ENG_Audit Management System Conceptual Design.docx

CONCEPTUAL DESIGN

AUDIT MANAGEMENT INFORMATION SYSTEM

JOHN YATES, IT ADVISOR

Table of Contents:

Technical Assistance to Support Tax Administration Reforms (TASTAR)

Chapter 1: Introduction

The purpose of this document is to describe the conceptual design of an Audit Management Information System for development and implementation in the State Revenue Committee (SRC) of Armenia. An Audit Management Information System (AMIS) would automate audit processes, capture key data, and improve monitoring and control. Development and implementation of an AMIS will depend on the reform of audit processes, which are currently under consideration. The AMIS would cover the following main processes:

· Risk Assessment

· VAT Refunds

· Audit Planning

· Discretionary Audits

· Cameral Studies

· Assigning Audits

· Field Audit

· Auditor Timesheets

· Appeals

· Third Party Information (collecting data from other sources)

· Management Information System (building data sets for analysis and reporting) After the conceptual design and key reforms of audit processes are agreed, preparation of detailed software requirements specifications could begin.

Integration with the State Revenue Committee’s Tax Information System The Audit Management Information System proposed in this document would follow a modular design and would be integrated with the SRC’s new tax information system under development—Taxpayer3. A modular approach is the best option because the AMIS requires data stored in the SRC’s tax information system. Best practices for tax system design also follow an integrated approach. Similarly, for VAT refunds, the conceptual design proposes integration with the AMIS.

Benefits of an Audit Management Information System The benefits of the AMIS are derived primarily from better selection of audit cases and improved management of audit activities. The following list summarizes the key benefits of the proposed AMIS:

· More Effective and Efficient Selection of Audit Cases,

· Improved Transparency of Audits,

· More Efficient Use of Audit Resources Leading to Higher Productivity

· Improved Control over VAT Refunds,

· Reductions in Successfully Appealed Audits,

· Better Monitoring of Audits,

· Increased Yield from Audit Activities and

· Overall Improvement in Management and Oversight of Audit Staff.

Overtime these benefits will lead to higher revenues and better voluntary compliance by taxpayers.

Chapter 2: Audit Management Main Processes

This chapter of the conceptual design describes the main processes that would be covered by the proposed AMIS. As a separate document, business-process diagrams have been prepared that depict the processes at a high level. Key issues that need to be understood for these processes are described below.

Risk Assessment The starting point for audit management is risk assessment in order to select tax returns for audit. At this time, the TASTAR project is working with the SRC to develop risk scoring models for Legal Entity Profit Tax and Value Added Tax (VAT) returns. The scoring models will classify tax returns by size and type and calculate risk scores. The scores will then be stored in the AMIS and used for audit planning purposes.

VAT Refunds The process for issuing a VAT refund starts with an application submitted by the taxpayer. However, in order to minimize incorrect or fraudulent VAT refunds, the risk model will also identify risky VAT returns to be considered for audit. The scores for VAT returns are then compared against applications for VAT refunds to determine, when an audit is required. If an audit is conducted and a refund is due, the request for refund is processed, accounting records are adjusted accordingly, and the refund is issued.

Audit Planning The audit planning process is the most complex process incorporated in the AMIS from an information technology perspective. This process is managed from headquarters with information disseminated to local offices. Data on average time required for audits by size and type, staffing levels by tax office, system parameters set by users, and third party/supplemental data are all used for audit planning purposes. The output is a plan with indicators for initiating audits. One decision that will need to be made is whether or not audits determined during the planning process are required. This would mean that lists would be generated, and audits performed should be tracked against the lists. Alternatively, audit managers in local offices would assign audits based on plan targets provided by headquarters, but would have discretion over the assignment of audits and would be managed on results.

Discretionary Audits Discretionary audits are assigned by the Heads of the Audit Departments in local tax offices. Required audits from the previous month should be completed before discretionary audits are conducted. Discretionary audits may be identified based on risk scores, workload, staff availability, third-party information and data in supplemental IT systems. Managing the number of discretionary audits should be parameterized, so it can be adjusted when required audits are distributed to local tax offices.

Cameral Studies Cameral studies are equivalent to desk controls or audits and must be selected based on set criteria. Information may be requested, including documentation, from the taxpayer to establish, if there are any irregularities in documents submitted to the SRC. Based on documents provided, the desk controllers may issue an assessment for underpayment of tax liabilities, and the taxpayer must be notified of the assessment amount.

