Auditors Change Sample Transaction Review Process and Pre-Assessment Survey to Match Today’s Audit Standards and to Provide Auditors Flexibility to Target Priority Trade Issues
US Customs and Border Protection’s (CBP’s) Office of Regulatory Audit will be hosting a webinar on Thursday, October 9, 2014 from 2:00 pm–3:30 pm Eastern Time to provide an overview of its Focused Assessment (FA) Program.
After 11 years, CBP is revising and updating its FA audit process. The good news is they are focusing more on what matters. The bad news is it will mean more work for importers selected for an FA. While CBP will be more targeted in its approach to assessing risk at a particular company, it will be asking more questions and requiring more sample entries to review. A more detailed description of the changes follows.
The webinar will also address recent updates to the program which will be effective for all new FAs started on or after October 1, 2014. The updated FA Pre-Assessment Survey Audit Program information was posted here on October 1, 2014.
FAs are comprehensive, risk-based audits of importers involving an assessment of internal control over import activities to determine whether the importer poses an acceptable risk for complying with CBP laws and regulations. The FA Program — which was last updated in October 2003 — promotes maximizing voluntary compliance while working cooperatively with the importer to address issues.
While in the past, auditors have tailored audit assessments to fit the needs of particular importers on an ad hoc basis, the changes now provide more context and parameters for allowing such changes on a nationwide basis. The changes also update CBP auditing techniques with other agency auditing practices. The changes also explicitly allow for auditors to sample a greater number of transactions in key areas at an initial judgmental stage to determine if further auditing is necessary.
How Can Importers Prepare for the New Audit Structure?
While the changes have yet to be put into practice, companies can take steps now to lower their risk and pass a customs audit with flying colors. These steps include: creating an import manual, tasking import compliance personnel, creating internal control procedures for imports, and periodic self-audits or assessments. Evidence of these controls — now more than ever — will lower an importer’s risk profile. Auditors will review not only that proper internal controls are in place, but that they operate effectively and have been tested periodically.
The changes follow outreach efforts provided by the Office of Regulatory Audit (Reg. Audit) this summer to various trade groups. The main ways that importers will be affected are:
- Increased emphasis on the consideration of significance/materiality in making audit decisions;
- Expanded guidance on tailoring the audit approach to suit the specific circumstances of the importer;
- Replacing sample size matrices with more general sample size ranges; and
- Incorporating changes in report language to limit scope or review findings and applicability.
Focused Assessment Program Basics
The FA program will continue to be a risk-based audit program comprising three phases:
- Pre-Assessment Survey (PAS);
- Assessment Compliance Testing (ACT); and
- Follow-Up Audit.
The current changes only affect the PAS phase. Other changes will be implemented at a later date.
The current update involves aligning risk assessment procedures with the audit risk model set out in current government auditing standards (such as the Government Accountability Office [GAO] Yellow Book) and the 2013 Committee of the Sponsoring Organizations of the Treadway Commission (COSO) framework on internal controls.
Regulatory Audit actions are generally categorized into four types:
- Focused Assessment Audits;
- Referral and Enforcement Audits (from the ports or Immigration and Customs Enforcement [ICE]) and Other Professional Services (formerly Quick Response Audits);
- User Fee Audits; and
- Importer Self-Assessment Evaluations.
The first two categories make up the bulk of Regulatory Audit operations, with an increased emphasis on Enforcement Referral Audits on specific issues in recent years.
Key audit areas have traditionally covered classification and valuation. In recent years, however, the focus has changed to cover areas of Priority Trade Interest (PTI) identified by CBP:
- Intellectual property rights (IPR) protections;
- Antidumping/countervailing duties (AD/CVD);
- Free trade agreements (FTAs); and
- Textiles and wearing apparel.
The new FA standards emphasize the consideration of materiality and significance throughout the audit, and will replace the Worksheets for Evaluating Internal Controls (WEICs) with more flexible guidelines.
