United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Oversight, Committee on Ways and

Means, House of Representatives

April 1998 IRS AUDITS

Workpapers Lack

Documentation of

Supervisory Review

GAO/GGD-98-98

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-279085 

April 15, 1998

The Honorable Nancy L. Johnson

Chairman, Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

Dear Chairman Johnson:

Part of the mission of the Internal Revenue Service (IRS) is to encourage

the highest possible degree of voluntary compliance with the tax laws. To

further this goal, IRS audits tax returns to determine taxpayers’ correct tax

liability. IRS’ Examination Division annually conducts about 750,000

face-to-face audits of individual taxpayers’ returns.1

IRS’ ability to fulfill this part of its mission is directly related to the quality

of the audits of these taxpayer returns. IRS requires its auditors to examine

a taxpayer’s books and records in sufficient depth to fully develop the

relevant facts and correctly apply the tax laws to these facts. IRS auditors

are to document these activities and their conclusions in audit

workpapers.

On December 30, 1997, we issued a report, at the request of the

Committee, on IRS’ use of financial status audit techniques.2

 For that

report, we reviewed workpapers for a random sample of 354 IRS audits to

measure how often IRS auditors used the financial status audit techniques

and what these techniques produced in tax adjustments.3

 We uncovered

two procedural issues that extended beyond the specific objectives of the

financial status assignment. These issues involve the adequacy of audit

workpapers and documentation of supervisory review of those

workpapers.

In this report, our objective is to evaluate the condition of the workpapers,

including documentation of supervisory review, that we found in doing the

work for the December 1997 report.

1

These face-to-face audits with individuals are conducted in the IRS district offices and do not include

other types of IRS audits, such as service center and corporation audits.

2

See Tax Administration: More Criteria Needed on IRS’ Use of Financial Status Audit Techniques

(GAO/GGD-98-38, Dec. 30, 1997).

3

During our 1996 and 1997 review, we used a random sample of 354 audits from a population of about

421,000 that focused on individual tax returns audited through district offices and closed during fiscal

years 1995 or 1996. This sample excluded audits, such as those done at service centers, that were

unlikely to involve financial status audit techniques.

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B-279085 

Background The Internal Revenue Manual (IRM) describes the desired outcome of an

income tax audit as the determination of the correct taxable income and

tax liability of the person or entity under audit. In making these

determinations, the auditor has a responsibility to both the audited

taxpayer and all other taxpayers to conduct a quality audit.

IRS uses nine audit standards, which have evolved since the 1960s, to

define audit quality. These standards address several issues, such as the

scope, techniques, technical conclusions, reports, and time management of

an audit, as well as workpaper preparation. Each standard has one or

more key elements. (See table I.1 in app. I for a list of these standards and

their associated key elements.)

Workpapers provide documentation on the scope of the audit and the

diligence with which it was completed. According to the IRM, audit

workpapers (1) assist in planning the audit; (2) record the procedures

applied, tests performed, and evidence gathered; (3) provide support for

technical conclusions; and (4) provide the basis for review by

management. Audit workpapers also provide the principal support for the

auditor’s report, which is to be provided to the audited taxpayer, on

findings and conclusions about the taxpayer’s correct tax liability.

The primary tool used by IRS to control quality under the nine standards is

the review of ongoing audit work. This review is the responsibility of IRS’

first-line supervisors, called group managers, who are responsible for the

quality of audits done by the auditors they manage. By reviewing audit

workpapers during the audit, group managers attempt to identify problems

with audit quality and ensure that the problems are corrected.

After an audit closes, IRS uses its Examination Quality Measurement

System (EQMS) to collect information about the audit process, changes to

the process, level of audit quality, and success of any efforts to improve

the process and quality. EQMS staff are to review audit workpapers and

assess the degree to which the auditor complied with the audit standards.

To pass a standard, the audit must pass all of the key elements.

