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Internal Audit Manual

[Year:2008]

Corporate Office:
A-11, Sector 24, NOIDA-201301
Registered Office:
Scope Complex, Core-3
7, Institutional Area, Lodhi Road, New Delhi-110003

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PREFACE

Internal control is a process influenced by management and other personnel,


designed to provide reasonable assurance regarding the achievement of
following business objectives of the company:

Reliability of financial reporting


Effectiveness and efficiency of operations
Protection of resources
Compliance with applicable laws and regulations
Compliance with the laid down policies and procedures

Effective internal audit is an integral part of internal control mechanism as well as


corporate governance in any organisation. The Internal Audit is often considered
as one of the "four pillars" of corporate governance, the other pillars being the
Board of Directors, Management and the External Auditor.
The company has an Internal Management Audit Manual to assist the internal
audit function covering areas of both technical and non-technical. It was last
revised in July 2001. This was as per extant accounting systems, procedures,
checks and balances. Nevertheless, over the years a number of changes have
taken place necessitating review of the existing Manual besides meeting the
requirement of ISO 9001-2000. This opportunity of review facilitated in providing
greater coverage and periodicity in the Manual using Enterprise Risk
Management methodology. Moreover principles and guidelines for conducting
the internal audit are defined comprehensively in the updated Internal Audit
Manual. This Manual applicable in all the Units of the company is expected to
equip internal audit staff adequately.
I am glad that with the constant endeavour of internal audit department at
Corporate Office and Units and professional competency of M/s Chaturvedi &
Co. New Delhi, the existing Internal Management Audit Manual has been
updated. I hope that the revised Internal Audit Manual will be very useful in
enhancing the effectiveness of internal audit and consequently of internal
controls in the company.

(NEERU ABROL)
Director (Finance)
Dated: 11.08.2008

NATIONAL FERTILIZERS LTD .


INTERNAL AUDIT MANUAL
I N D E X

CHAPTER
1

PARA

CONTENTS

PAGE #

OBJECTIVE & SCOPE OF INTERNAL AUDIT


1.1
Object of Internal Audit Manual

1.1

1.2

Definition of Internal Audit

1.1

1.3

Objectives

1.2

1.4

Scope

1.2

1.5

Responsibilities

1.3

1.6

Mission & Internal Audit Charter

1.4

1.7

Code of Ethics for internal audit

1.6

ORGANISATIONAL SET-UP OF INTERNAL AUDIT


2.1
Organisational structure of NFL

2.1

2.2

Organisational structure of internal audit dept.

2.3

2.3

Engaging the services of outside internal auditors

2.6

3.1

3.1

GENERAL PRINCIPLES OF INTERNAL AUDIT


3.1
Standard on internal audit reporting
(exposure draft of ICAI)
3.2
Approach to Internal Audit
3.3

Types of Audits

3.1

3.3.1

Operational Audits

3.2

3.3.2

Management Audits

3.2

3.3.3

Audit of Sanctions

3.2

3.3.4

Proprietary Audit

3.3

3.3.5

Audit of Expenditure

3.3

3.3.6

Departmental Audits

3.4

3.3.7

Financial Audits

3.4

3.3.8

Contract Audits

3.4

3.3.9

Fraud & Financial Irregularity Audits

3.5

3.3.10

Follow-up Audits

3.5

3.4

General

3.5

TECHNICAL ASPECTS OF FERTILIZER PRODUCTION


4.1.1
Brief process description of Ammonia Plant

4.1

4.1.2

Brief process description of Urea process

4.7

4.2

Ammonia Plant Process

4.8

4.2.1

Gasification

4.8

4.3

Urea Plant Process

4.11

5.1

MANAGEMENT AUDIT
5.1
General Principles

CHAPTER

PARA

CONTENTS

5.2

Planning & Review of Process Management

5.2

5.3

Controls

5.4

5.4

Systems and Procedures

5.4

5.5

Review Of Functional Areas

5.5

5.5.1

Purchase Management

5.6

5.5.2

Inventory Management

5.7

5.5.3

Production Management

5.8

5.5.4

Marketing Management

5.8

5.5.5

Personnel Management

5.10

Accounting and Finance

5.11

PLANNING, EXECUTION AND CONDUCT OF INTERNAL AUDIT


6.1
Overview

6.1

6.2

Objective of planning

6.1

6.3

Scope of planning

6.2

6.4

Annual internal audit plan

6.3

6.5

Preparation for audit

6.4

6.6

Progress review

6.5

6.7

Internal audit work papers

6.5

6.8

Retention policy & control of work products

6.9

INTERNAL AUDIT REPORT & FOLLOW UP


7.1
Reporting overview

7.1

7.2

Elements of audit report

7.1

7.3

Preliminary audit findings

7.2

7.4

Procedure for issuing audit reports

7.2

7.5

Framework of internal audit report

7.3

7.6

Points to consider while drafting final report

7.5

7.7

Follow-up

7.7

7.8

Review by corporate internal audit

7.8

ENVIRONMENTAL AUDIT
8.1
Introduction Environmental Perspective

8.1

8.2

Definition, Scope & Advantages

8.2

8.3

Guidelines for audit

8.3

FINANCE & ACCOUNTS DEPARTMENT


9.1
Introduction

9.1

9.2

Cash & Bank Accounts

9.2

General

9.2
9.3

5.5.6
6

PAGE #

Cash & Bank Books Receipts / Payments

Control over Electronic Fund Transfer

9.6

Bank Reconciliation

9.7

Register for unpaid wages

9.7

Register for collateral securities & valuable documents

9.8

Bank confirmation certificates

9.8

ii

CHAPTER

PARA

CONTENTS

PAGE #

Quantum & Periodicity

9.8

Purchase Account Section Checklist

9.9

Payment against purchase invoices

9.9

Advance against purchase

9.10

Sales tax / VAT

9.10

Confirmation of balances in creditors accounts

9.11

Quantum & periodicity

9.12

Sales Account Section Checklist

9.13

Terms and conditions

9.13
9.13

H
9.3

9.4
A
B

Invoicing

Credit policy & control

9.14

Reconciliation of dispatches with sales invoices

9.15

Sundry debtors / advances ledgers

9.15

Security deposits

9.16

Sales tax / VAT

9.16

Excise duty

9.17

Bagging, loading, transportation & shortages in transit

9.17
9.18

I
J

Warehouses

Operation of collection account

9.18

Central stockist scheme

9.19

General

9.20

Quantum & Periodicity

9.21

Stores Accounts Section

9.22

Receipts

9.22

Issues

9.22

Material returned notes

9.23

Priced stores ledger

9.23

Miscellaneous

9.24

Quantum & periodicity

9.24

9.6

Budget & MR Account Section

9.26

9.7

Insurance Account Section

9.28

Insurance Policies

9.28

Insurance claims

9.30

Fire claims under Mega Policy

9.31

Discount on premium

9.34

Insurance cost control

9.34

Quantum & periodicity

9.35

Central Accounts Section

9.35

Up-keep of main ledger / sub-ledger

9.35

Up-keep of assets ledger

9.35

Periodical returns

9.36

Compliance with Accounting Standards

9.36

Significant accounting policies

9.41

9.5

9.8

iii

CHAPTER

PARA

CONTENTS

PAGE #

Checklist for review of income tax return

9.45

Checklist for review of FBT

9.46

Checklist on Central Excise

9.47

Checklist for computation of service tax

9.57

Contingent liability

9.61

9.9

Cost Account Section

9.63

9.10

Works Account Section

9.65

Award of work

9.66

Recordings of measurements

9.67

Release / payment of advances to contractors

9.68

Payment to contractors

9.68

On-account and running bills

9.68

Final bills

9.70

Control over variations

9.71

Refund of security deposit

9.71

Abandonment of work

9.71

Other items

9.71

Accounting

9.73

Capitalisation of expenditure

9.73

Service contracts

9.74

Establishment Account Section

9.76

Pay Bills

9.77

Overtime payment

9.78

Travelling advance / bills

9.79

LTC

9.80

Reimbursement of LTE

9.80

Encashment of leave

9.80

Housing building / conveyance / education loan / salary

9.80

Statutory bonus & production incentive

9.81

Other miscellaneous payments

9.81

Perks & allowances

9.81

PF & Employees Pension Account Section

9.84

9.11

advance
H

9.12

10

Provident Fund

9.84

Employees pension scheme

9.86

CAPITAL EXPENDITURE
10.1
Introduction

10.1

10.2

Capital expenditure cycle

10.1

10.3

Internal audit preparatory work & working papers

10.3

10.4

Audit guidelines / checklists

10.4

10.4.1

Project initiation, approvals, detailed workings

10.4

10.4.2

Review of contracts

10.5

iv

CHAPTER

11

12

13

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CONTENTS

PAGE #

10.4.3

Project implementation & control

10.7

10.4.4

Escalation

10.8

10.4.5

Testing & commissioning

10.8

10.4.6

Acceptance

10.9

10.4.7

Project close-out reports

10.9

10.5

Quantum & Periodicity

10.10

PERSONNEL & ADMINISTRATION DEPARTMENT


11.1
Introduction

11.1

11.2

General Administration Audit guidelines

11.1

11.3

Personnel Deptt. Audit guidelines

11.2

11.4

Leave accounting - Audit guidelines / checklist

11.4

11.5

Medical Advance & Reimbursement of Bills

11.4

11.6

Quantum & Periodicity

11.5

FIRE & SAFETY


12.1
Introduction

12.1

12.2

Audit guidelines / checklists

12.1

12.3

Periodicity

12.2

MATERIALS MANAGEMENT - PURCHASES


13.1
Introduction

13.1

13.2

Criteria of effective procurement function

13.1

13.3

Audit guidelines / checklists on procurement

13.2

13.4

Quantum & periodicity

13.5

13.5

Materials Management Rail Transportation Audit

13.5

13.6

MATERIALS MANAGEMENT - STORES


14.1
Criterion for effective stores management

14.1

14.2

Audit guidelines / checklists

14.1

14.3

Quantum & periodicity

14.4

MARKETING DEPARTMENT
15.1
Introduction

15.1

15.2

Appointment of dealers

15.2

15.3

Credit administration

15.2

15.4

Handling & Transportation (H&T) Operations

15.3

15.5

Hiring of godowns / warehousing

15.5

15.6

Terms of sale

15.6

15.7

Sales accounting & sundry debtors

15.7

15.8

Import of fertilizers & other tradable items

15.8

TOWNSHIP ADMINISTRATION & GUEST HOUSE


16.1
Introduction

16.1

16.2

16.1

guidelines / checklists
13.6
14

15

16

Quantum & periodicity in case of rail transportation

Township administration Checklist

CHAPTER

17

18

19

20

PARA

CONTENTS

PAGE #

16.3

Township maintenance Checklist

16.4

16.4

Township Income Checklist

16.5

16.5

Rent & service charges - Checklist

16.5

16.6

Public Health Checklist

16.6

16.7

Guest House Checklist

16.7

16.8

Horticulture Checklist

16.8

16.9

Quantum & Periodicity

16.10

SCHOOL & HOSPITALS


17.1
Schools - Checklist

17.1

17.2

Hospitals Checklist

17.2

17.2.1

Hospital house keeping Checklist

17.2

17.2.2

Establishment & administration Checklist

17.2

17.2.3

Medicines & medical store Checklist

17.3

17.2.4

Dietary stores Checklist

17.4

17.2.5

Hospital equipments / machines Checklist

17.4

17.2.6

Non-entitled patients Checklist

17.5

17.3

Quantum & Periodicity

17.5

OPERATION AUDIT INCLUDING PRODUCT QUALITY


18.1
Introduction

18.1

18.2

18.1

REPAIRS & MAINTENANCE (PLANT)


19.1
Overview

19.1

19.2

Mechanical, Instrumentation & Electrical

19.2

19.3

Mechanical Maintenance

19.3

19.4

Instrumentation Maintenance

19.6

19.5

Electrical Maintenance

19.7

19.6

Civil Maintenance

19.9

INFORMATION & COMMUNICATION


20.1
Present status

20.1

20.2

Need for auditing the function of Computer and IT

20.2

20.3

ICT controls

20.3

20.3.1

Control objectives

20.3

20.3.2

Key control processes

20.4

20.4

Key ICT Policies

20.4

20.5

ICT resources usage

20.7

20.6

Maintenance

20.8

20.7

Business application acquisition

20.8

20.8

Telecommunications

20.10

20.9

Maintaining Contact with office

20.10

20.10

Records management

20.10

20.11

Electronic records management

20.11

20.12

Audit guidelines / checklists

20.11

Audit guidelines / checklist

vi

CHAPTER

21

22

23

PARA

CONTENTS

20.13

Quantum & periodicity

20.21

ENTERPRISE RISK MANAGEMENT (ERM)


21.1
Definition of ERM

21.1

21.2

Need for ERM

21.1

21.3

NFL Risk management policy

21.2

21.4

Role of internal audit in ERM

21.6

21.5

Audit guidelines / checklist

21.9

OFFICE NETWORK AUDIT


22.1
Introduction

22.1

22.2

Registered office / Head office

22.1

22.2.1

Scope of internal audit of RO

22.1

22.2.2

Audit Guidelines / checklist

22.2

Secretarial functions

22.2

Organisation structure

22.3

Internal control system

22.3

Financial management

22.4

Claims

22.4

Loans

22.5

Liabilities

22.5

Taxation

22.6

Forex transactions

22.6

Inter plant comparison

22.7

Research & Development

22.7

22.3

Manufacturing units

22.8

ROLE OF AUDIT COMMITTEE OF BOARD & INTERNAL AUDIT


RELATION WITH STATUTORY & GOVT. AUDITORS
23.1
Background

23.1

23.2

Audit Committee of the Board

23.2

Statutory provisions

23.2

Penalty for non-compliance

23.3

Scope of Audit Committee of the Board

23.3

Terms of reference

23.3

Purpose

23.4

Composition

23.4

Meetings of Audit Committee

23.5

Powers

23.5

Role of the Audit Committee of the Board

23.5

Review of information by Audit Committee

23.7

Government auditors

23.8

23.4

Statutory auditors

23.10

23.5

Comprehensive appraisal report

23.10

23.6

The Committee on Public Undertakings

23.11

23.3

PAGE #

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CHAPTER
24

25

26

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CONTENTS

PAGE #

CONFLICTS OF INTEREST
24.1
Introduction

24.1

24.2

24.1

DISPUTE RESOLUTION
25.1
Dispute between Audit Staff and & Management

25.1

25.2

Dispute resolution process

25.1

25.3

Disputes between the Company & Auditor

25.2

25.4

Policies & Procedures for Scope Limitations

25.2

25.5

Scope Limitations

25.2

RECORD RETENTION & LONG-TERM STORAGE


26.1
Audit guidelines / checklist for records retention

26.1

26.2

Audit guidelines / checklist for records destruction

26.2

ICAI Exposure Draft

A.1

Internal Audit Work Product Retention

A.7

Sample of Assurance Statement

A.9

Handbook on insurance

A.10

Companies (Auditors Report) Order 2003

A.41

NFL Risk Management Policy

A.46

Vijaipur Unit Process Flow Diagram of Ammonia Plant-I

A.68

Vijaipur Unit Process Flow Diagram of Ammonia Plant-II

A.69

Vijaipur Unit Urea Plant Process Flow Diagram

A.70

Bhatinda Project Block Diagram

A.72

Audit guidelines / checklist

Appendix

viii

INTERNAL AUDIT MANUAL

CHAPTER 1

OBJECTIVE & SCOPE OF INTERNAL AUDIT

1.1

OBJECT OF INTERNAL AUDIT MANUAL


The purpose of this manual is to outline the authority and scope of the Internal
Audit function within National Fertilizers Ltd. and to document standards and
provide cohesive and necessary guidelines/checklists for the Internal Audit
Department. These guidelines aim to provide for consistency, continuity, stability,
standards of acceptable performance and a means of effectively coordinating the
efforts of the staff members comprising the Internal Audit Department.
The overall objective of the Internal Audit function is to provide all levels of the
company management, The Audit Committee with an independent assessment
of the quality of the companys internal controls and risk management systems,
and operating and administrative processes, and provide recommendations and
suggestions for continuous improvements.
The internal auditor's judgment will be required in applying the information
contained in this manual to specific audit assignments. This manual provides
guidance, but it should not inhibit professional judgment, practicality and
innovative auditing.

1.2

DEFINITION OF INTERNAL AUDIT


The Institute of Internal Auditors (IIA) U.S.A. has defined Internal Auditing as an
independent, objective assurance and consulting activity designed to add value
and improve an organization's operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and
improve the effectiveness of risk management, control, and governance
processes.
It therefore follows:
(a) Internal audit is an independent and objective assurance and consulting
service within an organization, which is designed to add value by improving
an entitys operations.
(b) Internal audit primarily provides an independent and objective opinion on risk
management, control and governance, by measuring and evaluating their
effectiveness in achieving the organisations agreed objectives.

