Before discussing the concept
& scope of revenue auditing it seems proper that we should first
discuss the need for revenue auditing in the developing countries. The
need and importance of revenue auditing is well recognised by now, the
International Organization of Supreme Audit Institutions (1NTOSAI) as
well as Asian Organization of Supreme Audit Institutions (ASOSAI) have
indicated that revenue taxation be taken up in a much bigger way for the
reason that revenue collection itself is a major activity of the
government and government audit has to play its assigned role in
enforcing the public accountability of the revenue departments of the
The second most important
reason from the view point of developing countries would be that revenue
resources are scarce, the tax base narrow and there is a great need for
maximization of revenue. The revenue auditing could point out short
assessment, wastage and system weaknesses in revenue collecting
agencies. Thirdly, revenue auditing conclusively discharges the role of
a watchdog. In the absence of revenue audit, revenue administration gets
no occasion to review defective tax assessment in which government is
the loser by way of short collection of revenue.
Traditionally, auditing of
receipts of a government was limited to the checking of revenue account.
Government auditors need to report on the working of the revenue
departments of the government and assist government to increase the
productivity of its taxes through improving systems and procedures.
Surely revenue auditing has to be much more comprehensive than what is
it today. The consensus reached in the international organizations and
institutions such as that mentioned earlier is that besides auditing
accounts, revenue auditing should concern itself with at least two other
aspects. One is the aspect of conducting system studies in the revenue
collecting agencies with a view to reporting on the effeciency, economy
and effectiveness. The other is auditing of individual tax assessments
covering legality as well as regularity; correct system of collection as
well as correct accounting. Accordingly, we can look upon revenue
auditing as an area of audit where, in addition to conducting such
checks as to ensure correct accounting system, checks of tax on the
macro level to seek assurance on their adequacy and effectiveness exist.
It also involves auditing at the conceptual level namely; assessments,
refunds, rebate, etc not only to normally point out short assessment of
revenue but also to report system deficiencies wherever noticed.
With this understanding of what
is involved in revenue auditing, we can now examine its concepts and
scope. We mentioned that systems and procedures should be seen in audit
to seek assurance that secure an effective check on assessment,
collection and proper funding to government accounts. Where some
procedures and systems are laid down in relevant law itself, the bulk of
them are contained in the rules, regulations and administrative
instructions issued by the tax body of revenue administration.
Comprehensive revenue auditing involves examination of these rules,
regulations and administrative instructions on a concurrent basis.
The object is to seek assurance
on the legality, regularity and adequacy for the intended purpose. To
cite a particular example, if the revenue administration introduces a
system, say green channel clearance procedure exclusively for government
imports and the imports by the government companies, audit examination
of the relevant rules could extend to such issues as differentiating
imports by a private person and imports by government companies, whether
the procedure introduced is an improvement of the one replaced and
whether the procedure is going to cause a fall in revenues. If it is so,
whether government have allowed these concessions consciously?. This is
the kind of examination that is called for. It is also at this stage of
audit that audit forms some tentative opinion as to which of the
systems, procedures and modifications would require special attention at
the operational level.
There is another dimension to
this examination of rules and regulations. Besides laid down systems and
procedures, the revenue administration also issues exemption
notifications exercising power delegated to them by law. Scrutiny of
exemption notification remission and rebate orders issued by revenue
administrations is also audit's work at this stage to ensure the revenue
foregone is in accordance with the direction of law. Examination of the
assessment records is an extra stage in audit as the number of
assessment cases to be dealt with is very large. Audit goes in for test
check concentrating on high value revenue. Audit at this stage demands a
thorough knowledge of tax laws, rules, departmental systems and
procedure, court's rulings, trade, commercial and engineering practices
for commodity taxation and such matters.
We are very happy to see that
the kind of way we are expecting, we have developed in our country
Pakistan. That level of expertise is available for in-depth and detailed
tax auditing. The law does lay down details of documents to be filed
with the files of assesses, the time limits, step by step action that is
required to be taken by the assessing officer, the manner of payment,
the rate of tax, penalties on non compliance and what is discretionary.
