Session 9.1-P-21 Risk Analysis & Statistical Sampling Application in Sales Tax Audit

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Risk Analysis & Statistical Sampling

Application in Sales Tax Audit

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Introduction

Not necessary or desirable to

examine everything

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Objective

Scientific Selection of casesNumber of files audited reducedDerive audit assurance

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Application at two levels

Selection of wardSelection of dealer

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Selection of Ward…

Present SystemNumber of dealers 500 = 1 pointTax Collection 5 cr = 1 point

>45 cr=10 points

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Units planned for audit

ST annual units 81

ST Triennial units 11

Units to be audited in a year 92

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Proposed SystemNumber of dealers 500 = 1 pointTax Collection

Sr # Collection (Rs Cr) Points

1 <10 52 10-40 103 >=40 20

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Periodicity

Sr # Consolidated Weightage Periodicity

1 <10 Triennial

2 11-20 Biennial

3 >=20 Annual

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Proposed Periodicity for Audit

Sr # Periodicity # of Wards

1 Annual 25

2 Biennial 66

3 Triennial 15

Total 106

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Selection of Ward

Hence will audit

Sr # Periodicity # of Wards

1 ST Annual 25

2 ST Biennial 33

3 ST Triennial 5

Total 63

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Selection of Dealer…

Present SystemBased on GTOSelection of cases> 75 lakh 100%

< 75 lakh 20%Demand and collection register

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Risks

Inherent RiskRisk that error will occur in the first placeDetermine for each dealer

Control RiskRisk that internal controls will fail to detect the errorDetermine for ward as a whole

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Inherent Risk Factors…

1 GTO includes– Interstate sales– Exports– Sales within a state– Branch transfers– Job work/works contract

H 10 >10 cr

M 6 5-10 cr

L 2 <5 cr

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2 Purchase on forms

3 Purchase on ST- 35I

H 10 C, ST-35, F

M 6 Any 2

L 2 Any 1

Purchase on ST 35I Sale on form

H 10 ST35

M 6 C

L 2 By charging tax

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4 Branch transfer

5 No purchase form & commodity is a last point item

Purchase Sale

H 6 F F

M 2 F

Purchase Sale

H 5 No form No form

M 3 No form ST – 1

L 1 Last point item Transfer of stock

Local Form

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Control Risk Factors

Determined for a ward1 Summary & scrutiny assessment

– Summary Assessment • upto Rs 1 cr• Filed returns in time• Paid due tax

– Scrutiny Assessment• Issue Notice• Assess the amount of tax

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Summary as a % of Total assessment

H 10 40%

M 6 20-40%

L 2 Below 20%

STO WD 8Cases assessed # of casesunder summary

2000-01 357 923 38.67%2001-02 327 972 33.64%

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2 Cases Assessed within last 30 days% of assessment done in last

30 days

H 10 60%

M 6 30-60%

L 2 Below 30%

STO WD 8Assessed in # of caseslast 30 days

2000-01 478 923 51.78%2001-02 450 972 46.29%

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3 Internal Audit

STO WD 8 : Internal audit was carried out last year

4 Geographical Areas

STO WD 8 : Traders

H 6 More than 5 years

M 4 2 to 5 years

L 2 Internal audit carried out

H 6 Manufacturing units like Okhla

M 4 Traders

L 1 Others like Naya Bazaar

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5 Work Load

6 Previous Audit Experience

STO WD 8 : Outstanding IIA Paras

# of cases

H 8 2000-4000

M 6 800-2000

L 2 <800

H 6 DPs processed

M 4 Outstanding IIA paras

L 2 Others

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7 Non-production of recordsRecords not produced

H 6 >80%

M 4 40-80%

L 2 <40%

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Methodology

Selection of WardSTO WD 8 was selectedEarlier annual now biennial unit– # of traders 2278– Total tax collections 3609.72 lacs– Consolidated weightage 14

Mainly tradersAssessments for 2000-01 & 2001-02

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Methodology

Delhi Online Sales Tax (DOST) data is in Oracle 7.1Imported in IDEADifferent modulesR.C. No as key field

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Methodology...

Population of Running DealersInherent criteria were given weights 3 Categories of Dealers- – High– Medium– Low

Random selection of sample

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Methodology...

