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Total Number of Subscribers: 1626 |
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Date:06th July 2010 |
Compiled by: M Sathya Kumar |
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Background : An engineering company, with a turnover of Rs.350
crores, is into manufacturing and giving services for cooling appliances like
air-conditioners — window, split, cascade, etc., refrigerators, water
coolers. Its main Stores is at its three factories located at Mumbai, Vapi
and Mumbai factory is the largest factory located at Thane
with other two units at Vapi and The management has directed its outsourced internal
audit firm to carry out an internal audit of Stores activity other than raw
materials and capital items with a view to comment on the reasonableness of
inventory and also to immediately look to areas for cost reduction. The
management feels that store procedures are not properly controlled which is
leading to lot of cost being incurred in making avoidable purchases, rising
inventory holding costs and other issues. The management is of the firm
opinion that the processes in Stores could be streamlined and it is looking
for a thorough review from the internal auditors. Methodology : Based on the above background, the partner-in-charge of
the internal audit firm had a meeting with his audit manager to chalk out the
audit programme. As a first step, a flowchart of the Stores activity was
prepared. Based on the inputs gathered during the flow-charting process and arising out
of the study of the flowchart and the audit manager’s experience, a detailed checklist
was also prepared for meeting the audit programme objectives. The checklist
identified the objectives for this area — Refer Exhibit 1. Considering that this audit involved large volume of
transactions — the software being used in Stores being an ERP, the
traditional method of manual vouching would take a lot of time for the audit.
It was therefore decided to use a data analysis software — IDEA to carry out
a 100% check on all transactions depending on the objectives (using IDEA, the
audit for the Stores activity would take only four to five days for the
Mumbai-Thane factory). Additionally back up steps taken in the analysis would
also be available in the software. The methodology followed was therefore to : à flowchart the process. à prepare a control checklist. à pinpoint control weaknesses based on this flowcharting
and control checklist. à conduct a transaction-based audit on a few
transactions and documentation. à use IDEA software to conduct a comprehensive check on
all trans-actions based on deviations observed during the manual check on a
few transactions — this is with a view to identify comprehensively the extent
and value of the deviations to quantify and also to give an assurance to
management that other than these transactions there were no deviations during
the year. à give recommendations to make the system robust to
avoid controllable costs and enable smooth operations. Observations arising from the internal
audit : Following the checklist and using IDEA, the audit was
completed in a week’s time at the Thane factory. The same audit was to be
repeated for Vapi and A few major observations on systems and procedures are
given below : 1. 40% items valued at Rs.76.0 lacs of the total
inventory of Rs.1.5 crores are non-moving according to the ageing analysis of
stock furnished by the company. Approx. Rs.9.12 lacs is the interest cost on
such Stores @12% interest p.a. and in addition there is invisible carrying
cost which is incurred in terms of space and salaries. (Impact is avoidable cost in terms of ordering and
storing items and items deteriorating as these were not required and ordered. Recommendation is streamlining required in terms of
clearance of indents by Production and understanding of these indents and
requirements by Procurement). 2. The inventory included items worth Rs.12 lacs which
were not issued to the shop floor within 90 days of purchase. It is not clear
why these items had been indented as they were not below the standard
re-order level. These had been ordered on emergency basis purchases and still
not being used — to be investigated further as to indentors and why purchase
department allowed purchase of the same. Responsibility for the same to be
fixed and also emergency purchase system to be discontinued till the system
of indenting is streamlined. The items are stored for a considerable period,
again resulting in blocking of funds and high inventory carrying cost. (Itemwise details are furnished to the company as
part of the Annexure attached to the report) (Impact is improper purchases in the guise of
emergency purchases — as quotations are not required for emergency purchases.
Additional review is required in terms of quantum of purchases, price,
vendors, and why purchases on emergency basis. Recommendation is to stop such emergency purchases by
the present authorised personnel and authority for emergency purchase
elevated to directors). 3. Due to improper understanding and utilisation of ERP
System, stores and spares consumption cost changes from period to period.
Also, valuation of stocks is not properly done and maintained. ERP system
is not properly configured and needs review with expert help
from outside the company. (Impact is consumption cost cannot be evaluated for
different periods leading to wrong MIS reports and wrong decision-making. Recommendation is to invite an external expert
consultant to set right the system on an urgent basis). 4. No records are maintained for zero
value spares (spares received with machinery at the
time of purchase of machinery). There are approximately 300 such items. No
records of consumption of such items are maintained. (Impact is the likelihood of loss of such items
either intentionally or otherwise and then the company may have to import the
spares at a high cost as most of the machinery/equipment is imported from Recommendation — to maintain records of such spares at
zero value as part of the inventory). Conclusion : Major control weaknesses which had a material impact
were highlighted and the system set in motion to prevent such recurrences.
This also led to people at each of the units becoming alert to ensure that
such deviant behaviour in circumventing the systems and procedures would not
be tolerated. The auditee became conscious of the costs involved and
thereby reduced the costs by rationalising procedures and avoiding avoidable
overstocking. The excess and non-movable spares were sold and cash brought
into the system. Article by Deepjee Singhal and Manish Pipalia, expert in the field of internal audit |
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