Management report, Department of Revenue, an organizational unit of the state of Georgia, year ended June 30, 2004

STATE OF GEORGIA
DEPARTMENT OF AUDITS AND ACCOUNTS
Russell W. Hinton State Auditor
MANAGEMENT REPORT DEPARTMENT OF REVENUE AN ORGANIZATIONAL UNIT OF THE STATE OF GEORGIA YEAR ENDED JUNE 30, 2004

DEPARTMENT OF REVENUE MANAGEMENT REPORT -TABLE OF CONTENTS-

LETTER OF TRANSMITTAL

SECTION I

SELECTED FINANCIAL INFORMATION

EXHIBITS

A ANALYSIS OF CHANGES IN FUND BALANCE

BUDGET FUND

1

B SCHEDULE OF FUNDS AVAILABLE AND EXPENDITURES

COMPARED TO BUDGET

BUDGET FUND

2

C SCHEDULE OF CASH RECEIPTS AND DISBURSEMENTS

STATE REVENUE COLLECTIONS FUND

3

D ANALYSIS OF STATE REVENUE COLLECTIONS

4

SECTION II AUDITEE'S RESPONSE TO PRIOR YEAR FINDINGS AND QUESTIONED COSTS SUMMARY SCHEDULE OF PRIOR YEAR FINDINGS AND QUESTIONED COSTS

SECTION Ill CURRENT YEAR FINDINGS AND QUESTIONED COSTS SCHEDULE OF FINDINGS AND QUESTIONED COSTS

DEPARTMENT OF AUDITS AND ACCOUNTS

254 Washington Street, S.W., Suite 214

w. RUSSELL

HINTON

STATE AUDITOR

(404) 656-2174

Atlanta, Georgia 30334-8400

February 7, 2005
Honorable Sonny Perdue, Governor Members of the General Assembly of Georgia
and Honorable Bart L. Graham, Commissioner Department of Revenue
Ladies and Gentlemen:
As part of our audit of the statutory basis financial statements of the State of Georgia presented in the State of Georgia Report of the State Auditor, the basic financial statements of the State of Georgia presented in the State of Georgia Comprehensive Annual Financial Report, and the issuance of a Statewide Single Audit Report pursuant to the Single Audit Act Amendments, as of and for the year ended June 30, 2004, we have performed certain audit procedures at the Department of Revenue. Accordingly, the financial statements and compliance activities of the Department of Revenue were examined to the extent necessary in order to express an opinion as to the fair presentation of the financial statements contained in the foregoing documents and to issue reports on compliance and internal controls as required by the Single Audit Act Amendments of 1996.
This Management Report contains information pertinent to the financial and compliance activities of the Department of Revenue as of and for the year ended June 30, 2004. The particular information provided is enumerated in the Table of Contents.
This report is intended solely for the information and use of management of the State of Georgia and is not intended to be and should not be used by anyone other than these specified parties.
Respectfully submitted,

RWH:cgc

SECTION I SELECTED FINANCIAL INFORMATION

DEPARTMENT OF REVENUE ANALYSIS OF CHANGES IN FUND BALANCE
BUDGET FUND YEAR ENDED JUNE 30, 2004

EXHIBIT"A"

FUND BALANCE - JULY 1, 2003
Reserved Surplus
ADDITIONS
Excess of Funds Available over Expenditures Exhibit"B"
Prior Year's Checks Voided Reimbursement of Prior Year's Expenditures
DEDUCTIONS
Unreserved Fund Balance (Surplus) Returned to Office of Treasury and Fiscal Services Year Ended June 30, 2003
Reserved Fund Balance Carried Over from Prior Year as Funds Available

