Transcript Another example - PKF Sridhar & Santhanam

Internal audit
reports
By
S.Ramakrishnan
PKF S&S
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
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
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
Session 1
Some 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!
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
Another example
Draft National minimum
wages regulations 1998
 hours
in a pay
reference period shall
 The hours of non
work
be in
the
total of the hours spent
worked by a worker
a pay
by him
reference period shall
be the
 The hours of non hours work
total of the hours spent by him
worked by a worker
during the pay reference period
in carrying 
out
during
the duties
the pay reference period
required of him
in carrying
under the
out the duties
contract to do
required
non hours
of him
work.
under the
contract
do non hours work.
• Quoted as a masterpiece
of to
obfuscation
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
Most fundamental rule -KISS
'In Nuts
the Nuts
(unground), (other than ground nuts) Order,
'In the
(unground),
the expression nuts shall have reference to such nuts,
than ground
nuts)
other(other
than ground
nuts, as
would but for this amending
OrderOrder,
not qualify as nuts (unground) (other than ground
nuts) by reason of their being nuts. (unground).'
nuts
have 1992.
- the
takenexpression
from Guinness
Bookshall
of Records,
reference to such nuts,
One of the most inexplicable legislations. It was passed by a
judge of the Court of Session
of Scotland:
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).'
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
Avoid Bloomers- some classics from
real reports!
Cost or not realizable value
Freight payment not in accordance with the Post Office
EVA is a figure like NPA
40 hours of Resin
1.3 BUSHINGS WERE FOUND SHORT!
Production limited wage structure
Provision for doubtful expenses
10,00,000 lakh shares
Transportation of PVC resign
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
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!
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
Session 2
A 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)
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
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
PKF Sridhar & Santhanam
www.pkf.com
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A GOOD REPORT
SHOULD 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
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
SUGGESTIONS ON GOOD REPORT
Think ‘REPORT’ when doing audit
Avoid 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."
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
MORE SUGGESTIONS ON GOOD REPORT
EDIT 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’
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
MORE SUGGESTIONS ON GOOD REPORT
Ernest 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!
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
Be Laconic
Laconic 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.
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
Session 3
Skeleton of a report!
Basics of report writing
Consider users of reports
 Company management
 Audit committee/ Board
 External users
Report should be
 attention-getting,
 readable and
 credible
PKF Sridhar & Santhanam
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Design
 STANDARDISE
• 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.)
PKF Sridhar & Santhanam
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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’)
PKF Sridhar & Santhanam
www.pkf.com
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Simplify, simplify
Instead of
at 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
Consider
now
I suggest
so that we can
confidential
we believe
total
beginning
best
enough
every two months
twice a month
PKF Sridhar & Santhanam
www.pkf.com
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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
PKF Sridhar & Santhanam
www.pkf.com
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Session 4
PKF S&S Mnemonic
S&S mnemonic for report writing
Remember this Mnemonic:
Improve Overall S&S Report Quality
Next double the first words:
I N I
O N O
S N S
 R ‘N R
 Q ‘N Q
PKF Sridhar & Santhanam
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Which stands for
Ignore MIS not Internal control
On the whole not One liners
System not Symptoms
Research Reasons & Report recurring
issues
Quantum of checking & Quantification
PKF Sridhar & Santhanam
www.pkf.com
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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.
PKF Sridhar & Santhanam
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Ignore MIS - Example
WRONG REPORTING
Debts 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 REPORTING
The 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?
PKF Sridhar & Santhanam
www.pkf.com
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Ignore not Internal controls
Explanation: 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’.
PKF Sridhar & Santhanam
www.pkf.com
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Ignore not Internal controls Example
Use 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.
PKF Sridhar & Santhanam
www.pkf.com
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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
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com
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:---.
PKF Sridhar & Santhanam
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System and not symptoms
Explanation: 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..
PKF Sridhar & Santhanam
www.pkf.com
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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).
PKF Sridhar & Santhanam
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Research reasons and report
recurring issues
Explanation: 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.
PKF Sridhar & Santhanam
www.pkf.com
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Research reasons and report recurring
issues – Identify right reporting!
 Purchase orders are made for quantities much
above the quantities requisitioned leading to idle
stocks.(Wrong reporting)
 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. (Correct reporting)
PKF Sridhar & Santhanam
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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.
PKF Sridhar & Santhanam
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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 ---.
PKF Sridhar & Santhanam
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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.
PKF Sridhar & Santhanam
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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.
PKF Sridhar & Santhanam
www.pkf.com
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Session 5
Report Examples
CRISP REPORT –example (top
portion- the report)
SRIDHAR & SANTHANAM
NAME OF CLIENT:
RESPONSIBLE OFFICERS
AUDITORS:
AUDIT CONCLUSION:
EXEMPLARY
SUBJECT:
AREA OF RESPONSIBILITY:
SCOPE:
OVERALL RISK EXPOSURE:
LOW:
MEDIUM:
SATISFACTORY
SATISFACTORY, NEEDS IMPROVEMENT
HIGH:
NOT SATISFACTORY
AUDIT COMMENTS:
SIGNIFICANT AUDIT
RECOMMENDATIONS:
PKF Sridhar & Santhanam
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CRISP REPORT –example
(bottom portion-the response)
DATE ALL
RECOMMENDATIONS
WILL BE IMPLEMENTED:
MANAGEMENT
RESPONSE:
ACCEPTS:
DISAGREES:
PLANNED FOLLOW UP:
MANAGEMENT:
INTERNAL AUDIT:
PKF Sridhar & Santhanam
www.pkf.com
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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)
PKF Sridhar & Santhanam
www.pkf.com
www.sandsca.com