Lecture Date: - WordPress.com · Web viewThere are wide ranging differences among various GAAPs....

Mgmt study material created/ compiled by - Commander RK Singh [email protected]

Date: 28 Jun 2006Mr A. R. Parasuraman

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Why study audit when we, as management, will never be doing it ourselves and will always have qualified auditors to do the job?

We, as managers, may not be required to do the Statutory Audit or even Internal Audit, but we can never escape audit. Our job and performance would be audited and knowing the framework of audit would help us in ensuring that we do not fall on the wrong side of the auditors, knowingly or unknowingly.

What is an audit?

An audit is a check or scrutiny.

There are two types of audits: -

(a) Statutory Audit

(b) Internal Audit

Management Audit, functional audit, performance audit, etc are all part of the internal audit.

Statutory Audit – Statutory Audit is an audit which is done by a Chartered Accountant who is appointed by the shareholder during the AGM as per the requirements of the Companies Act. The terms of reference for the Statutory Audit are given in the Company Law. The report of the Statutory Audit is given to the shareholders who are the members of the company. The Statutory Audit reports on the trueness and fairness of the financial statements on the basis if examination of books of accounts on the basis of explanations that are given by the responsible officials of the company and after satisfying that what is reflected in financial statements is indeed in agreement with what is there in the books of accounts.

The essence of any audit lies in its TRUENESS and FAIRNESS. Thus, we need to know

(a) Definition of True and Fair

(b) Importance of concept of True and Fair

(c) Ways to ensure trueness and Fairness

Definition of “True and Fair” – True and Fair Financial Statements are ones where facts have been recorded as they are without any manipulation, without any window dressing and without any creative accounting.

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Creative Accounting - Creative Accounting and Earnings Management are euphemisms referring to accounting practices that may or may not follow the letter of the rules of standard accounting practices but certainly deviate from the spirit of those rules. Thus, Creative accounting, actually speaking, is systematic misrepresentation of the true income and assets of corporations or other organizations. It is characterized by excessive complication and the use of novel ways of characterizing income, assets or liabilities. The terms "innovative" or "aggressive" are also sometimes used. "Creative accounting" is at the root of a number of recent accounting scandals.

Importance of Concept of True and Fair – There are so many stakeholders in any company, including members (shareholders), lenders, creditors, govt (IT Deptt), employees, etc who need to know correct state of company. Since they can not access the books of accounts, their only source of knowledge about the company’s performance and prospects is AUDIT. In absence of true and fair audit, they would have no avenue to base their financial decision with regard to the company.

Ways to ensure trueness and Fairness: -

(a) By instituting the audits, and

(b) Having the independent auditors.

Question of independent auditors has been tougher of the two. Failure of companies like Enron and WorldCom have brought to open the most widely and well known secret about audit firms acting as stooges of the management rather than independently as the representatives of the members of the company who are deemed to have appointed them. In the wake of a series of corporate financial scandals, including those affecting Enron, Tyco International, and WorldCom (now MCI), The Sarbanes-Oxley Act of 2002 was enacted in the United States. It was named after sponsors Senator Paul Sarbanes and Michael G. Oxley.

The Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or SarbOx; is a United States federal law passed in response to a number of major corporate and accounting scandals involving prominent companies in the United States. These scandals resulted in a decline of public trust in accounting and reporting practices. The legislation is wide ranging and establishes new or enhanced standards for all US public company Boards, Management, and public accounting firms. The Act contains criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. Some believe the legislation was necessary and useful, others believe it does more economic damage than it prevents and yet others observe how essentially modest the Act is compared to the heavy rhetoric accompanying it.

The first and most important part of the Act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance and enhanced financial disclosure. It is considered by some as one of the most significant changes to United States securities laws since the “New Deal” in the 1930s.



GAAP – Generally Accepted Accounting Practices.

Every country has its own GAAP. There is an Indian GAAP, US GAAP, UK GAAP, Canadian GAAP and so on. There is also an International GAAP. There are wide ranging differences among various GAAPs.

International Accounting Standard Board promulgated IFRS (International Financial Reporting Standard) in 2001.

