![Page 20
Insert Organization Logo
Here
Internal Audit Report
[Name of Entity]
[Name of Audit Area / Location / Period Covered]
Date:
Distribution
For action For information
Insert name or business unit/group [Insert title] Insert name or business unit/group [Insert title]
[Insert name] [Insert title] [Insert name] [Insert title]
[Insert name] [Insert title] [Insert name] [Insert title]](https://image.slidesharecdn.com/veritaauditreportwritingtrainingv1-130527141802-phpapp01/85/Verita-audit-report-writing-training-v1-20-320.jpg)
![SCOPE OVERVIEW
Summary of objective and scope
[Sample text: An internal audit of [insert organization name] [insert process name] was performed in [insert month and year] and covered [insert business unit(s)].
The overall objective of the internal audit was to determine the effectiveness of key controls as identified with Management and compliance with current policies and
procedures relating to [insert process name], and to identify any improvement opportunities. The internal audit did not cover [insert any specific areas not covered and
any significant limitations].
The specific objectives, scope and approach of the internal audit were agreed with [insert organization name] Management.
Responsibilities of the Management and Internal Auditors
The internal audit procedures rely on information and representations made available to the internal auditor by the management of the Company and comprise
inquiries and observations and limited tests of transactions on a sample basis, covering the detailed assessment objectives. Accordingly, the internal audit procedures
may not detect fraud, defalcations and irregularities.
Internal auditors work does not in any way diminish the responsibilities of the Company’s management. The design, development, implementation and operation of
internal control systems are the responsibility of the respective Company’s managers. They are accountable for ensuring that adequate controls exist in the areas of
their responsibility and should not rely solely on periodic visits as a means of monitoring the adequacy and integrity of controls.
Linkage to your risk assessment study
[Sample text – option 1: This report delivery is planned in the Internal Audit Plan of [year] as approved by the Audit Committee. The scope areas have been risk
assessed in the Risk Assessment Plan [insert title/reference] provided to our team during the internal audit planning stage, however, it is important to note that this
linkage does not indicate full coverage of enterprise risks which are managed through a number of business processes and control procedures.]
[Sample text – option 2: This internal audit has been performed at the request of the [insert title e.g. Audit Committee/CEO/CFO] of [insert organization name]. This
ad hoc internal audit is in addition to the internal audits set out in the 201X/201X Internal Audit Plan.]](https://image.slidesharecdn.com/veritaauditreportwritingtrainingv1-130527141802-phpapp01/85/Verita-audit-report-writing-training-v1-22-320.jpg)
![METHODOLOGY:
INTERNAL AUDIT APPROACH
APPROACH
[Sample text: The internal audit of [insert organization name] [insert process name]
was performed using the following approach:
•[insert nature of specific procedures and testing performed to meet the
objectives of the internal audit, for example:
• names and titles of organization management/personnel interviewed
• details of information and documentation provided
• processes/systems documented
• areas and time period of walk-throughs, and observation and enquiry
performed
• areas, extent (i.e. sample sizes) and time period of items selected for testing
• the use of any third party subcontractors, where agreed with the
organization].]
INTERNAL AUDIT TEAM
Prepared by:
Name: Signature:
Reviewed by:
Name: Signature:](https://image.slidesharecdn.com/veritaauditreportwritingtrainingv1-130527141802-phpapp01/85/Verita-audit-report-writing-training-v1-23-320.jpg)
![Key findings and recommendations
[Sample text: The findings identified during the course of this internal audit are illustrated in the summary below. A full list of the findings identified and the
recommendations made is included in this report. Classifications of internal audit findings are detailed in Appendix X to this report.
These findings and recommendations were discussed with [insert organization name] Management responsible for the operations of [insert process name].
Management has accepted the findings and has agreed action plans to address the recommendations. This report also includes any findings and recommendations
where Management has implemented the action plans to date.
The management action plans will be included in the tracking of internal audit recommendations maintained by [insert name of the function responsible for internal
audit]
Executive Summary (Contd.)
Sr. No. Risk Rating Observation Headline / Title Observation Summary Recommendation Summary Detailed
Observation #
1. High
2. Medium
3. Low
Sr.
No.
Report Number of
Observations
Number of High rated
Observations
Implemented Direct Financial Benefits
1.
2.
