taxes

Auditing Fundamentals

Glossary

Account Receivable
A claim against a debtor, generally on open account, usually limited to uncollected amounts on a completed sale of goods and/or services
Account Receivable Ledger
A book or computer printout containing accounts receivable. It usually has a separate page for each account
Accrual Basis
The method of accounting whereby revenues and expenses are identified with specific periods of time, such as a month or year, without regard to the date of receipt or payment of cash
Agreed Contract Price
The price specified in the contract for the materials, plus any additional charges directly attributable to the materials, including profit calculated as a percentage of the cost of the materials, mark-up and handling charges
Asset Ledger
A book or computer printout listing all assets owned by a company
Asset Purchases
Purchases directly relating to the acquisition of capital assets
Asset Register
A record for the consecutive entry of transactions relating to capital assets - its form may vary from a one-column sheet to a spread sheet
Asset Sales
The disposition of capital assets
Assignment of Right to Refund
If a purchaser paid tax directly to a vendor in error, the vendor may assign the right to refund to the purchaser by completing the Assignment of Right to Refund (form 00-985) so that the taxes are refunded directly to the purchaser by the Comptroller. This is the proper procedure to follow if the purchaser does not have a sales tax permit
Audit
An exploratory, critical review of the underlying internal controls and accounting records of a business enterprise
Audit Deficiency Collection
The collection of monies from a taxpayer based on the adjustments made in an audit
Audit Lead Card (Account Information Card)
A card sent to the appropriate audit office by an auditor to send information pertaining to a particular taxpayer
Audit Plan
A document used by the auditor to record the auditor's plans to conduct an audit, what deviations were made from the plans and the results of the audit activities - documented utilizing CATS (Comprehensive Audit Tax System)
Audit Select
The function of determining which taxpayer accounts are to be examined
Bankruptcy
A legally declared (in U.S. Federal Bankruptcy Court) inability or impairment of ability of an individual or organization to pay their creditors - may be requested by creditors in a effort to recoup a portion of what they are owed or, in most cases, by the bankrupt individual or organization. The most common forms of bankruptcy for individuals and businesses are:
  • Chapter 7 (Liquidation)
    The sale of a debtor's nonexempt property and the distribution of the proceeds to creditors
  • Chapter 11 (Reorganization)
    Usually applies to corporations or partnerships but may also apply to individuals - allows the debtor to keep the business alive and pay the creditors over time
  • Chapter 13 (Reorganization)
    Applies to an individual with a regular income - allows the debtor to keep property and pay debts over time, usually three to five years
Basis of Accounting
The method employed in the recording and reporting transactions - the cash and accrual methods are the two most commonly recognized
Bill of Lading
A document issued by a carrier (an air freight company, a trucking company, etc.) acknowledging that specified goods have been received on board as cargo for conveyance to a named place for delivery to the consignee who is usually identified - title to the goods may be passed by transfer of the bill of lading
Blanket Resale Certificate
A resale certificate stating that all items purchased are for resale, lease or rental in the normal course of business
Book Value
The net amount at which an asset or asset group appears on the books of account, as distinguished from its market intrinsic value - usually represents the cost of an asset less any applicable accumulated depreciation
Bracket System
A schedule setting out the amount of tax to be charged depending upon the amount of the sales price
CAMS (Computer Audit Menu System)
System used to extract necessary data and print reports directly from taxpayer's computer tapes so that auditor can perform computer-assisted audit
CAMS PC
System whereby auditors acquire data from taxpayers, load that data onto their personal computers, and perform computer-assisted audit steps - creating populations, evaluating the populations, stratifying the populations, running reports, selecting samples, and exporting data
CATS (Comprehensive Audit Tax System)
System which, working with Agency Work Manager, tracks the status of an audit and where the auditor performs all the necessary audit documentation
CTD (City Transit Department)
City Transit Department that imposes a sales and use tax that is collected in addition to the state tax and any other local taxes - city, county and special purpose district, when applicable
Capital Asset
A long-term asset of significant value that is not bought or sold in the regular course of business - land, buildings, leaseholds, machinery, mineral deposits and intangible assets (i.e., goodwill, patents, trademarks, investments in affiliated companies)
Cash Basis
An accounting system where revenues are recognized when cash is received and deposited and expenses recorded in the accounting period when bills are paid For audit purposes, the Comptroller recognizes purchases at the time of purchase, without regard to date of payment of cash
Cash Disbursements Journal
A journal used to record all transactions involving the payment of cash
Cash Receipts Journal
A journal used to record all cash inflow including cash sales and cash collections
Certificate of No Tax Due
Certification in writing by the Comptroller that there are no sales taxes remaining due and unpaid on the operations of a business, up to a certain period of time - failure to obtain a certificate from the Comptroller could result in purchaser of a business incurring a successor liability
Chart of Accounts
A systematically arranged list of accounts applicable to a specific concern, giving account names and numbers
Cluster Sampling
A sampling technique in which the sampling unit is a cluster
Clusters
Groups of transactions, usually consecutive, which are selected and examined
Common Carrier
Any shipper or deliverer of goods for hire by any person or firm - trucking firms, commercial freight companies, etc.
