Audit Planning: Tips for a Successful Audit

tips for a successful audit

Your business file is chosen for an audit by the Canadian Revenue Agency. What does this mean? What happens next? How can you ensure a successful audit?  Read on to find answers.

What is a Tax Audit?

A tax audit is a detailed examination of a company’s records and books by the Canadian Revenue Agency (CRA). It’s intended to confirm that your records/books support your tax return. Audits ensure that the Canadian tax system is fair for all.

How is a Business Chosen for Audit?

11,328 small and medium-sized business audits occurred in 2020/2021. Files are chosen for audit based on a risk assessment; factors such as non-compliance with tax obligations, frequency of errors on tax returns, and comparison to similar files. If your company’s file is identified as high risk, a CRA officer reviews your information to determine whether the CRA should go forward with an audit.

What Issues Prompt an Audit?

The CRA may consider an audit due to any/all of the following:

  • Multiple or repeated errors on your tax returns
  • Expenses not in line with others in your industry
  • Major changes in income or expenses
  • Repeated losses
  • Overly large charitable donations
  • Under-reported earnings
  • Discrepancies between GST returns and Tax returns
  • Unsubstantiated home office deductions
  • Missing information
  • Shareholder loans that should be considered income
  • A lifestyle incongruent with your declared income
  • Real estate transactions
  • Vehicle expenses
  • Audit of a related party
  • Informant tips

What Happens During an Audit?

A CRA auditor contacts your company via mail or phone and sets a date, location, and time for the audit. A review is held at your business location, accountant’s/representative’s office, or a Canadian Revenue Agency office. Your company is given the CRA agent’s contact information and informed of the scope of the upcoming audit. You’re asked to provide supporting documents for the review. The auditor copies your records/books and/or borrows your documents. The agent discusses any questions and addresses any concerns that arise during the audit.

Tips for a Successful Audit

The following suggestions help smooth the audit process.

  • Provide all documents requested: This may include:
    • Business records (ledgers, invoices, bank statements, receipts,  journals, contracts, rental records)
    • Personal records (mortgage documents, bank statements, credit card statements)
    • Records of individuals related to the business (family members, spouses, corporations, partnerships, trusts)
    • Records from your accountant that relate to the books and tax returns of your company
  • Ensure books are accurate: 
    • Reconcile bank balances to ensure no mistakes have been made 
    • Review accounts  
    • Record every expense, categorizing expenses alongside cash flow tracking
    • Save and organize your receipts
    • Keep business and personal expenses separate
    • Backup your data
    • Use accounting software to increase accuracy and ease record-keeping
    • Consider outsourcing your accounting

  • Communicate with auditors: Keep auditors informed. Be courteous. Prep everything requested. Periodically request updates on the procedure. Ask questions for clarity.
  • Make yourself available to assist, to answer questions, and to gather further information. 
  • Review the findings: Ask for an explanation of any changes. Go over these changes with your Chartered Professional Accountant. Decide if you are in agreement or whether you wish to challenge the findings. 
  • Challenge the findings: If you disagree with the assessment, contact the auditor and explain your concerns. Provide documents to support your position. If you are unable to resolve the disagreement, you may appeal.

Filing taxes for a business is a complex and complicated procedure. A  Chartered Professional Accountant ensures your tax return is accurate/complete, you receive the deductions you’re entitled to, and the chances of your file being chosen for an audit are minimal.

Contact Cook and Company Accountants for all your tax needs. Whether you operate a sizable corporation with multiple subsidiaries or a sole proprietorship, we use our experience/expertise to make tax time a breeze. In the event of an audit, we’ll assist in dealing with the CRA. Contact us for a complimentary consultation.

Estate Planning for Blended Families: Navigating Complex Relationships

estate planning for blended families

A blended family forms when two individuals come together (married or common-in-law) bringing a child/children from previous relationships. They may then have a child/children together. The dynamics of this family arrangement can be complicated, resulting in both rewards and challenges. Financial and/or emotional issues often arise when one of the partners passes, revealing a mix of expectations from the remaining partner, children, and the ex-spouse(s). To reduce conflict, mistrust, and/or discord, it’s important to have open discussions and to develop a detailed and comprehensive estate plan, particularly if ownership of a business is involved. Preparation and communication are key to easing family dynamics. So, what does estate planning for blended families in Canada look like? 