3.](https://image.slidesharecdn.com/veritaauditreportwritingtrainingv1-130527141802-phpapp01/85/Verita-audit-report-writing-training-v1-27-320.jpg)
![Storage Facility
On verifying the storage facility, it was observed that bins and pallets were allocated
without proper spacing and stacking of products. Many of the bins were kept empty and
some bins & pallets were not utilized fully.
• As per the agreement with Aramex, Inward Process Point no.5.2 - Di representative
to be present during barcode pasting when no barcode are there on the products on
receipt, however on discussion it was learned that Aramex staff did bar code pasting
on their own and they were never accompanied by Di staff during this process.
• It was observed that practice of affixing preprinted system generated barcodes on
the material boxes is not in place and handwritten codes are affixed on the same
which are highly susceptible to errors. Also if any box has got empty and new
material is store in it, previous label code is not removed and new label code is affix
on the same. Thus 2 codes are reflected on the same box.
• 27 cases have been observed where location is incorrectly defined in the Optilog.
This makes tracking of materials difficult in case of emergency. [Refer Annexure VII
for details]
• As per agreement with Aramex, all rusted/corroded fittings to be isolated from
saleable inventory, however it was observed that many of the rusted materials were
still stored along with good quality materials and this can affect the quality of non-
rusted materials.
• Also as per agreement, rubber hose should be securely stretch-wrapped and stored
in warehouse, however during verification it was observed that some hose were lying
unwrapped.
• Cameras and smoke detectors at bin storage area on 2nd floor were not in working
condition.
All the operational gaps to be filled in by taking utmost care and using due diligence
for a better and smooth functioning business operation. Detailed list of
recommendation as per next slide.
Recommendation
• Auditee Response:
• Timeline:
• Process Owner:
Observation
Management Action Plan Awareness Monitoring
• Operation ineffectiveness
Root cause
Operational
Ineffectiveness
System
Deficiency
External
Design
Deficiency
High
Risk Implication Operational Control Compliance
• Financial loss to Dixon due to overcharging by Aramex.
• Handwritten codes are susceptible to errors
• Incorrect geographical mapping may lead to unfulfilled sales order due to misplaced items.
• Rusted/corroded items to be separated to avoid damage to other good products.
• Rubber hoses to be covered to avoid getting it dirty and its appealing looks may get diminished.
• Non-functioning Cameras, no audit trail in case of theft. Insurance claim may be denied.
Root cause](https://image.slidesharecdn.com/veritaauditreportwritingtrainingv1-130527141802-phpapp01/85/Verita-audit-report-writing-training-v1-36-320.jpg)
Verita audit report writing training v1
- 1. Audit Report Writing VERITA TRAINING SESSION MARCH 09 2013 By CA Huzeifa Unwala
- 2. Training topics • Session Objectives & Expectations • Client Reporting • Nature of Users • Key Reporting Standards • From Query to Reporting • Examples of reporting improvements • General Tips • Practical exercises
- 3. Session Objectives & Expectations
- 4. Client Engagement Reporting Types • Statutory Auditors financial attestation • Management Letter • Internal Audit Report • IT Audit Report • Concurrent Audit Report • Management Consultancy Engagement Report • Tax or Regulatory Opinion Illustrative • Fraud Investigation Report • Certification • Special Review • Business Valuation Report • Due Diligence Report • Internal Controls Testing Report
- 5. Users • Board of Directors • Promoters • Regulatory Bodies/ Tax Authorities • Audit Committees/ External Auditors • Special purpose forums/ management teams/ project teams • Capital Market intermediaries/ Private Equity Players/ Acquirers Illustrative • Government Agencies • Decision Makers/ CEOs/ Chief Financial Officers/ Chief Audit Executives • Forensic experts • International audiences/ Credit rating agencies • Research companies • Misuse by Competitors • Right to Information Act
- 7. • Accurate • Objective • Clear • Concise • Constructive • Complete • Timely Engagement communications should include: • Objectives • Scope • Conclusions • Recommendations • Action plans IIA Standards
- 9. Basic elements of the audit report Layout of the internal audit report includes: • Titles, Addressee, Report distribution list, • Period of coverage of the report, Opening or introductory paragraph, Objectives paragraph, Scope paragraph, • Executive summary, Observations, findings and recommendations, • Action taken report • Date of the report, place of signature and Membership number. Auditor should excise due professional care Ensure that internal audit report is: • Clear and Factual, • Specific and Concise, • Unambiguous and Timely, • Complies with generally accepted audit procedures in India. Communication to management • Different stages of communication are: • Discussion of draft, • Exit meeting, • Formal draft • Final report Limitation on scope and restriction on usage & circulation • Describe the limitation • For intended purpose and limited to distribution list ICAI SIA 4 Reporting