Though not the best or most conservative, US GAAP is today emerging as the most important GAAP due to the sheer size of market capitalisation of US securities market which is approximately half of the world stock market capitalisation. Canadian GAAP and UK GAAP are superior to US GAAP.

(Hereafter we will be concentrating primarily on the Management Audit and not the Statutory Audit).



Date: 12 Jul 2006

INTERNAL AUDIT

(a) Define Internal Audit.

(b) Why the concept of Internal Audit?

(c) How is the internal audit done in a company?

Internal Audit is an independent appraisal activity within an organisation for review of accounting, financing and other operations as a basis of protection and constructive service to the management. It is a type of control which functions by measuring and evaluating the effectiveness of other types of controls.

Deconstructing the above formal definition – a system audit is meant to protect the management from internal frauds and system failures. Thus, while a Statutory Audit is meant to protect the interest of the stakeholders (remember – stakeholders and not shareholders alone) against the misdeeds of the management, Internal Audit works as the eyes, years and watch dog for the management against the employees.

While the terms of reference of Statutory Audit are fixed as given by the company law, terms of reference for Internal Audit are flexible and are dictated by the management as per their requirement. Terms of reference can change from year to year depending upon management’s perception about internal fraud and performance evaluation.

Statutory Audit is mandatorily a financial audit only. However, scope for internal audit is very wide. Besides financial audit, it also covers areas like performance audit, marketing audit, quality audit, functional audit, management audit, and so on. It can cover any and every activity of the company.

For any audit to be effective, it is mandatory that it should be independent. In order to ensure that audits are independent, the auditors work under the audit committee of the Board of Directors which is formed by taking majority members from the independent directors. (It’s another matter that independent directors are themselves are independent only for the name sake. For that matter, even statutory auditors, dependent on management for their appointment as auditors, are not as independent as they ought to be. We have all witnessed the Enron and Arthur Anderson drama, WorldCom episode and so on, only recently).

Auditors work with a negative mindset. But that is what their brief is, to find the fault. Positives are in any case reported instantaneously by the respective departments. Therefore, management does not want to know the positives. It is only interested in faults which are often hidden by the departments which are required to be unearthed by the auditors. Auditors, whether Statutory or Internal, always have to dig out correct information from the rosy picture presented by the departments. It is left to the experience, tact and ingenuity of the auditor to ferret out the correct information.



However, auditors need to guard against the tendency of losing the objectivity in their effort to find the faults. Clerical errors, occasional slip with minimal losses, etc should not be hyped up while reporting.

Internal audit functions can also be outsourced. It has its own pluses and minuses. It saves on maintaining an expensive department having experts in various disciplines. Further, they are free of any influence. But at the same time, such outsourcing may lead to unwanted leaks of sensitive information about the company.



MARKETING AUDIT

Marketing involves -

(a) Customer Orientation

(b) Integrated use of company’s resources to aid and abet the firm to supply wanted goods and services at a profit to itself.

Check-off list for Marketing Audit –

(a) Strategic Marketing Planning

(b) New Product Development

(c) Product mix decisions

(d) Product Abandonment Decisions

(e) Pricing Policies

(f) Advertisement effectiveness

(g) Evaluating shipping costs

(h) Evaluating marketing information system

(i) Evaluating territories and markets

(Read Marketing Audit Chapter from Philip Kotler Book Eleventh Edition, 95 to 699, before arriving for the next lecture)

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19 Jul 06NEW PRODUCT DEVELOPMENT AUDIT

Definition – A new product is a product which regardless of the length of time it is marketed, is unknown by name or application to 75% of the potential users.

50 to 98% of the new products fail for various reasons. A large majority fail in the very first year. 75% of annual corporate expenditures for new products in the USA are unproductive. Of the successful, only one in four significantly contribute profit.

New product development should fulfil following: -

1. Success in meeting the sales objective

2. Success in meeting the profit objective

3. Success rate

4. Sales impact on company’s annual sales

5. Profit impact on company’s annual profits

6. Profitability relative to competitors

Price – Sum of cost to the company and the desired profit.

Price is the art of translating into quantitative terms the value of a product or service at a given point of time.

