Support #449
Updated by Daniel Curtis over 10 years ago
This is a guide for the basic financial auditing procedure for Automation Laboratory Technology. The purpose of this guide is to gather and verify each monetary business transaction, correlate each transaction to validate its legitimacy, sort each validated transaction into a proper tax category, provide a realistic representation of all financial business transactions for transactions, both income and expenses. The goal of this guide is to create an organized *+Financial Record Bundle+* and an accompanying *+Tax Filing Bundle+*; these two things, when accurately organized, will be sufficient expenses, for an IRS audit. Automation Laboratory Technology. h3. Prerequisites * Before beginning there are a number of things needed for the audit to be accurate: *# # Bank Statements *# # Credit Card Statements *# # Employee/Contractor 1099's *# # Customer 1099's *# # QuickBooks Detailed Income Tax Report *# # QuickBooks Simple Profit & Loss Report *# # Physical Check Stubs *# # Physical Invoices *# # Expense Reports & Statements (Lindsay, Richard, Daniel, etc.) *# # Physical Receipts *# # Vehicle Expense Receipts *# # Relevant IRS Forms, Instructions, and Publications * The whole process is broken down into a few *PHASES*: PHASES: #* * *Phase 1*: Gather all financial information for the year #* * *Phase 2*: Categorize the financial information #* * *Phase 3*: Correlate the financial information #* * *Phase 4*: Putting it all together * The finished product will be: *# *+Financial Record Bundle+*: This is an organized bundle of *Bank Statements*, *Physical Check Stubs*, *Any Relevant QuickBooks Reports*, *Physical Receipts*, *Invoices*, *Expense Reports/Statements*, *Logs*, *Notes*, etc. *# *+Tax Filing Bundle+*: This is a completed *Form 1040 Income Tax Return* with all relevant *Forms* attached. h2. Phase 1: *Phase 1*: Gather all financial information for the year * This phase requires that all relevant financial information is gathered. Information should include: # *Bank Statements*: Checking and Savings accounts; for *income* verification. # *Credit Card Statements*: Business and Expense accounts; for *expense* verification. # *Employee/Contractor 1099's*: 1099 Statements of an Employee/Contractor sent to the IRS; for *expense* verification. # *Customer 1099's*: 1099 Statements from customers at the End of Year: for *income* verification. # *QuickBooks QuickBooks Detailed Income Tax Report*: Report: Invoiced Amounts; for *income* verification. # *QuickBooks QuickBooks Simple Profit & Loss Report*: Report: General overview of income and expenses; for *income/expense* verification # *Physical Physical Check Stubs*: Stubs: Stubs from payments; for *income* verification. # *Physical Invoices*: Physical Invoices: Paper invoice documents; for *income* verification # *Expense Expense Reports & Statements*: Statements: Expense reports and statements provided by Employee/Contractor; for *expense* verification. # *Physical Receipts*: Physical Receipts: Physical receipts from business purchases; for *expense* verification. # *Vehicle Vehicle Expense Receipts*: Receipts: Physical receipts from Fuel, Maintenance, Repairs, etc.; for *expense* verification. *NOTE*: To be as accurate as possible, all of the above requirements must be met. It is OK if a couple of requirements are missing, however it will increase the difficulty in reconstructing the financial history. h2. Phase 2: *Phase 2*: Categorize the financial information This phase requires that all the gathered information from the previous phase be categorized into one of two groups, *Income* or *Expense*, groups. The obvious groups are Income and then further categorized into one Expense, however each group has a number of the sub-groups to allow for accurate association to IRS tax categories. Physical business receipts and monetary transactions for services and products used during the course of doing business are divided into envelopes for each tax category; each envelope being labeled with *+Tax