Case Study- Project (Problem)

Indian Government introduced new tax regime to simplify structure of the taxes and to make it
citizen and tax payer friendly. Central Board of Indirect Tax and Customs (CBIC) under the
Ministry of Finance aims at fully digitalise the system from the end of the taxpayer to the end of
government officials and ministry. There were two options for the Central Board of Indirect Tax
and Customs (CBIC) to develop the software inhouse or to outsource the development of
software. If Central Board of Indirect Tax and Customs (CBIC) goes for in house development
they will be required to hire the technical staff, provide them all the required facilities, overview
the process of development and deployment of software. For this they are not experienced with
this.

If Central Board of Indirect Tax and Customs (CBIC), goes for outsourcing of software
development they will get benefit of expertise and experience of software developer, they will
not be required to hire the specialised staff, provide the information technology infrastructure.
After doing cost benefit analysis Central Board of Indirect Tax and Customs (CBIC) decided to
outsource the development of software and released tender for this. After receiving tenders,
MOF selected most appropriate Information System Development Vendor M/s. Icon Developers
to develop their software.

It is concern for the Central Board of Indirect Tax and Customs (CBIC) that software
development is carried out as per the requirements, proper standards and best practices are
followed. For this purpose, they want to hire Information System Auditor to Audit the
outsourcing of software development. Central Board of Indirect Tax and Customs (CBIC)
approached M/s. ABC and Associates, Chartered Accountants to conduct information system
audit for outsourced development of its software.
Project Report (Solution)

Introduction

Auditee: -

In this project, we have taken example of outsourcing of software development by Central Board
of Indirect Taxes and Customs (CBIC) under the Ministry of Finance. CBIC has plan to
introduce new tax regime in the Country and for administration of new tax regime they have
decided to have fully digitalised system which shall serve to both the tax payers and tax officials.
For developing the software, they have outsourced this function to M/s Icon Developers, which
is leading firm in Information Technology services in India.

To get assurance that software which is developed by M/s Icon developers meets their
requirements, is efficient and have proper security of the data, they have appointed Information
System Auditor to conduct audit and give report including their findings and suggestions if any
required.

Auditors: -

M/s ABC & Co., Chartered Accountants having 3 partners, constituted in May, 2001, having its
registered office at Mumbai and branches at New Delhi and Bangaluru. All the partners of the
firm have passed their CA Examination throughout in First Attempt as conducted by Institute of
Chartered Accountants of India and have also qualified Diploma in Information System Audit.
Firm is having qualified and efficient team which provides services in the Information Systems
Assurance and Audits. Firm has good working experience in the field of Information system and
various assurance and audit services. Frim has been appointed as IS Auditor to conduct audit of
the outsourced software development.
Auditee and its environment

Here the Auditee is Central Board of Indirect Tax and Customs (CBIC) under the Ministry of
Finance, which has planning to implement new tax regime in the country. In today’s economic
and technological requirement, it is required to have latest system.

There many objectives of having new software system. Some of which are

- To curb tax evasion

- To implement faceless administration of tax regime
- To have a transparent tax regime
- To have an efficient and effective tax regime
- it is necessary that every thing and every process that should be done is online using
technology and system.

To achieve these objectives and to meet the requirements, Central Board of Indirect Tax and
Customs (CBIC) of Finance has decided to have a software which can be used by both the tax
payers and tax officials.

For, this purpose they have asked for Tenders and after tenders are received they have selected
most appropriate vendor M/s. Icon Developers to develop this software for their purpose.

After allotting the task to vendor, Central Board of Indirect Tax and Customs (CBIC) under the
Ministry of Finance have approached our firm M/s. ABC & Co., Chartered Accountants to
conduct audit of software development which is being outsourced. For this assignment,
necessary proposal letters, auditor’s acceptance letter, Audit Charter have been prepared and
signed by the respective parties.

