QUESTION 1: If a Field Audit case is selected this year for the
A/S and if the same employer is audited next year--should that employer
be included in the universe and if selected should that case be reviewed?
ANSWER: Yes.
February 1994
QUESTION 2: If a Field Audit is being conducted and the employer
has a corporate charter but no 1120 (corporate tax return) is this sufficient
to verify ownership?
ANSWER: Yes, the corporate charter is sufficient for RQC purposes.
February 1994
QUESTION 3: The question and first sentence in the rationale for
pre-audit discussion included "identified designated representative"
as meeting RQC requirement for pre-audit discussion. However, the second
sentence says "At a minimum, the owner, a partner, or a corporate officer…"
Does this mean that if the designated representative is NOT one of these
three categories, the audit should not receive the 10 points for this question?
ANSWER: No, the second sentence was meant to clarify that to meet RQC requirements,
either an in-person discussion took place, a telephone discussion
was held, or a letter was sent which explained the purpose of the audit
and provided an opportunity for a meeting. It was not intended to
restrict the individual with whom the discussion was held to these three
categories.
February 1994
QUESTION 4: N/A to Texas audit procedures.
QUESTION 5: Is it acceptable to ask an individual, who says he or
she is the designated representative, the name of the individual authorized
to make this designation? If yes, how should this be documented? Example,
trucker's wife keeps the books. The trucker is on the road and cannot be
reached. Is it OK to talk to the wife and accept her as designated representative
if she says she keeps the books and she says her husband has designated
her?
ANSWER: If there is evidence that the spouse or other person holding himself/herself
up as the representative has the authority to act on behalf of the employer,
go ahead with the audit. The evidence could be that the representative has
possession of the records, signs the payroll checks, has signed the quarterly
reports or other UI forms/letters on behalf of the employer or any other
document that pertains to knowledge of the books and records of the employer.
NOTE: Texas is a community property state and all spouses of sole proprietors
are authorized.
QUESTION 6: Is one quarter verification of one employee sufficient to verify employer payroll records?
ANSWER: It is up to the SESA audit requirements, but the minimum standard set by RQC is that at least one employee's record must be verified to meet the requirements.
February 1994
QUESTION 7: In the question regarding the search for misclassified
or hidden wages the handbook states:
"If the records are kept by the employer they must be examined by
the Auditor". It goes on to say "these records include but are
not limited to 1099's, misc. 1096, summaries, and master vendor files…"
Does this mean that if the employer has ALL of the records listed under
"these records include but are not limited to" that the Auditor
has to look at them all even if it appears redundant?
ANSWER: No. There are at a minimum, four types of employer records
that must be examined (i.e., contract labor, cash disbursements, detailed
general ledger, and miscellaneous reports and accounts). Contained in each
of the four types are examples of records that may be examined (i.e. as
examples for the records of contract labor: 1099, 1096, and master vendor
files are given). All the examples do not have to be examined to meet the
requirements. It is up to the Auditor's discretion to select the proper
records to examine from each of the four types of employer records.
February 1994
QUESTION 8: N/A to Texas audit procedures.
QUESTION 9: If certain employer records (deemed necessary for the
audit) are not available, must this be documented?
ANSWER: Yes. All books and records required by the RQC/ESM standards that
are appropriate for the audit should be requested. This request should be
documented.
February 1994
QUESTION 10: If necessary records are maintained but not available,
must there be an explanation?
ANSWER: Yes. The Auditor is to explain in the audit the reason the necessary
records were not available for examination.
February 1994
QUESTION 11: What if records essential to the audit are maintained
elsewhere, i.e., what if books are available in the Reviewer's State, but
corporate minutes are in another state?
ANSWER: If essential records are not examined because they are maintained
in another State, the audit should contain an explanation identifying the
circumstances and facts known and attempts to secure the records from the
employer or designated representative. The Auditor should attempt to access
another acceptable record to accommodate the objective, search for misclassified
workers/hidden wages. The audit is not to be penalized if the efforts are
attempted and documented in the narrative. Note that RQC provides minimum
requirements for audit staff, however States may expand on their individual
requirements.
