Contributed May 11, 2001 by Linda_Worley-Fonner@cp.vesuvius.com IMPORT AUDIT PROGRAM TABLE OF CONTENTS SECTION PAGE OBJECTIVE X PLANNING AND PREPARATION X ACCOUNTING SYSTEM X ELECTRONIC DATA PROCESSING FUNCTIONS X CUSTOMS PROCEDURES & RELATED INTERNAL CONTROLS X BASIS OF APPRAISEMENT X SAMPLING PLAN/SAMPLE SELECTION X COMPLIANCE TESTING X Classification X Quantity X Harbor Maintenance User Fees (HMF) X Transaction Value X Computed Value X Recordkeeping X HTSUS 9801 X HTSUS 9802.00.40 (formerly TSUSA 806.20) and 9802.00.50 X HTSUS 9802.00.60 Metal Articles Exported for Processing X HTSUS 9802.00.80 U.S. Articles Assembled Abroad X Anti-dumping/Countervailing duties X Bonded Warehouse X Foreign Trade Zones X Transshipment X Other Special Issues X Summarize compliance testing results & record on the matrix X EXHIBIT A: Risk Assessment Guidelines and Summary X EXHIBIT B: RAQ (Risk Assessment Questionnaire) X AUDIT TEST PROCEDURES: I. Accounting System Objective: Gain an understanding of Company' accounting system in order to develop compliance tests. Test of Controls: 1. Document how and where the Company location records Customs transactions in its books and records. Select one or two Customs entries and "walk them through" the accounting system from purchase to payment to Customs entry. 2. Review the chart of accounts and identify all accounts that are of interest to Customs, including inter-company accounts. 3. Confirm the accuracy and completeness of accounting records by reconciling the applicable general ledger accounts to cost of goods sold in the importer's financial statements. 4. Identify the best source data for compliance tests. II. Electronic Data Processing Functions Objective: Determine how computers are used to store Customs related data and assess the accuracy of Customs EDP information, in order to develop compliance tests. (NOTE: These steps may require the assistance of a computer specialist) Test of Controls: 1. Document the EDP systems used to process the information related to Customs transactions. 2. Analyze systems and programs used by the importer to prepare Customs related reports to ensure that information being generated is accurate, complete, and in compliance with Customs laws and regulations. III. Customs Procedures and Related Internal Controls Objective: Understand and evaluate the importer's organizational structure, procedures and their related internal controls as they pertain to Customs transactions, in order to develop compliance tests. Test of Controls: 1. Review the problem areas identified in the profile (prior disclosures, compliance measurement results, penalties, protests, entry rejects, etc.) to identify possible weaknesses in the Company location's procedures and internal controls. 2. To obtain the necessary understanding of a company's internal controls related to Customs matters, review the control environment, which is the attitude or tone set by management regarding the importance of accurate recording and reporting of Customs data and the company's assessment of its risk of not complying with Customs regulations. a. Determine if there is a Customs Department and if so what level of management does the department head report to? 3. Review the policies and procedures, including the communication of Customs information, that make up the internal control structure related to: (only applicable bullet items) a. Common Importer Checks * Classification (including quota) * Quantity * User Fees * Value (including quota) * Recordkeeping b. Special Issues * HTSUS 9801 * HTSUS 9802.40/50, 9802.60, 9802.80, 9802.90 * Antidumping and countervailing duties * Warehouse (including quota) * FTZ (including quota) * Prevention of transshipment * PFI concerns 4. Evaluate the effectiveness of the importer's Customs procedures and internal controls. IV. Sampling Plan/Sample Selection Objective Develop a sampling plan and select statistical samples for testing the Company location's level of compliance with Customs laws and regulations. (Note: it is more efficient to perform multiple tests on a single sample whenever possible.) Test of Controls 1. Complete the standard risk assessment questionnaire noted in appendix A. V. Compliance Testing Common Importer Checks A. Classification Subobjective: Determine if entered merchandise was classified in accordance with 19 CFR Part 152 Subpart B. (1) Using the sample selected above obtain the specifications, part numbers, or other applicable descriptions, lab reports and binding rulings from the company for each selected article. Provide this information and the entry containing the article to the import specialist for a review of classification including: - Quota - Anti-dumping and Countervailing Duties ADD/CVD - Other classification issues B. Quantity Subobjective: Determine if quantities of imported articles were accurately declared to Customs in accordance with CD 099 3550 061 (instructions for preparation of CF 7501) and 19 CFR Part 141 Subpart D. (1) Review inventory account adjusting journal entries to determine if overages and shortages were reported to Customs. (2) Using the sample selected above trace and reconcile the quantity from each sampled item to the quantity on the company receiving reports, inventory and or payment records. C. Harbor Maintenance User Fees (HMF) Subobjective: Determine if HMF user fees were reported on Automated Broker Interface (ABI) Customs entries. (1) Using the sample selected above determine if HMF were included on the entry. ABI entries are not always checked for inclusion of HMF, however, if HMF is included on an entry, the fee calculation is automatically