Computer Auditing
An audit technique in which accounting data is extracted from a taxpayer's computer records
Consular Exemption Certificate
An identification card issued by the United States Department of State to qualified consular personnel to enable them to make purchases of items tax-free
Contingent City, County, SPD, MTA or CTD tax
A computer coding system to transfer city, county, SPD, MTA, or CTD tax to the State fund for situations when these taxes are collected in error and cannot be refunded to the customer
Contractor
Any person who builds new improvements to residential or nonresidential real property, completes any part of an uncompleted new structure that is an improvement to residential or nonresidential real property, makes improvements to real property as part of periodic and scheduled maintenance of nonresidential real property, or repairs, restores, maintains, or remodels residential real property, and who, in making the improvement, incorporates tangible personal property into the real property that is improved - includes subcontractors but does not include material men and suppliers
Cost-Plus Contract
Generally considered to be a separated contract if the cost of labor is separately stated from the cost for incorporated materials
Credit Audit
Audits in which the adjustments result in a refund to the taxpayer
Credit Entries
Bookkeeping entries or postings recording the reduction or elimination of an asset or an expense
Credit Memo
Posting to a customer's account in order to reduce or write-off outstanding balances
Data File
Transactions stored in computer readable form
Debit Entries
Bookkeeping entries or postings recording the creation of the addition to an asset or an expense, or the reduction or elimination of a liability
Debt
Money, goods or services owing to another by virtue of an agreement, express or implied; giving rise to a legal duty to pay
Deductions
All sales, leases and rentals of tangible personal property and services on which sales tax is not required to be collected, including sales for resale, sales to exempt organizations, sales shipped out-of-state, specifically exempt items, etc.
Deficiency Audit
Audits in which the adjustments result in additional taxes being due the state
Deficiency Determination (Texas Notice of Tax Due)
Issued by the Comptroller to a taxpayer stating the amount of tax, penalty and interest due to the state - a normal deficiency determination becomes final 30 days after the date of the notice
Delivery
The passage or transfer of possession of goods or services from one person to another
Depreciation Schedule
A schedule listing all depreciable capital assets; usually listing date of acquisition, cost, depreciation and net book value
Detailed Audit
An examination of a taxpayer's records whereby all or substantially all entries and transactions are reviewed
Detail Exam Adjustment Schedule
A schedule which is part of the Windows Audit Tax System (WATS) personal computer software - audit adjustments can be made directly to this schedule
Direct Payment Permit Certificate
A form issued by the holder of a Direct Payment Permit to the seller of an item or service, enabling the Direct Payment Permit holder to make purchases for his own use tax-free - not to be issued for items or services purchased for resale
Direct Payment Permit
A permit issued by the Comptroller to qualified purchasers of tangible personal property and services, which allows the holder of the permit to purchase items and services for his own use tax-free - permit holder must accrue and pay taxes directly to the Comptroller
Disagreed Audits
Audits in which the taxpayer disputes the final adjustments and findings of the auditor
Divergent Use
Any use of tangible personal property, other than retention, demonstration or display, while holding it for sale, lease or rental in the normal course of business
Exemption Certificates
A form signed by a purchaser or purchaser's representative certifying that the items or services purchased will be used in a manner or for a purpose that qualifies the item or service for exemption from taxation
Export
To ship any good or commodity to a point outside the boundaries of the United States - see State Sales & Use Tax Rule 3.323 for acceptable proof of export
Fabrication
To make, build, create, produce, or assemble components of tangible personal property, or to make tangible personal property work in a new or different manner
Fair Market Rental Value
The amount that a purchaser would pay on the open market to rent or lease an item of tangible personal property
FOB (Free on Board) Destination
