Project on: INTERNAL CONTROL OF PURCHASES AND SALES

Subject: AUDITING II

CLASS: S.Y.B.COM (A&F)

Group members:01 Sanjay Acharya36 Vineeth Mudaliyar43 Tanmai Patel54 Priyanka Sureka55 Sancheet Wagle

ACKNOWLEDGEMENT

We take immense pleasure in presenting our project on “INTERNAL CONTROL OF PURCHASES AND SALES” of Auditing-II under the guidance of Prof. Shermin AlmeidaWe are indebted to our project guide Prof. Shermin Almeida Auditing - II in charge of 2nd Semester for spending her valuable time and energy and supporting us throughout our endeavor.We are also grateful to the teaching and the non-teaching staff of the college.

INDEX

INTERNAL CONTROL AND ITS COMPONENTS

BENEFITS OF STRONG INTERNAL CONTROLS

LIMITATIONS

COTTON CORPORATION OF INDIA LTD

OBJECTIVES

ACHIEVEMENTS

AUDIT COMMITTEE OF BOARD

CENTRAL JOINT MANAGEMENT COUNCIL

PURCHASE AND SALES COMMITTEE AT HEAD OFFICE

FUNCTIONS OF PURCHASE AND SALES COMMITTEE

INTERNAL CONTROL AND ITS COMPONENTS

Internal controls are methods and policies designed to prevent fraud, minimize errors,

promote operational efficiency, and achieve compliance with established policies and

procedures. In accounting and auditing, internal control is defined as a process effected

by an organization's structure, work and authority flows, people and management

information systems, designed to help the organization accomplish specific goals or

objectives. It is a means by which an organization's resources are directed, monitored,

and measured. It plays an important role in preventing and detecting fraud and protecting

the organization's resources, both physical (e.g., machinery and property) and intangible

(e.g., reputation or intellectual property such as trademarks). At the organizational level,

internal control objectives relate to the reliability of financial reporting, timely feedback

on the achievement of operational or strategic goals, and compliance with laws and

regulations. At the specific transaction level, internal control refers to the actions taken to

achieve a specific objective (e.g., how to ensure the organization's payments to third

parties are for valid services rendered.) Internal control procedures reduce process

variation, leading to more predictable outcomes. Internal control is a key element of the

Foreign (FCPA) of 1977 and the Sarbanes–Oxley Act of 2002, which required

improvements in internal control in United States public corporations. Internal controls

within business entities are also referred to as operational controls.

BENEFITS OF STRONG INTERNAL CONTROLS

A strong system of internal controls will help to bring the following benefits to the company:

• Ensure the accuracy of the company’s accounting data and financial reports;• Reduce the risks of fraud or theft against the company by third parties or employees;• Reduce the risks of unintentional errors by employees which could be damaging to

the company;• Reduce the risks of non-compliance with the company’s policies and business

processes; and• Prevent unnecessary risk exposure due to insufficient risk management.

Control Environment

The control environment means the overall attitude, awareness, and actions of directors and management regarding the internal control system and its importance in the entity.

There are potentially many control activities, but they generally fall into five categories:

1. Adequate separation of duties

2. Proper authorization of transactions and activities;

3. Adequate documents and records

4. Physical control over assets and records; and

5. Independent checks on performance

Commitment to integrity and ethical values: the effectiveness of internal controls cannot rise above the integrity and ethical values of the people, who create, administer and monitor them

Commitment to competence and quality: a company’s control environment will be more effective it its culture is one in which quality and competence are openly esteemed.

Independence, integrity and openness at the board of director’s level. An active and involved board of directors possessing an appropriate degree of management, technical and other expertise coupled with the necessary stature and mind set so that it can adequately perform the necessary governance, guidance and oversight responsibilities is critical to effective internal control

An appropriate organizational structure: by understanding the entity’s organizational structure, the auditor can discover the management and functional elements of the business and how control policies are carried out

Appropriate delegation of authority with accountability: responsibility and delegation of authority should be clearly assigned

Appropriate human resource policies and practices: with trustworthy and competent employees, other controls can be absent and reliable financial statements will still result.

Risk assessment

If management effectively assesses and responds to risks, the auditor will typically need to accumulate less audit evidence than when management fails to, because control risk is lower

A technique to identify risks involves identifying and prioritizing high risk activities is:

a. Identify the essential resources of the business and determine which are most at risk

b. Identify possible liabilities which may arise

c. Review the risks that have arisen in the past

d. Consider any additional risks imposed by new objectives or new external factors; and

e. Seek to anticipate change by considering problems and opportunities on continuing basis.

