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Audit personnel checklists and the tax preparer.

The checklist above and on pages 611-612 is the first part of a checklist used in connection with corporate audits, reviews and compilations to guide audit personnel in accumulating information necessary to test income tax provisions and to identify tax planning issues. The checklist is designed so that "yes" answers indicate instances that may require further action. The remaining portion of the checklist (not reproduced) covers treatment of compensation and certain asset and liability accounts.

The list has proved useful because the audit partner or manager is likely to be more familiar than the tax preparer with changes in a client's operations. Thus, his responses to the checklist are an important supplement to the tax preparer's input.

From Bernard Werner, CPA, Richard A. Eisner & Company, New York, N. Y. Audit Personnel Checklist

A. General organizational and ownership matters

1. Has the company incurred any organizational expenditures? (Sec. 248) 2. Has the company incurred any start-up expenditures for a new business? (Sec. 195) 3. Is the company a member of an affiliated or controlled group of corporations? (Secs. 1504 and 156 4. Does any individual or other entity own, directly or indirectly, 50% or more of the company? 5. Does the company own, directly or indirectly, 50% or more of another entity? 6. Is the company a member of any partnership or joint venture? 7. Has there been any change during the year in the percentage of stock owned by any 5 %

shareholders? (Applies to corporations with a net operating loss (NOL) or other tax

carryovers.) (Sec. 382) 8. Has the company's ownership changed by more than 50% within a three-year period? (Sec. 382) 9. If there was a change in ownership that was the result of the "deemed exercise" of options,

has there been a subsequent lapse or forfeiture of these options? (Temp. Regs. Sec. 1.382-2T) 10. Have any extraordinary transactions occurred during the year (e.g., redemptions; acquisitions;

reorganizations; recapitalizations; formation, liquidation or sale of subsidiaries or affiliates 11. Did the company acquire or sell the assets of a trade or business? (Information

statement required.) (Sec. 1060) 12. Were there any contracts entered into for the sale of stock; or the issuance of additional stock

stock options or warrants? 13. Have there been any transactions (e.g., sale or acquisition of property, performance of services

borrowings) with a related party? (Secs. 267 and 1239) 14. Do the correspondence files, permanent files, prior year's tax returns and tax return working

papers reflect any items affecting the current year's accrual or otherwise requiring attention? 15. Have any Federal, state or local tax examinations been completed within

the last five years or are any in progress?

B. Tax accounting matters

1. Has any change been made in the company's method of accounting with respect to any item

or in its accounting period? 2. Are there any Sec. 48 1 (a) adjustments from prior years (i.e., adjustments for changes

in accounting methods)? 3. If the company is on the cash method, is it required to change to the accrual method? (Sec. 448) 4. Does the company have any carryovers or carrybacks to or from the current year of:

a. NOLs

b. Capital losses

c. Charitable contributions

d. Investment tax credit (including rehabilitation credit)

e. Jobs tax credits

f. Research and development credits

g. Foreign tax credits

h. Excess pension contribution

i. Alternative minimum tax (AMT) credit

j. AMT NOL 5. Is the company subject to limitations on the use of its NOL carryovers or other tax attributes

(e.g., Sec. 382 and separate return limitation year (SRLY) rules)? 6. Should an election to forgo the NOL carryback be made? (Consideration should be given

to the AMT in making this decision.) (Sec. 172(b)(3)) 7. Does the company expect to incur an NOL in the subsequent year? (It may be able to defer

payment of its tax for the current year.) (Sec. 6164) 8. Were there sales of property that may be reported under the installment method?

(Consider electing out of the installment method.) (Secs. 453 and 453A) 9. Did the company buy or sell any property under a contract providing for deferred payments?

What interest rate was provided on such contracts' (Secs. 1271-1275) 10. Is the company a party to a lease providing for deferred or stepped rentals? (Sec. 467) 11. Are items accrued the amount of which is not precisely determinable as of year-end? 12. Are there accrued liabilities for items for which economic performance has not occurred as of th

end of the year? (Sec. 461 (h))

If yes, has the company failed to meet the recurring item exception? 13. For personal service corporations: Has an election been made to obtain a fiscal year other than

a required year? (Sec. 444) 14. Does the company manufacture, build, install or construct property under contracts in which the

work will not be completed within the tax year in which the contract is entered into? (Sec. 460) 15. For closely held C corporations and personal service corporations: Does the company engage in a

rental activity or any other activity to which the passive loss limitations apply? (Sec. 469)

C. Income statement

1. Are there any differences between book income and taxable income not reflected in the

audit working papers? 2. Did the company, directly or indirectly, make any political contributions? 3. Did the company make any charitable contribution of property other than cash? (If so,

Form 8283 may be required.) 4. Has the company incurred any research and development or experimental costs (including

development of computer software)? (If yes, eligibility for the credit for increasing

research activities should be considered.) (Secs. 41 and 174) 5. Does the company pay premiums for life insurance policies on the lives of officers

or other employees? 6. Does the company use independent contractors as part of its everyday operations? 7. Do any professional fees relate to nondeductible items (such as acquisitions, reorganizations,

stock sales and redemptions)? 8. Deductions for travel, meals, entertainment and business gifts must be substantiated by adequate

records. Does the company's documentation fail to include:

a. Amount of the expenditure

b. Time and place of the travel or entertainment

c. Type of entertainment, such as dinner or theater

(if the information is not otherwise apparent)

d. Business purpose or the benefit gained from the expenditure

e. Information about the person or persons entertained or to whom gifts were given, including

name, title, occupation or other designation sufficient to establish the business relationship 9. Are the company's accounting procedures insufficient for it to accumulate the amount of

all meals and entertainment expenses subject to the 20% statutory disallowance? (Sec. 274) 10. Travel and entertainment expenditures of $25 or more and all expenditures for out-of-town

lodging must also be substantiated by receipts. Cancelled checks alone will not suffice.

In addition, the deduction for gifts is limited to $25 per recipient each year. Based on

your inquiries, is the company failing to maintain this documentation and/or apply

the $25 limitation? 11. Indicate with which company officer the content of the preceding three questions was discussed:


Based on this discussion and your knowledge about the company, do you think the company

will have any difficulty in justifying its deductions for travel, meals, entertainment or gifts

should these items be questioned on a tax examination? 12. If the taxpayer has been examined in recent years and the IRS has disallowed claimed

deductions for travel, meals, entertainment and business gifts, procedures beyond inquiry are

required. if this has occurred, an adequate sample of expenditures should be reviewed

and/or additional other inquiries must be made to reconcile the inadequacies of the records in

the recent examination of an earlier year with the taxpayer's representation to the contrary.

Such inquiry should reasonably conclude that action has been taken to assure that

compliance is now being made and to determine the adequacy of records for the current year.

If applicable, did these procedures, which must be documented in the working papers,

indicate continued lack of adequate substantiation?
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Article Details
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Author:Werner, Bernard
Publication:The Tax Adviser
Article Type:Brief Article
Date:Sep 1, 1993
Previous Article:Improving quality control through checklists.
Next Article:Capital gain treatment for gains on sales between partnerships and related parties.

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