Results in Brief During our review of IRS’ financial status audits, we noticed that

workpapers did not always meet the requirements under IRS’ workpaper

standards. Standards not met in some audit workpapers included the

expectation that (1) the amount of tax adjustments recorded in the

workpapers would be the same as the adjustment amounts shown in the

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B-279085 

auditor’s workpaper summary and on the report sent to the taxpayer and

(2) the workpaper files would contain all required documents to support

conclusions about tax liability that an auditor reached and reported to the

taxpayer. These shortcomings with the workpapers are not new. EQMS data

for fiscal years 1992 through 1997 show similar problems, with the

percentage of workpapers that did not meet all standards ranging from

28 percent to 51 percent during these years.

We found documentation on supervisory review of workpapers prepared

during the audits in an estimated 6 percent of the audits in our sample. In

the remaining audits (94 percent of our sample), we found no

documentation that the group managers reviewed either the support for

the tax adjustments or the report communicating such adjustments to the

taxpayer. In response to our finding, IRS officials indicated that all audits in

which the taxpayer does not agree with the recommended adjustments are

to be reviewed by the group managers. If done, this review would occur

after the report on audit results was sent to the taxpayer. Even when we

count all such unagreed audits, those with documentation of supervisory

review would be an estimated 26 percent of the audits in our sample

population.

We believe that supervisory reviews and documentation of such reviews

are important because they are IRS’ primary quality control process. Proper

reviews done during the audit can help ensure that audits minimize burden

on taxpayers and that any adjustments to taxpayers’ tax liabilities are

supported. Although Examination Division officials recognized the need

for proper reviews, they said IRS group managers cannot review

workpapers for all audits because of competing priorities. These officials

also said that group managers get involved in the audit process in ways

that may not be documented in the workpapers. They stated that these

group managers monitor auditors’ activities through other processes, such

as by reviewing the time that auditors spent on an audit, conducting

on-the-job visits, and talking to auditors about their cases and audit

inventory. In these processes, however, the officials said that group

managers usually were not reviewing workpapers or validating the

calculations used to recommend adjustments before sending the audit

results to the taxpayer.

Scope and

Methodology

Our observations about the adequacy of the audit workpapers and

supervisory review during audits are based on our work during 1996 and

1997 on IRS’ use of financial status audit techniques. Among other things,

Page 3 GAO/GGD-98-98 Documentation of Supervisory Review
B-279085 

this work relied on a random sample of individual tax returns that IRS had

audited. This sample excluded audits that were unlikely to use financial

status audit techniques because the audit did not look at individual

taxpayers’ books and records. Such excluded audits involved those done

at service centers and those that only passed through various types of tax

adjustments from other activities (e.g., partnership audits and refund

claims). This random sample included 354 audits from a population of

about 421,000 audits that were opened from October 1994 through

October 1995 and closed in fiscal years 1995 or 1996. Each audit covered

one or more individual income tax returns.4

The sample of audits from our previous work focused on the frequency in

which IRS auditors used financial status audit techniques, rather than on

the adequacy of audit workpapers. Consequently, we did not do the work

necessary to estimate the extent to which workpapers met IRS’ workpaper

standard for the general population of audits. However, our work did

identify several cases in which audit workpapers in our sample did not

meet IRS’ workpaper standard.

We held follow-up discussions about the workpaper and supervisory

review requirements, as well as about our observations, with IRS

Examination Division officials. On the basis of these discussions, we

agreed to check for documentation of group manager involvement by

examining employee performance files for nine of our sample audits

conducted out of IRS’ Northern California District Office to get a better

idea of how the group managers handle their audit inventories and ensure

quality. According to IRS officials, these files may contain documentation

on case reviews by group managers even though such documentation may

not be in the workpapers.

We requested comments on a draft of this report from the Commissioner

of Internal Revenue. On March 27, 1998, we received written comments

from IRS, which are summarized at the end of this letter and are

reproduced in appendix II. These comments have been incorporated into

the report where appropriate.

We did our work at IRS headquarters in Washington, D.C., and at district

offices and service centers in Fresno and Oakland, CA; Baltimore, MD;

Philadelphia, PA; and Richmond, VA. Our work was done between January

4

For a more detailed discussion of our sampling methodology and the resulting sample, see appendix I

of our previously mentioned report, GAO/GGD-98-38.

Page 4 GAO/GGD-98-98 Documentation of Supervisory Review
B-279085 

and March, 1998, in accordance with generally accepted government

auditing standards.