This is what the tax ]egislation generally talks bout. Each of these
aspects in audit is to see that the steps taken by the assessing officer
are in compliance with mandatory provisions. We will come to
discretionary provisions later.
In review of assessment, Audit
does not go beyond what the law requires the assessing officer to do. To
give you an example, there is a system of levying tax called assembly
assessment in which the assessing officer is not required to subject the
returns filed by the tax payers to detailed scrutiny. In this system, a
list of checks prescribed by law exists and this is what the assessing
officer does when he reviews assessment and this is what we also do in
audit. We do not go beyond what the law requires the assessing officer
to do. This is one thing.
The other important point is
the matter of reviewing assessment decisions taken by assessing officers
exercising discretionary powers vested in them by law. Audit does not
substitute the judgment of the assessing officers by its own judgment.
What it does is, it sees generally whether the assessing officer has
taken into account all the relevant facts before arriving at a judgment.
Whatever the judgments be, we respect it. We do not question it. But
when obviously, the assessing officer has not taken into account the
relevant facts, we make a very polite inquiry to the assessing officer
that this is to be the relevant consideration and we hope this has been
taken into account. That kind of polite query is done.
And then there are also
problems as we are dealing with the cases in which the Income tax
officer exercises sometimes quasijudicial functions or appellate
Normally, Audit does not
question such decisions. In fact, appeal decisions are not even seen by
Audit. Nevertheless., if there is clear cut judicial opinion available
which the assessment officer has not taken into account, once again, we
make a polite reference to the assessing officer that this is the
supreme court judgment. Apparently this has not been seen.
The examination of individual
tax assessment is basically in the interest of revenues but revenue
audit has also to work in favour of the tax-payers because correct
assessment according to law not only means no short assessment but also
no over - assessment. Thus, excess levying of tax, delay in refund,
short payment of interest on refund and such other factors are our
concern of revenue auditing. When we are looking into details, we get to
know the actual working of the systems and procedures. Theoretical study
of rules are not the actual working of the systems and procedures. These
things are seen while we are auditing the individual tax files. This
combine of the knowledge enables us to undertake system studies.
There are basically two types
of system studies that we do. One is to pick up the areas of tax
administration mostly relating to the procedural aspects. That is one
way. The other way of doing it is to look into specific areas. Suppose
we take cement, one of the largest commodities manufactured in Pakistan.
Now, we undertake review of the system of assessment and collection of
revenue of small scale industries relating to cement because that gives
us the maximum yield of revenue. That is one way of area studies. The
other is we look into the non-revenue objectives which are part and
parcel of every legislation in developing countries, for development of
backward areas, promotion of industries, generation of employment,
adjustment of backward areas, small scale industries promotion, etc. are
implied objectives of tax legislation. There would be this kind of
study; we test check people who are availing this concession and see
whether they really deserves this concession. We see whether the
conditions subject to which these concessions were available, are
actually there. As such a number of examples are there.
The audit of accounting is
mainly to ensure that what is collected, is brought into the account.
Especially in a country like Pakistan, the tax proceeds are divisible
between the Centre and provinces and the Auditor General of Pakistan has
been given special task of certifying the net proceeds of tax. The audit
of accounting of revenues becomes more important when Auditor General
gives a certificate and authenticates the accounts /net proceeds of tax.
Therefore, great amount of care is required to be maintained so far as
our auditing of accounting is concerned.
Now we have come to the main
points which are challenges and constraints which revenue auditors have
First point is audit mandate.
Audit mandates are not theoretically available everywhere. They have to
be chalked out first.
The second most important
thing, in Auditor's view is production of record. Therefore, working
arrangements with the revenue collecting agencies are to be made in
order to avoid minor irritancy over availability of records or non
compliance of audit observations. This kind of hurdles have to be sorted
Audit also has to come to turn
out how to deal with differences that may arise in the revenue
administration in the interpretation of law, especially where there are
many high courts. Each high court gives its own opinion and there is no
authoritative opinion of the Supreme Court available to lay down the law
of the land. The revenue authority is quoting one case and the Auditor
quoting the other case. This kind of conflict takes place. But there
must be machinery for resolving that kind of conflict. Therefore, we
must strive for such a machinery.