Symptoms of problems in a firm’s pricing policy: -

1. Price changes are made too frequently

2. Pricing policy is difficult to explain to the customers

3. Channel members complain that their profit margins are inadequate

4. Price decisions are made without adequate data and information

5. Too many different price ranges

6. Too much sales personnel time is spent in bargaining

7. Price strategy is inconsistent with the target market

8. A high proportion of product marked down or discounted late in the selling season

9. Too high a proportion of customers are price sensitive

10. The firm has major problems confirming with pricing legislation.

Evaluating Shipping Costs –

1. When was the last time you personally inspected the shipping department



2. Do you invite competitive bids on transport service?

3. Do your company’s shippers have incentive rates?

4. Do you use air freight as an alternative to other forms of transportation?

5. Have you reviewed you shipping sheducles in the last few months?

6. Do you shippers have special rate for off peak shipments?

7. Do you review your shipment packing to assure getting the best rate classification? How accurate are your bills of description?

8. Do your truck drivers notify customers of their estimated arrival time?

9. Is all your packing really necessary?

10. How do you handle the freight charges on small orders?



26 Jul 06

MANUFACTURING AUDIT

Define Manufacturing Audit

Manufacturing management involves producing right quantity of goods of right quality at right time and at right cost.

If this simple definition is expanded – Manufacturing management is management of various elements affecting production viz – Production Processes, equipment, their utilisation, layout, maintenance philosophy, labour employment and deployment, materials management and production scheduling in order to be able to produce the right quantity of goods of right quality at right time and right cost.

Any management audit involves a check or scrutiny of all elements of the concerned function. Therefore, management audit of a manufacturing division will involve scrutiny of all the above stated elements of a production set up. Some of the important questions that the audit team needs to ask are –

1. Does the manufacturing department knows its product cost? This question is important because people at the ground level (production floor) are the best people to recommend changes and save costs (Often in better position than most of the consultants. Only no one asks them). Therefore, knowledge of costs is essential for production department staff.

2. Examine efficacy of moving, adding, or discounting plant locations (Relocation/Reconfiguration of Production Bases). This is a crucial aspect and can affect a company on a grand scale. Relocation of production base can be inspired by many factors:

(a) Tax breaks/benefits – SEZs and Backward regions,

(b) Availability of good and cheap labour (Gujarat for Diamond cutting)

(c) Labour troubles (Kerala and West Bengal)

(d) Closer to raw material source (Cement Plants in MP and Steel Plant in Orrissa and Jharkhand)

(e) Closer to customers

(f) Social problems

(g) Lawlessness problems (Bihar)



(h) Capitalisation of appreciation in mill land value (Mills in Dadar and Lower Parel area in Mumbai)

3. Manufacturing Methods – Are they reviewed and how often? Technological developments lead to better and more efficient and more cost effective methods. In order to maintain cost competitiveness, it is essential to continuous upgrade manufacturing processes and methods. In steel industry, use of continuous casting method, wherein molten metal is directly converted into final required shape/size has cut down final cost by over 20% and more.

4. Who schedules production? This question is important from the point of view of inventory management. A production engineer would plan by economic batch size and may overlook market demand. Marketing Department would plan as per market demand without any concern for economic batch size. Both have their own pitfalls.

5. Are production schedules based on long or short range sales forecast? While a variable demand low shelf life product needs to have a short range production forecast, a seasonal product like Fridge or Air Coolers and Blankets need to have long term forecast so that stocks can be built up before demand picks up and there is no inventory at the end of the season.

6. Are scheduling problems influenced by internal or external events? This analysis helps in deciding the course of action. Internal events are mostly within control of the management. Try to find a solution. External events are uncontrollable. Invoke heavenly blessings.

7. How effectively is the major equipment in the shop utilised? Ensure that high cost machines are not idle due to some low cost machine acting as a bottleneck.

8. Are the machines located optimally in the shopfloor? Too spaced out machines will increase time and cost of moving items while crowded floor will hamper movement.