There major two ends for the software to be designed are

1. Tax Payer End

2. Tax Official End
Tax Official hierarchy is as follows

Principal Chief Commissioner/ Chief Commissioner

Principal Commissioner/ Commissioner

Additional Commissioner/ Joint Commissioner

Deputy Commissioner/ Assistant Commissioner

Superindent/ Appraiser

Inspector / Examiner

There is need to understand requirements of this officers and Segregation of Duties for these
officials. So, work flow is to be identified and understood. Accordingly, Logic of software will
be designed.
Background
In Today’s economic and technological environment, it is necessary for every organisation to
have their system digitalised. Even government has to digitalise its operations so that it can do its
administrative work efficiently and effectively. If government does not upgrade its system, it
cannot go for development of the country.

Indian Government is changing its system and making most of the procedures digitalised, so that
work can be made easier and transparent. Government can get data in timely manner and take
appropriate decisions.
For all this purposes it is required to develop software which meet the requirements of the
government and tax payers.
There are two options
1. In- House Development
2. Outsourced software development
Both the methods have its benefits and limitations.
If we consider outsourcing of software development, it has following benefits.
- Expert Services
- Better experience
- No requirement of hiring qualified staff
- No requirement of providing IT infrastructure for development
- Reduced administrative cost
- Latest technology used by the vendor
- Cost efficient
Situation
In outsourcing of the Software development work, it has many benefits as discussed above.
CBIC wants to make new tax regime online and technology efficient. For this purpose, they are
required to have a software which is efficient and effective to handle tax administration.

CBIC to has to evaluate its requirements regarding the software, its IT capabilities, vendor
selection process, allotting the work to the vendor, approving the software developed by the
Vendor and implementation and maintenance services.

CBIC has outsourced software development work to M/s Icon Developers and have appointed
M/s. ABC and Co., Chartered Accountants to conduct audit of software development.

We, as an Auditor are required to have independent opinion on the software development and
give our suggestions and findings.
Audit Charter

Purpose

The purpose of this information system audit is audit for development of software which is being
outsourced. Objective for this audit is to check out whether software being developed by outside
vendor is fulfilling the requirements of the Auditee. Scope of this audit will be the software
being developed by the vendor, approaches used by the vendor to develop the software, phases
of software development and testing methodologies used for the software.

Responsibility

It will be responsibility of the auditor to conduct order with the standards of auditing, using
professional knowledge, skill and competencies. Auditor shall be independent from the vendor
and have no peculiar relationships with vendor. Auditor has to verify whether software
developed meets the requirements of the Auditee and if there are any discrepancies in the
development process Auditor has to inform the Auditee and take proper and necessary actions.
The Auditor should verify that proper risk assessment is done in this project and developed
software meets security criteria. It will be responsibility of the Auditee to provide access to all
the information and resources as required by the auditor and make necessary arrangements for
the auditor to communicate with and participate with Vendor who is developing the software.

Authority

The Auditors shall have right to access all the information, personnel, locations including
location of the vendor and systems relevant to performance of audit. The Auditor shall have right
to communicate with senior management of the auditee and vendor for any matter which are
relevant for the purpose of the audit.

Accountability

It will be accountability of the auditor to conduct the audit with standards on auditing, standards
for quality control (SQC) and best practices. Auditor shall perform professional skill and
competence to perform the audit functions. The Auditor shall provide necessary audit plans to
the auditee. The auditee shall have right to know at any point of time, how the audit is being
conducted and is there any requirement. The Auditor shall report the auditee about any
discrepancies or findings during the audit. After successful completion of the audit, the auditor
shall provide proper report to the Auditee with his suggestions.
Scope of the Audit

During the audit of outsourced software development, following areas shall be covered and
considered as audit scope.

1. Requirement document of the Auditee

2. Selection Criteria for the Vendors
3. Approach of software development as decided by Vendor
4. Requirement analysis done by the Vendor
5. Various phases of Software Development Life Cycle
6. Testing of the Software
7. Deployment strategy for the software developed