Enhancing tax audit quality

Tax audits of public and large private companies share many attributes with financial statement audits.

Tax audits of public and large private companies share many attributes with financial statement audits. In a discussion paper on the role of the audit committee in external auditor oversight released as part of their Enhancing Audit Quality initiative, CPA Canada and the Canadian Public Accountability Board (CPAB) have captured best practices used by audit committees to improve the quality and effectiveness of external financial audits.

Canada Revenue Agency (CRA) continuously looks at ways to improve its performance in all areas. I think there may be opportunities for CRA to adapt many of the external audit best practices for use in its tax audits of large companies, to the extent these practices are not already being used.

A role for the audit committee

CRA auditors are not accountable to the audit committee. However, the audit committee could influence the tax audit process if the audit committee has an oversight role in assessing the effectiveness of the tax audit process.

Monitoring the effectiveness of the tax reporting environment

The tax reporting environment is most effective when CRA auditors and management commit to a mutually constructive working relationship. The audit committee could set the proper tone at the top by establishing the expectation of open, candid and direct communication among management, the tax auditors and the audit committee.

Managing the tax audit process

Preparing for the audit

In preparing for a tax audit, CRA would prepare an overall strategy and detailed audit plans governing the nature, extent and timing of the audit procedures and resources required. Primarily, the plan would address tax risks identified through information supplied by the company or other means. Management would ensure CRA has access to all the factual information it needs to complete the risk assessment. The audit committee would be advised of CRA’s initial tax risk assessment.

During the audit

Communications during the audit should include regular meetings of management and the tax audit team to report progress and preliminary findings, address problems in real time, and raise any issues that the tax audit team has with the audit plan. Periodic progress reports also should be made to the audit committee.

At completion of the audit

When the audit is complete, management and the tax audit team leader should evaluate the audit findings and the CRA’s proposed tax assessment. The assessment’s components should be discussed to develop a consensus on areas where CRA and management agree and where they differ. In this discussion, the CRA team leader should offer their evaluation of tax governance and, where possible, suggest steps that management could take to reduce the company’s tax risk. The audit committee should be informed of the assessment’s status.

Assess the tax audit process

The audit committee is comprised of experienced board members who understand the tax audit process but are at arm’s length from the tax audit experience itself. Even though the CRA audit team is not accountable to the audit committee, feedback to the tax team and to management may give them insight into potential audit process improvements. The audit committee could facilitate the post-mortem evaluation by acting as an independent arbitrator.

Read the final report of CPA Canada and CPAB’s the Role of the Audit Committee in External Auditor Oversight Summary of Responses to Discussion Paper and Conclusions.

Join in the conversation

What do you think of extending of audit committee best practices with external auditors to CRA tax auditors? Do you find that many of these practices already exist? Are there other best practices you would recommend? The better we understand the issues you face, the better we can represent them to government and other stakeholders.

Post a comment below, or email Gabe Hayos.

About the Author

Gabe Hayos, FCPA, FCA, ICD.D

Vice-president, Taxation, CPA Canada

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