Estate planning tips for blended families:

The following are some estate planning tips to promote harmony in a blended family.

  • Keep estate documents updated: Be aware that separation/divorce does not affect pre-existing beneficiary designations. Ensure all documents are updated to reflect the blended status of your family (RRSPs, pension, insurance, will, etc.). 
  • Establish a mutual wills agreement: This contract between partners prohibits both from changing their will without the consent of the other. Mutual wills restrict the future testamentary freedom of the surviving spouse. 
  • Appoint a trustworthy, reliable executor, someone acceptable to all family members.
  • Consider a prenup: Creating a prenup presents the opportunity to begin communication and negotiation of difficult financial issues, providing protection and certainty for all involved/affected. Ensure the process is collaborative and based on mediation principles. 
  • Consider a trust: A trust (a fiduciary relationship that gives the trustee the right to hold title to property/assets for the benefit of a third party/parties) assists in the distribution of assets, solidifying a desired outcome. Tailor the trust to your preferences.
  • Communicate: Open, meaningful, ongoing dialogue with your partner and beneficiaries provides a means for making adjustments as circumstances change. 
  • Establish a power of attorney: If a partner is alive but unable to make decisions (personal care, property, business), a power of attorney may ensure that the new spouse/common-in-law partner is in charge of decision-making, reducing conflict with the ex-spouse and/or children. 
  • Seek advice: Obtain advice/assistance regarding the unique tax and law challenges of your blended family situation. Your chartered professional accountant can help guide you through the twists, turns, and pitfalls of estate planning (capital gains tax, estate-related taxes, and other expenses), particularly when ownership of a business is involved. 

A blended family often results in complicated estate planning challenges, particularly when a business is involved. Open and honest communication with all involved helps ensure harmonious relations. Keep beneficiary designations and documents current. Obtain advice to ensure that your estate plan meets your needs and desires. Consider tax and family law obligations. Contact your chartered professional accountant for assistance. 

Need help with business estate planning? Looking for advice and/or guidance? Cook and Company Chartered Professional Accountants (based out of Calgary and Edmonton) serve clients across Canada/United States, providing quality assurance, succession, and tax planning services for privately owned and managed companies. A detailed, tactful understanding of estate planning assists your company. Contact us today for a complimentary consultation.

Succession Planning: Preparing Your Business for the Future

Succession Planing

All business owners/managers strive for a stable, growing, profitable company. They plan, innovate, create, and organize in pursuit of their goals. But, what about the future of the company? Who will take over when the business owner/management retires, sells, or passes? How can owners/managers ensure that the business will survive and thrive? How can they be sure the outcome meets their needs and desires? Succession planning is a large part of the answer.

What is succession planning?

When people hear the term succession planning, they often think of personal wills and handing down money and/or property to family members. But what is a succession plan in business? Business succession planning refers to an exit strategy for business owners/managers, the steps taken to shape the future of the company in ways that meet the owner’s desires and/or needs. If a company owner plans on selling, succession planning enables a successful transition of ownership. If retirement is what an owner chooses, succession planning is aimed at finding the person(s) best suited to take over and identifying and developing a future leader(s). Business succession planning typically involves: 

  • Assessing current/future business needs according to the company’s strategic plan and their priority goals, projects, and/ or programs
  • Identifying individuals whose potential, skills, and talents best help the company meet its needs/goals
  • Developing plans to manage gaps in skills and/or capabilities that may occur if a key leader/leaders leave the company
  • Cross-training employees/managers to assist in the development of skills, knowledge, and an understanding of the business
  • Preparing for future changes and/or emergencies (when the unexpected arises)
  • Ensuring smooth business operation should owners/managers/employees retire or leave the company

Business succession planning focuses on more than the senior manager/executive, encompassing all key positions and all functions that require experience, skill, and/or seniority. 