February 1994
Question 12: Is a telephone call acceptable for the post audit discussion?
ANSWER: Yes. The Auditor is to discuss all relevant matters/issues with
the employer or designated representative. The post audit discussion must
contain the name, title, and telephone number of the individual contacted.
February 1994
QUESTION 13: Is it acceptable to review a sample of 1099s in lieu
of reviewing all 1099s to meet the RQC requirements for examining records
to search for misclassified workers?
ANSWER: No. All 1099s must be reviewed to meet the RQC requirements in
this section. Sampling of the 1099s would not identify all possible suspect
payments thereby compromising the test in this area.
The 1099s which have been categorized into separate types may be documented
as groups in lieu of being individually detailed, provided the Auditor determines
there is credibility in this method. Example: Auditor after categorizing
the 1099s may document by stating 15 1099s were for dividends and 25 1099's
were for interest.
February 1994
QUESTION 14: (a) Are RQC requirements
met for the acceptance sample question which
asks if an acceptable explanation documented
how the Auditor verified the ownership of the
business if the Auditor reviewed federal forms
940 or 941 for this purpose? (b) If the business
is a partnership, does reviewing the individual
1040-Schedule C satisfy requirements for verification
of ownership?
ANSWER: (a) No. Not unless specifically provided
for in the SESA field audit procedures.(b) No. The
1040- Schedule C is for the individual filing who may
or may not be a partner in the business. A 1065-Partnership
is the preferred tax return to examine when verifying
the ownership of the business.
February 1994
QUESTION 15: If a problem is discovered in the initial audit period,
what action is required in terms of expanding the audit?
ANSWER: The scope of an audit must include at least four consecutive quarters
or an acceptable documented explanation to preserve the integrity of the
audit program and to enhance the capability of the Auditor to verify taxable
wages. SESA procedures should offer guidance for expanding the scope of
the audit. Justification for expanding the audit must be documented in the
audit papers.
February 1994
QUESTION 16: (a) The four tests regarding
verification of employer's payroll appear to
be similar to the point of being duplicative.
(b) Regarding verification of employer's payroll
records, how should the field Auditor select
the employee to be traced?
ANSWER: (a) Each section is designed to build
on the previous one to establish the reliability of
the payroll data. Starting with source documents the
total payroll is verified, then it is reconciled.
Next the taxable payroll is verified and finally the
taxable payroll is reconciled.
(b) The selection of an employee is determined by the
SESA's field audit procedures.
February 1994
QUESTION 17: Is it acceptable to audit an employer for four quarters
if two of the quarters reflect no wages paid by the employer and are not
delinquent?
ANSWER: Yes. This is common for seasonal enterprises. The audit may be
conducted. However, coverage and liability requirements must still be in
place and this employer remains covered pursuant to ESM/RQC requirements.
February 1994
QUESTION 18: In the rationale for the misclassified worker question,
"Adjustment reports can be used…". Do we need to see just
the detail by SSN or must the reviewer redo all the math etc.?
ANSWER: Adjustments may be used as part of the supporting documentation
"when the reviewer can trace each individual discovered to the resulting
increases and decreases in the total wages and taxable wages". This
will not require calculating the math of the dollar/numeric figures.
May 1994
QUESTION 19: In the payroll records question, computation of total
taxable payroll, calls for the work papers to include the identity of the
payroll record used in the calculation and record of the calculations to
verify the total taxable payroll. Can this task be omitted if the SESA has
the individual wages of the employees on the main frame?
ANSWER: No. The wage information on file in the main frame data base previously
filed by the employer via the contribution report has not been audited and
could be incorrect. The Auditor must compute from the employer's records
and reconcile total taxable payroll to total taxable wages recorded on the
employer's copy of the UI contribution report to the SESA files. The Auditor
may run the information obtained in the audit through the main frame program
for the calculation process, but this is a SESA call.
May 1994
QUESTION 20: In the Field Audit Rational Section: Misclassified
workers - Why does the Field Auditor have to provide "evidence"
that payments do not constitute wages?
ANSWER: The information and data an Auditor obtains during the performance
of an audit is the evidence that furnishes the reason and the support for
the conclusion that payments do or do not constitute wages.
