BAI Innovative Exam Report
Case study on Audit and Tax Expert System
64 AIML Jayesh Potlabattini
65 AIML Parth Mehta
66 AIML Manas Singh
Introduction
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Audit staff is assigned to planning process
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Questionnaires are long and complex documents.
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Analysis conducted by audit and tax managers.
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Review process takes many on-site information gathering sessions.
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Generates considerable stress on the entire team to achieve tax-planning efficiency.
Application
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Guiding Audit staff
o Efficiently directs attention to relevant issues.
o Helps accountant grasp ramification of an issue.
o Improves quality of information gathered.
o Accelerates accountant's training process.
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Identifying relevant issues
o Analyzes info for audit and tax managers.
o Directs attention to high level issues.
o Eliminates resource-intensive tasks for audit and tax managers.
Structure of Expert System
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The components
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Knowledgebase
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Qshell
o Interface Engine
o User Interface
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KB Maintenance System
The Components
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Qshell is an interactive shell to access system.
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Knowledgebase stores all frames of data.
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Maintenance system to update, modify or expand KB.
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The inference engine and UI collectively make Qshell.
Interface Engine
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A forward-chaining, rule-based system.
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Incorporates frame manager,
database and ruleinterpreter.
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Rule interpreter uses facts and frames to
infer.
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Compares LHS with known facts and if
match found, rule is executed (fired).
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Keeps track of inference chain created.
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Displays specific reasoning associated with conclusions,
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Permits interruption, resumption and backtracking of the process.
facts
User Interface
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Consists of 3 active horizontal windows.
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Display the section, questions and clarification messages respectively.
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Operated by answering questions in a set of nested menus.
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Generates printed report at the end of procedure.
Knowledge Base
Stores information in 'frames'.
Question frames
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Question
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List of answers
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Pre-conditions
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Rules
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WHY messages
Issue frames
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Rule attribute: The condition being checked
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Display attribute: The assessment for that condition.
Sample Question
Question:
What is client's bad-debt write-off method for TAX purposes?
S - Specific charge-off
R - Reserve Method
Possible Answers:
S-Specific charge-off
(Clarifying explanation required.)
R-Reserve Method
Followup Questions:
QA19 - Bad-debt reserve method
QA20 - Difference between BOOK and TAX reserve
QA21-Bad-debt recoveries to reserve
WHY Message:
In a typical environment, the Reserve method over time will result in larger tax
deductions than the Specific charge-off method
Rule:
(QB6 IS L): Inventory valuing IS Lower of cost or market
AND
(QB14 IS L): Method of accounting for inventory IS LIFO
OR
(QB14 IS B): Method of accounting for inventory IS Both LIFO and FIFO
Display:
LIFO inventory may not be valued for tax purposes using the lower-of-cost-or-market
method!! The IRS may terminate the taxpayer's LIFO election if LIFO inventory is valued at
lower-of-cost-or-market. See Rev Proc 79.23. In limited situations, a taxpayer may be able to
change to the Cost method and preclude the IRS from terminating its LIFO election. See Rev
Proc 84-74. Market write-downs are required to be included in income under the provisions
of Sec. 472(d) when LIFO is elected.
KB Maintenance System
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To update, modify and expand the knowledgebase.
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System Includes a frame editor, logic evaluator, and rule interaction display.
1. Frame editor: States the different components of a frame.
2. Logic evaluator: Checks for logic conflicts.
3. Rule interaction display: Allows to dynamically observe all frames affected by
changes.
The Experts
For tuning the Qshell and populating the KB, domain experts were carefully chosen. The
current (at that time) tax accrual and planning process involved:
1. Audit and Tax specialists - design and maintain support tools
2. Engagement Auditors - gather data
3. Managers and Partners - review and issue recommendations
4. Tax Auditors and Consultants - Tax planning processes
Issues
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Identification of experts
o Illogical to develop without recognized expertise.
o Complicated design as it depends on questionnaires and informal consultations
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Knowledge Base Management
o Specialized expertise needed to evaluate and supervise the development
o Management of interactive growth of the software needs extensive expertise
interaction.
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System Distribution and Security
o Security paramount for protecting firm's information.
o Deprecation possible if not kept up-to-date & secure.
o Corrections against unauthorized usage to be made certain.
Conclusion
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Tax Accrual is an audit task that requires not only specialized training but also
a considerable amount of time.
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The entire process is highly tedious and is time - bound.
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A knowledge-based expert system supports this corporate tax accrual and
planning process.
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It provides guidance and advice to auditors and tax specialists in preparing the
tax accrual for financial statement purposes and identifies relevant issues for
tax planning, tax compliance and tax service purposes.