9. Are set up time studied to determine optimum production runs?

10. Have you compared production schedule to actual output?

11. Have you realised the flow of work through manufacturing areas?

12. How effective are your material handling equipment and techniques?

13. Is each manufacturing deptt or operation necessary? Quite often it is possible to eliminate few processes or merge two or more processes. Classical case here is the Teller system in the banks. Four or five operations have been merged to create the single window payment system called teller.



Next topic – Audit of financial management function.

Presentation due on 09 Aug 06

Topic for presentation –

1. Bank Audit – Bankers to necessarily present on this topic only.

2. Insurance Audit

3. IT Audit – Audit of company undergoing computerisation

4. Audit in Capital Markets (various components)

5. Audit in Defence (Navy guys to necessarily present on this topic only)



02 Aug 2006

AUDIT OF FINANCE MANAGER’S FUNCTIONS

Checklist

1. Whether sales targets were prepared?

2. Whether revenue collection is as per schedule?

3. Whether collection period is increased or decreased?

4. Whether bad debts have increased or decreased?

5. What steps were taken to reduce avoidable expenditure from previous year?

6. Project Capital expenditure are as per plan or not?

7. What is the cash balance? Is is more or less?

8. Whether investment decisions are regularly reviewed?

9. Regulatory compliance.

10. Adherence to accounting standards

11. Are the projects completed in time and without cost overrun.

12. What are the reasons for project failures and lessons taken from earlier failures?

13. How well is working capital management done?

14. Whether operating cycle is maintained or not?

O = R + W + F + D – C

Where O – Operating Cycle in days

R – Raw Material Storage period

W – Work in process period

F – Finished Goods Storage period

D – Debt collection period

C – Creditors collection period

R = Average inventory of RM storesRM consumed per day

Average inventory of raw material = Opening stock + Closing stock2

Raw Material Consumption per day = Raw Material consumed in the year365



W = Average work in processCost of production/day

F = Average Finished goods inventoryCost of goods sold/day

C = Average creditCredit purchases per day

D = Average debtsCredit sales per day

D is dependent on

(a) Credit Policy whether liberal or stringent

(b) Collection Policy

(c) Collection Effort

Reasons for delay in payment: -

(a) General Mentality/human factor

(b) Fund Problem

(c) Competition in the market

(d) Procedural delay in release of payment

(e) Genuine difficulty/loss in business.

Type of Creditors

(a) Statutory Creditors

(b) Essential Creditors

(c) Dependent Creditors

Audit can focus on how accounting is done –

(a) Whether proper capitalisation is done?

(b) Whether depreciation policy is continuously adhered?

(c) Whether current assets are accounted properly?

(d) Accounting policy should be continuously followed. Any deviation should be recorded with the reason.

(e) Whether capital and revenue expenditures are properly accounted?



(f) Risk Management – Whether all risks involved are recorded and taken care of?

Powers of Audit Committee

1. To investigate any activity within its terms of reference

2. To seek information from any employee

3. To obtain outside legal or other professional advice

4. To secure attendance of outsiders with relevant expertise, if considered necessary.

5. To have full access to information contained in the records of the company and external professional advance, if any.

Functions of Audit Committee

1. Oversight of the company’s financial reporting process and the disclosures of its financial information to ensure that the financial statement is correct, sufficient and credible.

2. Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees.

3. Approval of payment to statutory auditors for any other services rendered by the statutory auditors.

4. Reviewing with the management the annual financial statements before submission to the Board for approval.

5. Reviewing with the management, the quarterly financial statements before submission to the board for approval.

Statutory Audit

Audit should be conducted in accordance with the auditing standards generally accepted in India. The standards require that auditors plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management as well as evaluating the overall financial statement presentation.



Audit Checklist

1. To obtain all the information and explanations which are necessary for the purposes of audit.

2. To examine books of accounts and certify that these are maintained as required by law.

3. The balance sheet profit and loss account and cash flow statement are in agreement with the books of account.

4. On the basis of written representations reviewed from the directors and taken on record by BoD, to report that none of the directors were disqualified for being appointed as director in terms of companies Act 1956.

5. To certify that accounts give the information required by the companies Act, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India.

