Income Tax Audit Manual

Compliance Programs Branch (CPB)

Chapter 18.0 Audit Quality Review

18.1.0 Audit Quality Review

Quality audits are necessary to effectively deliver the Canada Revenue Agency (CRA) compliance programs’ mandate of identifying, addressing, deterring non-compliance, and promoting voluntary compliance. For this reason, enhancing audit quality is a priority for the audit programs and the Audit Quality Review (AQR) Program.

Definition of a quality audit

A quality audit is defined as one where:

• the auditor has identified and addressed material risk
• the audit adjustments are technically correct
• the auditor has adhered to the Taxpayer Bill of Rights, and
• a third party would clearly understand how the auditor reached their conclusions based on the information in the file 

18.2.0 Audit Quality Standards

AQR officers review selected cases against predetermined quality standards. The standards have been developed in consultation with the audit programs and reflect the Income Tax Act and the policies and procedures outlined in the Income Tax Audit Manual (ITAM), Audit communiqués, memoranda, and current learning products.

With the introduction of the Underused Housing Tax Act in 2022, the Underused Housing Tax (UHT) compliance program has developed its own audit quality standards based on its current policies, procedures and learning products. Audit quality reviews will be conducted by compliance officer within the UHT audit program in Headquarter (HQ).

Every two years, the AQR Program consults with stakeholders, including the audit programs, to ensure the standards continue to be relevant, and to identify changes needed due to new or obsolete policies.

In between these major reviews, the Audit Quality Standards are revised, when necessary, due to emerging issues or new audit policies and procedures. The version of the Audit Quality Standards that applies to an audit case is based upon the standards in place when the AQR case is created.

The March 2025 income tax audit standards are the most recent version; go to AQR Standards.

You will find more information on Underused Housing Tax’s Audit quality standards on their SharePoint.

Elements

The Audit Quality Standards are grouped under five elements of a quality audit:

1. Planning
2. Conducting
3. Application of law, policy, and procedures
4. End products
5. Professionalism

The first four elements follow the natural progression of an audit. As the name suggests, the Planning element includes the preliminary file review, preparing, and continuously updating the Audit Plan. The Conducting element begins with the initial interview and tour of the premises, and requesting the relevant information and books and records, followed by the review of revenues, expenses, and balance sheet items, as well as indirect verification of income (IVI) procedures, where applicable. The Application of law, policy, and procedures element considers the technical accuracy of the results, whether the case conforms to CRA policies, and whether the taxpayer relief and penalty provisions were properly considered. The End products element includes the content of the working papers, reports, correspondence, reassessment documents, and audit results coding.

The Professionalism element touches on each stage of the audit, and covers confidentiality, security, and service to the taxpayer.

Standards

Within each element there are one or more standards.

Individual standards are referred to using the format E#-S#. The number following the E refers to one of the five elements noted above, while the number following the S refers to a particular standard under that element. For example, E2-S3 would indicate the third standard, Revenue, under the second element, Conducting.

Measurement criteria

For each standard, there are a number of measurement criteria. The first measurement criterion for every standard is always “fully met,” signifying that every aspect of the standard has been completely satisfied.

This is followed by measurement criteria identifying one or more ways in which the standard may not have been met. Next are “needs improvement” criteria, which indicate ways in which the standard has been met, but where the audit work could have been better. The final measurement criterion is “N/A,” used where the standard does not apply to the audit under review.

Change required

In some cases, a “not met” rating results in a change required (CR).

CRs are significant errors or omissions in an audit case that:

• could jeopardize the assessment
• could result in an incorrect assessment
• could diminish the credibility of the CRA
• represent a failure to properly record the results of an audit
• represent a failure to address the risk associated with a case or
• represent a failure to follow CRA policies and procedures

When any standard has been rated as not met, CR in a live case, the case is returned to Audit for revision. 

Multiple ratings

Depending on the situation, more than one measurement criterion could apply to a particular standard. For example, the screener stated that IVI testing was required for the audit under review, but the auditor neither reconciled revenue nor conducted a second supporting IVI test. Two measurement criteria would apply for E2-S6:

3.  No attempt was made to reconcile reported revenue to the books and records or the reconciliation was incomplete and/or inaccurate. (not met, CR)

4.  Either the bank deposit analysis or the second supporting IVI test was not conducted, or it was incomplete or inadequate. This error resulted in an incorrect conclusion on the IVI Decision Tree. (not met, CR)*

Reference/Learning and Interpretation/Review considerations

For each standard, there are also References/Learning and Interpretation/Review considerations.

The References/Learning section lists sections of the ITAM, communiqués, memoranda, learning products, and other publications that apply to each standard.

The Interpretation/Review considerations define certain terms in the measurement criteria and spell out the circumstances that would warrant a specific rating. They contain valuable information to help auditors understand the audit programs’ expectations for various parts of the audit.