Category+*, *+Form Line+*, *+Total Amount+*, *+Attached Ticker Tape of Total+*. *NOTE*: Any discrepancy must be noted and reconciled for an accurate Tax Filing. * Discrepancies can take many forms; such as, but not limited to: #* "A check stub from a check for a repayment of a loan" #* "A missing check stub for deposit record" #* "An invoice issued in one year, but remitted in a following year" #* "An invoice issued and payment received that were not paired together, resulting in duplicated income amounts" #* "A payment received from an invoice issued in a previous year" #* "An expense report/statement being lazily written off as Contract Labor, instead of being sorted into the proper Business Expense Tax Categories" #* "Incomplete 1040 Bundle, missing Forms that do not efficiently maximize deductions" #* "Not adding up the Sales Tax from Physical Physical Receipts or Business Physical Receipts Missing a Categorization" #* "Not claiming a special Tax Credit that may be eligible for the year being audited" #* "Not claiming any special Tax Payments, Regulations, Forms that may be eligible for the year being audited" *NOTE*: For updates and/or special tax information, refer to the proper Instructional Documents for each _Form_ in the *+Tax Filing Bundle+*, as well as their related Publications. h3. Income This group involves all monetary transactions coming into the business bank accounts, as well as transactions that adjust the overall _Gross Income_: * *Gross Receipts*: This is the total amount invoiced to customers, including allowances; This is for _+Line 1 of Form 1040 Schedule C+_. * *Allowances*: This is the amount invoiced to a customer, but written off as an _Allowance_, such as a sample or donation service; This is for _+Line 2 of Form 1040 Schedule C+_. * *Cost of Goods Sold*: This is actually an expense, but is needed to achieve a _Billable Sale_, this is for _+Line 4 of Form 1040 Schedule C+_ and is a total of things like: #* _Materials_: These are things necessary for a product or service to be accomplished; This is for _+Line 38 of Form 1040 Schedule C+_. #* _Shipping Expenses_: This necessary to ship a product; This is for _+Line 39 of Form 1040 Schedule C+_. * *Other Income*: These are things such as interest gathered in a savings account; This is for _+Line 6 of Form 1040 Schedule C+_. h3. Expense * *Advertising*: These are expenses that promote and/or advertise business, such as door prizes, business retreats, etc.; This is for _+Line 8 of Form 1040 Schedule C+_. * *Vehicle Expenses*: These are expenses of business vehicles, such as fuel, repairs, tires, car washes, etc.; This is for _+Line 9 of Form 1040 Schedule C+_. * *Commissions and Fees*: These are expenses such as ATM and banking fees during business transactions; This is for _+Line 10 of Form 1040 Schedule C+_. * *Contract Labor*: These are expenses paid to contractors for services and/or labor; This is for _+Line 11 of Form 1040 Schedule C+_. * *Depletion*: These are not used by ALT, but referenced for potential use; This is for _+Line 12 of Form 1040 Schedule C+_. * *Depreciation*: These are the total values of long-term depreciable items, such as real property, vehicles, equipment, etc.; This is for _+Line 13 of Form 1040 Schedule C+_. *Requires Form 4562*. * *Employee Benefit Programs*: These are not used by ALT, but referenced for potential use; This is for _+Line 14 of Form 1040 Schedule C+_. * *Insurance*: These are expenses from insurance (not health); This is for _+Line 15 of Form 1040 Schedule C+_. * *+Interest+* #* *Mortgage*: These are expenses from mortgage interest paid to banks for things such as real property; This is for _+Line 16a of Form 1040 Schedule C+_. #* *Other*: These are expenses from interest paid for things such as loans; This is for _+Line 16b of Form 1040 Schedule C+_. * *Legal and Professional Services*: These are expanses from lawyer, accountant, or other professional services used by the business; This is for _+Line 17 of Form 1040 Schedule C+_. * *Office Expenses*: These are expenses that are for