# Computed Value

**Pre-Assessment Survey**

######### Internal Control Technical Guide

**Objective**

Provide guidance for performing a Pre-Assessment Survey (PAS) of the
company's internal control for computed value and evaluating the
results.

**Background**

Generally Accepted Government Auditing Standards require the PAS team to
obtain a sufficient understanding of internal control to plan the audit
and determine the nature, timing, and extent of tests to be performed.

The guidelines and terms in this technical guide are based on *Assessing
Internal Controls in Performance Audits*, GAO/OP-4.1.4, published by the
United States General Accounting Office, Office of Policy, September
1990, and the American Institute of Certified Public Accountant's
*Statement on Auditing Standards No. 78.*

19 CFR 152.106(a) defines the computed value of imported merchandise as
the sum of:

(i) the cost or value of materials and the fabrication and other
    processing of any kind employed in the production of the imported
    merchandise;

(ii) an amount for profit and general expenses equal to that usually
     reflected in sales of merchandise of the same class or kind as the
     imported merchandise that are made by the producers in the country
     of exportation for export to the United States;

(iii) any assist, if its value is not included under paragraph (a) (1)
      or (2) of this section; and

(iv) packing costs.

####### Examples of Red Flags

The following examples are conditions that may indicate a potential
problem with the valuation of merchandise under computed value.

####### 

-   Company has insufficiently documented, poorly defined, or no
    internal control for accurately declaring value for Customs
    purposes. Examples:

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-   The company does not monitor or interact with the broker on computed
    value issues.

-   The company relies on one employee to handle computed value issues,
    and there are poor or no management checks or balances over this
    employee.

-   The company does not have procedures in place to ensure that
    material costs are actual and not standard costs.

-   For computed value involving HTSUS 9802.00.80/90,

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-   The company does not have procedures to ensure that computed value
    amounts trace to supporting documents.

-   The company does not have procedures to reconcile reported foreign
    operating expenses to foreign assembler's income statement.

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-   Company's import staff lacks knowledge of computed value issues.

-   Company offers unreasonable explanations to Customs.

-   Company fails to cooperate with or respond to Customs.

-   Company has high turnover of people in key positions.

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-   Consignment merchandise.

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-   A significant variance exists between total entered value and total
    computed value.

-   Amounts shown on product cost sheets for unallowable costs such as
    general expenses and profit that are unusually low or nonexistent.
    \[In general, an amount for gross profit (general expenses and
    profit) of less that 20% of the sales price is low\]

-   Customs (e.g., import specialist, account manager, compliance
    measurements, prior audit, other Customs information) shows a
    history of problems with computed value.

-   The company does not maintain and report computed costs in a format
    that clearly accumulates all dutiable costs.

-   Non-manufacturing importer with manufacturing equipment depreciation
    or credits to fixed asset accounts (unreported assists).

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-   Chart of accounts indicates dutiable assists that are not reported.

-   Use of standard costs without any adjustments for variances.

-   For computed value involving HTSUS 9802.00.80/90,

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-   Discrepancies between the foreign assembler's income statement
    expenses and profits and the expenses and profit reported to
    Customs.

-   Allocation basis results in dutiable costs not being proportionally
    allocated between dutiable and non-dutiable HTSUS.

-   Non-dutiable material costs are not equal to the HTSUS 9802.

**Examples of Best Practices**

-   Internal controls over computed value:

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-   Are in writing;

-   Include procedures for monitoring and feedback,

-   Are monitored by management, and

-   Mandate that supporting documents for summary computed value
    documents are clearly identified and retained.

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-   One manager is ultimately responsible for control of the Import
    Department, including ensuring merchandise is properly valued. That
    manager has knowledge of Customs matters and the authority to ensure
    that internal control procedures for imports are established and
    followed by all company departments.

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-   Written internal control procedures assign Customs related duties
    and tasks to a position rather than a person.

-   Company has good interdepartmental communication about Customs
    matters.

-   Company conducts and documents periodic reviews of computed value,
    and uses the results to make corrections and changes to their import
    operations as appropriate.

-   Current standard costs are used to value imported merchandise at
    time of entry.

