Computer Assisted Audits — Questions and Answers

  1. What is a Computer Assisted Audit?
  2. What is a Computer Audit Specialist?
  3. What are the benefits of a Computer Assisted Audit?
  4. What are the benefits of performing a statistical sample?
  5. What are the general steps of the computer assisted portion of the audit?
  6. What will the auditor and Computer Audit Specialist need to know about my electronic records?
  7. What records will be requested by a Computer Audit Specialist?
  8. In what file format should the data be provided?
  9. What are the verification and reconciliation requirements for electronic data?
  10. We have a dedicated Information Technology Department who handles record requests. Should they be involved?
  11. Will the auditor or Computer Audit Specialist need unrestricted access to my computer system?
  12. How do you keep my records confidential?
  13. What documentation of the sampling procedures will be provided to me?
  14. Where can I find information on the BOE statistical sampling procedures?
  15. Who is in charge of the audit?

  1. What is a Computer Assisted Audit?

The primary objective of the tax audit is to determine, with the least possible expenditure of time, whether the correct amount of tax was reported during the audit period. The audit program has evolved over time. As a result of technological advances and benefits, taxpayers are increasingly using computerized records in their business. Sophisticated software packages are replacing printed books and records.

Sales and Use Tax Regulation 1698, Records, permits the Board of Equalization to access the electronic records and data taxpayers maintain. Since fewer taxpayers are maintaining printed books and records, it is imperative for the auditor to obtain electronic data in order to perform an accurate and efficient audit. When this electronic data is large in volume, the auditor will perform a computer-assisted audit. A computer-assisted audit is an audit where sophisticated software is used to design an efficient and effective testing plan and to prepare a sample using electronic records. This is generally accomplished with the assistance of a Computer Audit Specialist.

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  1. What is a Computer Audit Specialist?

A Computer Audit Specialist (CAS) is specially trained in data systems and statistical sampling, and provides technical support to sales and use tax auditors. The CAS has the skills to obtain and process all of the information that would have normally been provided as printed reports and journals. As a former auditor, the CAS has dual expertise in working with the audit program and with large databases and large volumes of taxpayer records. This expertise allows the CAS to assist the auditor in interfacing with the taxpayer’s information technology staff in order to provide cohesive, meaningful and useable electronic data to the auditor.

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  1. What are the benefits of a Computer Assisted Audit?
  • Increases accuracy of the audit results.
  • Reduces the overall time to complete the audit.
  • Lessens disruption to your business
  • Reduces the amount of documentation you need to retrieve, saving you time and money.

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  1. What are the benefits of performing a statistical sample?
  • Increases objectivity and control of bias.
  • Objectively provides an advance estimation of required sample size.
  • Provides an estimate of the reliability of the sample
  • Can result in a smaller sample size – saving you time and money.
  • Sample results may be evaluated statistically.

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  1. What are the general steps of the computer-assisted portion of the audit?
  1. The auditor and Computer Audit Specialist (CAS) will meet with you and your staff to identify the records needed and determine the most efficient way to sample them. Often, this meeting will take place prior to the start of the audit at the pre-audit conference.
  2. The CAS will conduct a review of your computer system with you and your information technology staff to identify internal controls and any constraints in obtaining the records
  3. Your information technology staff extracts and compiles the electronic data. You should reconcile the electronic data to your books and records so that the data does not need to be extracted more than once (see the question What are the verification and reconciliation requirements for electronic data below).
  4. You provide the requested data to the CAS. Generally, the volume of data is too large to be emailed, therefore, it is usually provided on disk or other tangible media.
  5. The auditor will perform their own verification and reconciliation of the electronic data with your books and records
  6. The auditor will work with you to develop a sample plan to identify the most accurate manner in which to sample your transactions.
  7. The CAS will use state-of-the art software packages such as ACL, Monarch, and V-Edit to select the most efficient and representative sample possible.
  8. The CAS will provide the auditor with the list of randomly selected transactions to be reviewed. Actual testing of each sampled transaction will begin at this point. For example, this is when the auditor will begin reviewing sales invoices for a sales test, or purchase invoices for a purchase test.

