What Constitutes an Audit? Presenters: Diane Robichaud-Cormier, NB Terry Hing, ON Michele Snow, ON

2 What is an Audit? IFTA – R209 IRP – Article II – 262 Audit

3 IFTA Audit Definition IFTA Articles of Agreement R209 Audit means:.100 The physical examination of the source documentation of the licensee’s operations either in detail or on a representative sample basis;

4 IFTA Audit Definition (Cont’d) R The evaluation of the internal controls of the licensee’s accounting system and operations; and

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

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

7 IRP Audit Definition (Cont’d) Article II – 262 Audit Continued The examination will be of the records maintained for a fleet during the respective preceding year. The purpose of the audit is to determine the proper total distance traveled and the percentage of distance traveled in each jurisdiction.

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

9 During the Audit, the Auditor will: ascertain the validity and reliability of information reported ascertain the validity and reliability of information reported assess the system’s internal control mechanisms assess the system’s internal control mechanisms provide reasonable assurance that the information is materially accurate provide reasonable assurance that the information is materially accurate

10 Uniformity Audits must be acceptable to all member jurisdictions Audits must be acceptable to all member jurisdictions It must be conducted professionally and competently It must be conducted professionally and competently The results must be clearly documented for all member jurisdictions to be satisfied The results must be clearly documented for all member jurisdictions to be satisfied

11 The Audit Process 1. Audit notification 2. Audit communication between jurisdictions 3. Opening conference 4. Evaluation of internal controls 5. Closing conference 6. Audit reports 7. Audit documentation

12 IRP Audit Process Differences Pre-audit contact Pre-audit contact Request for records Request for records No pre-audit communication between jurisdictions No pre-audit communication between jurisdictions Initial audit procedures Initial audit procedures Sampling and extrapolation procedures Sampling and extrapolation procedures New operation / changes in operations New operation / changes in operations Contents of audit reports Contents of audit reports

13 Would You Consider This An Audit?

14 Case # qualified vehicles 100 qualified vehicles travels in 20 different jurisdictions travels in 20 different jurisdictions purchases fuel in 15 jurisdictions. purchases fuel in 15 jurisdictions. No quarter has travel in all 20 jurisdictions No quarter has travel in all 20 jurisdictions 10 vehicles are broker 10 vehicles are broker 90 vehicles are company 90 vehicles are company 5 company vehicles have limited travel 5 company vehicles have limited travel Audit period is 3 years Audit period is 3 years

15 Scenario - Case 1 The auditor selected a quarter for which travel was reported in 18 jurisdictions and fuel purchased in 14 jurisdictions. No errors for both fuel and distance were found. No error was projected to other quarters.

16 Questions – Case 1 Was the sample size reflective of the company operations? Why or Why not? Is one quarter enough of a sample to draw conclusions on the accuracy of the information reported on the tax returns for the audit period? As your jurisdiction’s representative responsible for reviewing this audit would you accept these audit findings? Would you consider this an audit?

17 Case # 2 10 qualified vehicles 10 qualified vehicles Travels in 10 different jurisdictions Travels in 10 different jurisdictions Purchases fuel in 5 jurisdictions Purchases fuel in 5 jurisdictions 2 quarters have travel in all jurisdictions 2 quarters have travel in all jurisdictions 8 vehicles are company owned 8 vehicles are company owned 2 vehicles are brokers 2 vehicles are brokers The audit period is 3 years The audit period is 3 years During the first half of the audit period the company prepared their own returns, the second half of the audit period an agent prepared the returns. During the first half of the audit period the company prepared their own returns, the second half of the audit period an agent prepared the returns.

18 Scenario – Case 2 The auditor selected the two quarters that had travel in all jurisdictions for his sample. The sample consisted of two company owned vehicles. The sample periods were in the first half of the audit period. There were no errors found in the fuel reported. The auditor discovered five trips in the first sample period that misallocated distance between the jurisdictions. The auditor discovered two trips in the second sample period that misallocated distance between the jurisdictions. The auditor projected the distance errors for the audit period.

19 Questions – Case 2 Was the sample size reflective of the company operations? Was it representative? Should the errors have been projected? As your jurisdiction’s representative responsible for reviewing this audit would you accept these audit findings? Would you consider this an audit?

20 Case # 3 Farm Operation Farm Operation 20 licensed vehicles 20 licensed vehicles 8 qualified vehicles 8 qualified vehicles 12 licensed vehicles travel within the farm only per the taxpayer 12 licensed vehicles travel within the farm only per the taxpayer Travels in 3 jurisdictions Travels in 3 jurisdictions Majority of fuel is drawn from bulk storage Majority of fuel is drawn from bulk storage Qualified and unqualified vehicles are fuelled from bulk storage Qualified and unqualified vehicles are fuelled from bulk storage No records kept for bulk storage disbursements No records kept for bulk storage disbursements The audit period is 3 years. The audit period is 3 years.

21 Scenario – Case 3 The auditor tested two sample quarters for two trucks. No distance errors found. Fuel purchases reviewed for the entire audit period due to lack of disbursement records. Auditor judgment to allow 75% of bulk fuel purchases to be attributed to qualified vehicles. KPL determined to be 2.4.

22 Questions – Case 3 Was the sample size reflective of the company operations? Should the auditor have used the IFTA agreement stipulated 1.7KPL/4.0MPG? Would you deny or grant tax paid purchases credit for disbursements from bulk storage? Why or why not? As your jurisdiction’s representative responsible for reviewing this audit would you accept these findings? Would you consider this an audit?

23 Case # 4 30 qualified vehicles 30 qualified vehicles 15 vehicles are company owned 15 vehicles are company owned 15 vehicles are brokers 15 vehicles are brokers Travels in 20 jurisdictions Travels in 20 jurisdictions Purchases fuel in 15 jurisdictions Purchases fuel in 15 jurisdictions Jurisdictional distance assigned using mileage software Jurisdictional distance assigned using mileage software The audit period is 3 years. The audit period is 3 years.

24 Scenario – Case 4 The auditor tested all vehicles for one quarter. No fuel errors found. The review of the distance records for the sample period indicated that for certain trips the mileage software used the practical route which routed the trucks through two jurisdictions. Supporting documents indicated that the trucks used a different route which caused them to travel through three jurisdictions and increased the total distance traveled. A distance error rate was calculated and projected over the audit period.

25 Questions – Case 4 Was the sample size reflective of the company operations? Should the errors have been projected? As your jurisdiction’s representative responsible for reviewing this audit would you accept these findings? Would you consider this an audit?

26 Case # 5 IRP audit IRP audit 4 qualified vehicles 4 qualified vehicles Reported actual travel in 15 jurisdictions Reported actual travel in 15 jurisdictions Only traveled in 13 jurisdictions Only traveled in 13 jurisdictions Purchase fuel in 10 jurisdictions Purchase fuel in 10 jurisdictions

27 Scenario – Case 5 The auditor tested all vehicles for one quarter. No fuel errors found. The carrier declared distance in two jurisdictions on its application. However, the carrier did not travel in those jurisdictions in the record year reporting period. The taxpayer had under reported distance in three jurisdictions and over reported distance in two jurisdictions. The auditor reduced the reported distance (on the application) in the two jurisdictions to zero and projected the distance error rate over the other jurisdictions in which there was travel.

28 Questions – Case 5 Was the sample size reflective of the company operations? Should the errors have been projected? Should the reported distance have been zeroed out? As your jurisdiction’s representative responsible for reviewing this audit would you accept these findings? Would you consider this an audit?

29 Thank You Questions?Comments?