The Interpretation/Review considerations also address differences in how the standards apply to restricted audits and T1 Small Business Audit (T1-SBA) files. For restricted audits, how the standards apply will depend on the identified risk issue(s) and whether the auditor has expanded the scope of the audit.  

18.3.0 AQR team structure

Each region has a Business Intelligence and Quality Assurance (BIQA) Director, who reports to the Regional Assistant Commissioner. The region’s AQR team reports to the BIQA Director.

Program 18 audits at the AU-02 level and Program 17 audits are reviewed by the AQR team in the auditor’s own region. On the other hand, reviews of Program 18 audits at the AU‑03 level (also referred to as Basic Files) and all T1-SBA files are centralized, regardless of the auditor’s location.

AQR officers include SP-06s who review T1-SBA files, AU-01s and AU-03s who review Small and Medium Enterprises (SME) files, and an AU-04 who review Basic Files. Usually, AQR staff are former auditors and audit team leaders.

18.4.0 Types of AQR Files

Cases reviewed on a live basis

Reviewing cases on a live basis means reviewing them before the reassessment is processed, allowing for any errors or omissions to be corrected. The AQR Program has established a service standard of providing the initial feedback on a live case to Audit within eight business days of the date the audit team leader approved the audit software case.

If the AQR does not result in any Audit Quality Standards being rated as “not met, CR”, no revisions to the audit are required. The audit case is released from the AQR team, and the audit team leader is advised to process the adjustments or close the case without changes and issue the final correspondence.

If the AQR results in any Audit Quality Standards being rated as “not met, CR”, then changes to the audit are required. The audit team leader is notified if this is the case, and the audit case is returned to Audit for revision. The auditor will have access to the AQR report to review the ratings and comments provided.

For each standard which received a CR rating, the auditor must respond, detailing how the CR was addressed in the audit case, along with references to working papers where the changes were made, if applicable.

Sometimes, the changes required result in a change to the proposed audit adjustments and the auditor must issue a revised proposal letter to the taxpayer.

The revised proposal letter templates are in the audit software Template Library. They are also available in the CRA Electronic Library > Compliance Programs Branch Reference Material > Audit > Income Tax – Forms and Letters > Letters > Chapter 11. See:

• A-11.1.1, Post-AQR Proposal - With Penalty
• A-11.1.2, Post-AQR Proposal - No Penalty
• A-11.1.3, Post-AQR Proposal - Repeated Offence Penalty

Once the AQR team is satisfied that all issues have been appropriately addressed by the auditor, the audit case is released for final processing.

Cases reviewed on a delayed basis

Reviewing cases on a delayed basis means reviewing them after the reassessment has been processed and the file closed, using the same standards as for live cases. These reviews offer feedback to Audit on the strengths of the audit and areas for future improvement.

Usually, even where a standard has been rated with a CR, delayed cases are not returned to Audit for changes. The exceptions are when:

• the audit case contains technical errors (calculation errors or incorrect application of the legislation, policy and procedures), resulting in the taxpayer being over-assessed
• errors were made in processing the audit results that were not noted during the review by the audit team leader. An example would be where the auditor accidentally used the amounts from the proposal letter rather than the amounts after the taxpayer’s representations were taken into account to prepare the Data Change Record 

In such cases, an amending audit case will be generated in audit software so that the adjustment to the taxpayer can be processed. This policy aligns with ITAM 12.7.1, Situations that require a follow-up income tax audit.18.4.0 Types of AQR Files

Cases reviewed on a live basis

Reviewing cases on a live basis means reviewing them before the reassessment is processed, allowing for any errors or omissions to be corrected. The AQR Program has established a service standard of providing the initial feedback on a live case to Audit within eight business days of the date the audit team leader approved the audit software case.

If the AQR does not result in any Audit Quality Standards being rated as “not met, CR”, no revisions to the audit are required. The audit case is released from the AQR team, and the audit team leader is advised to process the adjustments or close the case without changes and issue the final correspondence.

If the AQR results in any Audit Quality Standards being rated as “not met, CR”, then changes to the audit are required. The audit team leader is notified if this is the case, and the audit case is returned to Audit for revision. The auditor will have access to the AQR report to review the ratings and comments provided.

For each standard which received a CR rating, the auditor must respond, detailing how the CR was addressed in the audit case, along with references to working papers where the changes were made, if applicable.

Sometimes, the changes required result in a change to the proposed audit adjustments and the auditor must issue a revised proposal letter to the taxpayer.

The revised proposal letter templates are in the audit software Template Library. They are also available in the CRA Electronic Library > Compliance Programs Branch Reference Material > Audit > Income Tax – Forms and Letters > Letters > Chapter 11. See:

• A-11.1.1, Post-AQR Proposal - With Penalty
• A-11.1.2, Post-AQR Proposal - No Penalty
• A-11.1.3, Post-AQR Proposal - Repeated Offence Penalty

Once the AQR team is satisfied that all issues have been appropriately addressed by the auditor, the audit case is released for final processing.