IRS’ Audit

Workpapers Did Not

Always Meet the Audit

Workpaper Standard

One of IRS’ audit standards covers audit workpapers. In general, IRS

requires the audit workpapers to support the auditor’s conclusions that

were reached during an audit. On the basis of our review of IRS’ audit

workpapers, we found that IRS auditors did not always meet the

requirements laid out under this workpaper standard.

IRS’ workpaper standard requires that workpapers provide the principal

support for the auditor’s report and document the procedures applied,

tests performed, information obtained, and conclusions reached. The five

key elements for this workpaper standard involve (1) fully disclosing the

audit trail and techniques used; (2) being clear, concise, legible, and

organized and ensuring that workpaper documents have been initialed,

labeled, dated, and indexed; (3) ensuring that tax adjustments recorded in

the workpapers agree with IRS Forms 4318 or 47005

 and the audit report;

(4) adequately documenting the audit activity records;6

 and

(5) appropriately protecting taxpayers’ rights to privacy and

confidentiality.

The following are examples of some of the problems we found during our

review of IRS audit workpapers:

• Tax adjustments shown in the workpapers, summaries, and reports did

not agree. For example, in one audit, the report sent to the taxpayer

showed adjustments for dependent exemptions and Schedule A

deductions. However, neither the workpaper summary nor the

workpapers included these adjustments. In another audit, the workpaper

summary showed adjustments of about $25,000 in unreported wages, but

the report sent to the taxpayer showed adjustments of only about $9,000 to

Schedule C expenses.

• Required documents or summaries were not always in the workpaper

bundle. For example, we found instances of missing or incomplete activity

records and missing workpaper summaries.

5

Summaries of audit work include IRS Form 4318, which is used by revenue agents, and Form 4700,

which is used by tax auditors. These summaries include information on the issues audited and the

findings of the audit and indicate the index mark where the workpapers supporting these findings can

be located.

6

The activity record is a summary of the auditor’s contacts with taxpayers and/or their representatives.

These records also document what actions are occurring and the amount of time required to complete

these actions.

Page 5 GAO/GGD-98-98 Documentation of Supervisory Review
B-279085 

• Workpapers that were in the bundle were not always legible or complete.

The required information that was missing included the workpaper

number, tax year being audited, date of the workpaper, and auditor’s name

or initials.

Although we are unable to develop estimates of the overall quality of audit

workpapers, IRS has historically found problems with the quality of its

workpapers. This observation is supported by evaluations conducted as

part of IRS’ EQMS, which during the past 6 years (1992-97) indicated that IRS

auditors met all of the key elements of the workpaper standard in no more

than 72 percent of the audits. Table 1 shows the percentage of audits

reviewed under EQMS that met all the key elements of the workpaper

standard.7

Table 1: Success Rate for EQMS

Workpaper Standard for District Audits

From Fiscal Years 1992-97 Success rate by fiscal yearb

Numbers in percent

Type of face-to-face audita 1992 1993 1994 1995 1996 1997

Office audit 61 66 69 69 71 72

Field audit 58 62 62 67 61 49

aIRS has two types of face-to-face audits through its district offices: (1) field audits, in which an

IRS revenue agent visits a taxpayer who has business income or a very complex return and

(2) office audits, in which a taxpayer who has a less complex return visits a tax auditor at an IRS

office.

bThe standard success rate represents the percentage of audits that met all of the key elements

of the workpaper standard.

Sources: IRS EQMS reports—fiscal years 1992 through 1997.

The success rate, as depicted in table 1, indicates whether all of the key

elements within the standard were met. That is, if any one element is not

met, the standard is not met. Another indicator of the quality of the audit

workpapers is how often each element within a standard meets the criteria

of that element. Table I.2 in appendix I shows this rate, which IRS calls the

pass rate, for the key elements of the workpaper standard.

Workpapers are an important part of the audit effort. They are a tool to

use in formulating and documenting the auditor’s findings, conclusions,

and recommended adjustments, if any. Workpapers are also used by

third-party reviewers as quality control and measurement instruments.

Documentation of the auditor’s methodology and support for the

7

Similar to our random sample of audits, EQMS samples both office audits and field audits done

through the district offices.

