Reverse Audits - Why They're Important and How They Can Save Your Company Money
Though it’s not actually a four-letter word, “audit” carries the same consequences when said around most adults.
The very thought of being audited arouses feelings of fear, frustration, and even anger.
However, there’s actually a specific type of audit that could end up saving your business a lot of money. If your company isn’t currently investing in reverse audits, it would be a wise practice to implement in the near future.
What Is a Reverse Audit?
A reverse audit is similar to the kind no one ever wants to go through. The main difference is that the fine-toothed comb is used to identify tax overpayments dispatched to suppliers or directly filed as a self-assessment of use tax.
Generally, a company’s accounts-payable department is responsible for identifying purchases that are exempt from taxes.
Unfortunately, sometimes, they may pay sales and/or uses taxes even though it’s not necessary. As it’s the purchaser’s responsibility to know when to pay taxes, the supplier charges them as they usually would.
Field auditors in many states have become progressively more aggressive with assessing interest, taxes, and penalties, which is why many suppliers and retailers to do the same in order to avoid being audited.
Why Compliance Systems Aren’t Always Enough
If your company doesn’t have an operational compliance system in place, a reverse audit is probably long overdue.
If you do have one in place, it might seem like this process would be a waste of time and money.
It’s still probably a good idea to double-check the compliance professionals’ work with a third-party, though, considering how much you could be overpaying.
That said, this would be an especially wise move if your company has recently been through any of the following:
These types of events make it easy for compliance system failures – even temporary ones – that allow overpayments to occur. If you never conduct a reverse audit, you’ll never recoup those funds.
Keep in mind that even something as simple as a miscommunication could cause an overpayment. It doesn’t mean that your compliance team isn’t doing a perfect job the rest of the time.
How a Reverse Audit Is Conducted
Having a third-party conduct the reverse audit is vital for the sake of objectivity.
It’s also such an in-depth practice that most companies couldn’t afford to allocate staff members to do it without accepting setbacks elsewhere.
Here’s what most reverse audits entail.
1. Understanding the Company’s Practices
Initially, the auditors will need to gain a complete understanding of your company’s business practices.
This may include any facilities that would be affected by your supply chain. For example:
They’ll need to know about how your company pays sales and use tax and any exemptions you claim.
Fortunately, this isn’t as lengthy a process as it may seem. An experienced auditing team can accomplish it with a brief tour of your company’s facilities and a discussion with relevant personnel.
2. Studying Your Compliance System
Next, the team will assess your use and sales tax compliance system. They must understand how sales tax is issued on invoices and how purchases are approved and made.
Usually, this involves looking at a sample of invoices and tracing them from purchasing through payment and accounting. Obviously, they’ll pay close attention to how sales and use tax is paid based on these invoices.
During this step, certain weaknesses within your system may be exposed. Even if no overpayments are found, this could make the entire reverse audit worth it as their discovery will prevent the issue from happening in the future.
3. Preparing and Executing the Reverse Audit Plan
With all of the necessary reviews completed, the team will present their recommendation to you and, upon approval, execute it. This is when overpayments will be identified and the overpaid amount recovered.
Ready to Benefit from a Reverse Audit?
As you can imagine, conducting a thorough reverse audit is no easy task. It requires an experienced eye to spot every opportunity where your company is owed money.
Fortunately, Peter Marshall and Company, CPA is here to help with our network of strategic partners. If you have any bookkeeping, tax planning, and accounting questions, contact us today and let’s talk about what our specific process entails.