-   The General Ledger system is designed to identify the value and
    dutiable status of all merchandise purchased for consignment to the
    foreign assembler.

-   The General Ledger system is designed to identify all dutiable
    assists.

-   For computed value involving HTSUS 9802.00.80/90,

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-   The foreign assembler's cost accounting system allocates overhead
    and General and Administrative (G&A) expenses and profit to products
    in a reasonable manner.

-   The foreign assembler compares its rates for profit and general
    expenses (gross profit) to industry rates in the country of export,
    and uses industry rates if there are significant differences.

-   The company calculates computed value using a format that
    accumulates all reportable costs

**Examples of Documents and Information to Review**

-   Internal control policies and procedures.

-   The company's response to the questionnaire.

-   Interviews with company staff concerning actual procedures and
    controls specific to computed value.

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-   Documentation that supports monitoring and verification of
    established and/or written internal control for computed value.

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-   Documentation that support the computed value such as worksheets
    showing the calculation and product allocation of overhead, general
    expenses and profit, financial statements, general ledger, foreign
    tax reports, and supporting schedules.

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-   Other documents affecting computed value such as reports of industry
    rates for gross profit (general expenses and profit) in the country
    of export, purchase orders, contracts, agency agreements, and risk
    sharing agreements.

**Suggested Testing**

PAS team judgement should be used to determine the type and amount of
testing needed to evaluate how effective internal control is and whether
there is a sufficient risk to warrant proceeding to the Assessment
Compliance Testing (ACT) process.

Using the chart and guidelines below, determine through limited
judgmental testing whether the company's internal control is effective.

To determine the extensiveness of internal control testing, it is
necessary to evaluate:

1.  The **risk exposure**, and

2.  The **internal control** system, by determining if the controls are
    in operation, how the controls are applied, how consistently they
    are applied, and who applies them.

**Risk Exposure**

Risk exposure is the probability of significant Customs noncompliance.
In each step of determining risk exposure, consideration should be given
to:

1.  Significance (to Customs) and sensitivity (e.g., issues of interest
    to Congress or the media, or impacting admissibility).

2.  Susceptibility (of making incorrect declarations).

3.  The existence of any "red flags."

4.  Management support (of strong internal control).

5.  Competent personnel (to adequately administer the controls).

*Steps to Determine Risk Exposure:*

1.  Evaluate problems identified in the profile, compliance measurement
    rates, questionnaire, and concerns raised by the import specialist
    and account manager.

2.  Perform the macro risk analysis test.

3.  Analyze all results to determine the risk exposure level.

4.  Evaluation of risk exposure is not simply a one-time process that
    occurs at the start of the PAS process. Continually reassess risk
    exposure as more information is gathered from evaluating internal
    control and performing other work in the PAS.

**Macro Risk Analysis Examples**

*Example A: Low Risk Exposure*

The Importer's cost of goods manufactured closely approximated the
entered value for the period under review. Rates used by the foreign
assembler for general expenses and profit (gross profit) were comparable
to industry standards. Additionally, review of the profile and
discussions with the Import Specialist and Account Manager did not
reveal any special concerns. Therefore, the macro risk analysis
indicated a low risk exposure.

*Example B: High Risk Exposure*

Based on a review of the completed questionnaire, it was determined that
the importer may not have included certain general ledger expenses in
the calculations of actual dutiable value. The PAS team conducted
interviews with the company's key financial accounting personnel and
determined that the company did not include all depreciation expense on
equipment assigned to the company's foreign affiliate in the calculation
of actual dutiable value. The PAS team compared depreciation expense on
the actual dutiable computation worksheet in the amount of \$1,758,595
to the annual totals for general ledger account numbers 10000 through
10999 (depreciation expense - foreign) in the amount of \$5,658,587.
Based on this analysis the PAS team determined that the actual dutiable
value could be understated by as much as \$3,899,992
(\$5,658,587-\$1,758,595), representing 2 percent of the companies
estimated entered value for the review period. In addition, the
company's Summary of Customs duty paid indicated that duty rates ranged
from 1.2 percent to 5.7 percent. Therefore, the macro risk analysis
indicated a high risk exposure.

**System of Internal Control**

To evaluate the internal control system:

1.  Consider the five components of internal control:

-   Control Environment.