For example: Bi-weekly payments are found in the cash disbursements journal classified as "other labor", to individuals not shown in payroll records. However, further inquiry reveals that these payments were for services not subject under provisions of law (e.g. payments to licensed contractors, in separately established businesses performing services for the employer under audit). Documentation could be: "Three individuals found in category of "other labor", not subject to provisions of law upon review of supporting documentation (e.g. vendor files, contracts), determined non employee services and not wages."
Without this documentation there is no support for the Auditor's decision that the three individuals were not covered employees.
May 1994
QUESTION 21: Please clarify the question which asks: "If discrepancies
or unreported wages and tax were found, or a credit is established was the
adjustment (monetary or non-monetary) posted in accordance with the SESA
requirements? If the audit is under appeal, adjustment reports should be
made in accordance with SESA policy."
ANSWER: Establishing a system to ensure the proper accounting of audit
results is an important component of a SESA's tax operation. The SESA has
a fundamental obligation to guarantee the accuracy of the posting to ensure
the employer is given the correct tax rate; that subsequent billings are
correct, and that the collection unit is provided with timely information
to process indisputable legal documents. This information may be monetary
or not. Any discrepancies found in the audit that are material to the current
or future tax payments of UI tax, should be adjusted/corrected. Documentation
should include the identification of the discrepancy and evidence that the
appropriate action was taken to correct the employer's files and compared
to the SESA's records.
May 1994
QUESTION 22: Does the Field Auditor have to compare employer's total
wages to the UI contribution report and with the employer records on the
SESA's automated system record?
ANSWER: Yes. Field audit question "Does the audit contain documentation
of the payroll record test--reconciliation of total payroll to total wages?
The rationale states…"Work papers must show that the Auditor compared
a payroll record (which was established as correct through verification
of the payroll posting system) to the total wages on the employer's copy
of the UI contribution report, and to the amount posted to the SESA's agency
contains the actual information submitted by the employer on the employer's
contribution report. The distinction is important to prove that information
keyed into the employer's record accurately reflects information shown on
the contribution report. The rationale for this question is to provide reasonable
assurance that the employer payroll system is credible and reliable. There,
both the employer's copy of the contribution report and the SESA's records
must be reviewed either manually or by computer programs.
Note: If the employer's copies of the contribution reports are not available
and the audit documentation reflects this, the audit should not fail because
the Auditor is unable to review the reports.
May 1994
QUESTION 23: What are acceptable procedures for verifying ownership
on a domestic account? Personal income tax return? 942 report, Federal UI
tax report?
ANSWER: It is permissible to use personal income tax returns and 942 reports
to establish ownership in a domestic account along with "other sources".
Examples of "other sources" may be: review of the canceled checks
or personal interview with the domestic employee. Absent these documents,
other sources of verification in accordance with State audit procedures
should be relied upon.
May 1994
QUESTION 24: In cases of multiple payroll systems, do you have to
verify each system?
ANSWER: Yes. Employers who operate stand alone multiple payroll systems
must be individually verified. Employers with payroll systems that correlate
the stand alone information from each payroll into a summary record/ledger
may use such record in the performance of this task in the cases where the
required information is available to meet the requirements for this verification
function. The audit must contain documentation that establishes the reliability
and credibility of the employer's reported payroll. The four tasks should
be conducted and complete with the information required for each.
May 1994
QUESTION 25: Scoring was considered not fair. By giving questions
on documentation for payroll record tests and documentation of the search
for misclassified workers and hidden wages such scoring weight, RQC was
ensuring cases would fail. There were questions about the "why"
the questions were scored as they were.
ANSWER: Scoring is deliberately strenuous. From discussions with the Office
of Inspector General, SESA Expert Panel and Field Audit Documentation workshop
group, it was agreed that the main intent of an audit is two fold: to confirm
that employer's records are accurate; and then to search for misclassified
workers. It was determined that if an audit does not accomplish this intent,
then it should not be considered a "quality" audit. As a result,
these tests were assigned a pass/fail score (25 pts).
December 1994
QUESTION 26: N/A to Texas audit procedures.
