Avail 20% discount on updated CA lectures for Dec 21 .Use Code RESULT20 !! Call : 088803-20003

ICICI

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More


The Internal audit function is very popular day by day due to its advantages to the organisations. The concept is heard recently in active form than earlier. There are  guidance notes and books published on the subject in detail. The guidance note also contains the Internal Audit industry wise and are informative. Having overview all these I decide to go a fresh and start the internal audit of a company and learned the basics of the internal audit  function. As I understood the function of internal audit the basics as per my views are enumerated as under.

The existence of internal audit function in all type of organisations in different names. The internal audit named on the basis of Audit as whole organisation or Audit of a particular function of management, operation, activity, and so on. It is called as Con current audit ,Income and Expenditure Audit, stock audit, Risk based audit, System audit, Credit audit, Audit of verification of Bills of entry, Audit of particular project, all these audits are Internal audits activity undertaken on the decision of the management of the organisation.

The Internal Audit is management function and a part of management. Its aim is of prevention for future and corrective action for past.

An Internal audit is a continuous function and on going activity.

An internal audit reflects a mirror image of the particular function of the management.

Internal audit function is verification of existing systems in particular activity of the management w.r.t. its effectiveness, efficiency, usefulness, in prevention of frauds, misappropriation ,misuse, and protection of the assets of the company.
 

When we begin the internal audit of a particular company, we ask the following details.

Requirements before the Internal Audit begin:

1. Letter of Appointment.

2. Consent letter form the previous auditor.

3. Scope and periodicity should be clearly defined and documented.

4. Locking of data for the audit period, and make the same available on all computers in auditors room.

5. Present internal control procedures adopted by the management on scope of audit should be clearly documented and submitted to auditors.

6. Files, vouchers, details, and documents for the period on scope as decided will be kept in auditors room duly completed. These files will not allowed to be rearranged or updated till audit completed.

7. The key person staff responsible for the scope should be named and his/her contact numbers will be given for quick and easy access.

8. Copy of previous year internal audit report along with details of rectification, if any.

9. Copy of Statutory Audit Report, and Memorandum of Asso. And Articles of Asso.

10. Fixation of daily time with key person as required by the auditors

11. All the entries for respective quarter should be completed before Blocking and transfer of the data to auditors for scope and periodicity as decided.

12. Fixation of results of be achieved by this exercise.

A specific time is given to the management to comply the above requirements before the  audit is begin.

When we begin the audit, requirement Sr. No.3,5, 12 which to our mind most important are not provided to us.

We decided the Audit Programme as under;

The following functions of the management are decided to be taken up for internal audit.

1. Purchase Department.

2. Accounts Department w.r.t Bank payments.

3. Accounts Department w.r.t Cash Payments.

4. Stores Department.

5. Production Department.

The period of audit is first half year i.e. 01st April to 30th June.

The Internal Audit methodology decided as under;

a) Interviews.

b) Verification of systems, internal controls, vouching.

c) Observations.

d) Discussion of our observations with Department.

e) Discussion with management.

Each one of the methodology is undertaken as explained in brief as follow:

Interviews:

The questionnaire is set for the interview of the Department head to ascertain the internal control systems followed by the Department.

The main questions are:

 i) The starting point of the function.

ii) Activities involved in the Department.

iii) System followed for particular operation, activity, in the Department.

iv) The decision flowchart of the each function in the Department.

v) The documentation of the each function of the Department.

vi) System of internal checking within the Department. Observations and feedback, corrective action taken.

vii) The end point of the function in the Department.

For Purchase Department.

The set of questions for purchase Department may be as under;

The major purchase of raw martial consists of which items with % of purchases.

Who access the requirement, periodicity.

System of purchases documentation, Purchase Requisition, Purchase Order,  Receipts of martial, Acceptance/Rejection of martial, quality checking and approval, Selection of supplier, martial ,price fixation etc, submission to accounts for payment.

Desions level for issue of PR, PO, Receipt, Quality approval, checking of invoices, and payments.

Internal control at each stage of purchase.

The end point may be payment to suppliers.

After the interview the basics of internal control followed in the dept is  ascertained.

Verification/Vouching:

Verification of the internal control as explained in the interview to ascertain its effectiveness, efficiency, deficiencies, gaps, feedback, period required , etc. The verification process required the vouching of evidences related to each transaction in the dept.

I recollect the vouching has following basics.

