30 November 2010  

 
Government Revenues - Accountability and Audit  
 
 Foreword
Audit  Overview
Plans
FOREWORD
Audit
Report Revenue Audit, as an independent and important domain of public auditing, has been enga
the Supreme Audit Institutions for quite some time. Right from the INTOSAI declarations a
s the various declarations of INTOSAI and ASOSAI have stressed the importance of this func
Declaration of June 1988 issued a fairly detailed guideline in the area of tax audit.
Papers
The ASOSAI Governing Board, which met in Sydney, Australia in May 1993, decided to laun
Archiv ASOSAI Research Project on "Government Revenues - Accountability and Audit". Conseque
es project was undertaken by a research team consisting of the following members:

Freque 1.    Mr. P.K. Lahiri, Deputy Comptroller and Auditor General of India (Team Leader)
ntly
2.    Mr. Ab. Rahman Mohammed, Deputy Auditor General of Malaysia
Asked
Questi 3.    Mr. Tony Minchin, Executive Director, Australian National Audit Office
ons
(FAQ) This publication is the outcome of the Research Project, Twenty Five member countries of A
contributed papers for this Research Project.
RAA
Photo On behalf of ASOSAI, I would like to express my appreciation of the work done by the mem
team. I would also like to thank all the members of ASOSAI, especially those who have con
Gallery
papers for this project. Without their active co-operation and support it would not have bee
out this publication. My thanks are also due to the Auditors General of India, Malaysia and
their Senior Officers available for this project.

This book brings out the structure and framework of revenue audit in the member countrie
papers bring out the revenue scenario (tax and non -tax) in different countries and some m
indicators like tax - GDP ratio and other comparators. I hope this publication will be useful
professionals in public auditing as well as academicians, researchers, administrators and le

Kunarto
Acting Chairman of the Supreme Audit Board
of Indonesia and
Chairman of ASOSAI

May 1998 

OVERVIEW
1.    Introduction

1.1    Government revenues : the conceptual framework:

1.1.1    Government revenues are derived from two sources: tax receipts and non-tax rece
source of national revenues being tax receipts raised through fiscal statutes. Non-tax receip
are generally raised through non-statutory mandates and usually a reciprocal benefit accru
from whom such receipts are collected, unlike tax receipts where the element of quid pro q
According to one classic definition "..... .taxes proceed upon the theory that existence of go
necessity, that it cannot continue without means to pay its expenses, that for those means
compel all the citizens and property within its limits to contribute, and that for such contrib
return of special benefit to any property but only secures to the citizen that general benefit
protection to his person and property, and the promotion of those various schemes which h
the welfare of all...". This definition finds an echo in Justice Holmes's rhetoric: "Taxes are w
civilised society".

1.1.2.    Taxation policy of a government generally seeks to apply the following desirable fi

(a)    The subjects of every State ought to contribute to the support of the Government as
proportion to their respective abilities; that is, in proportion to the revenue which they resp
the protection of the State. The observation or neglect of this maxim reflects what is called
inequality of taxation.

(b)    The tax which each individual is bound to pay ought to be certain and not arbitrary. T
the manner of payment, the quantity to be paid, ought all to be clear and plain to the contr
other person.

(c)    Every tax ought to be levied at the time, or in the manner, in which it is most likely to
the contributor to pay it.

(d)    Every tax ought to be so contrived as both to take out and keep out of the pockets of
as possible over and above what it brings into the public treasury of the State.

1.    Wharton's Law Lexicon-Fourteenth Edition 1993 (Published by Universal Book Traders
special arrangement with Sweet & Maxwell Ltd. London) - page 978

2.    Public Finance in Theory and Practice by R.A. Musgrave and P.B. Musgrave (Published
Kogakusha Ltd. Second Edition Chap. 9)

1.2    Audit of government revenues : INTOSAI declarations on revenue audit

1.2.1    In recognition of the importance of an efficient revenue collection system for mobil
resources of the government, the need to establish revenue audit as a specialised and inde
been engaging the attention of the Supreme Audit Institutions for quite some time. The Int
of International Organisation of Supreme Audit Institutions (INTOSAI) held at Rio de Janeir
1959 recommended that:

�    Supreme Audit Institutions (SAI) ought to exercise the broadest possible supervision o

�    Supervision should not be limited to the checking of collection of revenues in line with
rendered by the collectors but, wherever possible, a check should be made to see whether
were in line with legislation.