Auditor’s report should also include

1. Maintenance of proper records showing full particulars including details and situation of fixed assets.

2. Physical verification of assets by management in adequacy and disposal of fixed assets during the year.

3. Physical verification of inventory by management are reasonable and adequate. Company is maintaining proper record of inventory, reasonable procedure of inventory verification is followed, discrepancies are properly dealt with, etc.

4. Adequacy of internal control system with respect to purchases of inventory, fixed assets and sale of goods and services.

5. Whether the company has defaulted in repayment of deposits, whether the company has accumulated loss, whether the company defaulted in repayment of dues to financial institution or bank

6. Whether the company is regular in depositing with appropriate authorities undisputed statutory dues including PF, income tax, sales tax, wealth tax, service tax, custom duty, excise duty, etc.

7. Whether loans have been used for the purpose for which they were raised.

8. Whether fund raised for short term basis have been used for long term investments?



9. Whether any fraud was noticed or reported during the course of audit.

One of the important functions of the finance manager is sourcing of funds. If funds are not raised after due deliberations, it can cause huge loss to the company. Audit can check whether the weighted average cost of capital is minimum. How is the capital structuring done?

Q – Suppose Equity Share Capital is 50. Borrowed funds are 50, Cost of equity is 20%, interest rate 20%, tax rate 50%. Work out weighted cost of financing.

After tax interest rate = 0.50 x 20% = 10%

Amount Weight Cost Weighted CostShare Capital 50 0.50 20% 10%Loan 50 0.50 10% 05%Total 100 1.00 15%



Date: 16 Aug 06

Project Management Audit

Project is a special kind of activity which has got a beginning, which has got a life and which has got an end. Project is born, develops and a project dies (comes to conclusion). A project is unique; it is limited in time and scope; it involves variety of resources. Project has got objectives; the time, cost and quality objectives.

Time objective on project is given by scheduler.Cost Objective on project is given by budget.Quality objective on project is given by specification.

Project management includes the planning, organising, monitoring and controlling of all aspects of the project in a continuous process to achieve its objectives.

Objectives – The purpose of project management audit is to ensure that

(a) Projects are fully briefed with clear objectives, responsibilities and ownership defined,

(b) Costs and benefits are clearly determined and properly monitored,

(c) Projects are completed successfully in line with the plan, and on time and in budget.

Broad Scope of Audit

The key areas which need to be audited are:

1. Project Definition/Characteristics

2. Project Initiation and Project Plan

3. Quality of Project Management Process

4. Project Progress

5. Project Cost

6. Resource requirement and utilisation - Whether resources are adequate to meet the project objectives?

7. Whether personnel organisational structure is appropriate for the project?

8. Information Management

9. Risk Management

10. Contracts Control



11. Learning

1. Project Definition/Characteristics Audit

(a) Whether project scope, nature and plan are in line with organisational needs?

Every project has its characteristics. Take for instance a Defence Department development project. Such projects often represent cutting edge of the technology and therefore customers themselves are unsure about whole thing. Thus, such projects invariably lack proper definition. The requirements keep getting altered regularly, almost whimsically. Such projects face enormous delays and rework. A fixed cost project in such a scenario is bound to spell doom for the company. Similarly, public infrastructure projects involving land procurement like highways, dams, canals again face delays due to litigation, political expediencies, funds shortages, etc. There are long idle times for men and equipment. Such projects invariably face cost overruns due to inflation, payment for wages for men and rentals for equipment for their idle time and financing cost of semi completed work. Whether the project contract has catered to safeguard organisation’s interest against these contingencies?

(b) Do project management processes exist for planning, organizing, monitoring and controlling all aspects of the project?

(c) Is project divided into sub-processes / phases? Have the milestones been defined?

A “Milestone” is an event which is selected to signify that certain project activities have been completed. It is an event that signals completion of a related group of activities or phase and start of next group of activity. It is typically marked by a high level event such as completion, endorsement or signing of a deliverable, document or a high level review meeting. For example, signing of contract signals end of negotiations and start of project. Structural work completion is another milestone. Installation of equipments is next.

(d) Is there a clear definition of responsibilities for monitoring the realization of the sub-process / phase objectives and related risks?