- 10. Basic elements of the audit report Layout of the internal audit report includes: • Titles, Addressee, • Opening or introductory paragraph (identification of Financial statements audited and statement of responsability of the management and auditor) • Scope para describing the nature of audit and reference to accounting standards, regulatory sections that govern the audit and description of work performed • Opinion para giving reference to financial statement framework used for preparation the financial statements and expression to opinion • Date of the report, place of signature and Auditor’s signature. ICAI SA 700 The Auditor’s Report on Financial Statements Debate: • Auditor’s commentary • Going concern Significant uncertainty: “Without qualifying our opinion, we draw attention to Note X of Schedule…. The entity is the defendant in a lawsuit alleging infringement of certain patent rights……the ultimate outcome of the matter cannot be presently determined, and no provision for any liability that may result has been made in the financial statements” “in our opinion…………”
- 11. FROM QUERY TO REPORTING
- 12. Query to be thoroughly investigated to unearth the facts Audit findings, as discussed with Client Management and / or the audit sponsor at the closure meeting should be documented in clear, succinct language. For each issue, the following information should be communicated (known as the ‘so what factor’): • Description – what is the issue? This should be factual and free of interpretation. Example: We reviewed twenty-five payments and found ten of the payments were not approved in accordance with the organisation’s policy. • Cause – what is the root cause of the problem Example: This has been caused by a lack of training for new accounts payable personnel. The cause should be discussed with the client prior to writing the report. • Impact – what is the impact on the organisation? You may consider: What is the risk? Why should management be concerned? Does this issue have the potential to impact the organisation’s strategic objectives? Could this lead to a material misstatement in the organisation’s financial statements? Could this lead to a loss of reputation? Findings should be rated and prioritised in order of importance to assist the client understand the relative importance of the issues. The ratings also allow Client Management and the Audit Committee to compare the criticality of issues across internal audit reports. From Query to Reporting
- 13. Our responsibility is to turn up, tick a few things and express an opinion on the site based on our audit. We conducted our audit in accordance withadmittedly-not-quite generally accepted auditing standards.
- 14. Rating Financial impact on business Impact on customer Strategic Regulatory Management effort Publicity & reputation People SEVERE > Rs. 2 million damage or loss Material impact for many customers Failure to achieve two or more goals Loss of key business licence Criminal offence by director or manager Regulatory censure An event so severe in nature it leads to a change in the management structure of A. The event may lead to a collapse of the business Dramatic loss of stakeholder confidence undermining business viability Extensive negative public exposure Multiple fatalities, permanent disability A large number of key executives or directors resign MAJOR > Rs. 1 million damage or loss Impact for many customers Failure to achieve one of more goals Conditions imposed on business licence Civil offence by director or manager Regulatory censure A critical event which with proper management can be endured. May involve some management changes Negative public exposure with significant impact Single fatality or permanent disability Some key executives leave company (not perceived as employer of choice) MODERATE > Rs. 0.5 million damage or loss Potential impact for some customers Moderate implication for business licence Civil offence by company Increased regulatory oversight A significant event which can be managed under normal circumstances Concerns becoming broader and more vocalised within the industry Serious multiple injuries Poor reputation as an employer Key employee leaves MINOR Rs. 0.2 million damage or loss No impact Minor implications for business licence Civil offence by employee Potential review by regulator An event, the consequences of which can be absorbed but management effort is required to minimise the impact Serious segmented stakeholder concerns/ incidents Moderate injury or illness General staff morale problems High staff turnover INSIGNICAN T > Rs. 2 million damage or loss No impact Minor breach of law Minor sanction or penalty Potential review by regulator An event, the impact of which can be absorbed through normal activity Minor isolated stakeholder concerns/ impacts Minor injury or illness Increased staff turnover Assessing the Impact of Risk
- 15. • What has gone wrong? • What has been violated? • What is the consequence/ reputation/ financial/ compliance exposure? • What is the remedy? • What is the alternative remedy? • What is the best remedy? Is it complying with laws? • How the situation can be corrected? What is the time and cost for correcting the situation? • Is there a cause/ root cause which can be addressed? • Is your observation independent of your client relationship? • Are you making a constructive/ positive case for change or embarrassing auditees? • How will your view affect the client? Audit Observation & Opinion Building
- 16. Analyzing the Audience • Who will be the most important readers of the report? • How much do they know about the subject? • How do they plan on using the report? • How interested are they in the report? • What’s their reaction going to be to the report’s message?
