POST CLEARANCE AUDIT

P. C. DUBE

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 Course Objectives
• At the end of the module participants will be able to:
 Define Post Clearance Auditing
 Explain the Legal requirements for Post Clearance Auditing
 Describe the international trade trends and explain their
impact on the role of Customs
 Describe the challenges faced by Customs in reconciling the
trade facilitation and enforcement roles
 Explain the benefits of applying Post Clearance Audit
 Develop and document a Post clearance audit programme
and to be able to apply
 Outline the elements of an Audit report
 Evaluate success of Post Clearance Auditing
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 Course Objectives (cont.)
• At the end of the module participants will be able to:

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 Contents
1. Role of Customs in Facilitation of international Trade
2. PCA Environment
3. Types of audit
4. Strategic Planning
5. Risk Management
6. Internal and External Networking
7. Cycle of PCA
8. Audit Techniques
9. Inquiry techniques
10. Irregularities
11. Summary of audit process

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 1.0 International trade trends
• Globalisation and the importance of trade
• The increase volume of trade and increase in
commercial fraud and cross border offences
• Customs response to the conflicting role of trade
facilitation and enforcement role

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 Role of Customs
• Administer imports and exports
• Prevent international movement of prohibited goods
• Regulate the international movement of restrict
goods
• Administer control over excisable goods
• Collect and bring into account all revenue due
• Build a high performing organization with good
governance
• Compile trade statistics

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 Positive Impact
• Voluntary compliance
• Efficient trade facilitation
• Balanced trade facilitation and compliance
• Decreased cost to compliance on trade

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 Challenges
• Increase in white collar, trans-national and organized crime
• Rapid technological advancement e.g. eCommerce
• Speed of trade
• Volume of trade
• Lack of facilities, resources and proper infrastructure
• International conventions, treaties and standards
• Implementation pressures from trade agreements

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 1.1 PCA Definition
WCO definition:
PCA is a systematic Customs control measure to
ensure the accuracy and authenticity of
declarations through the examination of relevant
books, records, business systems, and
commercial data kept by persons/companies
directly or indirectly involved in the international
trade

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 Definition: PCA (cont.)
• The structured examination of clients relevant
commercial systems, financial and non-financial
records, physical stock and other assets, internally
generated data and that which is produced
independent of the client with the objective of:
– Measuring levels of compliance
– Improve future compliance
– Support clients who wish to comply
– Deter non-compliance
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 Definition PCA (cont.)
• A process which enables an auditor/investigator to
verify the accuracy of declarations through the
examination of books, business systems and all
relevant customs commercial data directly or
indirectly involved in international trade.

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 1.2 Objective of PCA
Ensure that businesses comply with relevant legislation
and requirements:

• Goods are properly declared

• Import/export prohibitions and restrictions are observed
(license, quota, CITES, etc)
• Retention of supporting documentation obligation is
complied with
• Exemptions are properly earned
• Excisable goods are properly accounted for
• Bonded warehouse procedures are properly adhered to
• All duties are properly calculated and paid by
appropriate date
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 1.3 Benefits of applying
PCA
• Customs Administration :

• Enforce compliance whilst facilitating trade

• Gaining better information on and
understanding of clients’ business
• Increase Customs effectiveness by focusing
only on non-complaint client

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 Benefits of applying
PCA (CONT.)

• Benefits to Stakeholders :

• Compliant clients rewarded with greater

facilitation
• Customs able to pinpoint areas where clients
are having difficulties
• Closer client relations promote voluntary
compliance

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2.0 The PCA Environment

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 2.1 Staff Requirement
Sustainable audit based control requires:

• Adequate Staff

• Sufficient knowledge and expertise in Customs

Business

• A full time PCA Unit

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 2.1.1 Expertise in
• Valuation
• Rules of Origin
• Tariff classification (HS)
• Excise
• Customs procedures and incentive regimes
• Auditing/Investigations
• Accounting (Generally Accepted Accounting Principles (GAAP)
• Legal
• Risk Management
• Case Management

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 2.1.2 Ethical Standards for Auditors
•
• Independence
• Integrity
• Confidentiality
• Due care and diligence
• Equity/Impartiality

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 Ethical Standards (cont.)
• INDEPENDENCE
• PCA Auditors are required to be:
– independent of the entity being inspected; and
– perceived as such.

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 Ethical Standards (Cont.)

INTERGRITY
• PCA Auditors are required to be:
incorruptible;
objective; and
unprejudiced in the execution of an audit

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 Ethical Standards (Cont.)

CONFIDENTIALITY

– The PCA Auditor/Investigator may not disclose –

without appropriate authority - anything he may
have learned, or may have been informed of,
during the performance of his duties

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 Ethical Standards (Cont.)

CARE

– The PCA Auditor/Investigator should conduct

himself professionally and may not abuse the
resources of the auditee

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 Ethical Standards (Cont.)

EQUALITY

• PCA must be conducted in such a way that it

does not result in inequality before the law
• Similar cases must be treated similarly

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 2.2 Equipment
• Information technology
• Phones
• Vehicles
• Cameras etc.
• Computers/especially laptops

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 2.3 Legal Provisions for PCA
National legislation should provide for, among
others:

 Disclosure of information
 Entry of premises
 Records keeping obligations
 Make extracts and or copies
 Take on premises an assistant or Police
 Owner/employee to facilitate access to premises
 Identification of traders
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 Legal Provisions for PCA (cont.)

