Smoak & Steh - Auditing Standards

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North Carolina
Department of Revenue
Advanced Personal Property Seminar
Audit Issues
Panel Discussion
NCDOR Advanced Personal Property Seminar
Audit Issues Panel Discussion
 Facilitators:
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Bill Smoak
Ed Steh
Turner Business Appraisers
Turner Business Appraisers
 Participants:
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9/17/2012
Teresa Purvis
Raina Dyer
Phil Evans
County Tax Services
Tax Management Associates
Evans & Associates
Audit Issues Panel Discussion
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Agenda
 Discuss three of the most common issues that
we as auditors face.
 Other audit suggestions and observations
provided by your peers – feel free to
download the presentation through the link
below and read at your leisure.
 http://www.dor.state.nc.us/taxes/property/seminars/index.html
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Audit Issues Panel Discussion
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Topic One
 Working with 3rd party tax representatives (i.e. only
providing to you what has been submitted to the county).
 Proving completeness of asset list records
 Getting the data files as provided by the taxpayer to the tax
rep
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Audit Humor
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Topic Two
 Obtaining balance sheet or profit & loss information
when told that such information is not tracked by
location.
 General ledger balance queries / screen prints
 Other types of data to use as corroboration.
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Audit Humor
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Topic Three
 What kinds of things are “red flags” that you encounter
when reviewing tax listings year to year, either while
reviewing for an audit, or while processing listings
internally for a county, that cause you to pursue and ask
for more information.
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Audit Humor
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Questions, Comments, Suggestions
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Additional Observations & Suggestions
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Elements of Taxable Historical Cost (Cost per Income Tax Returns / includes ALL Costs incurred to bring an asset
into production – labor, sales tax, fees, warranty cost, training cost, installation costs, validation costs)
Use Marshall & Swift if needed
Look at Construction In Progress (CIP) for BPP costs
Assets should be listed with the Assessor EVEN if fully depreciated for IRS; they are still taxable as long as they
are in use and not disposed)
Exemptions (applications should be TIMELY )
Penalties (Penalties are in lieu of interest and should never be compromised)
Power to Compromise (105-312K – be very careful – board members can be held personably liable)
Obsolescence (Functional and Economic – not all taxpayer requests are valid; determine what qualifies for
additional depreciation due to obsolescence and what steps the Assessor’s office should take in appraisal)
Idle Assets (Some assets are truly Idle and Obsolete and some are simply Non-Productive)
Timelines for Appeals (communicating the timeline window to each and every taxpayer per statute is important)
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Additional Observations & Suggestions
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Additional information that can be requested to validate the depreciation schedules if the P&L or trial balances
are not available, include the income tax returns, either Federal or State. The state income tax return can
narrow down assets owned by national companies that have only one operations located in North Carolina.
Some cases may involve taking an inventory of assets present during a tour of the facility and working with the
county/ taxpayer on costing and age of the assets.
Requesting information such as tag numbers on vehicles can also be useful. Today, with multi-year tags on trailer
that should be included in the annual listing, the tag number can help you to identify these items (i.e.: the tag
number starts with AX for example).
Red flag items are missing assets from the depreciation schedules when observed during the tour of the
location, no reporting of supplies, and large variance between the cost of real estate assets recorded in the
depreciation schedules when compared to the property record card from the county to name just a few.
Additional items that cause problems during an audit are:
 Reporting of capitalized repairs or betterments to existing assets and not disposing of the replaced
components in the cost of the original item.
 Not reporting of obsolete or idle equipment.
 Incorrect Records
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Additional Observations & Suggestions
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1) In addition to requesting a detailed depreciation schedules, detailed asset list, chart of accounts, general
ledger trial balances, and business expense information what additional information should be requested and
what additional procedures should be performed. BPP audits (other than a desk audit) should go beyond just
reconciling a depreciation schedule or fixed asset list to the BPP listing.
 a) A physical inspection/on site review of the business is one of the most important additional audit
procedures that needs to be performed. Example – County audit of a national retailer’s distribution center,
the auditor performed an on site review of the distribution center and discovered that an out of state
trucking company had trucks and trailers based out of the County location that moved inventory for the
County location. The trucks would leave the County location with deliveries and return to the County
location daily. The truck and trailers were registered out of state and tagged with out of state tags. The
audit resulted in a $2,576,492 assessed value discovery on the trucking company.
 b) Ask to visually see Supplies and Spare parts.
 c) Ask business if they maintain a fuel supply (gas, diesel fuel, propane, coal, saw dust used for fuel). If yes,
visually look at it. Example –County audit. The auditor went to the business location and noticed a large
pile of coal which was mainly used as fuel for a process. This resulted in a $3,600,000 assessed value
discovery just on the fuel supplies. Another County example – During an audit of a brick manufacturing
plant it was noticed that the company was expensing a large amount of saw dust. The county auditor
inquired about this and found that saw dust was used as a fuel for the brick kilns. This resulted in a
$1,180,000 assessed value discovery just on the fuel supplies.