What is the importance of succession planning?

The following items illuminate the importance of business succession planning. 

  • Ensures survival of unforeseen events: Abrupt resignation, illness, death, personal problems, and/or arrest may result in an unexpected vacancy in an important company position. Though you can not foresee these events, your company can plan, prepare, and strategize possible responses to ensure the smooth operation of the business. 
  • Forces long-term thinking: It’s easy to focus on weekly meetings, quarterly earnings, and yearly reports. Business succession planning forces a company to consider the future, helping plan and create a wise course for the company. 
  • Promotes communication: Succession planning requires the cooperation and participation of all department heads and senior management members. This promotes communication, improving day-to-day work. 
  • Saves money: Being unprepared for vacant positions risks your business incurring considerable costs as you search for suitable replacements. Attracting qualified people from their current positions can be an expensive undertaking. Succession planning can save you the cost of hiring outside employees for key roles as you have access to employees prepared for promotion from within. 
  • Motivates employees: A succession plan informs employees that you are planning for the future, committed to business growth/survival, dedicated to stability, and interested in internal promotion (developing staff for leadership positions). This creates confidence and motivates employees to give their best.  

What are the benefits of succession planning?

There are many advantages for employers and employees to having a well-developed succession plan in place.

  • Awareness that there is a chance for advancement/ownership empowers employees and results in higher job satisfaction
  • Succession planning reinforces employees’ career development
  • Commitment to succession planning results in supervisors mentoring employees to develop knowledge and expertise
  • Planning promotes tracking of employee value/skill/knowledge/loyalty with the intention of internally filling positions that arise
  • Promotes sharing of company values/vision with leaders/employees
  • A new generation of leaders is prepared for eventual need(s)
  • Reassures investors/shareholders during times of change

The steps of business succession planning:

There are a series of logical, beneficial steps that assist with successful business succession planning.

  • Identify possible serious business challenges for the next one to five years.
  • Identify employment positions that are critical for supporting business continuity.
  • Identify skills, competencies, and knowledge that are critical factors for success.
  • Consider high-potential employees, assessing possible future positions.
  • Select the skills/knowledge/competencies employees need to be successful in their positions and to meet the business challenges identified.
  • Capture the knowledge possessed by individuals before they depart the organization (mentorship programs, personal productivity tools, knowledge maps, manuals, storytelling, interviews, etc.).
  • Use targeted career development strategies to create a talent pool of individuals/employees to step into critical positions.

Transferring the ownership and/or management of a business is a professionally and personally delicate process. Without careful planning, a number of issues and/or mistakes may arise. Updating and revising your company’s succession plan regularly is critical. Constantly amend your plan, making changes as your needs/desires change and to meet the current business environment. Smooth transitions are achievable when you’re well-prepared. Talk to your Chartered Professional Accountant. They have the expertise, experience, and knowledge to help create and maintain a successful business succession plan. 

Need help with business succession planning? Looking for business guidance and/or advice? Cook and Company Chartered Professional Accountants are based out of Calgary and Edmonton, Alberta, serving clients across the United States and Canada. We provide high-quality assurance, succession, and tax planning services for a variety of privately owned and managed companies. Our detailed and tactful understanding of succession planning and its many parts is available to assist your company. Contact us today for a complimentary consultation. 

Common Errors in Accounting and How to Avoid Them

common errors in accounting

Keeping accurate up-to-date books helps a company make informed financial decisions and avoid mishaps that can affect financial health. However, tracking your business’ income, expenses, taxes and vendor payments is complicated and time-consuming. Including an item in the appropriate account, applying the correct description or code for the item and entering the correct amount takes time and attention. Accounting errors inevitably occur. The following are the most common types of errors in accounting that business owners make and suggestions on how to prevent accounting errors

What is an error in accounting?

