By: Lalit Dua EVP- Internal Audit and Risk Management with Riskpro India Ventures Pvt. Ltd.

Feature3

IA professionals have been advocating and proclaiming value additions by IA for decades. However, periodic reminders are required for management and other stakeholders regarding the same. The IA processes, approach, techniques and styles have underdone change over a period of time and even definition of IA has changed. The changes were pertinent to keep pace with changing business scenarios and IA professionals have indeed done this alignment with splendor.

This article is an attempt to highlight contributions of IA towards company objectives. The article will attempt to cover IA contributions to different departments/processes of a company, especially a manufacturing company. The detail of value additions highlighted here below is not exhaustive and much more can be written about it.

The contributions included here are the ones as per my experience while working with diversified business groups in India and abroad.

  1. Human Resource

Though some of the activities of this function are not to be audited because of confidentiality of personal data such as pay package and benefits to employees, however there are many areas which can be subject to audit. These are –

  • Organization charts of each department and its updating with increase/decrease of employees and change of position and roles,
  • recruitment as per approved manpower budget; and

documentation and updating of career growth plans and availability of the same with each function head and employee are important to be reviewed and will add value.

The HR documents a training calendar every year but many a time fails to adhere to the same. A timely review of its documentation, based on requests received from functional heads after annual performance reviews, and non-adherence will highlight to the management areas which need timely action.

The following are some of other important areas where the reviews will add great value. These are –

  • Documentation and updating of operating manuals, HR policies and their adherence
  • Review of engaging contract labor and verification of wage bills as per terms of agreement
  • Review of processes for recording of attendance, its updating and review by HR staff concerned
  • Compilation and verification of all required data needed for Payroll processing like loss of pay, deductions of different accounts, change in salary details etc.
  • Verification of returns, statements and other relevant documents to ensure statutory compliance

 

  1. Sales and Marketing

Though the working of this department is very dynamic and policies and guidelines change frequently according to marketing requirement, still IA can play a pivotal role to not only keep a check on misuse of policies but also make pertinent recommendations.

IA can highlight inappropriate activities and approaches of marketing the products/services like putting a hoarding of a high end premium product at low income group housing societies or doing roadshows of FMCG products on weekdays. The biggest setback a company can have when extensive marketing activities have been done but products are not available for sale in required quantities. IA can even proactively highlight this scenario to management based on projected sale vs. available stock.

IA can contribute significantly by doing concurrent audit of correct applicability of discounts and other incentives, timely updating of changes in commercial policies in the system, fixation of prices considering budgeted margin, change in taxes etc. The sales team is always under pressure to meet its periodic targets. The worst situation for a company can be when discounts and incentives are being provided at a predicted time like last week of the month. The customer will wait and book his order only during that period. I

In one case I reported to the MD of a company that a 250 gram product is being packed in 500gram packing under sales team pressure, since 250 gram packing was not in stock. This minor deviation, according to sales team, could have affected brand value of the product as well questions could have been raised on good governance.

 

  1. Procurement

The activities and processes of this department have always been subject to high risk of fraud. This could start from the process of determining quantities to be procured. IA can subject the following critical areas to regular audits-Maintaining required number of approved vendors for A and B category products and seeking quotations from these vendors only. The exceptions are to be approved by higher authority.

  1. Adherence to approved authority matrix for approval of PO and amendments to any terms, including quantity
  2. Verifying rating of vendors as per approved criteria and guidelines and taking required action as per policy
  3. Closure of POs in the system against which quantities to be delivered are pending but not executed for long. Such open POs can be used for fraud..

The effectiveness of procurement processes can contribute significantly in reducing cost of production and enhance profitability and IA can ensure this.

 

  1. Quality Assurance and Controls

The QA and QC department not only ensure that processes are followed but also ensure that the output is as per defined quality standards.

IA can play a role by verifying that all QA & QC SOPs are updated, documented quality parameters are being reviewed as defined, approved vendor facilities are being audited as planned and no vendor can be included in approved list without QA approval, and calibration of testing tools and equipment is done as scheduled.

Even though QA department defines its own annual audit plan but many such areas where financial and accounting aspects are concerned, they can be further audited by IA. Such areas can include identification of expired stock or near to expiry, frequent receipt of substandard products received from approved vendor, mismatch of quality parameters of products given to vendor and the ones with QC etc.

 

  1. Plant Maintenance

At first sight it appears that IA cannot provide value in an area which is more technical then procedural, but the truth is that there is rarely any activity and process which cannot be subject to audit. The effective maintenance of plant can ensure meeting of production targets which will ultimately result in substantial saving in product cost.

IA can verify maintenance of machine history card, maintenance of inventory of critical engineering parts, adherence of preventive maintenance schedule, effective and optimum utilization of engineering tools and machines etc. IA can also do analysis of high expenses being incurred on maintenance of a machine which may be due to substandard parts being used or correct processes not being followed for preventive maintenance. The Engineering department is responsible for quality of services rendered by outside service providers for engineering parts and IA can review whether the same is being ensured by it by conducting quality check and testing the items before being used on production floor.

 

  1. Production planning and Productivity

Production planning plays a significant role in meeting the forecast and it is subject to continuous monitoring, reviews and amendments. IA will have to understand the intricacy of the various assumptions, facts and data while reviewing its processes. The production planning is done quarterly, monthly, weekly and even on daily basis. IA can review whether production planning is being done based on forecast/actual requirements and the same is provided to Procurement department for material planning. IA can also review optimum utilization of production capacity by rationalizing batch size of products. The engagement of workforce, permanent and contract, is also part of production planning and the same should be accurately done to keep a check on labor cost.

 

  1. Resource Optimisation

In a manufacturing company there are ancillary facilities and utilities which are integral part of production operations. The effectiveness with which such utilities are used will add to production effectiveness. Such utilities include boilers, DG sets, Cooling systems etc. IA can on a periodic basis verify whether preventive maintenance has been done as planned, inventory of critical parts is maintained, consumption of fuel and output is as per standard. Also, IA can verify that all statutory compliance is done for these utilities and required certificates are displayed at appropriate places. Even review of records of capacity utilization, with reference to production capacity utilized can highlight under/over utilization of utilities and the same has its own implications.

 

 

  1. Warehousing

The end products after completion of all processes, hard work of direct and indirect workforce and spending of all stakeholders’ money is finally stored in warehouse. Hence it’s very important that functioning of Warehouse is always as per standard. IA can verify that the storage conditions are as per product requirements and are subject to continuous monitoring. The controls on checking un-authorized access, storing of products on defined locations, proper maintenance and handling of warehouse equipment are some of the areas which can be reviewed by IA periodically. Further, working of all fire extinguishing equipment and alarms should also be reviewed.

 

Conclusion

The list of areas where IA can do value additions includes many more important areas and including all those in one such article is not possible. IA can support other important areas like effectiveness of ERM framework, financial and accounting areas, statutory, Taxation and strategic compliance etc.

 

Because of its unique position in the organization, IA function can play multiple roles in every aspect of its working be it compliance verification, investigation, reviewer, advisor and facilitator. The IA function is required to be given a status and appropriate authority to carry out its function effectively. The CIA is also required to be self-motivated, analytical, always up to date about the business and its processes and capable of making objective assessment.

Finally if management consider and in reality establish IA function as an important support, IA can effectively align its activities with business activities and provide much needed support.