Page 6 GAO/GGD-98-98 Documentation of Supervisory Review
B-279085 

recommended tax adjustments are especially important when the taxpayer

does not agree with the recommendations. In these cases, the workpapers

are to be used to make decisions about how much additional tax is owed

by the taxpayer. Inadequate workpapers may result in having the auditor

do more work or even in having the recommended adjustment overturned.

Documentation of

Supervisory Review of

Audit Workpapers

Was Limited

IRS’ primary quality control mechanism is supervisory review of the audit

workpapers to ensure adherence to the audit standards. However, our

review of the workpapers in the sampled audits uncovered limited

documentation of supervisory review. As a result, the files lacked

documentation that IRS group managers reviewed workpapers during the

audits to help ensure that the recommended tax adjustments were

supported and verified, and that the audits did not unnecessarily burden

the audited taxpayers.

The IRM requires that group managers review the audit work to assess

quality and ensure that audit standards are being met, but it does not

indicate how or when such reviews should be conducted. However, the

IRM does not require that documentation of this review be maintained in

the audit files.8

We found little documentation in the workpapers that group managers

reviewed workpapers before sharing the audit results with the taxpayer. In

analyzing the sampled audits, we recorded whether the workpapers

contained documentation that a supervisor had reviewed the workpapers

during the audit. We counted an audit as having documentation of being

reviewed if the group manager made notations in the workpapers on the

audit findings or results; we also counted audits in which the workpapers

made some reference to a discussion with the group manager about the

audit findings. On the basis of our analysis of the sampled audits closed

during fiscal years 1995 and 1996, we estimated that about 6 percent of the

workpapers in the sample population contained documentation of group

manager review during the audits.9

In discussions about our estimate with IRS Examination Division officials,

they noted that all unagreed audits (i.e., those audits in which the

8

Supervisory review is a well-established standard in the audit community. Generally accepted

government auditing standards require that all audit workpapers be reviewed and that evidence of this

supervisory review be maintained in the workpapers. Auditing standards developed by the American

Institute of Certified Public Accountants have similar requirements.

9

The confidence interval for this estimate is ± 3 percent.

Page 7 GAO/GGD-98-98 Documentation of Supervisory Review
B-279085 

taxpayers do not agree with the tax adjustments) are to be reviewed by the

group managers, and they pointed to the manager’s initials on the notice of

deficiency10 as documentation of this review. We did not count reviews of

these notices in our analysis because they occurred after IRS sent the

original audit report to the taxpayer. If we assume that workpapers for all

unagreed audits were reviewed, our estimate on the percentage of

workpapers with documentation of being reviewed increases from

6 percent to about 26 percent.11 Further, we analyzed all unagreed audits

in our sample to see how many had documentation of group manager

review during the audit, rather than after the audit results were sent to the

taxpayer; this would be the point at which the taxpayer either would agree

or disagree with the results. We found documentation of such a review in

12 percent of the unagreed audits.12

The Examination Division officials also said that a group manager may

review the workpapers without documentation of that review being

recorded in the workpapers. Further, they said that group managers had

limited time to review workpapers due to many other responsibilities. The

officials also told us that group managers can be involved with audits

through means other than review of the workpapers. They explained that

these managers monitor their caseload through various processes, such as

evaluations of auditors’ performance during or after an audit closes,

monthly discussions with auditors about their inventory of audits, reviews

of auditors’ time charges, reviews of audits that have been open the

longest, and visits to auditors located outside of the district office. The

Examination Division officials also noted that any time the audit is

expanded, such as by selecting another of the taxpayer’s returns or adding

a related taxpayer or return, this action must be approved by the group

manager. According to these officials, these other processes may involve a

review of audit workpapers, but not necessarily during the audit.

We agreed that we would check for documentation of these other

processes in our nine sample audits from IRS’ District Office located in

Oakland. We found documentation of workload reviews for one of these

nine sample audits. In these monthly workload reviews, supervisors are to

monitor time charges to an audit. In one other audit, documentation

showed that a special unit within the Examination Division reviewed and

made changes to the form used to record data for input into IRS’ closed

10IRS sends a notice of deficiency to inform taxpayers of the additional taxes that have been

determined to be owed after taxpayers have received an earlier notice about tax adjustments that had

been recommended by the auditor. Generally, the statutory notice gives the taxpayer 90 days to file a

petition with the tax court for a determination of the deficiency.

