Understanding the audit procedure for your business

If your business has to go through an audit procedure by the Australian Tax Office (ATO), at the conclusion you will receive something called an audit statement. 

Wallace Kee of Kee & Co. CPA says simply, “It’s the conclusion that the ATO gives you to an audit.”

But what does an audit statement mean for your business and how do you interpret it?

Audit procedure assertions

An audit statement consists of five ‘assertions’. These are the criteria on which your business is evaluated during the audit process:

• Existence

The ATO will check whether the assets and liabilities your business has claimed are genuine. Your records may not be enough; the ATO has the right to physically prove that assets exist. They will also check that you have provided the correct date of acquisition.

• Completeness

The ATO will look for evidence that all of the transactions your business has conducted are included in your tax statements. They will require your business to provide proof of any and all of your transactions, including receipts, purchase orders and invoices.

• Valuation

The ATO will confirm the actual value of the transactions in your financial statements, including assets, liabilities, expenses and revenue. Valuations are done in accordance with the international standard for financial accounting, known as Generally Accepted Accounting Principles (or GAAP). 

• Rights and obligations

The ATO will check whether the assets and liabilities recorded in your documentation are attached to your company. Since companies sometimes create special-purpose entities (separate legal entities within a company to limit financial risk), they must establish which part of the business is responsible for the audited items.

• Presentation and disclosure

The ATO will establish whether the items included in the audit are organised and classified correctly. Even if the bottom line adds up, items need to be individually attributed.

Consequences of non-compliance

Wallace notes that no assertion is more significant than another - if your business is found lacking in any of them, the ATO can adjust your tax payments accordingly, including applying penalties and interest accrued.

“That’s why you must retain your files properly,” says Wallace.

Penalties for non-compliance

Prosecution can arise from:

• false or misleading statements in a tax return.
• keeping false or misleading records with intent to deceive the Tax Office.

You will then be subject to a settlement meeting, where you will have to come to an agreement with the ATO about any non-compliance. It is then that you can reveal any circumstances that may lessen the penalties.

Organisation and documentation

As you can see from the strictness of the audit procedure, statement and assertions, it is critical to keep all of your financial dealings meticulously documented and organised.

Contact a tax professional today to ensure that your audit statement comes out squeaky clean.