Value-for-money studies in revenue auditing

Value-for-money studies in revenue auditing

Khan, Muhammad Akram


The Auditor-General of Pakistan is constitutionally responsible for the audit of 98 percent of the receipts of the federal government and the provinces. Nonetheless, revenue auditing is a relatively recent development; the Auditor General set up a directorate of Revenue Receipt Audit in 1973 after overcoming considerable opposition. At that time, he was authorized to audit only four taxes: customs, excise, sales, and wealth. Since then, however, his role has expanded to audit almost all receipts, including income taxes. To handle this responsibility, the Auditor-General established a directorate of Income Tax Audit in 1988. The resources spent on conducting revenue audits of federal receipts are roughly the same as those spent on conducting revenue audits of receipts of the provinces. The fact that the role of the Auditor-General for auditing revenues is increasing gives reason to hope that resources for this activity will also increase.

This article reports on value-for-money (VFM) studies in revenue auditing in the Department of the Auditor General of Pakistan. Since the initiative for VFM studies comes mainly from the directorate of Revenue Receipt Audit, which is responsible for audit of indirect taxes, the article will report primarily on the work done by that office.

The directorate of Income Tax Audit does not issue any separate report on VFM audit. It, however, comments on various management aspects of the Income Tax Department. Thus, its reports on financial audit discuss VFM audit issues to some extent.

VFM studies in revenue auditing in Pakistan started in 1986 and 1987. Since then, 16 reports were issued up to June 1992. By early 1993, only four of these had been discussed in the Public Accounts Committee (PAC), The PAC generally appreciated the VFM approach to revenue auditing. It issued several directives to the Central Board of Revenue to initiate action for implementing the reports’ recommendations. In some cases, the Department of Custom and Excise contested the recommendations on the grounds it had already taken the recommended actions. The PAC advised that the recommendations be dropped after auditors verified this.


Initial VFM studies in revenue auditing started as an area of extensive inquiry by auditors, who used an approach similar to that used in financial audits: file review, case examinations, analytical review of accounts, and interviews. The only difference was that they examined 100 percent of cases and crossed the organizational boundaries of various Customs and Excise collection units. For example, studies were done on refunds and rebates; bonded warehouses; duty-free shops; beverages; and, reconciliation of accounts. The audit reports gave an overall picture of particular issues on a countrywide basis.

Gradually, the approach and the methodology of VFM studies evolved to a more systematic and professional level. The auditors started preparing survey reports; this was not done earlier. The survey report gives the general background of an audit area, the reasons for its selection, the main issues that may be potentially involved, and the audit approach to be followed. The subjects for study are selected mostly on the basis of auditors’ prior knowledge about tax-collecting agencies. Press reports, PAC directives and the size of the revenue are also considered.

Once an audit area is identified, it is discussed within the directorate before a formal survey is carried out. The survey report concentrates on main issues, audit criteria, the audit approach, and the reporting strategy.

After the survey is completed, a plan for audit is prepared; a team of two or three persons undertakes the audit. The fieldwork generally takes 8 to 10 months. Reporting takes another 2-3 months. Thus, each report requires two to three staff-years. The cost of audit, however, is more than compensated for by savings that are realized when reports’ recommendations are implemented.

In recent years, auditors focused on management issues rather than mere compliance with rules and regulations. VFM studies also looked more closely at the effectiveness of internal control systems and procedures. As a result, the auditors reduced the number of items in their sample for those areas where internal controls were operating effectively. Nonetheless, the size of the sample is still more than 50 percent. A systems approach to audit sampling and the use of appropriate audit software could reduce the time taken to perform VFM audits of revenues.

Auditors are also covering areas that were traditionally considered out-of-bounds for them. For example, they commented on certain taxation policies and their effectiveness. In the case of the Gadoon Amazai Industrial Zone Report (1990-91), the auditors commented that incorrect government policies have set back the process of industrialization.

Another promising area in which auditors are becoming involved is social audit. For example, in the above report, it was pointed out that the procedure to grant a license for importing acetic acid anhydride was defective. Since the chemical could be used for preparing heroin, greater safeguards were needed to prevent violation of the law. Unknowingly and unwittingly, the auditors had expanded their scope of inquiry social issues. it is encouraging that the executive authorities have not objected to this expansion of the scope of audit.

Auditors have also commented on the inadequacy of the law in a number of reports. They have pointed out that the law allowed for some revenue to go uncollected and permitted discriminatory application.


Some of the main findings resulting from VFM studies undertaken at the directorate of Revenue Receipt Audit were as follows:

* The supervisory control over the assessment and the collection of excise duties was weak.

* The monitoring system for collection and refunds of taxes needed strengthening.

* Various collecting units of customs did not properly coordinate their activities. Thus, some taxes were not collected and some refunds and rebates were not given.

* Samples of beverages were not being tested in laboratories to determine their nature and strength.

* Interference of military authorities as well as other influential people should be checked to prevent leakage of revenue.

* The application of laws was loose and has led to undue refunds and illegal rebates. There was evidence of fraudulent refunds and forged documents.

* Internal controls either were missing or were weak. Accounts were unreliable and had not been reconciled with the bank and accounts office records.

* Tax policies, in certain cases, were not achieving its objectives, for example, industrialization.


That the directorate of Revenue Receipt Audit has initiated VFM work is encouraging. Nonetheless, there is room for further improvement. A number of areas could be strengthened and enhanced to further improve the capability of the directorate to undertake VFM audits more effectively.

The directorate should prepare a VFM audit (performance audit) manual to document and standardize its procedures. It should also issue guidelines on audit criteria for various types of VFM studies,

The directorate should coordinate with the Audit and Accounts Training Institute for the training of its staff. The audit manual could form the basis for the development of training materials and for a systematic training program on VFM audit.

The directorate should also coordinate its VFM studies with the Auditor-General and the government. In particular, the scope of VFM work should be clearly defined and be cleared with the Auditor-General and the government to obtain their agreement. Some work may have to be abandoned if the executive department contests the legitimacy of the scope of audit.

The directorate should also formula a strategic plan for VFM studies, to cover all client organizations in a cycle of three to four years. Also, considering the constraint on resources, the directorate should try to use information technology and audit software for routine financial audits and allocate more resources to VFM work.

For additional information, contact the author at the Pakistan Audit Department, House No. 150, Street No. 37, Sector F-10/1, Islamabad, Pakistan.

Copyright International Journal of Government Auditing Oct 1994

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