$

9,543,451.15

2,273,719.61

$ _ _..;.1-'-'1,.;;,.8-'-'17_,_,1..;.7..;.0_.7..;..6

$

2,885,097.29

86,008.83

9,275.12

$ _ _ _2~,_98_0_,_,3_8_1_.2_4

$

2,273,719.61

9,543,451.15

$

11,817,170.76

FUND BALANCE - JUNE 30, 2004

$ ===2_,s_80_,3_8_1._24_

SUMMARY OF FUND BALANCE
Reserved Investment for Modernization
Surplus

$

2,120,536.10

859,845.14

$ ===2=,9=8==0==,3=8=1.=24=

- 1-

DEPARTMENT OF REVENUE SCHEDULE OF FUNDS AVAILABLE AND EXPENDITURES
COMPARED TO BUDGET BUDGET FUND
YEAR ENDED JUNE 30, 2004

EXHIBIT"B"

FUNDS AVAILABLE REVENUES
State Appropriation Regular Tobacco Settlement Funds
Federal Revenues Other Revenues Retained
CARRY-OVER FROM PRIOR YEAR
Transfer from Reserved Fund Balance

BUDGET

ACTUAL

VARIANCEFAVORABLE (UNFAVORABLE)

$ 466,895,136.00 $ 466,895,136.00 $

150,000.00

150,000.00

652,667.00

287,268.80

24,718,155.00

13,262,364.45

$ 492,415,958.00 $ 480,594,769.25 $

0.00 0.00 -365,398.20 -11,455,790.55
-11,821, 188.75

0.00

9,543,451.15

9,543,451.15

EXPENDITURES
Personal Services Regular Operating Expenses Travel Motor Vehicle Purchases Equipment Computer Charges Real Estate Rentals Telecommunications Per Diem and Fees Contracts County Tax Officials/Retirement and FICA Investment for Modernization Homeowner Tax Relief Grants

$ 492,415,958.00 $ 490,138,220.40 $

-2,277,737 .60

$ 60,751,841.00 $ 60,940,866.91 $

9,224,723.00

8,353,964.07

1,171,171.00

990,862.20

59,601.00

54,241.37

283,084.00

157,506.37

14,858,279.00

13,423,131.26

7,089,151.00

7,078,937.96

1,569,059.00

1,511,156.80

1,284,391.00

848,461.95

2,596,913.00

2,489,737.10

3,984,294.00

3,982,280.38

9,543,451.00

7,422,915.05

380,000,000.00 379,999,061.69

-189,025.91 870,758.93 180,308.80
5,359.63 125,577.63 1,435,147.74
10,213.04 57,902.20 435,929.05 107,175.90
2,013.62 2,120,535.95
938.31

$ 492,415,958.00 $ 487,253,123.11 $ _ _5..:..._,1_62__,_,8_3_4_.89_

Excess of Funds Available over Expenditures

$ 2,885,097.29 $=====2.!..,8.8..5_,o_9_7_.29_

-2-

DEPARTMENT OF REVENUE SCHEDULE OF CASH RECEIPTS AND DISBURSEMENTS
STATE REVENUE COLLECTIONS FUND YEAR ENDED JUNE 30, 2004

EXHIBIT"C"

CASH RECEIPTS

STATE REVENUE COLLECTIONS (See Exhibit"D")

Income Tax Corporate Individuals
Taxes Based on Sales: Sales and Use Tax Alcoholic Beverages Tobacco Products Motor Fuel Excise and Motor Carrier Mileage Tax Prepaid Motor Fuel Sales Tax
Business License Tax Non-Business License Tax Estate Tax Property Tax Public Utilities Fines and Forfeitures Peace Officers and Prosecutors Training Fund Unclaimed Property State Children's Trust Fund Earnings - General Goverrment

$ 493,947,622.65 6,829,822,177.54 $ 7,323,769,800.19

$ 4,902,078,965.61 149,561,385.16 229,443,237.99

$ 496,514,422.82 239,479,316.58

735,993,739.40

6,017,077,328.16 4,281,086.05 23,303.86 65,674,479.69 66,094,258.57 1,076,029.86 539,245.29 22,606,575.58 63,204,362.37 1,562,690.22 56,850,491.47