 To force entry and search (at night only if

accompanied by a Police Officer)
 To open packages in the absence of an
Importer.
 Production of records relating to imported
goods
 Detention of goods, records, etc.
 Third party verification
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 2.4 Organization
• Independent Functioning Unit
• Initially setup at HQ then regional
• Two sub-functions:
– Intelligence Team
• Collects, collates, analyzes and PCA information
• Contributes to the identification of risk
• Communicates with operational colleagues
• Constantly re-assess intelligence products
through effective feedback and refocusing efforts
accordingly
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 – Field Audit/Anvestigation Team
• Examination of books and records
• Education of taxpayers on customs procedures,
weaknesses on trader’s control systems
• Report results

• Coordination Team
– Coordination of nationwide audit plans
– Assessment of nationwide audit performance
– Communication on units/experts on the issues of
legislation, valuation, classification and customs
offence

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3. TYPES OF AUDITS

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3.1 Systems Based Audits

• This Audit is designed to identify and evaluate

the effectiveness of client’s systems to ensure
his compliance with requirements :
Is the client’s system (from the order to final disposal of the goods)
effective in assisting the client to comply with obligations, to prevent
non-compliance or to detect non-compliance when it occurs?

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3.2 Transaction Based Audit

• This audit focuses on the correctness of the

individual transactions. Substantive checks are
made on individual transactions such as :

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 Transaction based (Cont.)

 Bills of Entry
 Invoices
 Consignment Notes
 Packing Slips
 Contracts
 Purchase Orders
 Bank documents, etc

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 4.0 Strategic Planning
• Required for success and credibility of PCA
through:
– Optimum use of scarce resources
– Minimum disruption of trade
• Define:
– Objectives
– Scope and coverage
– Risk areas
– Resource management

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Objectives
• To ensure compliance with Customs laws and
regulations
• To detect infringements related to taxes and duties

Scope and Coverage

Most effective with:
• Identified persons/companies
• Persons/companies dealing with customs for a certain
period
• Prior analysis of historical records
• Importations for commercial purposes
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• Areas
– Valuation
– Tariff Classification
– Origin
– Duty relief/drawback/remission programmes

• Persons/Companies
– Importers
– Consignees of imported goods
– Owners of the imported goods
– Subsequent acquirers of the imported goods
– Customs clearing agents of the imported goods
– Storage agents of the imported goods
– Transporters of the imported goods
– Others directly or indirectly involved in the import transaction

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 Resource Management
• Review and analyze existing resources
• Identify obstacles to achieving PCA objectives
• Develop Monthly/Annual PCA Plan

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 5. Risk Management
• The WCO defines Risk Management as the
systematic application of management
procedures and practices providing Customs
with the necessary information to address
movements or consignments which present a
risk.

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• The following are the types of risks
considered:

 Inherent Risk: considered high where the

benefit of non-compliance are high
 Control Risk: considered high where internal
controls are inadequate
 Detection Risk: considered high where the
chance of non-detection or non-compliance is
high
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5.1 Risk Management Process
Comprises:
– Establishment of the risk management context
– Risk Identification
– Risk Assessment
– Addressing the risks
– Monitoring and review of the process through
compliance measurement

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• 5.1.1 Establishing the Context
• Involves establishing the goals, objectives,
strategies, scope and parameters of the activity, or
part of the organization to which the risk
management process is being applied
• Establish criteria for risk measurement
– Examples- revenue leakage, customs’ image, delivery of
government policy
• Determine acceptable and unacceptable levels of
risk
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• Risk Management in PCA context:
1. Strategic Risk Management
Risk imposed by an entire sector or group of
importers
An industry sector could be classified as high risk
because:
– The strategic importance of the industry to the
nation
– The international trade agreements which
govern the industry
– Public health and safety considerations
– Intellectual property rights
– Economic impact of the imports
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• Studies on specific commercial sector
– Helps deal with specific information in context.
Studies may be on:
• Fraud
• Valuation
• Textile trans-shipment
• Intellectual Property Rights

• Once sector is chosen, information must be defined

and collected on the various components, at both
macroeconomic (sector size, production,
consumption (and microeconomic levels (no. of firms
involved, their technological capacity, structure, the
type of fraud they are exposed, etc) 42
2. Tactical Risk Management
Involves identification of high risk transactions by
particular importers. Considerations include:
– Importer’s volume of imports
– Total value of imported goods
– Types of goods imported
– Prior importer or compliance problem
– First time importer/exporter

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3. Operational Risk Management

Deals with specific import transactions.

Considers:
– Who the importer is
– What commodity is involved
– Prior discrepancies or violations involving the
commodity
– Major high value importation
– Country of origin
– Applicable special regulations or programs
– Position of value in the high-low range

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• 5.1.2 Risk Identification
Risk cannot be addressed unless it is known. To identify
risk ask the following questions:
– What can happen; and
– When, where, how and why can each risk occur.

The following elements can assist in identifying risk:

– Performance of an industry against legislative/administrative
requirements
– Performance of individual auditiees
– Elements of individual auditees’ operations (e.g. internal
control, separation of duties/tasks, results of external
reviews if appropriate)

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5.1.3 Risk Analysis
• Risk analysis is a systematic use of available
information to determine how often defined
risk may occur and magnitude of likely
consequences.
• Risk is analyzed in terms of likelihood
(probability and/or frequency) and the
consequences (or the outcome of an event) in
the light of existing controls.
• A three point scale can be used to determine
likelihood and consequence.
• Risks identified as unacceptable will be given
priority
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5.1.4 Addressing Risk
Risks identified as unacceptable will require a specific
management plan.

