CU-MCOM-SEM-III-Advanced Auditing (1)

the bank’s investment operations are required and expected to be carried out, it is the auditing process that culls out and highlights the bubbles and weaknesses in the procedures adopted by the bank’s operating personnel and forewarn the management about the likely risks which have the potential to undermine the Corporate Objectives of the bank. Procedure of Allotment of Bank Audit The large PSBs having balance sheet size (assets + liabilities) of above 1 lac crore each to exercise managerial autonomy in regard to appointment of SBAs also from the year 008-09 onwards. Thus, State Bank of India, Allahabad Bank, Bank of India, Bank of Baroda, Canara Bank, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Syndicate Bank, Punjab National Bank, UCO Bank and Union Bank of India would be required to select/appoint their SBAs from the year 2008-09. In addition, Andhra Bank and Punjab & Sind Bank which have opted to exercise autonomy in the matter of appointment of statutory auditors will also select/appoint their SBAs in 2008-09. For the remaining PSBs, the existing practice of RBI providing the list of audit firms to be appointed as SBAs would continue during the years 2008-09. In respect of the banks identified above, RBI to provide the list of eligible auditors/audit firms. The existing categorization norms for empanelment of SBAs to continue. The auditors/audit firms who got statutory audit of branches of PSBs in the year 04-05 and afterwards will continue to get the audit of same bank except in certain exceptional cases. Banks do not have any authority to remove the audit firms during this period without prior approval of the Reserve Bank of India. The concept of one audit firm for one PSB to continue. The consent given by an audit firm will be treated as irrevocable. The number of eligible auditors/audit firms is more than the number of branches to be audited at the following 33 centres (viz. Mumbai, Kolhapur, Pune, Solapur, Thane, Kolkata, Chennai, Coimbatore, Delhi/New Delhi, Ajmer, Bikaner, Jaipur, Kota, Udaipur, Ahmedabad, Vadodara, Surat, Hyderabad, Chandigarh, Raipur, Faridabad, Gurgaon, Panchkula, Panipat, Sonipat, Bangalore, Ernakulam, Indore, Nagpur, Ludhiana, Jodhpur, Bhilwara and Ghaziabad). In such centres, the auditors/audit firms will be put to a period of compulsory rest for two years. In other centers, where the number of eligible auditors/audit firms is less 151 CU IDOL SELF LEARNING MATERIAL (SLM)

than the number of branches to be audited, the branch auditors will be subjected to the principle of rotation. After the selection of branch auditors, PSBs will be required to recommend the names of both continuing and new branch auditors to seek the approval from RBI before their actual appointment. Audit of Accounts Sub-section (1) of section 30 of the Act requires that the balance sheet and profit and loss account of a banking company should be audited by a person duly qualified under any law for the time being in force to be an auditor of companies. Similar provisions are contained in the enactments governing nationalised banks [section 10 of the Banking Companies (Acquisition and Transfer of Undertakings) Act of 1970/1980], State Bank of India [section 41 of the State Bank of India Act, 1955], subsidiaries of State Bank of India [section 41 of the State Bank of India (Subsidiary Banks) Act, 1959], and regional rural banks [section 19 of the Regional Rural Banks Act, 1976]. It is important to note that section 41 of the State Bank of India Act, 1955, specifically provides that the affairs of the bank shall be audited by “two or more auditors”. Qualifications of Auditor: According to section 226 of the Companies Act, 1956, a chartered accountant, a firm of chartered accountants or a restricted state auditor can be appointed as auditor of a company. However, the following persons cannot be appointed as auditor of a company: (a) a body corporate; (b)an officer or employee of the company; (c) a person who is a partner, or who is in the employment, of an officer or employee of the company; (d) a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees; (e) a person holding any security means an instrument which carries voting rights of the company (this disqualification is applicable from the expiry of a period of one year from the date of commencement of the Companies (Amendment) Act, 2000. 152 CU IDOL SELF LEARNING MATERIAL (SLM)

It may be noted that in case of indebtedness in excess of the specified limit as mentioned at (d) above, the chartered accountant concerned (or the firm of chartered accountants) becomes disqualified to audit any branch of the bank; the disqualification is not confined to appointment as auditor of the particular branch to which the debt is owed. In the context of banks, the expression indebtedness would cover, inter alia, the amounts outstanding in respect of credit cards issued by a bank. Thus, where the credit card outstanding exceeds the prescribed limit of 1,000, the chartered accountant in whose name the card is issued as well as the firm of which he is a partner would be disqualified for appointment as auditor of the issuing bank. Appointment of Auditor: As per the provisions of the relevant enactments, the auditor of a banking company is to be appointed at the annual general meeting of the shareholders, whereas the auditor of a nationalized bank is to be appointed by the bank concerned acting through its Board of Directors. In either case, approval of the Reserve Bank is required before the appointment is made. The auditors of the State Bank of India are to be appointed by the Reserve Bank of India in consultation with the Central Government. The auditors of the subsidiaries of the State Bank of India are to be appointed by the State Bank of India. The auditors of regional rural banks are to be appointed by the bank concerned with the approval of the Central Government. As mentioned earlier, the State Bank of India Act, 1955, specifically provides for appointment of two or more auditors. Besides, nationalized banks and subsidiaries of State Bank of India also generally appoint two or more firms as joint auditors. Remuneration of Auditor: The remuneration of auditor of a banking company is to be fixed in accordance with the provisions of section 224 of the Companies Act, 1956 (i.e., by the company in general meeting or in such manner as the company in general meeting may determine). The remuneration of auditors of nationalised banks and State Bank of India is to be fixed by the Reserve Bank of India in consultation with the Central Government. The remuneration of auditors of subsidiaries of State Bank of India is to be fixed by the latter. In the case of regional rural banks, the auditors’ remuneration is to be determined by the bank concerned with the approval of the Central Government. Powers of Auditor: The auditor of a banking company or of a nationalised bank, State Bank of India, a subsidiary of State Bank of India, or a regional rural bank has the same powers as those of a company auditor in the matter of access to the books, accounts, documents and 153 CU IDOL SELF LEARNING MATERIAL (SLM)

vouchers. He is also entitled to require from the officers of the bank such information and explanations as he may think necessary for the performance of his duties. In the case of a banking company, he is entitled to receive notice relating to any general meeting. He is also entitled to attend any general meeting and to be heard there at on any part of the business, which concerns him as auditor. It is important to note that under section 10 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980, the auditor of a nationalised bank may employ accountants or other persons at the expense of the bank to assist him in audit of accounts. Similar provisions exist in section 41 of the State Bank of India Act, 1955 and the State Bank of India (Subsidiary Banks) Act, 1959. These provisions are aimed at facilitating the work of auditors of these banks by empowering them to appoint the auditors of branches and are particularly important in the context of the fact that the above enactments do not contain any specific provisions for audit of branches of these banks. This is unlike banking companies where audit of branches is required under section 228 of the Companies Act, 1956. It may be noted that the Regional Rural Banks Act, 1976, does not contain any provisions relating to audit of branches. Accordingly, in the case of such banks, audit of branches is also carried out by the auditors appointed for the bank as a whole. Auditor’s Report: In the case of a nationalized bank, the auditor is required to make a report to the Central Government in which he has to state the following: whether, in his opinion, the balance sheet is a full and fair balance sheet containing all the necessary particulars and is properly drawn up so as to exhibit a true and fair view of the affairs of the bank, and in case he had called for any explanation or information, whether it has been given and whether it is satisfactory; whether or not the transactions of the bank, which have come to his notice, have been within the powers of that bank; (c) whether or not the returns received from the offices and branches of the bank have been found adequate for the purpose of his audit; (d)whether the profit and loss account shows a true balance of profit or loss for the period covered by such account; and any other matter which he considers should be brought to the notice of the Central Government. Long Form Audit Report: Besides the audit report as per the statutory requirements discussed above, the terms of appointment of auditors of public sector banks, private sector banks and foreign banks [as well as their branches, require the auditors to also furnish a long 154 CU IDOL SELF LEARNING MATERIAL (SLM)

form audit report (LFAR)]. The matters which the banks require their auditors to deal with in the long form audit report have been specified by the Reserve Bank of India. Conducting an Audit The audit of banks or of their branches involves the following stages: 1. Preliminary Work. 2. Evaluation of Internal Control System. 3. Preparation of Audit Programme for Substantive Testing and its Execution. 4. Preparation and Submission of Audit Report. Preliminary Work The auditor should acquire knowledge of the regulatory environment in which the bank operates. Thus, the auditor should familiarise himself with the relevant provisions of applicable law(s) and ascertain the scope of his duties and responsibilities in accordance with such law(s). He should be well-acquainted with the provisions of the Banking Regulation Act, 1949, as well as any other applicable law(s) e.g. Companies Act, 1956 in the case of audit of a banking company particularly in so far as they relate to preparation and presentation of financial statements and their audit. The auditor should also acquire knowledge of the economic environment in which the bank operates. Similarly the auditor needs to acquire good working knowledge of the services offered by the bank. In acquiring such knowledge, the auditor needs to be aware of the many variations in the basic deposit, loan and treasury services that are offered and continue to be developed by banks in response to market conditions. To do so, the auditor needs to understand the nature of services rendered through instruments such as letters of credit, acceptances, forward contracts, and other similar instruments. The auditor should also obtain an understanding of the accounting system of the bank and the terminology used by the bank to describe various types of transactions and operations. Most banks have well-designed accounting and procedures manual which can serve as an important source of information on these aspects. Banks are extensively using information technology for its operations. The advent of technology has added a risk parameter to the auditor’s process of risk assessment. Evaluation of Internal Control System 155 CU IDOL SELF LEARNING MATERIAL (SLM)

