Chapter 10 Schedule M-1 Audit Techniques Table of …

1 Chapter 10 Schedule M-1 Audit Techniques Page 10-1 Chapter 10 Schedule M-1 Audit Techniques By Ken Johnson (Central Mountain) And Alta Chesney, (Gulf Coast) and Fred Sanchez (Gulf Coast), Reviewers INTERNAL REVENUE SERVICE TAX EXEMPT AND GOVERNMENT ENTITIES Table of Contents Table OF CONTENTS ---------------------------------------- ---------------------------------------- -------------------------1 OVERVIEW ---------------------------------------- ---------------------------------------- ---------------------------------------- 3 INTRODUCTION---------------------------- ---------------------------------------- ---------------------------------------- ----------- 3

2 OBJECTIVES------------------------------ ---------------------------------------- ---------------------------------------- ------------- 3 BASIC INFORMATION ---------------------------------------- ---------------------------------------- -------------------------4 LINK OR BRIDGE---------------------------------- ---------------------------------------- ---------------------------------------- --- 4 Schedule M-1 DIFFERENCES----------------------------- ---------------------------------------- -------------------------------- 4 4 GENERAL CATEGORIES------------------------------ ---------------------------------------- ------------------------------------- 4 TIMING DIFFERENCES ---------------------------------------- ---------------------------------------- ------------------------5 TIMING DIFFERENCES----------------------------- ---------------------------------------- ---------------------------------------- -- 5 PERMANENT DIFFERENCES ---------------------------------------- ---------------------------------------- ----------------5 PERMANENT

3 DIFFERENCES----------------------------- ---------------------------------------- ------------------------------------ 5 Schedule M-1 MECHANICS ---------------------------------------- ---------------------------------------- ---------------6 Schedule M-1 ---------------------------------------- ---------------------------------------- -------------------------------------- 6 DISCUSSION OF Schedule M-1 ---------------------------------------- ---------------------------------------- ------------------- 7 Schedule M-1 PRINCIPLES------------------------------ ---------------------------------------- ---------------------------------- 7 Schedule M-1 LINE ITEMS ---------------------------------------- ---------------------------------------- ----------------8 LINE 1 ---------------------------------------- ---------------------------------------- ---------------------------------------- --------- 8 LINE 2 ---------------------------------------- ---------------------------------------- ---------------------------------------- --------- 8 LINE 3

4 ---------------------------------------- ---------------------------------------- ---------------------------------------- --------- 8 LINE 4 ---------------------------------------- ---------------------------------------- ---------------------------------------- --------- 9 LINE 5 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 10 LINE 6 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 10 LINE 7 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 11 LINE 8 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 11 LINE 9 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 11 LINE 10 ---------------------------------------- ---------------------------------------- ---------------------------------------- ------- 11

5 Continued on next page Chapter 10 Schedule M-1 Audit Techniques Page 10-2 Table of Contents, Continued AUDITING Techniques ---------------------------------------- ---------------------------------------- ------------------- 12 MECHANICAL ERRORS---------------------------------- ---------------------------------------- ----------------------------------- 12 BOOK EXPENSE NOT ON TAX RETURN---------------------------------- ---------------------------------------- ----------------- 13 NETTING ITEMS----------------------------------- ---------------------------------------- ---------------------------------------- -- 13 SIMPLE

6 MISTAKES-------------------------------- ---------------------------------------- ---------------------------------------- -- 13 OMITTED ITEMS----------------------------------- ---------------------------------------- ---------------------------------------- -- 13 FASB'S---------------------------------- ---------------------------------------- ---------------------------------------- -------------13 CONSISTENCY----------------------------- ---------------------------------------- ---------------------------------------- ---------- 13 ADJUSTING JOURNAL ENTRIES--------------------------------- ---------------------------------------- -------------------------- 14 INCORRECT ACCOUNT BALANCES-------------------------------- ---------------------------------------- ----------------------- 14 REVERSING DIFFERENCES----------------------------- ---------------------------------------- ------------------------------------ 14 SAMPLE IDR'S ---------------------------------------- ---------------------------------------- ---------------------------------- 15 EXHIBIT 1

7 ---------------------------------------- ---------------------------------------- ---------------------------------------- ---- 15 EXHIBIT 2 ---------------------------------------- ---------------------------------------- ---------------------------------------- ---- 15 EXHIBIT 3 ---------------------------------------- ---------------------------------------- ---------------------------------------- ---- 16 EMPLOYEE PLANS Schedule M-1'S ---------------------------------------- ---------------------------------------- -- 16 DEFERRED COMP. ARRANGEMENTS---------------------------- ---------------------------------------- ------------------------ 16 QUALIFIED PLAN IRC 404(A)(5) ---------------------------------------- ---------------------------------------- ----------------- 16 NONQUALIFIED DEFERRED COMP.

8 PLANS IRC 404(A)(6) ---------------------------------------- --------------------------- 17 COMP. ABSENCES IRC 404(A)(5) ---------------------------------------- ---------------------------------------- --------------- 18 SUMMARY ---------------------------------------- ---------------------------------------- --------------------------------------- 19 SUMMARY--------------------------------- ---------------------------------------- ---------------------------------------- ---------- 19 Schedule M-1 EXAMPLE ---------------------------------------- ---------------------------------------- ----------------- 20 TAX

9 RETURN---------------------------------- ---------------------------------------- ---------------------------------------- ------ 20 LINE 1 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 20 LINE 2 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 20 LINE 3 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 20 LINE 4 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 21 LINE 5 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 21 LINE 6 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 21 LINE 7 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 21 LINE 8

10 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 22 LINE 9 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 22 LINE 10.