business operations to function, such as furniture, desks, computers, software, etc.; This is for _+Line 18 of Form 1040 Schedule C+_. * *Pension or Profit-Sharing Plans*: These are not used by ALT, but are referenced for potential use; This is for _+Line 19 of Form 1040 Schedule C+_. * *+Rent or Lease+* #* *Vehicles, machinery, and equipment*: These are expenses for vehicle and equipment rentals, such as land-moving equipment, rental skis during a business retreat/product research, etc.; This is for _+Line 20a of Form 1040 Schedule C+_. #* *Other business property*: These are expenses for other business property, such as office space; This is for _+Line 20b of Form 1040 Schedule C+_. * *Repairs and Maintenance*: These are expenses for repairs and maintenance of business property; This is for _+Line 21 of Form 1040 Schedule C+_. * *Supplies*: These are expenses for supplies needed to create, modify, or combine to make products for sale or service; This is for _+Line 22 of Form 1040 Schedule C+_. * *Taxes and Licenses*: These are expenses from taxes or licenses paid for business transactions; This is for _+Line 23 of Form 1040 Schedule C+_. * *+Travel, Meals, and Entertainment+* #* *Travel*: These are expenses from traveling to/from customers or business related tasks; This is for _+Line 24a of Form 1040 Schedule C+_. #* *Meals and Entertainment*: These are expenses from meal, entertainment, or gifts to customers or business related peers; This is for _+Line 24b of Form 1040 Schedule C+_. * *Utilities*: These are expenses from daily resources used for business operations, such as water, electricity, waste, Internet, internet, telephones, fax, etc.; This is for _+Line 25 of Form 1040 Schedule C+_. * *Wages*: These are not used by ALT, but reference for potential use; This is for _+Line 26 of Form 1040 Schedule C+_. * *+Other Expenses+*: This is for _+Line 27 of Form 1040 Schedule C+_. #* *Product Research & Development*: These are expenses for materials used for product research and development; This is for _+Part V of Form 1040 Schedule C+_. #* *Dues & Subscriptions*: These are expenses for dues and subscriptions to service research and learning; This is for _+Part V of Form 1040 Schedule C+_. #* *Executive Dining Area*: These are expenses for food and catering during company meetings, interviews, overtime, and/or holiday celebration; This is for _+Part V of Form 1040 Schedule C+_. * *Total Expenses*: This is the gross total of business expenses, which is added from the all the above +Expense+ categories; this is for _+Line 28 of Form 1040 Schedule C+_. * *Expenses for Business Use of Home*: This is for writing off a portion of a personal home for business use, such as storage space or a home office; this is for _+Line 30 of Form 1040 Schedule C+_. *NOTE*: For more information about +Business Expenses+, refer to _Publication 535_. h2. *Phase 3*: Correlate the financial information This is where the real auditing takes place, and requires a great deal of patience and attention to detail. h3. Correlating Business Income [Invoice Numbers (QB Tax Report)] --> [Invoice] --> [Physical Invoices] --> *+Allowances+* --> [Bank Statements] --> [Check Stubs] --> [QuickBooks Income Tax Detail Report] --> *+Gross Receipts or Sales+* * The main process for verifying *+Gross Receipts or Sales+* _+Form 1040 Schedule C Line 1+_ is simple: *# Find the *Invoice Number* for every invoice for the year being audited; taking note of every invoice number. Correlate with the *+QuickBooks Income Tax Detail Report+* and taking note of any discrepancy. *# Add up the *Total Invoiced* for the year being audited using the *+Physical Invoices+*, including *+Allowances+* (they will be subtracted later), *Ticker Tape this Total* for later correlation; correlate with the *+QuickBooks Income Tax Detail Report+* and taking note of any discrepancy. *# Add up the *Total Allowances* for the year being audited using the *+Physical Invoices+*, *Ticker Tape this Total* for later correlation; correlate with the *+QuickBooks Income Tax Detail