Internal Audit has been recognized as an aid to the top management for monitoring the performance and effectiveness of various programs, schemes and activities. It ensures that the system is working effectively and provides the management with information for comprehensive management review. Minor corrections in the system are made as they occur.
An internal control system consists of all the policies and procedures adopted in achieving management’s objective and ensuring the orderly, efficient conduct of its business, including adherence to policies, prevention and detection of omissions, accuracy and completeness of records, and timely preparation of reliable information.
The primary function of Internal Audit is to evaluate processes that are in place to identify any weaknesses in internal controls that might lead to undetected errors or lapses. When any such weakness is identified it is reported to the line management for corrective action. The basic thrust of audit is not just detection of evaded duties and taxes but also over seeing that various provisions of the Acts, rules, regulations and procedures are being followed in true letter and spirit. This is included in the scope of audits performed by the Directorate General.
As greater emphasis is now being laid on good governance and accountability, Internal Control assumes much greater importance, and must be designed in a more modern and scientific manner in order to ensure credibility and efficiency.
The main function of all departments of the Federal Board of Revenue is to ensure the collection of due revenue for the Federal Government, and to check its leakage through evasion. An effective Internal Control, through Internal Audit, thus has a direct bearing on revenue. If it has a positive impact on revenue collection, it will be viewed as being useful and effective. The Directorate General, Internal Audit (Indirect Taxes) whose main task is Internal Control, through Internal Audit, Investigative audit & vigilance, has this main objective in view. Even when Audits are conducted for ensuring correct application of law, procedures, rules and regulations, the basic idea is to help secure legitimate revenue.
The Charter of Functions and Mandate of the Directorate General, which have been specified by the Federal Board of Revenue, vide two notifications (SRO. No. 26(I)/2006, dated 9.1.2006, for Sales Tax and Federal Excise, and SRO. No. 75(I)/2006, dated 26.1.2006, for Customs), is summarized below:
Briefly, the charter of functions of Directorate General, is as under:
The Directorate General of Internal Audit is required to monitor and evaluate the performance of the Customs formations vis-à-vis the objectives set by the Board. It strives to suggest improvements by highlighting risks and non-compliances. Hence, the main purpose of the internal audit is to ensure reduction in the risk of revenue loss, errors, irregularities, and fraud due to incorrect application of laws and procedures. Internal Audit is the first line of defense in detecting errors and risks. The scope of internal audit encompasses the examination and evaluation of the adequacy and effectiveness of the system of internal controls and the quality of performance in carrying out assigned responsibilities within the parameters of law. This requires a certain standard of knowledge, skills and proficiency in applying methods and techniques in performing the function of audit. Thus, the primary objectives of the internal audit are as follows:
The institution should act in a manner consistent with good governance and refrain from any conduct which might bring discredit to the organization. Internal Audit standards define the way in which the internal audit service should be established and undertake its functions. Internal audit should display appropriate professional objectivity when providing their opinions, assessments and recommendations. It is universally accepted that each internal auditor must follow the following principles and standards:-
The auditor should be straightforward and honest in performing professional services. The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment. Integrity implies honesty, fair dealing and truthfulness. It imposes the obligation on all auditors to be fair, intellectually honest and free of conflict of interest.
An auditor should be fair and should not allow prejudice, bias or influence of others to override objectivity. Internal auditors exhibit the highest level of professional objectivity in gathering, evaluating and communicating information about the activity or process being examined. Internal auditors make a balanced assessment of all the relevant circumstances and are not unduly influenced by their own interests or by others in forming judgments.
Internal auditors respect the value and ownership of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obligation to do so.
Internal auditors apply the knowledge, skills and experience needed in the performance of internal auditing services. The attainment of professional competency requires a continuing awareness of taxation and other relevant regulations and statutory requirements, which also includes examination and appropriate trainings.
In short, internal auditors should have impartial and unbiased attitude, characterized by integrity and an objective approach to work and should avoid conflict of interest. They should not allow external factors to compromise their professional judgment.
A written audit report is prepared and after approval from the senior management, is issued following the conclusion of each audit, and is forwarded to the audited section of the field formation, and the head of the formation. The head of the audited section receiving the report responds to audit recommendations, and these responses are included in the finalized report. The final report primarily includes:
For audit reports with corrective actions required, a follow-up review is planned within an appropriate timeframe to allow for the corrections to be made. A follow-up report is presented to the head of the formation to report on the compliance or corrective actions taken.
The performance of the Directorate General of Internal Audit (Customs), through its offices at Karachi, Lahore and Islamabad, has shown significant improvement in its performance. Number of audits of various field formations, of Customs has increased this year and observations pointed out have been of great significance.
An Audit schedule is drawn up by the Directorates every month on the basis of Annual Audit Program, approved by the Director General, Internal Audit (Indirect Taxes). The schedule is formulated in such a way that at least one office/ group / section of a Collectorate / Directorate is audited in a month.
During audit, if any discrepancy or deviation from law or procedure is detected, it is brought to the notice of the officer in charge of the office under scrutiny. If such discrepancy cannot be explained to the satisfaction of the audit staff, it becomes a part of audit report.
There are generally two types of irregularities / discrepancies that come to light during the course of audit exercise.
In this type of irregularity, it is observed that certain prescribed procedures, as laid down by the rules and regulations, are not being followed by an office. The procedural lapses are pointed out in the audit report, but it is not necessary that a contravention report be issued.
In this kind of irregularity, a procedural lapse may be coupled with, or give rise to, incorrect calculation of duty and taxes which may be livable on a unit, or refund/ rebate are paid in excess of what is actually payable. In such case, follow-up action / contravention report / show cause notice or recovery becomes imperative.
