Sales & Receivables April-May(1).docx

8/10/2019 Sales & Receivables April-May(1).docx

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m

Rupafab LimitedFor the period from April 2014 to July 2014

Internal AuditReportSales

and Receivables

QAVI & CO.Chartered Accountants


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Rupafab imited Internal Audit Report Sales and Receivable

QAVI & CO. Page 2 of 31Chartered Accountants

CONTENTS

Sr. # Particulars Page #

1. Executive Summary 3

2. Process Overview 6

3. Scope of Work 8

4. Procedures Performed 9

5. Overview of Sales 10

6.Detailed Internal Audit Findings, Risks, Recommendations, Action

Plans and Follow up11

7. Improvement Ideas 22

8. Definition of Issue and Report Ratings 29

9. Annexures 30


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Sub-Process FindingsIssue

RatingDetailed Report

Reference

Grey receiving

Inward Gate Pass (IGP) is manually prepared;

Original copy of IGP not retained at gate office;

No seperate record of cancelled IGPs;

High 6.3

Invoicing

Invoices are not electronically prenumbered, and date is enteredmanually;

Invoices are not stamped as paid;

Invoices issued with back dated serial numbers;

Some Invoices are not being prepared according to OGPs and PackingLists;

Lack of control over invoice generation;

Late approval of Invoices;

Late posting of invoices in General Ledger.

High 6.4

Despatch of goods

Manual preparation of Outward Gate Passes (OGP);

Lack of control over reports prepration;

Lack of adequate control over entering date on packing list.

High 6.5


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Improvement Ideas

The following table exhibits the summary of improvement ideas:

Sub-ProcessPotential Problem

Improvement IdeasDetailedReport

Reference

Marketing Can not overcome work load.

No concept of commission.

Should hier more personnel.

Concept of commission should be introduced.7.1

Recording Sales viaJournal Voucher (JV)

Sales invoices are posted in accountingsoftware through JV.

Sales invoice should be posted through Sale Invoice(SI)number and Journal Voucher (JV) should not be usedfor this purpose.

7.2

Data Entry andAccounts prepration

Accounting software is outdated and is difficultto use resulting in loss of time.

The accounting software should be upgraded to newerversion or new software should be purchased which iseasy to use.

7.3

Revenue Recognition Management recognized the revenue too late. Revenue should be recognized at the time of dispatch. 7.4

Categorisation of fabric No proper evidence about the category offabric

There must be a physical evidence to verify thecategory of fabric.

7.5


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2. Process Overview

Two types of processes are conducted by Rupafab

Commercial; and

Roll on Tube (ROT).

Order Placing

The marketing department contacts the customers and obtains orders from them. Initial negotiation with customers is done by marketing

department, but the rate is finally approved by CEO.

Formation of Sales Contract

After approval of rate by CEO, a written contract is formed by marketing department and is communicated to customer via e-mail to document the

terms and conditions. Major terms specified in sales contract includes Shipment, Mode of paymentand Delivery Time.After confirmation of

sales contract by the customer via e-mail, marketing department sends an intimation to production department to start processing of relevant lot.

Receiving Function

In case of Commercial Process, when the material arrives at the premises of the company, gate office informs marketing department and greigh

receiving department. Delivery note and packing list etc., are checked at the gate by Assistant Store Keeperand IGP is generated. One of the

security personnel guides the carrier to the grey department. Delivery note and packing list is handed over to supervisor of grey department by the

security personnel. Unloading of fabric is done by the grey department's labour, under the supervision of supervisor and security personnel.

Supervisor matches the quantity of packed rolls with the packing list.

Packing Department

After processing, the fabric is inspected by quality control department and finished fabric is sent to folding department for packing. At this stage, the

fabric is categorised into A, B and C Grade fabric and packing list is prepared and sent to PPC and PPC then send it to marketing department.

Marketing department communicates the list to customer to intimate that the fabric is ready for delivery.


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Loading

After packing, the fabric is loaded on vehicle and packing list is handed over to driver.

Dispatch

A request for gate pass is prepared by packing department and sent to assistant store keeper at gate. Assistant store keeper generates OGP

according to particulars mentioned on request for gate pass and a copy of OGP is handed over to driver.

Invoicing and Receipts

On the basis of packing list and OGP, sales invoice is generated by the accounts department and sent to the customer. According to payment

terms, accounts department follows the customer for remaining receipt against sales invoices issued.


