training, to determine a potential audit start date. The date proposed should:

• be mutually convenient;

• allow time for the taxpayer to prepare for the audit; and

• ensure that the contact persons are available.

In some cases, records may have to be retrieved from a storage facility.

The auditor is sensitive to the taxpayer's needs to continue business operations. The taxpayer's

hours of operation should be observed to reduce the inconvenience as much as possible.

The auditor also recognizes that the taxpayer may have other commitments in addition to

operating the business, and may only be available during certain hours. Do not schedule audits

around particularly busy periods such as month-end, when employees' workload may be greater

than usual. People may not be available to assist the auditor in locating documents and answering

procedural questions at that time.

The auditor should be flexible but maintain control of the audit and the audit schedule. By

recognizing the taxpayer's commitments and assuring the taxpayer that the time spent by

employees assisting with the audit will be limited as much as possible, the audit can usually be

scheduled and proceed without problems or delay. Keep the taxpayer informed of changes to the

estimated time required to complete the audit.

Factors that affect scheduling the audit

These factors affect scheduling the audit:

• the auditor's work in progress;

• the availability of the taxpayer and the employees;

• other audits that may be scheduled or in progress such as source deductions, provincial

sales tax, GST/HST, or external audits by accounting firms for year-end purposes;

47

Published May 2015

• the availability of specialists, if required - if the records are only available in electronic

format, Electronic Data Support specialists may be required to retrieve the records for

audit purposes;

• in the case of a team audit, the availability of the team members;

• the availability to travel, if necessary; and

• the location of the records and available space to work.

9.18.5 Audits delayed at the taxpayer's request


Difficulty scheduling the audit

In some situations, the taxpayer may make scheduling the audit difficult, may have agreed to

start the audit on a specific day and postpone at the last moment, or is not available when the

auditor arrives. The auditor must use professional judgement to determine if the audit is being

unreasonably delayed.

Repeated or undue delay of scheduled audit

If the taxpayer repeatedly or unduly delays the start of an audit and there are no extenuating

circumstances, send a letter to the taxpayer requesting that a firm date for the start of the audit is

set. The letter states that failure to comply might result in the application of penalties and a

compliance order to provide access to records may be issued.

These procedures also apply if the taxpayer agrees to the audit and then delays or hinders the

audit from progressing by limiting or restricting access to books and records. For more

information, go to 10.2.0, Books and records.

Appendix 9.1.0 Letters


A-9.1.1 Audit Contact


A- 9_1_1 Audit Contact.doc

A-9.1.2 Audit Confirmation


A- 9_1_2 Audit Confirmation.doc

A-9.1.3 Net Worth Audit Confirmation


A- 9_1_3 Net Worth Audit Confirmation.doc

48

Published May 2015

A-9.1.4 No Contact


A- 9_1_4 No Contact.doc

A-9.1.5 Second Contact


A- 9_1_5 Second Contact.doc

A-9.1.6 Department of Justice – Restoration of Corporation

(Revised February 2015)

A- 9_1_6 Department of Justice-Restoration of Corporation.doc

Appendix 9.2.0 Forms, templates, and checklists

(Revised July 2014)

A-9.2.1 Tax centres where returns are processed


Tax centres (where returns are processed)

Surrey Winnipeg Sudbury Shawinigan Jonquière Summerside St. John's iNote 1

Tax services office (local office)

Southern

Interior B.C. Winnipeg Sudbury

ii* Montréal Québec Kitchener Newfoundland

and Labrador

Vancouver Calgary Toronto

East

Laval Chicoutimi Hamilton Halifax

Vancouver

Island

Edmonton Toronto

North

Sudbury

(non-city)

Rimouski Charlottetown Sydney

Burnaby-

Fraser

Saskatoon Toronto

West

Sault Ste.

Marie

Trois

Rivières

Belleville Bathurst

Northern

BC

Thunder

Bay

Toronto

Centre

Nunavut Outaouais Moncton

Whitehorse Windsor Barrie Ottawa Monteregie-

Rive-Sud

Saint John

Regina London North Bay Kingston

49

Published May 2015

Yellowknife Sherbrooke Peterborough

Brandon Rouyn-

Noranda

St. Catherines

Red Deer

Lethbridge Sudburyiii

**

* Includes the federal ridings of Sudbury and Nickel Belt

**Includes the balance of the taxpayers previously serviced by Sudbury (North East Ontario)

Note 1: Implementation date to be determined.

A-9.2.2 Form TX75, T1 and/or T3 permanent document filing


Go to Form TX75, T1 and/or T3 permanent document filing.

A-9.2.3 Form TX75A, T2 permanent document filing slip


Go to Form TX75A, T2 permanent document filing slip.