Objective & Scope

1.1

INTERNAL AUDIT MANUAL

(c) In addition, internal audit where it is entrusted with such responsibility also
provides an independent and objective consultancy service specifically to
help line management improve the organizations risk management, control
and governance. The service applies the professional skills of internal audit
through a systematic and disciplined evaluation of the policies, procedures
and operations that management put in place to ensure the achievement of
the organizations objectives, and through recommendations for
improvement. Such consultancy work contributes to the opinion which
internal audit provides on risk management, control and governance.
Risk management, control and governance comprise the policies, procedures
and operations established to ensure the achievement of objectives, the
appropriate assessment of risk, the reliability of internal and external
reporting and accountability processes, compliance with applicable laws and
regulations, and compliance with the behavioural and ethical standards set
for the organization.

1.3

OBJECTIVES
To assist management at all levels in the effective discharge of their functions
and responsibility by furnishing it with objective analyses, appraisals,
recommendations and pertinent observations concerning the activity, reviews
and suggest cost effective remedial actions for managing risks effectively.

1.4

SCOPE

Determine the accuracy and propriety of financial transactions

Reviewing the reliability and integrity of financial and operating information


and the means used to identify, measure, classify, and report such
information.

Evaluate financial and operational procedures for adequacy of internal


controls and provide advice and guidance on control aspects of new policies,
systems, processes and procedures

Verify the existence of Company assets and ensure that proper safeguards
are maintained to protect them from loss

Reviewing the systems established to ensure compliance with those policies,


plans, procedures, laws, and regulations which could have a significant
impact on operations and reports and whether the organization is in

Objective & Scope

1.2

INTERNAL AUDIT MANUAL

compliance - Determine the level of compliance with corporate policies and


procedures, govt. state and local laws and regulations

1.5

Evaluate the accuracy, effectiveness and efficiency of the companys


electronic information and processing systems

Reviewing and appraising the economy and efficiency with which resources
are employed.

Monitoring and evaluating the effectiveness of the organization's risk


management system.

Determine the effectiveness and efficiency of departments in accomplishing


their mission and identify operational opportunities for cost savings and
revenue enhancements

Provide assistance and a coordinated audit effort with the CAG and Statutory
Auditors.

Investigate fiscal misconduct

Reviewing specific operations at the request of the Audit Committee or


management, as appropriate.

RESPONSIBILITIES
Internal Audit department shall be responsible for:


Prioritising the sequence of the reviews based on the perceived likelihood


and impact of the business risks.

Planning and conducting the audit assignments subject to supervisory review


and approval.

Reviewing the systems established to ensure compliance with the policies,


plans, procedures of the Company and the laws and regulations, which would
have a significant impact on operations and determining whether the
Company has complied therewith.

Coordinating the internal audit activities with the statutory auditors of the
Company. While compliance with the laid down systems and procedures,
exercise of internal check and internal control is the responsibility of the line
managers in all departments of the Company, the appraisal of sufficiency of
these systems and the efficiency of their operations is a major function of
internal audit.

Objective & Scope

1.3

INTERNAL AUDIT MANUAL

1.6

MISSION AND INTERNAL AUDIT CHARTER


Authority
The mission and internal audit charter authorizes and guides the NFL Internal
Audit Department in carrying out its independent appraisal function.

1.6.1

Mission Statement
The mission of Internal Management Audit is to support and assist the
management in the effective discharge of their oversight, management and
operating responsibilities through independent appraisal of the Companys
financial, operational and control activities.
Internal Audit will report on the adequacy of internal controls, the accuracy and
propriety of transactions, the efficiency, effectiveness and economy of
operations, the extent to which assets are accounted for and safeguarded, and
the level of compliance with corporate policies and government laws and
regulations. Additionally, it will provide analyses, recommendations, counsel, and
information concerning the activities reviewed.

1.6.2

Internal Audit Charter


(i) Authority: Internal Audit functions under the policies established by
management under delegated authority.
(ii) Independence: To permit the rendering of impartial and unbiased judgment
essential to the proper conduct of audits, internal auditors will be independent of
the activities they audit.
Independence is essential to the effectiveness of the Internal Audit Department.
This independence is based primarily upon organizational status and objectivity.
The Internal Auditors/Departments at the units and the head office report to the
In-charge(Internal Audit) who in turns forwards the reports to the Director
(Finance).
Internal Auditors may take directly to the Director (Finance) matters that they
believe to be of sufficient magnitude and importance.
In performing the audit function, the Internal Auditors/Internal Audit departments
have neither direct responsibility for, nor authority over, any of the activities

Objective & Scope

1.4

INTERNAL AUDIT MANUAL

reviewed. Therefore, the internal audit review and appraisal process does not in
any way relieve other persons in the organization of the responsibilities assigned
to them.
(iii) Scope: Internal Audit is authorized to have full, free and unrestricted access
to information including records, computer files, property, and personnel of the
Company in accordance with the authority granted by the Audit Committees
approval of this charter and applicable regulatory and government requirements.
Except where limited by law or Corporate policy, the work of Internal Audit is
unrestricted. Internal Audit is free to review and evaluate all policies, procedures
and practices of any activity, program, or function that has been approved as per
the internal audit programmes drawn up yearly and any amendments made
thereto. The audit programmes in terms of the charter shall, inter alia, focus on
the following objectives:

Resources - Resources are acquired economically, used efficiently and


safeguarded adequately.

Risk Identification and Management - Review of the identification and


management of Risks.

All operational and related activities are performed efficiently and effectively.

Significant financial, managerial and operating information is relevant,


accurate, reliable and is provided timely.

Employees' actions are in accordance with the Company's policies,


procedures, the companys Code of Conduct and applicable laws and
regulations.

Significant legislative and regulatory provisions impacting the organisation


are recognised and addressed appropriately.

Opportunities identified during audits, for improving management control, cost


reduction, business targets and profitability, process efficiency and the
organisation's image, are communicated to the appropriate level of
management.

Shareholders' and other Stakeholders' wealth and welfare are preserved,


protected and enhanced.

Transportation of best practices Good management practices identified


or implemented at any unit will be transported across units/ departments so
that these may be adopted by others. Corporate Internal Audit will document
these practices and communicate the same to other units/plants.

Objective & Scope

1.5

INTERNAL AUDIT MANUAL

The audit activities are undertaken as per the Annual Audit Plan developed
by Corporate Audit based on the risk profile of business processes/subprocesses of various functions and comments of the Units/auditee. The Audit
Plan is approved by the Audit Committee who regularly review compliance to
the Plan

(iv) Performance of Advisory Services: Advisory services are defined as


activities designed to mitigate risk, improve operations, and/or assist
management in achieving its business objectives, in which the nature and scope
of the engagements are agreed upon with the client department. Examples may
include advice, facilitation, process design, and training. Internal Audits annual
plan of engagements may include anticipated advisory services. Alternatively
engagements in the nature of advisory services may be communicated to the
internal auditor/units any time during the course of the financial year.
(v) Standards : The responsibility of Internal Audit is to serve the Company in a
manner that is consistent with the Companys code of conduct, standards
established by Audit Committee and the standards, guidelines and code of
conduct laid down by the Institute of Chartered Accountants of India in as far as
they pertain to Chartered Accountants and the Practice of Internal Auditing.

1.7

CODE OF ETHICS FOR INTERNAL AUDIT


The Code of Ethics and accompanying standards for the professional practice of
internal audit in NFL are addressed to both Heads of Internal Audit and audit
officers as well as outside consultants who may be engaged to conduct internal
audit services in NFL. Ethics are inherent in the internal audit process, from
operations to risk management to governance. The standards reflect the
developing nature of internal audit as it continues, in a context of rapid change
and development, to add value to the organisations it serves.
The purpose of this code of ethics is to set the standards and principles for the
performance and conduct of the internal audit staff to which it applies. This code
is intended to clarify the standard of conduct expected from all members of the
internal audit department including outside internal auditors when carrying out
their duties.

1.7.1

CODE OF ETHICS
There are four main principles that Internal auditors are expected to apply and
uphold:
1.
2.

Objective & Scope

INTEGRITY
OBJECTIVITY

1.6

INTERNAL AUDIT MANUAL

3.
4.

COMPETENCY
CONFIDENTIALITY

INTEGRITY
All members of the internal audit team should demonstrate integrity in all aspects
of their work. The relationship with fellow colleagues and external contacts
should be one of honesty and fairness. This establishes an environment of trust,
which provides the basis for reliance on all activities carried out by the internal
audit team. Following from the above, Internal auditors;
 Shall perform their work with honesty, diligence, and responsibility.
 Shall observe the law and make disclosures expected by the law and the
profession.
 Shall not knowingly be a party to any illegal activity, or engage in acts that are
discreditable to the profession of internal auditing or to the organization.
 Shall respect and contribute to the legitimate and ethical objectives of the
organization.
OBJECTIVITY
Objectivity is a state of mind that has regard to all considerations relevant to the
activity or process being examined without being unduly influenced by personal
interest or the views of others. Members of the internal audit team should display
appropriate professional objectivity when providing their opinions, assessments
and recommendations. Following from the above, internal auditors:
 Must not participate in any activity or relationship that may impair or be
presumed to impair their unbiased assessment. This participation includes
those activities or relationships that may be in conflict with the interests of the
organization.
 Must not accept anything that may impair or be presumed to impair their
professional judgment.
 Must disclose all material facts known to them that, if not disclosed, may
distort the reporting of activities under review.
COMPETENCY
Members of the internal audit team should apply the knowledge, skills and
experience needed in the performance of their duties. They should carry out their

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work to the standards set out in the ensuing part of this chapter. They should not
accept or perform work that they are not competent to undertake unless they
receive adequate advice and support to competently carry out the work.
Following from the above, Internal auditors:
 Shall engage only in those services for which they have the necessary
knowledge, skills, and experience.
 Shall perform internal auditing services in accordance with the Standards for
the Professional Practice of Internal Auditing laid down by the Institute of
Chartered Accountants of India.
 Shall continually improve their proficiency and the effectiveness and quality of
their services.
CONFIDENTIALITY
Members of the internal audit team should safeguard the information they receive
in carrying out their duties and be prudent in the use and protection of
information acquired in the course of their duties. There should not be any
unauthorised disclosure of information unless there is a legal or professional
requirement to do so. Confidential information gained in the course of audit
duties should not be used to effect personal gain or in any manner that would be
contrary to the law or detrimental to the legitimate and ethical objectives of the
organization.
1.7.2

INTERNAL AUDIT STANDARDS RULES OF CONDUCT, PERFORMANCE


ETC.
The purpose of the standards is to delineate basic principles that represent the
practice as it should be, provide a framework for performing and promoting a
broad range of value added activities, establish the basis for measuring
performance and foster improved organizational processes and operations.
The following standards define the way in which the internal audit service should
be established and undertake its functions and they cover both assurancerelated and consultancy work.

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1.7.2.1

INDEPENDENCE
The principles of independence - Internal audit should be sufficiently independent
of the activities, which it audits to enable auditors to perform their duties in a
manner, which facilitate impartial and effective professional judgements and
recommendations. They should have no executive responsibilities. The following
standards will be adhered to;
1.
Independence and Objectivity - The internal audit activity must be
independent, and internal auditors must be objective in performing their work.
2.
Organizational Independence -The chief audit executive must report to
a level within the organization that allows the internal audit activity to fulfil its
responsibilities.
3.
The internal audit activity must be free from interference in determining
the scope of internal auditing, performing work, and communicating results.
4.
Independence of individual auditors - Individual auditors should have an
impartial, unbiased attitude, characterised by integrity and an objective approach
to work, and should avoid conflicts of interest. They should not allow external
factors to compromise their professional judgement.
Objectivity is presumed to be impaired when individual auditors review any
activity in which they have previously had executive responsibility. Auditors
should not be assigned to assurance work in business areas where they have
had an executive or other involvement, and where the Head of Internal Audit
deems that this may impair their objectivity, until a suitable period has elapsed (a
period of one year may be considered). The Head of Internal Audit should
develop appropriate guidelines for determining the duration of such periods.
5.
Long-term responsibility for the audit of a particular aspect of an
organisation can also affect independence; assignment of ongoing audit
responsibilities should be rotated from time to time.
6.
Internal auditors may provide consulting services relating to operations for
which they had previous responsibilities.

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7.
Independence of outside consultants - Objectivity could be impaired if an
audit consultant also provides other services to the organisation. Steps should be
taken to avoid or manage such conflicts of interest.
8.
Declaration of conflict of interest - Individual auditors should declare any
conflicts of interest arising from audit work assigned to them by the Head of
Internal Audit. Such potential conflicts of interest include previous executive or
consultancy responsibilities and personal relationships with staff with current
executive responsibilities.
1.7.2.2

PROFICIENCY AND DUE PROFESSIONAL CARE


1.
Proficiency and Due Professional Care - Engagements must be
performed with proficiency and due professional care.
2.
Proficiency - Internal auditors must possess the knowledge, skills, and
other competencies needed to perform their individual responsibilities. The
internal audit activity collectively must possess or obtain the knowledge, skills,
and other competencies needed to perform its responsibilities
3.
Internal auditors should have working knowledge of key information
technology risks and controls and available technology-based audit techniques to
perform their assigned work. However, not all internal auditors are expected to
have the expertise of an internal auditor whose primary responsibility is
information technology auditing.
4.
Due Professional Care -Internal auditors should apply the care and skill
expected of a reasonably prudent and competent internal auditor. Due
professional care does not imply infallibility.
The internal auditor should be alert to the significant risks that might affect
objectives, operations, or resources. However, assurance procedures alone,
even when performed with due professional care, do not guarantee that all
significant risks will be identified.
5.
Staffing, Training and Continuing Professional Development
Internal audit should be appropriately staffed in terms of numbers, grades,
qualification levels, and experience, having regard to its objectives and to these
standards. Internal auditors should be properly trained to fulfil their
responsibilities and should maintain and enhance their professional competence,
knowledge skills and other competencies through appropriate and ongoing
continuing professional development programmes.

Objective & Scope

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1.7.2.3

PERFORMANCE STANDARDS
1.
Managing the Internal Audit Activity: Corporate Office should
effectively manage the internal audit activity to ensure it adds value to the
organization.
2.
Planning: Audit Committee should establish risk-based plans to
determine the priorities of the internal audit activity, consistent with the
organizations goals.
The internal audit activitys plan of engagements should be based on a risk
assessment, undertaken at least annually. The input of senior management and
the board should be considered in this process.
3.
Communication and Approval: The chief audit executive must
communicate the internal audit activitys plans and resource requirements,
including significant interim changes, to senior management and the Audit
Committee for review and approval.
4.
Resource Management : Audit Committee / Management should ensure
that internal audit resources are appropriate, sufficient, and effectively deployed
to achieve the approved plan.
5.
Coordination : The chief audit executive should share information and
coordinate activities with other internal and external providers of relevant
assurance and consulting services to ensure proper coverage minimize
duplication of efforts and transportation of best practices.
6.

Reporting :
i.
All internal audit assignments will be the subject of formal
reports

All internal audit assignments will be the subject of formal reports. Draft reports
will be sent to the manager(s) responsible for the area under review for
agreement to the factual accuracy of findings and the implementation of
recommendations made to address weaknesses in internal controls. After
agreement, the reports will be issued to the relevant HOD with a copy to Head of
Internal Audit H.O.
ii.

Reporting to the Senior Management

The chief audit executive, internal audit should report periodically to Audit
Committee and senior management on the internal audit activitys purpose,
authority, responsibility, and performance relative to its plan. Reporting should
also include significant risk exposures and control issues, corporate governance

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issues, and other matters needed or requested by the Audit Committee and
senior management. Significant control issues and potential for improving risk
management and internal control processes should be highlighted.
7.
Risk Management : The internal audit activity should assist the
organization by identifying and evaluating significant exposures to risk and
contributing to the improvement of risk management and control systems.


Determining whether risk management processes are effective is a judgment


resulting from the internal auditors assessment that:

Organizational objectives support and align with the organizations mission.

Significant risks are identified and assessed.

Appropriate risk responses are selected that align risks with the
organizations risk appetite.

Relevant risk information, enabling staff, management, and the Audit


Committee to carry out their responsibilities, is captured and timely
communicated across the organization.

Risk management processes are monitored through ongoing management


activities, separate evaluations, or both.
The internal audit activity should evaluate risk exposures relating to the
organizations governance, operations, and information systems regarding
the:





Reliability and integrity of financial and operational information.


Effectiveness and efficiency of operations.
Safeguarding of assets.
Compliance with laws, regulations, and contracts.

Based on the results of the risk assessment, the internal audit activity
should evaluate the adequacy and effectiveness of controls
encompassing the organizations governance, operations, and
information systems. This should include:





Reliability and integrity of financial and operational information.


Effectiveness and efficiency of operations.
Safeguarding of assets.
Compliance with laws, regulations, and contracts.

8.
Governance : The internal audit activity should assess and make
appropriate recommendations for improving the governance process in its
accomplishment of the following objectives:

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9.

Internal Assessments : Internal assessments should include:





1.7.2.4

Promoting appropriate ethics and values within the organization.


Ensuring effective organizational performance management and
accountability.
Communicating risk and control information to appropriate areas of
the organization.
Coordinating the activities of and communicating information among
Audit Committee, external and internal auditors, and management.

Ongoing reviews of the performance of the internal audit activity; and


Periodic reviews performed through self-assessment or by other
persons within the organization, with knowledge of internal audit
practices and the Standards.