AAS-6, ‘Risk Assessment and Internal Control’, states that auditor’s procedure should be addressed to keep the audit risk at an acceptably low level and also require the auditor to assess the components of the audit risk. Internal control evaluation is an important element of audit process. In the case of audit of banks, it assumes even greater importance due to the enormous volume of transactions entered into by banks. Evaluation of design and operation of internal control system enables the bank auditors to perform more effective audits. The auditor should, therefore, study and evaluate the design and operation of internal controls. This would assist him in determining the nature, timing and extent of substantive procedures in various areas, depending upon whether the internal controls are adequate and observed in practice. Preparation of Audit Programme for Substantive Testing and its Execution Having familiarized himself the requirements of audit, the auditor should prepare an audit programme for substantive testing which should adequately cover the scope of his work. In framing the audit programme, due weightage should be given by the auditor to areas where, in his view, there are weaknesses in the internal controls. The audit programme for the statutory auditors would be different from that of the branch auditor. At the branch level, basic banking operations are to be covered by the audit. On the other hand, the statutory auditors at the head office level have to deal with consolidation of branch returns (both audited and unaudited), verification of investments, items normally deal with at the head office (like provision for gratuity, inter-office accounts, etc.). The scope of the work of the statutory auditors would also involve dealing with various accounting aspects and disclosure requirements arising out of the branch returns. 9.7 AUDIT OF INSURANCE COMPANIES General Insurance sector is next only to the banking industry in terms of importance among the economic barometers of the nation. While the banking industry is creating assets and consequently national wealth, the insurance industry is ‘protecting’ such wealth to the tune of several millions of rupees. The industry is also very unique in the sense that it thrives in selling promises and marketing uncertainties and making good money in the process, cycling such money back in to the nation building process. Cash-rich, again next only to banking, it is also the only industry that is global, both by design and default, in its reach and perspectives and hence its numbers are also massive. 156 CU IDOL SELF LEARNING MATERIAL (SLM)

The industry, which was opened up for private sector participation with a defined limit of foreign equity, after three decades of public sector monopoly, is in the process of rediscovering itself. It has become the cynosure of all discerning eyes, with more than a dozen private companies sponsored by the top industrial empires of the country teaming up with some of the best international names, have sprung in the horizon to increase the size of the cake several fold and then to take their due slices of it. Audit of Accounts The various stakeholders in the general insurance companies such as the Government (as the owners of the PSU companies), Indian shareholders and the JV partners (in case of private companies), policyholders, re-insurers who do business with the companies etc. consider the published financials of the Insurance Companies as the symbol of the strength and more so because such financials bear the attestation of the Chartered Accountants, who ‘audit’ the companies. The excitement among Chartered Accountants that is perceptible in late March and early April in connection with Bank Audits, their eagerness to get acquainted with the latest on NPA provisioning norms and their self-propelling attitude to attend the Bank Audit seminars in huge numbers are all normally not very pronounced even among those who get the insurance audit allotments. For some unfathomable reasons, the auditors do not display any enthusiasm in acquiring the necessary domain expertise of this industry, the financial concepts of which are riddled with unique and specialized concepts such as heavy influence of the bottom lines by various estimations, statutory limitation on management expenses, relationship between the capitalizations and risk bearing capacities, protection of policyholders’ interests vis-à-vis expectations of stakeholders etc. This lack of domain expertise sometimes leads to an auditor’s performing his role in lesser dimension than he normally should. There are several areas in insurance accounting and finance, both at the corporate level and operational level that need an auditor’s focused attention and critical review. However, before embarking on the core area, let us briefly go over the metamorphosis in the area of financial reporting and disclosure requirements of general insurance companies. Under section 12 of the Insurance Act, 1938, the financial statements of every insurer are required to be audited annually by an auditor. Section 2(4) of the Insurance Act, 1938 defines the term ‘auditor’ as a person qualified under the Chartered Accountants Act, 1949 to act as 157 CU IDOL SELF LEARNING MATERIAL (SLM)

an auditor of a company. The auditor, for audit of financial statements, has the powers to exercise the rights vested in, and discharge the duties and be subject to the liabilities and penalties imposed on auditors of companies under the Companies Act, 1956. The provisions of Section 12 of the Insurance Act, 1938 apply only in a case where the financial statements of the insurer are not subject to audit under the Companies Act, 1956. A company carrying on general insurance business is subject to audit requirements laid down under the Companies Act, 1956. The financial statements under section 12 include Balance Sheet, Profit and Loss Account and Revenue Account. Section 12 of the Insurance Act, 1938 does not cover the requirement for audit of the Receipts and Payments Account of an insurer. It may be noted that the Insurance Regulatory and Development Authority Act, 1999 inserted a new sub-section (1A) in Section 11 of the Insurance Act, 1938. The sub-section has an overriding effect over sub- section (1) of section 11 that prescribed the financial statements to be prepared by an insurer. The new sub-section requires that after the commencements of IRDA Act, 1999, every insurer, in respect of insurance business transacted by him and in respect of his shareholders’ funds, should prepare, at the end of each financial year, a Balance Sheet, a Profit and Loss Account, a separate Account of Receipts and Payments and a Revenue Account in accordance with the regulations made by the IRDA. Since Receipts and Payments Account has been made a part of financial statements of an insurer, it is implied that the Receipts and Payment Account is also required to be audited. The Authority, in exercise of the powers conferred by the Insurance Act, 1938, issued the IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2000. These Regulations require the auditor of an insurance company to report whether the Receipts and Payments Account of the insurer is in agreement with the books of account and returns. The auditor is also required to express an opinion as to whether the Receipts and Payments Account has been prepared in accordance with the provisions of the relevant statutes and whether the Receipts and Payments Account gives a true and fair view of the receipts and payments of the insurer for the period under audit. This also implies that the auditor is required to audit the Receipts and Payments Account of the insurer. 158 CU IDOL SELF LEARNING MATERIAL (SLM)

Appointment of Auditors: The appointment of statutory auditors in the General Insurance Corporation of India, and its subsidiaries and the divisions is made by the Comptroller and Auditor General of India, as in the case of other public sector undertakings. The appointment of auditors of the agencies abroad is made by the Board of Directors of each company. Rights and Duties of Branch Auditors: It is a practice that the divisional offices prepare a trial balance in a manner that it provides information required to be included in the various formats of financial statements prescribed in the Insurance Act. Each trial balance, in which are incorporated the figures relating to the branches of the divisions, is required to be audited and the report thereon is furnished to the statutory auditors. The divisions of the companies carrying on general insurance business are treated for the purposes of the Companies Act, 1956 as their branches. It follows that the branch auditors appointed to conduct the audit of the divisions have the same rights and obligations under the statute as those of the, statutory auditors to whom they are expected to submit their report. Auditors’ Report: The Authority has prescribed the matters to be dealt with by the Auditors’ Report vide Regulation 3 under Schedule C of IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2000. Tax Audit: It is necessary for general insurance companies to get their accounts audited under Section 44AB of the said Act. For this purpose, the tax auditor(s) may be appointed by the company itself by means of a resolution of the Board of Directors or by the Chairman/Managing Director if so authorized in this behalf. The company is expected to fix separate remuneration for the auditor(s) appointed for this purpose. The Form of tax audit report applicable would be Form 3C and the prescribed particulars would have to be given in Form 3CD, in accordance with Rule 6G of the Income Tax Rules, 1962, pursuant to Section 44AB of the Income Tax Act, 1961. It is recommended that, wherever applicable, a common audit programme be framed for statutory audit and for certification of the prescribed particulars under the aforesaid rules for tax audit. Audit Procedures The important part of the business operations of general insurance companies comprises the issuance of policies for risks assumed and to indemnify the insured for losses to the extent covered by such policies. In financial terms, these operations get translated into the receipt and recording of premiums and the recording and settlement of claims. Both premiums and claims have a significant impact on the insurance companies’ revenues, it would be an 159 CU IDOL SELF LEARNING MATERIAL (SLM)

important part of the duty of the auditor to satisfy himself that the financial transactions involving both these operations have been fairly and properly recorded in the relevant books of account. The auditor’s primary objective in audit of investments is to satisfy himself as to their existence and valuation. Examination of compliance with statutory and regulatory requirements is also an important objective in audit of investments insofar as non-compliance may have a direct and material affect on the financial statements. The auditor should verify the investment scrips physically at the close of business on the date the balance sheet. In exceptional cases where physical verification of investment scrips on the balance sheet date is not possible, the auditor should carry out the physical verification on a date as near to the balance sheet date as possible. In such a case, he should take into consideration any adjustments for subsequent transactions of purchase, sale, etc. He should take particular care to see that only genuine investments are produced before him, and that securities held by the insurance company on behalf of others (e.g., those held as security against loans) are not shown to him as the insurance company’s own investments. The auditor should keep them under his control until he completes his checking. Normally, the investments of an insurance company are held by the insurance company itself or a depository (in the case of dematerialized securities other than government securities). Investments are normally dealt with at the Head Office and not at the branches. However, sometimes, for realization of interest, etc. and other similar purposes, investments of an insurance company may be held at Branch Offices also. In such cases, the auditor should examine the record maintained at the Head Office to record details of investments held at other locations and request the respective branch auditors to physically verify such investments as a part of their audit. The auditor should obtain a written confirmation to this effect from the branch auditors. In case the verification has been done on a date other than the balance sheet date, a statement showing the reconciliation of the investments held at the time of physical verification with the investments held as on the balance sheet date should also be obtained from the branch auditors. The branch auditors should report whether adequate records are maintained by the branch for the securities held by it on behalf of the Head Office. Investments should not normally be held by any other person (as laid down in the City Equitable Fire Insurance Co. case). If any investments are so held, proper enquiry should be 160 CU IDOL SELF LEARNING MATERIAL (SLM)

