Internal Control And Audit

Management Control System

WHAT IS INTERNAL CONTROL

Internal control is a process designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with applicable laws and regulations

Internal Control Process

Control (or Operating) environment Risk assessment Control activities Information and communication Monitoring

Control Environment
The control environment is the control consciousness of an organization; it is the atmosphere in which people conduct their activities and carry out their control responsibilities. Management is responsible for "setting the tone" for their organization.

Risk Assessment
Risk assessment is the identification and analysis of risks associated with the achievement of operations, financial reporting, and compliance goals and objectives. This, in turn, forms a basis for determining how those risks should be managed.

Risk Assessment
Determine Goals and Objectives
Identify Risks after Determining Goals

Risk Analysis

Control Activities
Control activities are actions, supported by policies and procedures that, when carried out properly and in a timely manner, manage or reduce risks.

Control Activities Includes:Approvals, Authorizations, and Verifications (Preventive). Reconciliations (Detective) Reviews of Performance (Detective) Security of Assets (Preventive and Detective). Segregation of Duties (Preventive) Controls over Information Systems

Information and Communication

Information and communication are essential to effecting control; information about an organization's plans, control environment, risks, control activities, and performance must be communicated up, down, and across an organization.

Monitoring
Monitoring is the assessment of internal control performance over time; it is accomplished by ongoing monitoring activities and by separate evaluations of internal control such as self-assessments, peer reviews, and internal audits.

Internal Audit
Definition:

It is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations.

History of Internal Audit

The Internal Auditing profession evolved steadily with the progress of management science after World War II. It is conceptually similar in many ways to financial auditing by public accounting firms, quality assurance and banking compliance activities. Much of the theory underlying internal auditing is derived from management consulting and public accounting professions.

Internal Auditors
Internal Auditors' roles include monitoring, assessing, and analyzing organizational risk and controls; and reviewing and confirming information and compliance with policies, procedures, and laws.

Internal Controls n Internal Audit

Internal audit is a procedure of internal control . Internal control has wider scope than internal audit. Role: Effectiveness and efficiency of operations. Reliability of financial reporting. Compliance with laws and regulations

Internal Audit n External Audit

Although they are independent of the activities they audit, internal auditors are integral to the organization and provide ongoing monitoring and assessment of all activities. On the contrary, external auditors are independent of the organization, and provide an annual opinion on the financial statements. The work of the internal and external auditors should be coordinated for optimal effectiveness and efficiency.

Dual Focus n MSM of Internal Audit

1. Structure Dealing with Structural Relationships of Things and People 2. System safeguards 3. Staff Safeguard

Structural Relationships of Things n People-Con t

Duties are segregated. Critical line of information is open. Defined levels of authorization. Accesses to valuable assets are restricted. External Auditing

Con t
Independence of auditors is respected. Audit Committee Adequate Supervision of one person by another person.

System Safeguards
Complete and accurate records are maintained. Reconcile different internal records. Reconcile internal records through external bank statements. Restricted access to information. Timely management report. Audit trail and documentation

Staff Safeguard
Recruit carefully after police verification. Note unusual behaviour. Keep adequate back-up staff. Get declaration of property. Use private detective agent. Make sure that those who indulge in fraudulent practices would be dealt with ruthlessly.

Internal Audit Control System (The Satyam Case)

You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time

-Abraham Lincoln.

Satyam chairman RAMALINGA RAJU managed to disprove the American president and has put some of the biggest fraudsters to shame by fooling the whole IT industry, stakeholders and employees.
Maytas Properties and Maytas Infra (Maytas is Satyam spelt backwards!)

on December 16, took a new turn with Raju's admission of a Rs 7,000 crore fraud on 7 January and ended three days later, with Raju and his brother Rama surrendering to DGP Andhra Pradesh. While the court cases may implicate several accountants, auditors and members of the top management, it has already rocked the foundations of corporate governance laws in India as also shaken up India Inc.

Rise Of A Global Major

Raju Founded Satyam Computer Services On 24 June 1987. The First Fortune 500 Client. Listing On BSE. An IPO Oversubscribed 17 Times. Lisited In NYSE. 'Golden Peacock Global Award For Excellence In Corporate Governance For 2008'

Chinks In The Armour

Indication Of Fraud 5 Yrs Back. Executives Refused To Join SATYAM. Large Amount Of Fund In CURRRENT A/C.

And Finally, The Fall

In Aug of 2008, top level officials of Satyam started resigning, Raju announced satyam as a core real estate company overnight, Rajus had lost Rs 3,400 crore in the day.