5.1.5 Monitoring and Reviewing Risk

A continuous and integral step in managing risk. Review
to:
• determine if risks current or new have emerged
• Re-evaluate levels of risk in the light of risk address
activity; and
• Evaluate the effectiveness of compliance activity
undertaken
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5.2 Establishment of Intelligence Systems
Intelligence can be defined as the result of analyzing
collected information and explaining what it means.
• An intelligence officer must:
– Be aware of the Customs regulations, duties,
regimes, prohibitions and licensing requirements
– Be aware of the controls and procedures
employed to enforce these regulations
– Have a clear idea of the weaknesses in the
controls and of the ways in with they can be
circumvented

• Intelligence information will indicate where efforts

should be directed in combating risks 48
5.3 National Valuation Database as
Risk Assessment Tool

• Assess potential risk regarding the

truth or accuracy of the declared
import value

• Targeting specific import for

examination 49
 6.0 Internal and External Networks

• Contacts should be maintained from audit

planning to closure of audit including sharing of
Audit Report. For example;
– Investigations – for potential Customs offences
– Legal section – legal interpretation
– Policy section – improvement of Controls
– Customs Offices – historical declarations and
reports of doubtful declarations
– External Organizations – publications, Customs
Enforcement Networks (CEN)
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 7.0 Cycle/Steps of PCA
The PCA process consists of the following phased steps:
• Development of audit programs
• Identification of Potential audit targets
• Selection of persons/companies for audit
• Preparation of audit
• Conduct of audit
• Closure of audit
• Evaluation and Follow-up

The process should be linked to strategic planning, risk

management and internal/external networks
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 AUDIT STEPS

Intelligence Information Strategic Planning

AUDIT PRIORITIES
1. Value
Define Potential Audit Areas Origin
Commodity

Identify Potential Audit Targets

Select Person/ Companies for

Audit

Data from Company Assign Auditor

Send Questionnaire 2. Prepare for Audit Contact Company

Contact Other Customs Units

Type/ Scope of Audit

3. Conduct Audit

Verify Person/ Company

Verify Compliance Record

Examine Records
Communicate Results to
Customs Units

4. Prepare Reports

5. Close Audit

Communicate Results
to Company

Conduct Measurement
Evaluation and Follow - Up

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 7.1 Development of Audit Programs
• Audit Program sets a direction of the
measures to be taken by auditors. Has the
following elements:
1. Coverage
2. Potential risks in the PCA coverage
3. Objectives
4. Annual / Monthly Working Plan
5. Modality of the PCA
6. Standardized PCA procedures / techniques

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 Annual / Monthly Working Plan
• Assign standard hours of completion to each
audit area
• Determine number of audits per auditor /
audit team
• Assign time to each stage of PCA
implementation to measure productivity
• Assign one auditor for small to medium sized
traders
• Assign two or more auditors for larger or
complex issues
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Modalities of the Audit
Two types:
a) Field Audit (On-site Audit)
At traders’ premises. The whole picture of transactions and
internal controls can be easily captured.

b) Office Audit (Desk Audit)

Appropriate where pre-audit survey suggests:
• The subjects requiring audit are a few simple items
• The auditee presents adequate relevant data
• Objectives of an audit can be achieved without
conducting a field audit.

Both modalities may apply.

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Development of the Standardized PCA Procedures
Necessary for efficient and effective PCA.
May include:
• An ethical code of PCA officers
• The audit procedure
• Collaboration manners between the PCA unit and
relevant Customs units.

All of the actions performed by the auditor should be

recorded in writing on pre-made form.

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 7.2 Identification of the Potential Audit
Targets
The target is not only the declarant but also other
persons/companies involved in the transaction
(“Consignee”, “Owner” or “Subsequent Acquirer”).
Main reasons:
– Declarant rejects PCA or provides insufficient
information
– Under WTO valuation method, Customs value is
between a seller and a buyer, who is not
necessarily the declarant of imported goods (i.e.
agent)
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7.3 Selection of persons/companies for audit

Selection criteria could include:

• Past history of the company
• Type of commodity/industry
• Volume and value of imports/exports
• Referral information from other customs units
• Origin of goods
• Potential duty/revenue recovery
• Risk of revenue loss
• Government program priorities, etc

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• Risk indicators for assessment and targeting of high risk
business for PCA
– Profile of Importers
• Ownership (in relation of related party transactions)
• Capital
• Establishment data
• Business connections
• Type of transaction
• Method of payment

– Trade Data
• Volume of importation
• Amount of duties paid
• Imported items and their duty rates
• Valuation declaration
• Origin of goods
• Ports of loading
• Transaction type
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– Past Records
• Audit Records
• Entry errors
• Offence records, etc

– Information/Intelligence
• Under/over-valuation
• Separate payments
• Supply of Assists
• Undisclosed arrangements
• Irregular cases of the same/similar industries, etc.

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 8 Auditing Techniques
• Understanding the entity to be audited
Establish the legal form of the entity (e.g.
company, partnership etc)
Determine the real ownership of the
entity the connection it has with related
companies
Identify the links between the different
divisions of the organisation including
commercial flows
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 Auditing Techniques
• Structural Analysis of the company

 Review the organisational chart to determine

which people to contact such as:
Management of ordering:
How are the orders decided?
What information, such invoicing units, price,
quantity, etc is included in the order?
Who does the ordering?
How are the orders numbered? 62
 Auditing Techniques
• Management of ordering :
How are delivery conditions agreed?
How are the of orders filed?
What documents are available
concerning delivery, receipt and
storage of imported goods?

