“Auditing” (narrowly defined) is a written report on the examination of records for a client.

1. International Fuel Tax Agreement (IFTA)/ International Registration Plan (IRP) Audit Overview(for non-auditors)Don Williams,Tax Policy Specialist, Idaho/ IFTA Audit Committee

2. Beginning Auditing Principles “Auditing” (narrowly defined) is a written report on the examination of records for a client. Auditors do not certify records—but report based on evidence provided—the records are reliable. IFTA and IRP audits answer two specific questions: 1. Where did you go with your truck? 2. IFTA adds: How much fuel did you use and where did you gas up?

3. Beginning Auditing Principles (continued) • IFTA licensee: • Is generally a single fleet • files a calendar quarter fuel tax report on one return for multiple jurisdictions to: • report tax paid (fuel purchase) and • fuel use (distance traveled) • Has a license and decals issued/renewed on calendar year basis • IRP registrant: • Registers one or more fleets once a year • Report distance from July 1-June 30

4. Beginning Auditing Principles (continued) • IFTA audit determines if: • The fuel use tax due is correctly paid • by fleet per jurisdiction • based on the fleet MPG • Tax paid on fuel purchases • IRP audit determines if: • Registration fees are correctly paid • per power unit per jurisdiction • based on reporting period distance, and • Based on apportionment percentage times fees by jurisdiction per unit in each fleet

5. Beginning Auditing Principles (continued) • IFTA auditor responsibilities: • Independence—A210.200 • judicial impartiality • obligation to fairness • Equal consideration—A420.200 • all jurisdictions treated the same • Proficient—A410.100 • Proper audit training • IRP auditor responsibilities—APM302: • Give all Registrants and Members fair consideration • Promote consistent application of Plan • Promote cooperation with Registrants and Members • Improve audit proficiency through educational opportunities

6. Some Resources • IFTA Audit Procedure Sources • Agreement: • R209 and Article XIII Audits • IFTA Audit Manual • Additional Reference: • IFTA Best Practices Guide • Jurisdiction Laws, Rules, Policy, & Procedures. • IRP Audit Procedure Sources • The Plan: • Article II, Definitions—Audit • Article X, Records and Audits • IRP Audit Procedures Manual • Additional References • Jurisdiction Laws, Rule, Policy, and Procedures

7. What is an “audit”? • How does IFTA define “audit”? • physical examination by detail or sample • accounting system internal control evaluation • determining material difference between actual and reported operations by jurisdiction. • How does IRP define “audit”? • examination of records (including source documents) • verify application distance • evaluate accuracy of distance accounting system for the fleet (can be multiple fleets and multiple years).

8. The Audit Process • Pre-audit analysis and notification • Opening conference • Audit of records • Evaluation of internal controls • Identifying and communicating errors • Closing conference • Analysis of data • Writing report, compilation of file, and notification • If protested, redetermining audit based on additional information

9. Pre-Audit Analysis and Notification IFTA returns 3rd & 4th Qtrs 2010 plus 1st & 2nd Qtrs 2011 IRP reporting period RY2012 application (for most registrants) equals • Compare the IFTA returns and IRP applications: • Review the jurisdictions distance reported by each program • Compare the number of IFTA decals to number of units registered under IRP, if different—why? • Review addresses, contacts, etc. • Notify licensee/registrant 30 days before audit.

10. Opening Conference • Discuss with the licensee/registrant: • Business operation, • The audit procedures, • The records to be examined, • The sample: • Periods • Methodology—How are you going to audit? • Error projection—How and what will you project? • Notification procedures

11. Audit of Records • Evaluation of Internal Controls, A640 & APM 500 • Walk through to test control elements • Tests of compliance • Report on weaknesses • Enter distance and fuel into spreadsheets or databases then test using tools (distance software, maps, etc.) • Time constraints • How long can you take to do an audit? • Audit methodology • How do you sample?

12. Closing Conference • Outline preliminary findings to include: • Review findings • Explain possible penalty and interest, • Recommendations to improve operations, • Rights of appeal, and • Identify to whom audit report is sent • “Preliminary findings” are not “audit results”

13. Analyzing Data • Analysis is a review of the records by the auditor: • All records should support each other • Miles trace to fuel • Fuel to miles • MPG is based on both factors. • Are there gaps and holes? • Is there other missing information? • The auditor determines an error rate and projects rate against reported amounts. • What is an error rate—A730?

14. Final Steps Before Notification • Prepare the audit report: • Include only factual information and data • “If it is not in the audit report, it didn’t happen” • Compile the audit file • Send the audit report to licensee/registrant

15. Final Steps After Notification • Notify affected parties of the final results • Inform the licensee/registrant of protest rights • 30-day protest period (IFTA, R1410; IRP, 1065a) • IFTA: Use base jurisdiction procedure or R1400 • IRP: Use base jurisdiction procedure, Section 1065 • Notify jurisdictions of audit results • IFTA: May request re-audit/re-examination, R1360, or DRC, 1555 • IRP: May request re-examination, 1040, or DRC, 1400

16. What Areas of an Audit are Likely to Result in a Protest? • Protests are: • more likely when the assessment is high • not likely with a refund or no change • Specific issues that may result in a protest: • Audit selection • Audit sampling • Inadequate records assessment • Evaluation of internal controls • IRP: Verify functions with walk-through • IFTA: Formal report on weaknesses