Pre-Assessment Survey (PAS)
The objective of the PAS is to determine whether a company’s import activities represent an acceptable risk to CBP. The auditors do this through an assessment of the company’s internal controls to determine compliance with applicable CBP laws and regulations. The period of review typically includes the most recently completed fiscal year, and the subject matter of the review would typically include value, classification, free trade agreements, reduced or duty free provisions (such as US goods returned/Chapter 98), and Antidumping/Countervailing duties (AD/CVD).
Preliminary Assessment of Risk (PAR)
The PAR (Preliminary Assessment of Risk) serves as the baseline for the initial scope of work to identify risk areas for auditing. The PAR is based on information that the auditor gathers on the company from internal and external sources (such as a company’s entry data), including the response to importer supplied questionnaires. In the changes, Reg. Audit proposes to eliminate the Advanced Conference to combine with other steps, such as a review of walk through entries and introductory audit steps.
Auditors will perform an initial assessment of the volume of activity and revenue implications of an importer’s entry data based on tariff codes, entry type, and special indicators (NAFTA, 9801, etc). Past evidence of noncompliance will also be considered (i.e., prior disclosure, previous audit findings, penalty case, import specialist reviews, cargo exams, seizures, etc.) to assess the potential for continued noncompliance. From this information, the auditor will develop an initial risk analysis and audit plan.
The PAR will no longer assess a level of risk (high, medium, or low). Because the PAR is based on CBP entry information and other readily available data, CBP believes it is too early to assess a level of risk at the conclusion of PAR phase. Rather, the assessment of inherent risk will be finalized at a later stage of the risk assessment procedures after Reg. Audit obtains additional information. The changes place an increased emphasis on the notion that audit areas included in the scope at the PAR phase may be subsequently eliminated. In fact, value and classification could potentially be eliminated as audit areas.
CBP is revising its questionnaire and renaming it the “Pre-Assessment Survey Questionnaire” (PASQ). A copy of the new questionnaire is provided on the website.
Changes to Sampling Transaction Review
Historically, CBP auditors selected one to four “walk-through” entries to review depending on the complexity of the importer’s activity and associated risks. CBP has indicated that it will select additional entries for the “walk-throughs” in the future to help identify or understand variations in types of transactions and procedures. Often the “walk-throughs” have been chosen from entry data to potentially show typical company processes or the occasional outlier entry to show potential exceptions to those procedures.
In the past, CBP would request samples (up to 20 samples) in each of the key areas to be reviewed. These samples would be selected based on an auditor’s judgment. The number of samples selected will now be replaced with more general guidelines. If there is a population of 250 items or more in the universe of data, the auditor may selection between 25 and 40 samples. If the population is 250 or less, the tested quantity will be about 10 percent. Auditors, however, can change the parameters as needed.
CBP states that companies that have no internal controls or weak internal controls over their import transactions will have higher risk, and therefore, possibly larger sample sizes.
PAS Risk Assessments
Following the completion of the on-site review and analysis of the samples, the auditors prepare a PAS Audit Report that identifies areas of risk deficiencies and materiality of errors. If there are areas of risk or deficiencies, CBP will request the importer to implement a Compliance Improvement Program (CIP) and allow them to assess the loss of revenue (to be subsequently verified by the auditor). Companies that choose not to implement a CIP or to assess the loss or revenue may be subject to a full compliance assessment by the CBP Audit Team (based on some form of statistical sampling).
Thus, Reg. Audit will now align its risk assessments with the audit risk models found in other government auditing standards (Audit Risk = Inherent Risk x Control Risk x Detection Risk).
Where instances of non-compliance are infrequent or immaterial or the internal control deficiencies are not significant and do not warrant the commitment of additional Reg. Audit resources, CBP may now conclude that there is an “acceptable risk,” and report the issue not as a finding but include it in an “Other Matters to be Reported” section of its report with suggestions to improve the system.
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While recognizing that companies are highly focused on containing costs, we strongly recommend now more than ever that if your company is importing merchandise into the US that you take stock of your current import processes and procedures and make sure your company has adequate internal controls in place regarding your customs and import operations. Based on the recent Trek Leathercase, CBP has more incentive than ever to focus on priority trade issues, and to focus on the companies that import those products.