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-   Risk Assessment.

-   Control Activities.

-   Information and Communication.

-   Monitoring

2.  Review relevant Customs and company documents to identify and
    understand relevant internal control over computed value. (Examples
    of documents and information to review are listed above.)

3.  Determine whether the company established and follows procedures.
    Review:

-   Documentary evidence of the results of periodic internal control
    reviews/testing and corrective action implemented.

-   Documentary evidence of communication between the broker and company
    on value issues, company testing of broker operations and
    verification that the broker followed company instructions.

-   Company-specific rulings and evidence that they are followed.

-   Documentary evidence of intra-company communications to ensure
    correct information is provided to Customs.

-   Training records and materials used to educate staff on Customs
    matters.

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-   Evidence, such as a log, that demonstrates the company periodically
    reviews broker's or the company's values.

-   Evidence that standard costs are periodically reviewed and updated.

-   Evidence that rates used for general expenses and profit (gross
    profit) are comparable with the industry rates.

4.  Review written policies and procedures and interview applicable
    company personnel to complete appropriate sections of the "Worksheet
    for Evaluating Internal Control Over Computed Value."

> Note: The internal control assessment should include steps to:

-   Identify and understand internal control.

-   Determine what is already known about control effectiveness.

-   Assess the adequacy of internal control design.

-   Determine whether controls are implemented and effective.

-   Determine whether transaction processes are documented.

**Extensiveness of Audit Tests (Testing Limit)**

The purpose of limited PAS testing is to take a survey in order to
determine the necessity for and extent of substantive tests. In some
circumstances, the PAS team may decide that it probably will not be able
to form an opinion based on limited PAS testing. In that case, it may be
necessary to proceed immediately to the ACT process. If the PAS team
believes that it can form an opinion based on limited PAS testing, test
the appropriate number of controls and associated transactions using the
table below.

######## 

**Determine Extensiveness of Audit Tests**

+----------+---+------------------+---+-------------------+-------------+
| **Risk   | * | > **Preliminary  | * | **Extensiveness   | **Testing** |
| Ex       | * | > Review         | * | of Audit Test**   |             |
| posure** | + | > Internal       | = |                   | **Limit**   |
|          | * | > Control**      | * |                   |             |
|          | * |                  | * |                   |             |
+==========+===+==================+===+===================+=============+
|          |   |                  |   |                   |             |
+----------+---+------------------+---+-------------------+-------------+
| **High** |   | Weak             |   | High              | 10-20       |
+----------+---+------------------+---+-------------------+-------------+
|          |   | Adequate         |   | Moderate to High  |             |
+----------+---+------------------+---+-------------------+-------------+
|          |   | Strong           |   | Low to Moderate   |             |
+----------+---+------------------+---+-------------------+-------------+
|          |   |                  |   |                   |             |
+----------+---+------------------+---+-------------------+-------------+
| **Mo     |   | Weak             |   | Moderate to High  | 5-15        |
| derate** |   |                  |   |                   |             |
+----------+---+------------------+---+-------------------+-------------+
|          |   | Adequate         |   | Moderate          |             |
+----------+---+------------------+---+-------------------+-------------+
|          |   | Strong           |   | Low               |             |
+----------+---+------------------+---+-------------------+-------------+
|          |   |                  |   |                   |             |
+----------+---+------------------+---+-------------------+-------------+
| **Low**  |   | Weak             |   | Low to Moderate   | 1-10        |
+----------+---+------------------+---+-------------------+-------------+
|          |   | Adequate         |   | Low               |             |
+----------+---+------------------+---+-------------------+-------------+
|          |   | Strong           |   | Very Low          |             |
+----------+---+------------------+---+-------------------+-------------+

*Source*: Adapted from *Assessing Internal Controls in Performance
Audits.*

Column titled "Testing Limit" reflects Customs test sizes.

**Evaluation of Pre-Assessment Survey Testing Results**

The following steps are guidance for determining the effectiveness of
company\'s internal control over computed value.

