PKF Sridhar & Santhanam Internal audit reports ByS.Ramakrishnan PKF S&S

PKF Sridhar & Santhanam www.pkf.com www.sandsca.com

Internal audit reports ByS.RamakrishnanPKF S&S


Sessions Structure

Session 1 Some bloopers in report writing!

Session 2 A good report is…

Session 3 Skeleton of a report

Session 4 PKF S&S Mnemonic

Session 5 Report Examples

Session 1Some bloopers in

report writing!


Some one does read your report!

“Certain dependent versions of the percolation model viz the integer random cluster model, are equivalent to the basic models of equilibrium statistical mechanics viz. the Ising and Potts magnets.” Make head or tail?

Some of our reports read like this!

First moral: Remember some poor guy has to read all your reports and make some sense out of that!


Another example Draft National minimum wages regulations 1998The hours of non hours work

worked by a worker in a pay reference period shall be the total of the hours spent by him during the pay reference period in carrying out the duties required of him under the contract to do non hours work.• Quoted as a masterpiece of obfuscation

The hours of non hours work worked by a worker

in a pay reference period shall be the total of the hours spent by him

during the pay reference period in carrying out the duties required of him under the contract to do non hours work.


Most fundamental rule -KISS

'In the Nuts (unground), (other than ground nuts) Order, the expression nuts shall have reference to such nuts, other than ground nuts, as would but for this amending Order not qualify as nuts (unground) (other than ground nuts) by reason of their being nuts. (unground).'

- taken from Guinness Book of Records, 1992.

One of the most inexplicable legislations. It was passed by a judge of the Court of Session of Scotland:

'In the Nuts (unground),

by reason of their being nuts. (unground).'

the expression nuts shall have reference to such nuts,

other than ground nuts, as would but for this amending Order not qualify as nuts (unground) (other than ground nuts)

(other than ground nuts) Order,


Avoid Bloomers- some classics from real reports!Cost or not realizable valueFreight payment not in accordance with the Post OfficeEVA is a figure like NPA40 hours of Resin1.3 BUSHINGS WERE FOUND SHORT!Production limited wage structureProvision for doubtful expenses10,00,000 lakh sharesTransportation of PVC resign


Spell check is not catch all

I was shocked to read "the manger is killed" in the report.

What the hell was happening?

Next it was "coffee seeds are planted in oil".

That was it and i blew the top.

The associate smiled and said 's' is not working in the computer key board!

No spell check will locate such errors!

Session 2A good report is…


A good report should be like a good book- interesting to read!

Think of all the good books, magazines you have read.Think of all good Annual reports you have read.What is good about following? Who moved my cheese? (Spencer

Johnson) GOAL (Eli Goldratt) One minute manager (Kenneth

Blanchard and Spencer Johnson) NUTS (on South West Airlines)


Every word, sentence counts!

In the IPO of SVPCL, in the cover page of the Red-herring prospectus it was mentioned “at least 50% of the net issue to public shall be allocated on proportionate basis to QIB “ (Qualified Institutional Buyer ).It should have read “up to” and not “at least”.Unfortunately that completely changed the meaning!Supreme Court in Aug 08 asked the company to return the entire IPO money (Rs 34.5 crores!) to the applicants with 15% interest.Please remember –every word and every sentence counts.

• Source Ecotimes 23 Aug 08


A GOOD REPORTSHOULD BE CLEAR CONCISE & CORRECT

SHOULD NOT BE FULL OF GOBBLEDYGOOK LIKE ECONOMICS PAPER -NO FEES BASED

ON WEIGHT! (P&G rule on reports) VAGUE WITH GRAMMAR ERRORS HAVING UNNECESSARY / IMMATERIAL

QUALIFICATIONS AND DISCLAIMERS


Think ‘REPORT’ when doing auditAvoid the OBVIOUS/ SUPERFLUOUS- ‘we found’; ‘in the course of the audit’; ‘statement of’; ‘nearly about 1000 odd cases’; ‘ new break through’; ‘foreign import’Avoid use of sentences which can be MISINTERPRETED- ‘company earned interest on investments of Rs 15 crores’AVOID JARGON: Accounting Jargon:

• "Our new widgets generate a negative contribution margin which impairs our capacity to increase shareholder wealth."

Plain English:• "We lose money on every one of the new widgets that

we sell."