A term used in the transportation of goods meaning that the title of the goods being transported passes to the buyer when the goods arrive at their destination
FOB (Free on Board) Shipping Point
A term used in the transportation of goods meaning that the title of the goods being transported passes to the buyer at the shipping point
General Audit Exam
A document which is part of the Windows Audit Tax System">Windows Audit Tax System (WATS) personal computer software - must be completed for all audits completed using WATS
General Journal
The journal in which are recorded transactions not provided for in specialized journals
General Ledger
A ledger containing accounts in which all transactions of a business enterprise are classified in detail or in summary form
Good Faith
The presumption that a resale/exemption certificate, a utility usage study, etc. is valid - the seller lacks actual knowledge that the claimed exemption is invalid
Gross Receipts/Gross Sales
The total amount of all sales, leases and rentals of tangible personal property and all labor and service charges - does not include the amount of any taxes collected
Handling
The packaging of an item for shipment
ICL (Inside City Limits)
Located inside a city in Texas that has adopted the city sales and use tax
Independent Audit Review Conference (IARC)
An informal meeting conducted by the Independent Audit Reviewer (IAR) with the taxpayer, auditor, supervisor and/or audit office manager in attendance. The purpose is to resolve the disagreed issues in the audit prior to becoming involved in the formal redetermination process.

Note: This process replaced the Dispute Resolution Conference.
Independent Audit Reviewer (IAR)
An independent third party who conducts the Independent Audit Review Conference. The IARs report directly to the assistant director of Tax Administration. The IAR is not an employee of the Audit Division and does not work at any Comptroller office that conducts audits.

Note: Replaced Dispute Resolution Officers (DROs)
Installation Charges
The separately stated identified amount charged for labor or service rendered in installing, applying, remodeling, or repairing the tangible personal property sold
Internal Control
Measures and methods employed within an organization to safeguard cash, inventories and other assets, as well as to maintain the accuracy and proper functioning of the accounting system
Itinerant Vendor
A retailer who does not operate any place of business
Jeopardy Determination
A bill issued to a taxpayer for tax, penalty and interest that becomes final 20 days after the date of the notice - liens are automatically filed on the taxpayer's property upon the issuance of this type of determination
Judgment Selection
A method used to select records for examination based on the auditor's intuition
Letter of Assignment
A letter transferring taxes reported to the State under an incorrect taxpayer number
Local Sales Taxes
Taxes imposed on the sales of taxable items and services within the boundaries of each local jurisdiction which has adopted to impose the taxes (i.e., city, county, SPD, MTA, CTD)
Lump-Sum Billing
An invoice which does not separately state labor and materials
Lump-Sum Contract
A contract for the improvement of residential or nonresidential real property in which the charge for labor and materials is included in one stated charge or price
MTA (Metropolitan Transit Authority)
Metropolitan Transit Authority that imposes a sales and use tax that is collected in addition to the state tax and any other local taxes - city, county, and special purpose district, when applicable
Manufacturer
One who manufactures or fabricates an item for sale but does not install it
Manufacturing
Each operation beginning with the first stage in the production of tangible personal property and ending with the completion of tangible personal property - would include all wrapping and packaging of the tangible personal property
Maquiladora Enterprise
A business entity chartered by the government of the United Mexican States and authorized by that government to make duty-free imports of raw materials, component parts, or other property into Mexico to be used in manufacturing, processing, or assembling items by the business entity in Mexico primarily for export from Mexico
Mean Estimate
A term used in the evaluation of an audit sample results - the average error per sample unit is calculated and multiplied by the total number of units in the population
NTD (No Tax Due)
An audit that does not contain any tax adjustments
Nexus
The establishment of representation within the state or other taxing jurisdiction
Non-Permitted
An entity which does not hold a permit for a Texas tax