�    SAIs should ascertain whether there has been negligence in the matter of collections o
estimates.

�    The observations of the Audit Court on the management of the budget, as presented t
assemblies, should contain the maximum of information in regard to revenues.

�    The SAIs ought to be equipped to carry out their duties, especially as regards supervis
mechanised accounting and statistical services.

1.2.2    The subject of revenue audit was again a matter of concern for the INTOSAI in the
Congress held at Madrid, Spain in 1974. The Congress recommended inter alia that:

�    SAIs exercise the most extensive control feasible over the collection of fiscal revenue a
equal significance with the control over expenditure

�    This control should cover both assessment and collection and the SAIs should be grant
documents, including the individual files of tax payers

�    The control of fiscal revenue should be primarily concerned with legality and regularity

1.2.3.    Section 20 of the Lima Declaration of INTOSAI (October 1977) again featured tax
concern. The declarations on tax audit covered the same grounds as Brazil and Spain recom

1.3    Bali Declaration of ASOSAI on revenue audit

1.3.1    The concept of tax audit was a sub-theme in the Third International Seminar of AS
Indonesia in June 1988. The following guidelines were recommended in the area of tax aud

(a)    Audit mandate: SAIs should seek clear and specific legal authority for undertaking co
audits in conformity with the relevant provisions of the Lima Declarations on Auditing Prece

(b)    Audit of individual tax assessments: It is important that individual tax files are exami
adequacy of the system and procedures of tax assessment and collection. As the examinat
neither feasible nor necessary, best results may be obtained while concentrating on high va
Selective auditing of business income cases rather than salary assessment, investigations o
and use of suitable statistical sampling techniques in the review of files are preferred pract
information on tax payers collected by the tax authority may be verified against other inde
available.

(c)    Interpretation of tax laws: SAls should scrutinise the rules, regulations and notificatio
executive agencies under the tax statutes.

(d)    Scrutiny of decisions of tax authorities: Where quasi-judicial and discretionary power
tax officials, any decisions taken in the exercise of such powers should be scrutinised in au

(e)    Audit methodology: Audit should be mainly system based and the objective should be
loopholes, lacunae and deficiencies not only in tax administration but also in tax laws. Adeq
identifying and dealing with tax avoidance rising from deficiencies in laws could be consider
action including amendments to the laws could be taken promptly.

(f)    Socio-Economic implication of taxation. The social and economic goals proposed to be
tax concession and relief should be reviewed in audit.

(g)    Reporting on the results of tax audit: Having regard to personal privacy consideration
that confidentiality be maintained in reporting individual assessments in the audit reports.

(h)    Training of tax auditors: Tax audit is a specialisation which requires thorough knowle
laws and regulations. SAIs should provide intensive and frequent training for tax auditors t
the training facilities available in their local tax department's training institutions as well as

1.4    Objective of the fourth ASOSAI Research Project on "Government Revenues

and Audit"

1.4.1.    The ASOSAI governing Board which met in Sydney, Australia in May 1993 decided
ASOSAI Research Project would be on the topic "Government Revenues - Accountability an
this research project was undertaken to study the system of revenue administration in ASO
countries and prevailing auditing practices in this area. Relevant aspects such as sources o
revenues through tax and non-tax measures, different fiscal statutes governing tax collecti
countries, the extent of government revenues under the audit domain, audit methodologies
and impact of revenue audit on tax administration etc. were examined. Papers have been c
following twenty six member countries of ASOSAI:

1.4.2.    (i) Australia, (ii) Bangladesh, (iii) Brunei Darussalem, (iv) China, (v) Cyprus, (vi) I
(viii) Iraq, (ix) Japan, (x) Jordan, (xi) Korea, (xii) Kuwait, (xiii) Kyrghyztan, (xiv) Malaysia,
Nepal, (xvii) New Zealand, (xviii) Pakistan, (xix) Papua New Guinea, (xx) Philippines, (xxi)
Arabia, (xxiii) Thailand, (xxiv) Turkey. (xxv) United Arab Emirates and (xxvi) Yemen

1.5    Methodology of the research project

1.5.1    The research team for the project, consisting of senior officers of SAIs of Australia,
under the leadership of Deputy Comptroller and Auditor General of India, framed the guide
which were circulated to thirty member countries of ASOSAI. Twenty six countries sent the
based on the guidelines. Each member of the research team was co-ordinator for a group o
The papers were edited by the co-ordinators and the edited texts were sent to the contribu
their comments/acceptance. The research team had three meetings to finalise the guideline
output. The country papers printed in the book are the final versions of the texts which hav
the contributing countries.