made to ensure that there is some justification for it, e.g., shares may be held by brokers for the purpose of transfer or splitting-up, etc. Shares may also be lodged with the companies concerned for transfer etc. When investments are held by any other person on behalf of the insurance company, the auditor should obtain a certificate from him. The certificate should state the reason for holding the investment (e.g., in safe custody or as security). In respect of scripless dealings in investments through the OTC Exchange of India, the auditor should verify the interim and other acknowledgements issued by dealers as well as the year-end confirmation certificates of the depository organization. The auditor should also examine whether securities lodged for transfer are received back within a reasonable period. Similarly, he should examine whether share certificates, etc. are received within a reasonable period, of the lodging of the allotment advice. In case there is an unusual delay in registration of transfers, etc., the auditor should see that adequate follow-up action has been taken. He may, in appropriate cases, also enquire from the issuers, or their registrars, about the delays. In cases where the issuer/registrar has refused to register the transfer of securities in the name of the insurance company, the auditor should verify the validity of the title of the insurance company over such securities. The auditor should examine whether the portfolio of the insurance company consists of any securities whose maturity dates have already expired. It is possible that income on such investments may also not have been received. In case the amount of such investments or the income accrued thereon is material, the auditor should seek an explanation from the management on this aspect. He should also consider whether any provision for loss on this account is required. Similarly, where income on any security is long overdue, the auditor should consider whether provision is required in respect of such income accrued earlier. Investments in securities now-a- days constitute a substantial part of total assets of many insurance companies. Method of valuation of investments followed by an insurance company may, therefore, have a significant effect on its Balance Sheet and Profit and Loss Account. The auditor should examine whether the method of accounting followed by the insurance company in respect of investments, including their year- end valuation, is appropriate. The auditor should examine the manner of accounting for investments in the context of the guidelines of the Insurance Regulatory and Development Authority and the accounting policy followed by the insurance company in respect of’ investments. The auditor should examine the appropriateness of accounting policies followed by the insurance company. In case any of 161 CU IDOL SELF LEARNING MATERIAL (SLM)

the accounting policies is not appropriate, the auditor should consider the effect of adoption of such policy on the financial statements and, consequently, on his audit report. A change in the method of valuation of investments constitutes a change in accounting policy and adequate disclosure regarding the fact of the change along with its financial effect should be made in the balance sheet. The auditor should examine whether income from investments is properly accounted for. This aspect assumes special importance in cases where the insurance company has opted for receipt of income through the Electronic Clearing Service. There may be cases where the certificates of tax deduction at source (TDS) received along with the interest on investments are found missing. This increases the incidence of tax on the insurance company. The auditor should see that there is a proper system for recording and maintenance of TDS certificates received by the insurance company. Audit Empanelment Requirements Prior to the private sector entry, the appointments of auditors for the four PSU companies were made by the CAG. In the current scenario where private insurers have begun operating, the appointment of auditors appears to have come within the ambit of functions of the IRDA, in terms of the regulations on preparation of financial statements and auditor’s report under the IRDA Act. Here, the IRDA Act does not make any distinction between Public Sector and Private Sector Insurance Companies. (However, to what extent the said Regulations notified under the sanction given under Sec. 114 A of the Insurance Act, which in itself does not specifically state anything on auditors’ appointment, can overrule the provisions of Companies Act is not clear.) Accordingly, IRDA has started compiling a panel of Chartered Accountants and for the purpose, has also prescribed certain exacting parameters for such empanelment. Of course, in such parameters, the longevity, size etc. of a firm seems to be only given importance rather than the specialized qualifications in the field or the domain expertise of the partners. This is rather sad. An industry that is so unique and important cannot be ‘audited’ casually and generally, when specialization is the order of the day. Realizing the importance of the need to create and develop ‘domain expertise’ in this industry that is all set to take a giant leap in the years to come, our Institute has newly introduced a specialized post qualification course on insurance and risk management. Providing assurance services to the people who are themselves in the business of assuring others is a serious affair and the responsibility of the members of our profession to provide 162 CU IDOL SELF LEARNING MATERIAL (SLM)

comfort (by doing ‘an informed audit’) to the stakeholders, regulator, reinsures, tax authorities can hardly be overemphasized. 9.8 SUMMARY • Cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting. • At present, the Companies Act contains provisions relating to maintenance of Cost Records under section 209 (1) (d) and Cost Audit under section 233B of the Companies Act in respect of specified industries. • In cost audit, auditor has to perform the following duties: Examine the correctness of the cost records maintained by the concern and to report as to whether the cost accounting plans have been adhered to or not. • If any activity of a company is covered under cost audit dated 2nd May 2011 or 30th June 2011 or 24th January 2012, the cost audit will be applicable to that company irrespective of the turnover of that particular activity. • Three basic evaluation methods exist for any work activity: inspection, compliance auditing and management auditing 9.9 KEY WORDS  Cost Ascertainment: The main objective of Cost Accounting is to find out the Cost of product / services rendered with reasonable degree of accuracy.  Cost Accounting: It is the process of Accounting for Cost which begins with recording of expenditure and ends with preparation of statistical data.  Cost Control: It is the process of regulating the action so as to keep the element of cost within the set parameters.  Cost Reports: This is the ultimate function of Cost Accounting. These reports are primarily prepared for use by the management at different levels. Cost reports helps in planning and control, performance appraisal and managerial decision making.  Cost Audit: Cost Audit is the verification of correctness of Cost Accounts and check on the adherence to the Cost Accounting plan. Its purpose is not only to ensure the 163 CU IDOL SELF LEARNING MATERIAL (SLM)

arithmetic accuracy of cost records but also to see the principles and rules have been applied correctly. 9.10 LEARNING ACTIVITY 1. Identify different steps carrying out by cost auditor in performing cost audit. ___________________________________________________________________________ ____________________________________________________________________ 9.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Basic energy Audit? 2. What is environmental Audit? 3. What is cost object? Long Questions 1. What is cost audit? Explain in brief. 2. What functions are performed by auditor in cost audit? 3. Explain procedure for cost audit. B. Multi Choice Questions 164 1. Cost auditor submits reports to the: a. Shareholder b. Board of directors c. Employees d. Creditors 2. Cost Accounting Standard 8 is a Cost Accounting Standard on ___________. CU IDOL SELF LEARNING MATERIAL (SLM)

a. Employee Cost 165 b. Utilities Cost c. Pollution Control Cost d. Selling and Distribution Cost 3. Cost Auditing Standard 102 deals with ______________. a. planning an Audit of Cost Statements b. Cost Audit Documentation c. knowledge of process and business d. overall objectives of the Independent Cost Auditor 4. Which of these is not an objective of Cost Accounting? a. Ascertainment of Cost b. Determination of Selling Price c. Cost Control and Cost reduction d. Assisting Shareholders in decision making Answers 1 – b, 2 – b, 3 – b, 4 – d, 9.12 REFERENCES  Arens and Lobbecke, Auditing and integrated approach  Bubbard and Johnson, Auditing  Gupta, K., Contemporary auditing, Tata McGraw Hill  Knechel, R. W., Auditing, South-Western College Publishing. CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 10 - AUDITING - AUDIT OF CO-OPERATIVE SOCIETIES Structure 10.0 Learning Objectives 10.1 Co-operative societies 10.2 Non-banking Financial Companies. 10.3 Summary 10.4 Key Words 10.5 Learning Activity 10.6 Unit End Questions 10.7 References 10.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe nature of Audit in cooperative societies  Identify scope of Audit in cooperative societies  Benefits of Audit in cooperative societies  Process of Audit in cooperative societies 10.1 CO-OPERATIVE SOCIETIES Let us now discuss the provisions for Audit as Per Section 17 of the Co-operative Society Act, 1912 −  The Registrar shall audit or cause to be audited by some person authorized by him by general or special order in writing on his behalf, the accounts of every registered society once at least every year.  The Audit under sub-section (1) shall include an examination of overdue debts, if any, and a valuation of the assets and liabilities of the society.  The Registrar, the Collector or any person authorized by general or special order in writing on his behalf by the Registrar, shall at all-time have access to all the books, 166 CU IDOL SELF LEARNING MATERIAL (SLM)