AUDIT COMMITTEES
This Standard only encompasses internal audit issues and does not define the
full role or constitution of an Audit Committee, which has been defined in another
chapter of this manual.
Internal Audit issues on which Audit Committees advice should be sought
Internal Audit through the executive nominated in this behalf should ask the Audit
Committee to advise them on:
a. the skill, experience and competency requirements for the post of Head
Internal Audit, where such post falls vacant and has to be filled.

of

b. the terms of reference for internal audit, where such audit is required at the
behest of the Audit Committee.
c. the effectiveness of the internal audit strategy and periodic plan in addressing
the organisations risks
d. the resourcing of internal audit
e. the periodic (annual) work plans of internal audit, and material changes to
these plans the Head of Internal Audits annual and interim audit report(s)
and any implications arising from their findings and opinion
f.

the arrangements for and the results of quality assurance processes

Objective & Scope

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g. the adequacy of management response to internal audit advice and


recommendations.
h. the arrangements made for co-operation between internal audit, external
audit and other review bodies.

1.7.2.5

RELATIONSHIPS WITH MANAGEMENT, OTHER AUDITORS AND


OTHER REVIEW BODIES
1.
Principles of good relationships : Heads of Internal Audit should coordinate internal audit plans and activities with line managers, other internal
auditors, external audit and other review agencies (govt. auditors) to ensure the
most effective audit coverage is achieved and duplication of effort is minimised.
2.

Relationships with management


I.

Internal Audit provides a service to management. Its strategy,


planning and delivery should aim to maximise the value added for
management without jeopardising internal audits responsibilities.

II.

Management and staff at all levels of the organisation should have


complete confidence in the integrity, independence and capability
of internal audit. The relationship between internal auditors and
line managers is a privileged one, and information gained in the
course of audit work should remain confidential to those with a
legitimate interest within the organisation.

III.

Co-operative relationships with line management enhance the


ability of internal audit to achieve its objectives effectively. Audit
work should be planned in conjunction with management as far as
possible, particularly in respect of the timing of audit work (except
where unannounced visits are essential to the achievement of the
audit objectives).

3.
Relationships with other internal auditors: Where unit internal auditors
need to work with internal auditors of another organization/unit (for example, in

Objective & Scope

1.14

INTERNAL AUDIT MANUAL

inter-unit /inter-departmental systems or cross cutting projects), the roles and


responsibilities of each party should be agreed and endorsed by each Head of
the Internal Audit. Whenever possible agreement to joint working or to placing
professional reliance on work carried out by one party should be sought.
4.
Relationships with external auditors: Internal Audit should seek to
meet with the external auditor to consult on audit plans, discuss matters of
mutual interest, discuss common understanding of audit techniques, methods
and terminology. In particular, Internal Audit should offer the external auditor the
opportunity to rely on their work where appropriate, provided this does not
prejudice Internal Audits independence.
In any case of conflict with the External Auditor, the Head of Internal Audit will
consult with, or refer the matter to, Director Finance.

Objective & Scope

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INTERNAL AUDIT MANUAL

CHAPTER 2

ORGANISATIONAL SET-UP OF INTERNAL AUDIT

2.1

ORGANISATION STRUCTURE OF NATIONAL FERTILISERS LTD.


NFL a Government of India undertaking and a Schedule A Mini Ratna Company
is Indias second largest producer of Nitrogenous Fertilisers with a 16.5% share
in the production of Urea in 2006-07. The company also manufactures and
markets Industrial Chemicals (methanol, ammonium nitrate, liquid
nitrogen/oxygen/argon/carbon-dioxide, anhydrous ammonia etc.) and also
undertakes other specialised services.
NFL, operates under the administrative control of Department of Fertilizers in the
Ministry of Chemicals & Fertilizers.
National Fertilisers Ltd. with its headquarters in New Delhi has plants and
marketing and other offices at the following locations,
Vijaipur Plants (Plants 1 & II) with a combined capacity of 17.28 lakh MTs of
Urea per annum after having been re-rated w.e.f 1.4.2000 from 7.26 lakh MTs of
Urea for each plant to 8.64 lakh MTs.
Vijapur is a small town situated in Guna District, Madhya Pradesh.
Bhatinda Unit (Punjab)- The installed capacity of this Plant is of 511500 MTs of
Urea. The Plant was commissioned on 1.10.1979 at a cost of Rs.239.30 crore.
Panipat Unit (Haryana) As like Bhantinda Unit, this Plant has capacity of
511500 MTs of Urea. The Plant was commissioned on 1.9.1979 at a project cost
of Rs.223.50 crore.
Nangal Unit (Punjab) - This Unit has got the installed capacity of 478500 MTs
of Urea and 22110 MTs of Methanol. This Plant was revamped on 1.2.2001 and
the Project cost was Rs.283.11 crore.
(The above three Units are strategically located in the high consumption areas
of Punjab and Haryana.)
The Company has an installed capacity of 32.31 lakh MTs of Urea.
The organization structure of NFL is given below in the form of an organogram.

2.1
Organizational set-up

INTERNAL AUDIT MANUAL

2.2
Organizational set-up

INTERNAL AUDIT MANUAL

2.2

ORGANISATION STRUCTURE OF THE INTERNAL AUDIT DEPARTMENT


Testing and assuring the effectiveness of controls over transactions has always
been a core part of the internal auditors responsibility. However, the
implementation of the Sarbanes-Oxley (SOX) Act in the U.S has elevated the
importance of internal controls effectiveness and transactional data integrity to
support financial accountability and sound corporate governance. It is recognized
that in due course, corporates in India will also increasingly recognize the need to
adopt best of breed internal audit practices being followed and developed in the
west.
The management of NFL requires and is seized of the need for and the
importance of adopting a strong corporate approach to the Internal Audit
Function. The paramount need is, therefore, to be visible and obtain top-level
support and commitment of appropriate resources. The ability for management to
trust and rely upon the internal auditors and for the internal auditors to accept
and repay that trust as a management control strategy is an essential part of any
organisation.
Modern internal auditors must have the skills to provide both assurance and
consulting services in the areas of control effectiveness, risk management, and
corporate governance while maintaining the objectivity and independence
required by professional standards. In this multifaceted role, IA serves the needs
of many stakeholders and must effectively interact with all levels of the company
up to the board level. As internal audit is an independent appraisal function
established by the management, internal auditors shall not have any line
responsibilities for the activities they review and/or for developing/implementing
the control systems except where they are involved in an advisory role for which
separate procedures are laid down in the manual.
Internal Audit in NFL is a multidisciplinary function capable of reviewing,
appraising and evaluating systems and controls and providing meaningful and
insightful recommendations for overall improvement. Being a Mini Navaratna
PSU, it is also incumbent on NFL to establish a transparent and effective system
of internal auditing, including the constitution of an Audit Committee of the Board
with membership of non-functional Directors.
The scope of Audit Committee approved by NFL Board of Directors covered all
commercial aspects of the company including, inter-alia, review of financial
statements, internal and operational control systems, Government and Statutory
Auditors Reports, Operational Performance, Projects, Statutory Compliance and
development of a commensurate and effective Internal Audit function in the
company.

2.3
Organizational set-up

INTERNAL AUDIT MANUAL

Good Corporate Governance has assumed tremendous significance today and


the Government of India is extremely serious in bringing about good corporate
governance in the functioning of various companies including PSUs. Disclosure
norms, transparency and accountability, etc. are being made more stringent by
SEBI on a regular basis and the regulator is also enforcing the regulations more
rigorously. Internal Audit function in NFL will play an advisory and a more positive
role in the fulfilment of these additional responsibilities through the Audit
Committee.
Internal Audit function in NFL requires that Heads of Internal Audit of all Plants /
Units report to Head of Internal Audit at CO functionally and administratively to
Unit Head. Head of Internal Audit report to Director (Finance).
The organization structure of the Internal Audit Department in NFL is depicted
below in the form of an organizational chart:

2.4
Organizational set-up

INTERNAL AUDIT MANUAL

NATIONAL FERTILIZERS LTD.


ORGANISATION CHART OF INTERNAL AUDIT DEPARTMENT

CHAIRMAN & MANAGING DIRECTOR

DIRECTOR [FINANCE]

HEAD OF INTERNAL AUDIT

CHIEF MGR.
[IA]

BATHINDA UNIT
DGM

AM
[Tech]

AM
[Non-T]

CHIEF MGR.
[IA]

PANIPAT UNIT
CM

Sup [SG]
[Non-T]

Senior
AM

AM
[Non-T]

VIJAIPUR UNIT
CM

Accounts
Officer

Foreman
[Tech]

Sr. AM
[Non-T]

NANGAL UNIT
DGM

Accounts
Officer

2.5
Organizational set-up

Exec. SG
[Non-T]

Sr. AM
[Non-T]

Foreman

INTERNAL AUDIT MANUAL

2.3

ENGAGING THE SERVICES OF OUTSIDE INTERNAL AUDITORS


While engaging the services of firms of Chartered Accountants to conduct
internal audit at any of the offices it is important to ensure that firms/partners and
audit staff to be deployed meet certain minimum eligibility criteria in terms of
competence, experience and reputation of the firm and partners etc. so that
value added services are received by NFL.

2.6
Organizational set-up

INTERNAL AUDIT MANUAL

CHAPTER 3

GENERAL PRINCIPLES OF INTERNAL AUDIT

3.1

ICAI EXPOSURE DRAFT


The Committee on Internal Audit of the Institute of Chartered Accountants of
India has come out with an Exposure Draft on Standard of Internal Audit (SIA)
Reporting. The purpose of this Standard on Internal Audit (SIA) is to establish
standards on the form and content of the Internal auditors report issued as a
result of an internal audit performed by an internal auditor of the systems,
processes, controls including items of financial statements of an entity.
Though not mandatory as yet (it is unlikely that there would be material changes
in the draft), the Standard which is placed at Appendix - 1 may be referred to
as a general guideline while finalizing internal audit reports to make the reports
more meaningful, presentable and professional.

3.2

APPROACH TO INTERNAL AUDIT


The key to an efficient Internal Audit is the ability to understand the business
processes and their objectives, identify current and future risks, which may
threaten the achievement of these objectives and thereby determine the degree
to which these risks need to be addressed by the management. The risks include
strategic, operational, environmental, safety, and social risks, in addition to the
financial risks associated with the business processes.
Given the above, Internal Audit shall adopt a risk-based approach for its review
of the business processes. This approach provides a framework to optimise
performance of critical resources by minimising the associated risks.

3.3

TYPES OF AUDIT
In preparing the Annual Internal Audit Plan, the Head of IA department at the unit
may determine the type of audit to be performed for each auditee. The following

General Principles

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INTERNAL AUDIT MANUAL

is a summary of the various types of audits within the generic definition of internal
audit, which will generally be conducted:
3.3.1

Operational Audits
Operational audits are designed to evaluate procedures and controls, which
impact the attainment of the companys organizational goals and objectives.
Operational audit is an impartial service to operational management, which gives
assurance when appropriate that operational objectives are valid; that
operational control information is reliable; and the operational activities are
effective and efficient. It is also an agent for change by identifying and analyzing
managerial problems and offering practical suggestions for improving operational
effectiveness, efficiency and economy.

3.3.2

Management Audits & its Objectives


Management audit involves a critical examination of the management policies,
systems and decisions to assess the adequacy of managerial inputs and
appropriateness of the management policies with a view to ascertaining the gaps
and to suggest modifications. The central purpose of management audit is to
secure improvement in performance in future.

3.3.3

Audit of Sanctions
 The purpose is to ensure through test checks by drawing samples using a
suitable basis, that items of expenditure are covered by the sanctions of the
competent authority. The audit should also seek assurance that the authority
sanctioning the expenditure is competent to do so by powers vested in it and
the sanction is specific.
 If the sanctioning authority is vested with powers, which are to be exercised
subject to certain criteria/limits, audit should check whether the sanctioning
authority has abided by them.
 If the sanctioning authority is vested with full powers in respect of certain
class of expenditure, sanction accorded under these powers may be
questioned by audit under standards of financial propriety and reliability of
data.
 For the purpose of financial sanctions, audit should check whether a
contract/work has not been split up to circumvent sanction of proper authority.
 Audit should also check that any alterations/amendments to a sanction have
been approved by an authority not below the level of the authority who
originally sanctioned it.

General Principles

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3.3.4

Propriety Audit
It is an essential function of audit to bring to light not only cases of clear
irregularity but also every matter which, in the judgment of the auditors, appears
to involve infructuous expenditure or wrong use of company's property even
though the accounts themselves may be in order and no system/financial
irregularity has occurred. It is of equal importance that the broad principles of
finance are borne in mind not only by disbursing authorities but also by
sanctioning authorities.
No precise rules can be laid down for propriety audit as such. Its objective is to
support a reasonably high standard of public financial morality of sound financial
administration, transparency and devotion to the financial interests of the
company.
Internal audit executives in the performance of their duties shall apply the
following general principles:

3.3.5

The expenditure should not prima-facie be more than what the job demands.

Every authority is expected to exercise the same vigilance in respect of the


use of company's property as a person of ordinary prudence would do in
respect of his own property.

No authority should exercise its power in such a way as will be to its own
advantage directly or indirectly.

Company's money should not be utilised for the benefit of a particular person
or a section of employees unless: (i) it is in pursuance of company's
recognised policy/custom, or (ii) the claim can be enforced in a court of law.

Audit of Expenditure
The main objectives of audit of expenditure are to ensure that:
 The expenditure is in accordance with the sanction of the competent
authority.
 The expenditure incurred is for bona fide purposes of the company and the
minimum necessary for the purpose.
 The prescribed procedures have been observed, such as framing of proper
estimate, approval of competent authority etc.
 The expenditure sanctioned for a specific period is not admitted beyond that
period without further sanction.

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 All purchases are properly accounted for.


 Proper records of payment are kept so that no second or further claim on the
same is possible.
 Payments to contractors/suppliers/any other party, are as per lawful
agreements/contract duly entered into with them.
 The expenditure does not involve any breach or violation of any of the
standards of financial propriety.
 Expenditure are distinctly classified in conformity with the generally accepted
accounting principles/standards, accounting policies of the company and
statutory provisions of the Companies Act; Income Tax Act, SEBI etc.
3.3.6

Departmental Audits
Departmental audits (e.g. Repairs and Maintenance) are designed to review and
evaluate the activities and operations of a particular function, activity,
department, or unit under review. Departmental audits will evaluate accounting,
operational, financial controls (where applicable), monitoring controls, and ensure
compliance with companys policies and procedures, applicable laws and
regulations, and validate the records and accounts of the auditee. Departmental
audits will utilize a complete battery of audit tests and procedures, including, but
not limited to, functional tests, transaction reviews, substantive tests, and
analytical reviews.

3.3.7

Financial Audits
Financial audits are designed to validate the accuracy and completeness of
records and account balances. Financial audits will utilize substantive tests,
analytical reviews, and other validation procedures, which may or may not
include functional tests or transaction reviews.
Financial audits determine whether the financial information of the company
function, activity, department, or unit under audit fairly represents the financial
position, results of operations, and cash flows or changes in financial position of
the auditee in accordance with Generally Accepted Accounting Principles,
keeping in mind various accounting standards and other pronouncements issued
by the Institute of Chartered Accountants of India

3.3.8

Contract Audits (Works and Service Contracts)


Contract audits are designed to evaluate the contracting process, compliance
with the provisions of contracts, and third-party contractual performance. These
audits may be performed with respect to any function, activity, department, or

General Principles

3. 4

INTERNAL AUDIT MANUAL

unit of the company and shall include all types of contracts; e.g., construction
contracts, service contracts including professional service contracts etc.
3.3.9

Fraud and Financial Irregularity Audits


Fraud and financial irregularity audits are designed to verify the existence and
magnitude of suspected fraud and financial irregularities. Such audits fall within
the purview of the Vigilance Department. Fraud and financial irregularity audits
may be conducted at the request of the Audit Committee, the BOD, the CMD and
Directors as a result of a tip from the companys whistleblower system; or at the
discretion of the ED (Vigilance). The highest level of discretion shall be utilized
when undertaking a fraud or financial irregularity audit.

3.3.10 Follow-up Audits


Follow-up audits are designed to determine whether corrective action has been
taken on previous audit recommendations. These audits may be conducted at
intervals as recommend by the Audit Committee / H.O. in case the need to do so
if felt and shall include only the deficiencies reported in the Final Audit Report.
The follow-up audit shall include such functional or substantive tests that are
necessary to verify that necessary and appropriate corrective actions have been
taken.
3.4

GENERAL
In order that the internal audits have a proper direction and purpose and cause
minimal disruption to the auditee, it is recommended that internal auditors adhere
to following:


Maintain an objective and flexible approach in analysing financial, operational


and management controls and report on control weaknesses that need be
strengthened.

Establish responsibilities and outputs for each phase of the internal audit
process; and

The Internal Auditor will develop the initial audit objectives with consideration
for any concerns expressed by the Audit Committee, BOD, Senior and other
relevant members of management.

