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Chapter - 9
Iraq

1.    Introduction

1.1.    The main concern of a modern state is to provide services to its citizens and take the country to the path of development. The state can discharge its duties only if sufficient resources are at the command of the state. These resources are generated through various government revenues.

2.    Types Of Government Revenues

The State does not depend on a single source of revenue; there are several sources which the State exploits to raise revenues. Such sources are developed over time under the influence of political and economic forces in operation.

The governmental revenues in Iraq can be classified as follows:

1. Oil revenues : makes a large contribution to the state budget.
2. Taxes:

Direct taxes (like income tax, wealth tax, agriculture income and estates taxes including corporations and companies taxes)

Indirect taxes (like commodity taxes, customs and other dues),

3. Revenues of the state enterprises (like the governmental enterprises revenues, capital revenues, revenues of selling and renting state properties, and other revenues).

2.3.    The table below indicates tax revenues as a percentage of GDP with indication in regard to the revenue sources as a percentage of total revenue (for 1993).

This table indicates that taxes do not play a significant role in providing the financial sources to the state and are mainly used as an effective method to tackle disparities in the income levels of the citizens which is the objective of the tax laws in Iraq.

The decrease of taxes specially in the last few years preceding the economic sanction imposed on Iraq since 1990, is basically due to dependence on oil revenues and is also because of exemptions, specially in income taxes.

The percentage of the tax revenues to the general state budget and G.D.P shows a deadline as indicated in the following table:

2.7.    Since 1982, the state economical enterprises have increased their share in government revenues as a result of central decisions governed by regulations like the law of Distributing the Profit of the Public Economical Enterprises No.56 of 1982

3.    Audit Mandate

3.1.    Auditing of government revenues basically aims to review and evaluate the results of implementing revenue policies and plans.

3.2.    Governmental revenues are audited with reference to the revenues laws. However, audit has to keep itself tuned to the following factors:

• Emergence of new sources of revenue and decline/abandonment of old ones.
• Inter se change of different revenue resources in keeping with the economic and political changes

3.3.    Generally revenues are raised through legislations such as:

• The State General Budget Law
• The General Accounting Law
• Taxation Laws
• Customs Law
• Companies Law
• The Distribution of Profits of Public Economic Enterprises Law
• Other laws.

3.4.    Revenue auditing in Iraq, basically, is subject to the Law of the Board of Supreme Audit no. 6 in 1990 and other laws like the General Accounting Law and the General State Budget Law. Audit is done in accordance with accountancy standards and principles. Bodies in charge of auditing are authorised to have access to all files concerned with revenues including taxes and check them out and issue the financial statements on them.

3.5.    In fact the financial control of public revenue is very much a concern of the Board of Supreme Audit. Accordingly procedures of checking, auditing and reviewing are devised to examine the procedures followed by the various administrative units to achieve their aims and suggest appropriate measures to avoid deficiencies that might stand against achieving these aims and also to point out the weaknesses in the system and individual errors.

4.    Audit Procedures And Methodologies In Revenue Audit

4.1.    Despite the variation in the nature and extent of different government revenues, the Board of Supreme Audit in Iraq follows a comprehensive auditing system in revenue audit which could be summarised as follows:-

(A)    System Audit: This kind of audit control examines the compliance to laws and instructions to estimate, realise, collect and deposit the revenues and also checks out that the revenues are accounted, recorded, obtained and classified in accordance with accountancy standards and principles. This audit has two facets:

1. Legitimacy auditing - determines the compliance with laws and instructions.
2. Financial auditing - determines the compliance with known accounting principles followed in applying, classifying and summarising financial procedures to be explained within the financial data.

(B)    Performance Auditing

4.2.    It is the most important type of auditing practised by the Board of Supreme Audit. This includes all financial and non-financial aspects to assure the soundness of statements and the extent of achieving the desired objects of institutions and their laws.

4.3.    Article 3 of the law of the Board of Supreme Audit provides for an annual plan for performance audit. Presently a study is under way to evaluate the performance of tax system in Iraq under the annual audit plan of 1997.

