Internal Auditing

BY CDR ALOK MOHAN

Internal auditing

IA is an independent, objective assurance & consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance of processes. Internal auditing is a catalyst for providing insight and recommendations based on analyses and assessments of data and business processes

What is Quality Audit ? A systematic independent and documented process for obtaining audit evidence and evaluating it objectively to determine the extent to which Audit criteria is fulfilled

What is Audit Criteria ?Set of policies Procedures or requirements used as reference

Purpose To collect evidence to permit informed judgment about status of QMS

Audit Evidence Records Statement of facts or other information which are relevant to audit criteria and are verifiable based on actual observations

Audit FindingsResults of evaluation of the collected audit evidence against audit criteria

Non conformity Is non fulfillment of audit criteria ie condition adverse to quality of product or services

Types of Audits

First Party Audit - By Company on itselfSecond Party Audit – By Customer on its SupplierThird Party Audit – By an independent OrganizationAdequacy Audit - An exercise to determine to which documented system address the applicable requirementsCompliance Audit – An audit to establish the extent to which the documented system is implimented

Features Of Audit

IndependenceRandomnessObjectivityReporting FormatCorrective action follow-upSuggestions remedy

Audit frequency should depend on:

Results of Previous AuditsChanges to QMSAny serious concern ie part of investigationsAny specific customer requirements

Internal Audit Preparations1. Planning: Gather relevant information & QMS documents – understand

documented QMS, Prepare Check list, Collect working documents, Confirm availability of auditee as per the audit schedule

2. Use Check lists Prepare bullet points, questions & use check lists as guide points For example check list for purchase process is:

Process-input-output-interfaces, product specifications, process for vendor evaluation, list of approved vendors, evidences of vendor evaluation, action on evaluation results, purchase planning process, purchase policy, purchasing information on purchase orders – orders on approved vendors, product specifications, quantity & delivery details, inspection & dispatch details, packing & commercial details accompanying documents, packing details, Authorizations on purchasing, process of ensuring receipt of material on time, purchase order amendment processwhen required, Post material receipt activities, rejections payment release etc

Conduct of IA Basic aim is to determine the Existence of operation ie knowledge & understanding, resources, controlsEffectiveness of QMS ie Visible & demonstrable, Known & understood1. Describe scope of audit to auditee2. Ensure entire scope of IA is covered3. Seek proof for objective evidence4. Investigate to the necessary depth5. Control and run audit as per plan6. To & fro checking7. Satisfy about effectiveness8. Take representative random samples

Audit PerformanceSome important points1. Follow sampling technique2. Read observe listen3. Observe facility, general housekeeping, condition of equipment,

documents & their consistency4. Observe people their knowledge, skill expertise etc 5. Do not try to have a policeman attitude

Auditing Techniques

Following techniques are used for gathering audit evidenceDiscussion with peopleVerification of facilities & environmentVerification of documents and recordsObservation of work in progressProduct Audit as appropriate

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Six Honest Men If we use they give definite response

(Rudyard’s kipling)They are

WHO, WHAT,WHEN,WHERE,HOW,WHYBur 7th Servant is highly effective That is

SHOW ME

Questioning Techniques1. Use open Questions ie questions which can not be answere with

simple yes or noFor example “can you please tell me what you do”2. Use closed questions rarely ie when you need a simple definite

answer to clear uncertainty For example“Are you responsible for this” 3. Use combinations with seven servants for example What if Who else

then what etc etc 4. Other techniques – For example I do not understand can you explain

or Silence & give nods motivating auditee to provide useful info

Internal Audit ReportingIf there is no fulfillment of audit criteria by the auditee or ifThere is a condition adverse to the quality of product or service then there should be Oral reporting or written reportingThe Audit report must be Concise, Complete, Clear, Correct & Appropriate NCR should contain details of department, Auditor, Auditee, Date of audit, NCR details, Corrective Action, Signatures of Auditor & Auditee & a provision for follow up actions

Audit report may contain five elements, sometimes called the "5 C's":

Condition: What is the particular problem identified?Criteria: What is the standard that was not met? The standard may be a Company policy or other benchmark.Cause: Why did the problem occur?Consequence: What is the risk/negative outcome (or opportunity foregone) because of the finding?Corrective action: What should management do about the finding? What have they agreed to do and by when?

Corrective Action 1. Cause Analysis – Why NCR occurred2. Action on objective evidence3. Action on other items which might have similarly got effected4. Action to ensure that the Non conformity does not occur again5. Target date for corrective action

Benefits: IA is a powerful tool to aid continual improvement & is used as a control mechanism by top management• Provides senior management with an efficient management process• Sets out areas of responsibility across the organization• Mandatory if you want to tender for some public sector work• Communicates a positive message to staff and customers• Identifies and encourages more efficient and time saving processes• Highlights deficiencies• Reduces your costs• Provides continuous assessment and improvement• Marketing opportunities

Some of the benefits to customers:

• Improved quality and service• Delivery on time• Right first time attitude• Fewer returned products and complaints• Independent audit demonstrates commitment to quality

Benefits what shipyard look for

• To assure customer satisfaction• To continually improve safe reliable products & services that meet or

exceed customer & statutory & regulatory requirements • To globify & unify the standard to avoid redundancy & varying quality

expectations from different suppliers & requirements by OEM• Increased opportunities & acceptance within the supply chain• Improved product and process quality• Potential reduction in variation of quality

Principles of AuditingEthic ConductFair PresentationDue professional careIndependenceEvidence based approach

Desirable Traits of an Auditor

Fact Finding, Polite, Direct, Persistent, Independent, Tactful, Decisive, Prepared, Honest, Patient, Unbiased, Communicative

Undesirable Traits of an AuditorFault finding, Rud3e,Meandering, Lazy, Gullible, indecisive, unprepared, dishonest, impatient, biased, aggressive, uncommunicative

Objectives of AuditingFollowing objectives:1. Management priorities2. Commercial intentions3. QMS requirements4. Statuary Regulatory & Contractual requirements5. Need for supplier evaluation6. Customer requirements7. Need of other interested parties8. Risks to the organization

Defining Audit ObjectivesThe audit objectives define what is required to be accomplished during

the audit1. Determination of extent of conformity of auditee QMS2. Evaluation of capability of QMS to ensure compliance of statuary &

contractual& regulatory requirements3. Evaluation of effectiveness of QMS in meeting objectives4. Identification of areas of potential improvement of QMS

Personal Attributes of an Auditor1. Ethical - Fair truthful sincere honest & discreet 2. Open minded - should be able to accept new ideas3. Diplomatic – Tactful in dealing with people4. Observant –Actively aware of surroundings activities5. Perceptive –instinctively aware & able to understand

situations6. Versatile Adjusts readily to different situations7. Tenacious – Persistent focused on achieving objectives8. Decisive – Reached conclusions timely9. Self reliant – Acts & functions independently while

interacting with others10. Knowledgeable – Should posses good knowledge &

skills

What is Quality ?Degree to which a set of inherent characteristics fulfill requirementsCharacteristics includeDistinguishing featuresInherent & or Assigned requirementsQualitative or QuantitativeStated implied or Obligatory requirements

Many Facets of QualityQuality of Work Quality of services Quality of informationQuality of processQuality of system Quality of PeopleQuality of ObjectiveQuality of Company

Quality CriteriaTechnically correctOn timeTo BudgetSafeLegalReliableMaintainableUsable by allLess or no adverse environmental impact