SUGGESTIONS ON GOOD REPORT


MORE SUGGESTIONS ON GOOD REPORTEDIT those Printer’s devils: ‘ACCORDING TO INFORMATION AND

EXPLANATIONS GIVEN BY US’ ‘IN ONE INSTANCE WE NOTICED A CASE!’ ‘Sexcellent quality’

Be Positive Instead of : No PSL is maintained Say: A PSL should be maintained

‘ELEVATOR PITCH’ in Venture capital industry Means that you should be able to explain

your business to someone within one elevator ride.

A good executive summary should be an ‘elevator pitch’!

Remember Hanuman’s classic reporting style? ‘Kanden Seethaiyai’- ‘Saw Seetha’


MORE SUGGESTIONS ON GOOD REPORTErnest Hemingway once wrote a very very short novel It's called ‘flash fiction’This is just 6 words!"For sale; baby shoes, never worn’ We need to learn to write reports that crisply!


Be LaconicLaconic means ‘using very few words.”

The origin of this word is interesting!

Philip of Macedon threatened to invade Laconia in 4th Century BC

He wrote to its Governors:

“If I enter Laconia I would raze it to the ground.”

They sent a one word reply- “If”.

What a beautiful way of saying what you want to say.

Session 3Skeleton of a report!


Basics of report writing

Consider users of reportsCompany managementAudit committee/ BoardExternal users

Report should beattention-getting, readable and credible


DesignSTANDARDISE

• Visual Appeal (graphs, tables)• Reading Efficiency (easy-on-the-eye)• Design Techniques (type size, line

length, header-footer, headings, justify, numbering, hyperlinks etc.)

• Format Specifications (fonts, margins, spacing etc.)


Writing style TONE, WORD ECONOMY & RHYTHM

• Terminology (precision and consistency)• Sentence Length (15 to 18 words)• Passive Voice (Avoid passive voice)

• Passive: "Based on the information available, no irregularity of operation was found."Active: "The audit team found no evidence of irregularity in the available information."Better Still: "The audit team found no irregularity."

• Intensifiers (clearly, special, key, well, reasonable, significant and vague quantum like few, some, many etc.)

• Bullets (Use for lists of standards, samples, activities, facts and results)

• Language (English is a tricky language; ‘ Nobody is perfect; I am nobody’)


Simplify, simplify Instead ofat this point in time I would like to suggest in order that we’re able to of a confidential nature we are of the opinion aggregate commencement optimum sufficient bi-monthly semi-monthly

ConsidernowI suggestso that we canconfidentialwe believetotalbeginningbestenoughevery two monthstwice a month


Report content• Structure (title page, table of contents (if big report),

executive summary, overview, legend, introduction (context, purpose and scope), findings (observations, effect, suggestions and action plan) and appendices)

• Level of Detail (consider materiality; use italics, Bold and Underline or color or different parts of report to segregate critical, essential and desirable observations)

• Commentary(statistics, percentages, graphics)

• Conclusion

Session 4PKF S&S Mnemonic


S&S mnemonic for report writing

Remember this Mnemonic: Improve Overall S&S Report QualityNext double the first words: I N IO N OS N SR ‘N RQ ‘N Q


Which stands for

Ignore MIS not Internal controlOn the whole not One linersSystem not Symptoms Research Reasons & Report recurring issuesQuantum of checking & Quantification


Ignore MIS

Explanation: Do not report matters already covered in MIS of the Company and well known to top management. Our job is not to copy from MIS and report back to them what they know.


Ignore MIS - ExampleWRONG REPORTINGDebts to the extent of Rs --

are over 180 days old and

steps must be taken to

recover such old debts.

(This is what they are

already doing! This figure

is available in Company

MIS)

RIGHT REPORTINGThe reported figure of debts over 180 days in MIS for Mar 02 should have been Rs --- whereas it is Rs ----(or)We find that the real reason for the high quantum of bad debts is that no proper credit evaluation is done in ---branch.

Ask yourself: will my reporting lead to some change /improvement in existing systems and controls?


Ignore not Internal controlsExplanation: The basic purpose of audit is not to ‘check oneself’ but ‘check if there is a check’. Internal control manual (ICM) lays down the internal control policy of the Company; our primary job is to see if these are followed in letter and spirit. Where there is no ICM laid down, follow

‘generally accepted internal controls’.


Ignore not Internal controls - ExampleUse common sense when looking for compliance; Take a case where daily approval of

Factory manager is needed; if the FM alternates between two factories, and is present only on alternate days in one factory, obviously he can approve only on alternate days. Do not become rigid; consider business realities.


