What is an example of an audit?

An example of an audit can be illustrated with a common IRS tax audit scenario. Suppose a self-employed graphic designer reports $80,000 income and $40,000 business expenses on Schedule C, including $15,000 vehicle expenses and $8,000 meals. The IRS computers flag the return because vehicle expenses are high relative to similar businesses and 100 percent business use is claimed without a mileage log. The IRS sends a letter scheduling a correspondence audit requesting proof of income, receipts for business expenses, mileage log, and bank statements. The auditor examines documents, finds that only 60 percent of mileage was business and meals lacked business purpose documentation, and proposes adjusting taxable income upward by $10,000 plus penalty and interest. Another example is a financial statement audit, a CPA firm audits a small company before a bank loan, they examine invoices, bank reconciliations, inventory counts, and internal controls, then issue a report stating whether financial statements fairly present financial position. A third example is an energy audit of a home where an auditor uses blower door testing and infrared camera to identify air leaks and insulation gaps and recommends improvements to reduce energy bills.