Control activities

They are those policies and procedures which management has established to achieve the entity’s specific objectives

Control procedures entail three fundamental functions which must be separated and adequately supervised: authorization, custody and recording.

Control procedures are usually considered to fall into five categories

a. Adequate segregation of duties

b. Proper authorization of transactions and activities

c. Physical custody control over assets and records

d. Independent checks on performance

e. And adequate documents and records

Information and communication

Information must be identified by management as relevant and delivered to the people who need it in a form and time frame that allows them to carry out their control and other responsibilities

The accounting system consist of method and record established and designed to

a. Identify and record all valid transactions, assets and liabilities

b. Describe the transactions on a timely basis insufficient detail to permit their proper classification for financial reporting

c. Measure the value of transactions, assets and liabilities in a manner that permits recording their proper monetary value in the financial statements

d. Present the transactions and related disclosures properly in the financial statement

As part of the procedures to obtain an understanding, the following should be documented

a. The accounting record, computer files, supporting documents and financial accounts involved in processing transactions

b. The classes to significant transactions

c. How the transactions are initiated

d. The accounting process from initialization of a transaction to its inclusion in the financial statements

e. The financial reporting process used to prepare the financial statements including significant accounting estimates and disclosures.

Monitoring

Monitoring is a process that deals with ongoing or periodic assessment of the effectiveness of their design and operation

Monitoring should address whether proper accounting records are being maintained and whether the financial information used within the business and for publication to third parties is reliable

When evaluating the ongoing monitoring the following issues might be considered

a. Extent to which personnel obtain evidence as to whether the system of internal control continues to function

b. Periodic comparisons of amounts recorded with the accounting system with physical assets

c. Responsiveness to internal and external auditor recommendations on means to strengthen internal controls

d. Effectiveness on internal audit activities.

Evaluation of Accounting and Internal Control System

The basic audit approach to evaluating internal controls involves four broad steps:

1. Obtain an understanding of internal control and its components

2. Assessing Control Risk

Assessing control risk is the process of evaluating the design and operating effectiveness of a company’s internal controls as to how it prevents or detects material misstatement in the financial statement assertions

Assessing control risk follows this process

1. Identify financial statement assertions and audit objectives;

2. Identify relevant controls;

3. Evaluate weakness in internal control

4. Assess control risk at or below maximum

Identify financial statement Assertions and audit objectives

Assessing control risks starts with the financial statement assertion about significant account balances and transactions

Identify Relevant Controls

The auditor identifies important controls by referring to the types of control activities that might exist, and asking if they do exist

Evaluate weaknesses in internal control

When assessing controls the auditor looks for weaknesses in the controls for two reasons: to determine the nature and extent of the substantive tests she will perform and to formulate constructive suggestions for the improvements

Assess Control Risk at or below maximum

Control risk should be assessed at the maximum (the greatest risk that a material misstatement that could occur will not be prevented of detected on a timely basis by the internal control structure) for some or all assertions if:

• Policies and procedures are unlikely to pertain to an assertion;

• Policies and procedures are unlikely to be effective;

• Obtaining enough or proper evidence is not efficient

If internal controls are assessed below the maximum (at medium or low risk) the assessment must be supported by tests of control.

3. Tests of Controls

Test of controls are audit procedures to test the effectiveness of control policies and procedures in support of a reduced control risk.

The nature of tests of controls is that the tests generally consist of one (or a combination) of four types of evidence-gathering techniques:

Inquiry: Inquiry evidence is based on interviews concerning the effectiveness of controls.

Observation: for controls that leave no documentary of evidence, the auditor generally observes them being applied.

Examination of documents (inspection): many control activities leave a clear trail of documentary evidence in the form of either written or computer records.

Reperformance: if content of documents and records is insufficient to assess whether controls are operating effectively, the auditor re-performs the control activity to see if the proper results were obtained.

4. Reassessment of control Risk

The auditor’s assessment of the components of audit risk may change during the course of an audit.

5. Effect of control Assessment on substantive Tests

The assessed level of control risk for an assertion has a direct effect on the design of substantive tests. The lower the assessed level of control risk the less evidence the auditor needs from substantive tests. The auditor’s control risk assessment influences the nature, timing and extent of substantive procedures to be performed.

LIMITATIONS

Internal control can provide reasonable, not absolute, assurance that the objectives of an

organization will be met. The concept of reasonable assurance implies a high degree of

assurance, constrained by the costs and benefits of establishing incremental control

procedures.