11The confidence interval for this estimate is ± 6 percent.

12The confidence interval for this estimate is ± 9 percent.

Page 8 GAO/GGD-98-98 Documentation of Supervisory Review
B-279085 

audits database. However, none of this documentation showed

supervisory review of the audit workpapers. If any other forms of

supervisory involvement with these audits had occurred, the

documentation either had been removed from the employee performance

file as part of IRS’ standard procedure or was not maintained in a way that

we could relate it back to a specific taxpayer. As a result, we do not know

how frequently these other processes for supervisory involvement

occurred and whether substantive reviews of the audits were part of these

processes.

IRS is currently drafting changes to the IRM relating to workpapers. In the

draft instructions, managers are required to document managerial

involvement. This documentation may include signatures, notations in the

activity record, or summaries of discussions in the workpapers. When

completed, this section is to become part of the IRM’s section on

examination of returns. According to an IRS official, comments from IRS’

field offices on the draft changes are not due into headquarters until

May 1998.

Conclusions IRS audits tax returns to ensure that taxpayers pay the correct amount of

tax. If auditors do quality work, IRS is more likely to meet this goal while

minimizing the burden on taxpayers. Quality audits should also encourage

taxpayers to comply voluntarily. Supervisory review during the audits is a

primary tool in IRS’ efforts to control quality.

IRS requires group managers to ensure the quality of the audits, leaving

much discretion on the frequency and nature of their reviews during an

audit. IRS officials noted that group managers are to review workpapers if

taxpayers disagree with the auditor’s report on any recommended taxes.

The IRM does not specifically require that all of these supervisory reviews

be documented in the workpapers, even though generally accepted

government auditing standards do require such documentation. However,

recent draft changes to the IRM may address this issue by requiring such

documentation.

We found little documentation of such supervisory reviews, even though

these reviews can help to avoid various problems. For example,

supervisory review could identify areas that contribute to IRS’ continuing

problems in creating audit workpapers that meet its standard for quality.

Since fiscal year 1992, the quality of workpapers has been found wanting

by IRS’ EQMS. Inadequately documented workpapers raise questions about

Page 9 GAO/GGD-98-98 Documentation of Supervisory Review
B-279085 

whether supervisory review is controlling audit quality as intended. These

questions cannot be answered conclusively, however, because the amount

of supervisory review cannot be determined.

The lack of documentation on workpaper review raises questions about

the extent of supervisory involvement with the audits. Proposed changes

to the IRM’s sections on examination of returns require documentation of

management involvement in the audit process.

Recommendation We recommend that the IRS Commissioner require audit supervisors to

document their review of audit workpapers as a control over the quality of

audits and the associated workpapers.

Agency Comments

and Our Evaluation

On March 25, 1998, we met with IRS officials to obtain comments on a draft

of this report. These officials included the Acting Deputy Chief

Compliance Officer, the Assistant Commissioner for Examination and

members of his staff, and a representative from IRS’ Office of Legislative

Affairs. IRS documented its comments in a March 27, 1998, letter from the

IRS Commissioner, which we have reprinted in appendix II. In this letter,

IRS agreed to make revisions to the IRM instructions for the purpose of

implementing our recommendation by October 1998. The letter included

an appendix outlining adoption plans.

The IRS letter also expressed two concerns with our draft report. First, IRS

said our conclusion about the lack of evidence of supervisory review of

audit workpapers was somewhat misleading and pointed to examples of

other managerial practices, such as on-the-job visitations, to provide

oversight and involvement in cases. We do not believe our draft report was

misleading. As IRS acknowledges in its letter, when discussing the lack of

documentation of supervisory review, we also described these other

managerial practices. Second, IRS was concerned that our draft report

appeared to consider these other managerial practices insufficient. Our

draft report did not discuss the sufficiency of these practices but focused

on the lack of documentation of supervisory review, including these other

managerial practices. We continue to believe that documentation of

supervisory review of workpapers is needed to help ensure quality control

over the workpapers and audits.

