Chapter 6 - Computer assisted audit techniques (CAAT)

Issued: 2014/02; Revised: 2019/06/15

Computer assisted audit techniques (CAAT) is a method of gathering and reviewing electronic records. CAAT is used to simplify or automate the data analysis and audit process, and it involves using computer software to analyze large volumes of electronic data for anomalies. The branch has a dedicated team of Computer audit specialists (CAS) who develop and maintain CAAT, and respond to auditors’ requests for assistance.

Benefits of a CAAT audit are:

• Makes the audit less disruptive for the taxpayer. Auditor spends less time at the taxpayer’s business premises and can focus on managing audit risks and quantifying compliance issues
• Reduces the time to complete the audit. CAAT are efficient in testing for completeness, accumulation, and calculation errors
• Increases accuracy of the audit results when a larger population and stratified samples are used
• Improves compliance and lessens chance of making errors. Auditors can review more segments of the taxpayer’s business activities systematically using analytic tools

The adoption of CAAT to an audit does not change the normal process. The assigned auditor is responsible for every aspect of planning, scheduling, directing, and completing the audit process. The assigned auditor's responsibilities include the following: 

Planning the audit

• Review the lead package to ensure adequate preparation and planning time exists
• Check if TACS lead case information has been flagged as a potential CAS Audit. If it has been flagged on the taxpayer and audit ribbons, there is potential for use of CAAT. Contact a CAS auditor to discuss CAAT and the audit objectives
• Initiate contact with the taxpayer. Advise the taxpayer, in general terms, that a CAAT approach to the audit is being contemplated. Explain to the taxpayer that we are not requesting unrestricted access to their computer system but we do need the taxpayer to retrieve the requested data for our review. Include a non-standard paragraph to discuss the planned CAAT audit approach in the initial audit appointment letter

Opening Conference

• Arrange all meetings with the taxpayer, including conference calls and field visits that involve the CAS auditor
• Work together with the CAS auditor and taxpayer’s IT expert to obtain a good understanding of the taxpayer’s accounting and point of sales systems. Identify the data files and related fields that are linked to the taxpayer’s sale and purchase processes as well as tax accumulations and self assessment processes
• Explain to the taxpayer our statistical sampling and non statistical sampling (for example block sampling) procedures
• Arrange to have the required files transferred to your possession. For mainframe systems, CAS may ask the taxpayer for a sample electronic file in order to test for importation
• If the auditor removes the taxpayer’s business records and data on physical media (such as USB drive, DVD, etc.) from the taxpayer’s premises, prepare a receipt for removed books, records, and documents
• Indicators that a taxpayer is not a good candidate for a CAAT audit include nonexistent or unreadable data files, and no access to their data records
  • If CAAT are not going to be used, under the ‘Additional Information’ section of the audit report, document reasons for not doing electronic data processing (EDP) or CAAT audit, attempts that were not successful, and additional detailed substantive testing performed as a result

Directing workflow

• Save any data provided by the taxpayer onto your encrypted laptop. If auditors use encrypted USB memory drives to transfer data files, they must transfer the data to their encrypted laptop before leaving the taxpayer’s site
• If a taxpayer does not allow its data file to be removed from its premises, the CAS auditor should arrange to perform the CAAT analysis at the taxpayer’s premises
• Imported data must be verified with some other source (sales summary, record count, etc.). Compare run results to taxpayer control total information. Discuss unexpected results with the taxpayer
• Review sample items with the taxpayer and detail any adjustments found. If additional testing is required, arrange for CAS auditor to carry it out
• Review projected assessment amount and attach all supporting CAS reports

Closing conference and completing the audit

• Present all the items with errors outstanding and discuss computation of the projected error amount
• Return all the physical records to the taxpayer, scan and attach the signed Receipt for Removed Books, Records, and Documents form (FIN 494) to TACS. If the taxpayer does not wish to have digital media like CDs and DVDs returned, have them indicate this on the form
• Document the utilized EDP or CAAT process in the appropriate sections of the audit report
• Arrange to have archived any relevant electronic files and taxpayer records that were saved on auditor workstations, if required

When the audit is finished, the following is how DVDs and CDs are destroyed and there is no additional form necessary to document the taxpayer’s name(s) and information:

• Ontario office has their own shredder to shred the DVDs and CDs
• North and South offices wait until the shredding company comes into the offices for this purpose, which periodically is arranged by the audit manager
• Vancouver, Surrey, and Island auditors drop the DVDs and CDs in the basket marked for destruction, which is located in the Vancouver office on the 8th floor mail desk, or mail the DVDs and CDs to the Vancouver office, clearly indicating they are for destruction

The following are a few examples of where CAAT can be used: 

Sales

• Extract a listing of sales where no tax was collected. Determine the number of transactions and total dollar amount involved for each exempt customer. If applicable and necessary, request all or a sample of the related exemption certificates
• Extract a listing of sales sorted by specific product lines or codes. Calculate the taxes that should have been collected and compare to computer system generated totals. If discrepancies are found, perform a detailed comparison to isolate the tax error(s)
• Extract sales to in province customers or sales with delivery points in B.C.
• Extract sales to out of province shipping addresses. For each sale to which Provincial Sales Tax Exemption and Refund Regulation section 26 was applied, examine supporting documents to ensure the products were shipped for delivery outside B.C. by the seller, not by the purchaser
• Calculate tax due on each sampled sales transaction. Compare to actual tax charged by the taxpayer

Tax Account

• Analyze the taxpayer’s tax account to identify unusual fluctuations or debit entries
• Summarize and compare the tax account transaction by period with the reported tax amount
• Prepare tax variance by reporting period report

Purchases of operating supplies (for accounts at risk of tax liability) or capital assets

• Identify purchases where the purchase price is in even dollar amounts. This is useful to identify purchases from out of province suppliers where the taxpayer is required to self assess tax but has not. Match the records to the tax account credit entries by journal ID or transaction number posted
• Calculate the total number and dollar amount of purchase transactions within a particular time period. This may assist in the selection of a test sample of purchases

Refunds

For refunds containing more than 500 lines items to review and for which all the supporting documents are available, statistical sampling may be used to draw random test samples. The CAS auditor will select the representative sample based on branch statistical sampling policy, and then extrapolate the results back to the refund. Refer to Bulletin CTB 004, Statistical Sampling (PDF, 399KB), for more details.

Scan a List of Paper Records or Imaged Documents

Auditors should use optical character recognition software to convert paper copies and image files (such as Adobe Reader image files) into files whose information can be searched or (if applicable) arranged in spreadsheets. For example:

• Paper bank statements can be scanned and converted to a spreadsheet. Cleared cheques selected for sampling can be quickly located electronically by their numbers
• Read-only lists of sales and purchase transactions can be converted into sortable files that can be searched for transactions on which no provincial sales tax (PST) was charged or paid, as part of testing for failure to collect or pay PST