- 17. Demonstrate the procedure adopted for undertaking physical verification of inventory (Give brief details w.r.t. description of items verified, names of persons involved in verification, manner of verification of physical stock and of comparison with the book stocks, methodology adopted in the count etc.) “The difference between the physical balances and the book balance in respect of the Exhibited items have been identified. The difference is Rs. XXXX implying that the inventory position has been under/ over reported in the year end unaudited financials. Subsequent to our verification the differences were adjusted in the books and the book (quantity) balance were brought in line with the physical balances. The quantities included in the year-end audited financials represent the so adjusted book balances. To adjust the differences, the following entries were passed in the books of accounts…………………………. ” Reporting Significant deviation in Physical Verification Example
- 18. Approvals for waiver of charges were documented through e-mails, however, instances were also identified wherein charges were reversed by ABC, for which specific waivers were not on record. We were informed, these charges were not leviable considering the nature of the product, however, possibility of such waivers being recorded without approval cannot be ruled out in the absence of System controls. Reporting on Out of System Approvals Example
- 19. INTERNAL AUDIT REPORT TEMPLATE
- 20. Page 20 Insert Organization Logo Here Internal Audit Report [Name of Entity] [Name of Audit Area / Location / Period Covered] Date: Distribution For action For information Insert name or business unit/group [Insert title] Insert name or business unit/group [Insert title] [Insert name] [Insert title] [Insert name] [Insert title] [Insert name] [Insert title] [Insert name] [Insert title]
- 21. 1. Summary of Scope and Objectives 2. Internal Audit Approach 3. Executive Summary 4. Detailed Audit Observations 5. Disclaimer 6. Risk Grading Rationale 7. Contact details REPORT CONTENTS
- 22. SCOPE OVERVIEW Summary of objective and scope [Sample text: An internal audit of [insert organization name] [insert process name] was performed in [insert month and year] and covered [insert business unit(s)]. The overall objective of the internal audit was to determine the effectiveness of key controls as identified with Management and compliance with current policies and procedures relating to [insert process name], and to identify any improvement opportunities. The internal audit did not cover [insert any specific areas not covered and any significant limitations]. The specific objectives, scope and approach of the internal audit were agreed with [insert organization name] Management. Responsibilities of the Management and Internal Auditors The internal audit procedures rely on information and representations made available to the internal auditor by the management of the Company and comprise inquiries and observations and limited tests of transactions on a sample basis, covering the detailed assessment objectives. Accordingly, the internal audit procedures may not detect fraud, defalcations and irregularities. Internal auditors work does not in any way diminish the responsibilities of the Company’s management. The design, development, implementation and operation of internal control systems are the responsibility of the respective Company’s managers. They are accountable for ensuring that adequate controls exist in the areas of their responsibility and should not rely solely on periodic visits as a means of monitoring the adequacy and integrity of controls. Linkage to your risk assessment study [Sample text – option 1: This report delivery is planned in the Internal Audit Plan of [year] as approved by the Audit Committee. The scope areas have been risk assessed in the Risk Assessment Plan [insert title/reference] provided to our team during the internal audit planning stage, however, it is important to note that this linkage does not indicate full coverage of enterprise risks which are managed through a number of business processes and control procedures.] [Sample text – option 2: This internal audit has been performed at the request of the [insert title e.g. Audit Committee/CEO/CFO] of [insert organization name]. This ad hoc internal audit is in addition to the internal audits set out in the 201X/201X Internal Audit Plan.]