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 Auditing Techniques
• Classifying Imported Goods
Capital goods such as machinery are
entered in the company books as
assets
The classification declared at
importation must be verified after the
physical examination
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 Auditing Techniques
• Reselling imported goods
The Auditor must review purchase
orders, invoices, delivery notes in order
to verify the price paid to the importer
If the goods are received for re-
exportation, the auditor must review
customs documents regarding the
original import
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 Auditing Techniques
• REVIEW OF TRADE RELATED DOCUMENTS TO VERIFY
TRUE PARTICULARS OF THE GOODS
 Shipment and entry stages: Declared Particulars
a) Import/export permits
b) Valuation declarations
c) Invoices, bill of lading, airway bill
d) Packing slips
e) Delivery order, Receiving order
f) Handling and storage papers
g) Insurance policies, etc

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 Auditing Techniques
• REVIEW OF TRADE RELATED DOCUMENTS (cont.)
 Contract stage :
a) Contracts
b) Agreements, order sheets,
c) Acknowledgments
d) Purchase notes, indents
e) Price lists
f) Debit/credit notes

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 Auditing Techniques
• REVIEW OF TRADE RELATED DOCUMENTS (cont.)
 Pre-contract stage :
 Correspondence: Letters, Fax Machines Journal,
Telex, Telegrams, etc
 Price: Price list, Quotation, Offer sheet, Pro-forma
invoice, estimated/Actual cost Accounting note, etC.
 Order : Order sheet, Purchase note, etc

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 Auditing Techniques
• REVIEW OF TRADE RELATED DOCUMENTS
(cont.)

 Settlement stage :
Letter of credit, Statement of remittance, Debit
note, Credit notes
Error correction procedures

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 Auditing Techniques
• REVIEW OF TRADE RELATED DOCUMENTS
(cont.)

 Financial recording stage :

Sales/Purchase Journals, Cash book,
Account statement, Balance Sheet, Profit
& Loss, Income tax returns, etc

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 Auditing Techniques
• ACCOUNTING AND PAYMENT

 Identify people involved in company

accounting
 Understand how accounts are kept
 Documents that could indicate fraud :
Debt accounts - debts owed to specific
suppliers
Charges - purchase, transport, insurance,
royalty, financial fees, and loan accounts
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 Auditing Techniques
• CONDUCTING A REVIEW IN THE COMPANY

 General method: compare the elements

declared with the information included in
different information systems of the company
 Accounting checks: highlight specific
transactions and review their debt accounts,
charges and asset, and payment accounts

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 Auditing Techniques
• VALIDITY TEST OF SELECTED TRANSACTIONS

 Select a transaction and verify how the

corresponding invoice was recorded in the
books of accounts

 Compare invoices reflected in accounting

entries with those produced in support of
declarations
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 Auditing Techniques
• VALIDITY TEST OF SELECTED TRANSACTIONS
(CONT.)

 A disagreement between the invoices could

indicate false declaration

 Record irregularities as they are found

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 Auditing Techniques
• CHECKING OF THE PAYMENT ACCOUNTS

 Establish how payment was made and to

whom

 Payments to third parties could impact on the

Customs value of the goods and should be
investigated
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 Auditing Techniques
• DOCUMENTS TO CHECK
–Compare the following with the
declaration to find discrepancies :
Invoice
Commercial name on the invoice
Supplier reference
Transport documents (usually
describe goods)
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 Auditing Techniques
• QUANTITIES

 Auditors should check the quantity of goods in

stock against the amount of purchases, less
the amount sold
Initial stock & purchases - sales =
final stock

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 Auditing Techniques
• ORIGIN
Look for or falsified origin documents
Verify declared Country of origin for
high risk or high duty goods
Examine transport papers to detect
routing of the goods
Examine correspondence with the
seller 78
 8.1 Preparation for Audit
• Objective
– Draft specific audit plan that includes
• Audit scope
• Audit methods
• Assignment of audit team members
– Gain understanding of the business
– Identify main areas of risk
– Plan to address areas of risk
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• Before leaving for the site, the auditor should:
– Study the specific points to be scrutinized
– Study declarations and supporting documents
– Obtain information concerning the importer
• Past records of importation
• Valuation and other rulings
• Previous visit reports
• Information from other sources, e.g.
internal taxation
– Consult other customs units
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 8.2 Phases of Audit
Audit process:
1. pre-audit survey
2. initial importer contact
3. opening conference
4. audit questionnaire
5. internal corporate review
6. audit co-ordination
7. exit conference
8. final report 81
 8.3 PCA - Pre-audit survey
• Depending on size of company – a survey may
include gathering data regarding:
a) Corporate organization and structure
b) Commodity information
c) Methods of payments
d) Value of commodities
e) Costs associated with commodities
f) Related-party transactions
g) Record-keeping systems
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1) Analysis of Basic Data
Examination of basic data bases on two profiles
• Audit profile
• Transaction profile

• The most basic and important sources data:

– Import declarations and attached documents
– Valuation declarations and attached documents
– Statistical data sheets on past import and paid
customs duty

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Commercial Invoice
Most useful for transaction terms and conditions.
Analyze for the following:
• Participation of third parties in a transaction
(“c.c.” – commission, brokerage)
• Delivery terms (Ex-works – FOB, etc)
• Payment terms (Ex-works – FOB, etc)
• Shipping points
• Signature of an exporter
• Unit price – unit price, HS classification and duty
rate are unified in every invoice or same unit
price given to different goods
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Valuation Declaration
Analyze for:
• Relationship between buyer and seller
• Involvement of third parties
• Price list – is it addressed only to the importer?
Difference in fonts, queer blank spaces, note like “net
price”
• Separate payment – royalty and license fee,
commission and brokerage etc
• Comparative examination with other declarations of
the same transaction (e.g. value composition
consistence such as commissions)