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Additional Observations & Suggestions
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d) Does the company have uninstalled equipment on site.
e) Is Idle Equipment being listed?
f) Obtain a list of all leased Machinery, equipment, furniture, fixtures, office equipment, point of sale
equipment, and computer equipment at the business location with the name and address of the lessor,
description of the item leased, make & model, serial #, lease #, original cost, and a copy of the lease.
Determine whether the leases are operating leases (not to be reported by the business being audited) of
capital leases (leases that should be reported by the business being audited).
g) Obtain a list of all equipment at the business location that is not owned or leased by the business.
Examples are vending machines & equipment used at the business location owned by others. Obtain the
property owner’s name and address and also a description of the property, make & model, and serial #.
Example – During a County audit of an automotive parts manufacturer the auditor discovered that a truck
manufacturer had molds and other BPP at this corporation’s location which had never been listed. This
discovery resulted in a $10,979,000 assessed value discovery.
h) Review the company’s Leasehold Improvement account balances for unlisted business personal
property.
i) Review the company’s Construction In Process account balances for business personal property.
j) Ensure that the property owner has not included items that we consider Machinery & Equipment in the
Computer Equipment group on the BPP Listings.
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Additional Observations & Suggestions
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k) Has the business excluded Pollution Abatement & Recycling Equipment from the Business Personal
Property Listing? If so, has the equipment been certified by DENR and approved by the tax office for
property tax exemption. Example –County audit of a peak power provider. The company claimed that part
of the equipment qualified as pollution abatement & recycling equipment. The auditor discovered that the
equipment had not been certified by DENR and did not qualify as Pollution Abatement or Recycling
Equipment which resulted in a $48,338,000 discovery.
l) How are trade-in allowances treated on the books? Watch for companies capitalizing assets net of a
trade-in allowance. Look at a few invoices and purchase contracts for equipment to see if they are net of a
trade-in allowance, especially when auditing businesses with construction equipment and farm equipment.
m) Ask the property owner if they remove fully depreciated assets from the depreciation schedule when
fully depreciated or are the assets left on the depreciation schedule until disposed of.
n) For assets that indicate a January 1st or January 2nd acquisition date, ask to see invoices and/or
purchase agreements for these assets. They may have actually been acquired in the prior calendar year.
o) Inquire about expensed business personal property. Expensed business personal property is
assessable. Find out what the company’s capitalization threshold is. Companies maybe only expensing
small hand tools but some companies may be expensing large machinery. Some large companies may have
a $1,000, $2,000 or $5,000 capitalization threshold for assets.
p) Review the company’s inventory and expense accounts for supplies, small tools, spare parts, and fuel
supplies.
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Additional Observations & Suggestions
q) Search the North Carolina Secretary of State’s website for Uniform Commercial Code (UCC) forms filed
for the business you are auditing. This can sometimes lead to the discovery of unlisted business personal
property.
 r) Works of art, antiques, and other decorations used by a business should be assessed at their full cash
value.
 s) Ask if the business has had a cost segregation report prepared. If it has, review the cost segregation
report. This report may indicate items that should be reported as BPP that have not been reported as BPP.
 t) Review the real property card and aerial photo of the property that the business is located on. You
may find situations where building additions and paving have not been picked-up and assessed by the real
property section. This information can be forwarded to the real property section to pick-up and assess.
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2) A common red flag is when the taxpayer gets irate, uncooperative, and tries to bully us into doing what they
want us to do and/or only look at what they want us to look at. Also auditors need to learn as much as possible
about reading a person’s body language. Reading body language will many times tell you a lot.
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Additional Observations & Suggestions
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3) If a third party tax representative only provides the auditor with what has been submitted to the county in
the original listing, the tax representative is
 a) trying to see how much the auditor knows about auditing
 b) he is trying to get the auditor to easily go away
 c) he wants to see how serious the auditor is about performing a thorough audit
 d) he doesn’t want an auditor digging to find unlisted BPP
 e) the tax representative may be purposefully hiding unlisted equipment (auditor was able to obtain 2 sets
of asset records from a department store when auditing their distribution center).
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4) Question a situation when a business indicates that it does not keep track of assets at each business location.
What are they going to do if the location burns to the ground and they don’t know what assets were at the
location or what assets need to be removed from the accounting records?
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Next Steps
 Please go to the NCDOR website below, and download this
presentation to read the additional observations and
suggestions at your leisure.
 http://www.dor.state.nc.us/taxes/property/seminars/index.html
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