accounts, papers and securities of a society, and every officer of the society shall furnish such information concerning the transactions and working of the society as the person making such inspection may require. Qualification of Auditor A chartered accountant within the meaning of the Chartered Accountant Act-1949, Or, A person who holds a government diploma in Co-operative Accounts or in Cooperation and Accountancy; or, A person who has served as an Auditor in the co-operative society department of the State Government and whose name has been included by the Registrar on the Panel of Certified Auditors maintained and published by him in the official Gazette at least once every year. Appointment of Auditor The appointment of an Auditor is done by Registrar of Co-operative Societies. The Auditor conducts his audit on behalf of the Registrar. The Audit fees is paid by co-operative society according to the statutory scale of fees prescribed by the Registrar in this regard according to the category of society. The Auditor is required to submit his audit report directly to the Registrar and one copy of the audit report is submitted to the concerned society. Rights of an Auditor  As per Section 17, an Auditor can access all the books, accounts, documents and securities of the society.  He has to see that Balance-sheet of the society shows a true and fair view of a business according to information and explanation given to him.  Every officer of the society is bound to give all information regarding working and transactions of the society. Duties of an Auditor • An Auditor needs to consider the following points to be able to perform his duties in an efficient way − • An Auditor should be well-versed with the Co-operative Society Act, 1912 and the by- laws of the society. • If there is any type of irregularities and improprieties found by an Auditor during his audit 167 CU IDOL SELF LEARNING MATERIAL (SLM)

regarding Co-operative Societies Act, 1912 and by-laws, he should immediately point out the same. • An Auditor should ascertain that how many shares are held by each member of the society; for this, he should check the member ship registers. • An Auditor should be well aware of power of officers regarding loan, investment, borrowings, advancing of the funds. • He should thoroughly check and vouch the cash book and bank book. • An Auditor should check all the receipts and payments of the society according to standard auditing practice. • He should go through the agreements between society and borrower to check the interest due on loan and repayment schedule. An Auditor should also check and compare the actual interest received and the repayment of loan received with dues from them. • He should carefully vouch and verify that loan given to members of the society is according to agreement, regulation and resolution passed by the Managing Committee of the society or not. • An Auditor has to assure that a loan given to a non-member is not without the permission of the Registrar. • He should verify the loan given by Co-operative bank should be according to the prescribed limit. • An Auditor should physically examine and verify the assets of a society. • He should adopt different methods for different kind of societies. • Balance-sheet, profit and loss account and Auditor report should be according to the proforma given by the Chief Auditor of the Co-operative Society of the State. • Accounts should be according to the Co-operative Society Act and also with the provision of Income Tax Act. • All the assets, expenses, income, cash-in-hand, etc. should be vouched and verified according to standard accounting procedures and principles. Books, Accounts and Other Records of the Society 168 CU IDOL SELF LEARNING MATERIAL (SLM)

Under Section 43(h) of the Co-operative Society Act, 1912, the Government of a state can frame rules prescribing the books of accounts to be kept by a Co-operative society. Following books and accounts are prescribed by the Maharashtra Government.  Cash Book  General Ledger  Stock register  Personal Ledger  Register of Members  Register of Shares and debentures  Minutes books of general body meeting and committee meetings  Property Register  Register recording loan applications  Maintenance of register of audit objections and their rectifications Special Features of Co-Operative Audit The checking of posting, arithmetical accuracy, vouching, verification of assets and liabilities and scrutiny of balance sheet are same as Auditor do in any other case. We will now discuss a few important aspects related to the Audit of Co-operative societies. Examination of Overdue Debts An Auditor has to examine and classify overdue debts  from six months to five years and,  overdue above five years in two categories and shall have to report it in his audit report. Overdue Interest While calculating the profit of Co-operative society overdue amount of interest outstanding should be excluded. Valuation of Assets and Liabilities 169 CU IDOL SELF LEARNING MATERIAL (SLM)

General principles of accounting and auditing conventions and standard are adopted at the time of valuation of assets and liabilities. No specific provisions or instructions under the Act and Rules are provided. Adherence to Co-operative principles An Auditor should ascertain how far the objectives, for which the Co-operative society is set up, have been achieved in course of its working. It is not necessarily in terms of profit, but in terms of extending of benefits to members who have formed the Society. Certification of Bad-debts As per Rule No.49 of the Maharashtra State Co-operative Rules, 1961, it is very interesting to note that no bad debts can be written off unless they are certified as bad debts by the Auditor. Where no such requirement of law exists, the managing committee of the society must authorize the write-off. Observation of the Provisions of the Act and Rules An Auditor should be well versed with the Provisions of the Act and Rules of the Cooperative Society and the by-laws thereof. If the Auditor finds any irregularity, it should be immediately assessed and reported to the next level. Verification of Members Register and Examination of their Pass Books This is essential especially in rural and agricultural credit society where members are illiterate, the Auditor should verify the pass book and members register to verify the amount of loan granted and their repayments. It will help to ensure that the books of accounts are free from any manipulation. Special Report to the Registrar During audit if any irregularities are found by the Auditor that should be reported to the Registrar and an appropriate action may be taken by the Registrar against the society. Audit Classification of Society After assessing the overall performance, an Auditor has to award a class to the society. Judgement of Auditor should be based on the criteria fixed by the Registrar. The Auditor should be very careful when making decisions related to the classes in the society; if management is not satisfied by the award he may file an appeal to the Registrar and the Registrar may direct to review the audit classification. 170 CU IDOL SELF LEARNING MATERIAL (SLM)

Discussion on Audit Draft After completion of audit, minor irregularities may be settled and rectified; matters concerning policies should be discussed in detail. The audit report can never be finalized without discussing with the managing committee. By-laws Each registered society is required to frame its own by-laws which have to be registered with the Registrar of Co-operative societies. According to Section 11 of the Act, the amendment of the by-laws of a registered society shall not be valid until the same has been approved by the Registrar of the Co-operative societies. Investment of Funds A registered society can invest or deposit its funds only in −  Saving bank account of Government Banks.  Any of the securities specified under Section 20 of the Indian Trust Act, 1882.  The shares or in the security of any other registered society.  Any bank or person carrying on the business of banking approved for this purpose by the Registrar.  Any other mode permitted by the Section 32 of the Co-operative Societies Act. Restriction on Co-operative Society Let us now understand the restrictions that are imposed on co-operative society. Restriction on Shareholding According to Section 5 of the Act, where liabilities of the members of a society is limited, no member other than a registered society can hold more than 20% of the shares capital or shares of the society worth more than Rupees one thousand. Restriction on Transfer of Share A member of registered society with unlimited liability, cannot transfer any shares held by him or his interest in the capital of the society unless −  He has held that share for at least one year, and  The transfer and change is made to the society or to a member of the society. 171 CU IDOL SELF LEARNING MATERIAL (SLM)

Restriction on Loan  According to Section 29 of the Act, a registered society cannot advance any loan to any person other than a member except with the prior permission of the Registrar.  A society with unlimited liability cannot lend money on the security of a movable property except with the sanction of the Registrar of Co-operative society.  The State Government has the power and can prohibit or restrict loans against mortgage of immovable property by any registered society or class of registered societies. Restriction on Borrowings A registered society can receive deposits and loans from persons who are not members of the society, only such an extent and under such condition as may be prescribed by the rules of the Co-operative Societies Act or by-laws of the concerned society. Exemptions According to Section 28 Central Government may exempt any registered societies or class of registered societies from Income Tax (Payable on the profits of the society or on dividends or other profit related to payments received by the members of the society). Stamp duty or registration fees. Reserve Fund, Contribution to Charitable Funds and Distribution of Profit  According to Section 33, the first 25% of the net profit earned during the year should be transferred to a Reserve Fund.  10% of Balance amount of net profit after transferring 25% to Reserve fund, a registered society can contribute for charitable purpose with the sanction of Registrar.  Under such conditions as may be prescribed by the rules or by-laws, the balance amount of current profit plus past years profit can be distributed to members of the society.  Dividend can be distributed according to rules and by-laws but cannot be more than 6.25%. Only after special order of the State Government, unlimited liability society can distribute his profit otherwise not. 172 CU IDOL SELF LEARNING MATERIAL (SLM)

10.2 NON-BANKING FINANCIAL INSTITUTIONS Audit or auditing is a process to check if a particular company is working in compliance with all the guidelines and regulations directed to them and which they need to comply with. It means verifying the activities are happening on-site/ within the company. It includes inspection or examination of processes and quality systems to ensure compliance with the regulatory guidelines. Auditing can be either of some specific functions, processes, etc. or of the entire company. Some audits have a particular purpose why they are conducted such as, auditing documents, risk, performance, or following up on specific corrective actions. Type of NBFC Audits There are three different types of audits, according to the ISO 19011:2018 standards. These are as follows;  Process Audit: It is a type of audit that is conducted to verify if the processes in the companies are following the predetermined instructions by the governing bodies. Also, the objective of performing this type of audit is to ensure any company process does not involve any activity that does not adhere to these rules.  Product Audit: This type of audit is for any specific product or service. The auditing of the product/service may include hardware, processed material, or software, to ensure that they conform to the specifications, performance standards, or customer requirements.  System Audit: This type of audit conducted on the management level. It is done to ensure proper system developed and whether everything is useful and in conjunction with the specified requirements. What are Statutory Audits? As the name suggests, it is a type of audit that is mandatory for all companies registered under the Companies Act, 2013[1]. The purpose is almost the same as the internal audits. However, it is a compulsory audit directed by the law, unlike internal audits. The Statutory Auditor makes a report after auditing the Book of Accounts of the company in the prescribed format. 173 CU IDOL SELF LEARNING MATERIAL (SLM)