Internal audit must not start an audit without a conference first with the
manager concerned - The Internal Auditor will prepare an audit notification
letter; the foregoing will be completed far enough in advance to ensure that
the notification letter is issued to the auditee at least one to two weeks before
the Initial/Opening Conference for scheduled audits. The audit notification

General Principles

3. 5

INTERNAL AUDIT MANUAL

letter may be delivered by electronic mail or in hardcopy format. For


unscheduled audits, notification will be made as far in advance as time
permits. To initiate good working relationships and cooperation, the
notification letter may generally be preceded by a phone call to the
appropriate member or members of management. The notification letter to
the auditee will include the following information:
 The activity name or a brief description of the function, activity,
department, to be audited;
 The type of audit to be conducted and the audit objectives and scope;
 The date the Internal Auditor plans to commence / appear at the location
to be audited;
 A request of required documentation to be available at the Opening
Conference or provided to the Internal Auditor by a specified date;


The planning phase will develop the initial audit objectives and an audit plan
and the requisite audit methodology to satisfy those objectives based on the
risk profile of the auditee. Some flexibility, however, will be in order for the
plans to be modified as the findings develop.

Act as facilitators to the line managers for improving the performance of the
departments/functions under the responsibility rather than critics.

Should interact with the key officer/s of the department, study policies,
procedures, manuals and prepare a flow chart for analytical recording of
controls and systems information.

After completing a particular phase, should tabulate the deviations and


exceptions, if any, and prepare a brief summary of their
significance/implications, which will help to determine whether additional
checks are necessary.

Should discuss with the line managers to ensure accuracy and validity of their
findings.

Should establish personal contact with the line managers and try to avoid
usual form of correspondence which has tendency to delay matters or dilute
the issues involved.

GUIDELINES ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNANTS


OF INDIA
The Institute of Chartered Accountants of India has issued a handbook titled
'General Guidelines on Internal Auditing'. This handbook can be used as an
illustrative guide while conducting the audit.

General Principles

3. 6

INTERNAL AUDIT MANUAL

CHAPTER 4
TECHNICAL ASPECTS OF FERTILIZER PRODUCTION

4.1

BRIEF PROCESS DESCRIPTION OF PLANTS

4.1.1

AMMONIA PLANT
Ammonia is product from mixture of Hydrogen (H2) & Nitrogen(N2), where the
ratio of H2 to N2 shall be approximately 3:1. Besides these two components, the
mixture shall contain inert gases, such as argon (Air) & methane (CH4), to a
limited degree. Basic principle for production of ammonia is as follows:
NATURAL GAS
RAW WATER
ATMOSPHERIC AIR
ELECTRIC POWER

AMMONIA
PLANT

AMMONIA
CARBON DIOXIDE

The source of H2 is water and the hydrocarbons of the natural gas and the
source of N2 is the atmospheric air.
Process steps necessary are as follows:
(1)

DESULPHURIZATION:

Natural gas feedstock, which may contain maximum of 50ppm (by vol.) sulphur
compounds, is desulphurised. Reaction takes place in two stages (i) Hydrogenation

(ii) H2S Absorption

Hydrogenation takes places in the hydrogenator at a temp. of 3900C. H2S


absorption takes place in the two ZnO absorbers connected in series. After
desulphurization, content of sulphur is lowered to less than 0.05ppm (by volume).
The natural gas feed stock is passed to the two pre-heater coils in the waste heat
section, where it is preheated to 390oC before entering the HDS reactor.
Hydrogen required for the hydrogenation is supplied as synthesis gas from the
synthesis gas compressor and added to the natural gas downstream pre heater.
The HDS reactor is equipped with one catalyst bed of 1815mm height containing
8.9m3 of Ni-Mo based catalyst. The most advantageous operating temp of the

Technical Aspects of Fertilizer Production

4.1

INTERNAL AUDIT MANUAL

hydrogenation is between 3800C and 3890C. Following major reactions takes


place:
RSH + H2  RH + H2S
COS + H2  CO + H2S
(2)

ABSORPTION

From the HDS-reactor, the hydrogenated natural gas is led to the two ZnO
absorbers connected in series. Each vessel has one catalyst bed with a height of
2800mm and containing 13.8m3 of Zinc Oxide catalyst and its normal operating
temperature is between 350 - 4000C. The following reactions take place:

(3)

ZnO + H2S

ZnS + H2O

ZnO + COS

ZnS + CO2

REFORMING SECTION

Desulphurised NG is converted into raw ammonia synthesis gas by catalytic


reforming of the HC mixture with steam and air. Process can be described by
following reactions:
i)

CnH2n+2 + 2H2O

Cn-1H2n + CO2 + 3H2 HEAT

ii)

CH4 + 2H2O

CO2 + 4H2 HEAT

iii)

CO2 + H2

CO + H2O - HEAT

Reaction (i) describes the mechanism of reforming the higher HC, which are
reformed in stages lower and lower HC, finally resulting in methane, which is
reformed according to reaction (ii). The shift reaction requires only little heat,
whereas the heat required for (i) & (ii) quite dominate the picture.
Reaction takes place in the two steps in the two reformers. In the first reformer,
the necessary heat of reaction is supplied as indirect heat by firing and in second
reformer the heat is supplied as direct heat of combustion of the gas mixture with
air. Introduction of air provides N2 for ammonia synthesis. Since the H2/N2 ratio in
the purified synthesis gas must be maintained at a value close to 3.0, the amount
of air is fixed accordingly. An operating pressure of approximately 35 kg/cm2g in
the reforming section gives a reasonable economic compromise.

Technical Aspects of Fertilizer Production

4.2

INTERNAL AUDIT MANUAL

PRIMARY REFORMER
The first step of the steam reforming takes place in the primary reformer, where
HC and steam mixture, which is preheated to 505 - 5200C is passed downwards
through vertical tube containing catalyst. Primary reformer is a fired heater where
the sensible heat and the heat of reaction are transferred by radiation from a
number of wall burners to the catalyst tubes.
The HC in the gas, which leaves primary reformer, has methane content of
approximately 10 mole %(on dry basis). The exist temperature is 8000, which is
also the inlet temp to the second step of the reforming.
SECONDARY REFORMER
In this, process gas is mixed with air. The partial combustion takes place in the
top part and causes considerable increase in temperature. From this, gas passes
down through catalyst bed, where last part of the reforming is carried out. The
temp of process gas is about 9900C at the exist and the methane concentration is
approximately 0.30 mole% (on dry basis). The exit gas contains about 13 mole%
CO and 7.3 mole% CO2. The cooling of the process gas is carried out in waste
heat boiler, where the exchanged heat is used for producing main part of the
HPS (HIGH PRESSURE STEAM) in the ammonia plant. The combustion of
process gas with, air gives temp of 1100-12000C in the upper part, reforming
reaction of methane absorbs heat, so outlet temp of reformer is 990C.
4)

CO-CONVERSION SECTION

Process gas leaving reformer contains approximately 13.0 Vol % CO2 which is
converted into carbon dioxide and hydrogen by shift reaction:
CO + H2O

CO2 + H2 + heat

Optimum temperature for the shift reaction depends upon the activity of the
catalyst and the quantity of the gas handled. The shift reaction takes place in
three converters, with process gas cooling after each converter.
The following conditions prevail during normal operation:
R-1204
R-1205
R-1206

Temp in, 0C
360-380
260
190

Temp out, 0C
430-450
280
192

CO in/out, Dry mole %


13.0/3.5
3.5/0.7
0.7/0.17

HT CO-CONVERSION (R-1204)
It contains a total of 92 M3 of chromium oxide promoted iron oxide catalyst in two
beds, each 2350mm high.

Technical Aspects of Fertilizer Production

4.3

INTERNAL AUDIT MANUAL

MT CO-CONVERSION (R-1205)
It has been provided with tow-catalyst bed each 2850 mm high. Both beds
contain a total of 112 M3 of chromium and zinc based catalyst, which can be
operated in the tem range of 2000C to 3500C
LT CO-CONVERSION (R-1206)
It has been provided with two catalyst beds each 2240 mm high and containing a
total of 88M3 copper zinc an alumina based catalyst, operating in the tem range
of 1700C-2500C.
(5)

CO2 REMOVAL SECTION

Process gas leaving shift section has a content of CO2 of about 17-18%. CO2 is
removed by absorption in an eq. Hot Potassium Carbonate solution, containing
25-30. Wt.% potassium carbonate partly converted into bicarbonate (HCO3).
The following reactions take place:
K2CO3 + CO2 + H2

2KHCO3

This reaction takes place in the CO2 absorber and outlet process gas now
contains approximately 0.10 vol% carbon dioxide.
CO2 ABSORPTION
It is provided with four beds. The two upper beds are 7010mm high and consist
of 1.5 stainless steel slotted rings (41.1 M3). Two lower beds are 8540mm high
and consist of 2 stainless steel slotted rings (104.1 M3). CO2 rich gas is
introduced at the bottom absorber, it flows upwards against a flow of HPC
solution, which is introduced at two levels. About 20% of solution (split stream) is
introduced at top and balance in the middle. The inlet temp of HPC solution are
600C and 1140C respectively, outlet temp of CO2 enriched solution is 1160C.
CO2 REGENERATION
Rich HPC solution coming from the bottom of CO2 absorber is depressurized
from 27 kg / cm2g to 8 kf/cm2 in an expansion turbine and then introduced at the
top of the CO2 regenerator. Regenerator is provided with three identical 9145mm
high beds, containing stainless steel 2 slotted rings (172.5M3).
As the solution flows downwards, CO2 is stripped off by means of steam. The
reaction of regeneration is opposite to that for the absorption. Operating pressure
is just above atmospheric pressure at the top of regenerator and it increases

Technical Aspects of Fertilizer Production

4.4

INTERNAL AUDIT MANUAL

slightly down through the column.


The removed CO2passes through a separator before it is sent to the urea plant.
Content of CO2 in the gas is 99.0 Vol% and the rest inerts (H2 and N2).
(6)

METHANATION

In this, carbon oxides which are poisons for the synthesis catalyst are converted
into methane, which acts like an inert gas in ammonia synthesis.
The following reactions take place:
CO + 3H2
CO2 + 4H2

CH4+ H2O + heat


CH4+ H2O + heat

Equilibrium conditions are within the recommended temp. of range of 2800C to


4000C, the reactions are exothermic. In normal operation temp rises by 100C.
The reactor consists of two beds having a total of 60 M3 Nickel catalyst
containing approximately 27% Ni each 2650 mm high. Reaction starts at about
2500, causing temp increase in the catalyst bed. The increase of temp depends
on the contents of CO and CO2 in the process gas, but dT will be approximately
600 per 1% CO2 converted and 750C per 1% CO converted.
(7)

AMMONIA SYNTHESIS SECTION:

The following reaction takes place:


3H2 + N2

2 NH3 + heat

The ammonia synthesis loop has been designed for a maximum pressure of 245
kg/cm2 and the normal operating pressure is 210-220 kg/cm2g. Normal operating
temp will be in range of 360 to 5250 C for the first bed and 370 to 4600C for the
second bed. The basket consists of two catalyst beds and an inter bed heat
exchanger, placed in the center of the upper catalyst beds. The catalyst beds
contain a total of 108M3 of Promoted iron catalyst containing small amounts of
Non-reducible oxides. Heat liberated by synthesis reaction is utilized for highpressure steam production in synthesis loop boiler and pre-heat of high pressure
boiler feed water.
About 30% of the reactants (H2 and N2) at the converter inlet synthesis gas is
recycled back to synthesis loop after recovery of ammonia. Re-circulation is
carried out by means of the re-circulator, an integral part of the synthesis gas
compressor.
Converter effluent gas is cooled stepwise, first in loop waste heat boiler, from

Technical Aspects of Fertilizer Production

4.5

INTERNAL AUDIT MANUAL

4570C to 350oC and then to 275oC in the boiler feed water pre-heater, and then in
the hot heat exchanger to 650C by preheating of converter feed gas. Synthesis
gas is then cooled 390C in the water cooler and 30-310C in the cold heat
exchanger wherein converter feed gas is preheated. Final cooling to 120C takes
place in the ammonia chillers. Condensed ammonia is separated in separator.
From the top of separator the recycle gas is re-circulated to the converter through
cold heat exchanger, re-circulation and hot heat exchanger.
Make-up synthesis gas is introduced between the two ammonia chillers to
remove water and CO2 in condensed ammonia to avoid catalyst poisoning.
Condensed ammonia from separator is sent to let down vessel where liquid
Ammonia separated from recycle gas is sent to Urea Plant as product at 24
kg/cm2 g pressure.
In the event of ammonia to be sent to Ammonia Storage tank, liquid from let
down vessel is flashed in Flash vessel. Vapours from top are sent to refrigeration
compressor for compression followed by water-cooling in ammonia condenser.
Liquid ammonia from Flash vessel is pumped to Ammonia Storage Tank at
3kg/cm2 g pressure and 320C temp. Refrigeration is supplied to the synthesis
loop by three stage ammonia chiller levels.
AMMONIA PROCESS FOR VIJAIPUR II
The basic process for Ammonia II remains same as Ammonia I, except that in
Ammonia-II, naphtha (maximum 50% on energy basis) mixed with natural gas
can be used as feed. The major additions in the process include Separate HDS
reactors for removal of sulphur form NG and Naphtha. NG HDS reactor contains
Ni-MO catalyst while naphtha HDS reactor contains Co-Mo catalyst. Hydrogen
required for the hydrogenation is supplied as synthesis gas from the synthesis
gas compressor and added to the natural gas downstream preheater.
The outlet streams from HDS reactors are mixed and fed to 2 Nos. ZnO
absorbers to remove H2S and then sent to the reforming section.
Reforming
Reaction takes place in the two steps (Primary and Secondary
reforming) when NG is used as feedstock and in three steps (Adiabatic prereforming, Primary and Secondary Reforming) with Mixed Feed stock. In case of
mixed feed (Naphtha with NG), the desulphurised gas is sent to an adiabatic pre
reformer where all higher hydrocarbons are virtually decomposed into methane
by steam reforming. The outlet gas from pre reformer is sent to Primary reformer
and then to secondary reformer.
The reformed gas is fed to CO shift conversion after heat recovery, followed by
CO2 absorption, methanation and synthesis as explained for Ammonia I above.

Technical Aspects of Fertilizer Production

4.6

INTERNAL AUDIT MANUAL

4.1.2

UREA PROCESS
2 STREAM 1310 TONS/DAY EACH
Raw materials required are ammonia and carbon dioxide. Ammonia is in liquid
form while carbon dioxide is in gaseous form. Normal pressure & temperature for
ammonia is 23 ata and 12oC, while for carbon dioxide normal and maximum
pressure are 1.58 ata/1.68 Ata while temperature is 400C.
PROCESS DESCRIPTION:
Urea production process takes place through the following four main operations.

(1)

UREA SYNTHESIS AND HIGH PRESSURE RECOVERY:


Urea is produced from liquid ammonia and gaseous carbon dioxide. These two
react to form ammonium carbamate, a portion of which dehydrates to form urea
and water. The reactions are as follows:
2NH3 + CO2

NH2COONH4

NH2COONH4

NH2CONH2 + H2O

Hence, overall reaction is,


2 NH3 + CO2

NH2COONH2 + H2O

In reactor (T = 1900C, P = 160 kg/cm2), first reaction occurs rapidly and is


completed, second reaction occurs slowly. The Mole ratio of ammonia to carbon
dioxide is 3.6 to 1. The liquid ammonia coming from B/l is collected in a receiver
tank from where it is drawn and compressed to 23 ata. Part of this ammonia is
sent to MP absorber and remaining is compressed to 240 ata in reciprocating
pumps before entering the reactor, while simultaneously acting as motive fluid for
carbamate ejector.
The liquid mixture of ammonia and carbamate enters the reactor where it reacts
with compressed carbon dioxide. A small amount of air is added to compressors
suction in order to passivate S.S. surfaces protecting them from reagents and
reaction product. Reaction product goes to the steam heated falling film film
stripper, operating at the same pressure as the reactor. Mixture is heated as it
flows down the falling from exchanger. CO2 content of solution is reduced by the
stripping action of ammonia as it boils out of the solution.

Technical Aspects of Fertilizer Production

4.7

INTERNAL AUDIT MANUAL

The carbamate decomposition heat is supplied by 24 ata steam. Overhead gases


from stripper and recovered solution from Medium pressure absorber flow to HP
carbamate condenser from where it is recycled to reactor.

(2)

UREA PURIFICATION AND LOW PRESSURE RECOVERY


Urea purification takes place in two stages at decreasing pressure, in heat
exchangers known as decomposers (because carbamate decomposition takes
place) as follows:
1st stage at 18 Ata pressure
2nd stage at 4.5 Ata pressure.

(3)

UREA CONCENTRATION SECTION


Solution leaving low pressure decomposer bottom with about 72% urea is sent
to the first vacuum concentrator operating at a pressure of 0.3 Ata.
Mixed phase coming out of first vacuum concentration enters the gas liquid
separator, where from the vapours are extracted by the first vacuum system,
while the solution enters 2nd vacuum concentrator operating at a pressure of 0.03
Ata. The concentrators are fed by 4.5 Ata steam.

(4)

UREA PRILLING
Melted urea (99.8%) leaving second vacuum separator is sent to Prilling bucket.
Urea coming out of bucket in the form of drops falls along the prilling tower and
encounters a cold airflow, which causes its solidification.
The solid prills falling to the bottom of prilling tower are sent to belt conveyor.
From there, they are sent to screeners to retain lump only, and then to belt
conveyor, which carries the product to automatic weighing machine and to the
urea storage section.