To verify the date with in the audit period.

The account heads are properly mentioned.

Voucher attached with proper evidence, supporting.

The voucher/Invoices/ supporting should be in the name of company. The voucher is properly authorised and duly signed by recipient.

Cash payments have revenue stamp whenever applicable.

It means the transaction should be as per the voucher.

I now called the above method of vouching is First Generation Method.

The Second Generation Method of vouching consists of,

Activity     To verify
1.Restrict to the period of Audit.   Period
2.List Complete Set of documents.   Set
3.Ascertain the Sequence of documents.     Sequence
4. Reference check.     Reference
5.Completeness of each documents, (independently)  Completeness
6. Checking of calculations.       Calculation
7. Ascertain the entries to be made.     Entries
8. Checking of entries in SAP        Correctness of entries
9. Principle of minimum. Sample mix. 100% checking Sample size v.i.s. extent of checking
10. Listing of all difficulties in format.  Listing
11. Tick only on 100% verified. 100%
12. Frequency check   Frequency of Purchase/Issues
13. Capacity Check   Storage capacity v.i.s purchases Mfg. Capacity v.i.s.Purchase. Sales Capacity v.i.s. production

Now a days both the FGV First Generation Vouching and SGV Second Generation Vouching is required to ascertain the internal control effectiveness and existence.

Sequence check is checking of sequence of preparation of documents in ascending or  descending order. In purchase Department the sequence should be Purchase Requisition, Purchase Order, Order Validation, Issue of Purchase Order, Receipt of Martial, Quality Check, Approval of Documents, Submission to Accounts, Verification of Credit terms, Payment to Suppliers, Receipt of Payment. This will help in ascertain odd sequence in the internal control system.

A Reference check may be checking of reference of previous document to subsequent document, and unique reference number for all documents. The  Purchase Order Number should be on all the above documents. Invoice should contain the Purchase Order Number and date of the Order.

Frequency checks to ascertain number of days from one purchase to another this will help to ascertain excessive or shortage in stocks then required.

The capacity check is checking of balance of stock vis the storage capacity.

The odd transaction from above transaction is the query to ascertain the internal control.

Observations:

After the vouching as above, the observations should be noted w.r.t. the  internal control weakness if any.

The observation on purchases may be as under:

Inward /Receipts of the material in stock matches  with the ledger of the supplier. Number of entries for purchases matches with number of receipts in the stock ledger of the item.

Frequency of Diesel purchases shows variances. Two tankers of 3000 lifters purchases same day in spite of less storage capacity. The normal frequency is one week as the Diesel is only used for generator and power shutdown on Thursday once in a week.

Excess payments were made in spite of less outstanding as per ledger.

The Léger account of the supplier is not reconciled with the agents account.

Purchase Order Number PON not mentioned o al the purchase invoices.

Delay observed in preparation of GRN Goods Receipt Note.

Number of Pices produced does to match with the number as per invoices of the labour contractor.

Fresh Purchase Order is issued without cancelling the earlier PO.

The above observations are discussed with the Department. Head. The Discussion Note is prepared and reflected in the respective chapters.

The observations which requires policy decisions like, PO number must for all the invoices. Time schedule should be fixed for preparation of all the documents. No Fresh PO will be issued without cancelling the earlier PO. are discussed with the movement for implementation.This Discussion Note is also reflected in respective chapter.

FORMAT OF THE REPORT.

1. The report addresses to the Board of Directors. This letter specifically mentioned following points.

Concept of Internal Audit.

Scope of Audit.

Coverage.

Period.

Methods adopted for Audit.

Non-Availability of requirements if any.

2. Details of Each Department.

Available Internal Controls.

Interviews.

Observations.

Supporting for observations.

Discussion Note with concern Department head.

Discussion with Management.

3. Conclusions.

Decisions taken for rectification of mistakes if any.

Policy decisions taken.

Representations to the Audit Committee.

Hope the note will help to beginners to initial starting of Internal Audit assignment.

Satish C. Badve

B.Com.F.C.A.D.C.M.D.I.S.A.(ICA)

Email: badveco@yahoo.co.in

"Loved reading this piece by CA Satish Badve?
Join CAclubindia's network for Daily Articles, News Updates, Forum Threads, Judgments, Courses for CA/CS/CMA, Professional Courses and MUCH MORE!"






Category Audit, Other Articles by - CA Satish Badve 



Comments


update