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3. Scope of Work

Our role as internal audit is to provide independent assurance that Rupafabs risk management, governance and internal control processes are

operating effectively.

Moreover, our Scope is to:

Based on the scope of work and the audit procedures carried out, by us and to the best of information and explanations provided to us by themanagement, we report details of our findings in section 6 to the report. The format of our report is such that we only report on the short comingsand exceptions noted by us. Therefore, the observations noted in the report are where control objectives are not met or where we believeimprovements can be made in the efficiency or effectiveness of procedures.

1. Determine the accuracy and propriety of financial transactions;

2.Evaluate financial and operational procedures for adequacy of internal controls and provide advice and guidance on control aspects of newpolicies, processes and systems;

3. Verify the existence of assets and ensure that proper safeguards are maintained to protect them from loss;

4. Determine the level of compliance with the company policies and procedures, and Government laws and regulations;

5. Evaluate the accuracy, effectiveness, and efficiency of the electronic information and processing systems; and

6.Determine the effectiveness and efficiency of company in accomplishing mission and identify operational opportunities for cost savings andrevenue enhancements.


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4. Procedures Performed

Following procedures were performed in order to evaluate process from sales to receipts:

We have evaluated controls over maintenance of customer file;

We have evaluated credit management system, i.e. credit policy, credit risk evaluation policy and aging analysis;

We have matched 'Sales Contracts' with 'Sales Invoices', 'OGPs', and 'Packing Lists;

We have performed review procedures to overview greigh receiving function;

We have matched Rates in 'Sales Contract' with 'Sales Invoices;

We have traced receipts against 'Sales Invoices' into 'Bank Statements;

We have evaluated 'Internal Controls' over sales and receivables area for efficiency and effectiveness;

We have matched fabric despatched with invoice generated;

We have evaluated B Grade Productions and C Grade Productions that give rise to opportunity costs;

We have performed a walkthrough and checked that whether invoices are generated against every OGP.


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5. Overview of Sales

During the month of April 2014, Rupafab made sales amounting to Rs.16,930,102. During April 2014, significant customer that contributed, the most, to achieve

the above stated amount of sales include Rajby Industries, representing approximately 83.97% of total sales during the period. The customer that contributed the

least include Ambition Apparel, representing 0.6% of total sales during the period.

While in May 2014, revenue of Rs.25,258,535 was achived, which shows a 45.17% increase as compared to the last month. The increase in actually due to

selling greater quantity of Roll On Tube fabric to Rajby Industries. in this month Rajby Industries contribute 77.2% and 13.58% of the total sales made to Shafi

Texcel limited, remaining part of sales were made to other customer.

In June2014, total reported revenue was of Rs. 4,760,320 out of which 58% was made to Shafi Texcel Limited, amounting to Rs. 2,827,976 and remaining 42% of

the sales are made to others customers.

During July 2014, reported revenue was of Rs.17,242,008. The customer that contributed a significant share in achiving this amount of sale include Rajby

Indusries.


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6. Detailed Internal Audit Findings, Risks, Recommendations, Action plans and Followup:

Process Sales Issue Rating Medium

Sub Process Customer database maintenance

6.1 Controls over maintenance of customer database

Finding:

Customer history is maintaining customers past record of purchased quantities, payment

patterns, bad debts, if any. Maintaining customers past history helps in continuance &

strengthening business relationship with customers

While analysing control over maintenance of customers history ,we observed

a. There is no formal process of maintaining customer past history.

b. There is no bifurcation between new and old customers.

c. Customers with good past history are not identifiably separated from other

customers.

d. There is no ongoing activity of customers past history analysis.

e. There is no feedback mechanism in place.

Recommendation:

a. Management should maintained a proper file that

should at least include the following information:

Name,

Summary of transaction history,

Summary of payments made against each

transaction,

Bad debts, if any, Disputes, if any,

Total volume of transactions at the end of the

period.

b. Management should categorize the customers baseabove information as key customers.

c. Customers should encourage to give promptfeedback.

d. A mechanism of feedback analysis should bedeveloped.

e. Customers grievances should immediately beaddressed.

f. Management should seriously considerrecommendations given in feedback.

Risk:

a. As customers past history is not maintained hence its relevant controls could not be

effectively reviewed

b. Management may not be able to identify and respond to business risk effectively.

c. Customers with good past history may be ignored as there is no bifurcation for

identifying customers having good history.


