People often talk about “not wanting to get audited” when they are preparing their books for the year-end tax return of their small business in Toronto…

What most people do not realize is that any penalties and interest resulting in audit findings are only one potential “cost” associated with the audit (assuming there were errors made in the recording of income and expenses). The amount of time, energy, stress and cost of assistance from Chartered Accountants in Toronto can also be very significant.

Here is what an audit process might look like:

Audit Letter

The Canada Revenue Agency (CRA) advises you by letter that you have been selected for an audit and provides the details regarding the scope of the audit. You may be asked to submit particular receipts or records or all the receipts and records of a certain type, perhaps an entire line item on the financial statements or GIFI; or you may be asked to prepare for an audit of your records in your place of business.

Audit Process

Based on receipts and records you submit, an audit may take place at the offices of the CRA or it may take place at your business office. In an audit focused on a specific area, the auditor makes sure that the totals you have declared and claimed are backed up by your records, and that the records reflect individual transactions that he or she can verify. In addition to having the backup, you must also be able to demonstrate that the expenses were incurred for business purposes; to earn business income.

Your records must show that you have included and declared all income, and your expenses must be documented with receipts that have a reference to how they were paid, such as a cheque number, a bank reference or a note that they were paid by cash. The auditor chooses samples (spot checks) to see if the records are consistent and may investigate further if a difference is noted. You may have to obtain additional documentation from the bank and from other people you dealt with if your records are incomplete. If everything is in order, no adjustment to your taxes is needed. If you made a mistake in your documentation or calculations, there may be a reassessment with penalties and interest, as well as the taxes owing on the new taxable income amount.

Audit Results

Once the audit is complete, all issues should be resolved. If you have to pay an outstanding balance, it will typically be because you made an honest mistake or interpreted a tax regulation incorrectly. If your documentation is in order and the auditor found no mistakes, there will be nothing more to do. The auditor will usually advise you of his findings and confirm them in a letter.

Of course, you should always work with a Small Business Accountant Toronto in order to ensure your year-end accounting is done correctly.