internal audit

Internal Audit

-Brahmayya & Co, Visakhapatnam

-Brahmayya & Co.Vishakapatnam

Introduction:

1. Control is basic human requirement.

2. Without control human behavior tends to deviate.

3. Management decision making is based on financial statements.

4. Internal Audit reviews environment under which operations are carried out.

5. Internal audit reviews both Accounting & other control like cost, production.


Section 138 of the Companies Act 2013 mandates Internal Audit for certain class of companies.

1. Every listed company.

2. Every unlisted public company having Paid up capital 50 cr or more Turnover 200 cr or more O / s loans or borrowings from Banks or PFC 100 cr or more O / s deposits of 200 cr or more 3. Every private company having

Turnover 200 cr or more ; or O/s loans or borrowings 100 cr.

Applicability


Internal Audit Standards• Issued by AASB under the authority of ICAI.

• Separate authority called as Internal Audit Standard Board.

• A total of 20 internal audit standards have been issued.

• Apart from these Technical guidance on conduct of internal audit of specific industry are issued under the authority of IASB.

-Brahmayya & Co ,Visakhapatnam

Objective Of Controls 1. To ensure that information generated is reliable. 2. Prevent frauds & errors. 3. Policies, procedures & plans are properly implemented. 4. Transactions are executed in line with management general or

specific authorization.

Effectiveness of controls depends upon environment under which controls are operated.


Factors Effecting Control Environment

1. Organization Structure.

2. Management supervision.

3. Personnel.

Control Environment means overall attitude & awareness of mgmt regarding control system.

SA-315 requires auditor to obtain understanding of control environment.


General Areas of Internal Audit 1. Cash & Bank Transactions2. Purchases3. Sales4. Creditors Review5. Debtors Review6. Stocks7. Indirect Expenditure8. Other income 9. Statutory compliances10. Costing


Cash & Bank Transactions 1. Vouchers are pre numbered.

2. Payments are properly authorized.

3. Alterations in payment records are to be enquired into.

4. Acknowledgement for payment to be obtained for cash transactions.

5. Compliance with Indian Stamps Act, Income Tax Act 1961.

6. Physically cash verification( including petty cash) & verify BRS at periodic intervals.

7. Write back of stale cheques. 8. Verify ‘I Owe You’ with relevant expense bills or advance accounts.


9. Pay special attention to huge cash balances.

10. Whether adequate insurance is taken against cash balances.

11. Whether organization has practice of deposit cash above prescribed level into bank on daily basis.


Purchases

1. Purpose for purchase should be backed up by purchase requisition from stores dept with requisite details.

2. The budget for the proposed purchase should be within the annual budget granted.

3. Whether a list of approved suppliers is maintained.

4. Are quotations called from requisite no of suppliers.

5. Is comparative quotation analysis sheet drawn.

6. If lowest quotation is not accepted, special approval obtained ?


7. Are receipt of goods supported by GRN & are inspected, counted etc.

8. Whether all eligible goods are considered for Cenvat credit purpose.

9. Periodic reconciliation of Excise, Vat records with books of account.

10. Are debit notes issued checked for prices.

11. Are all pending purchase orders compiled after reasonable period.

12. Suppliers invoice, GRN , Purchase orders are forwarded to accounts dept for payment.


Creditors Review Whether schedule of creditors with general ledger balance.

Whether advance payments made to creditors are made under proper authorization.

Verify schedule of creditors with general ledger balances.

Regularly carrying out ageing analysis.


Sales: 1. Are written orders received before order is booked ?

2. Numerical controls over sale orders, sales invoices.

3. Are any Credit limits fixed in respect of customers. 4. Are these limits checked before accepting new orders.

5. Are prices checked with price list or agreements, discounts are as per agreement


6. Sales tax is charged correctly.

7. Dispatch of goods are authorized by Gate passes.

8. Sale invoices, gate pass are forwarded to accounts dept.

9. Sales / Gross receipts are periodically reconciled with RG – 1 register, Excise returns or service tax returns as the case may be.

10. Credit notes issued are checked for prices.


Stocks Periodic physical verification is performed.

Treatment of slow moving, non moving stocks.

Whether Bin cards are updated & matching with store records.

Reconciliation of quantities of stock.(opening stock + purchases/ production – sales).

Consumption records.

Reconciliation with stock statements submitted to banks.


Debtors Review Basis for fixation of credit limit. System of review of limits at

reasonable intervals.

Preparation & review of ageing analysis.

Adjustments to debtors on account of bad debts, rebates to be reviewed etc.

Old bills are pending but new bills are fully settled, repeated dishonor of cheques.

Collections barred by limitations. Receipt of post dated cheques.

Verify secondary schedule with general ledger balance.

Analytical review procedures i.e. reconciliation with sales.


Indirect Expenditure Generally in form of Administrative nature.

The concept of propriety audit may relevant to a limited extent(For PSU’s).

Generally salaries, rates & taxes, advertisement, business promotion, interest on loans or advances.

Expenditure of this nature are generally subjected to TDS.

Verify expenditure with relevant supporting evidence as under: Rent Paid – Rental agreement Commission - Sales report Interest - Bank statements/ loan repayment schedule/ agreements.

These form of expenditure are recognized on Accrual basis.


Other Income Generally in the form of Interest Income, Dividends, Rent, Gain

on sale on assets, Scrap sales.

Is Recognized on accrual basis.

Board resolution for sale on investment.

Verify Loan agreements, bank statements for accounting of interest.

Internal controls on Miscellaneous income should be effective because chances of fraud are very high.


Statutory Compliances

1. Fiscal Laws

Income Tax Act 1961 Finance Act 1994 Central Excise Act 1944 Customs Act 1962 EPF,ESI Acts VAT, CST Acts AP Trades, Professional & Employees Act

2. Labour Laws

Payment of Wages Act Bonus Act

3. Economic Laws SEBI FEMA

4. Industry Specific Laws Banking – Banking Regulation Act Electricity - ERC Act Insurance - IRDA Act, Manufacturing – Factories Act

5. Nature of Organization Partnership Act or LLP Act Companies Act


Costing

1. Method of costing in use. Pharma Sector – Batch costing Automobile sector - Job costing

2. Verification of Production log books or job cards.

3. Method of recording wages, salaries, overtime. 4. Method of stock taking & its valuation – FIFO, Weighted average etc.

5. Basis of allocation of overheads to cost center.

6. Treatment of interest, R & D, Royalty expenses.

7. Valuation of Inter branch transfer.

-Brahmayya & Co, Vishakapatnam

Misc Areas Sub contracts works with work orders , bills etc.

HR operations – Payroll processing.

Discharge of Statutory liabilities like Gratuity etc. computations.

Inter unit reconciliations.

Reconciliations between statutory records & books of account.

Interest calculations on CC accounts.


Disadvantages Internal auditor is appointed by management. Scope of audit is

decided mutually by the auditor & auditee.

Provides assurance of control only at a point of time.

Inherent limitations of audit.

Collusion among employees. Change in conditions of operation.


Thank You

internal audit

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