4.4.    Performance auditing consists of many procedures which seek to examine:

1. The extent of efficiency of the internal control systems, and the effectiveness of other systems and the financial procedures and how far the employees understand them and their capabilities to achieve the task.
2. The extent of efficiency, adequacy and comprehensiveness of the accounting system in the administrative unit.
3. The extent of efficiency of data which are produced by the system to meet the user needs in different administrative levels related to planning, implementation, follow up and control.
4. The extent of efficiency of the laws and legislations: whether the objects and financial policies are clear.

5.    Audit Planning

5.1.    Board of Supreme Audit prepares an annual general p'an of its work and also particular plans for different sectors. The Board has specific plans for offices such as Income tax, Customs etc.

5.2.    These plans are prepared according to scientific norms depending on the available audit resources. While implementing the audit plans the Board ensures that the objects of the plan are carried out in a sound way in addition to routine activities related to the checking up, auditing, follow up etc. The Board seeks assurance:

1. That the auditees have achieved the policy and programme objectives
2. That treatment and classification of the revenues were done according to the established accounting standards.
3. That the related instructions, systems and laws have been applied to the fullest extent.

6.    Audit Reporting

6.1.     Through the audit reports the Board of Supreme Audit informs the auditee about the shortcomings noticed in control of government revenues. These reports are of following categories:

1. Normal financial control reports which include the discovery notes related to the classification or accounting treatment of revenues and the extent to which the concerned entities have followed the laws/instructions and standards.
2. Comprehensive performance evaluation reports which are submitted to the specialised ministry.
3. The general annual report which are submitted to the President of the Republic. This report consists of specialised notes with the evaluation results concerning implementation of the policies and plans of ministries.

6.2.    The reports are followed up for action taken by the administration on audit findings. If the administration does not respond to the audit report the matter is reported to the concerned Minister and if the Minister also fails to respond, the matter is reported to the President of the Republic. The follow up procedure of audit report is very strict.

7.    Auditing Methods of Government Revenues

7.1.     The main duty of Board of Supreme Audit is preparing a report in which it explains its opinion about the results of the statements through checking up and auditing according to the produced facts and data. The Board follows several methods of audit checks according to the nature of work such as>

(i)    The pre - control:-

This task is achieved according to the law and a previous agreement of the President of the Revolution of Command Council in Iraq.

(ii)    The periodic (immediate) control

The control institutions checking up the accounts in the same year

(iii)    The post control: -

The Board's checking during the post-control process focuses on' the two operational stages:

A - The estimating stage. This task is done by the technical departments to check and determine tax.

B - The implementation, levying and collection stage. This is done by departments responsible for levying and collection of tax.

8.    Stages of Auditing process of the Specialised Departments in the Tax Offices:

8.1.    A. The following parameters are followed in audit checking of the technical departments:

• To realise the efficiency of internal control systems.
• To ascertain how far the tax estimates are accurate.
• To ensure that tax estimates are fair and based on a sound footing and on adequate data.
• To ensure the soundness of tax procedures.
• To ensure that procedures are being followed properly

B.    For departments engaged in collection of revenues, the following checks are applied:

• To ensure that all revenues that are collected during the financial period in fact represent all the revenues which are due for collection during the period under the laws,
• To compare the actual collections with the budget estimates
• To analyse the reasons for arrears in collection
• To assure that all revenues are deposited in the banks accounts
• To ensure that all records (journal, ledgers) have been fixed by law.
• To ensure that the system for collection of revenues is working efficiently
• To ensure that demand notices have been issued to the tax payers.
• To ensure that proceedings have been initiated against tax defaulter.

C.    Questionnaire on Internal control:-

This method is used for obtaining accurate information related to the soundness of financial procedures to check the following points:-

• The extent of soundness of the accounting and financial systems and the adequacy of the records used by tax offices
• The soundness of the internal control systems which help determination of the size of the sample of audit
• To ensure that the procedures related to collection of revenues and other procedures are accurate.