A-9.2.4 Sample – Nil return completed by Audit

Form not available

A-9.2.5 RAPID T1 menu

%%%% RAPID %%%% RAPID MENU 1A

RPD 500 - PREVIOUS USER HAS BEEN SIGNED OFF

- KEY IN THE REQUIRED INFORMATION AND PRESS ENTER

(KEY OPTION AND PRESS PF1 TO OBTAIN NEWS)

CURRENT USER: ACCESS IS PERMITTED

CLEAR= SIGNOFF ON A NEED-TO-KNOW BASIS

PF1 = NEWS ONLY.

OPTION: PF5 = FRENCH

(FRANCAIS)

ALL ACCESS IS AUDITED

PF6 = NEW PASSWORD

ACCOUNT NO: PF8 = MAIN MENU 2

TAXYEAR:

CCYY THIS TERMINAL IS CURRENTLY IN PRODUCTION

MODE

? * GENERAL NEWS



50

Published May 2015

A

*

T 1 CHARGE-OUT

MENU

J * T 1 INTERCEPT

DISPLAY

S - GSTC

B

*

T 1 TAXROLL MENU K

*

T 1 PRINT REQ MENU T

-

ALPHA SEARCH

C - INCOME &

DEDUCTIONS

L

*

T 1 ACTION REQ

MENU

U

-

TIPS

M

*

T.R.I.S. V

-

TELEPHONE

LOOKUP

E * T 1 IDENT N

*

T 1 ACCOUNTING W

-

ADVANCED C.T.C

F - FWD AVG/CAP GAINS

MENU

0

*

T 1 ACCT. ACTION

REQ.

X

*

PROCESSING

STATUS

G

*

REFUND CHEQUE

NUMBERS

P

*

T 1 ACCT. INPUT

MENU

Y

*

ONLINE RAP MENU

H - DELPAC MENU Q

-

DISCOUNTER

CLEARANCE

Z

*

CORRESPONDENCE

I - SUMMARY OF T 1

DATA

R

-

PENSION REFORM

ENQ.

* = NEWS AVAILABLE (HIGHLIGHTED IF RECENT)

A-9.2.6 RAPID T2 menu

%%%% RAPID %%%% RAPID MENU 2A

RPD 500 - PREVIOUS USER HAS BEEN SIGNED OFF

- KEY IN THE REQUIRED INFORMATION AND PRESS ENTER

(KEY OPTION AND PRESS PF1 TO OBTAIN NEWS)

USER-ID: CLEAR= SIGNOFF ACCESS IS PERMITTED

PF1 = NEWS ON A NEED-TO-KNOW BASIS

PF5 = FRENCH

(FRANCAIS)

ONLY.

OPTION: PF6 = NEW PASSWORD ALL ACCESS IS AUDITED

PF7 = MAIN MENU 1

ACCOUNT NO:

TAXYEAR:

CCYY THIS TERMINAL IS CURRENTLY IN PRODUCTION

MODE

51

Published May 2015

? * GENERAL NEWS

AA

-

SUBSIDIARY LEDGER - SS - CORPAC

ACTION REQ

BB

*

INSTALMENT

NOTICES

- TT - T2 ALPHA

SEARCH

CC

-

LIFELONG LEARNING

PLAN

LL

*

MISP IDENT MENU UU * T2 CHARGE-OUT

MENU

DD

-

MISP DISPLAY MENU MM

-

PAYDAC ACCT.

CREATE

VV * T2 TAXROLL

MENU

- - WW- CHILD TAX

BENEFIT

FF

*

BN OO

-

PAYDAC ALPHA

SEARCH

XX - T2 PROCESS

REPORTS

GG

*

CITY INDEX PP - PAYDAC DISPLAY

MENU

-

HH

-

HOME BUYERS PLAN QQ

-

PAYDAC ACTION

REQ

-

II - INTEREST

CALCULATOR

RR

*

CORPAC DISPLAY

MENU

* = NEWS AVAILABLE (HIGHLIGHTED IF RECENT)

A-9.2.7 Sample Audit Plan

(Revised July 2014)

Taxpayer:

Taxation Years Audited:

Go to 9.2.0, Preliminary review, before preparing the Audit Plan.

Audit steps

For more information, go to 9.6.2,

Factors to consider and procedures to

include in the Audit Plan.

W/P #

Note working

paper number

(using the

WinALS

numbering

system)

detailing the

audit step and

results as

applicable.

Comments and disposition

Comment on results of the audit step.

52

Published May 2015

Additional audit steps

List additional audit steps determined

necessary that were not included in the

original Audit Plan.

Some audit steps from the original

Audit Plan may be determined to be

unnecessary. These may be eliminated

from the Audit Plan and the reasons for

their removal noted.

The Audit Plan should remain flexible.

W/P # Comments and disposition

Approved by team leader:

Team leader signature

Date

If the team leader sends a detailed email to the auditor approving the Audit Plan, a copy of that

email, imported into WinALS, is accepted as approval.

i Note 1: Implementation date to be determined.

ii * Includes the federal ridings of Sudbury and Nickel Belt

iii **Includes the balance of the taxpayers previously serviced by Sudbury (North East Ontario)