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Sub Process Customer database maintenance

6.1 Controls over maintenance of customer database

d. Risk of bad debts may increase.

e. Needs of customers may not be satisfied.

f. Upon need, it may be difficult to contact customer on timely basis.

Management Comments: Responsible Official(s):

Sales and Marketing department.

Followup:

The findings discussed in this section were also reported

in our previous correspondence and are still

unimplemented.

Process Sales Issue Rating High

Sub Process Sales Contract formation

6.2 Controls over sale contract formation

Finding:

A review of controls over Contract formation has determined the following:

Recommendation:


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a. Contract is formed using initial quantity that is received by the company

and, on this basis, forthcoming receipt is estimated, therefore, shrinkage

level is not taken into account while making this estimate.

b. A distinctive, serial wise, number is not assigned to most of the contracts, in

order to trace the progress of fabric.

c. Contracts are not valid because that are not signed by buyers. For details

please see - ANNEXURE A.

d. There is considerable lack of control over entering date of contract .While

observing the contracts we found 7 instances where contract date was after

the date of invoice. For details of instances, Please refer to - ANNEXURE

B.

e. Lack of control over implementing terms of contract. For details please see

ANNEXURE C.

a. A distinctive number should be assigned to every

contract, so that the quantity dispatched, relating to that

contract, could be traced easily.

b. The contract should be signed by both parties.

c. All contracts should be dated.

d. While forming contract, business name of client must

be clearly stated in order to establish the parties to the

contract.

Risk:

a. The Company may not have a legal recourse in case of any disagreements withthe client.

b. In the absence of distinctive contract number, management may not be able totrace the quantity dispatched in relation to that that contract.

c. As critical terms, described in finding above, are not mentioned in contract. Thismay result in dispute between client and Rupafab. Ultimately company may

lose its customerd. In the absence of Signatures of either party, the contract may lack its legalgrounds.


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Management Comments: Responsible Person:

Marketing and Sales Department

Follow up:

Following are the issues that were reported in our previous

report and are still unresolved:

a. A distinctive, serial wise, number is not assigned to

most of the contracts.

b. Lack of Control over entering date of Contract.


Sub Process Grey Receiving


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6.3 Lack of Control over grey receiving function

Finding:

The company carries out two types of Processes:

Commercial: in this process company receives fabric from customer andreturn back after processing on it

Roll on tube: in this process company purchase the fabric, process on it &

sale it out to customer.

While performing review procedures on both processes, it was observed that:

a. IGPs are prepared manually.

b. Same IGP is used for both process.

c. While preparing reports, IGP is simply ignored.

d. Original copy is retained at gate office.

e. No seperate record of cancled IGPs is maintained.

Recommendation

a. Company should use separate IGP for

Commercial; and Roll on Tube processes.

b. A distinctive number should be assigned to fabric received

the time of its receipt. That will also help in tracing the

progress of fabric during process. The same numer should

be assigned to contract and should be included in any

reports prepared and on OGP.

c. IGPs should be made electronically in order to avoid any

discrepancy.

In addition to this,

d. The date on IGP should be either pre-printed or should be

entered via Stamp or it should be electronic posted,e. Management may consult IT Department in order to develop

a electronic system for Inward Gate Pass

f. The original copy of IGP should remain at gate office in

order to avoid any fraudulent amendment..

g. Accounts department should maintain a separate record of

cancelled IGPs and should update it on timely basis via

specifying the reason of cancellation.


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Sub Process Grey Receiving

6.3 Lack of Control over grey receiving function

Risks

a. Tracing the current status of fabric, in process, is too difficult.b. IGP can be replaced easily.

c. IGPs can be altered.

d. It may results in lack of data backup.

e. Fabric can be misplaced and will be difficult to tace if IGP also misplaced.

f. The current system is inclined towards fradulent activities.

Management Comments: Responsible Person:Gate Office / IT Department/marketing department

Agreed Date of Implementation:


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Process Sales Issue Rating Low

Sub Process Invoicing

6.4 Lack of control over invoicing process

Finding:

Following the despatch of fabric to party, invoice is generated by Accounts

Department. While analysing controls over invoicing process, we observed the

following:

a. Invoices are not pre-numbered, although a distinctive number is assigned to

invoice but the fact is that, it is manually entered

b. There are considerable delays in approving sale invoices. We noted 10

instances of this and for detail of instances, please refer ANNEXURE D

c. Invoices are not stamped as paid at the time of receipt.

d. Invoices are not posted in ledgers on timely basis.While discussing the invoicing process with management, we were explained that

invoice is generated after conforming the supporting evidences and B gradefabric

is charged at a rate of 50% of A grade fabric andC grade fabric is dispatched at

free of cost.