- 23. METHODOLOGY: INTERNAL AUDIT APPROACH APPROACH [Sample text: The internal audit of [insert organization name] [insert process name] was performed using the following approach: •[insert nature of specific procedures and testing performed to meet the objectives of the internal audit, for example: • names and titles of organization management/personnel interviewed • details of information and documentation provided • processes/systems documented • areas and time period of walk-throughs, and observation and enquiry performed • areas, extent (i.e. sample sizes) and time period of items selected for testing • the use of any third party subcontractors, where agreed with the organization].] INTERNAL AUDIT TEAM Prepared by: Name: Signature: Reviewed by: Name: Signature:
- 24. Report status Audit Opening Audit Closing Draft Observation Summary issued on Draft Report issued on Management responses received Discussion with the Management & Validations Final report issued on TEAM INTRODUCTIONS & AUDIT TIMELINE
- 25. Executive Summary Implementation Summary of Previous Report Rating Process / Sub Process Report Period / Reference Management Action Plan Responsibility & Date Implementation Status
- 26. Overall Report Grading Executive Summary (Contd.) Level of assurance High Medium Low Key Conclusions Top Root Causes
- 27. Key findings and recommendations [Sample text: The findings identified during the course of this internal audit are illustrated in the summary below. A full list of the findings identified and the recommendations made is included in this report. Classifications of internal audit findings are detailed in Appendix X to this report. These findings and recommendations were discussed with [insert organization name] Management responsible for the operations of [insert process name]. Management has accepted the findings and has agreed action plans to address the recommendations. This report also includes any findings and recommendations where Management has implemented the action plans to date. The management action plans will be included in the tracking of internal audit recommendations maintained by [insert name of the function responsible for internal audit] Executive Summary (Contd.) Sr. No. Risk Rating Observation Headline / Title Observation Summary Recommendation Summary Detailed Observation # 1. High 2. Medium 3. Low Sr. No. Report Number of Observations Number of High rated Observations Implemented Direct Financial Benefits 1. 2. 3.
- 28. Observation <Observation in detail> Risk/ Implications • <Risk / Implication in detail> Recommendation Management Response/ Proposed action steps Responsibility & Timeline Root Cause 1. <Recommendation 1 in detail> 2. <Recommendation 2 in detail> 1.1 <Proposed action steps for Recommendation 1> 1.2 <Proposed action steps for Recommendation 1> 2.1 <Proposed action steps for Recommendation 2> 1 Mr. XYXYXY GM - Production (Shafts) February 15, 2012 2 Mr. XYXYXY GM - Production (Shafts) April 1, 2012 Sr. No. # : Title of Observation DETAILED OBSERVATION
- 29. The individual risk within the areas are reviewed and an overall rating of High, Medium or Low is assigned based on the following definition: High A weakness where there is substantial risk of loss, fraud, impropriety, poor value for money, or failure to achieve organisational objectives. Such risk could lead to an adverse impact on the business. Remedial measures must be taken urgently. Medium A weakness in control which, although not fundamental, relates to shortcomings which expose individual business systems to a less immediate level of threatening risk or poor value of money. Such a risk could impact on operational objectives and should be of concern to senior management and requires prompt specific action. Low Areas that individually have no significant impact, but where management would benefit from improved controls and/or have the opportunity to achieve greater effectiveness and/or efficiency. RISK GRADING RATIONALE (INDIVIDUAL RISKS)
- 30. FEW EXAMPLES OF REPORTING IMPROVEMENTS
- 31. GAP No. Internal control weakness/Process Improvement COSO Category of Control Impact Recommendation Selection and Analysis of Broker The company has not followed appropriate process while selection of brokers for equity shares. The criteria for the broker is not defined and documented. Brokerage comparative statement and other benefits are not documented for selection of brokers for investment in equity shares. The effective brokerage rate analysis was done and it was observed that company has done its 68% of investment through A Stock Broking whose rate is more than B in XYZ Ltd. Effective brokerage rate analysis was done for ABC portfolio wherein the 44% of total transaction (in value) are done through A Stock Broking whose rate was more than S and C. Risk of incurring excess cost due to absence of competitive analysis Broker wise analysis must be carried out to ensure better service and low transaction cost Managements Comments Ø Process Owner: Ø Comment: Operational Weakness – During Investment Function (Eq Shares)