Assigning Audits Assigning of audits to auditors is straightforward, risk scores for each category of taxpayer are reviewed, and required audits are assigned by the Head of Audit of local tax offices. If required audits have not been performed for the previous month(s), they must be conducted first. Auditors are then assigned audits based on their background and experience. The order of assigning audits to auditors is left to the discretion of the Head of Audit in local tax offices, as long as required audits have been completed for the previous month. Once an audit is assigned in the IT system, an audit case number is generated in the system, and the audit case is tracked until its completion.

Field Audit Conducting field audits is a hands-on process that has limited potential and benefit in terms of IT systems automation. The key point is to initiate cases, track their progress and capture the results. All important documents prepared during field audit should be generated by the AMIS to capture important data. The audit order, report on taxpayer non-compliance, the audit report and act of audit are all documents that should be prepared and tracked in the AMIS. Results of audit will also be critical for providing feedback on the effectiveness of the risk model.

Auditor Timesheets In order to track the time of auditors properly and accurately calculate the amount of time in staff hours that audits of different types take, auditor timesheets must be captured in the AMIS. Timesheets is a critical requirement for monitoring audit activity, as well as audit planning. Although the AMIS cannot be implemented properly without capturing detailed data on time spent on audits, introducing timesheets will be a significant change in approach and must be well managed to change the attitudes of audit staff. Poor discipline entering timesheets would lead to poor data quality, which would in turn reduce the benefit of capturing the data. To control the submission of timesheets, the Heads of Audit in the local tax offices will have to approve timesheets on a weekly basis.

Appeals Along with assessments from cameral studies and field audits, taxpayers have the right to file appeals. The appeals module of the AMIS will capture appeals in the system. While this data specifically relates to taxpayers, it is important to review the results of appeals, as uncollectible assessment do not benefit the SRC and may have been a poor use of time and resources. Management of audit activity must include analysis of collectible assessments to measure audit performance properly.

Third Party Information Third party information can be a useful indicator for selecting audits and should be leveraged by the SRC. The process for building a database of third party information is technically straightforward. Data can be sent by cooperating institutions by XML files and uploaded to the third party information database. Managing the data exchange is the most complicated issue for creating the database. Log files would need to be created, and problems would have to be corrected when there were failures. Once the data exchange mechanism is fully tested and has been in operation for awhile, errors in transfer and uploading of data should be at a minimum, and data exchange should be an automatic process that happens in the background.

Management Information System All data collected in the AMIS will be available through the management information system (MIS). Two types of reporting will be available through the MIS: 1) standard reports and 2) dynamic reports. Standard reports must be defined, programmed and then would be published for users. This capability currently exists in the SRC’s Taxpayer2 IT system. TASTAR also recommends implementing dynamic, multidimensional reporting. By creating standard data structures, off-the-shelf user interfaces can be purchased that would allow the retrieval very flexible reports, transferring the capability to generate complex, dynamic reports to users from IT staff.

The process of building and maintaining the appropriate data structures for all of the types of reporting that the SRC would need is complicated. The core techniques and technologies are related to data warehouses, and the SRC does not have the experience at this time to manage this process. Therefore, TASTAR recommends outsourcing in the initial stage of implementation, and then the processes could be transferred to the SRC.

Chapter 3: Conclusion and Next Steps

The goal of this paper was to describe the conceptual design of an Audit Management Information System. This document is accompanied by high-level process diagrams that compliment the text. Key recommendations include:

1) A modular approach to development and implementation of the AMIS should be taken to maximize the benefit and phase modules in over time;

2) Integration of risk assessment for VAT returns (including refunds) and legal entity profit tax returns;

3) The AMIS overall should be configurability in order to allow parameters to be changed rather than requiring reprogramming (for example, the percentage of discretionary to conduct could be flexible and changed by users through the system);

4) Developing an AMIS module for capturing auditor timesheets; and

5) Implementing dynamic reporting based on multi-dimensional reporting techniques through an outsourcing vendor.

Additionally, a key issue will be integrating the AMIS with the Taxpayer3 system. However, since a modular approach is proposed, this would not be a problem.

In conclusion, the next steps for defining the requirements for the AMIS include:

1) Gaining consensus on the conceptual design,

2) Gathering all documents and forms generated during audit and related activities described in the conceptual design,

3) Proposing reforms to audit activities and changing business processes accordingly,

4) Preparing more detailed business process diagrams, and

5) Developing detailed software requirements specifications.

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