Who conducts it? As per RBI guidelines, a CA conducts the Statutory Audit under the Companies Act, 2013. It is a type of audit performed by the qualified auditors who work as an external auditor and independent parties Significance of Statutory Audits The main objective of conducting a Statutory Audit is to ensure whether the company is providing a fair and accurate representation of its activities by evaluating the bank balances, bookkeeping records, financial transactions, etc. What is Internal Audits? Internal audit is the process to evaluate the internal control systems of the company, corporate governance and the processing of the accounts. The purpose of internal audit is to identify problems and find their solutions before any inspection. It helps detect any issues within the internal systems in the company, and ultimately improve operational efficiency. Importance of Internal Audits Internal audits are important because it helps to identify problems in the functioning of the company and solve them. It improves the effectiveness of governance, control processes, and risk management. By conducting an internal audit, the company can avoid penalties that might be imposed on them otherwise. However, performing an internal audit is not mandatory, unlike the Statutory Audit. But, it is done to check every function and other aspects that might be caught by a Statutory Auditor and the company might become liable for the penalty. Who conducts it? Audits in NBFC is conducted by an eligible person appointed by the management of the company. It is generally lead by a Chief Audit Executive {CAE} who then reports to the Audit Committee of the Board of Directors with administrative reporting to the Chief Audit Officer. Auditor’s Report 174 CU IDOL SELF LEARNING MATERIAL (SLM)

The Reserve Bank of India formulates the auditor’s directions under section 45MA of the RBI Act, 1934. The RBI guidelines are applicable to auditors of all registered/non-registered NBFCs whether they are accepting deposits or not. The Auditor creates a report on the matters he audits and submits it to the Board of Directors of the company. The report that the auditor makes is as per Section 143 of the Companies Act. The contents of the Auditor’s report are different in different cases such as if the NBFC has obtained the Certificate of Registration { CoR } from the bank, if the NBFC already has obtained CoR, etc. The audit is conducted once, at the end of every financial year or every fiscal. Moreover, the Auditor’s report must include the reason for the all unfavourable or qualified statement given by the auditor on the contents of the report and submit a separate report to the Board of Directors of the company. This report must be submitted to the Regional Office of the NBFCs at the end of the financial year. This has to be done within one month from the date of finalizing of the Balance Sheet and should not be later than 30th December of that year. Key Audit Areas of NBFC: What’s included in the Auditor’s Report? There are many matters that are included in the Auditor’s Report, and that differs in the type of activity the NBFC is indulged in. Here are I am giving you a few of them which will help you understand the broad aspect of the key inclusions in the Auditor’s Report:  Physical verification of all the share/ securities held by the firm  NBFC Prudential Norms stipulated or not  Verifying whether the NBFC has not advanced any loan against their shares  Whether KYC performed or not  If there is any window dressing, i.e. whether a new loan is passed to repay an existing loan  Checking the Board’s Minutes for purchase of any purchase and sale of investments  Ascertaining whether the requirements of the AS 13 “Accounting for Investments” has been compiled by the NBFC  Obtaining the balance confirmations of the concerned parties  Checking whether the NBFC has lent/invested in the specified limits to any single borrower 175 CU IDOL SELF LEARNING MATERIAL (SLM)

 Confirming whether the NBFC has a proper appraisal and follow up on loans and advances  Verifying that the payment for acquiring an asset is directly made to the supplier and the original invoice has been drawn out in the name of the NBFC  Confirming if the hire purchase is against vehicles then the registration certificate contains an endorsement in favor of the hire purchase company  Also, confirming that the assets given on hire purchase are adequately insured against it  Ascertaining that the NBFC has proper appraisal system for extending the equipment leasing finance  Verifying that the lease agreement entered into with the lessee in the request of equipment given on lease Audit of NBFC: Procedure The following are the steps how audits are conducted in a non-banking financial company;  Step 1: The first step is to determine the type of work the NBFC does by checking the company’s Memorandums and Articles of Association. If the auditor finds it necessary may also inspect the minutes of the Board/Committee Meetings and discuss with apex level management people to understand a better picture of the principal functions of the company. Determining the principal business activities such as providing loans, Investment Company, etc. in which the company is involved to determine the norms which the company need to comply with accordingly.  Step 2: Next, the auditor evaluates the Internal Control System of the company. The functions of the Internal Control System include maintaining an adequate system and incorporating various measures of internal control within the organization, aids in taking timely decisions, detecting frauds, etc. The auditor reviews the effectiveness of the Internal Control System present in the company.  Step 3: It is mandatory for all NBFCs having a minimum net owned fund of Rs. two crores to obtain the Certificate of Registration for commencing its business under Section 45-IA of the RBI Act. Then the auditor obtains a copy of the Certificate of Registration of 176 CU IDOL SELF LEARNING MATERIAL (SLM)

the company to ensure that the company is not carrying out business without the certificate. In case if the company has applied to obtain the certificate, the auditor needs to get a copy of the application of the same.  Step 4: The auditor must ascertain if the NBFC is a loan company, an investment company, or a hire purchase finance company or an equipment leasing company. If the NBFC does not lay in any of the classifications, the auditor classifies the type of the company to make sure they comply with the related regulations or not.  Step 5: The auditor checks the company’s compliance with the specified prudential norms based on their income source such as from investments, accounting standards, asset classification, accounting for investments, provisioning for bad/doubtful debts, capital adequacy norms, etc. 10.3 SUMMARY Like every other company, NBFC also conduct Audits to check whether they have complied with all the prescribed norms and avoid penalty. There are three types of audits based on the key area where the auditing is done, namely; Process, Product and System Audit. Internal audit is the one conducted by the internal management of the company to check everything is in compliance and to dodge any penalty. Government is encouraging co-operative societies to help society. Co-operative societies are operative in various sections like consumer, industrial, service, marketing, etc. 10.4 KEY WORDS  NBFC – Non Banking Financial Company  Statutory Audits It is a compulsory audit directed by the law, unlike internal audits. The Statutory Auditor makes a report after auditing the Book of Accounts of the company in the prescribed format.  Internal Audits - Internal audit is the process to evaluate the internal control systems of the company, corporate governance and the processing of the accounts. 10.5 LEARNING ACTIVITY 1. How audit procedure for banks is different from insurance company? 177 CU IDOL SELF LEARNING MATERIAL (SLM)

___________________________________________________________________________ ____________________________________________________________________ 10.6 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Write short notes on Co-insurance; 2. Write short notes on Re-insurance 3. Write short notes on Management Expenses of Insurance Companies; 4. Write short note on “Unexpired Risks Reserve Long Questions 1. Explain the types of NBFC Audits 2. List down the duties of an Auditor in Non-Corporate society Auditing 3. List down the procedures in auditing of NBFC. 4. What are the special features of Co-operative society B. Multi Choice Questions 1. As per RBI guidelines, a _____conducts the Statutory Audit under the Companies Act, 2013. a. CFO b. CA c. CEO d. None of these 2. The main objective of conducting a _______is to ensure whether the company is providing a fair and accurate representation of its activities by evaluating the bank balances, bookkeeping records, financial transactions, etc. a. Statutory Audit b. Internal Audit 178 CU IDOL SELF LEARNING MATERIAL (SLM)

c. External Audit d. a & b 3. Chartered Accountant Act-_____ a. 1949 b. 1950 c. c)1947 d. 1948 4. Which is/are the types of NBFC Audits? a. Product Audit b. Process Audit c. System Audit d. All of these Answers 1 – a, 2 – a, 3 – a, 4 – d, 10.7 REFERENCES  Arens and Lobbecke, Auditing and integrated approach  Bubbard and Johnson, Auditing  Gupta, K., Contemporary auditing, Tata McGraw Hill  Knechel, R. W., Auditing, South-Western College Publishing. 179 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 11 - AUDIT PLANNING Structure 11.0 Learning Objectives 11.1 Planning Audit of financial statement Assertions 11.2 Marketing 11.3 Sales 11.4 Distribution Management 11.5 Summary 11.6 Keywords 11.7 Learning Activity 11.8 Unit End Questions 11.9 References 11.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe nature of Audit Planning  Identify scope of Audit Planning  Benefits of Audit Planning  Process of Audit Planning 11.1 PLANNING AUDIT OF FINANCIAL STATEMENT ASSERTIONS Financial statement assertions, also referred to as management assertions, are explicit or implicit assertions a company makes concerning the fundamental accuracy of the information contained in its financial statements: the balance sheet, income statement, and cash flow statement. The financial statement assertions are a company's official statement that the figures the company is reporting are a truthful presentation of its assets and liabilities following the applicable standards for recognition and measurement of such figures. 180 CU IDOL SELF LEARNING MATERIAL (SLM)