2.    Government Revenues: scope and extent

2.1.    Sources of government revenues

2.1.1    As mentioned earlier, government revenues are sourced from various tax and non-
country papers bring out the dimensions of these two sources which in turn influence the a

2.2.    Tax and non-tax revenues

2.2.1    Government revenues are largely dependent on taxes legislated through various ta
the spread of the two sources, viz. tax and non-tax revenues, varies between countries.

2.2.2. The table below indicates the figures for these two sources for which the SAI has tax

Table 1
Spread of tax and non-tax revenues

Percentage share of tax and non-tax

Fiscal year
revenue in national revenue
 Tax revenue Non-tax revenue
Country

1. Australia 1995-96 95.6 4.4

2. Bangladesh 1995-96 79 21

3. Cyprus 1995 83.52 16.48

4. India 1995-96 65.43 34.57

5. Indonesia 1996-97 64.3 35.7

6. Jordan 1995 54.1 45.9

7. Korea 1995 96.3 3.7

8. Malaysia 1996 81 19

9. Nepal 1994-95 80 20

10. New Zealand 1996-97 93.9 6.1

11. Pakistan 1995-96 79.9 20.1

12. Papua New Guinea 1995 83.5 16.5

1997
13. Russia 86 14
(estimated)

1997
14. Thailand 90.3 9.7
(estimated)

15. Yemen 1993 61 39

2.3.    Direct and indirect taxes

2.3.1    An interesting feature of taxation scheme is the degree of dependence of the count
of taxes, i.e. direct (on income/wealth/receipt) and indirect (on manufacture/transaction).

Table 2
Share of direct and indirect taxes

Percentage share of direct & indirect Taxes

in the tax revenues
Fiscal Year
Country
Direct Taxes Indirect Taxes

1. Australia 1996-97 74.7 25.3

2. Bangladesh 1994-95 14 86

3. China 1995 24.7 75.3

4. Cyprus 1995 42 58

5. India 1995-96 30.7 69.3

6. Iraq 1993 40.5 59.5

7. Japan 1995 67 33

8. Jordan 1995 18 82

9. Korea 1995 44 56

10. Malaysia 1996 54.7 45.3

11. Myanmar 1995-96 30.2 69.8

12. Nepal 1994-95 19.6 80.4

13. New Zealand 1996-97 67.7 32.3

14. Pakistan 1995-96 26 74

15. Phillipines 1995 32.8 67.2

16. Russia 1996 43.7 56.3

1997
17. Thailand 31.9 68.1
(estimated)

18.Turkey   48.6 51.4

19. Yemen 1993 40 60

(note: local taxes have been excluded)

2.4.    Tax-Gross Domestic Product (GDP) ratio.

2.4.1.    Tax-GDP ratio is an accepted macro-economic indicator to measure tax buoyancy.

Table 3
Tax-GDP Ratio

Fiscal Year Percentage of tax to GDP

Country

1. Australia 1996-97 23.9

2. Bangladesh 1995-96 9.4

3. Cyprus 1995 22.9

4. India 1995-96 17.2

5. Iraq 1993 2.3

6. Jordan 1992-93 18.2

7. Kyrghistan 1992 12.7 (of GNP)

8. Malaysia 1996 36.3

9. Myanmar 1996-97 3.1

10. Nepal 1994-95 9.4

11. Pakistan 1995-96 13.8

12. Phillipines 1995 41.5

13. Thailand 1993 17.1

14. Turkey   18
2.5.    Revenue-GDP ratio

2.5.1.    Revenue-GDP ratio is an extension of tax-GDP ratio covering both tax and non-tax

Table 4
Revenue-GDP ratio

Percentage of total governments revenues

Fiscal Year
Country to GDP

1. Australia 1996-97 25

2. Bangladesh 1995-96 11.9

3. Cyprus 1995 27.4

4. India 1995-96 25.6

5. Jordan 1995 33.5

6. Malaysia 1996 44.2

7. Myanmar 1995-96 5.9

8. Nepal 1994-95 11.7

9. Pakistan 1995-96 17.2

10. Turkey   21
2.5.2    Many countries have a three-tier system of raising revenues: (a) federal taxes and
state/provincial taxes and non-tax sources and (c) revenues raised by and for local bodies.
the above tables are indicative only, due to possible differences in the classification betwee