1.  Complete the "Worksheet for Evaluating Internal Control Over
    Computed Value" to determine whether risk determination is
    acceptable or unacceptable and document why. Put the results of
    testing in perspective and evaluate confirmed weakness as a whole.
    The evaluation should consider the results of the internal control
    testing, problems identified in the profile, and/or concerns raised
    by the import specialist and account manager. The team must evaluate
    the PAS results based on the specific situations.

> Customs considers risk unacceptable when testing reveals that internal
> control is not effective, or not sufficient, in providing reasonable
> assurance that accurate, timely, and complete declarations are
> reported to Customs.

2.  The following will assist the PAS team in determining whether
    conditions warrant proceeding to ACT:

##### Do not proceed to ACT (Revenue) if:

-   Cost-benefit analysis warrants no further effort (do not spend a
    significant amount of resources to identify a potential loss of
    revenue considered insignificant).

-   The PAS indicated that the value error was due to an isolated
    incident.

-   The company agrees with PAS finding(s) and agrees to quantify the
    loss of revenue within an acceptable timeframe.

##### Do not proceed to ACT (Compliance) if:

-   The error was isolated.

-   The errors were systemic and the importer agreed to develop and
    implement a compliance improvement plan within an acceptable
    timeframe.

##### Proceed to ACT (Revenue) if:

-   Company does not have adequate internal control, and PAS indicates a
    material loss of revenue that cannot be quantified without
    statistical sampling or further review.

-   Importer will not quantify loss of revenue.

##### Proceed to ACT (Compliance) if:

-   The company refuses to take corrective action on systemic errors and
    it is necessary to calculate a compliance rate.

Note: If substantive tests necessary to determine a compliance rate or
revenue loss can be quickly performed without extensive effort, the team
should immediately perform the substantive tests without proceeding to
ACT.

3.  Determine whether referrals should be made for enforcement action.

### **Examples**

The following examples of situations that might be encountered under PAS
*are for clarification only*:

## *Example A: Situation in which the team* would not *proceed to ACT* *(Revenue)*

## Company's Policies and Procedures

The company procedures requires that general ledger account transaction
detail be downloaded by the foreign subsidiary and provided by the
accounting department, to the Compliance Manager within 30 days of the
end of each fiscal year. The Compliance Manager (Import Manager) and two
Compliance Analysts review the chart of accounts and select all
manufacturing expense accounts and appropriate non-manufacturing
accounts (i.e. general operating expenses) for inclusion in the
calculation of actual dutiable value (ADV). Once the dutiable accounts
are identified, the Compliance Analyst prepares ADV worksheets using
general ledger account transaction detail after year-end adjustments are
made to standard costs by the accounting department. Standard costs are
evaluated every year and are based on the results of the most recently
completed annual computed value. Additionally they compare rates used by
the foreign assembler for general expenses and profit (gross profit) to
industry rates, and use industry rates if there are significant
differences.

The company calculates computed value using a format that accumulates
all reportable costs. The company calls the report an Actual Cost Report
(ACR). Once the ACR is prepared, it is reviewed and signed by the
Accounting Manager and the Import Manager. The ACR and supporting
schedules and EDP files are filed and maintained by the Import Manager.
The Accounting Manager maintains another backup copy.

Differences in estimated and actual entered values are applied to
estimated entered values by HTS on schedules prepared by the company's
broker in order to determine additional duties due. The Customs broker
makes the value allocation based on a ratio of the entered values per
HTS to the total entered value for the year. The broker's calculation's
are reviewed and signed by the Import Manager and the broker then files
the appropriate reconciliation entry. On an annual basis, the company's
internal audit department reviews the cost preparation process, and
makes appropriate recommendations as needed.

## Monitoring Activities

The Import Compliance Manual established procedures to ensure that
values of entered merchandise were accurately reported to Customs.
First, the Import Manager and two Compliance Analysts review the chart
of accounts and select all manufacturing expense accounts and
appropriate non-manufacturing accounts for inclusion in calculating
actual dutiable value. Detailed evaluations of new accounts are
conducted with the assistance of the Assistant Controller. In addition,
the process of calculating the actual costs is documented in a permanent
file that is reviewed and signed by the Import Manager and Accounting
Manager. Ratios between the last years estimated and actual costs are
compared to the current year ratios for purposes of testing the
reasonableness of actual values. The Import Manager and Accounting
Manager review the broker's calculations of duties due, and indicate
their review by signing each of the broker's worksheets.