2. Project Initiation and Project Plan Audit

(a) Does an approved project and quality plan exist? If so, is it kept up to date, and by whom?



(b) Has the project plan been prepared to allow for traceability (measuring and assessing objectives/ deliverables)? If not, is there an alternative means of traceability?

(c) Is the objective of the project to fulfil the requirements of a contract? If so, are contract reviews performed?

(d) Are reviews and progress evaluations included in the Project Plan? If so, do these reviews include preventative / corrective action measures?

3. Project Management Processes Quality Audit

(a) Which project management processes exist; (whether documented or not) within the organisation e.g. cost, resource and time related processes to ensure the project is managed efficiently and effectively?

(b) Do Project Management guidelines and processes exist within the organisation / project organisation to ensure quality?

(c) Is there a clear division of responsibility versus authority between the organisation, in and within project team?

(d) Do project progress evaluations exist? If so, what do they evaluate? How is the reporting and review structure?

(e) Do quality attributes exist within the Project Management Process? E.g. approvals, documentation, preventative and corrective action, reviews, traceability, training, verification, etc.

(f) Have management provided an organizational structure that is conducive to support the project objectives?

(g) Is the decision making process based on data and factual information?

(h) Has a project manager been appointed and defined with accountability, authority and responsibility for managing the project?

(i) Has a system been put in place to collect and analyze the information gained during / after a project for use in a continual improvement process?

4. Project Progress Audit - Whether project is progressing as per schedule? Are there any time overruns?

(a) Schedule Planning

(i) Is there a proper timetable?



(ii) Have key events, milestones, critical and near-critical activities been identified in the schedule?

(iii) Does a time-related plan exist to determine the dependencies and duration of activities to ensure timely completion of the project?

(b) Schedule Management

(i) Is project progressing as per the schedule?

(ii) How often is the schedule revised?

(iii) What are the causes of deviations from schedule?

(iv) How can the delays be made-up by crashing of activities?

(v) What are the costs involved in activity crashing vis a vis costs due to delay?

(c) Activity Control

(i) Have the activities been defined in such a way that its outputs are measurable?

(ii) Are the activities defined and carried out in accordance to the project plan?

(iii) Has the project defined and documented inter-relationships, logical interactions and interdependencies? E.g. project network diagrams.

(iv) Have reviews been planned on the activities?

(v) Are variations from the defined activities being updated on the Project Plan?

5. Project Cost Audit - Are there any cost overruns?

(a) General

(i) Are there any cost overruns?

(ii) What are the reasons for cost overruns?

(iii) What remedial measures have been taken to avoid recurrence?

(b) Cost Estimation

(i) Have project costs been clearly identified and documented?



(ii) Has the project cost estimation involved significant cost related risks? If so, how are these managed?

(iii) Have the project costs been linked to the activity definition process?

(c) Budgeting

(i) Is the project budget consistent with the project requirements, assumptions, risks and contingencies? Is this documented?

(ii) Has the project budget been established based on the project cost estimation process and is it in accordance with the approved accounting procedures within the organisation?

(d) Cost Control

(i) What is the process for project purchasing/incurring expenditure?

(ii) Has this process been documented and communicated to those responsible for authorising expenditure or authorizing work that may have cost implications?

(iii) Are project expenditure records reviewed, managed and maintained?

(iv) Are the root causes for budget variances, both favourable and unfavourable, identified? If so, is this part of a project budget review?

6. Resources Requirement and Utilisation - Whether resources are adequate to meet the project objectives and are they being utilised effectively?

7. Personnel - Whether personnel organisational structure is appropriate for the project?

(a) General

(i) Has a project organisational structure been established?

(ii) Is the project organisational structure appropriate for project scope, size and local conditions?

(iii) Is the project organisational structure encouraging for communication and co-operation between the project participants?

(iv) Are accountability, authority, responsibility and job descriptions defined and documented?



(v) How often is the project organisational structure reviewed for validity and adequacy?

(b) Staff allocation

(i) Were selection criteria prepared for staff allocation?

(ii) Is the allocation for each sub head of project adequate in terms of numbers, knowledge and experience?