Total Cash Receipts CASH AND CASH EQUIVALENTS - JULY 1, 2003

$ 13,622,759,651.31 47,878,464.47

GOVERNMENTAL COST
Commissions Paid to Counties: Property Tax
Compensation Paid to Vendors: Taxes Based on Sales Sales and Use Tax Motor Fuel
Reimburse Budget Fund: Income Tax Collection Costs Unclaimed Property Expenses
Total Governmental Cost
TRANSFERS
To Office ofTreasury and Fiscal Services Less: Refi.nds through Office of Treasury and Fiscal Services
Total Disbursements
CASH AND CASH EQUIVALENTS - JUNE 30, 2004

DISBURSEMENTS

$ 13,670,638,115.78

$

2,569,597.05

$

47,446,632.52

4,625,965.48

52,072,598.00

$

7,896,072.20

2,563,550.00

10,459,622.20

$

65,101,817.25

$ 15,544,325,235.84 -1,987, 770,541.94 13,556,554,693.90 $ 13,621,656,511.15 48,981,604.63

-3-

$ 13,670,638,115.78

DEPARTMENT OF REVENUE ANALYSIS OF STATE REVENUE COLLECTIONS
YEAR ENDED JUNE 30, 2004

EXHIBIT"D"

INCOME TAX
Corporate Original Returns, Amendments, Assessments, Interest and Penalties Estimate of Taxes Corporate Net Worth Financial Institution Business Occupation
Less: Refunds
Individuals Original Returns, Amendments, Assessments, Interest and Penalties Estimate of Taxes Fiduciary Withholdings
Less: Refunds

$

74,891,694.59

606,180,516.91

30,645,073.00

13,753,537.19

$

725,470,821.69

231,523,199.04 $

493,947,622.65

$

602,398,234.75

895,089,855.70

16,193,643.34

6,896,541,982.78

$ 8,410,223,716.57

--'-'-;c.c1...,.c5-'-8'-0'--,'-4'-'-0.C1..,.C5..3.C9..C.0.C3....

6,829,822,

$ 7,323,769,800.19

Reimburse Budget Fund Income Tax Collection Costs
Netto State Cash Balance
July 1, 2003 June 30, 2004

$

7,896,072.20

7,313,305,735.95

$

-89,038,084.74

91,606,076.78

2,567,992.04

$ 7,323,769,800.19

-4-

DEPARTMENT OF REVENUE ANALYSIS OF STATE REVENUE COLLECTIONS
YEAR ENDED JUNE 30, 2004

EXHIBIT"D"

TAXES BASED ON SALES Sales and Use Tax Regular Less: Refunds
Compensation Paid to Vendors Net to State Cash Balance
July 1, 2003 June 30, 2004
Alcoholic Beverages Malt Beverage Malt Beverage Tax Less: Refunds Liquor Liquor Tax Less: Refunds Wine Wine Tax Less: Refunds
Netto State Malt Beverage Liquor Wine
Cash Balance July 1, 2003 June 30, 2004

$ 4,997,957,599.27 95,878,633.66

$ 4,902,078,965.61

$

47,446,632.52

4,860,904,312.34

$

48,650,448.55

-54, 922,427.80

-6,271,979.25

$ 4,902,078,965.61

$

86,707,136.32

7,224.58 $

86,699,911.74

$

39,183,828.96

6,758.99

39,177,069.97

$

23,690,192.62

5,789.17

23,684,403.45

$

149,561,385.16

$

87,062,977.23

39,500,454.41

23,684,582.80 $

150,248,014.44

$

-86, 146.68

-600,482.60

-686 ,629 .28

$

149,561,385.16

-5-

DEPARTMENT OF REVENUE ANALYSIS OF STATE REVENUE COLLECTIONS
YEAR ENDED JUNE 30, 2004

EXHIBIT"D"

TAXES BASED ON SALES Tobacco Products Tobacco Tax Less: Refunds
Netto State Cash Balance
July 1, 2003 June 30, 2004
Motor Fuel Collections Aviation Dealers Gasoline Dealers Special Fuel Dealers Diesel Operators - Bonded Undistributed by Fuel Type Penalties and Interest Motor Carrier Mileage Tax Collections
Less: Refunds International Fuel Tax Agreement Other
Prepaid Motor Fuel Sales Tax (3%) Collections Penalties and Interest Less: Refunds
Compensation Paid to Vendors Netto State Cash Balance
July 1, 2003 June 30, 2004