The different financial statement assertions attested to by a company's statement preparer include assertions of existence, completeness, rights and obligations, accuracy and valuation, and presentation and disclosure. Accuracy and Valuation The assertion of accuracy and valuation is the statement that all figures presented in a financial statement are accurate and based on proper valuation of assets, liabilities and equity balances. For example, the assertion of accurate valuation regarding inventory states that inventory is valued in accordance with the International Accounting Standards Board's IAS 2 guidelines, which requires inventory to be valued at the lower figure of either cost or net realizable value.2 The financial assertion of accuracy and valuation states that the different components of a financial statement, such as assets, liabilities, revenues, and expenses, have all been properly classified within the statement. Existence The assertion of existence is the assertion that the assets, liabilities, and shareholders' equity balances appearing on a company's financial statements exist as stated at the end of the accounting period that the financial statement covers. For example, any statement of inventory included in the financial statement carries the implicit assertion that such inventory exists, as stated, at the end of the accounting period. The assertion of existence applies to all assets or liabilities included in a financial statement. Completeness The assertion of completeness is an assertion that the financial statements are thorough and include every item that should be included in the statement for a given accounting period. For example, the completeness of transactions included in a financial statement means that all transactions included in the statement occurred during the accounting period that the statement covers and that all transactions that occurred during the stated accounting period are included in the statement. 181 CU IDOL SELF LEARNING MATERIAL (SLM)

The assertion of completeness also states that a company's entire inventory, even inventory that may be temporarily in the possession of a third party, is included in the total inventory figure appearing on a financial statement. Rights and Obligations The assertion of rights and obligations is a basic assertion that all assets and liabilities included in a financial statement belong to the company issuing the statement. The rights and obligations assertion states that the company owns and has the ownership rights or usage rights to all recognized assets. For liabilities, it is an assertion that all liabilities listed on a financial statement belong to the company and not to a third party. Presentation and Disclosure The final financial statement assertion is presentation and disclosure. This is the assertion that all appropriate information and disclosures are included in a company's statements and all the information presented in the statements is fair and easy to understand. 11.2 MARKETING A marketing plan audit is a comprehensive review used to evaluate marketing strategy, gauge return on investment and ensure meeting an organization's objectives. Simply, the audit will identify strengths and weakness, enabling the organization to recommend changes in processes and resources to increase effectiveness and efficiency. This systematic approach should be conducted periodically. Often, a marketing plan audit is conducted by outside agencies to ensure objective viewpoints. If conducting the audit in-house, be realistic about strengths and weaknesses. Also, when evaluating marketing goals, ensure they are specific, measurable, attainable and realistic. Also, keep your competition in mind as you conduct your audit. Ask yourself how your company compares to similar companies. Marketing Audit Types Three main audit types are the SWOT, PEST and Five Forces Analysis. A SWOT analysis focuses on strengths, weaknesses, opportunities and threats. Strengths and weakness are both internal aspects, while opportunities and threats are both external. The PEST 182 CU IDOL SELF LEARNING MATERIAL (SLM)

marketing plan audit model acknowledges there is an internal environment as well as an external environment -- referred to as the micro-environment -- encompassing factors such as customers, manufacturers and competitors. However, the focus of this audit type is o n the macro-environment: political, economic, sociocultural and technological factors. The Five Forces Analysis focuses on the external factors of the larger aspect of the business instead of simply the product or product line. This analysis consists of the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products and competitive rivalry. Internal Variables Internal variables focus on what the company can control. This can include in-house marketing expertise, labour costs, financial resources, time, equipment, business location, current media relationships, innovation and additional company resources. This can also encompass product specifics such as pricing, distribution, product selection, sales, manufacturing costs, profit margin and marketing mix effectiveness. External Variables External components of analysis include customer factors: needs, buying behaviour and segmentation. Competition is also analysed with a concentration on their perceived strengths and weaknesses, over-saturation of the market, profitability and market share. Other factors considered are the economic climate, situational changes in the target demographic, technology, taxation and political landscape. Opportunities could include launching new products, joint ventures or a newly developing market. Threats may encompass price wars, new taxation guidelines or emerging competitors. Political factors are important, as they dictate the government's position on business and advertising policy, tax regulation and trade agreements. Politics influence the country's view on economics and spending. Economic factors are pivotal considerations when shaping or reshaping a marketing plan, as they include the employment level, interest rates and inflation. Sociocultural factors encompass dominant religions, target demographic languages and 183 CU IDOL SELF LEARNING MATERIAL (SLM)

subsequent barriers, gender roles, income levels per generation and opinions on topics like green living and time for leisure. Technology factors cover distribution of products, services and information -- such as how new mediums are affecting marketing, sales, distribution and communication. Audit Follow-Up After concluding your audit, analyse the results. Identify how to overcome the weaknesses and increase plan effectiveness and profitability. Consider working with trusted members of your team to brainstorm solutions. Also consider purchasing case studies from a site like the Harvard Business Review, to see how various companies have overcome similar issues. 11.3 SALES A sales audit focuses on the activities and performance of your company's sales staff. The review may be conducted by internal or external auditors, depending on your goals for the audit. Lenders and potential investors may request an external audit to assess the company's risk as an investment. Internal audits help you find areas where you can improve a process or generate more sales. Hiring and Training Start the audit by reviewing your hiring process for new sales employees, including background checks and due diligence. Application and orientation paperwork should be standardized. Copies of salary agreements and employment contracts should be in each employee's personnel file. Analyze your selection process if turnover in the sales department is unusually high for the industry or recent hires have not performed up to the company's standards. Market Conditions External factors in the market can affect the sales department's performance. Analyze the strength of your competition to see if the company's sales process will be enough to keep up with your competitors. Develop a profile of your target customer, including the customer's age, marital status, education level, salary and motivation for buying. This helps your sales team tailor its approach to the type of customers it is most likely to encounter. Sales Procedures 184 CU IDOL SELF LEARNING MATERIAL (SLM)

Compare the ideal sales procedures on paper with the company's actual operations. The use of discounts and other incentives to attract customers should be in line with the market and allow you to make a profit from your promotions. Track the sales department's progress on its short-term and long-term goals. The head of the department should be able to clearly communicate the relevant goals to the rest of the sales staff. Customer Service Examine your company's customer service activities after the sale is made, such as contact with customers, call centre wait times, follow-up communication, shipping speed and the removal of old equipment as promised to customers. To gather this information, the auditors may send surveys to some of your past customers. All items should be available to the customer if your inventory management system lists them as being in stock. Office Environment The company's internal environment also affects the efforts of its salespeople. It is in the employer's best interest to provide a positive work environment where all employees can perform up to their potential. The sales department should be able to communicate with other departments to make sure orders go through the system efficiently. The sales team is usually expected to complete administrative work, such as expense reports, time cards and commission reports for the company's accounting staff. 11.4 DISTRIBUTION MANAGEMENT An internal distribution management audit is one of the most powerful methods of evaluating and possibly improving your distribution management, reduce operations costs, and increase competitive advantages. The goal of the internal audit is to help you find weaknesses within your supply chain and correct pain points, bottlenecks to increase supply chain flexibility, agility, and overall efficiency. To make the most out of your audit and its results, it’s important to understand that the supply chain isn’t a stand-alone, isolated feature of your business. In all actuality, the supply chain is suffused in every aspect of your business. As such the supply chain needs to be viewed between all participating companies and suppliers throughout the supply chain, with solutions applied from a holistic approach. Why an Internal Audit is Necessary for Distribution Management 185 CU IDOL SELF LEARNING MATERIAL (SLM)

For most companies, audits are typically part of the normal routine, either for financial records or for physical inventory. The entire purpose behind an audit is to make sure things are where they should be and that everyone is playing by the same rules. “Internal auditing is defined as an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes,” as defined by The Institute of Internal Auditors (IIA). This is especially important when trying to maintain retail compliance, for example, with increasing customer demands like On Time; In Full (OTIF) or Must Arrive by Date (MABD). Simply put, an internal audit is a multi-step process that is a means of determining whether your current systems and operations are in compliance with your company’s predetermined operating procedures and regulations. This is especially important when trying to maintain retail compliance, for example, with increasing customer demands like On Time; In Full (OTIF) or Must Arrive By Date (MABD). Conducting an internal audit does more than just evaluates the supply chain, it also takes a necessary look at the interaction between other aspects of the organization such as the accounting and financial systems, practices, and procedures. For example, are your planners and purchasers communicating properly, not only with each other but with the production floor and shipping department? Are parts coming in with enough lead time that items can be manufactured and shipped according to customer requirements? An internal audit is important because it allows the company executives and logistics decision makers to examine the effectiveness of their business operations and controls and applications of new policies. Over time, establishing those best practices means a more competitive and more profitable company in the future. Things to Consider Before You Start the Audit Performing an audit is one thing, but knowing what areas you need to be focusing on is something else entirely. While every audit should be more or less tailored to the specific 186 CU IDOL SELF LEARNING MATERIAL (SLM)

needs of an individual organization, here is the basic framework for initiating an audit that needs to be included:  Audit Planning: Internal auditors should have a plan in place well before the actual auditing begins.  Examining and Evaluating Information: Internal auditors should have a standardized criterion to compare findings against.  Communicating Results: Audit should have a clear and concise method of reporting their findings.  Follow Up: Internal auditors should follow up in a timely manner to ensure that appropriate actions have been taken to correct audit findings. This framework also serves as a support system for corporate managers and allows managers of larger production systems to delegate the oversight of the audit to the internal audit department. This is important for a few reasons:  Operating Complexity: Automated data processing has increased the levels of complexity when analyzing data, a task better suited for those who know what to look for.  Decentralization: Given that supply chains are prone to be decentralized in terms of a physical location due to globalization.  Lack of Expertise: As the adage goes, stick to what you know. Leave those auditors in charge of the audit for the best quality audit. With the right framework in place for the audit to commence, let’s take a look at the tasks involved for the actual audit. Distribution Structure and Internal Audit Tasks Like we mentioned above, every company is different and, as a result, the needs for every individual supply chain will vary. So while there is no hard and fast or “Use audit ‘A’ for Supply chain system ‘1’ ” convenient method of doing things, there are some common focal points that are applicable for just about every organization and style of the supply chain. The supply chain management processes identified by The Global Supply Chain Forum are: 187 CU IDOL SELF LEARNING MATERIAL (SLM)