On the whole and not one liners

Explanation: State what you want to state clearly; ensure that the background and what you want to state are clearly explained


On the whole and not one liners - Example

Wrong reporting: Bill king figures do not tally with the Switch.

Right reporting: The data used by Bill King, the software used for billing differs from the data as per Switch which records the basic transaction. The difference in Dec 02 in Rupee terms is Rs -----(short billing); The reasons for this are: ---; The suggestions to rectify this are:---.


System and not symptomsExplanation: Report on internal controls and their adequacy and do not report isolated instances of problems and errors. When we report isolated instances of errors we are not striking at the root cause..


System and not symptoms – Which is right reporting?

Our test check showed that there was an error of Rs 450 (short billing) in billing in Division A.

The Company does not have the concept of ‘maker/checker’ in the case of manual bills raised in Division A. For instance: Our test checked showed that there was an error of Rs 450 (short billing) in billing .This error was noted when we checked 16 instances of billing (Amount Rs 4000) in Sep 02. Effect: This could lead to either higher billing (leading to customer displeasure) or lower billing (leading to loss of revenue).


Research reasons and report recurring issuesExplanation: Do not skim the surface; get into the reason for why something has happened and report that; also report issues that are likely to recur; not one-off problems and something which happened in the past and which is not going to happen again. An isolated instance shall not be used to generalize.


Research reasons and report recurring issues – Identify right reporting!

Purchase orders are made for quantities much above the quantities requisitioned leading to idle stocks.

Purchase orders have to be sometimes raised for higher quantities than requisitioned in view of minimum packing /minimum order specifications by supplier. However we found that in the following case, despite the supplier (XX) offering items in loose (as evidenced by PO ref. Inv ref. ) and in packs, in item ---, the full pack quantity (of ---nos costing Rs ---) has been ordered. This has led to higher and non moving stocks. Details provided below for quantity and value of purchase, issues and stock on hand.:----Company should order the correct quantities required to avoid over stocking.

(Wrong reporting)

(Correct reporting)


Quantum of checking

Explanation: State the sample size clearly. This is very important to gauge the importance/ significance of the errors reported. Also for using statistical sampling, this is certainly required.


Quantum of checking – Right vs Wrong reporting

We found that there were 3 instances of voided Order tickets where the reasons for voiding have not been stated as required by the ICM.

We verified the Order tickets of ---for the period from--- to ---. In 3 out of 14 voided Order tickets, the reasons for voiding have not been mentioned. These are also not approved by the-- manager as required by the ICM ref. --. The value of voided Order tickets not approved is Rs ---.


Quantification

Explanation: Our report points have to quantify the impact in financial terms as far as possible; or at least a statement that quantification is not possible for such and such reasons.


Quantification – Which is correct?

The test physical verification done by us revealed that 40 XXX were found short.

We did a test verification of 50 items taken at random (out of –items in stock) in ---stores on ---and in one item viz. XXX. We found a shortage of 40 nos costing Rs 58 each i.e a total shortage of Rs 2320. The Stores has a system of continuous verification which is expected to cover all items within a period of year. However we find that the system is not working properly as can be seen from this example.

Session 5Report Examples


CRISP REPORT –example (top portion- the report)

SIGNIFICANT AUDITRECOMMENDATIONS:

AUDIT COMMENTS:

NOT SATISFACTORY

SATISFACTORY, NEEDS IMPROVEMENT

HIGH:

SATISFACTORYMEDIUM:

EXEMPLARYAUDIT CONCLUSION:LOW:OVERALL RISK EXPOSURE:

SCOPE:

AREA OF RESPONSIBILITY:

SUBJECT:

AUDITORS:RESPONSIBLE OFFICERS

NAME OF CLIENT:SRIDHAR & SANTHANAM


CRISP REPORT –example (bottom portion-the response)

MANAGEMENT RESPONSE:

ACCEPTS:

DATE ALL

RECOMMENDATIONS WILL BE IMPLEMENTED:

DISAGREES:

PLANNED FOLLOW UP:

MANAGEMENT:

INTERNAL AUDIT:


To put it in a nutshell• "Have something to say, and say it as clearly as

you can. That is the only secret of style." (Matthew Arnold)

• "To me, style is the outside of content, and content is the inside of style, like the outside and the inside of the human body: both go together, they can't be separated." (Jean-Luc Godard)

• "Too much of a good thing is worse than none at all." (English Proverb)

• Doesn't expecting the unexpected make the unexpected become the expected? (Anon)

Documents

PKF Sridhar & Santhanam Internal audit reports ByS.Ramakrishnan PKF S&S