Department of Revenue management letter

              Department of Revenue
A REPORT
TO THE
ARIZONA LEGISLATURE
Department of Revenue
Year Ended June 30, 2002
Financial Audit Division
Debra K. Davenport
Auditor General
The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five
senators and five representatives. Her mission is to provide independent and impartial information and specific
recommendations to improve the operations of state and local government entities. To this end, she provides financial
audits and accounting services to the State and political subdivisions, investigates possible misuse of public monies, and
conducts performance audits of school districts, state agencies, and the programs they administer.
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.auditorgen.state.az.us
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553 -0333 • FAX (602) 553-0051
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
February 5, 2003
J. Elliott Hibbs, Director
State of Arizona
Department of Revenue
1600 West Monroe Street
Phoenix, AZ 85007
Dear Mr. Hibbs:
In planning and conducting our audit of the State of Arizona for the year ended June 30, 2002, we
considered the Department of Revenue’s internal controls over financial reporting and tested its
compliance with laws and regulations that could have a direct and material effect on the State’s
financial statements as required by Government Auditing Standards.
Specifically, we performed tests of the receipt and distribution of individual, withholding,
corporate, transaction privilege, use, excise, tobacco, and liquor taxes; taxes receivable; tax
refunds; tax refunds payable; due to local governments; payroll; transfers; and journal entries.
There are no audit findings that are required to be reported by Government Auditing Standards.
However, our audit disclosed an internal control weakness that did not meet the reporting criteria.
This internal control weakness was reported in prior years. Management should correct this
deficiency to ensure that it fulfills its responsibility to establish and maintain adequate internal
controls. Our recommendation is described below.
The Department should reconcile income
tax receipts to income tax revenues recorded on the
Arizona Financial Information System (AFIS)
Periodic reconciliation of information posted to separate accounting systems allows users
to detect and resolve any differences. The reconciling process helps to ensure that
potential problems will be detected and corrected. It also allows users to rely on the
information in those systems.
J. Elliott Hibbs, Director
February 5, 2003
Page Two
Amounts recorded on the Department’s income tax processing system and
amounts recorded as income tax revenues on the AFIS differ because of timing
differences and/or input errors. The Department should reconcile total income tax
collections recorded on its system to the amount of income tax revenues recorded
on AFIS at least quarterly. Any discrepancies should be investigated and resolved
immediately.
Performing timely reconciliations will also help ensure that accurate and complete
financial information is provided to the Department of Administration and reported
in the State’s Annual Financial Statements.
This letter is intended solely for the information of the Department of Revenue, and is not intended
to be and should not be used by anyone other than the specified party. However, this letter is a
matter of public record, and its distribution is not limited.
Should you have any questions concerning its contents, please let us know.
Sincerely,
Debbie Davenport
Auditor General
Janet Napolitano
Governor
J. Elliott Hibbs
Director
ARIZONA DEPARTMENT OF REVENUE
OFFICE OF THE DIRECTOR
1600 WEST MONROE, ROOM 910
PHOENIX, ARIZONA 85007
Telephone: (602) 542-3572 • Fax: (602)542-4772
January 31, 2003
Ms. Debra Davenport, Auditor General
Office of the Auditor General
2910 North 44th Street, Suite 410
Phoenix, AZ 85018-7243
Dear Ms. Davenport:
We have reviewed the Management Letter and accompanying audit finding resulting from your test work
performed in conjunction with the audit of the State of Arizona for the year ended June 30, 2002. Our
general comments about the finding and specific responses to the recommendation are as follows:
The Department should reconcile income tax receipts to income tax revenues recorded on the
Arizona Financial Information System (AFIS)
Department Response: Agree
The department understands that a periodic reconciliation of our income tax systems to AFIS is necessary
to ensure potential problems are detected and corrected. However, the design of our current systems
does not allow for a comprehensive reconciliation. The department performs periodic reviews of different
aspects of the income tax systems including:
• A daily reconciliation to ensure the accurate transmission of all deposit batches from our
remittance processing and electronic funds transfer systems to the income systems.
• A daily reconciliation to ensure the accurate transmission of all receipts taken through our cashier
system to the income systems.
The department is currently involved in reengineering how it conducts business for the purpose of
integrating our tax systems. As part of the project scope, there is a requirement for a comprehensive
reconciliation of the integrated tax systems to AFIS. The implementation for the withholding tax system is
expected in 2004. The implementation of the corporate and individual income systems is expected in
2006. We are anticipating the successful integration of these tax systems will eliminate this management
letter in the future.
Sincerely,
J. Elliott Hibbs
Director
JEH:TM:dbl
cc: Tom MacConnell, Comptroller
File