While performing valuation procedures on sales invoices;

e. We found 3 instances where B grade fabric is invoiced as A grade;

Recommendation

a. Invoices should be posted in ledgers on daily basis so

that accurate balance of the customer is available on

daily basis.

b. Invoices must in sequence. Any cancelled invoice

should be stamped as cancelled and a separate file of

cancelled invoices must be maintained.

c. Packing list should be made for every delivery so that

the invoice is correctly generated.

d. Due diligence is required in preparation of invoices.

e. Balance Invoices should be pasted in relevant ledger ondaily basis so that accurate of customers is available.


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This difference is due to the rate charged to the customer and as a result

revenue is overstated by Rs. 1,764. This also have a direct impact on sales tax

submitted to Tax authorities.

f. There is some unusual variation in invoice number and date of invoice. It seems

that some invoices are prepared on back dated serial number. For details,

please refer to -ANNEXURE E.

g. Some Invoices are not prepared according to quantity dispatched. We noted 2

instances where there is a difference. For details of instance please refer to -

ANNEXURE F.

Sr#

Invoice#

Quantity(Meters)

SalesAmountRecorded(Rs.)

SalesAmountthatshouldhavebeenrecorded(Rs.)

Diff(Rs.)

1 18319 91 2,457 1,2291,228

2 18324 28 756 378 378

3 18352 63 2,142 1,984158

Total 182 5,355 3,5911,764

Followup:

Following matters were also communicated in our previous

correspondence and are still not considered by

management.

a. Invoices are not stamped as paid.

b. Invoices are not posted in General Ledger on timely

basis.


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Moreover, Lack of control over invoice generation was observed. While performing

completeness procedures on a two month period data, from April to May, we

observed;

h. A total of 88.5 meter fabric, altough samples, is uninvoiced . For details, Please

refer to - ANNEXURE G

Risk:

a. Delay in invoicing may result in improper credit control & aging analysis.

b. Non availability of pre numbered invoice may provide an opportunity to involve in

fraudulent activity.

c. data backup issue may arise due to non posting of invoices in ledger.

d. There may be duplication in invoicing.

e. Customers may loose trust.


Accounts Department



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Sub Process Despatch of goods

6.5 Lack of control over goods dispatching process

Finding:

We have reviewed the dispatch process and observed the following:

a. OGPs are manually prepared and date on these are also entered manually.

b. There is significant delay in delivery of fabric.

c. Lack of controls over preparing reports were observed. The date of dispatch entered by

marketing department is before packing date. For details please see following:

Sr # Party name Quantity Inward Date Packing date Dispatch date

1 Shafi Texcel 10,001 4/8/2014 5/24/2014 5/5/2014

d. Delivery challan is not prepared and ultimately not sent to the customers.

e. Late deliveries of fabric as compared to agreed date. We noted 2 instances where

delivery is made late. For details of instances, Please refer toANNEXURE C

Recommendation

a. OGPs should not be prepared manually instead

these should be printed through computer. If it is

not possible for the time being, the management

should issue date stamps to gate office so that

the dates are stamped on OGP and no one can

change it afterwards.

b. The OGPs should be computerised so that no

one can generate OGPs in back dates.

c. Reports should be prepared with due care.

d.


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Moreover,

f. Lack of adequate internal control on overall dispatch process was observed. We found 2

instances where date of dispatch is before packing list date. For details of instances,

Please see following:

Sr # Invoice # Party NameDispatch date

(OGP)

PackingList Date

1 18390 Shafi Texcel Ltd 11 July 14 July

2 18389 Shafi Texcel Ltd 30 June 14 July

Risk:

a. As date is entered manually, OGPs can be changed easily.

b. There may be loss of customer satisfaction which may in turn result in loss of

revenue.

c. It may be difficult to take stratic decisions as reports prepared lack proper controls.

d. No proper evidence of receiving of fabric by customer in the absence of delivery challan

Management Comments:Responsible Person:

Gate Office / IT Department



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7. Improvement Idea(s):

Process Sales

Sub Process Marketing

7.1 Analysis of Marketing department

Finding:

Major activities of Sales and Marketing department include:

Develop and Implement marketing strategies and

Initiate free sample to indulge new customers,

Search for new customers,

Cold calling to arrange meetings with potential customers. Co-Ordinate with existing Customers,

Negotiating terms with customers,

Sales Contract formation,

Prepare reports,

Monitors and track the status of fabrics work in pocess.

