Table of Contents
Why does Customs do audits?
It is not possible for Customs to check on or closely monitor every single shipment coming into or going out of the country. Customs administrative processes in most countries require traders to make declarations to authorities to notify them of what products they are bringing in. However, since authorities also cannot completely rely on this voluntary information, they have to carry out audits, which are primarily designed to validate whether the information supplied by the trader in the past was accurate and correct.
Customs officials have the lawful authority to carry out these audits on both importers and exporters. This authority also extends to inspections at warehouses or licensed depots.
What is a Customs audit?
In a Customs audit, the authorities will review and go through the records provided by traders as they export or import goods. Some times, such audits happen right after the importation, while in other times records from several years ago can be examined by the authorities. The customs legislation gives the officials the power to do so, depending on a statute of liability.
What kinds of Customs audits are there?
Desktop audits:
These audits are primarily an inspection of the transactions between the trader and the Customs authorities. A desktop audit is useful when the intended source of risks can easily be identified based on an inspection of the transaction documents alone. In some cases though, such an audit might also involve the physical inspection of products, post completion of the desktop audit. Erroneous HS classifications and incomplete Free Trade Agreement forms are easily picked up during desktop audits.
Focused audits:
Focused audits are usually carried out at the client’s business location in order to ensure that both the electronic and physical records are available for inspection. Such audits are usually done if there is a certain aspect of the client’s dealings with customs that needs to be checked. For example, if Customs suspects that the trader has the habit of issuing different invoices for the same shipment with different values or quantities in order to evade duties and taxes, this audit method would be adopted.
Warehouse verification audits:
These audits are performed inside the warehouses that the traders use for their goods. They usually consist of verifying the documentation of goods going out or coming in to the warehouse. Custom officials also have the powers to monitor any manufacturing processes being carried out at the warehouse or inspect revenues, if the company is registered as an exporter of the goods.
Self assessment audits:
These kinds of audits will require the trader to fill in a questionnaire that Customs will then review before that make a decision if they want to visit the company for a more formal audit. The self assessment audit allows Customs to raise awareness of compliance at a larger scale than if they go to companies one at a time.
Which companies do Custom officials audit?
Custom authorities can choose any company involved in import or export activities to perform an audit on. As a trader, one can never know whether or when his/her company will be audited. Companies are chosen according to risk management rules set out by Customs. However, some audits, especially desktop audits can truly be at random. Usually, authorities will select a few traders each in multiple sectors and using the audit results, determine which sectors are likely to fall behind in compliance, then adjust the selection rules accordingly.
How is a Customs audit carried out?
The following will apply to most audits:
As soon as your company has been shortlisted for an inspection or an audit, you will be contacted by Customs officials. You can if necessary, involve your Customs broker or trade consultancy a part of the audit proceedings. In order to ensure that the day to day workings of your business aren’t affected, officials will usually try their best to execute the audit without interference.
However, in most countries, Customs is not legally obliged to put your business interests above their audit focus.
At the start of the audit, Custom officials will request to meet the management of the company to discuss how they will go on with their work. This is where the audit’s scope, its timeframe, access to information and IT system etc. are discussed. The audit can be carried via interviews, inspection of standard operating procedures, analysing transaction records, ledgers, past shipping documents and even email correspondence related to trade activities. Once the audit has been completed, another meeting is usually held between the company’s management and Customs officials. The company is handed over the initial findings report and can discuss any issues or consequences arising from it.
What do Customs auditors check for during an audit?
A Customs audit is used to identify wrong HS Classifications, wrong duty amounts paid, wrong administrative forms used, wrong values declared to Customs and licensing issues. Of course, other aspects of Customs compliance can also be brought to light during an audit.
During the course of the audit, you may be asked to produce any physical or electronic records of your cross border transactions. Here are some of the documents you might have to show:
- Accounting ledgers
- Airway bills
- Bills of landing
- Permits
- Contracts
- Correspondences with customers or suppliers
- Orders
- Invoices
- Packing lists
- Evidence of monetary transactions
- Evidence of transference of money overseas
How will Customs behave and what can they do?
In most countries, Custom officials are expected to be professional and polite in dealing with you. They have to carry out the audit in the way prescribed by the law and need to respect your privacy as well as the day to day working requirements of your business during the time of the audit. They are also expected to clarify any queries you may have regarding the whole process. However, in most countries, Customs officials are also well within the confines of the law if they need to resort to force to secure documents and evidence of wrong doing.
What happens if there are errors/mistakes in my transactions?
The purpose of an audit is to find out discrepancies in your transactions and records. As mentioned above however, Customs officials use the audit results to get an idea of how much compliance there is in a particular sector. If they find errors in your records, they won’t necessarily penalize you harshly for all them. One main intent of the exercise is to ensure the errors don’t continue to happen in the future.
Audit officials will also discuss such discrepancies with you and may even want to have those errors adjusted and reflected in your records. In some cases, penalties or fines may be necessary. However, they will typically also listen to any explanations you may have regarding the discrepancies.
In some cases, penalties or fines may be necessary.
You also have the right to disagree and fight for your rights against Customs officials’ decisions. However, it is worth knowing that following all the legal procedures in your dealings with Customs is mandatory even if you may have hired a third party to handle the Customs facing end of your business.
Some common errors found during Customs audits:
Failing to keep records:
Companies should ensure they retain all documentation related to Customs transactions until the end of the period defined by law. the income tax department may also require the same set of documents to be retained for tax auditing purposes. However, the retention period defined for tax audit purposes may be different. The trader should keep the documents for the longest period defined between the two.
Incorrect entry of imports:
The products that a company imports need to be correctly declared with correct tariff numbers assigned. Even samples, promotional products or products that weren’t ordered but still received need to be recorded and entered in the documentation. Erroneous HS classification is a major source of compliance issues for many traders.
Wrong Customs value calculated:
When determining the Customs value for a shipment, all the associated costs need to be taken into account. These costs could include costs like ads, royalties, intellectual property fees, rebates, research, commissions etc. If a trader fails to provide these details, Customs officials won’t be able to calculate the correct Customs value for the goods.
Incorrect origin:
You will need to declare the country of origin so that the proper tariffs or preferential rates can be applied to your shipment. This information is provided by vendors and suppliers who may have made mistakes when supplying this information to you.
Related transactions:
Any related party transactions also need to be indicated on import declaration documentation.
Remedies – Voluntary Disclosure:
If you have discovered errors in your transactions, it is a good idea to report those errors to the Customs department, assuming they have a volumtary disclosure program. This ensure you are staying in compliance and respecting the law of the country and also saves you from future headaches related to audits, costs, penalties etc. However, not all countries have voluntary disclosure programs.
However, such disclosures cannot be made any time you may wish. For instance, once an audit has started, it may no more be possible for you to disclose your errors. Some countries may allow such disclosures before some specific stages in the audit progress has been reached. In general however, you cannot use the voluntary disclosure option once you realize your discrepancies will be exposed in an audit.
The best way to proceed is to find out how an audit affects your disclosure rights in the country you do business in. Some companies hire their own auditors to carry out a mock Customs audit before the actual Customs audit takes place. This way, they can find out the risks involved and take the appropriate measures to to mitigate risks and craft defense plans.
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