$

229,530,201.92

86,963.93 $

229,443,237.99

$

227,421,510.96

$

-5,082,675. 70

7,104,402.73

2,021,727 .03

$

229,443,237.99

$

28,536.02

184,960,089.66

488,168.01

58,122,095.64

284,099,787.48

322,185.59 $

528,020,862.40

10,852,934.12

$

538,873,796.52

$

40,550,509.19

1,808,864.51

42,359,373.70

$

496,514,422.82

$

239,132,230.54

377,157.31

30,071.27

239,479,316.58

$

735,993,739.40

$

4,625,965.48

731,547,847.49

$

6,856,352.95

-7,036,426.52

-180,073.57

$

7351993,739.40

-6-

DEPARTMENT OF REVENUE ANALYSIS OF STATE REVENUE COLLECTIONS
YEAR ENDED JUNE 30, 2004

EXHIBIT"D"

BUSINESS LICENSE TAX
Malt Beverage Dealers Wholesalers' Licenses Retailers' Licenses Special Permits License and Brand Registration
Liquor Dealers Wholesalers' Licenses Retailers' Licenses Special Permits License and Brand Registration
Wine Dealers Wholesalers' Licenses Retailers' Licenses Special Permits License and Brand Registration
Tobacco Products Dealers Wholesalers' Licenses
Coin Operated Amusement Machines Licenses and Permits Less: Refunds
Netto State Malt Beverage Dealers Liquor Dealers Wine Dealers Tobacco Products Dealers Coin Operated Amusement Machines
Cash Balance July 1, 2003 June 30, 2004

$

33,250.00

793,283.83

31,550.00

2,700.00 $

860,783.83

$

42,000.00

557,712.00

48,205.00

5,535.00

653,452.00

$

35,750.00

674,897.17

7,750.00

2,700.00

721,097.17

18,683.05

$

2,033,895.00

6,825.00

2,027,070.00

$

4,281,086.05

$

860,783.83

652,472.00

721,097.17

17,740.00

2,033,895.00 $

4,285,988.00

$

111,668.95

-116,570.90

-4,901.95

$

4,281,086.05

-7-

DEPARTMENT OF REVENUE ANALYSIS OF STATE REVENUE COLLECTIONS
YEAR ENDED JUNE 30, 2004

EXHIBIT"D"

NON-BUSINESS LICENSE TAX
Motor Carrier Registrations Miscellaneous Collections
Net to State Cash Balance
July 1, 2003 June 30, 2004

$ _ _ _ _2_3..,,3_0_3_.8_6

$

306,251.07

$

-261, 118.20

-21,829.01

-282,947 .21

$ ====2=3.,,,,3=0=3=.8==6

ESTATE TAX
Original Returns and Amendments Less: Refunds
Netto State Cash Balance
July 1, 2003 June 30, 2004

$

73,310,871.01

7,636,391.32 $

65,674,479.69

$

65,110,424.65

$

1,539,913.58

-975,858.54

564,055.04

$

65,674,479.69

-8-

DEPARTMENT OF REVENUE ANALYSIS OF STATE REVENUE COLLECTIONS
YEAR ENDED JUNE 30, 2004

EXHIBIT"D"

PROPERTY TAX County Tax Digest Accounts Vehicle Property Mobile Home limber Not on Digest Penalties and Interest Less: Refunds Intangible Recording Gross Collections
Commissions Paid to Counties: County Digest Accounts Collector Intangible Recording
Netto State County Tax Digest Accounts Intangible Recording
Cash Balance July 1, 2003 June 30, 2004
PUBLIC UlllffiES Property Tax Ad Valorem Tax Assessments
Net to State Cash Balance
July 1, 2003 June 30, 2004