Accounting errors are unintended accidents; inadvertent mistakes. Sometimes accounting errors are caused by transposing a number or hitting an incorrect key. Other times they stem from a misunderstanding of accounting rules and/or company policy. Accounting departments attempt to limit errors, especially in data that flows into financial reporting used by stakeholders. 

What are the most common errors in accounting?

  • Improper record keeping: Record keeping is the act or practice of recording important information for future reference. It involves identifying a transaction, recording it, classifying it, posting it and balancing the account. It may involve paper copies but can also be managed digitally. To avoid improper record keeping, implement a receipt capture, filing and backup system and enforce its proper use. 
  • Failing to do monthly reviews of your financial statements: A profit and loss statement provides a snapshot of a company’s sales, expenses and profit for a given accounting period. A balance sheet statement reports the ending balance of a company’s assets, liabilities and equity for a given accounting period. These statements provide insight into a company’s financial health. Financial statement analysis should be done on a regular basis (preferably monthly) to ensure all expenses have been categorized accurately and account balances have been reconciled. Add this task to the monthly duties schedule.
  • Neglecting to analyze budget vs. actual expenses: A budget versus actual expense analysis should be performed at the end of each month and each quarter to be sure your business is adhering to the budget. This analysis uncovers variances that require corrective action and helps determine areas where you can cut back. Schedule this analysis into your monthly duties roster. 
  • Neglecting reconciliations: When you reconcile your accounts at the end of the month, you validate the information in your books against an external document (the bank or credit card statement). Regularly reviewing business bank accounts against your books helps reduce the incidence of fraudulent transactions. It ensures you discover errors and thus prevents issues from developing. Put a note in your calendar to reconcile your bank and credit card accounts each month.

  • Failing to reconcile loan accounts: It’s important to reconcile your loan account each time you receive a statement as this is the easiest way to ensure the liabilities portion of your balance sheet is accurate. Put a note in your calendar to ensure your loan account is reconciled regularly.

  • Leaving undeposited funds on the books: Undeposited funds on the books means the payment has been posted but the deposit hasn’t been. This makes revenue look larger than it is, causing incorrect tax payments and inaccurate assumptions about business growth. This error can be avoided with proper workflows.

  • A lack of data backup: In case the device that stores your business’ financial information is lost, stolen or hacked, it’s important to have the information backed up. There are many backup options available.

  • Not utilizing accounting software: Investing in the right accounting software helps you avoid mistakes and makes it easier to handle your finances. Accounting software ensures you have all the historical data you need to manage your books, payroll and taxes. Choose accounting software that integrates with your bank account and has backup capability.

  • Inadequate checks and balances: No one person in the business should handle business funds without oversight. Ensure the person who does the bookkeeping in your business isn’t the same person making deposits for the company. Avoid giving employees signing authority on your business bank accounts. Make sure you review your business’s bank statements, including images of cancelled checks, on a monthly basis.

Accurate accounting information is critical for a business. Though there is no sure way to eliminate all accounting errors, understanding what errors are common and where to look for them is an important first step. Processes and controls help minimize their occurrence. Using good accounting software and preventive controls helps create a less error-prone accounting environment. Accurate books allow you to make informed decisions that will help improve your bottom line. Correction of errors in accounting is crucial.

Need help establishing a good accounting system and/or incorporating accounting software? Looking for business advice? Contact Cook and Company Chartered Professional Accountants. We are based out of Calgary, Alberta, serving clients across Canada and the United States. We provide high-quality tax, assurance and succession planning services for various privately-owned and managed companies. Contact us for a complimentary consultation.

Innovations in Accounting Software

Innovations in Accounting Software

The use of accounting technology increases efficiency and streamlines a business’ approach to managing finances, enabling them to be competitive. Accounting technology enables accountants to connect effectively with the businesses they serve, allowing them to provide ongoing advice and guidance. Remaining current with recent innovations in accounting technology is critical for both accountants and businesses. The following are some of the most recent innovations in accounting software.

