ANNUAL PLAN IN DETAIL-ENG.docx

FEBRUARY, 2010 ARMENIA

ANNUAL AUDIT PLAN—CONCEPTS AND BEST PRACTICE

PRESENTED BY NORMAN FOX, DELOITTE AUDIT ADVISOR

WHY WE NEED AN ANNUAL AUDIT PLAN:

It is useful to strategize about Audit workload and programs by recognizing that all taxpayers are not the same. It is essential that we break down the entire population of taxpayers into smaller meaningful groups to address the audit needs in a more specific manner.

Thus, we create “classes”, or groups of taxpayers that have similar tax characteristics. We refer to them as homogeneous groups. Groups are differentiated by the tax return they file, their size, and other unique features. This will help audit planners better understand the nature of the audit on these particular taxpayers. They may be able to better identify the complexity of audit, the time requirements, the type of audit approach, and outcomes.

A key ingredient in the annual plan process is to determine the coverage level for each of the classes. We want to allocate the Audit manpower in a strategic manner to achieve reasonable coverage for each of the separate classes. This typically means assigning staff to larger business classes with greater risk to achieve higher coverage. And to have lower coverage in the high population smaller business taxpayers.

This is most obvious in the practice of establishing the LTI to focus much attention on the biggest entities in Armenia. But, since more than 99% of all businesses are not in the LTI, we still need to emphasize focus on the bigger entities.

THE ANNUAL AUDIT PLAN TABLE:

See the attached table to see the data needed to construct the plan. Before we can fill in the coverage and the number of audits, we need to know or establish the: 1) the total Audit staff-years for each TI and the nation, 2) the average time it takes to conduct an audit on one year of each class of taxpayer and 3) how many days in the year can an auditor devote to the direct work of doing audits.

The plan is designed to cover a period of one year, from January 1 to December 31. It will have a table for the nation, and tables for each TI.

The table for the TI will give targets for the number of returns/years to be completed for the upcoming calendar year. The number will vary for each class.

The TI will be expected to honor the plan and work toward completing the target number for each class, not just the total number of returns/years.

We count the returns for those taxpayers that only file an income tax or profit tax return. Each return represents one year. If we complete only one return, or one year, we count this as one. If we complete work on two years and audit two returns we count this as two; etc.

For taxpayers that file more than just the income or profit tax return; such as a taxpayer that files VAT returns as well, we will count each comprehensive audit for each year as one. This will simplify the counting method. Comprehensive audits that cover more than one type of tax will take longer per year than an audit on just one type of tax, on average.

If we use a team of auditors to complete a case, we must count the total days for all the team members to determine the total days expended on the audit.

It may take a number of iterations to finalize the audit plan. Initial attempts to allocate resources to the different classes may not result in a satisfactory overall result. Successive attempts should get us closer to a plan that is acceptable.

A national strategy should first be agreed to and a national plan should be the starting point. Once that is in place, we can use a similar strategy for each TI. But the population of classes and the relative mix is likely to be very different in the TI’s. Of course, the actual staff in each TI will drive the plan. We cannot always achieve the preferred coverage levels if there is not enough staff. Some TI’s may be understaffed compared to other offices. And, some TI’s may be overstaffed compared to the other offices. This naturally will affect the level of coverage that can be achieved.

The headquarters Audit staff will prepare the annual plans. For the TI plan they should consult with local TI managers to get agreement on the plan numbers.

At the end of the year we may see that TI’s will have overachieved the target in some classes and underachieved the target in other classes.

The audit manager in the TI should strive to meet the targets in all classes. He must observe the accomplishments to date and start new cases in accordance with plan targets. The MIS system will provide data to assist in this effort.

The number of audits for each class can be completed by obtaining cases from a number of sources. We will have the risk based selection formulas that score all returns as a primary source of workload. But, we can also have other sources of workload. We can use supplemental systems to produce a list of potential workload. We may also be required to perform mandatory audits on liquidated companies or other categories. The headquarters will provide guidance to the TI’s about the sources available and how to use these for selecting additional cases to put into the audit stream. All cases, regardless of the source, will be counted toward the completion of work for that class.

The annual plan covers all the classes where it intended to control the level of workload and count the results. Clearly, this includes the classes of Profit tax returns, Income tax returns, VAT returns and Excise returns. There are other types of activity that may not lend itself to easy counting and control. If a type of work is voluminous, is completed quickly, and not individually counted; we may be satisfied to just assign an appropriate level of staff days to the work but not attempt to control the number of units. When first starting the planning process, it may be best to start out slowly and build more into the plan as we gain experience.

STAFF YEARS FOR PLANNING PURPOSES:

There are about 260 potential work days in a year. This is simply 5 days a week times 52 weeks. But we know that workers do not work every one of these days. We are really interested in the days that can be devoted to doing audit work; or called “direct time”. There is also “indirect time” which is not available to spend on auditing cases. This consists of: Holidays, sick days, training time, administrative time, etc. Thus, only about 200 to 220 days are available for each auditor to spend working on cases. The plan can only use the days devoted to working on audits. So, for each auditor we must use the actual days on audit of cases.

The time on the audit is calculated for all the auditors’ time and for each year that is completed. For example, if a team of two auditors work 10 days that adds up to 20 staff days. If one year is completed, that means 20 staff days for one year. If the auditors complete two years, it means that 10 staff days per year is used. We will always use average time per year for each class; and this will be calculated on a national basis. Even though the averages will vary from TI to TI.

By using the class structure where all the taxpayers are similar, we should be able to compare fairly the results from one TI to another.

We will need to construct a mechanism to collect the time data. The MIS system will collect the data and provide summary information for use in the annual audit plan process.

MIS DATA AND USING RESULTS TO REFINE FUTURE PLANS:

It is intended that a Management Information System (MIS) be designed for the SRC. This will build on the data that is already collected, by adding additional data elements that are useful to monitor and evaluate results. The details of the MIS will be the subject of separate design efforts, concept papers, and detailed instructions.

The basic concept is to capture results of audit activity, to help monitor accomplishing the annual plan, and have detailed results of the completed cases. We then can compare the results against the plan to evaluate how well we carried out the plan. We also can summarize data to see how productive the audits are, class by class, and TI by TI. We can observe the total revenue produced, the average revenue, the average time on audit cases, and the revenue per day. We do this on a class by class basis to compare like cases.

For future planning, we may want to increase the number of the most productive cases and reduce the number of cases in classes that prove to be less productive. Of course, we will want to look behind the numbers to attempt to determine the causal relationship.

FLOW CHART OF PLAN PROCESS:

ANNUAL PLAN

SCORE RETURNS

SELECT RETURNS

DO AUDIT

CLOSE CASE AND COLLECT DATA

INPUT DATA INTO MIS

MAKE REPORTS OF ACCOMPLISHMENTS AND ANALYTICAL TABLES

USE DATA TO REFINE PLAN FOR NEXT YEAR

USE DATA TO REFINE SELECTION CRITERIA

DRAFT

ARMENIA ANNUAL AUDIT PLAN TABLE

EXCISE

CASH REGISTER

PAYROLL

NEW BUSINESS

lti

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