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  1. What will the auditor and Computer Audit Specialist need to know about my electronic records?

Before starting any sales and use tax audit, the auditor and Computer Audit Specialist need to understand your business operations and recordkeeping procedures. The auditor or CAS will ask such questions as:

  • What accounting software do you use (Oracle, SAP, etc.)?
  • What electronic records do you have? What format are they in?
  • For what periods do you have electronic records?
  • What internal controls are in place to support your tax accrual system?
  • How have you developed and implemented tax accrual system changes?
  • Do you have records of individual sales and purchases?

The auditor and CAS will also need to:

  • Understand the accounting system and sales/purchasing processes.
  • Identify information (files) that is maintained on the computer.
  • Determine relationships between files and any fields that link them together.
  • Determine which fields in those files contain the needed information. Generally these are fields that contain data that would appear on paper documents such as invoices, purchase orders, etc.
  • Observe a system walk through (A systems walk through is an opportunity for the auditor or CAS to watch someone enter a sales or purchase invoice and obtain a screen print of what information is captured in the taxpayer’s computer records. Just like in a paper based audit, the more the auditor or CAS learns about your record keeping system, the more efficient the audit process will be.)

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  1. What records will be requested by a Computer Audit Specialist?

In general the auditor and Computer Audit Specialist will request electronic data that would be used to compile the taxpayers accounting and financial books and records. In a non-computer assisted audit, the auditor would request various printed reports such as a detail general ledger, trial balances, sales journals, purchase journals, accounts receivables and accounts payable data.

In a computer assisted audit, the CAS will request reports, similar to printed reports, in electronic format. However, each testing situation is different. The specific records the CAS requests will be determined when the auditor and CAS meet with you and your IT staff.

While each audit situation is different, below is an example of what a CAS might request for the sales test portion of your audit:

  • Download of all sales shipped to California for the period 01/01/XX through 12/31/ZZ in a non-delimited, fixed width flat file.
  • The fields for each invoice should include:
    • Sales invoice number
    • Sales invoice date
    • Bill to customer name
    • Bill to customer address
    • Ship to customer name
    • Ship to customer address
    • Invoice taxable total
    • Invoice exempt total
    • Invoice freight total
    • Invoice tax total
    • Invoice gross total
    • Product code
    • Product description
    • Fees – (e.g., Tire Fee, eWaste fee, etc.)
  • A copy of the data map, or schema, detailing the query used to extract the electronic data.

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  1. In what file format should the data be provided?

Typically, the Computer Audit Specialist will request that you submit electronic data in a non-delimited, fixed width flat file format along with the record layout. Data is accepted in EBCDIC format or ASCII format. Data received in EBCDIC format is converted to ASCII format. With advanced notification and approval, other formats may be accepted. The CAS can work with most data systems to find the most effective manner to complete the audit.

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  1. What are the verification and reconciliation requirements for electronic data?

All electronic data you provide will be verified by the auditor for completeness. An audit trail must exist to reconcile the data to the books and records, therefore it is imperative that you reconcile the data yourself before you provide it to the auditor.

In addition, you are required to provide the following with each download:

  • Total for each numeric field in data.
  • Total number of transactions for each file provided.
  • Unique record identifier used to summarize related transactions for sample selection (for example.: invoice number or combination of vendor number & invoice number, etc.).
  • First and last dates in data.
  • Date field to be used in sampling.

These check figures provide comparison tools which are necessary for the following reasons:

  • They assist in verification that the data is not corrupted.
  • Both you and the auditor can agree to the initial population totals prior to testing.
  • Which, in turn, prevents either you or the auditor from discrediting the test due to incomplete or excess data.