  • Blockchain technology is an advanced database mechanism (involving the distribution and decentralization of database tech) that allows transparent information sharing within a business network. It’s intended to protect encrypted data, reduce redundancy, improve efficiency and enable the maintenance of an expanding number of transactions. Blockchain technology enables a complete, automated digital audit of each individual transaction. Using modern encryption methods, this technology allows companies to use a common data retention infrastructure (involving the use of a shared ledger) even as each accountant, auditor and company maintains a privately managed database.

  • Cloud computing applications allow the storage and accessibility of data online rather than on a hard drive. They don’t require expensive hardware, hosting, ongoing updates and dedicated IT to maintain. They handle everything from payroll and invoicing to taxes and benefit payments. Financial information is updated as changes occur and can be monitored and managed from a user-friendly dashboard, enabling a free flow of information, no matter where you are or which device you’re using. Cloud computing makes it easier to collaborate and exchange information. The flexibility of cloud accounting software makes it simple for growing businesses to scale. Adding new users/features is as simple as upgrading your monthly subscription. Cloud-based software also helps companies to reduce their carbon footprint.

  • Automated accounting technology uses software to automate important financial operations. It limits the number of steps in workflows and makes the accounting operation a more hands-off experience by decreasing time spent on data entry. This tech is capable of highlighting anomalies or patterns without manual data input, creating greater efficiency. It reduces human error, often translating to higher profitability. From invoice approval processes to inputting sales data and automating revenue recognition, automated software features are expected to continue to develop. Automated accounting technology helps accounting teams work smarter, not harder.

  • Optical character recognition applications (also referred to as text recognition) scan printed/handwritten documents and convert them into machine-readable text that can be shared with colleagues/clients. This data can be copied and/or edited as required and allows for the performance of a simple digital search to find the information needed. This technology reduces time spent on tasks such as itemizing receipts, organizing invoices and tracking expenses. It eliminates paper clutter.

  • Artificial intelligence and machine learning make accounting more effective and efficient, improving productivity by up to 40%. AI can conduct repetitive, rudimentary tasks including auditing, payroll, uploading files and sorting through data. This frees up time for tasks such as analyzing and interpreting data and building more effective, efficient recommendations for corporate growth and stability.  AI substantially reduces the likelihood of frustrating and time-consuming mistakes. Deviations from the established pattern can be caught before calculations move beyond the problem. This leads to more accurate reporting, reducing the need for audits.

  • Real-time reporting is the process of updating your books at all times; revenue, account balances and profit. It allows the entire company to view all metrics/insights and make better use of analytics to make decisions.

  • Personalization technology is about delivering a valuable service or product to a customer based on personal experiences and historical customer data. It’s becoming more common, from sales and marketing solutions to consumer apps to accounting software programs. It allows specific functionality.  

By organizing everyday finance management, accounting software allows companies to grow their businesses. The administration process is streamlined, data can be processed remotely and the margin of error is reduced. Daily finances are better understood, empowering the business as a whole. Tasks that took hours can be done in minutes. Financial data is quickly and easily accessed in an easy-to-understand format. Innovations in accounting software save time and money while adding value to a company. 

Need help establishing a good accounting system and/or incorporating accounting software? Looking for business advice? Contact Cook and Company Chartered Professional Accountants. We are based out of Calgary, Alberta, serving clients across Canada and the United States. We provide high-quality tax, assurance and succession planning services for a wide variety of privately-owned and managed companies. Contact us for a complimentary consultation.

Can Your Business Plan for Inflation?

Business Plan for Inflation

Historically, inflation has plunged countries into long periods of instability and politicians have won elections on promises to combat it. Inflation is currently at a high not felt for decades. Canada’s annual inflation rate rose to 8.1% in June of 2022, the highest since January 1983. Businesses are paying more to find and retain talent. Supply costs are escalating. Companies are feeling squeezed as the costs of goods and services continue to rise. Inflation is expected to remain elevated until 2024. It’s necessary for businesses to take decisive action to strengthen their growth plans and deal with the pressures of an inflationary period. The following are strategies to plan for and deal with the impact of inflation on your business. 

What is inflation?