- 32. GAP No. Control deficiency/ Audit Observation COSO Category of Control Impact Recommendation Broker Selection and Evaluation Procedures There is no written procedure for selection and evaluation of equity brokers as a result the equity deal team has not followed consistent broker selection process. Higher Equity Brokerage Payout to A Stock Broking Effective brokerage rate analysis reveals that the company has executed 68% of investment transactions through A Stock Broking. Despite a higher share of business to A the brokerage rate of A is more than B. The quantum of excess payout is estimated at @@@. Absence of defined norms leading to process inefficiencies and financial losses Absence of monitoring checks leading to process inefficiencies and financial losses Broker selection and evaluation procedures should be framed by the front/mid office team and adopted by the Board. The procedures should include the broker selection criteria, value added benefits expected from the broker and quantum of trading limits. Periodical monitoring checks such as Broker wise analysis must be carried out to lower transaction costs and improved service levels. Managements Comments Ø Process Owner: Ø Comment: Higher Equity Brokerage Payout
- 33. Inventory Turnover and Finished Goods Turnover analysis Observations Inventory Turnover Ratio:- The inventory turnover ratio of 3.16 which is very low implying that the company is carrying its stock for a very long period and are not managing its inventory efficiently. It has been observed that these products are hazardous and company takes 116 days to convert raw material into sales, so it is very risky to hold such high inventory. Finished Goods Turnover Ratio:- Finished goods turnover ratio of 11.84 implies that the company is able to convert its finished goods stock 11.84 times. In 31 days it is able to sell the finished goods manufactured. Root Cause Absence of defined control procedures Poor implementation of defined / not defined job responsibility Recommendation A complete assessment of inventory on terms of quantity and valuation is essential. High value and risky material needs to be stored in proper conditions and required quantity. Management Action Plan Particulars Rs.(lacs) Cost of Goods Sold 1614 Opening Stock as on 1/4/2012 400 Closing stock as on 31/12/2012 621 Average Stock 511 Inventory Turnover Ratio 3.16 Inventory Turnover Ratio in no of days 116 Particulars Rs.(lacs) Sales (Export and Local) 1932 Opening Stock as on 1/4/2012 ( FG) 72 Closing stock as on 31/12/2012( FG) 253 Average Stock (FG) 163 Finished Goods Turnover Ratio 11.84 Finished Goods Turnover in no of days 31 Inventory Turnover Ratio: - Finished Goods Turnover Ratio: -
- 34. CARO Para 4 (ii) (a) Whether physical verification of inventory has been conducted at reasonable intervals by the management. Observation Practice of conducting physical verification of inventory is not carried out by the management at regular intervals. However, physical verification has been carried out in the month of July 2012 and reverse calculation was done to arrive at 31st march 2012 stock CARO Para 4 (ii) (c) Whether the company is maintaining proper records of inventory and whether any material discrepancies were noticed on physical verification and if so, whether the same have been properly dealt with in the books of account Observation Stock prior to April 2011 was maintained at AB location and these stocks were brought in the books by passing stock transfer entry. While passing transfer entry, reconciliation of these stocks with warehouse stock was not carried out and as a result discrepancies were noticed. No relevant supporting documents were made available for such adjustment. As of date of audit i.e. 20th July, 2012 re-conciliation is in process. Summary High CARO Para 4 (ii) – Inventory Management • Inventory records should be maintained properly in the books of accounts on real time basis • Reconciliation with warehouse stock should be done on monthly basis. Monthly report of reconciled stock should be submitted to senior management • Physical verification should be conducted half yearly by independent party Recommendation Management Action Plan Awareness Monitoring Auditee Response: Post physical verification of stock by internal auditor, the stock records will be reconciled and thereafter it will be maintained properly by the company. Timeline: Process Owner:
- 35. CARO Para 4 (iv) (a) Is there an adequate internal control procedure commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods. Whether there is a continuing failure to correct major weaknesses in internal control? Observation Company does not have adequate system control in relation to purchase and sales of inventory & fixed assets. For instance; i) Tally (Accounting System) allows passing of sales entry even if there is no stock with the company and as a result stock report is showing negative stock. This lapse in system control is highly prone to error. ii) Competitive rate analysis for fixed assets procurement is not done iii) Sales price list is not maintained in system to ensure that all products are sold at defined price Is there an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services. Whether there is a continuing failure to correct major weaknesses in internal control system;