Cases reviewed on a delayed basis

Reviewing cases on a delayed basis means reviewing them after the reassessment has been processed and the file closed, using the same standards as for live cases. These reviews offer feedback to Audit on the strengths of the audit and areas for future improvement.

Usually, even where a standard has been rated with a CR, delayed cases are not returned to Audit for changes. The exceptions are when:

• the audit case contains technical errors (calculation errors or incorrect application of the legislation, policy and procedures), resulting in the taxpayer being over-assessed
• errors were made in processing the audit results that were not noted during the review by the audit team leader. An example would be where the auditor accidentally used the amounts from the proposal letter rather than the amounts after the taxpayer’s representations were taken into account to prepare the Data Change Record 

In such cases, an amending audit case will be generated in audit software so that the adjustment to the taxpayer can be processed. This policy aligns with ITAM 12.7.1, Situations that require a follow-up income tax audit.

18.5.0 File selection

The emphasis placed on the selection of files by new or newly promoted auditors, which began in April 2022, continues, as well as the January 2025 reintroduction of cases selected for auditors who fall outside this population. Also, as of April 1, 2026 and for a one-year term, restricted files that are completed under the Small Business Compliance Division of the Compliance Programs Branch will be reviewed on a deferred basis only.

File selection is based on AQR capacity and audit cases available at the time of selection. Generally, where there is a choice in case set selection, and the auditors in question have had a similar number of cases previously selected for AQR review, HQ will prioritize case sets for new or newly promoted auditors.

Regardless of the type of AQR file selected, whether the process is live or delayed, a feedback discussion between the AQR officer, the auditor and their team leaders follows each review. The purpose of the feedback discussion is to explain the key findings of the review in greater detail, particularly their impact on the audit results.

18.6.0 AQR results report

Once the review of the audit is complete, AQR provides an AQR results report to the audit team leader and manager within the AQR audit software case.

The report includes an overall comment on the quality of the audit as well as ratings and detailed comments for each standard, which make it clear exactly how the auditor met the standard or, if not, exactly what issue(s) were identified. 

In a live file, if the ratings include any CRs, the auditor must make the necessary revisions to the case and provide a response in the report for each CR, explaining how it was addressed. Then the case is then sent back to the AQR team for a second review.

AQR reports should not be used directly in performance management, but the findings can indicate potential areas for improvement in future audits as well as training needs.

18.7.0 Dispute resolution process

There is a dispute resolution process in place to resolve situations where Audit does not agree with the AQR results. This process has two levels. Resolving disputes should be treated as priority workload by everyone involved.

• Level One: The audit team leader and the auditor review the AQR findings and disagree with the results. The audit team leader contacts the AQR team leader to try to resolve the disagreement. Usually, disputes can be resolved at this level.
• Level Two: If no agreement can be reached at level one, then the regional Business Intelligence and Quality Assurance (BIQA) Director or BIQA Assistant Director and the audit manager or Assistant Director of Audit (ADA) discuss the issue.

If they are still unable to resolve any disputes about the rating between them, the ADA has final say about whether additional audit work will be completed. The documentation in the AQR file will reflect all decisions made by the ADA with respect to the final resolution of the audit.

18.8.0 AQR statistical reports

AQR statistical reports are prepared for each functional audit program semi-annually.

They include cumulative results for the fiscal year at both the national and regional level, and observations for each standard about what audit did well and what quality issues were observed.

Where a case received multiple ratings for a single standard, only the most serious rating is included in the statistical report. For example, if a standard was rated with both a not met, CR and a needs improvement, only the not met, CR would be counted for the final report.

18.9.0 Role of Headquarters Quality Assurance Section

The Quality Assurance (QA) Section at HQ, National QA, is responsible for the functional program design and direction of the AQR Program in close consultation with the HQ audit programs. It provides the regional teams with policies and procedures, technical guidance related to AQR, and AQR training.

To ensure the quality and consistency of AQR Program reviews, National QA undertakes a number of initiatives:

• National QA advisors review a sample of AQR reviews completed by AQR officers and provide individualized feedback on the quality of the review
• Calibration exercises, where all AQR officers review the same audit case, the responses are compared, and the correct ratings are discussed
• Training for new AQR officers
• Ongoing support provided by responding to enquiries made through the HQ mailbox and facilitating regular monthly conference calls. This communication also ensures that emerging issues are addressed in a timely manner

National QA and the HQ audit programs regularly communicate to address national trends and situations where policies and procedures need to be clarified. National QA also liaises with other stakeholders, including the Legislative Policy and Regulatory Affairs Branch, the Appeals Branch, and the International and Large Business Directorate.

For more information and the current Audit quality standards, please see Audit Quality Section (AQS).