Sam Brotman, JD, LLM, MBA August 23, 2014 3 min read

Board of Equalization Audits - Short Tests and Sampling – Part One

BOE uses short tests to come up with a decision as to whether to proceed or to accept as correct that item being tested. In fact, BOE encourages its auditors to use short tests when taxpayer's records are in order. Any time short test can be expanded into full examination.

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A short test may be defined as the examination of any record, supplemental data, original detail, etc. for any purpose. A short test audit may be a combination of several short tests. A short test might be, for example, the review of an income tax return to see if the mark-up over cost is acceptable for the type of business, a spot check of sales invoices for proper tax accrual, etc.

The nature of the short test places a great deal of emphasis on the individual auditor’s judgment. Auditor evaluates the results of a short test and comes to a decision as to what to do. In certain businesses where the number of transactions are large (e.g., department stores), BOE auditor may design a controlled test for a short period. An example might be the operations of one day or less.

This test, even though formal in nature vs. spot checking, would be construed as a short test because this forms the basis of a decision to stop testing or to proceed. If auditor decides to proceed, this original test might be the nucleus of an expanded audit program.

Size of test period. Auditors use their experience and exercise judgment in determining the size of test periods. The following principles should be considered in selecting a test period:

• The size should be adequate to insure reasonable accuracy

• The auditing time required should not be excessive in relation to the problem

There are two broad categories of testing used in sales and use tax auditing - statistical sampling and block sampling. The second category of testing is used when statistical sampling cannot be used. BOE looks for number of conditions to employ tests – most important of which is consistency of units sold, consistency in business characteristics in the test period and so on.

For example, it may be that what is being tested is a hodgepodge of various deductions. In this case, the base would be all the deductions recorded and claimed. Verification is then mad by auditor made in accordance with the taxpayer’s method of computing the claimed deductions.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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