85
2) Cross-checks with other Units (Internal
and External)
– Request a professional opinion of other
units in a pre-audit survey

3) Consolidation of Findings (Documentation

of integrated Study Parameter)
– The results of the analysis of basic data
guide focal points and examination
methods of the field audit.
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 8.4 Conduct of Field Audit
Notification of the Field Audit

Initial Conference

Overview Examination

Documentary Inspection

Examination of Commodity Third-Party Audit

(If necessary) (If necessary)

Review & Assessment of Findings

Inquiry of Auditee

Exit Conference

Reporting

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 8.5 PCA - Initial importer contact
• Customs will contact company prior to visit.
Records and documentation needed may
include:
1. Customs clearance documents
2. Certificates of origin
3. Commercial invoices
4. Shipping records
5. Purchase orders
6. Delivery notes 88
 PCA - Initial importer contact (cont.)
7. Chart of accounts
8. Contracts
9. Royalty and marketing agreements
10. Inventory records
11. Journals
12. Ledgers
13. Business correspondence
14. Any record of payments

89
 8.6 PCA - Opening conference
• The conference will discuss audit scope,
objectives and matter pertinent to the audit
• The purpose is to identify and evaluate the
actual controls in the system
• Representation by an executive of company
being audit is invaluable to ensure
cooperation at all levels

90
 8.7 PCA - Audit questionnaire
• Companies may be asked to fill out a
questionnaire to obtain information
• In related-party transaction – foreign parent
company may also be requested to complete a
questionnaire

91
 8.8 PCA - Internal corporate review
• Encourages where practical to perform a
review and analysis of operation in relation to
scope of audit before it begins

92
 8.9 Audit co-ordination
• Auditors’ must be fully apprised of any potential
findings or other Customs matters throughout the
audit.
• If misrepresentation, potential violation is
discovered, co-ordination with appropriate
investigative unit must be initiated to formulate an
investigation
• Subject to nationals laws regarding confidentiality,
information may be availed to other revenue/tax
agencies

93
Initial Audit Conference
On arrival at the trader’s premises the auditor should:
• Introduce and identify themselves to the relevant
personnel
• Explain the broad method of the audit
• Refer to estimated duration of the audit
• Request presence of an official at all times to answer
queries that may arise
• Mention that the Financial Controller may be required
for valuation issues
• Verify the availability of supporting documents earlier
requested for.
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Overview Examination
An interview for updating and completing data
concerning outline of the auditee’s business.
• Target most adequate records for examination
• Adjust audit plan according to initial examination
• Narrow down points for intensive examination
• Gain understanding of both the physical and
accounting processes
• increasingly perform a series of specific
verifications on the books and records against
declarations made to Customs
• Ascertain the name (s) of person (s) who kept
records, wrote up the books and list the record
kept
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c) Organizational Structure
– Identify sections dealing with international
transactions
– Establish section authority, responsibilities
and workflow especially those dealing with:
• Negotiations and contract with suppliers,
shipping, insurance, agents etc
• Purchase and/or sales of imported goods
• Receipt and storage of imported goods
• Payment and receipt of money
• Entries to accounting books
96
1) Key points for questioning
• Select appropriate interviewees
• Make interview by a designated officer. Other
members to observe responses and attitudes
• Prepare questions in a logical manner

2) Items to be examined

a) Background of the auditee

– Business history
– Industry situation, position in industry, existence of
competitors of identical/similar goods

97
b) Business Scale and Performance

– Identify all possible parties, process or branches

– Identify range of business items, no. of employees,
banks accounts held, volume and value of imports,
the financial position, and business results
– Note that degree of importance of import
transactions often relates to concerns of reducing
costs for imports

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d) Business System
• Examine organization and accounting system
• Identify most adequate books and records that
represent realities of transactions
• What procedures and records concerning
import transactions are required by the
auditee’s internal rules
• Who/which section is in charge of the required
procedure
• Where are the records retained

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Documentary Inspection
PCA enables verification of particulars required for the
following:

Duty Base- Duty Rate- Duty Amount-Related Others

Related items Related Items Items

 Value  Classification  Exemptions/reductions  Other

Quantity Application of -Justification restrictions/
Currency rates -Amount prohibition
exchange rate -Preferential Accuracy of duty on imports
rate License
calculation
-Tariff IPR

quota/ceiling CITES

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1) Books and Records to be Inspected
a) Business related books and records – e.g.
sales and purchase contracts, commission
contract, order sheets, etc
b) Account related books and records – e.g.
sets of account books, all source
documents such as Letters of Credits, bank
statements, remittance applications,
debit/credit notes

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2) Common procedures for documentary inspection
• Inquire about internal rules of documentation, such as sorts of
records created, received and retained, function of each record,
and staff in charge of each record

Control of Presented books

• Inspection usually takes place at conference room in order not to:
• Hinder the auditee’s daily business; and
• Prevent documents from getting scattered and lost

Check of the appearances

• For books and records Check for page no.s to identify
replacements and extraction of pages
• For business related documents, all requested documents are
presented

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 Inspection of business-related books and
records
Basic guidelines
• Pay attention to order of filling
• Check quality of paper, styles and signature
• Check handwritten notes on margins
• Examine original document

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1) Inspection of contracts and correspondences