QUESTION 27: The rationale for the question which asks about misclassified
wages states …"Likewise, the extent of the business may indicate
multi-state employment, and may require that the Auditor's investigation
ensure the employer reported employees to the appropriate State."
What does the Auditor do and what does the reviewer do to verify what has
been done?
ANSWER: The Reviewer will need to confirm that the Auditor has done whatever
the SESA policies and procedures require when it comes to initiating out
of State contact.
December 1994
QUESTION 28: (a) In the course of an audit assignment, an Auditor
discovered that the employer maintained no records because they were now
"leasing" all workers, including corporate officers, form an "Employee
Leasing Firm". Would the audit pass review
by RQC when the audit examined no records?
(b) The Auditor is conducting an audit and finds that
the employer has, after a period of time in the
year being audited, started "leasing"
all workers, including officers, from an Employee Leasing Firm", and
is no longer maintaining records. Thus the Auditor can only submit an audit
on the quarters for which he/she had the records. Will this audit pass a
RQC review?
ANSWER: (a) The assignment would not be considered
an audit under EMS field audit policy and would thus
fail the pass/fail question. It should not have passed
review as an audit and should never have been included
in the field audit universe. It would be a failure
and the RQC reviewer need not answer the rest of the
Acceptance Sample questions.
(b) Yes, if the audit
of the available quarter(s) was complete and the tests
for payroll accuracy and misclassified workers were
conducted on the records available, then the audit
would pass. The Auditor would have to document why
the records were not maintained and available on the
other quarters of the year under audit.
March 1995
NOTE: Texas audit requirements state that four consecutive quarters of records must be reviewed in order to complete an audit assignment. If the year targeted for audit does not have four quarters of employment, the audit must be expanded to cover a prior year's records plus the quarters in the targeted year.
QUESTION 29: How much documentation is enough? Are field Auditors
expected to look at every record that the State requires employers to maintain?
ANSWER: The audit should include sufficient information to: (1) adequately
respond to the nine items required in the ESM Part V, Section 3687; (2)
indicate the source of the information used to respond to the items; (3)
state the Auditor's conclusions and; (4) provide evidence to support the
Auditor's conclusion.
RQC established minimum standards for documentation requirements.
Field Audit, Chapter VII identifies these requirements for both the questions
on payroll record tests and the search for misclassified workers and wages.
The information found in each of the tests for each of these questions builds
and supports the reliability and credibility of the audit findings. It is
therefore, necessary to document the evidence that supports the findings
and conclusions identified in the audit. The SESA audit procedure should
be the benchmark on documentation requirements.
March 1995
QUESTION 30: Audits are extended because discrepancies are detected
during the audit. Since it is apparent that problems exist, it would be
redundant to conduct all the RQC payroll tests on the quarters included
in the extension. Will States have to complete all the RQC tests on the
quarters the audit was extended to cover?
ANSWER: No, unless the Auditor suspects inaccuracies in the payroll system
during the period the audit is extended to cover, there is no need to repeat
the payroll accuracy tests that were conducted to cover quarters in the
original scope of the audit. However the search for misclassified workers
and hidden wages must be conducted on all quarters covered by an audit,
including the quarters that the audit was extended to cover. If wages or
tax are adjusted on quarters for which no search for misclassified workers
or hidden wages is conducted, the quarters are not to be counted
as quarters audited and the adjustments for those quarters are not
to be included in the audit under-reported or over-reported figures.
March 1995
QUESTION 31: One of the acceptable methods noted in the RQC Handbook
for verifying the employer's payroll posting system, states that the Auditor
should trace the transactions of at least one employee's wages from source
documents through to the SESA's records. Does this mean that the Auditor
should check the SESA's mainframe to see what is recorded for that individual
employee?
ANSWER: The purpose of this test is to verify the accuracy of the EMPLOYER'S
posting system. Therefore, the Auditor should trace an individual employee's
wages from the source document through to the employer's copy of the UI
quarterly contribution and wage report. If the SESA has supplied detailed
wage information to the Auditor prior to conducting the audit, the Auditor
should insure that the one individual being traced has been properly posted
to the SESA records.
December 1995