Non-Filer
A permitted taxpayer that failed to file a required tax return
OCL (Outside City Limits)
Located outside any taxing city in Texas that has adopted the city sales and use tax
Occasional Sale
  • Less than three sales of tangible personal property or less than eleven admissions for amusement services during a twelve month period by a person not holding a sales tax permit
  • Also applies to sale of the entire operating assets of a business or an identifiable segment of a business
Qualifying sales are exempt from sales tax
One Time Sale
A sales tax permit covering a specific period of time - normally used to process an audit on a non-permitted taxpayer who will not need to be permitted in the future
Open Collection Record
A record set up on the Comptroller's computer system when a taxpayer has either under paid or over paid a sales tax return or audit
P&I (Penalty and Interest)
Statutory amounts, based on the amount of tax due, assessed for failure to file a tax report or for failure to file a tax report when due
Partial Payment Agreement (PPA)
An agreement in which the Comptroller will allow a taxpayer to pay a deficiency audit on installments
Percent of Error
The term used to describe the proportion of audit adjustments found in a sample of transactions - audit adjustments are divided by the dollar amount of the sample base
Petition for Redetermination (Statement of Grounds)
A petition from a taxpayer to the Comptroller requesting a redetermination of the amount of taxes claimed to be owed - must be filed before the determination becomes final
Place of Business
An established outlet, office, or location operated by a retailer, the retailer's agent, or the retailer's employee for the purpose of receiving orders for taxable items - includes any location at which three or more orders are received by the retailer in a calendar year
Population Base
The dollar total of all transactions in the population
Populations
Groups of transactions which will be studied and on which inferences will be made
Prior Contract Exemption
An exemption allowed for a bid offered or a contract signed before any change in the tax rate or tax base
Processing
The physical application of the materials and labor necessary to modify or to change the characteristics of tangible personal property
Projection Procedures
Auditing procedures used to apply the percentage of error found in a sample of transactions to all transactions occurring in the population base
Purchases Journal
A book or computer printout listing all purchases on account of merchandise, materials, supplies and similar items occurring during a specific time period
Qualified/Restricted Certificate
A resale certificate which restricts the tax-free purchase to only those items specifically listed on the certificate itself
Random Selection
A method of selecting transactions to sample in which all transactions have an equal chance of being selected
Ratio Estimate
The method used to apply adjustments found in a sample to the entire audit - the percent of error is multiplied by the total dollar value of all similar transactions
Redetermination
A formal process in which disputed audit adjustments and/or penalty and interest waiver decisions are reviewed by our legal services and an administrative law judge - it must be requested by the taxpayer before the audit determination becomes final
Redetermination Status
The term used to designate an audit that is being challenged by a taxpayer
Remodeling
To make over again in a similar but different way or to change the form, shape or style of real or tangible personal property without causing a loss in its identity
Repair
To mend or restore real or tangible personal property which was broken, damaged, defective or malfunctioning to working order or operating condition
Resale Certificate
A form signed by the purchaser of an item stating that the item purchased is to be resold, leased or rented in the normal course of business or is to be transferred as an integral part of a taxable service performed in the regular course of business
SPD (Special Purpose District)
Special Purpose District that imposes a sales and use tax that is collected in addition to the state tax and any other local taxes - city, transit, and county, when applicable
Sale
A business transaction involving the delivery of a commodity, an item of merchandise or property, a right or a service in exchange for cash, a promise to pay or money equivalent
Sales Journal
A book or computer printout in which sales are recorded individually or in groups - it may also contain columns classifying sales by departments, products, etc.
