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‘Internal Audits – Case Studies’

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Parveen Kumar (Partner)ASA & Associates LLP chartered accountants www.asa.in

November, 2014

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Some Numbers...

Estimated loss from Fraud - 5% of a company’s annual revenue

Potential projected global fraud loss > $3.5 trillion

87% of occupational fraudsters - never been charged or convicted of a fraud-related offense84% never been punished or terminated by an employer

44% of Fraud Cases detected by means of 'tips & chance’

Median loss from frauds committed by:1. Owner/executives - $573,000, 2. Managers - $180,000 and by employees -$60,000

[Source: ACFE, 2012 Report to the Nation]

Some Accounting Stories…

Bank of Credit and Commerce International (BCCI) was founded in Karachi, in 1972 and registered in Luxembourg, London. It was a major international bank with 30,000 employees and had operations in 78 countries. It was the seventh largest private bank up to 1991 until it was closed

Allegations:

• One of the largest scandals with $ 20-billion-plus-heist. • More than $13 billion funds were unaccounted.• Other allegations include bribery, support of terrorism, money laundering, smuggling, sale of nuclear technologies etc.

Enron Corporation was founded in Houston, Texas in 1985. Was one of the world’s leading electricity, natural gas, pulp, paper and communications company (22,000 employees). This most Innovative Company lost its fame in 2001 with its accounting fraud.

ALLEGATIONS:

The debts of the company were hidden and profits were inflated by more than $1 billion. It offered bribes to foreign governments to win contracts abroad.

ALLEGATIONS:

Underreporting interconnection expenses by capitalizing on the balance sheet and $3.8 billion is overstated as capital expenses rather than operating expenses.

WorldCom was the United States’ second largest long distance phone company that was founded in the year 1983 as LDDS. After 19 years of establishments i.e. in 2002 the company’s accounting scandal came into exposure.

Tyco international was a global manufacturing company founded in 1960. Its operational headquarters is in New Jersey. With 118,000 employees it is composed of security services, safety products, fire protection services, flow control, electrical and metal products.

Allegations:

CEO Dennis Kozlowski and former CFO Mark H. Swartz were accused of the theft of $600 million from the company in 2002.

Kanebo Limited was a textiles and cosmetics group giant in Japan. It was originally established in 1887. It has 13,580 employees. In 2003 a major accounting fraud was revealed which was considered as the largest fraud in Japan.

Allegations:

Inflated profits by $2 billion over a five-year period.

Parmalat was founded in 1961 in Italy. It is a multinational Italian dairy and food corporation with more than 15,000 employees. This leading company collapsed in 2003 with an accounting scandal of $ 20 billion which is considered as one of the biggest bankruptcy.

Allegations:

Company’s total debt was more than double on the balance sheet. Forgery and bankruptcy are some other allegations

AIG was founded in 1919 in Shanghai, China by Cornelius Vander Starr, it went to public in 1969. It is a major American Insurance Corporation based in New York City with 116,000 employees.

Allegations:

The company maintained lucrative payoff agreements, soliciting rigged bids for insurance contracts and inflated financial position by $2.7 billion in 2005.

Satyam Computer was founded in 1987 in Hyderabad, India to offer information technology services. The company has a network in 67 countries with 53,000 employees. Very recently i.e. on 7th January, 2009 the accounting scandal came into exposure.

Allegations:

Inflated cash and bank balances of more than $1.5 billion (INR 7,000 crore), overstated debtors’ position of $100 million and understated liability.

Good Morning……!!!!

India works on a multi-regulator model

Reserve Bank (RBI)

NBFCs

…FC AAA.C XXX

LC..C

MCAState RegistrarOf Chit Funds

RBI regulates deposittaking activity

XXXNidhi

ZZZZChit Fund C.

NationalHousing

BankIRDA SEBI

CCCCHFC SBC MF

XX co.YY

Infrastructure

General Insurance ABC

Financial Statements

Ind AS

IFRSAS

Company Law

Regulators – RBI, SEBI,

IRDA….

To Help User Take Decisions

Tax Standards

Cost Standards

Case Studies

Dep Rate Changed from past

ProperDisclosures

Increased Profits of 1 Billion+

LISTED COMPANY

Income Tax to SCH XIV

AS-6

AS-5

Your View………???????

Pu

rpose

AS-1

Teaming and Leading.....One of MOST popular tricks..!!!

II CASE II

Bank Interest …… IT Fraud

II CASE II

OPPORTUNITIES WELCOME….

II CASE II

Cost Saving…..Travel Expenses

II CASE II

Internal Auditing?

• “Eyes and Ears”• “Policeman”• “Watchdog”• “Consultant”• “Catalyst”

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II PURPOSE II

II EXPECTATIONS II

II EXPECTATIONS II

II EXPECTIONS II

Corporate Management Team

Planning and Approach…….

II CASE II

Audit PlanAudit Plan

Gather Evidence/Documents Gather Evidence/Documents

Opening Meeting with ClientOpening Meeting with Client

Record Results (Draft report)Record Results (Draft report)

Develop ChecklistsDevelop Checklists

Discussion with ClientDiscussion with Client

Final Report SubmissionFinal Report Submission

Approach-C

onducting the Audit

Approach-C

onducting the Audit

Approach (Complete Cycle)

Entity objectives can be viewed in the context of four categories:

1. Strategic 2. Operations3. Reporting4. Compliance

Approach -2 (Use of COSO framework)

Approach -3 (Risk Analysis Audit Approach) Sample Chart

Summary of Controls and Gaps identified under SOX - Tracking Sheet

Area Critical Activities

Category of Risk

Open Gaps in Jun' 06

Closed by user in JAS'

06

Closed by user in ON'

06

Closure accepted

by IA

Closure not accepted by

IA

Closure being tested by IA / IT

Security

Gaps due for closure in

Dec' 06

Gaps closed in Dec' 06 - Due for

IA testing

Gaps closure - Mar' 06

High Medium Low                           Revenue and Accounts Receivables

26  3 2 5 1      1 4   Fixed Assets 22  4 2 6 1 1 1  1 4   Travel 24  11 4 15 5 1  6 14  1Payroll 18  13 5 18 3    2 1 14 3 3Accounts Payable 11  2  2 0        2   Financial Closing 29    3 3 1    1  3   Regulatory Compliance

62  2 5 7 3    2 1 6   Treasury 10      0 0             IT Controls 25 1 5  6 3    1 2 3  1IT Application Controls (AP and GL)

18    3 3 2 1 1  2                                Totals

245 1 40 24 65 19 3 2 12 8 50 3 5

Internal Audit – Controls Review Team

Yes No Comment

I Quality Control

1. Does the Unit-Paints participate in external QA programmes?

2. Are they adequate for the range of tests performed?

3. Are the results of external QA programmes: circulated?

reviewed?

actioned appropriately?

4. Are records maintained for external QA programmes?

5. Are internal QC procedures adequate and appropriate for the range of tests

performed?

6. Are internal QC procedures documented?

7. Are records maintained for internal QC programmes?

Sample-Internal Audit Checklist

Sample- Process Flow-chart

Approach -4 (Use of Collaborative Approach)Usage of SME (Subject Matter Experts)

II CHALLENGES II

Report

Data

Time

Priority

GoalTone

at the top

We Know

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THANK YOU

+919810101790

(parveen.kumar@asa.in)

www.asa.in