verified. D. Transaction Value Subobjective: Determine if there are any limitations on the use of transaction value and if the value reported to Customs reflects the actual price paid or payable plus statutory additions. (1) For each sampled item selected above review the location's books and records and related documents to determine if there were any limitations on the use of transaction value: - Evidence of sale for export to U.S. - Restrictions on use of imported merchandise - Conditions of sale - Proceeds of subsequent resale - Related party relationship (2) Determine if the declared invoice price was paid or payable: (a) Review the effect of currency fluctuations - Ensure that conversion rate used was based on date of exportation - If there was a contracted currency exchange rate, determine the effect on the price paid or payable (b) Review the accuracy of reported nondutiable charges: - International freight and insurance - Buying commissions - Transportation costs after importation - Customs duties - Federal excise taxes (3) Using an "unreported" value sample, review the importer's books and records and related documents to determine if there were any unreported: (a) Supplemental payments - Quota/Visa payments - Currency exchange adjustments - Other (b) Additions to the price paid or payable - Selling commissions - Royalties - Assists - Proceeds - Packing E. Computed Value Subobjective: Verify the validity of computed value costs submitted for imported merchandise on Customs entries. (1) Obtain a cost submission (CF247) covering the foreign manufacturers' cost and profit related to production of the imported merchandise. (2) Determine the reliability of foreign records used to support cost submission. (3) Compare the costs of materials and components listed on the CF247 to invoices, bills of materials and inventory records. (4) If material is consigned by the U.S. importer, verify that the cost of the material is included in the total value of the exported articles. (5) Verify that scrap is included as an element of cost. (6) If the exporting country refunds an internal tax on imported products used in production and later exported, verify the cost of the tax is not included in the merchandise value. (7) Verify the manufacturers' cost of fabrication and other processing. (8) Verify the manufacturers' profit and general expenses. (9) Verify that all assists have been included as part of the foreign manufacturer's production costs. (10) Verify entered value listed on CF247; compare entered value to computed value; verify the "average duty rate" used by the company. F. Recordkeeping Subobjective: Determine if information and records are maintained, stored, and can be produced upon reasonable demand in accordance with 19 U.S.C. 1508, 19 U.S. C. 1509 and Treasury Decision 96-1. (1) Determine if the importer is a certified record keeper and/or has a certified recordkeeping agent (step when 19 CFR Part 163 is finalized). (2) If a recordkeeping certification agreement exists, obtain and review it and compare the recordkeeping system to the description in the agreement. Take appropriate action if the system does not correspond to the agreement (step when 19 CFR Part 163 is finalized). (3) Verify that the importer maintains, stores, and retrieves records and information in accordance with 19 U.S.C. 1508, 19 U.S.C. 1509 and TD-96-1. (using the sample above) Special Issues G. HTSUS 9801 Subobjective: Verify that products of the U.S. are entitled to duty free entry when returned after having been exported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad. (1) For each sample item: - Verify U.S. origin - Verify reported value - Determine if drawback was claimed on the exportation H. HTSUS 9802.00.40 (formerly TSUSA 806.20) and 9802.00.50 Subobjective: Determine if imports entered under HTSUS subheading 9802.00.40/50 met the criteria for entry under those tariff numbers. (1) For each sample item: (a) Verify that the items were exported for repair (b) Review foreign operation to determine whether the operations qualify for partial exemption under the provisions of HTSUS item 9802.00.40/50 (c) Verify no drawback was claimed for the articles exported from the U.S. (d) Verify that a repair or alteration took place. (e) Request and review importer support for costs of repair work performed abroad. I. HTSUS 9802.00.60 Metal Articles Exported for Processing Subobjective: Determine if imports entered under HTSUS subheading 9802.00.60 met the criteria for entry under that tariff number. (1) For each sample item: (a) Determine that imported metal articles were: - Manufactured in the U.S. and then exported for further processing at a foreign plant. - Returned to the U.S. for further processing - Processed in the U.S. after return (b) Ascertain that foreign processing operations qualified for HTSUS 9802.00.60 treatment. (c) Obtain and verify the importer's support for: - Total value of the imported article - Nondutiable value claimed under HTSUS 9802.00.60 J. HTSUS 9802.00.80 U.S. Articles Assembled Abroad Subobjective: Determine if imports entered under HTSUS subheading 9802.00.80 met the criteria for entry under that tariff number. (1) For each sample item: (a) Verify claimed component(s) meet requirements for HTSUS 9802.00.80 treatment: - No drawback claimed on component(s) - Component(s) maintain identity from time of U.S. exportation through time of assembly into article imported under HTSUS 9802.00.80 - Component(s) ready for assembly at time of U.S. exportation; no foreign fabrication required before assembly - Foreign operation was assembly and not manufacturing. (b) Verify origin of