4.2

AMMONIA PLANT PROCESS Fuel Oil based Plant

4.2.1

Gasification (By Shell partial oxidation)


Preheated fuel oil is burnt with preheated oxygen in the presence of steam in
refractory lined Reactors at 55Kg/cm2. Temperature inside the reactor is
controlled at around 1350C. A gas mixture consisting of mostly of CO & H2 is
produced here. The converted exit gas is wet and contains small quantities of

Technical Aspects of Fertilizer Production

4.8

INTERNAL AUDIT MANUAL

C02, H2S, COS, HCN and Carbon particles.


Heat associated with this raw gas is first utilized to produce high-pressure steam
at 105 ata in Waste Heat Boilers. The gas is then cooled and made free of its
carbon particles by quenching with water.
During quenching Carbon particles agglomerate in bigger particles and they are
separated out from the raw gas with the water phase in Carbon Separators. The
gas is further scrubbed and cooled with water in Carbon Scrubber before it goes
to next unit for the removal of Sulphur compounds.
The Carbon slurry as it is called is obtained from Carbon Separator and led to
slurry tanks for subsequent recovery of carbon. This is done by bringing the
slurry in contact with oil in specially designed equipment known as palletizers
where the oil and carbon particles are made to form pallets. As the best use of
these pallets lies in reusing them as for as possible in the gasification reactor
they are mixed with oil in the mixing trough and the slurry is homogenized in the
homogeniser, the Carbon oil slurry formed is pumped back along with feed stock
fuel oil to the gasification reactors.
Rectisol-I (Desulphurisation by Lurgi's Rectisol Process)
The gas is first cooled to sub zero temp. and then the impurities of sulphurous
gases (H2S/COS) from the raw gas are removed by giving it a counter current
wash with cold methanol at 31oC in a tall tower known as H2S absorber.
The height, the flow rate of the absorbent and the temp. are so chosen that
H2S+COS content in the gas coming out is not more than 0.4ppm.
The pressure of H2S rich methanol drawn out from the bottom of H2S absorber is
released in stages in H2S flash column. By this method, gas is obtained which
contains 50% sulphur compounds. This gas is led to Sulphur Recovery Plant
(SRP) for conversion to element Sulphur. The methanol obtained from the flash
column is further led to H2S hot regenerator for its complete regeneration.
Shift Conversion Section
The Desulphurised gas which comes out at a temp. of -280C (from the top of H2S
absorber) is heated to 350C and sent to this section. The gas is heated up and
saturated with water vapours at 2110C. in humidifier. It is then passed over from
chromium catalyst in Shift Conversion at 3600C. CO in the gas reacts with steam
to produce additional hydrogen and CO2 as per the shift reaction.
CO+H2O ----------- CO2+H2
(In the presence of Iron & Chromium as Catalysts)
As the reaction is exothermic some cooling of gas in between catalyst beds

Technical Aspects of Fertilizer Production

4.9

INTERNAL AUDIT MANUAL

becomes necessary to carry the reaction forward. Finally the gas leaves the CO
Converter at about 4000C and with CO content of 3.5%. The gas is cooled and
dehumidified and sent to ARU where it is utilized as source of heat in Ammonia
Deaerator. The gas is then led to a low-pressure boiler and shift converter
effluent economizer for recovery of heat and is finally cooled by Cooling Water.
The gas is then sent for CO2 removal.
Rectisol-II (Decarbonation by Lurgi's Rectisole Process)
The gas is again cooled to sub zero temp. and led to CO2 absorber where the
rising gas is washed with falling methanol at 70oC. The laiden methanol from the
bottom of CO2 absorber is depressurized in 3 stages and is finally stripped of
CO2 with pure nitrogen in CO2 Regenerator.
CO2 gas is released in the 2nd and 3rd flash stage (1.8 Kg. And 0.8Kg pressure) is
of sufficient purity to be utilized in Urea plant for making of urea. The
decarbonated gas from CO2 absorption tower contains less than 5ppm CO2 and
is then fed to Nitrogen Wash unit for removal of residual impurities (CH4, CO etc.)
The low temp. of the two Rectisol sections are maintained by utilizing liquid
ammonia in 1.
2.
3.
4.
5.

H2S Absorber feed NH3 Chiller,


CO2 Absorber Circulation Chiller,
CO2 Absorber circulation Chiller,
Lean methanol Ammonia Chiller, and
CO2 Regenerator Ammonia Chiller.

The Ammonia evaporated in these chillers is liquefied in the previously


mentioned ARU and is thus made good for reuse in the Chiller.
ASU and NWU:
The air is compressed to a pressure of about 7Kg/Cm2, freed from moisture and
CO2 and led to cold Box in ASU. In the Cold Box of ASU the air is cooled to
about -1600C and led to rectifying column where it is separated into its elements
i.e. CO2 and N2. This is done by rectifying the air in two different pressure stages.
First in the high-pressure stage N2 is obtained at the top as almost pure N2 and
O2 is obtained as oxygen rich liquid. Both streams are led to the low pressurerectifying column (operating at near 0.8 kg. pressure). Pure N2 is obtained from
the top of low pressure column and Oxygen is obtained from the bottom of this
column.
Whereas, oxygen need be only 98.5% pure for its use in the gasification
processes. The N2 must be of high purity. It is produced in 99.99% purity. The
operating temperature in ASU is as low as -1920C.

Technical Aspects of Fertilizer Production

4.10

INTERNAL AUDIT MANUAL

The N2 produced above is compressed in a centrifugal compressor to a pressure


of 45Kg/cm2 liquefied in ASU & brought to wash the process gas in NWU at 1900C.
In NWU also low temperature to the extent of -1900C is applied. The process
parameters and the operation of the plant are so controlled that the impurities
previously mentioned are removed and necessary amount of N2 is mixed with the
process gas so as to obtain a gas mixture of H2 & N2 in 3:1 ratio. The gas mixture
is known as synthesis gas, which is processed further to produce ammonia.
Ammonia Synthesis (Topsoe Process)
Synthesis gas is mixed with the make up gas obtained from product let down
tank and compressed from a pressure of 37Kg./cm2 to about 230Kg/Cm2 by a
steam driven centrifugal compressor. The above gas is also mixed with recycled
gas obtained from Ammonia separator.
The combined gas is heated in Synthesis hot exchanger and led to Radial flow
Type Ammonia Converter. The outlet of Ammonia Converter contains about
16.19% NH3 and is at 4250C. A considerable part of the heat of converter outlet
gas is utilized in heating the BFW in synthesis economizer where the gas is
cooled to 1690C.
The gas is further cooled in a synthesis gas exchanger, Synthesis Water Cooler,
Synthesis Cold Exchanger & finally in Ammonia Cooled Condenser to 100C
before its entry to Ammonia Separator.
The liquid ammonia from the above separator is depressurized to 45Kg./cm2 to
liberate the gases dissolved in product let down Tank. The liquid Ammonia from
product let down tank is delivered at Battery limit of Ammonia Plant at a pressure
of 25 Kg/cm2 & sent to Urea Plant for urea production.
4.3

UREA PLANT PROCESS


Mitsui Toatsu Total Recycle Improved C-process for Panipat and Bathinda
This plant consists of four sections:
1.
2.
3.
4.
5.

Synthesis
Decomposition
Crystallization
Dying & Prilling
Recovery Section

Technical Aspects of Fertilizer Production

4.11

INTERNAL AUDIT MANUAL

4.3.1

Synthesis
In this process, CO2 from Ammonia Plant is compressed by a booster
compressor to 30Kg./cm2, washed with water for removal of traces of methanol &
is compressed further to a pressure of 250Kg/cm2 in a high pressure compressor
(Kobe Compressor). NH3, the other reactant is pumped by Ammonia boost up
pump and subsequently by liquid ammonia feed pump heated to 2500C in liquid
ammonia Pre-heaters and led to urea Synthesis reactor. Recycled Carbonate
from high-pressure absorber cooler is also pumped by recycle solution boost up
pump and recycles solution feed pump to the reactor. Operating Conditions in
this titanium-lined reactor is maintained at 250Kg/cm2 & 2000C.
Reaction products consisting of a mixture of urea, unconverted ammonia
Carbonate, excess ammonia and water are let down through a let down valve at
the top of the reactor into high pressure decomposer

4.3.2

Decomposition and Crystallization


Excess Ammonia and unconverted Carbonate are separated from urea solution
and discharged from the reactor by reduction of pressure and application heat in
3 different stags operating at following pressures:
a)
b)
c)

17 Kg 2.5 Kg 0.3 Kg -

H.P. Decomposer
H.P. Decomposer
Gas separator

Urea solution is gradually concentrated, while excess ammonia & C02 are
recovered in HP absorber in the form of Carbonate solution, which is recycled
back to the reactor as mentioned above.
Urea solution of 71% concentrated from the last of three decomposes is sent to
upper part of Crystalizer operating under vacuum. As the solution flows down,
the crystals are formed and the water is evaporated out. The slurry from the
crystalizer is fed to centrifuge. Urea Crystals separated in the centrifuge are dried
in the fluidizing dryer and transported to Melter on the top of prilling tower for
making prills. Mother Liquor from centrifuge would be sent back to Crystalizer.
4.3.3

Drying & Prilling


Urea Crystals are then melted in Melter by steam and the level of urea solution is
maintained in Head Tank. From the Head Tank the solution is fed to a number of
distributors for prilling. Hot Urea is cooled by fluidising cooler at the base of
prilling tower. Dried & Cooled urea prills are screened and sent to storage
through Weighing Conveyor bells.

Technical Aspects of Fertilizer Production

4.12

INTERNAL AUDIT MANUAL

4.3.4

Recovery section
In this section, the overhead gases from three stages of decomposition would be
absorbed in their respective absorbers. Overhead gases from the top of H.P.
absorber is pure ammonia, it will be condensed in Ammonia condenser and sent
to recovery Ammonia Reservoir. Inert gases purged from Ammonia Condenser
would be scrubbed with water in Ammonia Recovery Absorber. Aqua Ammonia
thus formed will be pumped to the top of HP absorber for scrubbing Ammonia
Vapours.

Urea Plant (Nangal Unit)


The Urea Plant, based upon Tecnimont total recycle improved C process, is laid in
single stream. Its original capacity was 1000 MTPD of Urea. The Urea Plant capacity
has been revamped and its capacity has been raised to 1450 MTPD of Urea by
absorbing Urea Casale High Efficiency Combined (HEC) Technology in Feb, 2001 with
104 M high circular Prilling Tower.
The ammonia obtained from the Ammonia Plant-II is reacted with Carbon dioxide at a
temperature of 1950 C and pressure of 219-220 Kg/cm2 to produce Urea The reacted
effluent is separated from the unconverted carbamate in three pressure stages and two
vacuum stages and the urea solution is gradually concentrated to over 99.5% Urea melt.
The separated carbamate is recovered and recycled into the system. The urea melt is
taken to the top of the 104 metre high prilling tower and sprayed through a rotating Tuttle
bucket against natural counter current draft of air. As the urea melt comes into contact
with air, it solidifies into prills. The prilled urea is collected in a hopper at the bottom of
the tower and transported through a conveyor belt to the bagging plant or silo.

Technical Aspects of Fertilizer Production

4.13

INTERNAL AUDIT MANUAL

CHAPTER 5

MANAGEMENT AUDIT

5.1

GENERAL PRINCIPLES
Management audit requires an interdisciplinary approach since it involves a
review of all aspects of the management function. It should be conducted by a
team of experts because the variety of skills required cannot be mustered by
anyone individual. This team may consist of accountant, operations research
specialist, industrial engineer, and social scientist. Each member of the team
should have an analytical mind and an ability to look at a management function
from the point of view of the organisation as a whole.
The members of the management audit team should have proper training. They
should have an expert knowledge of the science of management. They should
also be acquainted with salient features of various functional areas. Experience
of actual work situations would be useful.
To conduct its work properly, the management audit team should have a clearly
defined authority from the management. Management audit cannot be effective
unless it is fully supported by the top management.
In the process of conducting a review of the various activities in an organisation,
a management auditor can adapt and use a number of techniques of verificatory
audit. However, a management auditor may not be concerned much with
techniques like recomputations, retracing book-keeping procedures, external
confirmation of balances, and comparison of records with supporting documents.
This is because the objectives of a management audit are much different from
the objectives of a verificatory audit. The management auditor is primarily
concerned with the appraisal of performances in the various areas of
management. Hence, he does not look for evidence to support definite
accounting figures. Instead, fie attempts to evaluate the processes and functions
of management. In doing so, he can use the following techniques effectively.

Management Audit

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INTERNAL AUDIT MANUAL

Inquiry
A management auditor may collect most of the evidence required by him by
asking relevant questions and obtaining pertinent answers to these questions.
Proper framing of questionnaires is one of the first steps in conducting
management audit. The main value of a questionnaire lies in the fact that a good
question is often a key to uncover a hidden problem. Some of the questions that
the management auditor can ask in different areas are given by way of a
questionnaire. It must be emphasised that these questions just illustrate the
process of management audit. Raising a proper question is often a matter of
personal judgement in a specific situation.
Examination
In many cases, the management auditor may have to conduct an examination of
documents and records. This may be necessary in case his inquiries reveal
certain information that needs corroboration or that suffers from internal
contradictions.
Confirmation
A management auditor may also obtain written or oral statements from various
persons in order to confirm the information obtained by him.
Observation of Pertinent Activities and Conditions
In many cases, the management auditor may have to rely upon his own
observation of pertinent activities and conditions in the organisation. A
management auditor may prepare organisational charts and flow charts as a
result of his observation of pertinent activities and conditions.
Correlation of Information
The information collected through the various techniques has to be correlated so
that proper conclusions can be drawn. The management auditor has to compare
the actual performances with the standards laid down or with the performances
in the previous years. A good deal of skill is required in correlating the relevant
information so as to reach meaningful conclusions.
5.2

PLANNING & REVIEW OF PROCESS MANAGEMENT


Planning
(1)

Does the organisation have a system of long range and short range
planning? Is the system formalised?

(2)

Is planning viewed as the starting point of management functions? Is

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5. 2

INTERNAL AUDIT MANUAL

planning related to the objectives of the organisation?


(3)

What is the degree of involvement of the various levels of management in


the planning process?

(4)

Are operating plans prepared periodically? Are these expressed in


quantitative terms for each area of operation?

(5)

How are the budgets framed? Is budgeting a coordinated activity?

(6)

How are budget estimates developed?

(7)

Are budget estimates reviewed in depth by a high level committee?

(8)

Are budgets formulated, scrutinised, and approved sufficiently before the


budget period?

(9)

Are budgets conveyed to various operational managers in time? Are they


easily understandable by them?

(10)

How far are the functional managers committed to the targets set up in
the budgets?

Organisation
(1)

Does the company have a well-defined organisational structure? Has an


organisation chart been drawn?

(2)

What are the various levels in the organisational hierarchy? Are the lines
of authority and areas of responsibility clear? Are there any positions
where a person reports to two or more authorities?

(3)

Are the principles of formal organisation being followed?

(4)

What is the managerial philosophy in the organisation? Is the decisionmaking centralised or is it spread over the various levels of the
organisation?

(5)

What is the usual span of supervision?

(6)

Are the informal relationships and pockets of influence perceived and


used to further the objectives of the organisation?

(7)

What is the nature of superior-subordinate relationships in general?

(8)

How do various managers view people at work? Are the employees


subjected to dose supervision and detailed directions?

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5.3

5.4

(9)

Is there a system of motivation? Are the rewards and punishments linked


with performance?

(10)

Does the work distribution take into account the modem theories of
organisation? Is there too much of specialisation?

CONTROLS
(1)

What is the philosophy of control? Are controls close, detailed and


frequent or broad and periodic?

(2)

Is there a list of active and identifiable controls? Are the controls physical
or monetary or both?

(3)

Are controls related to the plans?

(4)

What are the main parameters of control? Are these defined precisely for
each responsibility area?

(5)

Do the controls highlight the variances between the actual performances


and the targets? Is it possible to have management by exception?

(6)

Are controls acceptable to the various levels of management?

(7)

Is there a system of rewards and punishments linked with the controls?

(8)

Has the cost of each control been worked out? Is it ensured that the cost
does not exceed the benefits?

(9)

Are controls reviewed periodically? Are inactive controls eliminated?


What is the procedure for altering or terminating controls? .

(10)

What is the detailed system of operational controls over various assets


and transactions? More specifically, what are the types of operational
controls over cash, bad debts, fixed assets, pay roll, inventory levels,
research and development, overtime, tax payments, inventory
obsolescence, and connection of sundry debtors?

SYSTEMS AND PROCEDURES


(1)

Who is responsible for designing the systems? If there is a separate


department, is it adequately manned with qualified people?

(2)

Are there proper descriptions, flow charts, and manuals showing various
systems?

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5.5

(3)

Are the systems related to the changing technology and environment of


the business? Is there a periodic review of the systems to modify them in
this context?

(4)

While recommending a new system, are all the relevant factors taken into
account? Are the new systems properly explained to the persons
concerned before they are put into operation? What other steps are taken
to meet the usual resistance to a new system?