Report+* and taking note of any discrepancy; if no discrepancies are found use this should represent an adequate figure for *+Allowances+*, for _+Form 1040 Schedule C Line 2+_ *# Add up the *Total Deposited* for the year being audited using *+Bank Statements+*, *Ticker Tape this Total* making sure to not include deposits from other business accounts, such as savings; correlate each deposited amount with *+Invoice Number+* and *+Check Stub+* and taking note of any discrepancy. *# Correlate the *Total Deposited* with the *+QuickBooks Income Tax Detail Report+*, taking note of any discrepancy. *# At this point any income discrepancies should be spotted, noted, and reconciled; once every discrepancy has been reconciled the *Total Invoiced* should represent an adequate figure for *+Gross Receipts or Sales+*, for _+Form 1040 Schedule C Line 1+_. By now you should have *+Gross Receipts or Sales+*, for _+Form 1040 Schedule C Line 1+_; and *+Allowances+*, for _+Form 1040 Schedule C Line 2+_. h3. Correlating Cost of Goods Sold [Materials Physical Receipts] --> [QuickBooks Materials Report] --> *+Materials+* --> [Shipping Expense Physical Receipts] --> [QuickBooks Shipping Expense Report] --> *+Shipping Expense+* --> *+Cost of Goods Sold+* * The main process for verifying *+Cost of Goods Sold+* _+Form 1040 Schedule C Line 4+_ is simple: *# Correlate +Materials+ and +Shipping Expense Physical Receipts+ with the *QuickBooks Detailed Materials Report* and *QuickBooks Detailed Shipping Expense Report*, respectively; for each matching Physical Receipt set apart from the nonexistent ones, these are verified and do not need to be added twice. *# Add up *QuickBooks Detailed Materials Report Total* with any *+Physical Receipts+* not included on the report, this will be the the total for *+Materials+*, for _+Line 38 of Form 1040 Schedule C+_. *# Add up *QuickBooks Detailed Shipping Expense Report Total* with any *+Physical Receipts+* not included on the report, this will be the the total for *+Shipping Expenses+*, for _+Line 39 of Form 1040 Schedule C+_. *# Once all the above have been verified and reconciled. add up both *+Materials+* and *+Shipping Expenses+* to come up with *+Cost of Goods Sold+*, for _+Form 1040 Schedule C Line 4+_. By now you should have *+Cost of Goods Sold+*, for _+Form 1040 Schedule C Line 4+_; *+Materials+*, for _+Line 38 of Form 1040 Schedule C+_; and *+Shipping Expenses+*, for _+Line 39 of Form 1040 Schedule C+_. h3. Correlating Other Income [Interest Dividend (Bank Statements)] --> [QuickBooks Other Income Report] --> *+Other Income+* * The main process for verifying *+Other Income+* _+Form 1040 Schedule C Line 6+_ is simple: *# Add up the *Interest Dividends* for the year auditing using *+Bank Statements+*, *Ticker Tape this Total*. *# Correlate the *Interest Dividends* with the *+QuickBooks Other Income Detail Report+*, taking note of any discrepancy. *# Once the *Interest Dividends* have been verified and reconciled, add up the total to come up with *+Other Income+*, for _+Line 6 of Form 1040 Schedule C+_. By now you should have *+Other Income+*, for _+Line 6 of Form 1040 Schedule C+_. h3. Correlating Business Expenses * The main process for verifying *+Total Business Expenses+* _+Form 1040 Schedule C Line 28+_ is simple: #* Correlate the *QuickBooks Advertising and Promotions Report* with the *Advertising Physical Receipts*, setting aside any receipts that are not listed in the QuickBook Report; add the total from the *Physical Receipts* that were set aside with the total from the *QuickBooks Report*. This will come up with *+Advertising+*, for _+Form 1040 Schedule C Line 8+_. #* Correlate the *QuickBooks Total Automobile Report* with the *Vehicle Expense Physical Receipts*, setting aside any receipts that are not listed in the QuickBook Report; add the total from the *Physical Receipts* that were set aside with the total from the *QuickBooks Report*. This will come up with *+Car and Truck Expenses+*, for _+Form 1040 Schedule C Line 9+_. #* Correlate the *QuickBooks Bank Fees Report* with