Words and Symbols

• Numerals
• Symbols of currency unit
• Rates – e.g. %, percent, per
• Price terms – e.g. list price, net price, special price
• Delivery terms – e.g. Ex-works, FAS, FOB, C&F, CIF,
DDP
• Payment terms – e.g. L/C, Telegraphic Transfer, cash
• Discounts and separate payments – e.g. loss claim,
discount, commission, royalty etc
• Disposal restrictions
• Condition or consideration affecting the price
• Relationship between buyer and seller
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2) Verification of transaction value
• Records of inquiry and bargaining-
correspondences
• Price lists – compare if acceptable price levels
• Price terms – delivery terms
• Payment terms – contracts, shipping documents,
ad payment records
• Additional terms – offsetting of debts, supply of
material or service free of charge by the importer
• Separate payments – check accounting books.
Check also business related documents -
correspondences, contracts etc

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Inspection of accounts-related books and records
– Trace double entry inputs
– Missing pages
– Contradictions between figures and
descriptions
– Check consistency with GAAP

Inspection of traders’ computer system

System audit looks at the entire processing
cycle rather than just the transactions
themselves
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Examination of Commodity
Objective:
• Follow the “life-cycle” of goods –
storage-production/processing to disposal
• Note storage and handling procedures
• Note control documents (inwards notes, delivery notes,
stock records, production schedules etc)
• Determine accuracy of declarations in connection with
such items as the nature, specification, and quantity
• Comparison with relevant records
• Compare counted quantity with the inventory, purchase
and sales records

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Confirmation through Third-Party Audit
Required where:
• Declarant has not retained sufficient records
• Records are false or manipulated
• There is lack of evidence of correctness or
incorrectness of proper declaration

Targets
• Customs clearing Agents
• Persons/companies who consign import to the
declarant
• Persons/companies who acquire goods imported by
the declarant
• Intermediary, broker and other agents involved in
import transactions
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Recording the Audit
• Record all audit work thoroughly
• Obtain sufficient relevant and reliable evidence
to form a sound basis for conclusion
• Maintain any documentation and notes taken
safely and securely
• Receipts should be issued both in respect of
documentation removed and samples taken as
an aid to classification
• Deal with suspected fraud as under 7.2(3)

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 8.10 Closure of Audit
Exit Conference
– A formal meeting should be held
– Present and discuss the conclusions and findings
– Highlight problem areas and recommend specific actions to
remedy them
– Agree implementation timetable for corrective action. The
auditee should reply in writing actions to be taken
– Listen to the auditee’s representations
– The trader should be made aware that:
a) The meeting is to convey results and report would follow
later
b) The results only apply to the period audited
c) The audit may be reopened where documents/samples
have been taken
d) They may be liable to audit again at any time in the future
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Final Report
Should contain information, which is sufficient, competent and
relevant to allow full understanding of the findings
The final report may contain:
• Dates of visit
• Name and designation of persons interviewed
• Company Status- legal form, Capital, held by whom, list of
related persons, list buyers who import similar goods
• Principle types of goods imported
• Countries from which goods are imported
• Purposes for which goods are imported
• Importer’s function- manufacturer, distributor, etc
• Details of procedures in auditing records and documents
• Settlement details in paying for goods
• Details of irregularities
• Specific action Customs have instructed the trader to take
• Disagreements on conclusions and findings of the audit
• Auditee’s right of appeal
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 8.11 Audit Report Format

• Introduction
• Scope
• Executive Summary
• Objectives
• Findings
• Conclusion
• Recommendations

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 Audit report format (cont.)
• Ingredients of audit report:
– Why the inspection was conducted (risk model,
specific intelligence)
– What did we plan to do (identified risk areas &
testing programme)
– What did we do (details of actual visit & tests
completed)
– What was found (irregularities identified)
– What did we do about it (schedules/directions
issued and future recommendations)

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• Supporting Documents
All working papers should be well documented to
serve as:
– Physical evidence on which the achievement of the
inspection objectives (plan) is based
– Documentation should be sufficiently complete and
detailed to support conclusions
– Working papers must be well structured, complete,
accurate, relevant, legible, and adequately cross-
referenced
– Good source of planning, controlling and reporting of
an audit

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Functions of the Report
• Request for Approval of Superiors
– Basis for superiors’ approval of audit result
• Notification of Audit Result to an Auditee
– Payment/refund
– improvement of internal controls
• Notification of Audit Result to relevant Customs Offices
• Intelligence Source for PCA Management
– Efficiency and effectiveness of PCA implementation
– Updated auditee’s profile
– Adequacy of criteria for auditee selection
– Trend of irregularities
• Basis for enhancing auditors’ knowledge and skill

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 8.12 Evaluation and Follow-up
• The proper implementation of post audit procedures
ensures that:
– The audit tests and results are correctly recorded
– Audit results are fully evaluated
– The traders rights are fully respected; and
– Anomalies and/or deficiencies in audit procedures are
addressed
– A mechanism exists to evaluate success:
• Additional revenues collected
• Number of investigations referrals
• Cost/benefit analysis
• Legislation or procedure updates
• Intelligence data contribution
– Check auditee compliance to recommended actions
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 8.12.1 PCA Debt Management
• Management of assessments resulting
from audits
– Consideration of business continuity
– Time to pay agreements
– Debt follow-up and responsibility