$

5,332,585.68

57,275,205.93

283,068.88

134,543.86

733,185.81

679,550.57 $

64,438,140.73

455,265.24 $

63,982,875.49

2,111,383.08

$

66,094,258.57

$

2,445,782.21

123,814.84 $

2,569,597 .05

$

61,537,093.28

2,124,793.04

63,661,886.32

$

-273,681.49

136,456.69

-137,224.80

$

66,094,258.57

$

16,797.34

1,059,232.52

$

$

2,135,376.22

$

-1,041, 190.56

-18, 155.80

-1,059,346.36

1,076,029.86

$

1,076,029.86

-9 -

DEPARTMENT OF REVENUE ANALYSIS OF STATE REVENUE COLLECTIONS
YEAR ENDED JUNE 30, 2004

EXHIBIT"D"

FINES AND FORFEITURES Malt Beverage Liquor Wine Tobacco Products

BOND FORFEITURES

$

1,124.25 $

118,944.40

PENALTIES 244,254.33 $ 28,125.00 36,642.58 110,154.73

TOTAL 245,378.58 147,069.40 36,642.58 110,154.73

$

120,068.65 $

419,176.64 $

539,245.29

Netto State Cash Balance
July 1, 2003 June 30, 2004

$

713,565.78

$

10,054.94

-184,375.43

-174,320.49

PEACE OFFICERS AND PROSECUTORS TRAINING FUND Fees from Court Fines and Bond Forfeitures

Net to State

Cash Balance

July 1, 2003

$

June 30, 2004

$

539,245.29

$
-91,040.40 -57,563.87

$ 22,755,179.85
-148,604.27

22,606,575.58

UNCLAIMED PROPERlY Proceeds from Sale of Abandoned Property Less: Refunds

$

22,606,575.58

$

71,327,898.88

8,123,536.51

Reimburse Budget Fund Unclaimed Property Expenses
Netto State

$

63,204,362.37

$

2,563,550.00

60,640,812.37

$

63,204,362.37

- 10 -

DEPARTMENT OF REVENUE ANALYSIS OF STATE REVENUE COLLECTIONS
YEAR ENDED JUNE 30, 2004

EXHIBIT"D"

STAlE CHILDREN'S TRUST FUND Fees from Marriage Licenses and Divorce Cases
Net to State Cash Balance
July 1, 2003 June 30, 2004
EARNINGS - GENERAL GOVERNMENT Collection Cost Homestead Option Sales Tax Local Option Sales Tax MARTA Sales Tax Railroad Equipment Car Tax Real Estate Transfer Tax Sales Tax for Educational Purposes Special Purpose Sales Tax Other Fees on Contracts Liquor l11118stigation Fees Motor Carrier Citations Miscellaneous Collections
Net to State Cash Balance
July 1, 2003 June 30, 2004

$

1,562,690.22

$

1,335,278.04

$

107,655.50

119,756.68

227 412.18

$

1,562,690.22

$

984,503.34

9,923,844.49

2,837,755.46

55,117.38

419,942.92

12,217,344.66

8,658,548.63 $

35,097,056.88

$

10,105.00

92,300.00

3,005.56

21,648,024.03

21,753,434.59

$

56,850,491.47

$

52,182,510.42

$

-9,280,621.17

13,948,602.22

4,667,981.05

$

56,850,491.47

- 11 -

SECTION II AUDITEE'S RESPONSE TO PRIOR YEAR FINDINGS AND QUESTIONED COSTS

DEPARTMENT OF REVENUE AUDITEE'S RESPONSE
SUMMARY SCHEDULE OF PRIOR YEAR FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2004

PRIOR YEAR FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

FINDING CONTROL NUMBER AND STATUS

FS-474-02-02 FS-474-03-01 FS-474-03-02 FS-474-03-03 FS-474-03-04

Further Action Not Warranted Partially Resolved - See Corrective Action/Response Unresolved - See Corrective Action/Response Previously Reported Corrective Action Implemented Previously Reported Corrective Action Implemented

CORRECTIVE ACTION/RESPONSES

CASH AND CASH EQUIVALENTS Inadequate Accounting Procedures Finding Control Number: FS-474-03-01

The Department has put into place additional policies and procedures to assure adequate identification of reconciling items and their timely correction. Prior year reconciling items have been identified and corrections posted. Regular void check files are sent to the bank as each requisition is processed. The remaining unidentified bank reconciling items are being researched by the bank.