2.5.3.    Since containing the level of fiscal deficit is an area of concern for any government
of revenue collection is a very vital component for a country's fiscal stability and economic
audit has an important role to play in supporting the tax effort of the government by sugge
in existing revenue assessment and collection systems. Widening the tax base through legi
measures is, however, within the purview of the executive and outside the audit domain.

3.    Role of Revenue Audit: Audit Mandate

3.1    The member countries of ASOSAI derive their mandate for revenue audit from the re
and/or audit acts.

3.2    The audit legislation of Australia sets out the mandate of the Auditor General and pro
Auditor General has access to all federal agencies' accounts and records. In Bangladesh the
derives his mandate from the Constitution and the Comptroller and Auditor General, Additio
1974 which give the Auditor General access to all records in possession of any person in th
Republic. However, a controversy has arisen between the National Board of Revenue (NBR)
General regarding the Auditor General's access to the individual assessment records for dir
according to the NBR, are confidential documents as per the Income Tax Ordinance 1984. T
and Justice has upheld the rights of the Auditor General in its latest opinion. Hence audit of
assessments have not yet truly begun there. A similar situation prevails in the Philippines w
Commission on Audit (COA) promulgated a resolution authorising the auditors to evaluate
of the revenue administration system and to review the assessment records, collection reco
accounting records. This resolution has been opposed by the Board of Internal Revenue (BI
encroachment by COA on the authority of BIR and a petition has been filed in the Supreme
the COA resolution. The COA is optimistic that the court will finally resolve the case in its fa
CAG has unfettered right of access to any assessment or other records of revenue. Since in
records in income tax are confidential documents, a provision has been made under the Ind
endorsing the CAG's right of access to any individual assessment record. In Malaysia variou
contain provisions allowing the Auditor General unimpeded access to all financial records. T
Tax Act provides for disclosure of all classified materials to the Auditor General. In Brunei D
audits all revenues from services, utilities and indirect taxes but does not audit revenues d
tax and oil and gas extraction. In Cyprus, the audit teams visit the factories and bonded wa
the departmental representatives for audit of excise and customs. In Japan the Board of Au
taxes only and does not audit the local taxes collected by local governments i.e. Municipalit
In Jordan the SAI has sought an amendment of Audit Bureau's Law No. 28 for 1952 which
constitutional immunity for the President of the Audit Bureau and ensure his financial and a
independence. In Korea the SAI has the power to seal warehouses, safes, documents and a
examine any person who is concerned with the subject matter of audit. In Russia the refus
audtitee to supply information/records to the SA1 is tantamount to an offence under the Cr
Russian Federation. The Russian SAI (Accounts Chamber of the Russian Federation) has a m
examination of federal draft laws as well as of the standard legal acts of the federal bodies
governments which bear on the federal budget and budgets of federal extra-budgetary fun
expert study of the draft Tax Code, which will introduce an integrated taxation system in th
recommendations have been presented to the Federal Council, the State Duma and the Go
Russian Federation. In New Zealand the auditing standards prescribed by the SAI have ado
of the Institute of Chartered Accountant of New Zealand as the minimum but has enlarged
the area of non-financial performance measures which provide a gauge on how well the Inl
Department has performed in carrying out its functions on behalf of the Crown.

3.3    The audit mandates of most of the countries are quite comprehensive and exhaustive
access to all revenue records, confidential or otherwise. Wherever controversies have arise
jurisdiction of audit, the issues have been generally settled in favour of the SAIs. The const
audit acts have provided for the independence of audit vis-a-vis the executive.