Effective internal control implies the organization generates reliable financial reporting

and substantially complies with the laws and regulations that apply to it. However,

whether an organization achieves operational and strategic objectives may depend on

factors outside the enterprise, such as competition or technological innovation. These

factors are outside the scope of internal control; therefore, effective internal control

provides only timely information or feedback on progress towards the achievement of

operational and strategic objectives, but cannot guarantee their achievement.

COTTON CORPORATION OF INDIA LTD.

CCI- AN ORGANIZATION

CCI Operations cover all the cotton growing states in the country comprising of

Punjab, Haryana and Rajasthan in Northern Zone

Gujarat Maharashtra and Madhya Pradesh in Central Zone and Andhra Pradesh Karnataka & Tamil Nadu in Southern Zone as also in Orissa.

In Maharashtra, CCI made its entry during cotton season 2002-03, after the state government of Maharashtra relaxed its monopoly procurement scheme thereby allowing ginneries, traders & CCI to purchase raw cotton from the farmers of the state.

CCI was established on 31st July 1970 as a Government Company registered under the Companies Act 1956.  In the initial period of setting up, as an Agency in Public Sector, Corporation was charged with the responsibility of equitable distribution of cotton among the different constituents of the industry and to serve as a vehicle for the canalization of imports of cotton.

OBJECTIVES

With the changing cotton scenario, the role and functions of the Corporation were also reviewed and revised from time to time.  As per the Policy directives from the Ministry of Textiles, Government of India in 1985, the Corporation is nominated as the Nodal Agency of Government of India, for undertaking Price Support Operations, whenever the prices of kapas (seed cotton) touch the support level.  As per this Textile Policy of 1985, the specific role assigned to the Corporation, in brief, is as under: -

To undertake price support operations, whenever the market prices of kapas touch the support prices announced by the Government of India, without any quantitative limit;

To undertake commercial operations only at CCI's own risk;

To purchase cotton to fulfill the export commitments;  &

To act as implementing agency for Mini Missions III & IV of TMC.

As a Nodal Agency of Government of India to undertake price support operations, Corporation keeps itself in preparedness to meet the eventualities of price support operations.  As and when kapas prices touch the level of Minimum Support Price (MSP), kapas purchases are made under MSP operations without any quantitative limits.  Under these MSP operations, cotton farmers are free to offer their kapas produce to CCI and Corporation continues purchases of such kapas till the prices rule at MSP level.

In the event of kapas prices ruling above MSP level, Corporation undertakes commercial operations at its own cost for supply of cotton to mills in the State sector as well as private sector.  All these operations are dovetailed to benefit the cotton growers on the one hand and supply of quality cotton to the textile mills on the other hand. As Implementing Agency for Mini Missions III & IV of Technology Mission on Cotton, CCI is striving its best to achieve the laid down targets in respect of development of market yards and modernization of ginning & pressing factories.  These targets of IXth Plan period have already been achieved and the projects targeted through the Xth Plan period, are at different stages of completion.

ACHIEVEMENTS

CCI has been championing the interest of Indian cotton farmers for more than three decades and is the single largest cotton trading company in the country.

Serving the cotton farmers of the country in realizing fair price of their produce, by operating more than 300 procurement centers on All-India basis. CCI remains present in the market yards from day one of the kapas arrivals so as to ensure fair competition at the time of auction.

Serving Textile Industry by playing a leadership role of a dependable supplier of quality cotton on most competitive terms. It has earned a reputation for maintaining quality, adhering to sale terms and for delivery schedules both in domestic as well as international market.

To supply cotton to the textile industry at competitive prices, CCI keeps on selling cotton on day-to-day basis and does not speculate on prices. We also believe in transparent working and fair trade practices. We also strike a balance between offering fair price to cotton growers and excellent pre and post sales services to cotton buyers.

Achieved all targets of annual programme for use of official languages. CCI has been honored with first prize for Indira Gandhi Raj Bhasa shield for 15th time.

CCI is a profitable and MOU signing Company with the Ministry of Textiles, Government of India since 1992-93 with MOU ratings of Good to Excellent.

AUDIT COMMITTEE OF BOARD

The constitution of Audit Committee is decided by Board of Directors that how many members are there and what reference for their constitution are. As nominated by Board, presently three Directors constitute the Audit Committee. The scope of the Audit Committee has been defined by the Board as under: a) To oversee the Corporation’s financial reporting process and the disclosure of its

financial information to ensure that the financial statement is correct, sufficient and credible.

b) To review with management the annual financial statements before submission to the Board, focusing primarily on

• Any changes in accounting policies and practices. • Major accounting entries based on exercise of judgment by management. • Qualifications in draft audit report. • Significant adjustments arising out of audit • The going concern assumption Compliance with accounting standards • Compliance with legal requirements concerning financial statements.

c) To review with the management, external and internal auditors, the adequacy of internal control system.

d) To discuss with the internal auditors any significant findings and follow up thereon.

e) To review the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of material nature and reporting the matter to the Board.

f) To discuss with external auditors before the audit commences, nature and scope of audit as well as have post-audit discussion to ascertain any area of concern.

g) To review the Corporation’s financial and risk management policies.