 Customer Relationship Management  Supplier Relationship Management  Customer Service Management  Demand Management  Order Fulfillment  Manufacturing Flow Management  Product Development and Commercialization  Returns Management All of these processes are hallmarks of a healthy supply chain and also indicative of the successful supply chain management. Here again, we can see all of the links that connect the supply chain to every other facet of the business. Another benefit to performing an internal audit is that offers to perfect opportunity to increase the synergy between these various departments. For CFO’s and supply chain leaders, this means that supply chain management deals with total business excellence and represents a new way of managing the business and relationships with vendors, suppliers, and partners. An internal audit can help a company in finding answers to crucial questions about managing success factors of supply chain excellence, of which these can be divided into five main sections:  Strategy – To determine if the enterprise has a clear strategy tuned to business expectations and focused on profitably servicing customer requirements  Organization – To determine if an effective organization structure exists enabling the enterprise to work with its partners to achieve its supply chain goals  Process – To determine if the enterprise has excellent processes for implementing its strategy, embracing all plan-source-make-deliver operations  Information – To determine if the enterprise has reliable information and enabling technology to support effective supply chain planning, execution, and decision- making  Performance – To determine if the enterprise is managing supply chain performance in ways that will increase the bottom line, cash flows and shareholder returns 188 CU IDOL SELF LEARNING MATERIAL (SLM)

Supply Chain Risk Management As much as we wish we could, the ability to see and accurately predict the future still eludes us to this day. In the end, it all comes down we can optimistically refer to as an “educated guess”. With that being said, even the most educated guesses can’t predict the weather or a broken down truck. This means that within every supply chain, there will always be an element of risk. That risk represents any number of things that can go wrong within your supply chain and halt or delay your shipments. For this very reason, risk management is incredibly important when evaluating your supply chain. An internal audit can provide business leaders with the necessary framework to develop an appropriate supply chain risk management program. Risk management is a huge proponent of supply chain health, especially given the instabilities in the global marketplace created by political uncertainty, trade tariffs, etc. An internal audit can provide business leaders with the necessary framework to develop an appropriate supply chain risk management program. This is how your supply chain audit can also help with risk reduction and increased security:  Reviewing and understanding supply chains, including their strengths and weaknesses, in developing markets, to validate monitoring programs  Working with the company’s supply chain specialists to help develop a monitoring process that can be repeated  Helping to identify which suppliers are critical  Assessing which suppliers may be vulnerable to threats and helping draw up a residual mitigation profile  Identifying strong risk control procedures  Helping to develop key analytic tools and techniques  Aiding with compliance monitoring Ideally, the risk mitigation will also allow companies to increase supply chain efficiency to the point where on hand stock can be reduced. While having excessive stock might create a buffer in time where shipments are running late or capacity is tight, that excess can also eat 189 CU IDOL SELF LEARNING MATERIAL (SLM)

into company profit margins. Additionally, having a well-running supply chain vastly lowers the chance for disruptions, operating costs, and other unexpected costs such as chargebacks, detention fees. Supply chain management is a very complex structure of activities with cross-functional processes, and it presents one of the most important functions in the company since it is directly linked to all functions of the company. Supply chain problems can result from any number of things including natural disasters, labour disputes, supplier bankruptcy, an act of war or terrorism, systems breakdowns, procurement failures, and other causes. Despite the cause, however, the results are often the same, a drastic slowdown of operations and a huge impact on customer satisfaction and profitability. The supply chain internal audit aims to support managers in process optimization and above all in cost reduction which result from an uncertain environment by evaluating and directing management towards approaches which will prevent or reduce negative effects. After analysing definitions and some of the standards of internal audit, it can be concluded that this process can improve effectiveness and efficiency, and by that, the performances of many functions within the organization. High-impact supply chains are more competitive and are capable of winning market share and customer loyalty, creating shareholder value, extending the strategic capability and reach of the business. Independent research shows that excellent supply chain management can yield:  25-50% reduction in total supply chain costs  25-60% reduction in inventory holding  25-80% increase in forecast accuracy  30-50% improvement in order-fulfilment cycle time  20% increase in after-tax free cash flows To increase supply chain strength, agility, and overall integrity, companies should develop a framework for a structured approach to ongoing risk identification and management. This will enable businesses to proactively address organizational supply chain risks on a periodic 190 CU IDOL SELF LEARNING MATERIAL (SLM)

basis – a practice that affords stronger company and brand protection against supply chain risk gaps. 11.5 Summary  Planning is, by far, the most important step in the process to achieve the defined objectives. In an audit engagement, a public sector auditor provides the legislature and the general public with information, independent and objective assessment concerning the stewardship and performance of public sector policies, programmes and operations. Such enormous responsibility cannot be discharged effectively without an efficient and comprehensive audit planning.  Audit planning involves obtaining an understanding of the nature of the entity/programme to be audited, conducting risk assessment, identifying and assessing risks of fraud/non-compliance relevant to audit objectives and planning work/developing strategy to ensure that the audit is conducted in an efficient and effective way. 11.6 KEY WORDS  Audit Planning is developing an overall strategy for the audit. The nature, extent, and timing of planning vary with size and complexity of the entity, experience with the entity, and knowledge of the entity’s business.  Audit program contains step by step instructions to be carried out by team members i.e. it is simply a list of audit procedures to be executed by team members.  Audit risk is the risk that an auditor may give an inappropriate audit opinion on financial statements that are materially misstated. 11.7 LEARNING ACTIVITY Identify different skills and qualifications of an expert. CASE STUDY Background 191 CU IDOL SELF LEARNING MATERIAL (SLM)

An external audit firm is conducting internal audit in an engineering company since the last two years. The audit committee chairman had a one to one meeting with the partner– in- charge for a review of the present internal audit reports and the internal audit process. During the discussions, the chairman asked the internal auditor to present an annual internal audit plan that takes into account the bigger picture rather than smaller issues and really adds value to the business. Based on recent corporate events and the Board’s responsibilities in the matter of Transparency and Control, the Audit Committee Chairperson enquired with the – Chief Audit Executive – CAE, the status of implementation of Standards of Internal Audit of ICAI. The CAE highlighted that a Risk Based Audit Planning process is being currently followed. However, the process has not been benchmarked against the Standards. The CAE affirmed that the entire activity will be aligned with Indian Standards and a report presented in the next Audit Committee. Methodology The internal audit function has a five member team. The internal auditor therefore has to select projects (areas) with high risk to the organization and direct the limited resources towards such projects. Frequency of high risk areas needs to be high – maybe twice a year whereas in cases of low risk or almost zero risk areas, the frequency may be once in three years and so on. A benchmark against the standard was carried out by the team to identify further areas for improvement. Opportunities for Improvement Overall, the standard sought to address audit planning from two dimensions – 1. Overall Annual Audit Plan 2. Audit engagement or each specific audit project For the Overall Annual Audit Plan, the areas identified were – 1. The existing Audit Charter adequately explained the ‘purpose, authority and responsibility’ of the Internal Audit function. The Audit Charter designed earlier had not been reviewed and revised for the last two years. During the last two years, the auditee had implemented an ERP and adopted a Balanced Scorecard strategy for evaluating performance. Efforts of Cost Reduction have rationalised middle level management. 192 CU IDOL SELF LEARNING MATERIAL (SLM)

(a) The CAE and the team felt that the focus of audit needed to be revised through use of Audit Tools and the possibility of taking on a leading role in implementing Continuous Auditing. (b) One of the overall objectives that the standard expects the Internal Audit to achieve is to “strengthen overall governance, particularly strategic risk management”. The Audit Charter had not mentioned any specific responsibility for this objective. The audit team appreciated the following fact however with this objective that: (i) When strategic risks are taken, there is no audit involvement. (ii) The operating management does not perceive any specific role of the internal auditors in strategic risk management. (iii) The Internal Auditor is expected not to be a part of the decision. In this way, he/she retains their independence. If he is a part of this process, it may be a barrier to his independence at a later date, when the decision might not achieve the desired objectives. The Internal Auditor’s role as an assurance provider may get compromised if the internal auditor is involved in decision making One of the internal audit team members pointed out however that if he gets additional information at a later date, should he not then advise review of the decision rather than wait for issuance of the report? This change was therefore sought to be introduced and highlighted specifically for discussion. The CAE took a stand that while the Internal Auditor could be a part of the Strategic Risk Management process, it should be seen as a ‘facilitator role’ and not as member of the decision making team. 2. While the Audit Plan was provided to the Audit Committee for approval, there was hardly any debate on the same and it was approved. The CAE thought that in the current practice, they were not really benefiting from the experience and knowledge of the Audit Committee Members. He therefore thought it fit to arrange for meetings with each of the Audit Committee Members to gain individual input prior to the next Audit Committee Meeting, where his first report would be presented. These meetings helped the CAE improve the audit plan. 193 CU IDOL SELF LEARNING MATERIAL (SLM)

