Sampling Design Issues in Sales and Use Tax Audits

This document outlines sampling issues to be considered by auditors and taxpayers in designing a sales and use tax audit. These issues were identified from my own review of the literature and helpful comments from sources in universities, government agencies, industrial firms, consulting firms, and professional organizations. All views and errors in this document are my own. I welcome your comments suggestions for improving this document. Please e-mail any comments or suggestions to wyancey@acrlsbs.com
 

Written by

Will Yancey, PhD, CPA
38705 Seven Mile Road, Suite 460
Livonia, Michigan  48152
Phone  734.744.4400
Fax      734.744.4150
Email: wyancey@aclrsbs.com
Web:  http://www.willyancey.com/

Revised October 7, 2010.

Web address of this document: http://www.willyancey.com/sampling-design.htm
 
 

Contents

1.0 Audit Objectives

2.0 Sampling Methods

3.0 Planning a Statistical Sample

4.0 Executing Sampling Plan

5.0 Evaluating Sample Results

6.0 Projecting Results

Bibliography at http://www.willyancey.com/sampling.htm



 
 
 

1.0 Audit Objectives
 
 

1.1 Legal Constraints


 
 

1.2 Scope Alternatives


 
 

1. 3 Period and Entities To Be Examined

1.4 Budget for Government and Taxpayer 1.5 Sampling Risk 1.6  Trade-off Cost and Sampling Risk
 
 

2.0 Sampling Methods


 
 

2.1 Sampling Method Categories

2.2 Detail Census


2.3  Judgment and Block Sampling
 

2.3.1 Characteristics of Judgment Sampling

2.3.2 Comments on Block Sampling from Dr. Edward Bryant
 
 

2.4 Statistical Sampling

2.4.1 Simple Random Sampling 2.4.2 Stratified Random Sampling


3.0  Planning a Statistical Sample
 

3.1  Defining Population


 
 

3.2 Sampling Unit


 
 

3.3 Testing Sampling Frame


 
 

3.4 Tolerable Error


 
 

3.5 Acceptable Sampling Risk


 
 

3.6 Stratification Attributes

3.6.1 Possible Stratification Attributes
 
 

3.7 Sample Leverage

3.7.1  See "Sample Leverage Example"
 
 

3.8 Initial Sample Size (N)

3.9 Possible Procedures for Missing Documentation
 
 

3.10 Reviewing the Plan

4.0  Executing a Sampling Plan
 
 
 

4.1 Random Selection


 
 

4.2 Correctly Evaluate Each Sample Item


 
 

4.3 Follow Sampling Plan


 
 

5.0 Evaluating Sample Results
 
 

5.1 Compare Results to Sampling Plan


 
 

5.2 Example of Tolerable Error Goal


 
 

5.2.1 Example of Tolerable Error Achieved


 
 

5.2.2 Example of Tolerable Error Failure


 
 

5.3. Why Tolerable Error Not Achieved?

5.4. Possible Actions To Revise Sampling Plan
 
 

5.5 Involvement of Taxpayer


 
 

6.0 Projecting Results
 
 
 
 

6.1 Minimum Number of Errors Required Before Projecting a Stratum


 
 

6.2 Mean Projection


 
 

6.3 Ratio Projection


 
 

6.4 Point and Interval Estimates


 
 

6.5 Lower Bound of Confidence Interval

 6.6  Possible Appeals
 
 

6.7 Use Results for Planning Future Audits


 
 

Bibliography at http://www.willyancey.com/sampling.htm



 

I welcome your comments suggestions for improving this document. Please e-mail any comments or suggestions to wyancey@aclrsbs.com