The Fall The game-plan behind the takeover of Maytas was to fill the gap of cash reflected in the books but actually nonexistent, by taking over his own company, with his sons running the show. WORLD BANK barred SATYAM for 8 yrs for bidding for contracts.

Modus Operandi
The Balance Sheet on 26th September 2008 showed :
Fictitious Rs.5040 crores in inflated Cash and Bank Balance against Rs. 5361 crores in the books. An accrued Interest of Rs 376 Crs. Which was non-existent. An understated liability of Rs.1230 crs. On account of fund managed by Mr. Raju An overstated debtors position of Rs.490 cr. (as against Rs.2651 reflectedin the books) Revenues were overstated. 10000 salary accounts were fudged and funds diverted.

Game Plan
FAKE INVOICES INCREASED SALES FICTIOUS DEBTOR POSITIONS INCREASED PROFIT AND CASH RESERVES

FUDGED SALARY A/Cs

ROSY BALANCE SHEET

HOW THE LID WAS BLOWN?

As day broke, at 9.45 am, before the opening of the markets, a letter was faxed to SEBI Chairman, the board of Satyam, BSE and NSE. In the letter Raju, admitted about an inflated (non-existent) cash and bank balance of Rs 5,040 crore, an over stated debtor position of Rs 490 crore (as against Rs 2651 reflected in the books) and a fake liability of Rs 1,230 crore.

GOVERNMENT ACTS
Concerned about the fate of its 53,000 employees spread across 55 countries, the government took stern steps. PC Gupta, the Minister for Company Affairs, announced sacking of the board and appointment of new directors, to be announced over the next few days.

THE WAY FORWARD

Experts agree that Satyam may not exist as a standalone entity for very long. With government support it will be easier, to begin with get cash to manage the operations of the cash starved company, reassure global clients and stakeholders and eventually find a buyer.

INVESTORS RAISE QUESTIONS OVER PWC SATYAM AUDIT

Furious Indian investors are demanding to know how PricewaterhouseCoopers (PwC), one of the world's largest accountancy firms, missed a systematic 1 billion fraud at Satyam, the IT outsourcing giant, for as long as seven years.

ROLE OF AUDITORS, IN LIGHT OF SATYAM SCAM

DUTIES OF AN AUDITOR
The statutory duties of the auditor basically entail the following: Duty to make certain inquiries Duty to make a report to the company on the accounts examined by him Duty to make a statement in terms of the provisions prescribed.

Auditors Report
As per Section 227 of the Companies Act, the report should also stateThat the auditor has obtained all information and explanations, which are to the best of his knowledge and belief necessary for his purpose; Whether in his opinion, all the books of accounts and requisite documents necessary for the audit have been furnished by the company; Whether the balance sheet and profit and loss account comply with the books of accounts; Any observation and comments on the functioning of the company,

Duty to report fraud

During the course of the audit, the auditor could come across situations where he discovers that a senior employee is defrauding the company or using unfair practices, then an obligation arises of the auditor to report what he has discovered to the management immediately so that appropriate action can be taken. If the auditor identifies the possible existence of fraud or other irregularities in accounting practices, the auditor should attempt to clarify it or report it.

Duty as to considerable accuracy

The auditors function is not just to verify the arithmetical accuracy of the accounts; but that it includes all the particulars required by law and that it presents a correct and honest view of the companys financial standing. Therefore he must examine all the records and books of the company with utmost care and precision.

Detection and Prevention of Fraud

The term fraud is defined as: An intentional perversion of the truth, for the purpose of inducing another in reliance upon it, to part with some valuable thing belonging to him, or to surrender a legal right.

Fraud basically falls into the following three categories:

Management Fraud
Employee Fraud External Fraud

LIABILITIES OF AN AUDITOR
In order to hold the auditor liable for fraud, the following conditions must be satisfied:
1. That the statement signed by the auditor is untrue and false; 2. That he knew it to be untrue either or did not apply reasonable care and skill; 3. That he intended the report to be relied on by others; and 4. That the parties on relying upon the report suffered loss.

Material & equipment Purchase dept.

Finance dept.

concurrence

Store dept.

Account dept.

Functions of Concurrences Dept. @NTPC

tool of parallel and continuous control Checks the financial transactions concurrently Checks for validity , propriety and delegation of power rules applied. Catches faults at early stage.

CONCLUSION
Internal control is a critical part of Management Control . It is Self control and self correcting control. Internal audit is a tool of internal control it deals with HR audit and Financial audit

THANKING YOU