(5)

Is there a periodic review of the costs and the related benefits of a


particular system?

(6)

What are the various forms in use? Are they designed to give proper
information with minimum effort?

(7)

What are the steps taken to reduce paper work?

(8)

Is the routing of various forms and statements periodically reviewed,


keeping in view the need for in formation at the various levels and the
possibility of delay?

(9)

Are the filing and storage procedures for various documents properly laid
down? Is there a well defined system of automatic disposal of
documents?

(10)

Does the organisation have computerised information systems? In


establishing such systems, has their cost-effectiveness and the need for
creation of the necessary knowledge and motivation levels in the
organisation been considered? Also, has there been a review of the flow
of transactions, nature of documents and manner of processing so as to
eliminate documents, procedures and controls, which are not required or
are not cost-effective in the computerised systems?

(11)

Is there a period review of the efficacy of computerised systems in the


context of developments in technology? Is there a constant upgradation
of both hardware and software? .

REVIEW OF FUNCTIONAL AREAS


Having reviewed the management process, the management audit team should
review the various functional areas to assess their role in achieving the overall
goals of the organisation. Some of the questions that can be raised in respect of
each functional area are listed below. It should be reiterated that these questions
are merely illustrative in nature.

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5.5.1

Purchase Management
The main objective of purchase management is to procure raw materials,
supplies, and stores of the requisite quality at a reasonable cost and at the right
time. The following questions can be asked to evaluate whether or not these
objectives are being achieved.
(1)

How is the purchase function organised? Are there separate purchase


departments for various units or is purchasing a centralised function?

(2)

What is the purchase policy? Does it take into account the uncertainties in
availability of materials consequent to the changes in market conditions?

(3)

Are purchase requirements related to production schedules and


dependent upon level of inventories?

(4)

Has the organisation developed links with suppliers to ensure regular and
dependable supplies?

(5)

What is the system of purchase authorisation?

(6)

How are the suppliers selected? Is there a list of suppliers with whom
running contracts have been executed?

(7)

Is there a system of eliminating unreliable suppliers?

(8)

What is the system of executing emergency purchases?

(9)

Is there an information system whereby the latest market information


regarding new products, spareparts, and machinery items useful for the
organisation is automatically collected and considered?

(10)

Are studies conducted periodically to analyse the price trends in order to


form an opinion about the future prices of major raw materials in use?

(11)

Are regular comparisons made between the average purchase prices


paid by the organisation and the average market prices?

(12)

What are the built -in controls against misutilisation of purchasing


powers?

(13)

How effective is the system of follow-up of orders?

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5.5.2

Inventory Management
Inventory management aims at keeping an adequate stock of raw materials and
other items at the minimum carrying cost. The following questions may be asked
to bring out how far this objective is being achieved.
(1)

How is inventory management organised? Is there a separate department


looking after this function or is it a part of production or purchase
department?

(2)

Are the storekeepers well equipped to grasp the fundamentals of the


inventory control system and to apply it intelligently in practice?

(3)

Is there a well-defined policy regarding inventories? Are inventory levels


worked out keeping in view factors like availability of funds, future price
projections, consumption rates, etc.?

(4)

What is the system of maintaining stores records? Are perpetual


inventory records maintained? Are the records up-to-date?

(5)

What is the system of receipt and inspection of stores?

(6)

What is the system of physical stocktaking? Are the physical stocks


verified on a continuing basis by the internal audit department? If periodic
stocktaking is conducted, are the cut-off arrangements effective? How are
the discrepancies between actual stocks and book stocks dealt with?

(7)

Is there a system of ABC analysis so that management by exception is


possible?

(8)

Is there adequate control over obsolescence of materials? Are stocks


reviewed periodically to identify slow-moving, dormant, or obsolete items?

(9)

How is the investment in various items of stores controlled?

(10)

What is the system of material issues? Is the system followed


consistently?

(11)

How effective is the management information system regarding


inventories?

(12)

Are actual losses during storage computed periodically and compared


with the standards? What is the system regarding writing-off of stocks?

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5.5.3

Production Management
The main objective of production management is to turn out finished goods of
requisite quality by making an optimum use of men, machines, materials and
services. The management auditor can evaluate this function by asking the
following questions.

5.5.4

(1)

Is there an adequate system of production planning? Are production


schedules drawn up to optimise various factors like plant capacity, raw
materials, skilled labour, availability of funds, machine hours, and
availability of power?

(2)

Is there a close coordination with sales department to ensure


acceptability of the finished products by customers? How effective is the
quality control on production? How are the customer complaints
regarding manufacturing defects, etc., dealt with?

(3)

Are the inputs and outputs of each process or department linked up


periodically? Are the actual in put-output ratios compared with the
standard ratios?

(4)

What is the system of reviewing delays in production?

(5)

What is the frequency of accidents? Are safety measures adequate?

(6)

Is there a system of incentives linked up with the production output? Have


the incentive systems been designed on the basis of scientific studies?

(7)

How effective is the control over idle time?

(8)

Is each production process reviewed periodically to explore the possibility


of having more efficient production methods?

(9)

Are the performances of equipment/machinery appraised periodically?


Have standard efficiency factors been worked out? Are they compared
with actual efficiency ratios?

(10)

How effective is the management information system regarding the


production function as a whole?

Marketing Management
The main objective of this function is to create and develop customers and retain
the position of the organisation in the market. The following questions would be
of help in evaluating the marketing management.

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INTERNAL AUDIT MANUAL

(1)

How is the marketing department organised? Is it adequately staffed?


Have specific responsibilities been fixed for development of products in
various areas?

(2)

Are market forecasts developed regularly? What is the method of


preparing them? Are they reliable?

(3)

How does the growth in sales during the last five years or so compare
with the growth in the sales of the industry as a whole?

(4)

What are the steps taken to increase the market share of the
organisation?

(5)

Is the system of appraising the performance of marketing divisions and


salesmen objective and fair? Is performance linked with rewards? Does
the system motivate the salesmen to give their best performance?

(6)

Are sales budgets realistic? Do they show detailed physical targets for
each sales office?

(7)

What controls exist on the expenses incurred by the salesmen?

(8)

What is the percentage of sales returns and allowances? Has this


percentage declined over the years?

(9)

How do marketing managers keep in touch with the changing conditions


in the market? Are consumer surveys conducted regularly?

(10)

Is there a constant review of the status of the order book?

(11)

Is there a proper control over stocks of finished goods? Are slow-moving


stocks reviewed periodically?

(12)

Is there a proper budget for advertising and sales promotion?

(13)

Are the advertising campaigns well planned? How is their effectiveness


judged?

(14)

Has the credit policy been framed after considering factors like growth in
sales, availability of finance and the nature of customers? Is it reviewed
periodically?

(15)

What are the overall controls on outstandings? Are they analysed


periodically?

(16)

Are ageing schedules prepared regularly? What is the procedure of


writing-off bad debts?

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INTERNAL AUDIT MANUAL

5.5.5

(17)

Are distribution channels properly selected? Are the techniques of


operations research, etc., being used in distributing products to optimise
costs?

(18)

Is there an efficient system of after-sales service? What is the frequency


of customer complaints? How are these complaints dealt with?

Personnel Management
The main objective of this function is to create such conditions in the
organisation that the employees can give their best performance. The personnel
manager has to assess manpower requirements, select, recruit, train and
develop staff, ensure industrial peace, redress grievances of the workers,
maintain discipline, keep various personnel records, and negotiate wage
settlements. The performance of the personnel function may broadly be
reviewed by asking the following questions.
(1)

What is the organisation of the personnel department? Is it adequately


staffed? What is the status of the personnel manager in the
organisational hierarchy?

(2)

What is the personnel policy? Is the organisation production-oriented or


people-oriented? How does the top management look at its employees.

(3)

How are the future manpower requirements assessed? Do long-term


projections relate manpower with the estimated levels of activity? Are
manpower requirements defined clearly in respect of different kinds of
skills required?

(4)

What is the recruitment policy? Are qualifications for each job specified
clearly? Is the recruitment procedure well-designed?

(5)

What is the internal promotion policy? Are the employees given a chance
to grow in the organisation itself through an objective assessment of their
qualifications and performance?

(6)

How does the organisation scout for talent at both the managerial and
other levels? Does it regularly keep in touch with institutions, which
develop technical, managerial and other skills?

(7)

Are training programmes conducted regularly? Are they effective in


updating the knowledge and skills of the employees? Are the
opportunities for training adequate? Are the employees seconded to
outside programmes?

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INTERNAL AUDIT MANUAL

5.5.6

(8)

Are the training methods modern and scientific? Are they suited to the
needs of the organisation?

(9)

Are proper records maintained for all workers? Is timekeeping effective?

(10)

What is the procedure for dealing with the grievances of the employees?
Are they encouraged to speak to the personnel manager?

(11)

How is discipline maintained? How are the erring workers dealt with? Is
there a uniform and consistent policy of dealing with indiscipline and
misconduct on the part of all the employees?

(12)

Are various employee costs properly analysed? Is the cost of labour


turnover and absenteeism worked out periodically? Are attempts made to
reduce labour turnover to an optimum level?

(13)

How effectively are the labour welfare activities organised?

(14)

Is there a mechanism for dealing with the demands of workers? Is


legitimate union activity encouraged?

(15)

What is the extent of man-hours lost due to strikes and lockouts? How do
these losses compare with man-hours lost by similar organisations in the
area?

Accounting and Finance


The main objectives of this function are to provide economic information for
decision-making at the various levels of management, to account for assets and
liabilities, and to manage the sources and applications of funds. An appraisal of
this function may be attempted through the questions given below:
(1)

What is the role of accounting and finance department in the overall


management structure? Is it properly staffed with qualified people? What
is its relationship with other departments?

(2)

Does the organisation have a proper system of financial accounts and


cost accounts? Are the two integrated or separate?

(3)

Is the financial accounting system efficient? How regularly is the trial


balance prepared? How much time does it take to prepare the final
accounts after the annual closing?

(4)

How effective are the internal checks in the accounting department?

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INTERNAL AUDIT MANUAL

Have the systems and procedures been designed to minimise the


possibility of errors, frauds and misappropriations? What are the controls
on the flow of cash, goods, and documents?
(5)

Do manuals and flow charts exist describing the various accounting


procedures? Are these reviewed periodically?

(6)

Does an internal audit department exist to examine various transactions


and procedures and to ensure that actual decisions adhere to the
managerial policy? How are the reports of internal auditors dealt with?

(7)

Is the costing system suited to the needs of the organisation?

(8)

Have standard costs been determined? Are they developed on the basis
of time, motion and work studies?

(9)

Are cost statements prepared in time? Are they geared to meet the
requirements of the management? Are they reviewed periodically?

(10)

Is there a system of budgetary control? How are the variances between


actual figures and budgets dealt with?

(11)

What are the bases of allocation, apportionment and absorption of


overheads? Are they fair and objective? '

(12)

Are costs classified by their nature? Does the cost department use the
technique of marginal costing for profit planning?

(13)

Are the future requirements of funds estimated periodically? Are the


projections related to the planned levels of activity?

(14)

Is the capital structure designed keeping cost and risk factors in mind?

(15)

What is the cost of capital? How does it compare with that of other similar
units?

(16)

Is a detailed financial analysis conducted before funds are committed for


capital expenditure?

(17)

Are working capital requirements properly analysed? Are they related to


the changes in the level of activity?

(18)

Are the policies regarding credit, stocks, cash, etc., reviewed periodically
to keep working capital at the optimum level?

(19)

How is working capital financed?

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5. 12

INTERNAL AUDIT MANUAL

(20)

How is cash management organised? Is it centralised? How do various


segments of the organisation receive adequate cash?

(21)

Is a constant watch kept on the solvency and liquidity of the organisation?


Are ratios computed periodically to ensure that the organisation earns an
optimum return on investment while maintaining a sound financial health?

(22)

How does the return on investment of the organisation compare with that
of other similar organisations?

(23)

What is the system of financial control? Are the various divisions


appraised on the basis of their financial results?

Management Audit

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INTERNAL AUDIT MANUAL

CHAPTER 6

PLANNING, EXECUTION & CONDUCT OF INTERNAL AUIDT

6.1

OVERVIEW
Proper planning helps to ensure that auditors and management share the same
agenda and that each engagement adds value to the organization. Adequate
planning ensures that appropriate attention is devoted to significant areas of
audit, potential problems are identified, and that the skills and time of the staff are
appropriately utilised. Planning also ensures that the work is carried out in
accordance with the applicable pronouncements of the Institute of Chartered
Accountants of India.
To be effective, internal audit function is to be properly planned and its coverage
controlled. Planning is a continuous exercise. A plan once prepared should be
continuously reviewed by the internal auditor to identify any modifications to the
plan required to bring the same in line with the changes, if any, in the audit
environment. However, any such modifications to the internal audit plan, if major,
should be done with the approval of the Audit Committee.

6.2

OBJECTIVE OF PLANNING
The overall objectives of an internal audit:

to suggest improvements to the functioning of the entity,

to strengthen the overall governance mechanism of the entity, including its


strategic risk management as well as internal control system

The internal audit plan should be comprehensive enough to ensure that it helps
in achieving the above overall objectives of an internal audit. The internal audit
plan should 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. In case the entire internal audit or a particular
internal audit engagement has been outsourced, the internal auditor should also
ensure that the plan is consistent with the terms of the engagement.

Planning & Execution

6. 1

INTERNAL AUDIT MANUAL

6.3

SCOPE OF PLANNING
1.

Internal audit plan should cover areas such as:

obtaining the knowledge of the entitys accounting and internal control


systems and policies

determining the effectiveness of the internal control procedures


adopted by the entity

determining the nature, timing and extent of procedures to be


performed

identifying the activities warranting special focus

identifying and allocating staff to each of the above activities

setting the time budget for each of the above activities

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.

Factors affecting the scope of an internal audit plan include:

terms of the engagement

nature of accounting system manual or IT - based and the degree of


reliance placed by the auditor on the same

accounting policies adopted by the entity

identification of areas of audit requiring special attention

establishing materiality thresholds in respect of various areas of audit


especially, those areas requiring special attention

nature and extent of audit evidence to be obtained

assigning audit staff and supervising, directing, coordinating and


reviewing their work

Planning & Execution

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INTERNAL AUDIT MANUAL

6.4

requirements of any applicable pronouncement of the Institute of


Chartered Accountants of India

statutory or regulatory framework, in which the entity operates.

ANNUAL INTERNAL AUDIT PLAN


The annual audit plan is a prioritised list of audit activities to be conducted at
various locations in the ensuing financial year. This plan enables the Internal
Audit function to ensure:


Audit coverage is appropriate and adequate, given the business risks facing
NFL

Optimum utilisation of IA personnel is made, given the dominant objective of


balancing their productive hours and training and development needs.

The annual plan shall be prepared by completing the following activities:

Determining the scope of work

This includes a detailed description of the controls and associated risks that will
be covered/are proposed for coverage in the audit during the financial year
having regard to the awareness and analysis of risk by the internal audit at the
Units/Offices.

Scheduling Internal Audit Executives (Technical/Non-Technical)

The extent of coverage by Internal Audit, among other things also depends on
the skills set of the auditors. Further, balancing of work areas between auditors
allowing them a mix of familiar areas to build expertise and also new areas to
develop knowledge and skills is required. Accordingly scheduling of audit
personnel should address these requirements where this is practicable and
feasible e.g. at some plants due to staff resource constraints there may be a
single technical internal auditor as well as a single non-technical auditor in which
case scheduling may not be possible.
After giving due consideration to the above the internal audit plan will be drawn
up annually well before the close of the financial year for the next financial year,
broadly covering the areas short-listed for the year and the tentative timing of
fieldwork.
The Internal Audit plan highlighting areas/functions to be taken up for audit will
be divided into quarterly programmes for the quarters ending June, September,

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INTERNAL AUDIT MANUAL

December and March of the coming financial year at the Corporate Office (based
on feedback and inputs received form the plants/units/offices) for approval first by
the functional head of IA (Director Finance) and then by the Audit Committee.
The annual plan/program will outline the broad scope of audit covering financial
as well as operational/technical areas on the basis of feed back received from
the head of Internal Audit Cell of different Units/Offices of the Company. At this
phase the initial audit objectives and the requisite audit methodology to satisfy
those objectives should also be developed with consideration for any concerns
expressed by the Audit Committee of the Board, the CMD/Director Finance and
other relevant members of management.
After obtaining the approval of the above audit/plan/program by the Audit
Committee, the same shall be forwarded to the Units in the 1st week of April for
compliance during the year.
In addition to the above Internal Audit program, any special audit as and when
entrusted by CMD/Audit Committee/ Director (Finance)/Head of Unit shall also be
taken up by the Internal Audit cells located in the Units/Corporate Office.

