Based on the above background, the partner-in-charge of the firm had a meeting with his audit manager to chalk out a plan to achieve the above objectives and ensure that the internal audit service was really beneficial to the SME. The success of the first quarter internal audit would demonstrate the ‘value added’ by internal audit. In the first quarter, it was decided that the team would focus on Procurement, Stores including Inventory, Human Resources and the partner-in-charge would be reviewing the Finance & Accounts.

Throughout the internal audit, it was agreed amongst the internal audit team members, that education and awareness for institutionalised systems and procedures including importance of decisions to be taken on scientific basis rather than ‘rule of thumb’ would be emphasised. This is particularly relevant in an SME where the decisions are mainly taken on ‘rule-of-thumb basis’.

Based on the internal audit carried out, the following are some of the observations and recommendations :

1.0 The organisation had exports of around 20 crores. There was absence of understanding of Forex Risk Management in the organisation. With crores worth of exports which entail inward remittances, high capital expenditure outflow expected in future due to machinery imports was imperative to understand and have a robust Forex Risk Management policy.

The organisation was losing out in forex transactions because of lack of awareness of negotiating rates on presentation of documents and at the time of inward remittance with the banker. The rate given by the bank was accepted as the final rate. It was not important as to what rate was given and whether the organisation had been losing out on negotiating better rates — it is important to note here that there was no awareness of the fact that the same could have been negotiated with the bankers, especially, in view of the organisation’s growth in future.

Better awareness of the above would have led to cost savings — probable cost savings could have been Rs.3.0 lacs approx. on an annual basis. Better negotiation were required on the margin which bank takes on each transaction. It was later learnt that the spread on inward remittance was around 11 paise which was later renegotiated to 3 paise. The bank was earlier charging the card rate rather than giving the best rate. A process was put in place to verify each inward remittance with the rate being given benchmark against rates from other banks, bank’s dealing room in case of high-value inward remittances and also the rate from specialised agency dealing in forex consulting.

The partner also recommended that a workshop by some specialised agency dealing in forex consultancy be arranged for the Finance team for better understanding of forex transactions undertaken by the organisation.

2.0 Insurance — The Company has Marine Transit Policy for all exports. The present exports were of Rs.20 crores last year and are bound to increase on year-to-year basis. The premium paid is 10 paise per Rs.1000 to XYZ Co. Ltd. The claim ratio was zero last year.

Since this is a negotiable policy, the company may negotiate it to 2.25 paise per Rs.1000. This will lead to savings of 7.75 paise per Rs.1000 for the export that takes place on yearly basis, which is again a savings of few lacs every year. The management was able to bring down the insurance premium based on absence of claims in the past.

3.0 High interest rate on working capital and term loans :

The organisation has a good balance sheet and profit and loss account in terms of profitability and other ratios which are used for basis for lending and deciding interest rates by the bank.

The company presently pays interest rate of 11.25% on working capital and term loans, which is much higher than that charged to good organisations. It was suggested that the organisation needs to negotiate with the bank to bring this interest rate down to 9%. The Finance department was not aware of the basis for rating by the bank.

With working capital and term loans to be increased to 10 crores, the savings on interest outflow, considering 9% interest, would be again a few lacs per annum.

In addition, there existed the necessity to negotiate and get waivers and reduction in rates for Bank Guarantee commission, LC charges and other charges from the bank. Better interaction with the Bank was recommended.

The above areas are illustrative examples of observations and recommendations. There were numerous issues in which suggestions were made to improve the controls — for example — Procurement, Stores, Management and Human Resources.

Gist of observations in Stores is given below.

The Managing Director appreciated the efforts of the internal audit team and wanted the internal audit to be carried out bi-monthly. He specially appreciated the approach of the internal audit team in understanding of the business and giving value-added advise which resulted in cost savings. The Managing Director also happened to be the President at the SME Engineering Association at Chennai and promised to propagate the need for such value-added internal audit services by Chartered Accountants to all SMEs.

It led the internal auditing function to be elevated to deliver business solutions.

Article by Deepjee Singhal, Manish Pipalia, a renowed Chartered Accountants having expertise in Internal Audit.