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 9. Inquiry Techniques
9.1 Basic Guidelines
• Maintain a resolute but friendly attitude
• Maintain a strong will to elucidate fact
• Create cooperative relationship
• Have a mind of critical examination
• Make clear a suspicious point on the spot
– Secure/note material which have evidential capacity
• Guide the auditee (unintentional errors)
• Maintain communication and cooperation within the
audit team
• Tell the auditee about the audit result after concluding
all examination
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9.2 Questioning technique
• Organize diversified questions logically
• Flexibly develop consequential questions
• Note expressions and behavior
• Questions should seek clarification of:
– When: the suspicious actions occurred in the transaction
process
– Where: Where the suspicious actions occurred
– Why: identify motives and reasons
– Who and whom: who carried out the actions for whom and
who takes charge of recording them
– How: means and how the actions where made
– What: what resulted from the actions and possible future
consequences

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1) Selection of Interviewee
• Make inquiry to a representative, e.g. director or a
senior executive
• Identify the interviewee’s post, authority and
responsibility

2) Key points for inquiry

• Ask questions corresponding to the situation
– Be cool headed even when faced with defiant attitude
– Eliminate excitement and prejudice by presenting
evidence
– Be patient and establish inconsistencies for a smooth-
tongued opponent
– Where vague answers are given, repeat questions after a
certain interval
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• Listen to the client
– Do not jump to conclusions too early
– Where fraud or error is suspected, ask questions to
identify the fact in detail
– Observe reactions
– Avoid leaving questions unfinished
– Avoid ambiguous and leading questions
– Display confidence and a rational, calm approach
– Summarize the interview and seek clarification, where
necessary
• Ask questions supported by evidence
– Walk the process with client
– Object deferring an answer to a later stage to avoid the
seeking of inappropriate advice 121
9.3 Obstruction
• Try to obtain cooperation
• Advice legal authority for carrying out
an audit
• Advise legal consequences
• If obstruction continues, withdraw and
report to head of PCA unit who may
consider referring the matter to the
Investigations Division.
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 10. Irregularities
Irregularity means the breach of the laws and
regulations, regardless of its causes such as
intention, negligence, or simple mistake. It
comprises the fraud, the negligence and the error.
Awareness of types of errors is crucial to an
efficient and effective PCA because:
– It contributes to identifying potential risks
– It contributes to clarifying types of
information appropriate for assessment of
auditee’s risk
– It contributes to clarifying the types of
records for examination in field audits
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1) Fraud
Means willful intent of a taxpayer to evade tax,
prohibition, restrictions or receive any
repayments, subsidies without proper
entitlement
2) Negligence
Means lack of due care or failure to do what is
reasonable and ordinarily prudent person
would do under the given circumstances
– Covers omissions and commissions
3) Errors
Means a mistake in a Customs declaration
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 10.1 Indication of a Serous Offence
Two main types of evidence in tax offences:
1) Documentary
– Refer via head of PCA to Investigations Unit
– If the case is suitable for investigations, the
audit is terminated and case taken over by
Investigations

2) Statements made by the Taxpayer

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 10.2 Revenue Risk areas under the WTO Valuation
Agreement

1. Status of Buyer and Seller

• Branch office importing from head office
• The selling or buying agent
– Check role played
– Resell – buyer-reseller’s margin
– May not be invoiced – check under Commissions on Sales in the accounts

2. Deposits/part payments
• Check for following invoice notations:
– First or part payment only
– Deposit only
– As per contract terms
– Final payment
• Common for capital goods and/or importations for large scale projects

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3) Price Escalation Charges
• Usually for large projects with long lead times

4) Discounts
Non deductible discounts”
• Buyer undertakes certain activities for or on behalf of
the seller as a condition of sale
• Credits received in respect of earlier transactions

5) “Customs purpose only” invoices

May indicate:
• No sale of the goods being valued
• An actual commercial invoice not available
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6) Package Deals
• High duty - low price allocation
• Condition or consideration for which a value cannot
be determined (Article 1.1)

7) Price Averaging
• Price averaging across different products

8) Price dependent on resale price

• The transaction value must be the final price actually
paid or payable (commentary 4.1 – Valuation
compendium)
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9) Transfer pricing by Multinational corporations
Price may be adjusted according to profitability goals. Check:
• Whether a sale took place
• Whether relationship affected the price
• Existence of conditions or consideration to which a price
may be subject

10) Management fees or contributions to a Research and

Development Project
Percentage of turnover may be paid to seller as management
fees or contribution to R&D. Check
• whether payments are a condition of sale
• Whether they are related to the goods imported

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11) The cost of transport, insurance and related charges
– Inland freight in the country of export
– Cost of packing
– Container cleaning costs
– Cost of insurance

12) Royalties and license fees

Usually not explicitly shown on contract of sale, rather
separate agreement is made

13) Tooling costs (Assists)

14) Profit sharing

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 10.3 Types of Commercial Fraud
1) Misdescription Fraud
May be observed in connection with:
• Classification
• Origin
• Value
• Quantity/quality
• Quota limits and trade restraints
Pay attention to comparing purchase invoices and
Customs declarations with stock and sales
invoices
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2) Undervaluation/Overvaluation
Intention of undervaluation is to pay less duty/taxes
The intention of overvaluation maybe the following:
• Obtaining higher export refunds and higher duty
compensation
• Evading internal taxes
• Avoiding anti-dumping duties
• Money laundering schemes
Check documents such as accounting documents, bank
records, correspondence, shipping documents,
insurance documents, contracts, purchase orders and
confirmations etc

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3. Off-Record Transaction Fraud
Indicators of this fraud include
• The ratio of purchases to sales differs from
what is typical of the type of trade
• Different series of invoices or receipts are
used in the business
• Invoices used are not pre-numbered by printer
• The trader does not use sequential invoice
numbers
• Observation of a business shows that the
amount of trade is higher than declared