6.5

PREPARATION FOR AUDIT


Audit programme shall be intimated to the auditee department concerned in
advance before audit is actually taken up, except in case of special audits
desired by the Management. The convenience of the auditee department should
be taken into consideration. It would, therefore, be advisable to discuss the audit
plan with the Head of Department concerned and timing of audit decided
mutually before issuing a formal notice. This would facilitate the acceptance of
audit and ensure cooperation from the auditee department.
Before commencing audit, each member of the audit party should acquaint
himself thoroughly with the objectives, functions, system and procedures of the
department to be audited, the previous audit reports issued, replies given thereto
by the department and also the results of subsequent follow-up. Points requiring
verification or which are still outstanding should be noted. The intention of doing
so is that at the commencement of the audit work, auditor should have a clear
idea as to the various activities, records etc. to be audited and the extent of
check to be exercised. The Head of Internal Audit should interact with the audit
team to give requisite inputs, direction and guidance in the beginning itself.
In preparing the detailed programme of audit of each department/section, based
on the annual audit plan, care shall be taken to ensure that any of the routine
audit processes, which the statutory auditors are to perform, is not normally
duplicated.

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INTERNAL AUDIT MANUAL

The extent and coverage of audit shall depend upon the level of soundness of
systems and procedures (as well as internal checks and controls built into them),
prevalent in the auditee department. However, the Head of Internal Audit should
discuss this aspect with the audit team during preparation for audit.
The organization chart of the department/section to be audited should also be
studied to ascertain the authority and responsibilities of the various executives in
the department. The audit team should also familiarize themselves with the
current procedures followed in the department. This will help in refining/updating
the programme of audit of the department including the extent of various checks
to be carried out and identifying the areas, which are comparatively weak from an
internal control standpoint and hence require more intensive checking.
6.6

PROGRESS REVIEW
The Head of Internal Audit of respective plant/unit shall submit a monthly
progress report and consolidated quarterly report to the Head of Internal Audit
(IA) / CO indicating the progress achieved on fulfilment of the audit programme in
the previous quarter. These report shall be submitted by 10th of the following
month and shall indicate:
(a)
(b)
(c)
(d)
(e)
(f)

Number of audits in progress at the beginning of the quarter.


Number of audits planned for the quarter.
Total (a+b)
Number of audits completed during the quarter
Number of audits in progress at the close of the quarter.
Number of audits planned, but not taken up i.e. f= c-(d+e)

This report should highlight the reasons for not taking up the planned audits and
future action plan for conducting the same. The status of issuing the reports in
respect of completed audits should also be brought out.
The Corporate Internal Audit (apart from the audit work at Corporate Office)
should monitor the activities of the plant/unit level Internal Audit Groups. During
the course of their review, the Corporate Internal Audit would also take stock of
compliance with the approved annual plan/programme and discuss deviations, if
any, with the Head of Internal Audit of the Unit.
6.7

INTERNAL AUDIT WORKPAPERS


The working papers containing the records of work done, facts verified and the
supporting details collected with source reference should be given due
importance and arranged in a logical order/sequence keeping in view the
necessity of adequate audit trail. These working papers should form the basis of

Planning & Execution

6. 5

INTERNAL AUDIT MANUAL

conclusions and opinions of the auditors while drafting the audit report besides
being helpful in;


Providing support to audit findings for discussions with operating personnel of


auditee departments,

Acting as a ready source of reference when the audit conclusions and


recommendations are not accepted by those who are appraised by the
auditor, and

Providing background and reference data for subsequent review.

In the performance of audit work internal auditors should collect, analyse,


interpret, and document information to support audit results. The Internal
Auditors work papers will provide the principal evidence that the audit was
performed professionally.
The term work papers includes all documents and papers collected or prepared
during a given audit. Work papers provide the basis and support for the
conclusions reached by the Internal Auditor. All relevant work papers prepared
during a review will be preserved and included in the work paper files maintained
by the Internal Auditor.
I. Characteristics of Work papers
Work papers include the evidential matter that links fieldwork and the Final Audit
Report. Work papers will contain the necessary evidence to support the findings,
judgments, and conclusions in the Final Audit Report.
(1) Sufficiency
Work papers will always be complete and accurate, and include adequate data to
precisely indicate the audit work performed. Work papers will also provide
support for findings, judgments, and the conclusions reached by the Internal
Auditor as a result of the internal audit process. Work papers will delineate
sufficient data so that following can easily verified that:




The audit assignment has been properly planned;


The auditees system of internal control has been reviewed and evaluated in
determining the extent of the audit tests undertaken; and
Appropriate audit tests were performed, and the appropriate auditing
procedures were followed.

(2) Competency
Work papers will include only high quality information and evidence. Accordingly,
the Internal Auditor will take all necessary steps to help ensure that the
information contained therein is reliable.

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(3) Relevance
The information contained in the work papers will be restricted to matters that are
materially important and relevant to the audit objectives.
(4) Usefulness
The evidence retained in the work papers must be useful in helping the company
meet its goals.
(5) Clarity and Understandability
Work papers will be understandable without detailed supplementary oral
explanations. Work papers will also be complete and concise.
(6) Principles of Documentation


Work papers will substantiate everything included in the Final Audit Report.

A work paper or series of work papers will be prepared for each step in the
audit program.

Work papers will clearly identify the documents or series of documents


examined. It is not necessary to include a copy of each document examined,
although in some cases, efficiency may result by utilizing copies of documents.
II. Indexing and Cross-Referencing Work papers
Work papers shall be adequately indexed and cross-referenced.
III. Standards for Work papers
All work papers prepared by the Internal Auditor shall be prepared in good form
with proper attention to layout, design, and legibility, with complete headings,
explanations of sources, and verification of work performed. The Internal Auditor
will generally observe the following rules when preparing work papers:

Every work paper will be properly identified. The work paper heading will include
the name of the auditee, a description of the information presented, and the
period covered or applicable date.

A separate work paper will be used for each audit program step.

Work papers will be linked to the audit program.

The source of the data presented on each work paper will be clearly stated so as
to leave no doubt as to the source of the information.

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The nature of verification work performed by the Internal Auditor will be indicated
on each work paper. A review of paid invoices, for example, might be
supplemented by the testing of related purchase orders to substantiate the
authenticity of the invoices examined; a description of this verification procedure
will be included in the work papers.

The extent and scope of sampling will be clearly stated at every phase of the
audit to which it is applied; accordingly, the work papers will disclose the
character and extent of all sampling methods utilized.
IV. Audit Evidence
In performing internal audits the Internal Auditor generally gathers evidence from
internal sources, which may require verification from external sources. Some of
the internal sources of audit evidence include books of account, ledgers (primary
and subsidiary/sub), memoranda records, minutes of meetings, documents that
support transactions e.g. Material Receiving and Inspection Notes, and
management letters. When considered necessary, information gathered from
these sources may be verified from external sources that include confirmations of
bank balances, accounts receivable, investment balances, assets held by third
parties, long-term debt, and other assets and liabilities.
All of the information gathered to support the internal audit effort, and the
conclusions drawn there from, should be considered audit evidence, which may
be categorized as analytical, documentary, physical, or testimonial. These terms
are described below;
(1) Analytical Evidence
Analytical evidence includes computations, comparisons, reasoning, and the
separation of information into components.
(2) Documentary Evidence
Documentary evidence consists of letters, contracts, accounting records,
purchase orders, invoices, etc.
(3) Physical Evidence
Physical evidence is obtained by direct inspection or observation of (1) activities,
(2) property, or (3) events. It may take the form of memoranda, photographs,
charts, or other summary documentation, which recapitulates the subject matter
of the inspection.
(4) Testimonial Evidence
Testimonial evidence is obtained from others through statements received in
response to inquiries or through interviews. The statements critical to the audit
will be corroborated through independent verification when feasible.

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6.8

RETENTION POLICY & CONTROL OF WORK PRODUCTS


All work papers pertaining to an audit belong to and are to be kept in safe
custody by Internal Audit Department. These work papers are considered
confidential since they often contain sensitive information that must be protected
from unauthorised use or review.
Work papers in process need also to be controlled and preserved. While
conducting fieldwork away from the office, the auditors should control the work
papers to ensure that information is neither removed, nor substituted / altered.
The internal work products (reports & work papers) will be retained in the manner
described in Appendix - 2 Internal Audit Work Product Retention.
PURPOSE OF SAMPLING
Sampling will be used by the Internal Auditor in his work. Samples are portions of
a population that are used to represent the population. Samples are very useful
in obtaining information about a population.
There are many types of samples; however, samples can be grouped into two
main categories, judgmental samples and statistical samples.
A. Judgmental Sampling
Judgmental sampling occupies a prominent place in the Internal Auditors sample
selection and evaluation procedures. Judgmental sampling may be used to
select examples of deficiencies to support a hypothesis that a given system is
weak. This is a valid use of judgmental sampling. But it will not be used to
estimate the number or value of such items in the total population because not
every item in the population was given an equal chance of selection.
Judgmental sampling will in some cases be used to provide the Internal Auditor
with clues as to whether to proceed with a statistical sample. If the Internal
Auditor encounters a well-designed and well-executed internal control system,
good management, well-trained employees, and a feedback mechanism that
highlights errors, it may be unnecessary to spend a great deal of time performing
extensive transaction tests. A small sample selected at random to obtain some
reasonable representation of the population may suffice. If no errors are found,
the Internal Auditor may reasonably determine that he sees no basis for
examining the population further or for suspecting any material error.
B. Statistical Sampling
The main advantages of statistical (probability) sampling over judgmental
sampling are based on the fact that there is a significant body of accepted theory

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to support and explain statistical sampling. Because strong theoretical support


exists, the use of statistical sampling is widely accepted.
One of the attractive aspects of probability sampling is that it is possible to
measure the reliability of the estimates computed from the sample results. The
ability to measure reliability furnishes additional desirable features for statistical
sampling. There are several types of statistical sampling.
(1) Random Number Sampling
Random number sampling is generally considered the most likely to result in a
random sample. It makes use of a computerized random number generator to
select items to be sampled.
(2) Interval Sampling
Interval sampling simply means selecting items at intervals; it is a relatively
simple sampling method. When using interval sampling, every item must have an
equal chance of being selected. Interval sampling is particularly useful when the
records are in manual form, the items are unnumbered, or the population
contains some items that are not applicable to the audit purpose.
(3) Stratified Sampling
In stratified sampling the Internal Auditor will separate the population into two or
more strata; i.e., separate populations, and then takes samples from each.
Typically significant or expensive items will be set aside in one strata for
complete examination, and sampling will generally be used for the remaining
strata.
In every population, the Internal Auditor will look for wide variations in size,
amount, and characteristics of the items making up the population. When such
wide variations are found, the Internal Auditor will consider stratification. Stratified
sampling arranges the population so as to provide greater sampling efficiency.
Properly used, stratified sampling will result in a smaller variance within a given
sample size than simple random sampling.
(4) Cluster Sampling
When documents and records are so scattered or dispersed that it is too time
consuming to use simple random number sampling, the Internal Auditor may use
the technique of cluster sampling. Cluster sampling is what the name implies;
clusters of items are selected at random, then the clusters are either examined in
their entirety or are themselves sampled.
Clusters may be based on natural separations; e.g., all documents in a file
cabinet drawer may be examined. Clusters may also be artificial.
(5) Dollar Unit Sampling
The dollar unit sampling technique selects records according to monetary units
rather than physical attributes. The advantages of dollar unit sampling are

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smaller sample sizes, an almost infinite degree of stratification and the greatly
increased likelihood of finding large but infrequent errors.
(6) The Sample Size
Sample sizes can be determined judgmentally or statistically. The decision will be
made based on the audit objectives. In many audit situations a large audit
sample or a statistically determined sample size is unnecessary. Where the
Internal Auditor has determined the system of internal control to be strong, it may
be appropriate to sample only a few handpicked items to determine that the
system is actually functioning properly.
Assuming the system functions as planned, it can then be declared that the
system does indeed have the purported control points, and they are in fact
working. If a particular system is found satisfactory from an internal control
standpoint further sampling may not be necessary or appropriate.

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CHAPTER 7

INTERNAL AUDIT REPORT & FOLLOW UP

7.1

REPORTING OVERVIEW
An internal audit report covers the findings of the auditor along with the
conclusions, implications and recommendations arrived at during the course of
audit. A significant element in an internal audit report is its capacity to motivate
and encourage management action to remove shortcomings/weaknesses,
improve systems and procedures and find viable solutions to achieve favourable
outcomes and improvement in performance.
The internal auditors report should contain a clear written expression of
significant observations, suggestions / recommendations and managements
response based on the policies, processes, risks, controls and transaction
processing taken as a whole. It should avoid faultfinding and should offer
constructive and credible and persuasive suggestions/recommendations for
solving problems or for reducing cost/wastages or for improving productivity and
profitability.
A good internal audit report should fulfil the following attributes;









7.2

Clarity, Accuracy and Objectivity


Consistency
Conciseness
Good construction
Timeliness
Un-ambiguity
Compliance with generally accepted audit procedures in India, as applicable
Capability to motivate and encourage remedial management action

ELEMENTS OF INTERNAL AUDIT REPORTS


While recording the findings, the internal auditor should lay emphasis on the
following:

weaknesses in internal controls calling


enhance/strengthen controls or to avoid loss;

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for

corrective

action

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7.3

deviations from budgets and established systems and procedures;

in the recommendations, the internal auditor must comment on the


effectiveness of the existing internal controls and clearly indicate what should
be done to improve the existing controls and operating efficiency either by
amending the existing controls / procedures, strengthening existing controls,
introducing new controls, making changes in the organisational or
recommending a review by a specialized agency etc.

PRELIMINARY AUDIT FINDINGS


Preliminary audit findings are written statements of conditions noted during the
audit that require corrective action and a response by the auditee.
Types of Findings - Deficiencies and findings noted during the audit may be
classified as reportable, non-reportable, or de minimus (level of risk which is too
small to be concerned with). Reportable findings will be included in the Final
Audit Report. Non-reportable findings will not be included in the Final Audit
Report, but may be discussed briefly during the Closing Conference/discussions
with the auditee department. It should be noted that the category of any
deficiency or finding may change as additional information becomes available.
Non-reportable findings refer to findings of the following nature:


Observations of routine nature for record purpose only and where no


discrepancy is observed e.g. verification of cash.

Observations where auditee has accepted and taken action (which are not
material in nature) like wrong code of accounts, non-recovery from
employees etc.

The head of internal audit will have the discretion to consider whether to include
any non-reportable findings in the final audit report or not.
Processing of Findings - As deficiencies are identified during the audit, they will
be discussed with the auditee to verify the facts before any audit reports are
drafted. If these discussions confirm that a deficiency exists, the Internal Auditor
will draft preliminary findings. All findings will be considered preliminary unless
(and until) they are included in the Final Audit Report.
7.4

PROCEDURE FOR ISSUING INTERNAL AUDIT REPORTS TECHNICAL


AND NON-TECHNICAL
Non-Technical Reports - The head of the Internal Audit Cells at the Unit/Office
shall discuss the findings to be included in the Internal Audit report relating to

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financial transactions with the concerned Head of the Department before finally
drafting the report. The Internal Audit report should contain only those significant
points on which the head of the Internal Audit Cell is either not convinced with the
reply given and or where there is no documentary evidence in support of the
reply so given.
The audit point will also include cases, which are not in accordance with the
guidelines/practice issued/prevailing in the Company. The Internal Audit report
shall be forwarded to Internal Audit Department at Corporate Office, which in turn
after examining the report so received from the Units/Offices, shall forward the
same to the concerned Head of the Unit with a copy to Head of Finance &
Accounts Department. The Head of the Finance & Accounts Department of the
Unit/Office shall forward their replies to Internal Audit Department, Corporate
Office with a copy to its Internal Audit Cell. The Head of the Internal Audit Cell of
the Unit / Office shall examine the reply to such report and issue supplementary
queries where more information is needed with a view to ensure that all points
included in the report are taken to its logical end. The Internal Audit Department.
C.O. shall pick out important/significant points out of these reports after
considering supplementary queries and their reply received, if any for submission
to Director (Finance) / CMD/ AC for their information and necessary action
wherever required.
Technical Reports - Technical reports regarding plant operations, maintenance
activities and consumption of input materials shall be submitted to Head of
Technical Department/Plant/ Section as per audit program circulated at the
beginning of the financial year. Head of the Technical Department shall submit
replies including remedial action plan wherever required within one month of draft
report. The final report shall be sent to Corporate Office for information of Dir
(Tech)/ CMD/ Audit Committee and other units (wherever necessary).
During the course of audit if head of the Audit Cell of the Unit/Office finds any
case of suspicion of fraud or defalcation, the matter may be discussed personally
with the Unit Head, so that immediate remedial action is taken. Points involving
high financial implication will be pursued at personal level by the head of the
Internal Audit Cell of the Unit/office concerned under advice to Corporate Internal
Audit Department.
The head of the Internal Audit Cell at Unit/Office may also send a monthly report
to Internal Audit Dept at CO in respect of reports pending for reply by the local
Management.
7.5

FRAMEWORK OF THE INTERNAL AUDIT REPORT


The report shall be in a well laid out format, which should systematically include
the following:

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The title page

Executive summary, (The executive summary should highlight the key material
issues, observations, control weaknesses and exceptions arising from the audit
along with conclusions).

An Assurance Statement (in case of special audits desired by the management /


Audit Committee (refer Appendix 3 for a sample of the Assurance
Statement).