4.    Audit Methodology

4.1    The methodologies and techniques of revenue audit have evolved over time in memb
depending on the local circumstances. The methodologies have been designed to achieve t
provided in the audit mandates. The object of receipt audit is to seek evidence that revenu
collected according to law and errors of omission and commission are avoided in assessme
assurance that pre and post control systems operate efficiently and in accordance with the
the sovereign and subordinate legislations. It is the duty of audit to identify the lacunae in
leading to non-fulfilment of stated policy objectives of the Government regarding revenues
remedies to overcome the legal infirmities. Since correct interpretation of tax laws is a prer
audit, a proper understanding of the "settled law" is an absolute necessity for an auditor. W
pronouncement exists the problem is easily solved. But in grey areas where the revenue an
eye to eye or there are conflicting judicial opinions, a machinery/system like bi-partite/tri-p
involving the Law Department or reference to the Attorney General should be available who
acceptable to both Audit and revenue department. Such systems are already in operation i
Bangladesh, Cyprus, Pakistan etc.

4.2    The collection and accounting system of Government revenues are checked in audit t
internal procedures and controls adequately provide for regular accounting of collection and
of the collections to the Government account.

4.3    The Australian National Audit Office produces four main audit products: (a) Financial
(b) Performance Audits, (c) Financial Control and Administration Audit and (d) Assurance a
Assessment Audits each with particular methodologies. Tax auditing in China involves the a
implementation and measurement of the growth in tax collection with reference to the grow
analysis of the causes of variance, if any. In Japan the Board of Audit is entitled to present
improvement of tax laws and regulations. In Korea mobile inspection is carried out by the a
check corrupt practices in tax assessment and collection. In Customs audit in Myanmar, the
rules and regulations have been framed in accordance with laws and policies of the governm
provide an effective internal control system. In Pakistan the audit of SAI is divided into two
compliance audit and (b) "subject studies". In the Philippines a system based approach is a
government revenues. In Saudi Arabia the SAI applies statistical sampling techniques for s
documents. In the United Arab Emirates the SAI audits the government revenues in three p
phase, collection phase and "deposit phase". In Yemen the SAI checks the various factors a
estimation.

4.4    Proper audit process presupposes careful audit planning to achieve the desired audit
have developed audit planning systems with reference to audit parameters and audit resou

4.5    At the strategic planning level, Australia prepares annually audit strategies for each m
agency. These strategic documents are the basis for all audit work programmes. Operation
plan identifies:

�    The task to be completed

�    The resources to be used

�    The timing of key milestones in the project

�    The expected outcome and impact of the audit

4.6.    In Bangladesh, depending on the budget size, revenue collection and risk, the audite
categorised as 'A', 'B' or 'C', the 'A' category units being audited annually. In Indonesia the
includes evaluation of the internal controls and verification and monitoring of periodic and a
Japan the audit planning is two-fold i.e. top-down and bottom-up. The Board of Audit Mana
overall audit policies and the Audit Divisions shifts priorities for tax audit,- points of empha
Annual Corporate Plan of the SAI is drawn up before the end of the previous year. Based o
Plan, the Quarterly Plans are prepared to suit available audit resources and the environmen
Philippines the audit plan is dependent inter alia on the size and complexity of the agency's
quality of the internal control system. In India the strategic audit plan identifies the order o
assessment units based on risk perception. The risk parameters are :

�    Level of revenue realisation of each assessment unit

�    Nature of audit findings in each assessment units

�    The nature of the assessment unit etc.

4.7.    In Saudi Arabia the SAI lays down the annual plans and quarterly work programmes
systems to maximise output. In Malaysia the Audit Planning Memoranda are prepared by th
Branch for review by senior management in the National Audit Department before compreh
conducted. Sampling techniques are extensively used in Malaysia to select transactions for
Pakistan the auditee formations are classified according to their workload.

4.8    The strategic and operational planning of revenue audit are a component part of the
planning with individual audit risk parameters of revenue provided suitably with due weight

5.    Information Technology (IT) Audit

5.1    Many member countries of ASOSAI have developed sophisticated Information techno
systems for effective use in audit process.