REVENUE/RECEIVABLES/RECEIPTS Deficiencies in the Income Tax Division Subsidiary Records Finding Control Number: FS-474-03-02

Under present budget initiatives and restrictions of the Department, we are unable to provide the necessary funding for a project of this magnitude. There are 3.7+ million individual returns filed annually. This number does not take into consideration multiple W-2's for married couples and withholding from more than one employer. To capture and warehouse this data, manually and electronically, the Department would have to redirect various projects that are essential to the Department's current strategic direction. To fulfill the action, the Department would need to start an initiative that would require additional funding to implement such a system. It should also be noted that the Department presently has a compliance partnership with the IRS to match relevant data against Georgia individual income tax returns and taxpayers. Since 2002, this initiative has generated 144,000 assessments with a proposed assessment value of $130. 7 million. The Department has collected $22.4 million during the initial development stage for states to partner with the Federal Government that may be a viable cost efficient alternative. The Department continues to monitor the progress of these programs.

- 1-

SECTION Ill CURRENT YEAR FINDINGS AND QUESTIONED COSTS

DEPARTMENT OF REVENUE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004

FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

ACCOUNTING CONTROLS (OVERALL) Inadequate Separation of Duties Finding Control Number: FS-474-04-01

Condition:

The Department of Revenue did not maintain an adequate system of internal control over the collection of tax on tobacco products. Key tasks and responsibilities related to collecting receipts, custody of and maintaining the inventory of cigarette stamps and depositing of the receipts for their sale are not adequately separated. These activities are not sufficiently supervised to mitigate these weaknesses. In addition, no verification that all funds collected and recorded on the agency's general ledger is performed independent of the personnel responsible for the collection of receipts, sale of cigarette stamps and preparation of deposits.

Criteria:

The Accounting Procedures Manual for the State of Georgia, Section Five states, in part, as follows:

"Each state organization is responsible for adopting an internal control framework that is suitable for the type of services they provide... Each state organization has a responsibility to assess their internal control system and use this information to design, implement, and monitor internal controls that are suitable for their organization ... ".

Cause:

These deficiencies were the result of the Department's failure to implement adequate policies and procedures to ensure that key tasks are adequately separated or monitored and to ensure that tax on tobacco products included on the Department's general ledger completely represent all collections.

Effect:

Assets of the agency are subject to misappropriation. The revenues recorded on the Department's general ledger for tax on tobacco products could be misstated.

Recommendation:

The Department of Revenue should review its internal control procedures over tax on tobacco products, and design and implement procedures to adequately safeguard the Department's assets and to ensure that detailed records supporting the general ledger are complete, accurate and reliable.

-1-

DEPARTMENT OF REVENUE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004

FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

CASH AND CASH EQUIVALENTS Inadequate Accounting Procedures Finding Control Number: FS-474-04-02

Condition:

The Department of Revenue did not perform adequate bank reconciliation procedures on the Income Tax - Control Disbursement Account. General ledger reconciling items in the amount of $19,057,296.98 and bank reconciling items in the amount of $16,752,175.08 were not adequately identified. Also, reconciling items identified during the bank reconciliation process were not corrected in a timely manner.

Criteria:

Good internal control practices dictate that bank reconciliations are performed and adjustments are identified and corrected in a timely manner. Completed reconciliations should also be subjected to an independent supervisory review to ensure accuracy and completeness.

Cause:

These deficiencies were the result of the Department's failure to adequately manage and monitor the Income Tax - Control Disbursement Account.

Effect:

The cash balance per the general ledger for the Income Tax Control Disbursement Account is misstated. Due to the age of some of the bank reconciling items, the bank may be unwilling to correct certain errors causing the general ledger balance to be further misstated.

Recommendation:

The Department of Revenue should implement additional policies and procedures to properly reconcile the Income Tax - Control Disbursement Account and follow up on all reconciling items with the bank or post documented adjustments to the general ledger.