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4) Origin fraud
5) Temporary admission fraud
6) Drawback Fraud
• Substitution of commodity
• Incorrect quantity
• Fictitious export
Indicators include: Amending of documents, high-
duty/high-risk goods, high transport/insurance costs

7) Import/Export licensing fraud

• Counterfeit licenses
• False statements made to obtain a license
• Alteration of a genuine license
Liaise with appropriate issuing authorities

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8) End-Use Fraud
Examples of end use provisions are:
• Agriculture
• Diplomatic
• Government
• Medical/scientific
• Specific economic (promotion) regimes
Possible indicators of End-use fraud:
• High-duty-risk goods
• Amended End-use certificates
• First-time importer
• Consignee or commodity does not correspond to end-use
• Non-production of end-use certificate
• Quantities appear disproportionate in relation to the purpose
specified

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SUMMARY OF

THE AUDIT

PROCESS

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 OBJECTIVES

To outline and explain the

“PERCET” approach to System Based
Audit

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 PERCET Approach
PLAN
ESTABLISH
RECORD
CONFIRM
EVALUATE
TEST
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 PERCET Approach
PLAN

• Determine priorities and establish the best

way to achieve inspection objectives given
the time and resources allocated

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 PERCET Approach (cont)
• Output of the planning stage
 A good picture of:

The Commercial Practice of that client

The perceived risk areas
Indicators of non-compliance
A list of questions to be asked during the
inspection; and
A list of specific inspection tasks to the
undertaken

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 PERCET Approach (cont)

ESTABLISH

• Obtain comprehensive information about the

client and his systems

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 PERCET Approach (cont.)

ESTABLISH (cont.)
• Output of the ‘establishing’ stage :
 A picture of the business in terms of:
What it does
How it operates
Who does what, and
When and where do procedures take place

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 PERCET Approach (cont.)

ESTABLISH (cont.)
• A description of Accounting System in terms
of :
What records the business keeps
How the Accounting system operates
Who does what, and
When and where do procedures take place

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 PERCET Approach (cont.)

Establish (cont.)
• A clear picture of :
How, where and by whom the customs records
are maintained
who signs Customs documents and what checks
are employed by the client to ensure accuracy
and completeness
A list of the main elements of the audit trail
A brief description of the software in use
A list of all bank accounts

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 PERCET Approach (cont.)
RECORD

• Document the system as appropriate

• Output of the ‘Recording’ stage:

 A properly completed note book record of the
inspection

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 PERCET Approach (cont.)
RECORD (cont.)

• A note book must be completed fully and

correctly because the record:
May be used as evidence at court
Ensures that information is not lost
Can be used for Management checks
Can be used by Investigation Teams

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 PERCET Approach (cont.)
CONFIRM

• Confirmation of the accuracy of the findings

of establishing stage
Use walkthrough tests to verify the findings
“build up the client’s account” by selecting
entries and working backwards to source
documents

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 PERCET Approach (cont.)
CONFIRM (cont.)
For example confirm that figures recorded in the
Customs records tie up with other related entries
in other accounts such as invoices, bank
documents,

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 PERCET Approach (cont.)
CONFIRM (cont.)
 Confirmation is about asking the question “Is
what I see, hear and understand about this
business reflected in the client’s revenue
activities?”

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 PERCET Approach (cont.)
CONFIRM (cont.)

• Confirmation of perceived risks

Walk through some processes considered
as high risk to verify whether the risk in
fact exists

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 PERCET Approach (cont.)
CONFIRM (cont)
• Confirmation is also about establishing the
following by any means including by simply
looking around:
The type of goods handled
The amount of stock held
Any additional business activities

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 PERCET Approach (cont.)
CONFIRM (cont)
The size of the premises
Any other business sharing the premises
The number of staff employed
The method used for receipts
processing and disposal of goods
The practices following when dealing with
imported goods

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 PERCET Approach (cont.)
EVALUATE

• Assess whether the systems procedures and

controls are able to assist the client to comply
with his obligations
• Identify weaknesses that may require
rectification

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 PERCET Approach (cont.)
TEST
• Perform compliance and substantive tests
derived from the evaluation of clients
systems

• Compliance Testing is checking if the controls

are working

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 PERCET Approach (cont.)
TEST (Cont.)

Examples of compliance test are:

Tariff classification made by a junior clerk is to be
double checked by a senior clerk. Compliance
check involves verifying that the senior clerk is
actually double checking the classifications

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 PERCET Approach (cont.)
TEST (Cont.)
Examples of compliance tests:
Client controls provide for periodic stock takes –
check for evidence that the stock takes have
taken place
Checking that there is evidence that quality
control check has been performed

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 PERCET Approach (cont.)
TEST (Cont.)
Substantive Test – The results are used to assist
the inspector to form an opinion as to
whether he/she considers that the audit
objectives have been achieved
Examples of Substantive tests are:
Checking that tariff items are correct
Checking that valuations are correct

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 PERCET Approach (cont.)
TEST (Cont.)

Checking correct recording in the stock register or

stock control system as being on the premises can
be located
Checking that duty free and under deliveries are
only made to appropriate premises

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 PERCET Approach (cont.)
TEST (Cont.)
Checking that raw material stated as having
been used has been correctly recorded as input to
production runs
Checking that ratio of production yield to raw
material usage is reasonable.

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 PERCET Approach (cont.)
REVIEW
• This is where conclusions formed on the
adequacy of the client’s systems and controls
in meeting their revenue objectives. Where
weaknesses exist, clients should be reminded
of their responsibilities and any proposed
remedial action, demands for duty/Vat,
discussed and recorded.

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 The End
Thank you

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