Sam Brotman August 23, 2014 5 min read

BOE Prior Audit Percentages of Error (PAPE) Program and Cut-Off Techniques

The prior audit percentages of error (PAPE) program involves the use, under certain circumstances, of a percentage of error developed in a prior audit for the sales or accounts payable portion of a current audit. It can be a valuable tool in streamlining the audit process. It is designed to reduce the time it takes to complete an audit and minimize the burden on taxpayers. When planning the audit, BOE supervisors and auditors evaluate whether the taxpayer is eligible for the use of a PAPE. This evaluation is conducted whether or not the taxpayer has already requested the use of a PAPE. If the taxpayer is eligible for the use of a PAPE, the auditor discusses the PAPE with the taxpayer as soon as possible rather than wait for the taxpayer to request using a PAPE. To qualify for the PAPE, the taxpayer must have at least one prior audit and must meet the number of conditions. One of the conditions is consistency of business operations during prior audit and current audit. Minor changes are generally ignored. It is important to remember that the use of a PAPE is limited to the current audit period as a PAPE cannot be used in two subsequent audits.

BOE also uses cut-off techniques. “Cut-Off” is that point in the audit program where the auditor has accumulated sufficient data to support a reasonable conclusion or opinion based on acceptable audit standards. It might be defined as when to stop testing or examining data. It could be used for whole examination or for a specific task or test and auditor has discretion in this case. When a prospective cut-off point is reached, a decision is made by auditor whether to accept the test results, alter the audit approach, or discontinue the audit. Basically, important consideration here is given to existence of errors. It is up to auditor to decide if errors exist, whether to keep testing, or disregard errors. Auditor can decide to accept test results and cut-off point is reached then. Auditor considers materiality of error, frequency of error, and other factors.

The principle of whole dollar auditing (i.e., dropping cents) is used by BOE as a time-saving technique. In whole-dollar auditing, cents are eliminated at the earliest practical stage in an accounting sequence and only whole-dollar amounts are recorded thereafter. In this case any $.49 cents and below are rounded down, and $.50 cents and more are rounded up. Whole dollar audit is not used when taxpayer objects (auditor may still try to convince taxpayer by explaining this method), when computing markup form shelf orders or when precise data is necessary.

During an audit auditor will examine multiple records, all to find undisclosed and unreported taxable transactions. The general ledger accounts will be examined for debits and credits. Auditor may examine general journal entries, correspondence, contracts, sales or revenue invoices, cash receipts records, accounts receivable ledger, partners' drawing accounts and employees’ advance accounts, purchase journal for sales at cost or returned merchandise, including inventory accounts. Auditor will try to reconcile sales or revenue reported to general ledger. In cases of missing or flawed record, BOE auditor will do gross profit and net worth analysis. Auditor will review tax returns as well.

Overall, BOE auditor will make a significant effort to ensure good relationship with taxpayer and will try to make audit convenient for taxpayer, as long as taxpayer does not create unnecessary obstacles for an audit. Nevertheless, it is advisable for taxpayer to cooperate with auditor to ensure smooth and efficient auditing process. It also really helpful to ensure that all books and records are always kept in order, even if taxpayer does not expect an audit.