17. IFTA Audit Selection • A310 number of audits: • 3% per year • Multiple “years” or “fuel types” equal one “audit” • Excludes new licensees • A320 selection of audits: • Accounts stratified by distance • high (top 15%) • low (bottom 25%) • Selection is based on total fleet distance • Must include 25% high and 25% low

18. IRP Audit Selection • Article X, Section 1025: • 3% per year of renewed fleets • One “fleet” for one “registration year” equals one “audit” • Three records reviews equal one audit (NEW) • A records review: • Does not adjust fees • Determines adequacy of internal controls & record-keeping • May review less than one full registration year • May be conducted before first renewal

19. Comparison of Audit Selection • IFTA requires stratification on audit size. • IRP does not • Jurisdictions may use: • Pure random sampling using a random number generator to select audits • Judgmental sampling • Other methods

20. Audit Selection Methods • Red flags: • Rounded numbers for distance on (both) • IFTA report • IRP application • MPGs (IFTA) • the same every quarter • rounded (e.g. 5.0, 6.0) • “1” or another low number used for distance in one or more jurisdictions (IRP) • Non-contiguous jurisdictions (both) • Low mileage per truck or decal (both)

21. Audit Selection Methods (continued) • Recommendations from 3rd party sources: • Enforcement divisions • Fraud hotlines • Other tips with credible information • Visual oddities noted by staff • Shared information between divisions

22. IFTA Sampling • A530-audit must be by sampling • Samples: • must be representative • reflect business operations • Licensee should be: • Allowed input on sample selection • licensee should sign an agreement that sampling is appropriate • A520-use of three representative months is suggested

23. IRP Sampling • APM 503 • Audits are generally conducted on a sample basis • Discuss with registrant: • sample vehicles, • sample periods, and • records required • At least three representative months • Auditor may use different sampling methods

24. Inadequate Records Definition—IFTA • What should be audited? • A540.200-audit completed using best information • burden on licensee • A540.300-reasonable attempt to verify reported information • What is a “reasonable attempt”? • What are “inadequate” records? • What is the licensee’s responsibility? • What is an Individual Vehicle Distance Report (IVDR), P650.100? • “Trip report may be more than one page”

25. Inadequate Records Definition—IRP • Official commentary for Section 1015—records are “inadequate” if as a whole they cannot be audited • What can be audited: • 1005(a)—adequate to verify application distance • Official commentary for 1005(b)—records are adequate when they are: • Sufficient: substantially cover operations • Appropriate: contain auditable information

26. Inadequate Records Assessment—IFTA • A550-procedure for inadequate assessment? • Estimate fuel use using: • prior experience with licensee • licensees with similar operations • industry averages • records available from distributor • other pertinent info obtained or examined • “Unless the auditor finds substantial evidence to the contrary by reviewing the above, in the absence of adequate records, a standard of 4.0MPG/1.7KPL will be used” • A550.200- “When tax paid fuel documentation is unavailable, all claims for tax paid credit will be disallowed”

27. Inadequate Records Assessment—IRP • Based on apportionable fees paid on actual and estimated distance, the registrant will pay a penalty for inadequate records. Additional fees are as follows: • First audit offense, 20% • Second audit offense, 50% • Third and subsequent audit offenses, 100% • IRP Ballot 392—will add “unreported” distance • Go to http://www.irponline.org. Select “IRP Ballots” and “Open Ballots”

28. Evaluation of Internal Controls-IFTA A640 Evaluation of Internal Controls The auditor’s study and evaluation of the licensee’s internal accounting system has several identifiable phases .100 Review and documentation (information gathering) .200 Preliminary Evaluation (identify apparent weaknesses) .300 Tests of compliance (optional extensive tests) .400 Report on weaknesses (formal report before end of audit)

29. Evaluation of Internal Controls-IRP • APM 202. Study and Evaluation • Distance accounting system • gain understanding • document • Evaluate internal controls • document weakness • inform registrant • verify reported functions with walk-through • Obtain sufficient and appropriate evidence (records) to make reasonable conclusions • sufficient—substantially cover operations • appropriate—information needed to audit

30. General Definition of Internal Control The process designed to provide reasonable assurance regarding the reliability of reporting, effective and efficient operations, and compliance with applicable laws and regulations. Safeguarding assets against theft (or unintentional loss) and unauthorized use, acquisition, or disposal is also part of internal control.

31. Why are Internal Controls Important to Auditors? • Are the internal controls reliable? • What are the impacts of any weaknesses in the controls?

32. Why is it Important to Study Internal Controls? The auditor can determine weaknesses in the internal control system and decide whether the distance and fuel records are reliable. This helps the auditor select of sample periods as well as sample size. When the records are more reliable, fewer records are required to sample—there is more assurance the records are correct.

33. How are Internal Controls Evaluated? • To properly evaluate the internal controls the auditor will conduct a review through inquiry and observation and should gain an understanding of the flow of the transaction process. • Is there separation of duties? • Are there policies and procedures in place to encourage and support internal controls? • Are accounting codes used for the tracking of distance and fuel?

34. How are Internal Controls Evaluated? (continued) • Were there changes in the accounting procedures or operations during the audit period? • What records were used to compile the IFTA reports and IRP applications? • What is the process used: • To get distance and fuel information from • The driver to support staff to the governing agency?

35. How are Internal Controls Evaluated? (continued) • Does the staff create summaries (monthly, quarterly)? • Does the company audit the summaries and driver’s records before the tax returns or applications are submitted to the base jurisdiction? • Does the company ensure all distance traveled and fuel consumed is being reported? • In the the proper quarter or application year?

36. Questions?