List of dealers to be audited– Name– Registration #– GTO

Control Risk Medium

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Methodology

n = Z2 p(1-p)/E2

where,

n = sample size

z = score

p = proportion

= 7/150

= No of IIA paras No of cases seen

E = precision

= 3%

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Sample Size : 2000-01

Range Points # of dealers Sample Size

High >=16 38 38

Medium 8-16 285 102

Low <8 861 71

Total 1184 211

According to present system : 418 cases

Sample size : 211 cases

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Sample Size : 2001-02

Range Points # of dealers Sample Size

High >=16 37 37

Medium 8-16 277 102

Low <8 870 71

Total 1184 210

According to present system : 421 cases

Sample size : 210 cases

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Documents in Dealer File

RCForms Issue SheetUtilization AccountsReturnsChallansFinal accountsSales SummaryForms furnished by DealerST RegisterAssessment Order

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Check List…

I Purchases other than tax paidAllowed in RCLocal + Central + Tax paid purchase = PurchasesPurchases in Assessment record > Purchases in trading accountMateriality = 0.5%

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Check List…

II Sale1. First Point

• Purchase on ST 35-I & sold against ST 35• Purchase on ST 35 & sold on ST 35• Scheduled items sold on ST 35• Purchased on ST 35 & used in manufacturing of Tax free items• Whether allowed in RC• First point items sold on ST 1• Good purchased on ST 35 for trading and manufacturing interchanged• Goods purchased on ST 35 transferred out of Delhi• Materiality = 0.5%

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Check List…

2 Tax Paid Items• Purchased from Delhi• Last point item sale• Verified from Seller• Materiality = 0.5%

3 Last Point Item• Transferred out of Delhi• Payment of Tax claimed as tax paid item• Materiality = 0.5%

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Check List…

4 Sale against C form• Dispatch particular• S No of bills & tally with Sales Tax Register• Materiality = 1.0%

5 Sale against D form• Dispatch particular• Interstate sale• Sale against D form to government department• Materiality = 0.5%

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Check List…

6 Sale against E forms• Movement of goods• Purchase on C forms• Materiality = 0.5%

7 Stock transfer• Movement of goods• F form not there then A.O., stock register, GR & copy of

RC• Materiality = 0.5%

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Check List…

8 Export(a) CA Certificates

• RBI permission• Import/Export code #• Exported & cleared in same year• Certificate entries justified• Export value realization• Name & address of foreign buyer• Shipping Bill• Duly signed by CA & Assessee

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Check List…

8 Export(b) Documents in lieu of CA certificate

• Shipping Bill & Bank realization certificate• Signed by Customs• Sale of tradable license taxed

• Goods purchased against ST 49 or H formsMateriality = 1.0%

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Check List…

III Manufacturing DealersSale price includes excise dutyRate of Tax commodityRaw material purchases after payment of taxMateriality = 1.0%

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Check List…

IVScrutiny of formsDeclarations from RDDuly filled & signed by purchasing dealer– Bill details– Good sold details

Purchasing dealer has RC for goods purchasedMateriality = 0.5%

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Pilot Study

Audit of STO Ward 8

Year Selected Cases

Made Available

2000-01 211

2001-02 210

37

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Pilot Study…

Ms Enrich Agro Food– In the year 2000-01– Tax not levied on a part of GTO– Tax effect = Rs. 9.52 lakh– GTO = Rs. 1913.47 lakh– GTO not taxed/ Total GTO=2.38%

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Pilot Study…

Ms Orient Paper Mills– In the year 2001-02– Irregular grant of Exemption on defective forms– Tax effect = Rs. 56.5 lakh– Total amount of ST1 forms = Rs. 1870.11 lakh– % of Value of defective ST 1 /Total Value of ST 1

=32%

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Pilot Study…

Ms Star Paper Mills– In the year 2001-02– Irregular grant of Exemption on defective forms– Tax effect = Rs. 72.97 lakh– Total amount of ST1 forms = Rs. 5145.58 lakh– % of Value of defective ST 1 /Total Value of ST 1

=15.02%

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Sample Size

Determine safety margin in view of non production of records

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Advantage

Cases selected prior to auditTime saved Predefined Checks Checklist help less experienced to contribute Audit Assurance

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Constraints

Reliability of DOST – No of Dealers as per DCR and Database not

matching– Sale on “Central Form” not shown– Commodity not shown

GTO figures are not always presentManpower constraintsIntroduction of VAT

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Thank You