Finally, the manual establishes procedures for conducting internal
audits on an annual basis. The manual requires that the Import Manager
review a sample of 5 transactions from 10 accounts not used in the
preparation of actual cost, in order to determine if some of the account
transactions should be included in the actual dutiable value. The
accounts and the sample items are to be randomly selected.

The Import Manager holds a meeting prior to the preparation of the
current ACR, in order to educate those involved in the preparation
process of issues or concerns identified in prior years. All meetings,
training seminars and discussions regarding the process are documented
and filed by the Import Manager. In addition, employees involved in the
process of preparing costs for Customs value attend a one-week training
session provided by the company's outside counsel.

Pre-Assessment Survey

To determine if the controls were working, the PAS team:

-   Interviewed employees engaged in the preparation of ACR's to
    determine if they were familiar with the procedures established in
    the Customs Compliance Manual.

-   Verified that the trial balance included all general ledger
    transactions.

-   Verified the ACR review process and that they were signed by the
    Accounting Manager and the Import Manager.

-   Selected 10 of the 50 transactions not used in the preparation of
    actual cost and reviewed by the Import Manager to verify how the
    review had been conducted.

-   Reviewed broker duty calculations to ensure that they were reviewed.

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-   Compared brokers estimated duty to the PAS teams estimated duty
    totals.

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-   Reviewed internal audit reviews of the last two years ACR reviews.

-   Reviewed attendee sign-in sheets and course descriptions for
    periodic training sessions regarding preparation of ACR's.

-   Reviewed correspondence between the company and Customs on value
    related matters.

The PAS indicated that the company's internal controls were in affect
and were working with one exception. One dutiable account was omitted
from the calculations used to calculate dutiable costs and file the
reconciliation entry. The company agreed to file corrective entries to
report the additional value and to pay the additional duty. Therefore
proceeding to ACT was not considered necessary.

## *Example B: Situation in which the team* would not *proceed to ACT (Compliance)*

Same situation as Example A above. The company agreed to change
procedures to include the account in the future. Therefore, it was not
necessary to proceed to ACT to calculate a rate for compliance.

## *Example C: Situation in which the team* would *proceed to ACT for (Revenue)*

Same situation as Example A above, except unreported assists were
identified in a material account. Statistical sampling was necessary to
separate dutiable assists from material that was used in domestic
production.

## *Example D: Situation in which the team would proceed to ACT (Compliance)*

The same situation as Example A above, with the additional finding that
the Import department had decided that reviewing all the new general
ledger accounts was too cumbersome due to the company's change in
accounting system that had occurred early in the audit period. In
addition, the company did not agree to take proper corrective action.
Proceeding to ACT was considered necessary due to the fact that there
were many general ledger accounts not yet reviewed that could impact the
ACR.

**Worksheet for Evaluating Internal Control**

**Over Computed Value**Objective: Determine whether the company has
procedures designed to effectively control Customs risks related to
computed value.

Risk Determination:

  ------------------------------------- ---------------------------------
                                        

  **Acceptable**                        

  **Unacceptable**                      
  ------------------------------------- ---------------------------------

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  **Internal Control**     **Yes**   **No**   **Not          **Internal   **Work Paper  **Comments**
                                              Applicable**   Control      Reference**   
                                                             Manual Page                
                                                             Number**                   
  ------------------------ --------- -------- -------------- ------------ ------------- --------------
  Are internal controls                                                                 
  over computed value                                                                   
  formally documented?                                                                  

                                                                                        

  Are written policies and                                                              
  procedures approved by                                                                
  management?                                                                           

                                                                                        

  Are written policies and                                                              
  procedures reviewed and                                                               
  updated periodically?                                                                 

                                                                                        

  Are internal controls                                                                 
  over computed value                                                                   
  periodically tested?                                                                  

                                                                                        

  Were the results of the                                                               
  periodic internal                                                                     
  control tests                                                                         
  documented?                                                                           

                                                                                        

  If weaknesses were found                                                              
  during internal control                                                               
  testing, were import                                                                  
  operations corrected?                                                                 

