This lesson examines the critical preparatory work undertaken before commencing an audit, including intelligence gathering, prior compliance history review, and the development of an audit plan.

• Pre-Contact Work: The auditor must review evidence for potential underreporting. Techniques include additional analysis of the tax return to ensure all income is properly reported, using gross profit reviews and cash flow analysis. Minimum income verifications may be identified during selection .

• Intelligence Gathering: An essential part of the risk assessment process. Auditors need to ensure all relevant intelligence from internal and external sources is gathered together to inform the audit plan .

• Internal Sources: Bank interest and other financial details, prior/subsequent tax returns on file, and third-party information for interest, dividends, or other income payments to taxpayers .

• External Resources: Anything available in the public domain or by use of formal information requests from public bodies such as local authorities. Internet resources are extensive. Important to keep control of resource costs in compiling additional data compared to potential benefits .

• Reviewing Prior Compliance History: Common technique of getting tax returns from multiple tax years for comparison of income, expense, or balance sheet issues. Some countries formalize the review process with ratios to gain a better perspective on the taxpayer’s overall compliance track record .

• Returns Preparer Performance: Common practice to consider the firm or individual who prepared the return as a factor in selecting returns for audit. If the preparer is perceived as a risk to the health of the tax system, additional scrutiny may be exercised .

• Developing the Audit Plan: The audit plan should define areas of common interest to examine, jointly develop strategies, understand how each country proposes to conduct its examination (time and scope), and agree on target dates. This is especially important in international audits .