At the March 25, 1998, meeting, IRS provided technical comments to clarify

specific sections of the draft report that described IRS processes. IRS

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officials also discussed the distinction between supervisory review and

documentation of that review. We have incorporated these comments into

this report where appropriate.

We are sending copies of this report to the Subcommittee’s Ranking

Minority Member, the Chairmen and Ranking Minority Members of the

House Ways and Means Committee and the Senate Committee on Finance,

various other congressional committees, the Director of the Office of

Management and Budget, the Secretary of the Treasury, the IRS

Commissioner, and other interested parties. We will also make copies

available to others upon request.

Major contributors to this report are listed in appendix III. If you have any

questions concerning this report, please contact me at (202) 512-9110.

Sincerely yours,

Lynda D. Willis

Director, Tax Policy

 and Administration Issues

Page 11 GAO/GGD-98-98 Documentation of Supervisory Review
Appendix I 

IRS’ Examination Quality Measurement

System

The Office of Compliance Specialization, within the Internal Revenue

Service’s (IRS) Examination Division, has responsibility for Quality

Measurement Staff operations and the Examination Quality Measurement

System (EQMS). Among other uses, IRS uses EQMS to measure the quality of

closed audits against nine IRS audit standards. The standards address the

scope, audit techniques, technical conclusions, workpaper preparation,

reports, and time management of an audit. Each standard includes

additional key elements describing specific components of a quality audit.

Table I.1 summarizes the standards and the associated key elements.

Table I.1: Summary of IRS’ Examination Quality Measurement System Auditing Standards (as of Oct. 1996) 

No. Standard Key elements Purpose Overview

1 Considered

large,

unusual, or

questionable

items

A.Balance sheet

and Schedule M

considered

B.Income,

deduction, and

credit items

considered

C.Scope of

examination was

appropriate

Measures whether consideration was

given to the large, unusual, or

questionable items in both the precontact

stage and during the course of the

examination.

This standard encompasses, but is not

limited to, the following fundamental

considerations: absolute dollar value,

relative dollar value, multiyear

comparisons, intent to mislead,

industry/business practices, compliance

impact, and so forth.

2 Probes for

unreported

income

A.Consideration of

internal controls for

all business returns

B.Consideration of

books and records

C.Consideration of

financial status

D.Appropriate use

of indirect methods

Measures whether the steps taken verified

that the proper amount of income was

reported.

Gross receipts were probed during the

course of examination, regardless of

whether the taxpayer maintained a double

entry set of books. Consideration was

given to responses to interview questions,

the financial status analysis, tax return

information, and the books and records in

probing for unreported income.

3 Required

filing

checks

A.Consideration of

prior and

subsequent year tax

returns

B.Consideration of

related returns

C.Compliance items

considered

Measures whether consideration was

given to filing and examination potential of

all returns required by the taxpayer

including those entities in taxpayer’s

sphere of influence/responsibility.

Required filing checks consist of the

analysis of return information and, when

warranted, the pick-up of related, prior and

subsequent year returns. In accordance

with Internal Revenue Manual 4034,

examinations should include checks for

filing information returns.

(continued)

Page 12 GAO/GGD-98-98 Documentation of Supervisory Review
Appendix I 

IRS’ Examination Quality Measurement

System

No. Standard Key elements Purpose Overview

4 Examination

depth and

records

examined

A.Adequate

interviews conducted

B.Adequate exam

techniques used

C.Fraud adequately

considered and

developed

D.Issues sufficiently

developed

Measures whether the issues examined

were completed to the extent necessary to

provide sufficient information to determine

substantially correct tax.

The depth of the examination was

determined through inspection, inquiry,

interviews, observation, and analysis of

appropriate documents, ledgers, journals,

oral testimony, third-party records, etc., to

ensure full development of relevant facts

concerning the issues of merit. Interviews

provided information not available from

documents to obtain an understanding of

the taxpayer’s financial history, business

operations, and accounting records in

order to evaluate the accuracy of

books/records. Specialists provided

expertise to ensure proper development of

unique or complex issues.

5 Findings

supported

by law

A.Correct

technical/factual

conclusions reached

Measures whether the conclusions

reached were based on a correct

application of tax law.

This standard includes consideration of

applicable law, regulations, court cases,

revenue rulings, etc. to support

technical/factual conclusions.