Making periodic visits.

Reporting to CEO.

Recommendation:

a. Marketing department should use Strategic marketing

stategies. A draft regarding this can be obtained from

audit department.

b. More personnel should be hiered to overcome the work

load and to increase the scope of work.

c. Marketing department should be commission toincrease the volume of sales.


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Process Sales

Sub Process Marketing

7.1 Analysis of Marketing department

While analysing over all sales and sales department we noted the following:

1. Sales and marketing department lack competative research strategies.

2. The department is made up of two individuals that can not properly overcome

the work load.

3. Currently, there is no concept of commission to marketing department.4. There is only one customer to which ROT can be sold, accordingly, more reliance is

placed on one customer that increases going concern threat.

5. Level of sales are not enough to cover the factory overheads.





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Process Sales

Sub Process Sales Invoices are not printed from software

7.2 Recording of sales invoices via JVs

Finding:

We have found that sales invoices are entered into accounting software through

Journal Vouchers(JVs). Normally, Journal Voucher (JVs) are only used for

adjustment purposes and not to enter sales or purchase invoices.

Recommendation:

Sales invoices should be posted in accounting software

through Sale Invoice (SI) and not through JVs.

Moreover, Sales invoice should not be prepared in

excel, instead it should be printed from accounting

software.


Accounts Department

Follow up;

This matter was also discussed in our previous report

and is still unimplemented.


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Process General

Sub Process Data entry and Invoice prepration

7.3 Outdated accounting software

Finding:

Currently, company is using outdated accounting software and is not compatable

with companys operations. It is not suitable for company to continue its use as it

take much time to enter data.

In addition to this, Sales Invoices are not printed from software , accordingly,invoices lack back up as well as the system is prone towards misstatement.

Recommendation:

Management should take steps to update and improve

accounting software in order to increase the effectiveness

and efficiency of accounting system.


Accounts Department

Followup:

This was reported in our previous correspondence and is

still unimplemented.


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Process Sales

Sub Process Revenue recognition

7.4 Late recognition of revenue

Finding:

On taking an overview of sales cycle and applying cutoff procedures we came to

know that management recognise revenue too prudently.

According to IAS 18:

Revenue should be recognised when the seller has transferred to the buyer, the

significant risks and rewards of ownership.

Accordingly, revenue should be recognised when fabric, including samples are

dispatched to customer.

Recommendation:

Revenue should be recognised as soon as critera

explained in IAS 18 is met.


Accounts department



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Process Sale

Sub Process Categorization of fabric

7.5 Lack of evidence regarding categorization of fabric

Finding:

While analysing the process we realized that after the dispatch there is no proper

physical evidence to conform the grade of fabric.

Recommendation:

Packing list is the sole primary evidence about the

category of fabric. There should be some physical

evidence to verify after the dispatch of fabric and, atleast,

the reason for changing the category should also be

mentioned.


Folding department



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Process Sale

Sub Process Budgeting

7.6 Lack of prepration of budgets

Finding:

While discussing anticipation about forthcomming sales we observed,

a. There is no formal procedure for sales budget prepration.

Recommendation:

Management should focus on prepration of Sales budget

that can help in taking strategic decisions and comforting

long-term planning.

In relation to this, management may consult audit

department for perfoming procedures for initial

development of budgeting system.





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9. Annexure

S No. DescriptionIssue

ReferenceAnnexure Reference

1. Contracts are not valid. 6.2 AnnexureA

2. Contract date is after the date of invoice date. 6.2 AnnexureB

3. Contract term not followed. 6.2 AnnexureC

4. Late approval of invoices. 6.4 AnnexureD

5. Unusual variations in invoice numbers and dates. 6.4 AnnexureE

6. Invoices are not prepared according to the quantity dispatched. 6.4 AnnexureF

7. OGPs are prepared but invoices are not generated against those OGPs 6.4 AnnexureG

8. Late deliveries. 6.5 Annexure - C

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