-2-

DEPARTMENT OF REVENUE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004

FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

REVENUES/RECEIVABLES/RECEIPTS Deficiencies in the Income Tax Division Subsidiary Records Finding Control Number: FS-474-04-03

Condition:

The Taxpayer Services Division of the Department of Revenue does not adequately track data received from companies and individuals concerning taxpayer wages, income tax withholdings or estimated payments of Georgia income tax.

Criteria:

The Accounting Procedures Manual for the State of Georgia, Section Five, provides that management should establish policies and procedures to enable management to monitor the reliability of reporting systems. Such policies and procedures should include periodic review of reports to ensure data are accurate, reliable, and measuring the appropriate things, as well as, integrating or reconciling information used to manage operations with data generated by the financial reporting system.

Cause:

These deficiencies were the result of management's failure to design and implement needed procedures, programs or systems.

Effect:

The Taxpayer Services Division cannot ensure, in all cases, that the withholding amount claimed by the taxpayer on the annual income tax return is accurate or that all known taxable income is reported as income.

Recommendation:

The Department of Revenue should design and implement a system that will provide for the systematic reconciliation of income and withholding data received from employers and individuals with Form W-2 and other documents filed with year-end individual tax returns.

-3-

DEPARTMENT OF REVENUE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004

FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

GENERAL LEDGER Ending Balances in Balance Sheet Clearing Accounts Finding Control Number: FS-474-04-04

Condition:

Our review of the general ledger balance sheet clearing accounts revealed that one clearing account contained a balance at June 30, 2004. In addition, while the clearing accounts recorded in the balance sheet of the State Revenue Collections Fund were zero on a department-wide basis, there were multiple programs within the fund with both positive and negative balances at June 30, 2004.

Criteria:

In accordance with the Accounting Procedures Manual for the State of Georgia, Section Three, clearing accounts have been provided in the State Chart of Accounts to facilitate the accumulation of transactions, which are subsequently distributed to appropriate accounts. At fiscal year end, no balances should remain in the clearing accounts.

Cause:

This deficiency was a result of management's failure to ensure that all clearing account balances were properly distributed to appropriate accounts on the general ledger.

Effect:

Balances remaining in these accounts at fiscal year end can misstate the financial statements of the Department and can lead to erroneous decisions by the Department's management.

Recommendation:

The Department of Revenue should ensure that clearing account balances have been distributed to the appropriate accounts at the end of each accounting period and that no balances remain in the clearing accounts at fiscal year end in accordance with the Accounting Procedures Manual for the State of Georgia.

-4-

DEPARTMENT OF REVENUE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004

FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

CAPITAL ASSETS Inadequate Accounting Procedures Finding Control Number: FS-474-04-05

Condition:

Posted entries from the Asset Management (AM) module of the State's Phoenix accounting system into the machinery and equipment balances on the Department's capital asset general ledger do not accurately reflect the actual machinery and equipment transactions that took place at the Department during the year under review. The Department failed to prepare adequate "offline" analyses and adjusting entries to correct these balances as a part of the Department's year-end close.

Criteria:

Generally accepted accounting principles require the maintenance of a system of accounting for capital asset acquisition, depreciation and disposition. The Accounting Procedures Manual for the State of Georgia, Section Three, provides that accurate subsidiary capital asset inventory records must be maintained and that balances, additions and deletions to the inventory records should be reconciled periodically to the general ledger.

Cause:

The AM module failed to provide accurate information for the posting and adjusting of machinery and equipment entries. The Department failed to have adequate controls in place to monitor the entries posted by the AM module and to prepare manual analyses and adjusting entries to correct the general ledger balances.

Effect:

The property management records generated from the AM module could not be accurately reconciled to the Department's general ledger. In addition, capital asset balances may be misstated. The extent of the misstatement cannot be determined.

Recommendation:

The Department of Revenue should implement controls to provide for adequate review and monitoring of postings to the general ledgers. Such controls should include considering the reasonableness of amounts posted to asset, contra-asset, expense and gain/ loss on capital asset accounts related to the accounting for machinery and equipment transactions.

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