THE importance of revenue auditing is well recognized by now. The International Organization of Supreme Audit Institutions (INTOSAI) and Asian Organization of Supreme Audit Institutions (ASOSAI) have indicated that revenue taxation be taken up in a much bigger way, as it is a major activity of the government and audit helps in enforcing the public accountability of the revenue departments.

The audit becomes all the more important for developing countries because revenue resources are scarce, the tax base narrow and there is a great need for maximization of revenue. The auditing could point out-short-assessment, wastage and system weaknesses in revenue collecting agencies.

The revenue auditing functions as a watchdog. In the absence of 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 and assist government in improving systems and procedures. Surely, revenue auditing has to be much more comprehensive than what it is today.

The consensus reached in the international institutions 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 and report on their efficiency, 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.

If the revenue administration introduces a system, say green channel clearance procedure exclusively for imports by government and public sector companies, audit examination of the relevant rules could extend to such issues as differentiating imports by a private person and imports by government firms, 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. At this stage, the 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. The level of expertise required for in-depth and detailed tax auditing is available in the country.

The law does lay down details of documents to be filed by 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 legislation generally talks about. Each of these aspects in audit is to see that the steps taken by the assessing officer are in compliance with mandatory provisions.

In review of assessment, audit does not go beyond what the law requires the assessing officer to do. 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 officer 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 is, 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 exercise sometimes quasi- judicial functions or appellate functions.

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 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 are our concern of revenue auditing.

When we are looking into details, we get to know the actual working of the systems and procedures. The theoretical study of rules is not beyond actual working of the systems and procedures. These things are seen while auditing the individual tax files. This dual process enables us to undertake system studies.

There are basically two types of system studies. 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. A review of the system of assessment and collection of revenue of small scale enterprises relating to cement may be undertaken because that gives us the maximum yield of revenue. That is one way of area studies.

The non-revenue objectives 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. These also need to be looked into.

There would be this kind of study. It is test check of people who are availing this concession and see whether they really deserve 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 when 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 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 to face. 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 out.

Audit also has 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 difference takes place. But there must be machinery for resolving that kind of conflict. Therefore we must strive for such a machinery.

The writer is the director-general, Audit and Evaluation Revenue Receipts, South Karachi