5.2    In Australia, the SAI's audit approach integrates the impact of information technology
associated internal control structure and recognises that IT systems are vital to the operati
the development of their financial statements. The SAI of Brunei Darussalem has a small IT
officers having IT audit experience. In India a computerised audit planning system has bee
facilitate the audit process. In Japan, the SAI's computerised audit process involves unload
from audtiees' mainframe computers to the personal computers of auditors for audit analys
uses three techniques for IT audit : (a) the relevant data comparison method, (b) the prog
and (c) the parallel simulation method. The SAI in Malaysia is using propriety software i.e.
Language" for conducting audits. The Revenue Audit Branch uses computer software in its
procedure. In New Zealand the SAI uses Computer Assisted Audit Techniques (CAAT) durin
Pakistan proposes to introduce the monitoring of audit observations through computer and
computer link with the Central Board of Revenue. The SAI of the Philippines proposes to co
of the computerised tax system in the revenue departments when the same becomes fully
of Saudi Arabia has established an Information Centre with the object of developing an acc
system.

5.3    IT audit is an area which is showing varying degrees of growth in the member countr
countries have developed fairly sophisticated systems, others are in the process of develop
the increasing level of computerisation in the audit environment.

6.    Audit Reporting: standards and systems:

6.1    The Audit Report is one of the instruments to ensure legislative accountability of the
administration. The Audit Reports are placed in the Parliament where there is a parliamenta
reported to the highest executive of the country where the parliamentary system does not
countries there is a select committee of legislature/parliament which discusses the Audit Re
evidence on the issues raised by Audit and gives its final recommendations. The initial audi
during the course of field audit typically are communicated to the revenue administration in
management letter/inspection report and the views of the department are obtained before
observation. Significant audit findings involving large transactions, leakages and fraud are
Parliament/legislature/chief executive through Audit Reports. An active and meaningful deb
and public media helps in plugging the loopholes in the system if the report is timely and fo
standards.

6.2    The system of examination of audit reports by legislative committees of the legislatur
countries with a parliamentary form of government like Australia, Bangladesh, Cyprus, Ind
Malaysia, Myanmar, Pakistan, Papua New Guinea and Russia. In other countries the major
reported to the head of the state.
 7.    Human Resource Management

7.1    Revenue audit has been accepted as a specialised area requiring adequate skill forma
improvement. Most of the SAI members are responsive to the training needs in this area a
develop or have developed strong task forces to carry out an effective mission in this branc
internal and external training courses and workshops are organised by the SAls to equip th
necessary technical inputs Since revenue audit is largely a legalistic audit, the complexities
tax laws and case laws have to be clearly understood and appreciated by revenue auditors
audit analysis. Maintenance of a properly documented and accessible system of case laws,
international, is necessary to keep the knowledge and information up to date.

7.2    Many of the member countries of ASOSAI have in-house training facilities in specialis
audit. Some countries have the system of utilising the training facilities of the revenue dep
the skill and knowledge of the revenue auditors. However, some SAIs feel that existing trai
improvement, especially in revenue audit and computer systems.

8.    Impact of Audit: systemic and legislative changes

8.1    As stated in the Bali Declaration, one of the objectives of the receipt audit is to point
deficiencies and lacunae not only in the tax administration but also in tax laws. Many SAIs.
important procedural/legislative changes through their audit reports.

8.2    In Australia the SAI has succeeded in producing systemic changes through their perfo
the Australian Tax Office and other agencies. The SAI of Japan has brought about importan
Income Tax discount system. In India significant legislative and procedural changes have b
tax laws of the Union and the States as well as in non-tax receipts through the audit finding
helped in streamlining the revenue administration. In Malaysia audit studies have brought
amendments to the Income tax Act and Customs Act as well as important system changes
administration. In Korea audit findings have institutionalised the widening of the database
departments. In Jordan, as a result of audit findings, rent charges were included within the
income.

9.    Conclusion : future trends

9.1    Revenue audit has been recognised by all the member countries as an important are
greater attention and more specialisation. In this era of trade globalisation and shift to mar
country will be opening avenues of investment. Government's fiscal policies and laws will in
according to the new economic environment. Consequently audit will have to adapt itself to
of government revenues and define its auditing standards accordingly. For example, Value
may replace the existing indirect taxes in many countries and a liberalised tax regime may
to attract investments without reducing the share of Government Revenues. Audit will have
ensuring that appropriate tax laws are in position to translate the changes, and that laws a
properly to safeguard government revenues in an era of liberalisation and that "what is Cae
unto Caesar". As mentioned earlier, IT audit is another area of challenge which will have its
development in the member countries of the ASOSAI.

Royal Audit Authority

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