Good Record Keeping Makes Good “Cents”

In Business on July 25, 2011 at 10:03 am

By Sheila A Wisner, C.A.

If you think that keeping good records is just a nice “best-practice” for your GST/HST reporting processes, you may want to think again about the profit-making opportunities and cost savings that record-keeping presents.

The costs to be saved are GST/HST assessment, interest, and penalty costs. The Canada Revenue Agency (CRA) has legislative authority to calculate assessments based on estimates andprojections if certain conditions not are met; the main one being inadequate or unreliable records. Estimates and projections are not warranted where any other quantification technique is available. Projections are often based on such things as bank deposits, revenue trends, a net-worth analysis and financial ratios. The use of method is often up to the judgement of the CRA and auditor.

If you are going to be assessed on an issue, it is usually best to help the auditor calculate the most accurate assessment. It is highly unlikely that if the CRA needs
to use an estimate, it will be a low one.

Even before the assessment stage, projections can be used as part of the risk-assessment process if adequate documentation and information is not available. The CRA and auditor are going to perform a risk assessment of some sort; of this you can be sure! Giving them more work to do, including guess-work and justification for the guess-work will not make them feel any more at ease about the level of risk. Risk assessments can be based on net worth testing and reasonableness tests. As easy as
these tests are to administer, they are equally difficult to properly interpret. The best form of explanation is the records and support of the actual transactions.

It is also worth keeping in mind that during the conduct of an audit, a risk assessment is in progress for your next audit. The audit file on record is one of the documents reviewed before the next audit.

Adequate records will likely keep the “projection” assessments at bay, but I will suggest that betterthan adequate records may keep even more assessments away.  Auditing is based on testing and sampling theories, and in auditing terms, compliance and substantive testing. Whether these terms or new “techno” terms are used, the concept is the same. The extent of detailed testing is dependent upon the auditor’s opinion on the extent of detail needed. A key factor of this is the assessment coming from the initial audit planning, which includes some compliance testing. Wouldn’t we all assume that a nicely presented, complete package available upon the auditor’s arrival would make any of us feel less at risk? Try this trick, if you have purchased a
birthday gift for someone, and get home to realize it isn’t that great….try to
repackage it, take it out of the shrink wrap and put it in a box with a
bow….first impressions are first impressions, it will work!

Even before the CRA considers your business for an audit risk assessment, having good documentation, records, and audit trails can facilitate a very cost-effective internal audit process. Audit trails not only provide a means of demonstrating a process to another person, but also provide an excellent form of self-checking. If the audit trail cannot be followed easily internally, there is a higher likelihood of error. Thereby savings as long as the errors are identified before the CRA catches them in the case of a possible assessment, or before a possible additional claim becomes statute-barred.

The next time someone asks why you need to be so detailed and keep
so much information, tell them that you are making money for your company by doing so!

Source: Stephen Thompson, 167 Tax Tips for
Canadian Small Business: Beat the Taxman to Keep More Money in your Business


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