                                                                                        

  Were results of periodic                                                              
  tests used to file                                                                    
  corrections to Customs                                                                
  declarations when                                                                     
  appropriate?                                                                          

                                                                                        

  Do written internal                                                                   
  control procedures                                                                    
  assign computed value                                                                 
  responsibility to a                                                                   
  position rather than an                                                               
  individual?                                                                           

                                                                                        

  Is one                                                                                
  department/individual                                                                 
  primarily responsible                                                                 
  for ensuring compliance                                                               
  with computed value                                                                   
  requirements?                                                                         

                                                                                        

  Does the individual                                                                   
  overseeing compliance                                                                 
  with computed value                                                                   
  requirements have                                                                     
  adequate knowledge and                                                                
  training and authority                                                                
  to ensure that internal                                                               
  control procedures for                                                                
  imports are established                                                               
  and followed by all                                                                   
  company departments?                                                                  

                                                                                        

  Does the company have                                                                 
  good interdepartmental                                                                
  communication about                                                                   
  value matters?                                                                        

                                                                                        

  Do procedures ensure                                                                  
  that industry rates for                                                               
  general expenses and                                                                  
  profit (gross profit) in                                                              
  the country of export                                                                 
  are checked, and used if                                                              
  significantly different                                                               
  than company rates?                                                                   

                                                                                        

  Do procedures ensure                                                                  
  that, if standard costs                                                               
  are used, variances are                                                               
  added to arrive at                                                                    
  actual costs?                                                                         

                                                                                        

  Do procedures ensure                                                                  
  that material costs                                                                   
  include transportation                                                                
  costs to the place of                                                                 
  production?                                                                           

                                                                                        

  Do procedures ensure                                                                  
  that freight costs are                                                                
  properly allocated                                                                    
  between dutiable and                                                                  
  non-dutiable materials?                                                               

                                                                                        

  Do procedures ensure                                                                  
  that materials are                                                                    
  properly identified                                                                   
  between dutiable and                                                                  
  non-dutiable tariff                                                                   
  numbers?                                                                              

                                                                                        

  Do procedures ensure                                                                  
  that dutiable costs are                                                               
  not allocated to                                                                      
  non-dutiable tariff                                                                   
  numbers?                                                                              

                                                                                        

  Do procedures ensue that                                                              
  any internal tax imposed                                                              
  on imported material by                                                               
  the country of                                                                        
  exportation, which is                                                                 
  refunded at the time of                                                               
  exportation, are                                                                      
  excluded from material                                                                
  value?                                                                                

                                                                                        

  Do procedures ensure                                                                  
  that all foreign                                                                      
  operating expenses,                                                                   
  applicable to the                                                                     
  production of exported                                                                
  merchandise, and profit                                                               
  reported on the foreign                                                               
  assembler\'s income                                                                   
  statement are reported                                                                
  as part of computed                                                                   
  value.                                                                                

                                                                                        

  Do procedures ensure                                                                  
  that exchange gains are                                                               
  reported and that                                                                     
  translation gains are                                                                 
  not reported as part of                                                               
  computed value?                                                                       

                                                                                        

  Do procedures ensure                                                                  
  that all assists are                                                                  
  included?                                                                             

                                                                                        

  Do procedures ensure                                                                  
  that material scrap                                                                   
  value, less any proceeds                                                              
  from the sale of the                                                                  
  scrap, is included in                                                                 
  computed value?                                                                       

                                                                                        

  **Internal Control                                                                    
  Conclusions**                                                                         

                                                                                        

  Does the company provide                                                              
  adequate broker                                                                       
  oversight?                                                                            

                                                                                        

  Did PAS testing verify                                                                
  that control procedures                                                               
  were being followed?                                                                  

                                                                                        

  Did interviews with                                                                   
  responsible persons                                                                   
  support control                                                                       
  procedures?                                                                           

                                                                                        

  Does the company have                                                                 
  adequate internal                                                                     
  control to address                                                                    
  specific issues                                                                       
  identified in the                                                                     
  profile?                                                                              

                                                                                        

  **List company-specific                                                               
  procedures and controls                                                               
  below (if applicable)**                                                               
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