3. The Risk Based Audit Planning process as currently implemented (Refer article of BCAJ IAS article in March/April, 2003) was generally found to be robust. The process included the following: (a) Identify the Audit Universe (comprehensive list of Audit Areas), (b) Established weights and ranks for criteria which will form the basis of ranking the audit areas and cut off score, (c) Applying criteria to the various audit areas, (d) Arrive at scores for each area, and (e) Applying the Cut off criteria and shortlisting the areas of audit for the year. This forms a part of the Annual Audit Plan. 4. The revised Annual Audit Plan was also reviewed along with the first report. In order to ensure continuing relevance of the audit plan, a process of a half yearly review of the audit plan with the Audit Committee was suggested and approved. For the Audit Engagement or each specific Audit Project – A brainstorming on the issues and difficulties faced by the Audit Team Members in Audit Engagements was undertaken. A few of the difficulties that came up from all members was: 1. the general appreciation of raising the right business issues in the audit reports. 2. the adequacy of time for performance of the audit – at times, key areas of audit were left out given the demands of completing the report. 3. the team members voiced their concern that the response that the CAE gets from officials was not the same as that received by them. They felt that the auditor’s employees did not give the required efforts and seriousness, which resulted in avoidable delays. The team thought of the options that the Standard provided towards overcoming these difficulties. The following were the guidelines that they felt could overcome the difficulties: 1. Preliminary Review: A visit by the CAE along with the audit team members of the audit area was planned to be conducted 15 days prior to the actual start date. This audit visit was to understand the business process area and operational realities within which the team performs, the expectations of the auditee and the auditor are discussed and firmed up, the data and time requirements from the auditees are discussed and the JOINT objectives of the audit process are laid down. The auditee’s person-in-charge is made aware of the audit objectives, 194 CU IDOL SELF LEARNING MATERIAL (SLM)

methodology and the ways that risk and control needs to be looked at within the Risk Management Framework implemented. Apprehensions of the Auditee team are laid to rest in these interactions. This meeting is also sought to be used as a means to improve auditee’s person-in charge responses. 2. Audit Engagement Planning: The Preliminary Review meeting was also to be used to study past reports . The larger participation of all team members in identification of potential risk and control focus in each area was scheduled for at least once a fortnight in such a way that no area is taken up without the inputs received from all team members. These measures would also ensure that the issues that are relevant to the organisation and the auditee team are addressed. This will also ensure that there is an ongoing value addition out of the audit process. 3. The CAE decided to improve the following areas: (a) Resource allocation in line with the scope: The knowledge and skills required for each audit was sought to be formally identified and matched with the ability of the team members. In case there was a mismatch, the CAE considered the option of training a team member in the area in advance and also involving an outside professional for the specific aspect of audit as part of the on the job training for the team. The option of including a guest auditor from within the organisation also was considered. (b) Detailed Audit Programme with specific priority for audit checks: Normally the Audit Programmes were packed with all possible tests to be conducted during an audit for all identified risks and controls. The team decided to identify which controls significantly mitigate the risk (Key Control). Single control mitigating multiple risks were also sought to be specifically identified in a list of controls. The audit priority was focused on key controls. This focus improved audit effectiveness. Conclusions These measures were implemented in the quarter and some significant improvements were observed. The gaps identified vis a vis the standard and the measures already taken and thus impact were shared with the Audit Committee. The initiatives taken were highly appreciated by the Audit Committee members. All the action of CAE were based on Internal audit standard issued by the Institute of Chartered Accountant of India. 195 CU IDOL SELF LEARNING MATERIAL (SLM)

Exhibit 1: Standards of Internal Audit – 1 of The Institute of Chartered Accountants of India The internal auditor should, in consultation with those charged with governance, including the audit committee, develop and document a plan for each internal audit engagement to help him conduct the engagement in an efficient and timely manner. The internal audit plan should be comprehensive enough to ensure that it helps in achieving of the above overall objectives of an internal audit. The internal audit plan should, generally, also be consistent with the goals and objectives of the internal audit function as listed out in the internal audit charter as well as the goals and objectives of the organisation. An internal audit charter is an important document defining the position of the internal audit vis a vis the organisation. The internal audit charter also outlines the scope of internal audit as well as the duties, responsibilities and powers of the internal auditor(s). In case the entire internal audit or the particular internal audit engagement has been outsourced, the internal auditor should also ensure that the plan is consistent with the terms of engagement. A plan once prepared should be continuously reviewed by the internal auditor to identify any modifications required to bring the same in line with the changes, if any, in the audit environment. However, any major modification to the internal audit plan should be done in consultation with those charged with governance. Further, the internal auditor should also document the changes to the internal audit plan. Internal audit plan should cover areas such as: 1. Obtaining the knowledge of the legal and regulatory framework within which the entity operates. 2. Obtaining the knowledge of the entity’s accounting and internal control systems and policies. 3. Determining the effectiveness of the internal control procedures adopted by the entity. 4. Determining the nature, timing and extent of procedures to be performed. 5. Identifying the activities warranting special focus based on the materiality and criticality of such activities, and their overall effect on operations of the entity. 6. Identifying and allocating staff to the different activities to be undertaken. 196 CU IDOL SELF LEARNING MATERIAL (SLM)

7. Setting the time budget for each of the activities. 8. Identifying the reporting responsibilities. The internal audit plan should also identify the benchmarks against which the actual results of the activities, the actual time spent, the cost incurred would be measured. The internal auditor should obtain a level of knowledge of the entity sufficient to enable him to identify events, transactions, policies and practices that may have a significant effect on the financial information. The audit universe and the related audit plan should also reflect changes in the management’s course of action, corporate objectives, etc. The internal auditor should periodically, say half yearly, review the audit universe to identify any changes therein and make necessary amendments, to make the audit plan responsive to those changes. The establishment of such objectives should be based on the auditor’s knowledge of the client’s business, especially a preliminary understanding and review of the risks and controls associated with the activities forming the subject matter of the internal audit engagement. The internal auditor should also document the results of his preliminary review so conducted. For this purpose, the internal auditor should prepare an audit work schedule, detailing aspects such as: 1. Activities/procedures to be performed; 2. Engagement team responsible for performing these activities/procedures; and 3. Time allocated to each of these activities/procedures. While preparing the work schedule, the internal auditor should have regard to aspects such as: 1. Any significant changes to the entity’s missions and objectives, business processes, and management’s strategies to counter these changes, for example, changes in the entity’s controls structure or changes in the risk assessment and management structures 2. Any changes or proposed changes to the governance structure of the entity. The engagement work schedule should, however, be flexible enough to accommodate any unanticipated changes as well as professional judgment of the engagement Notes team in the components of the audit universe as discussed above. The work schedule should also reflect 197 CU IDOL SELF LEARNING MATERIAL (SLM)

the internal auditor’s assessment of risks associated with various areas covered by the particular internal audit engagement and the priority attached thereto. The internal auditor should also prepare a formal internal audit programme listing the procedures essential for meeting the objective of the internal audit plan. Though the form and content of the audit programme and the extent of its details would vary with the circumstances of each case, yet the internal audit programme should be so designed as to achieve the objectives of the engagement and also provide assurance that the internal audit is carried out in accordance with the Standards on Internal Audit. Questions: 1. Analyze the case and find out different methods employed in planning internal audit ___________________________________________________________________________ ____________________________________________________________________ 2. What were the main areas identified for overall annual audit plan? ___________________________________________________________________________ ____________________________________________________________________ 11.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Planning Audit of financial statement Assertions, Explain. 2. Discuss about the Marketing Audit types? 3. Why an Internal Audit is Necessary for Distribution Management? Long Questions 1. What do you understand by audit planning? What is the purpose and methodology of audit planning? 2. What do you understand by obtaining an understanding with the client? 3. What factors are considered by an auditor in understanding client’s business and industry? 4. Why transactions with related parties are important to auditors? Write its implications. 198 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Why assessing audit risk and inherent risk is an essential part of audit planning? Elaborate with suitable example. B. Multiple Choice Questions 1. Which of the following is not a kind of audit? a. Statutory and private. b. Government and continuous audit. c. Interim audit. d. None of these 2. The main object of an audit is ___ a. Expression of opinion b. Detection and Prevention of fraud and error c. Both (a) and (b) d. Depends on the type of audit 3 Which of the following statements is not true? a. Management fraud is more difficult to detect than employee fraud b. Internal control system reduces the possibility of occurrence of employee fraud and management fraud c. The auditor’s responsibility for detection and prevention of errors and frauds is similar. d. None of these Answers 1 – d, 2 – c, 3 - b 199 CU IDOL SELF LEARNING MATERIAL (SLM)

11.9 REFERENCES  Arens and Lobbecke, Auditing and integrated approach  Bubbard and Johnson, Auditing  Gupta, K., Contemporary auditing, Tata McGraw Hill  Knechel, R. W., Auditing, South-Western College Publishing. UNIT 12 - ROLE OF HUMAN FACTORS IN SUPPLY CHAIN MANAGEMENT Structure 12.0 Learning Objectives 200 12.1 Supply chain and production management processes 12.2 Human Resource Research processes 12.3 Summary 12.4 Key Words/Abbreviations 12.5 Learning Activity 12.6 Unit End Questions (MCQ and Descriptive) CU IDOL SELF LEARNING MATERIAL (SLM)