8. Information Management Audit

(a) How does the project manage the following:

(b) Preparing information

(c) Collecting information

(d) Classifying information

(e) Distributing information

(f) Filing information

(g) Updating information

(h) Retrieving information

9. Risk Management Audit

(a) Have the potential risks through the project life cycle been identified and assessed?

(b) Has the probability of the occurrence and impact of the identified risks assessed?

(c) Are the contingency plans for management of these risks in place?

10. Contracts (Sub Contracts) Control

(a) Does the project have monitoring mechanism to ensure that all contract requirements, due dates and records are met?

(b) What is the procedure for sub-contracting work? Are the sub-contractors evaluated for technical competence, experience, delivery performance, quality of work and financial standing?

(c) How are tenders evaluated?

11. Learning from the Project



(a) At project closure, is the organisation collating, storing, updating and retrieving information from the project?

(b) At project closure, are reviews performed of project performance, highlighting experience from the project?

(c) Was expenditure within budget and objectives achieved and the project accounted for accurately?



Date: 23 Aug 06

Audit of Material Management Function

Define Material Management function

Materials management is planning, procurement, warehousing and handling of materials required by the company to ensure timely availability of required quantity of desired quality of material at the least possible cost. The two key words in the definition are timely availability and at the least possible cost within the constraint of time and quality.

In a production set up, the dirtiest word is Stock Out of raw material. The cost of lost opportunities due to stock out of raw material could be huge. Therefore, any material management audit starts with examination of stock outs, its frequency and impact on production processes and schedule. The underlying reasons for stock outs and the steps taken to eliminate or at least reduce such instances are examined. This will cover areas like material planning, vendor management, inventory management (MSL, reorder point), etc

The next logical step in materials management is to audit if the materials are being managed at the least cost possible cost. Material cost has several elements, like purchase price, transportation cost, handling cost, inventory cost, handling cost, wastages, etc. Efficiency of each element, head or process needs through scrutiny.

Check Off List for Audit

1. Planning

(a) Forecasting the quantity required

(b) Forecasting the time when required as per production schedule

(c) Determining the EOQ, MSL and Reorder Points.

(d) Number of suppliers/vendors to enlist for supply

2. Sourcing

(a) Identifying the vendors based on their quality, cost and reliability – Fewer vendors means larger procurement size from each and therefore better discounts and lesser procurement overheads. But it carries risk of break in supplies

(b) Negotiating price and payment terms



3. Procurement

(a) Procurement Process – Mechanics of choosing supplier – Single Tender, Limited Tender, Open Tender, Global Tender or Rate Contract. Have the benefits of rate contract, etc been taken? Does the procurement process induce right kind of competition to ensure best prices for right quality?

(b) Order size – Whether benefits of bulk purchase discounts availed.

(c) Delivery Schedules – A single large order can be placed with delivery schedules spread over a period and even different destinations (plants)

(d) Have the right quantities been procured at right time? Were any demurrage charges paid due to storage capacity constraints?

(e) Whether option to offer long term contract has been explored to avail better discounts?

(f) Whether bulk purchase discounts offset additional carrying cost.

(g) Have the probability of implementing modern material management mantras like JIT, TQM, computerisation, etc been explored?

4. Increasing Staff Efficiency – Audit with respect to

(a) Identify lost time

(b) Define roles to do away with loose roles and non roles.

(c) Identify Duplicated Roles and Empire Buildings

5. Has the department switched over to Proactive mode of buying from reactive mode of buying? Reactive mode of buying is when corrective actions are taken after at least one instance of a undesirable event occurs. Proactive mode is when preventive action is taken even before first occurrence. Whether the company has taken steps to ensure right quality of material proactively?

6. Warehousing Audit

(a) Material identification procedures – allotment of unique part numbers to every type of material

(b) Inspection procedures

(c) Storage methods

(d) Issue procedures and lag time to fulfil demands



(e) Use of material handling equipments

(f) Pilferages and losses

(g) Delivery mechanisms

(h) Accounting procedures

(i) Periodical stock verification procedures


Lecture Date: - WordPress.com · Web viewThere are wide ranging differences among various GAAPs....

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