6 Penalties

properly

considered

A.Recognized,

considered, and

applied correctly

B.Penalties

computed correctly

Measures whether applicable penalties

were considered and applied correctly.

Consideration of the application of

appropriate penalties during all

examination is required.

7 Workpapers

support

conclusions

A.Fully disclose

audit trail and

techniques

B.Legible and

organized

C.Adjustments in

workpapers agree

with 4318, 4700,

and reports

D.Activity record

adequately

documents exam

activities

E.Disclosure

Measures the documentation of the

examination’s audit trail and techniques

used.

Workpapers provided the principal support

for the examiner’s report and documented

the procedures applied, tests performed,

information obtained, and the conclusions

reached in the examination.

8 Report

writing

procedures

followed

A.Applicable report

writing procedures

followed

B.Correct tax

computation

Measures the presentation of the audit

findings in terms of content, format, and

accuracy.

Addresses the written presentation of audit

findings in terms of content, format, and

accuracy. All necessary information is

contained in the report, so that there is a

clear understanding of the adjustments

made and the reasons for those

adjustments.

9 Time

span/time

charged

A.Examination time

commensurate

B.Exam initiation

C.Examination

activities

D.Case closing

Measures the utilization of time as it relates

to the complete audit process.

Time is an essential element of the

Auditing Standards and is a proper

consideration in analyses of the

examination process. The process is

considered as a whole and at examination

initiation, examination activities, and case

closing stages.

(Table notes on next page)

Page 13 GAO/GGD-98-98 Documentation of Supervisory Review
Appendix I 

IRS’ Examination Quality Measurement

System

Source: IRS data.

IRS uses the key element pass rate as one measure of audit quality. This

measure computes the percentage of audits demonstrating the

characteristics defined by the key element. According to IRS, the key

element pass rate is the most sensitive measurement and is useful when

describing how an audit is flawed, establishing a baseline for

improvement, and identifying systemic changes. Table I.2 shows the pass

rates for the key elements of the workpaper standard for fiscal years 1992

through 1997 for office and field audits.

Table I.2: Key Element Pass Rate for EQMS Workpaper Standard for District Audits From Fiscal Years 1992-97

Key element pass rate by fiscal yeara

Numbers in percent

Key elements for workpaper standard 1992 1993 1994

1995

(10/94-3/95)

1995

(4/95-9/95) 1996 1997

Office audits:

Fully discloses audit trail and techniques 81 85 87 89 87 90 90

Legible and organized 86 88 88 88 89 93 93

Workpapers agree with Form 4318 or Form 4700

and audit report 89 91 91 92 90 93 94

Activity record adequately documented 90 90 92 91 88 88 87

Disclosureb n/a n/a n/a n/a 96 99 99

Field audits:

Fully discloses audit trail and techniques 83 86 87 86 90 87 81

Legible and organized 88 89 91 90 91 90 84

Workpapers agree with Form 4318 or Form 4700

and audit report 93 93 91 92 93 92 92

Activity record adequately documented 80 81 81 83 80 80 72

Disclosureb n/a n/a n/a n/a 97 96 94

Legend: n/a = not applicable

aThe pass rate measurement computes the percentage of audits demonstrating the

characteristics defined by the key element.

bThe key element “Disclosure” was added in the middle of fiscal year 1995.

Source: IRS data.

Page 14 GAO/GGD-98-98 Documentation of Supervisory Review
Appendix II 

Comments From the Internal Revenue

Service

Page 15 GAO/GGD-98-98 Documentation of Supervisory Review
Appendix II 

Comments From the Internal Revenue

Service

Page 16 GAO/GGD-98-98 Documentation of Supervisory Review
Appendix II 

Comments From the Internal Revenue

Service

Page 17 GAO/GGD-98-98 Documentation of Supervisory Review
Appendix III 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Thomas D. Short, Assistant Director, Tax Policy and Administration Issues

Tim Outlaw, Senior Evaluator

San Francisco Field

Office

Kathleen E. Seymour, Evaluator-in-Charge

Louis G. Roberts, Senior Evaluator

Samuel H. Scrutchins, Senior Data Analyst

(268838) Page 18 GAO/GGD-98-98 Documentation of Supervisory Review
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