Background : The top management of a freight forwarding company whose turnover is Rs.150 crores plans to set up a Container Freight Station (CFS) near Jawarharlal Nehru Port Terminal (JNPT) at Nhava Sheva in Mumbai. The company has carried out a survey which shows that inbound and outbound container traffic would be growing on a yearly basis and there would be good demand for the CFS. The company enjoys good relations with CHAs (clearing agents), shipping companies and other agencies for freight movement. This diversification would be a natural extension in related business activity.
The managing director is also extremely happy with its outsourced internal auditors since they have been acting as systems and procedures control experts and have given a lot of value addition to the organisation. The managing director decides to involve the internal audit function from project initiation stage for the new CFS. After a discussion with the partner of the outsourced internal audit firm, the managing director asks for help in three areas from the firm, namely :
1.0 Laying down manual systems and procedures for smooth, effective and efficient functioning of CFS from day one. Assisting in giving inputs for a software to be made for the entire functioning of the CFS.
2.0 Project audit to ensure proper completion of project in terms of proper payments (no double payments) and proper bill passing including certification by architect, proper procurement procedures in terms of quotations, testing of all material received, all statutory compliances, proper documentation at all levels etc.
3.0 Continuous monthly audit to ensure operational effectiveness and efficiency (special emphasis on identifying any revenue leakage), compliance with laws and policies laid down as per manual and reliability of MIS reporting to management.
Based on the above background, the partner-in-charge of the firm had a meeting with his audit managers to chalk out a plan to achieve the above objectives. He also decides to include a civil engineer in his team to carry out this review.
The methodology adopted was the following :
Laying down systems and procedures — The partner-in-charge alongwith the audit manager would spend two weeks with departmental heads who were recruited from other CFS. In a workshop setting all processes including formats and legal requirements would be discussed and compiled into a manual. This would be used from day one of start of operations. It was also decided that any practical difficulties encountered during actual operations would be discussed after the first two weeks of operations and updated accordingly in the manual.
(This worked very well with enthusiastic response from the new personnel. They were also very happy that they were establishing systems and procedures for the CFS. There was no hitch during operations in the first month).
(The internal audit team also is part of the committee which is reviewing the progress and is also giving inputs on the design of the software).
Project audit — Project audit was carried out at the end of the project getting completed. It was carried out simultaneously by with the exercise for making manuals. The civil engineer was part of the audit team. Audit findings and the recommendations are given below in a gist of observations.
Continuous monthly internal audits — The audit manager who was part of the exercise to create the manuals was deputed as the head of the audit team. He was given one other assistant on a continuous basis. The audit manager had developed good rapport with the managers at CFS during the exercise to create the manuals. This made his job easier in terms of acceptability of audit findings and immediate action on the same by the auditee.
In addition to above the partner in charge also requested the Managing Director that he would like to visit two/three CFSs in India and abroad. This was arranged by the Managing Director. The partner-in-charge visited one CFS in Singapore which he combined with his visit to an International Conference. This also gave him an idea as to the automation and efficiency levels for operations for a CFS.
Gist of audit observations :
(A) Project Audit :
The main observations in Project Audit were :
1.0 Steel and cement for the project was priced higher than that in the market during the same period.
2.0 One double payment of Rs.2,00,000 to a contractor was noted.
3.0 Architect completion certificate was not obtained .
4.0 Capitalisation was not correctly recorded in books of accounts.
Company negotiates better purchase of capital material in future projects.
The bill tracking and payment process needs to be strengthened to avoid any double payment. Recovery to be made for any double payment.
Architect’s certificate to be obtained for completion of project for proper certification of civil structures and others.
Capitalisation entries to be rectified as pointed out in the audit report).
(B) Continuous monthly internal audit :
1.0 Cash billings :
Total cash receipts generated for March 2004 — 1930 Nos.
Audit sample. (100% receipts checked for Rs.2000 and above, for following days in March — 1, 2, 3, 4, 5, 16, 17, 27, 29, 30, and 31)
In Cash Receipt No. 5253 dated 5-3-2004 during verification totalling mistake of Rs.100 was identified (Actual amount Rs.3,612 recorded amount Rs.3,512).
Initiation of collection/recovery made at audit instance.
Instances of short charges (revenue leakage) in certain cash receipts. Out of the errors identified, most amounts recovered from the CHA/consignee. The total of short charges levied amounted to Rs.31,140 out of which Rs.25,575 have been recovered till date of audit.
There is considerable reduction in number of errors in collections for the month of March 2004. On an average basis the reduction is nearly 50%. Till last month the average errors were 2% but in month of March 2004 it has come down to nearly 1%.
Recommendation — Looking to volume of transactions, an additional check to be introduced by Finance to check all cash receipts in respect of calculations every day for previous day.
A cash counting machine to be provided to the cashier as the volume of cash receipts is quite high).
2.0 Verification of primary records maintained by CFS (Surveyor records) for import container with Gate-in Register maintained by security :
Verified the records maintained by security (gate-in register) with the records maintained by surveyor, and entered by CFS employee in excel sheet. We have done 10% verification of records maintained by surveyor for accuracy for the month of March 2004. A few differences observed in two records.
Recommendation — Differences need to be reconciled to check that no container has been missed being considered for billing purposes.
3.0 Verification of records maintained for import cargo delivery :
Checked 10% of records for Import cargo delivery (Import Loaded Containers) for the month of March, 2004. The records reviewed were gate pass details of the container and excel sheet printout maintained.
One instance was recorded where container number was changed after authorisation was taken from all the concerned authorities. Originally container No XDFE 3403772 was written on the delivery gate pass. This gate pass was authorised by CFS executive and Surveyor. Later on the container number was cancelled and new container number KLIU 2286543 was written. This cancellation was not authorised by CFS executive. The supporting documents to the gate pass were also for XDFE 3403772 and container number KLIU 2286543 was not in the delivery list for month of March, 2004.
The mistake was on the part of surveyor as during preparation of gate pass due to pressure a wrong container number was entered. CFS executive did not check these details at the time of authorization. As the cargo was destuffed, the delivery was made in truck hence this did not come to attention of security. Next day at the time of reporting, the CFS executive noticed the mistake and he cancelled the wrong number XDFE 3403772 and wrote the correct number KLIU 2286543 on the delivery gate pass.
Chances of different material dispatched against different container numbers.
Recommendation — CFS Executive should check all the details of the gate pass with the supporting(s) before authorising the gate pass.
4.0 T.D.S. of Rs.2,043 not deducted in case of payment made to ABC Ltd. for maintenance service rendered by them :
T.D.S. of Rs.2,043 was not deducted in respect payment made to ABC Ltd for maintenance service rendered by them.
The company has not been deducting T.D.S. on this service from the start of the financial year.
This lapse was informed to the Manager Finance-Accounts and he assured that henceforth tax would be deducted whilst making payment.
This lapse leads to violation of the Income Tax Act and the Rules and exposes the auditee to penalties and interest for default in deduction of T.D.S.
Recommendation — T.D.S. should be deducted on amounts, which have already been paid and also on future payments to be made on account of Photocopier maintenance service.
Timely preparation of manual for all major processes at CFS helped the company to run the operations effectively and efficiently. The manual preparation exercise created a bond between the internal audit team and the operational staff which resulted in a healthy interaction during continuous monthly internal audit. The internal audit issues raised found acceptability and quick implementation of suggestions by auditees which led to strengthening of the business processes. The Managing Director appreciated the efforts of the internal audit team.
This led to the internal auditing delivering business solutions.