Inflation is the rate of increase in prices over a given period of time. It represents how much more expensive a relevant set of goods and/or services has become. It can be translated as the decline of purchasing power over time and is expressed as a percentage. Essentially, inflation means that a unit of currency effectively buys less than it did in prior periods. When inflation rises, consumer spending declines as people can’t afford to buy as much as previously. 

How does inflation affect a business?

Inflation means that a company’s cash reserves are worth less. Labour expenses rise. Consumers buy less of a business’s goods and/or services. The value of some assets (real estate, steel, lumber) increases. Supply chain issues often occur, affecting scheduling, pricing and estimation. The shifting nature of the economy during an inflationary period is unnerving for many business owners. The answer? Be prepared!

How can a business plan for and address inflation?

Normal economic cycles include four stages: expansion, peak, contraction, and trough. As a business owner, it’s wise to have contingency plans for navigating each stage. A company’s plan for a period of inflation should include metrics to measure success and actionable steps to take. The following are tips for dealing with inflationary pressure as a business.

  • Be aware of real income: Track net income against the rate of inflation (real income). As the rate of inflation increases, profit decreases, reducing value and equity. 
  • Adjust the length of contracts: Lock in pricing for materials and/or expenses with a long-term contract. This protects your budget and guarantees revenue for your supplier. 
  • Time your purchases: Make large purchases before the price rises, particularly for equipment, land or other assets. This allows you to borrow cash when it is worth more and pay off your debt with money that is worth less. 
  • Optimize pricing: Create value for your product/service through marketing and an improved customer experience. This will allow you to raise your prices with less difficulty. Tie your price increase to the PPI (producer price index) or the CPI (consumer price index). Consider targeting less price-sensitive customers. 
  • Understand your cash flow: Cash flow and working capital are essential parts of a plan to deal with inflation. Do a financial modelling exercise to map out your situation. Look at ways to improve cash flow:
    • extending payments to vendors
    • tightening up invoicing and collection policies
    • divesting underperforming divisions or assets
    • prioritizing your resources in areas that are performing well
  • Reduce your tax burden: Talk to your accountant about ways to reduce your tax burden. Take advantage of losses. 
  • Review your debt and capital needs:  Assess your ability to meet current debt obligations. Reach out to lenders if you’re considering expansion, the purchase of new technology and/or refinancing existing debt.
  • Consider your strategies for growth: What worked in the past may not work now. Reevaluate and refresh your strategies.
  • Assess your technology: Do you have access to real-time data regarding your business? If not, it may be time to upgrade your technology. Consider a cloud accounting system, an enterprise resource planning system (ERP), a warehouse management system (MHS) and/or a customer relationship management system (CRM). The information provided can guide your decision-making. 
  • Simplify operations: Look for ways to streamline complicated processes, run leaner, reduce cost and increase profitability. 
  • Prioritize high-profit margin products: Many companies give priority based on the date of the order regardless of profit margin. Tell customers purchasing low-profit items/services that delivery will be slow. Ship goods/deliver services that are most profitable first. 
  • Differentiate between strategic and nonstrategic cost cutting: Selectively trim costs to improve the return on operating expenses. Boost growth through greater investment in the strategic capabilities needed to achieve differential results. Deploy scarce resources to reinvigorate strategy and maximize shareholder value.
  • Eliminate work: Scrutinize what activities are performed and how those activities are performed.  Eliminate unnecessary work and automate when possible.
  • Keep morale high and prevent attrition: Losing key employees results in lost productivity and requires time and effort to find and train a replacement. To avoid this, openly communicate with employees. Be aware and accommodating of personal needs. 

Inflationary pressures and supply chain issues are real and complicated. It’s important to develop a plan that addresses the rapidly evolving situation. Utilize the wisdom and leadership available to your business by talking to your accountant. They have the knowledge and experience to help you weather current circumstances. 

Does your business need help weathering current inflationary conditions? Contact Cook and Company Chartered Professional Accountants. We can provide you with powerful financial planning solutions. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to help your business. Contact us for a complimentary consultation.