Sample Audit
An audit in which less than a detailed audit is performed and the resulting adjustments are projected - the accuracy of the accounting system and internal control is determined by the characteristics found in the selected transactions
Sample Base
The dollar total of the transactions selected for examination
Sampling Units
The item or items that will be selected and examined - individual transactions, daily sales, weekly sales, etc.
Seller/Retailer
A person in the business of making sales of tangible personal property or services, including sales at auction
Separated Billing
An invoice (not a contract) which lists material and labor separately
Separated Contract
A contract for improvement of residential or nonresidential real property in which amounts for material and labor are separate and identifiable
Service
Useful labor that does not produce tangible personal property
Short Test
To verify selected items in an account or record for the purpose of arriving at an opinion of the correctness of the entire account or record
Short Testing
Tracing selected transactions or accounting entries through the accounting records to determine the accuracy and reliability of the accounting system
Show Cause Hearing
A formal meeting of representatives of the taxpayer and of the Comptroller where the taxpayer may show reason why the taxpayer's sales tax permit should not be revoked or suspended
Sole Proprietorship
A business enterprise the net worth of which belongs entirely to one individual
Source Document
A document showing the character, quantity, price, terms, nature of delivery and other particulars of goods sold or of services rendered
Specific Exam
A document which is part of the Windows Audit Tax System (WATS) personal computer software - this document must be completed for all audits utilizing WATS
Split Audit
Audits completed on a portion of a statute period
Statute Extension Agreement
An agreement between the taxpayer and the Comptroller to extend the normal four year statute of limitations
Stratified Sample
A sampling technique in which the population of transactions is divided into separate groups based on transaction amount - each group is sampled separately
Subpopulations
Groups of transactions which have similar characteristics - they can occur naturally or the auditor can create them from the accounting system
Successor Liability
The liability for any sales tax amounts due and unpaid by the former owner of a business which passes to the succeeding owner
Summary Records
Ledgers or journals used to record and classify transactions
Surety Bond
A binding agreement between a bonding company and a taxpayer guaranteeing that the bonding company will be liable to the Comptroller for any debt, default or failure to pay taxes incurred by the taxpayer
Systematic Selection
A sampling procedure in which the sampling units are selected at some fixed or designated interval, e.g., every fifth file card in a file system
Tangible Personal Property
Any personal property having physical existence - would also include computer software
Tax Accrual
The establishment of a tax liability as a result of collecting sales tax and/or self-assessing use tax
Tax-Free Inventory
The stock of goods purchased without the payment of any sales or use taxes, generally purchased using a resale certificate
Taxable Purchases
Purchases of taxable items and services purchased for personal or business use on which sales or use tax was not paid when purchased, including items taken out of inventory for use and items given away for promotional use - does not include inventory items held for resale
Taxable Services
Services provided which are subject to state, city, county, SPD, MTA, and CTD taxes - for a complete listing of the taxable services, see 151.0101(a) of the Tax Code
Taxing City
Any city in Texas which has adopted city sales and use tax
Taxpayer History
A computer generated report listing information about a taxpayer and tax return information - may also be referred to as an Audit History
Temporary Permit
A sales tax permit issued at a field office - this type of permit is valid for a specific number of days
Time Period Sampling
A sample selection procedure in which the sampling unit is a time period, i.e., days, weeks, or months - all transactions occurring during the selected time periods are examined
Transaction Sampling
A sample selection procedure in which the sampling unit is an individual transaction
Transaction
An event or condition the recognition of which gives rise to an entry in accounting records
WATS (Windows Audit Tax System)
Sales tax scheduling program for personal computer - soon will be incorporated into CATS
Warehouse, Storage Yard or Plant
A location where items are manufactured or where inventory is maintained, and which does not take three or more orders or does not make three or more sales per year (not a place of business)
Working Papers
Schedules or other documentation used to calculate and summarize amounts reported on the sales tax return

TOC | Preface | 1 | 2 | 3 | 4| 5 | 6 | 7 | 8 | 9 | 10 | Appendix | Glossary | Timelines

(Revised 06/2008)