CENTRAL JOINT MANAGEMENT COUNCIL (CJMC) :

There is a Central Joint Management Council at Head Office comprising of equal representation from management as well as staff side, the meetings of which are held twice in a year. The composition of the Central Joint Management Council is as under:

Management Side Staff side

1 Managing Director President - Central Zone Staff Unit

2 Director (Finance) General Secretary - Central Zone Staff Unit

3 Director (Purchase & Sales) President - North Zone Staff Unit

4 Chief General Manager (Marketing)

General Secretary - North Zone Staff Unit

5 Chief General Manager (Finance) President - South Zone Staff Unit

6 General Manager (HRD) General Secretary - South Zone Staff Unit

The basic objective/function of the Central Joint Management is to have employees’ participation in the management and their involvement in the decision making process, with a view to have improvement in productivity in general and give encouragement to and consideration of suggestions. The power of nomination of the members for management side rests with Managing Director and Members from staff side rests with General Secretary of All India CCI Employees’ Council.

PURCHASE & SALES (P&S) COMMITTEE AT HEAD OFFICE

The high level Purchase & Sales Committee reviews and finalises the offers received during the day as per the indicative prices fixed by Price Fixation Committee at Head Office. The P&S Committee consists of the following officers:

1. Chairman-cum-Managing Director Chairman 2. Director (Marketing) Member 3. Adviser (Finance) Member 5. Chief General Manager (Finance) Member 4. Chief General Manager (Marketing) Member 6. General Manager (Sales Promotion) Member 7. General Manager (Purchase/Export

Promotion) Member

8. General Manager(IA/IT) Member 9. General Manager(Finance) Member 10. Dy. General Manager(Logistic) Member 11. Manager (Vigilance) Invitee

Director (Mktg.) / CGM (Mktg) can invite any other officers to assist them from Marketing Department, if required. In the absence of Chairman the next senior most officer will Chair the meeting. The functions of the Committee are broadly given in Annexure –A. Director (Mktg.) should ensure the minutes are circulated in time.

FUNCTIONS OF PURCHASE & SALES COMMITTEE

To review the international and domestic market situation on daily basis in respect of demand and supply, prevailing prices, expected trends and other related aspects like prices of competitive fibres, position of yarn having bearing of the demand and supply position of cotton as also its prices, both on the short terms as well as on long term basis.

To review the seed cotton prices in respect of arrivals, competitor’s prices, expected trend of arrivals, expected price trend etc.

To review the purchases operations of the Corporation with particular reference to prices and aspects of budgeting having bearing on the cost, branch-wise and variety-wise.

To note the market information in respect of transactions of competitors, both in the domestic market as well as in the export market.

To decide about the individual offers received for transactions in the domestic as well as sales against ‘H’ Form, for acceptance, countering or rejection keeping in view the best interest of the Corporation.

To decide about the purchase price for various varieties and grades to be purchased under different branches as well as fix cost ceilings for the same.

To discuss and decide various points of agenda regarding financial matters like L/C, bank guarantee facility, allowing of godown storage facility and other sales related issues.

To review the cottonseed sales and lifting position, branch-wise.

Other related matters with the permission of the Chair.

The Committee for deciding the indicative sales prices for domestic & export markets will now consist of the following officers:

1. Director (Marketing) Chairman 2. Chief General Manager (Finance) Member 3. Chief General Manager (Mktg) Member 4. General Manager (Export Promotion) Member 5. General Manager (Purchase/Export

Promotion) Member

6. General Manager (Hindi/ADM) Invitee 7. General Manager (IA/IT) Invitee 8. General Manager (Finance) Invitee 9. Dy. General Manager (Logistic) Invitee

Director (Mktg.) / CGM (Mktg) can invite any other officers to assist them from Marketing Department, if required. In the absence of Chairman the next senior most officer will Chair the meeting. The functions of the Committee would be to decide the indicative selling prices for the day keeping in view the market conditions and other relevant information and data. It should be ensured by the Chairman of the Committee that the indicative prices are circulated / put on the website preferably before 12.00 noon everyday.