Chapter 6: Audits

What is an audit?

Auditing is a way for the CRA to monitor and inspect GST/HST and income tax returns and payroll records. Although there is a high standard of compliance with the law in Canada, audits help us maintain public confidence in the fairness and integrity of Canada's tax system.

How we select files to audit

Your tax return is recorded in a computer system that enables us to select returns to be audited. The system also lets us sort returns into various groups to help with our selection.

In some cases, we compare selected financial information for current and previous years of clients engaged in similar businesses or occupations. From computer-generated lists of returns for potential audit, we then choose specific returns.

Most returns are selected in this way. But there are four other common ways of selecting files.

1. Computer-generated lists

Most returns are selected for audit review from computer-generated lists. For example, the computer system can compare selected financial information of taxpayers engaged in similar business or occupations and generate lists of returns with audit potential. From these lists we choose specific returns to be audited.

2. Audit projects

In some cases, we test the compliance of a particular group of taxpayers. If the test results indicate that there is significant non-compliance within the group, we may audit its members on a local, regional, or national basis.

3. Leads

Leads include information from other audits or investigations, as well as information from outside sources.

4. Secondary files

Sometimes we select files for audit because of their association with other previously selected files. For example, if you are in partnership with another taxpayer, and that person's file has been selected for audit, it is usually more convenient to examine all the records at the same time.

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How we conduct audits

If you are selected, an auditor will review your records at a CRA office (office audit) or at your place of business (field audit). The audit usually includes an examination of the following documents:

• information on file at CRA, such as the returns selected for audit, financial statements, audit reports from previous audits, if any; and
• your business records including your ledgers, journals, bank accounts, sales invoices, purchase vouchers, and expense accounts.

The auditor will contact you and either request that you send specific records to a CRA office, or arrange a convenient date and time to start the audit at your place of business.

If a field audit is required, on arriving at your place of business, the auditor will present an identification card. Before examining your records, the auditor may want to discuss the general nature of your business, or tour the premises to get a better understanding of the transactions recorded in your books.

Throughout the process, the auditor may need to get information and assistance from your employees, particularly those who do your accounting.

Delays in the audit, and how to avoid them

Audits usually take only one or two weeks, but could be delayed for a number of reasons. For instance, you may want to consult with advisers, or you may be called out of town on other business before the audit is completed. Similarly, the auditor may ask for an interpretation from CRA Headquarters on a particularly complex or contentious point of law.

Well-kept records will reduce the time required to complete the audit. Refer to the section called Keeping Records.

Finalizing an audit

When the audit is completed, the auditor may propose certain adjustments to your return. He or she will prepare a summary of the proposed adjustments.

Initially, the auditor will discuss this with you or your representative. If you request it, or if it is reasonable to expect that you will need some time to analyze the proposed adjustments, the auditor will confirm the proposal in writing and allow a reasonable time for your reply.

If you provide additional information within this period, the auditor will consider it and will issue a new proposal letter, if applicable.

If there are no proposed adjustments to your return, the auditor will inform you of this when the audit is completed.

If there are changes, you will be issued a Notice of Assessment or Notice of Reassessment.

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