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  1. We have a dedicated Information Technology Department who handles record requests. Should they be involved?

Yes. Early in the audit, you will meet with the Computer Audit Specialist and the auditor to discuss your records. The discussion may lead to technical questions which you may not be able to answer. It may be necessary to have someone who is very familiar with your operating system and the data dictionary of that system to be involved early, so that any questions can quickly be answered. Having a member of your information technology staff in the initial discussions is imperative to a successful download of electronic data.

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  1. Will the auditor or Computer Audit Specialist need unrestricted access to my computer system?

No. The Computer Audit Specialist or auditor will not directly access your computer system if you object to such access, except in the case of a search warrant. The CAS will provide technical directions to your staff as to the type of files and information needed. Your information technology staff will be responsible for retrieving the requested data. Only you and your information technology staff will have access to your computer system.

Electronic data requested will generally include only the normal books and records maintained electronically or on paper, such as the general ledger, sales or purchase summaries, sales invoices, purchase invoices, and purchase orders.

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  1. How do you keep my records confidential?

To protect your privacy, BOE employees are forbidden by law from divulging confidential information obtained during an audit, whether it is paper or electronic, to any unauthorized persons. BOE employees who violate this law are subject to internal disci¬pline and criminal prosecution.

California State law requires that data encryption or equally effective measures be used for all confidential, personal, or sensitive information that is stored on the following:

  • Portable computing devices (including, but not limited to laptop and notebook computers)
  • Portable electronic storage media (including, but not limited to, CDs, DVDs, external and/or removable hard drives, and thumb drives, etc.)

To comply with this policy all BOE owned or leased laptop and desktop computers have encryption software installed and used. In addition any confidential information stored on portable media is encrypted as well. Before you provide copies of electronic business records, you and the auditor should agree on the following:

  • Security measures we will use to protect the confidentiality of your records.
  • What the auditor will do with your electronic records at the end of your audit.

If you request, we will keep your electronic data at the audit location and perform all work on the premises.

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  1. . What documentation of the sampling procedures will be provided to me?

Before testing, the Computer Audit Specialist will use form BOE-472, Audit Sampling Plan, in the planning of the sample procedures. The purpose of the Audit Sampling plan is to obtain information from your operations in order to establish the most effective and efficient means of developing a sample plan. The information on the form sets the criteria by which the sample results will be evaluated.

The entire sample process, from set-up to selection, is documented on form BOE-472. The procedures documented on the form will be discussed with you prior to sampling. Once the sample setup is finished and testing is ready, the auditor will provide you a copy of the completed form.

In addition to the Audit Sampling Plan, the CAS can provide, for your reference, the computer generated log used in the setup and creation of the sample. This log provides the technical parameters the software uses to select the best sample.

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  1. . . Where can I find information on the BOE statistical sampling procedures?

A complete explanation of the BOE statistical sampling procedures is too lengthy for this page.  If you have any questions about the sampling methods used in your audit, you should discuss them with the auditor.  You may also want to download or review Audit Manual Chapter 13“Statistical Sampling”. This chapter explains the BOE sampling practices and standards in detail.

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  1. Who is in charge of the audit?

The auditor or lead auditor (if there is more than one auditor) is responsible for the audit as a whole. The Computer Audit Specialist is a technical consultant to the auditor to assist with the electronic records. The CAS’s responsibility is limited to that of a technical role of obtaining the necessary data, data processing, and sample set-up. Specific technical questions regarding the data and testing may be addressed to the CAS, but all questions and issues related to the audit program and scope of work should be discussed with the auditor.

Once the CAS provides the auditor the sample items to be reviewed, the auditor is responsible for performing the actual testing. This may include reviewing resale certificates, exemption certificates, and sales invoices for a sales test, or purchase orders and purchase invoices for a purchase test. The auditor will determine, based on testing, whether or not an item is subject to tax. Any concerns in this area should be addressed to the auditor.

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