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Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

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Chapter 2<br />

Getting Started<br />

The key to a quick and competent closure of any new vehicle dealership examination hinges on<br />

narrowing the scope of the examination to items that may prove productive. This section<br />

addresses tools necessary to frame the scope of the examination, influenced by financial status<br />

concerns, and to make the transition present in each examination from planning to the next step:<br />

where do we start our examination of the books and records.<br />

In order to determine what focus the agent may take in the examination, it may be prudent to<br />

request copies of a few audit necessities even before the initial interview. These documents form<br />

the cornerstone of any auto dealership examination:<br />

1. Unadjusted Trial Balance and Adjusting Journal Entries<br />

2. Tax Classification Work Papers<br />

3. Manufacturer’s Statement<br />

An agent obtaining this information before the initial appointment will be able to accomplish two<br />

objectives. First, the agent will be able to reconcile the trial balance to the tax return. Second,<br />

the agent will be able to ask more pointed questions during the initial interview.<br />

Regarding the reconciliation, it is recommended the agent do a full reconciliation of the trial<br />

balance and the adjusting journal entries to the tax return. By doing a little work up front the<br />

agent should have a specific understanding of the underlying transactions that make up the return.<br />

More on this in the next section.<br />

Often in a dealership examination the liability accounts have special significance. If the dealer is<br />

"taking money out of the business" the agent may be able to spot the issue here. The<br />

recommended reconciliation will enable the agent to analyze liability accounts to determine if any<br />

issues exist regarding loans or intercompany transfers. When the initial interview is held, the<br />

agents’ questioning may be more specific regarding liabilities or any transaction analysis made<br />

possible through the reconciliation.<br />

The agent has requested the tax classification work papers. It is difficult to envision a return at<br />

the level of a new vehicle dealership to be prepared without the assistance of such work papers.<br />

Most representatives are forthcoming and do provide these work papers. If received, most of the<br />

reconciliation is completed and the agent has saved the up front time previously scheduled.<br />

In order to open and maintain a franchise, the auto dealership is required to furnish financial<br />

statements with the manufacturer on a regular basis, usually monthly. These manufacturer’s<br />

statements are usually reliable, as shareholders in automobile dealerships do not want to risk<br />

2-1

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