claimed components - Certificates of origin from U.S. manufacturers. (c) Verify claimed components were actually used to produce imported article (usage). (d) Verify that claimed 9802.00.80 value of the component, whether consigned or sold to the assembler, was the cost or value at the time of export for assembly. Ensure claimed value included all costs (i.e., freight and insurance) to the U.S. port of exportation. K. Anti-dumping/Countervailing Duties Subobjective: Verify that merchandise subject to antidumping (AD) or countervailing duties (CVD) was correctly entered. (1) Determine if the Company location imported articles subject to ADD/CVD. If so, test for compliance. L. Bonded Warehouse Subobjective: Verify that the importer accounted for inventory stored in bonded warehouses and properly controlled quota merchandise. (1) Determine if the Company location uses a bonded warehouse to store imported merchandise. If so, test for compliance. M. Foreign Trade Zones Subobjective: Verify that the importer properly controlled and entered any merchandise stored or processed in a foreign trade zone. (1) Determine if the Company location uses a foreign trade zone to store or process imported merchandise and whether any of that merchandise is subject to quota restrictions. If so, test for compliance. N. Transshipment Subobjective: Determine if circumvention of existing trade laws occurred for the purposes of avoiding restrictions on quota, duty and country of origin. (1) Review the Company locations to determine possible transshipment. Include quota closure dates for specific tariff numbers and a list of manufacturers producing merchandise that was imported by the location under review. If transshipments apply, then test for compliance. APPENDIX A: Objective: Was entered merchandise classified in accordance with 19 CFR Part 152 Subpart B? Test: Obtain the specifications, part numbers, or other applicable descriptions, lab reports, and binding rulings from the Company location for each selected article. Review this information and the entry containing the article for the classification including: - Quota; - Anti-dumping and Countervailing Duties; and, - Other classification issues. Errors: Merchandise was not classified in accordance with the Harmonized Tariff Schedule of the United States (HTSUS) as interpreted by administrative and judicial rulings. Objective: Were quantities reported to Customs in accordance with CD 099 3550 061 (Instructions for Preparation of CF 7501) and 19 CFR Part 141 Subpart D? Test: Review inventory account-adjusting entries to determine if overages and shortages were reported to Customs. In addition, reconcile importer's declared quantities of merchandise to receiving reports, inventory, payment records, or other related records. Errors: Quantity of merchandise entered was not accurately reported to Customs. Objective: Were harbor maintenance fees (HMF) properly included on applicable ABI entries? Test: Determine whether HMF were appropriately included on applicable ABI entries. Errors: HMF were not accurately reported Objective: (1) Are there any limitations that would preclude the use of transaction value? (2) Were declared invoice prices paid or payable? Test: (1) Determine if there are any limitations on the use of transaction value. (2) Determine the accuracy of reported nondutiable charges. Errors: (1) Review of sampled items disclosed one of the following limitations on the use of transaction value: - Evidence of sale for export to U.S.; - Restrictions on use of imported merchandise; - Conditions of sale; - Proceeds of subsequent resale; and, - Related party relationship. (2) The declared invoice price was not the price paid or payable. (a) One of the following currency exchange rate conditions exist: - the conversion rate used was not based on the date of exportation; or, - there was a contracted currency exchange rate that effected the price paid or payable. (b) One of the following nondutiable charges were inaccurately reported: - international freight and insurance; - buying commissions; - transportation costs after importation; - customs duties; or, - federal excise taxes. Objective: Was the reported price paid or payable for the importation correct (see 19 CFR section 152.102 and 152.103)? Test: Determine whether undeclared supplemental payments/indirect payments or additions to price paid or payable (selling commissions, royalties, assists, proceeds, packing or indirect payments such as quota, trace amounts entered) exist. Errors: Review disclosed: (a) unreported supplemental payments; and/or, - quota/visa payments - currency exchange adjustments - other (b) unreported additions to the price paid or payable. - selling commissions - royalties - assists - proceeds - packing Objective: Are records and information being maintained, stored, and produced upon reasonable demand in accordance with 19 USC 1508, 19 USC 1509, and Treasury Decision 96-1? Test: Verify that the importer maintains, stores, and retrieves records and information in accordance with 19 USC 1508, 19 USC 1509, and Treasury Decision 96-1. Errors: (a) Company did not produce records or information to support/validate entry information (classification, quantity, user fees, entered value, and admissibility) in a reasonable time frame. (b) Company does not store records and information in accordance with 19 USC 1508, 19 USC 1509, and Treasury Decision 96-1. Objective: Was merchandise properly classified under HTSUS 9801 for conditionally duty free treatment? Test: Validate U.S. origin and the reported value. In addition, determine whether drawback was claimed on the exportation. Errors: - Failed to prove U.S. Origin - Advanced in value overseas - Drawback was claimed - Other preclusions Objective: Was merchandise properly classified under HTSUS 9802.00.40/50 for conditionally duty free treatment? Test: Verify that: - items were exported for repair; - foreign operations qualify for partial exemption; - drawback was not claimed for articles exported repairs; - alterations occurred; and, - support for costs of repair were valid. Errors: - failed to prove items were exported; - drawback was claimed; - failed to prove items were repaired or altered; - failure to identify items imported as the items previously exported for repair/alteration; or, - repair/alteration resulted in changed article and/or HTSUS classification. Objective: Was merchandise properly classified under HTSUS 9802.00.60 for conditionally duty free treatment? Test: Verify: - Whether metal articles were: - Manufactured in the U.S. & exported for further processing; - Returned to the U.S. for further processing; - Processed in U.S. after return; and, - Whether foreign processing operations qualify for HTSUS 9802.00.60 treatment; and, - The total value of imported articles and nondutiable value claimed. Errors: - metal articles were not manufactured in the U.S. or not exported for further processing; - Metal articles were not returned for further processing; - Metal articles were not processed in U.S. after return; - Foreign processing does not qualify for 9802.00.60 treatment; or, - Total value of imported articles including nondutiable value is not correct. Objective: Was merchandise properly classified under HTSUS 9802.00.80 for conditionally duty free treatment? Test: Verify: - components meet requirements for HTSUS 9802.00.80 treatment; - no drawback claimed on component(s) - component(s) maintain identity from time of U.S. exportation through time of assembly into article imported under HTSUS 9802.00.80 - component(s) ready for assembly at time of U.S. exportation (no foreign fabrication required before assembly) - foreign operation was assembly and not manufacturing - origin of claimed components; - claimed components were actually used to produce imported article (usage); and, - claimed value of component was the cost or value at the time of export for assembly, and included all costs (i.e., freight and insurance) to the U.S. port of exportation. Errors: - Components did not meet requirements for HTSUS 9802.00.80 treatment; - Failed to prove U.S. origin; - Component not used in imported article; - Commingled inventory; and, - Invalid U.S. value. Objective: Was merchandise properly classified under HTSUS 9802.00.90 for conditionally duty free treatment? Test: Verify: - components meet requirements for HTSUS 9802.00.90 treatment; - no drawback claimed on component(s) - fabric was formed, finished and cut to pattern in the U.S. without further fabrication - component(s) were exported in condition ready for assembly without further fabrication - components were not advanced in value or improved in condition in Mexico except by operations incidental to assembly - components have not lost their physical identity in the assembled article by change in form or shape. - Origin of claimed U.S. formed and cut components; - Claimed components were actually used to produce imported articles; and, - Claimed value of component was the cost or value at the time of export for assembly, and included all costs (i.e., freight and insurance) to the U.S. port of exportation. Errors: - components did not meet requirements for HTSUS 9802.00.90 treatment; - failed to prove U.S. origin of formed and cut components; - component not used to produce imported article; - invalid U.S. value Objective: Was merchandise subject to anti-dumping or countervailing duties properly classified and appropriate duties paid in accordance with 19 CFR 353 and 19 CFR 355? Test: Identify ADD/CVD merchandise and test for compliance with customs regulations. Errors: Merchandise subject to anti-dumping or countervailing duties was not properly classified or the appropriate duties were not paid in accordance with 19 CFR 353 and 19 CFR 355. Objective: Does the importer properly account for inventory stored in bonded warehouses? Test: - Perform an inventory verification (description, quantity) for quota and non-quota merchandise stored in a bonded warehouse. - Verify whether rewarehoused quota merchandise is still classified as quota merchandise, and that the quota was open when withdrawn for consumption. Errors: - Quota merchandise was diverted into commerce of the U.S. when quota was closed. - Misdescription of merchandise to evade quota restrictions or gain other trade preferences. - Incorrect quantity of merchandise in warehouse. Objective: Does the importer properly account for FTZ merchandise? Test: Determine whether FTZ quota merchandise is properly withdrawn or transferred. Errors: - Merchandise exiting the zone without duty being paid - Unreported overages/shortages - Quota merchandise diverted into Commerce of the U.S. - Incorrect status claimed Objective: Did the importer circumvent existing trade laws for the purpose of avoiding restriction or paying duty? Test: Determine whether the country of origin was misstated to avoid Customs restrictions (i.e., quota) or to gain trade preferences. Errors: Misstatement of country of origin to avoid Customs restrictions or gain trade preferences. Objective: Did the importer properly categorize auto parts under HTS 8708.99.8080? Test: Obtain part specifications, style description, etc. for each sampled product and review. Errors: Importer misclassified merchandise under HTSUS 8708.99.8080.