the *Commissions and Fees Physical Receipts*, setting aside any receipts that are not listed in the QuickBook Report; add the total from the *Physical Receipts* that were set aside with the total from the *QuickBooks Report*. This will come up with *+Commissions and Fees+*, for _+Form 1040 Schedule C Line 10+_. #* Correlate the *QuickBooks Commissions Report*, *QuickBooks Contract Labor Report*, and *QuickBooks Stipend Payments Report* with the *Contract Labor Physical Receipts* and *Contractor 1099's*, setting aside any receipts that are not listed in the QuickBook Report; add the total from the *Physical Receipts* that were set aside with the total from the *QuickBooks Report*. This will come up with *+Contract Labor+*, for _+Form 1040 Schedule C Line 11+_. #* Correlate the *Previous Years Form 4562* with the *Current Years Form 4562*, *Real Property Mortgage Receipt*, and *Real Property Escrow Receipts*; carrying over depreciable property from the *Previous Years Form 4562*, making sure to adjust the recovery period for the *Current Years Form 4562*, as well as recalculating the amount depreciable with the year being audited depreciation percentage. If a new piece equipment, vehicle, or property is purchased, then add in with the *Current Years Form 4562* and depreciate accordingly. This will come up with *+Depreciation+*, for _+Form 1040 Schedule C Line 13+_. #* Correlate the *QuickBooks Insurance Report* with the *Bank Statements*, verifying the payment records from the *QuickBooks Report*; add the total from the *QuickBooks Report*. This will come up with *+Insurance+*, for _+Form 1040 Schedule C Line 15+_. #* Correlate the *QuickBooks Loan Interest Report* with the *Bank Statements*, verifying the payment records from the *QuickBooks Report*; add the total from the *QuickBooks Reports*. This will come up with *+Mortgage Interest+*, for _+Form 1040 Schedule C Line 16a+_. #* Correlate the *QuickBooks Credit Card Interest Paid Report* and *QuickBooks Isata Load Interest Report* with the *Bank Statements*, verifying the payment records from the *QuickBooks Report*; add the total from the *QuickBooks Reports*. This will come up with *+Other Interest+*, for _+Form 1040 Schedule C Line 16b+_. #* Correlate the *QuickBooks Professional Fees Report* with the *Legal and Professional Services Physical Receipts*, setting aside any receipts that are not listed in the QuickBook Report; add the total from the *Physical Receipts* that were set aside with the total from the *QuickBooks Report*. This will come up with *+Legal and Profession Services+*, for _+Form 1040 Schedule C Line 17+_. #* Correlate the *Vehicle, Machinery, or Equipment Rental Physical Receipts* with *Bank Statements*, add the total from the *Physical Receipts*. This will come up with *+Vehicle, Machinery, or Equipment Rental+*, for _+Form 1040 Schedule C Line 20a+_. #* Correlate the *QuickBook Office Rent Report* with *Bank Statements*, add the total from the *QuickBooks Report*. This will come up with *+Other Business Property Rental+*, for _+Form 1040 Schedule C Line 20b+_. #* Correlate the *QuickBooks Repairs Report*, *QuickBooks Facility Repairs/Improvements Report* with the *Physical Receipts*, setting aside add the total from the *Physical Receipts*, setting aside any receipts that are not listed in the *QuickBook Report*. This will come up with *+Repairs and Maintenance+*, for _+Form 1040 Schedule C Line 21+_. #* Correlate the *QuickBooks Shop Supplies Report* with the *Supplies Physical Receipts*, setting aside any receipts that are not listed in the QuickBook Report; add the total from the *Physical Receipts* that were set aside with the total from the *QuickBooks Report*. This will come up with *+Supplies+*, for _+Form 1040 Schedule C Line 22+_. #* Correlate the *QuickBooks Total Property Tax Report* with the *Bank Statements*, add the total from the *QuickBooks Report*. This will come up with *+Taxes and Licenses+*, for _+Form 1040 Schedule C Line 23+_. h2. *Phase 4*: Putting it all together h2. Resources * http://www.irs.gov