- 36. Storage Facility On verifying the storage facility, it was observed that bins and pallets were allocated without proper spacing and stacking of products. Many of the bins were kept empty and some bins & pallets were not utilized fully. • As per the agreement with Aramex, Inward Process Point no.5.2 - Di representative to be present during barcode pasting when no barcode are there on the products on receipt, however on discussion it was learned that Aramex staff did bar code pasting on their own and they were never accompanied by Di staff during this process. • It was observed that practice of affixing preprinted system generated barcodes on the material boxes is not in place and handwritten codes are affixed on the same which are highly susceptible to errors. Also if any box has got empty and new material is store in it, previous label code is not removed and new label code is affix on the same. Thus 2 codes are reflected on the same box. • 27 cases have been observed where location is incorrectly defined in the Optilog. This makes tracking of materials difficult in case of emergency. [Refer Annexure VII for details] • As per agreement with Aramex, all rusted/corroded fittings to be isolated from saleable inventory, however it was observed that many of the rusted materials were still stored along with good quality materials and this can affect the quality of non- rusted materials. • Also as per agreement, rubber hose should be securely stretch-wrapped and stored in warehouse, however during verification it was observed that some hose were lying unwrapped. • Cameras and smoke detectors at bin storage area on 2nd floor were not in working condition. All the operational gaps to be filled in by taking utmost care and using due diligence for a better and smooth functioning business operation. Detailed list of recommendation as per next slide. Recommendation • Auditee Response: • Timeline: • Process Owner: Observation Management Action Plan Awareness Monitoring • Operation ineffectiveness Root cause Operational Ineffectiveness System Deficiency External Design Deficiency High Risk Implication Operational Control Compliance • Financial loss to Dixon due to overcharging by Aramex. • Handwritten codes are susceptible to errors • Incorrect geographical mapping may lead to unfulfilled sales order due to misplaced items. • Rusted/corroded items to be separated to avoid damage to other good products. • Rubber hoses to be covered to avoid getting it dirty and its appealing looks may get diminished. • Non-functioning Cameras, no audit trail in case of theft. Insurance claim may be denied. Root cause
- 37. Observation Risk Implications Criticality Probability Existing Maturity Recommendation Desired Maturity Non Compliance with SEBI Regulation • Outstanding clients review – funding violation W.r.t. the Exchange circular no. NSE/MEMB/261 dated May 27, 1997 regarding clarification given by SEBI on applicability of Rule 8(1)(f) and 8(3)(f) of Securities Contract (Regulation) Rules, 1957, relating to fund based activities of brokers and as per clarification vide NSE Circular Ref.No: 136/2012 dated 26th April, 2012 - If debit balances arise out of client’s failure to pay such amount for more than fifth trading day reckoned from date of pay-in, and further exposure is granted to client it would be construed as a funding violation even if fully paid collaterals are available for margins. On review of long outstanding client positions (more than T+5day) for the period 01st April 2011 to 31st May 2012, it was observed that clients were being funded for debits in their account and for the same they were being charged Delayed payment Charges (DPC), as sufficient collaterals were available in client’s account. • Non Compliance with SEBI Regulation Very High Very High Repeatabl e • Funding violation to be avoided, by adhering to exchange guidelines. • A complete compliance manual needs to be defined which indicate checkpoints for all the applicable compliances and its adherence with a feature enhancement in Risk Management Software for a risk and self-certification process Managed Non Compliance with SEBI Regulation • Simplify the start • Full review to unearth the extent of non-compliance • Recent Penalties & Reputation • Level of exposure client category wise and ageing
- 38. GENERAL TIPS
- 39. Unhelpful Client Communication Practices • Issuing client communication prior to Superior & Partner review • Asking too many questions at once. • Saying you understand when you don’t! • Arguing. • Criticising individuals. • Taking sides.
- 40. • Headlines grab attention • First impression matters • Story telling – follow a theme • Concise - word count helps • Big picture and detailing – both are equally important • Self review, superior review and partner review • Use graphics, photo graphs (where presented as evidence) • Avoid repetition of phrases, words • Cut prepositions • Adopt a positive • Write while auditing Tips for success
- 42. Scenario 1: • Unbudgeted capex spending of INR 5 million • Uninsured Material in warehouse of the company
- 43. Scenario 2: • 100% depreciation charged on low value assets • Assets recorded at zero value
- 44. Scenario 3: • Procurement Policy states that purchases should be made only against valid contracts. Material purchased without any underlying contract • There is a trend of delay in receipt of material
- 45. Scenario 4: • You are a Statutory Auditor of a Listed company and have completed your annual review. You have to frame a management letter to the CFO highlighting weaknesses in Fixed Assets, Revenue Recognition, Inventory controls and failure to implement internal auditor recommendations.