With flourishing business and increasing volume of monetary transactions, it often becomes difficult for a multi-states company to examine every transaction. Determining the right tax amount seems to be arduous work. In such cases, sampling can be an easy way to resolve the matter. With the help of this process, it becomes easier to estimate whether company's sales & use tax is overpaid, underpaid or correctly paid. Sampling is regarded as a crucial part of auditing used by state auditors.
€ Sampling is useful when there is a huge volume of documents or transactions that need to be examined in a short period of time.
€ It is an inexpensive way to test where the problematic areas are.
€ It also becomes a useful tool and used increasingly in state tax audits.
Most states adopt a sampling approach which is efficient, effective and at the same time equitable. The sampling process varies from state to state. However, selecting unbiased requires careful review and understanding of the business. Otherwise the results may surprise you with an unfavorable assessment.
Techniques for perfect Sampling
Before agreeing on any particular sampling method, it is important to find out the main objective behind it. Understand how the samples are selected and to extrapolate the errors without bias. Basically, there are two methods of sampling - statistical and non-statistical sampling. Statistical sampling is based on random selections and uses probability theory to evaluate the result of the sampling. It also includes the measurement of sampling risk. On the other hand, non-statistical, such as block , does not follow the above mentioned characteristics. In order to measure the sampling risk, it is better to use the statistical approach rather than the non- statistical sampling approach. However, depending on how the books and records are organized, block may be easier and saves time. But both sampling approach requires the auditor's judgment during planning, implementation and evaluation of the sampling plan.
Statistical sampling is sub-divided into - simple Random sampling, Systematic sampling and Stratified sampling. Non-statistical sampling is further categorized as Haphazard selection, Judgment selection and Block selection.
Defining the Sampling Unit
Sampling unit indicates the basic unit that is to be sampled. Desired sample unit is defined as one that yields air assessment from the result. The sampling unit can be invoice, batch number, line item, purchase order, time period, location, contract or even customer. The control unit is fixed, depending on the process through which records are filed.

Determining the Size
Sample size defines the sampling unit selected for examination, which generally includes the financial transaction over a period of time. Sample size can be fixed by using mathematical formulas or computerized programs. State tax authority can also set guidelines for establishing a minimum size, for all strata or for a particular stratum. In case of stratified random sampling, a separate will be fixed for each stratum. The size of which is fixed statistically.
Developing successful Sampling Plan
Before conducting the sampling, a written sampling plan should be prepared. A well developed sampling plan helps to identify the loopholes before the audit begins, to resolve the taxpayers concerns, and to identify potential issues. This will go a long way to reduce the time required to solve any sort of dispute. The sampling plan consists of the following steps:
€ Determining the objective of sampling
€ Identifying the period , the sampling unit, technique and any odd situations to be excluded from the sample
€ Developing the procedure to be followed to identify the units to be examined and describe any particular procedure to follow
€ Choosing the evaluation and projection procedure to be applied to get proper result.
Many states generally don't provide a specific direction, whether to use statistical or non-statistical sampling process. It is at auditor's discretion. Generally, sampling for sales & use tax audit focuses on additional effort to identify the sampling population. For example, transactions might consist of capital assets, ordinary recurring expenses for multiple locations and divisions. The magnitude and quantity of the amount can also vary for each type of purchase. Often stratification of population is carried out to keep the samples representative.
For more details contact at http://www.statessalestax.com