Addressee

Report distribution list

Period coverage of the report

Opening on introductory paragraph


(i)
(ii)

Identification of the process / functions and items of financial


statement audited
A statement of the responsibility of the entitys management and the
responsibility of the internal auditor

Audit Scope

Audit Objectives and Methodology,

Sampling method used (in situations where sampling is employed e.g. discovery
sampling method based on a confidence level of 95% and a margin of error of
10%.was used and the population consisted of xx Purchase Orders exceeding a
value of Rs. xx approved between dmy and dmy), Based on these paramaters a
sample size of xx P.Os was selected.

Audit Results or Findings Audit findings shall be laid out in the following
manner:
Audit Programme Area: " ---------------"
a.

Observation/Finding
Where warranted the individual observation should contain adequate
Background / Contextual information elucidating the problem; the overall aim
being to include only what is necessary and to communicate the observation
in unequivocal terms in easy to understand language. Background /
Contextual information shall inter alia contain a history / background of the

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unit/department under audit including brief description, organization, previous


production/performance details etc.
Each individual observation should explain the following; what the problem is
- "Current Practice and shortcomings resulting there from"; why is it a
problem, i.e. what are the risks associated with it
Audit findings should be listed under each audit program area in the order of
materiality).
b.

Implications/Risks (Where possible this should be quantified)

c. Recommendation & conclusion - What is required to be done to overcome


/ remedy the weakness.
d. Managements response (Comments from auditee / local management,
comments from top management and management action plan for resolution
of issues and internal audit observations.
e. Compliance report Compliance and
observations made in previous audit reports
f.

non-compliances

with

Summary of observations not accepted by auditee or which are material


in nature and where (a) policy/procedural deviations have taken place (b)
higher cost has been incurred or loss has been incurred due to blockage of
funds etc. and (c) there is a possibility of maximisation of revenue.

g. Summary of total observations made in the report as per the following details:
Sl.
No.
a)
b)
c)

7.6

Particulars

No.

Quantification of benefits
Value /Rs

Observations made
Observations accepted
Observations implemented

POINTS TO CONSIDER WHILE DRAFTING THE FINAL REPORT


In order to make the final audit report more meaningful and useful to the auditee
and the Heads of auditee departments, the following shall be addressed while
drafting the final report:

Final Audit Report should be issued after incorporating the comments of the
auditee and any further comments of internal audit. Findings,
recommendations, and opinions will be expressed objectively.

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Final Audit Reports will be organized so as to clearly and concisely disclose


relevant, timely, and important information that can be used to enhance or
improve relevant aspects of the companys operations.

Findings, recommendations, and comments will contain all relevant


information necessary for the addressee to fully understand the reported
conditions. All Final Audit reports will present factual matters accurately,
completely, and fairly.

The report should be succinct, specific, to the point and based on accurate
facts and figures. The report should not contain suggestions based on mere
theoretical concepts without regard to the practical work situation under audit.
Rushed or hasty conclusions should be avoided and the facts and figures
should speak for themselves.

Positive points should be highlighted so that the auditee department feels that
their achievements are appreciated. The observations should be worded
carefully so that the auditee department feels motivated enough to take
necessary steps to improve.

In situations where this is feasible an in-depth cost-benefit analysis should be


presented along with each significant recommendation.

The Final Audit Report will prominently identify the most significant conditions
requiring managements attention.

Further comments of internal audit should include critical examination of the


observations based on auditee's comments and may include proposed
suggestions/actions wherever required or state reasons why auditee's reply is
not satisfactory.

In case auditee's comments to the audit observations are not complete or


there is an ambiguity in the reply, the same must be sorted out before
issuance of Final Audit Report.

Numbering of audit reports should be DR-l, DR-2 etc. in case of draft or


preliminary audit reports and FR-l, FR-2 and so on in case of final audit
reports.

All audit observations shall be properly numbered as Audit Observation No.1,


2 in sequence so that there is a proper Control No. in the final audit report (for
the audit observations word PARA should not be used).

The first observation to the Final Audit Report must relate to Review of the
earlier Audit Reports.

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Issues of a sensitive nature - Confidentiality of findings should be maintained


wherever the situation so warrants. Issues of sensitive nature may be discussed
in separate reports.
Responsibilities of Auditee Departments - It shall be the duty of concerned
auditee department to offer their written comments on the audit report, point by
point, within one month of the receipt of said report (or such extended time as
may have been agreed to) by the department. In case where the department
agrees with the suggestions/recommendations of audit, they should clearly state
the action that has been taken or would be taken by them for rectification of the
situation/implementation of the suggestions within a stipulated time frame.
In cases where department does not agree with certain observations/suggestions
made in the report, it should clearly state the reasons for doing so. Such
observation shall be further examined by internal audit in the light of explanation
given by the auditee department and shall be submitted to the Head of
Department stating in clear terms the reasons for not dropping the audit
observation, for consideration and taking up the points at his level, if necessary.
7.7

FOLLOW-UP
In case the comments of the auditee department are not received within the
stipulated period of one month or such exented time as may have been agreed
to, the internal audit should follow up with the Head of the auditee department
through written as well as oral communication. The Head of Internal Audit shall
take up the matter with the concerned authorities personally or through his senior
in case of an abnormal delay.
To bring about effectiveness in internal audit activities, the Internal Audit at CO
shall conduct a quarterly review of the internal audit reports and shall take up
with senior levels of the auditee departments wherever the internal audit
observations have not been attended to. A quarterly review of Internal Audit
observations and the action taken thereon by the various departments shall be
held at the level of Chief Officer of the plant/unit where the Head of the Internal
Audit shall highlight the important points for a fruitful discussion and follow-up
action. Directives of the Chief Officer shall be recorded and circulated to all
concerned.
With a view to keep the top management at the Corporate Office informed of
major audit observations involving considerable financial implications and having
impact across the company, a quarterly review of such observations shall be
submitted by unit head of Internal Audit to the corporate internal audit. This report
should reach the corporate office by 15th of the subsequent month.

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Corporate internal audit shall scrutinise the important audit observations and call
for further information wherever necessary. Thereafter, the important
observations shall be put up to top management/audit committee with suggested
course of action for its disposal.
7.8

REVIEW BY CORPORATE INTERNAL AUDIT


Corporate internal audit shall review the activities of internal audit teams at the
plants/units quarterly. Besides looking into the compliance of the requirements of
this manual by the teams, corporate internal audit shall carry out in depth review
of the various internal audit reports and the replies given by the auditee
departments. This review should bring out sensitive areas requiring the
intervention of the top management for effecting prompt improvements.

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CHAPTER 8

ENVIRONMENTAL AUDIT

8.1

INTRODUCTION
Environmental Perspective
The natural environment is a requirement and a resource for human life. Humans
act upon their surrounding natural environment, not only by using its resources,
but also simultaneously by changing it and adopting it to meet their economic
and other needs.
In the context of the increasing emphasis on protection of environment,
Environmental Accounting & Auditing have assumed special importance in recent
years. Environmental Accounting aims at measuring the impact of activities of an
organisation on the environment. The end product is the environmental
statement containing, inter alia, the following:
1. A description of the activities of the organisation along with an assessment of the
significant environmental issues arising out of these activities.
2. A description of the organisations environmental policy, programme and
management systems.
3. A summary of the figures of pollutant emissions (air, water), waste generation,
consumption of raw material / energy & water, noise and other significant
environmental aspects, along with a comparison with legal norms.
4. A summary of cost incurred to protect the environment, classified into capital
costs and expenses.
Human activities are now affecting some of the most basic climatic and biological
cycles of the planet. Ozone layer depletion, global climate change, transboundary shipment of hazardous materials, soil loss, desertification,
deforestation, and destruction of wetlands are some of the practical
manifestations of the impact of human activity on the environment.
In the context of the above there is even greater responsibility for the company to
ensure that the best environment management systems are in place and that

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INTERNAL AUDIT MANUAL

best practices are followed for the preservation and management of our
environment.
8.2

DEFINITION, SCOPE & ADVANTAGES


Environmental auditing: Environmental Audit can be defined as a systematic
process of obtaining and objectively evaluating the evidence relating to
performance of an organisation as reflected in the environmental statement.
Thus, environmental audit attempts to examine and report on verifiable
quantitative or qualitative information in the areas of environmental concerns. It is
a management tool comprising a systematic, documented, periodic and objective
evaluation of how well the management systems are performing with the aim of:

Waste prevention and reduction,


Facilitating control of environmental practices by management,
Ascertaining that resources are used efficiently, economically and effectively,
Assessing compliance with regulatory requirements such as those set by the
Central and State Pollution Control Boards, etc.
Placing environmental information in the public domain.
Ensuring that the environmental policy framed and plants / units maintain
environmental standards set by the company.
Identification of environment control areas and suggesting measures for
adoption /projects for execution.

Since environmental audit involves specialised skills, the internal auditor


conducting environmental audit should have qualifications and experience in (a)
concepts and techniques of auditing, (b) environment related disciplines, and (c)
knowledge of environmental legislation. Since a single individual is not likely to
possess all of these qualifications, an environmental audit generally requires a
multi-discipline audit team.
In India, an enterprise has to meet the requirements of Water (Prevention &
Control of Pollution) Act, 1974, Air (Prevention & Control of Pollution) Act, 1981
and Environment (Protection) Act, 1986. The Central Government has, in
exercise of the powers conferred by the Environment (Protection) Act required
that each organisation which requires consent under any of the Acts relating to
environment should submit an Environmental Audit Report for the financial year
ending on 31st March to the State Pollution Control Board concerned by 15th May
each year. The statement has to contain, inter alia, information regarding water
and raw material consumption, water and pollution generated (along with
variation from prescribed standards), quantities and corrective steps of
hazardous and solid waste, impact of pollution control measures on conservation
of natural resources and on cost of production, and additional investment
proposals for environmental protection.

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Benefits to NFL
In general the following benefits accrue to the company.

8.3

Determining how well the process systems and pollution control systems are
performing, and identifying the operations of poor performance,

Identifying the potential cost savings which can accrue through reduction in
raw material consumption by way of waste minimisation, and adoption of
recycle / recovery/ reduction in pollution load.

Helping in understanding the technical capabilities and attitudes of the


environmental organisation of the company,

Providing up to date environmental data for use in plant modification,


emergencies etc.

Unravels surprise and hidden liabilities due to which regulatory risk exposure
to litigation can be reduced.

Ensures independent verification, identifies matters needing attention and


provided timely warning to the management on potential future problems, and

Helps safeguard environment and assists in complying with local, regional


and national laws and regulations, and the companys policy and
environmental standards.

GUIDELINES FOR AUDIT


The Audit should ascertain that control and monitoring system in case of liquid
effluents, gaseous emissions and solid wastes is in order. Major diversion should
be highlighted to improve the system of pollution control. Following should be
checked.
1.

Audit should check that liquid effluents and stack emissions meet
MINAS/State Pollution Control Board norms.

2.

Check that frequency of analysis is sufficient.

3.

Check that prescribed sampling techniques are used.

4.

Check that Ambient Air Quality monitoring is as per schedule.

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5.

Check, that sub-soil water analysis is done as per established procedures


and steps are taken to preserve its quality.

6.

Emphasis should be given on the availability of environment control


equipment such as availability of electrostatic precipitators.

7.

Check that analysers installed in plants to control process effluents are


attended regularly.

8.

Check that ambient air monitors installed in different plants are monitored
and corrective action taken

9.

Check that optimum use is made of effluent treatment plant

10.

Check the availability and operation time of Sulphur Recovery plants at


Bathinda, Nangal and Panipat. Plant availability should be compared at
CO and abnormalities highlighted. Operation of SRP being necessary to
control the air pollution.

11.

Check that prior action is taken keeping in view expected changes in the
Environment policy of the Govt.

12.

Check that analysis equipments in laboratories are in proper working


condition, calibrated and reliable.

13.

Ensure

14.

Review of MIS with respect to adherence of pollution control norms at


various
plants /units as required by Central / State regulatory
agencies.

15.

Review of penalties paid, if any, against non-observance of pollution


control norms and action taken thereof.

16.

Review of various environment clearances being pursued.

17.

Review of Idle equipments at various plant/units for pollution control and


action taken for disposal.

18.

Review of projects under execution for pollution control at various


plants/units.

19.

Report on Plant's Environment equipments status.

Environmental Audit

that

noise

level

is

monitored

and

controlled.

8.4

INTERNAL AUDIT MANUAL

CHAPTER 9

FINANCE & ACCOUNTS

9.1

INTRODUCTION
The Finance & Accounts Department in NFL is primarily responsible for:


Raising financial resources at minimum possible cost.

Utilising the company's finances optimally and in the best interests of the
company through budgetary control, cost control, laying down proper systems
and methods for speedy and correct decision-making etc.

Rendering financial advice to the top and various levels of management.

Preparation and submission of quarterly / half yearly / annual accounts and


getting the same audited in accordance with the Companies Act.

Compliance with direct and indirect tax laws and other statutory legislations.

Introduction of internal check and control systems for various activities of the
organization and monitoring of such systems.

Coordination of the audit functions including the Govt. Audit and COPUs
(Committee on Public Undertakings) examination.

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9.2

CASH & BANK ACCOUNTS

9.2.1

Introduction
Almost all the activities of a business are directly or indirectly connected with the
receipt or payment of cash.
Implementing effective internal controls is important in the area of cash
management because of the diverse nature of the processes involved, i.e.,
billings, collections, deposits, and disbursement processes, the fragmented
oversight responsibilities generally associated with these processes as well as
the inherent risk of loss created by the nature of cash transactions.
Internal auditors would ascertain and verify that effective and adequate
arrangements exist for recording each transaction and that adequate safeguards
and controls are in place for protecting the Company against fraud and
defalcation.
The Cash Accounts Section is responsible for receiving payments, depositing
cheques, drafts and postal orders into the Company's Accounts with the Bank as
well as to retire documents through banks on receipt of instructions/intimation,
keep a track of collection under ECS (Electronic Clearing Scheme) . The Section
is also responsible for timely payments to employees, suppliers, contractors
outside agencies etc.

9.2.2

Points for examination


In order to achieve the objectives mentioned above, the following points should
be checked / examined/reviewed while conducting audit of the Cash Section;

A.

GENERAL

1.

Verify that cash is kept in a safe manufactured by a reputed manufacturer with a


double key operation. Ensure that both the keys of the safe are kept with different
officials of the company. Duplicate set of keys for the safe are sealed and lodged
with the bankers for safe custody and are checked at least once in a year and
sealed afresh.

2.

Verify that insurance cover for cash in safe has been obtained and the amount
kept in the safe has not exceeded the insurance limit. It should also be
examined that insurance cover against cash in transit has been obtained and the
amount carried from the bank to the cash office or vice-versa has not exceeded
the insurance cover limit.

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3.

The employees working in the Cash Office and those authorized to operate on
the Company's account have been covered under the Fidelity Insurance Cover.

4.

The Cash balance is physically verified by the concerned Officer daily and
suitable record of such verification under his signature is kept on the cashbook.
Also surprise verification of cash by an officer other than In-charge (Cash) is
done under the orders of the Head of the Finance and Accounts Dept. and the
results of such verification are put up to him and in case of discrepancies,
adequate and prompt action is taken.

5.

Verify that the number of soiled and mutilated notes kept in the Cash office is not
large and they are exchanged from the bank from time to time.

6.

The Denomination register is being maintained and the cash with its full
denomination is recorded daily in this register.

7.

Review the organization and rotation of duties of different employees in Cash


Accounts Section.

8.

The internal auditors will also ensure that the following requirements of a good
control system are in place.
(a) The time-value-of-money is being recognized as a part of each cash
management decision.
(b) Cash related transactions are fully documented so that an undisputable audit
trail exists.
(c) Cash related transactions occur only after the approval of an individual with
delegated authority to make approvals.
(d) Documents used in cash related transactions are safeguarded against reuse, tampering, or unauthorized disposal.
(e) Segregation of duties - Cash related duties, such as maintenance of
accounts receivable, cashiering, accounting, disbursing, and collecting funds
are segregated.
(f) Cash derived from collections and cash used for disbursements is not
commingled.

B.

CASH & BANK BOOKS RECEIPTS / PAYMENTS

1.

Check that Cash Books are prepared daily and signed by the Cashier / Junior
Executive (Accounts) and countersigned by the In-charge (Cash).

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2.

Ascertain that there are no unauthorized corrections in the cash and bank books
and corrections have been attested wherever required.

3.

Tally the counterfoils of the receipts with the corresponding entries in the
cash/bank books to make sure that all the receipts have been correctly
accounted for and have been countersigned by the authorized officer. It may also
be seen that the counterfoils of receipts/cheques are being properly stored.

4.

Check that only machine numbered printed receipts are used and that all unused
new blank receipt books are kept in the custody of the authorized officer. The
existence of unused books may be verified physically with reference to the stock
register. Ensure that the original copies of all the cancelled receipts are kept
attached with the counter-foils invariably. Similar check may also be exercised in
respect of cheques.

5.

Verify that all receipts are deposited promptly into the bank on the same day or
the next working day.

6.

Verify that the cheques / bank drafts / postal orders in hand with the Cashier are
in order and whether the transmission to the Bank has been delayed for more
than a day. Ascertain the reasons for delay, if any, in depositing the
cheques/drafts/postal orders. It may also be ensured that the Postal Orders are
being received promptly from the various other Departments such as Personnel,
Material, Civil Engg. etc.

7.

Check the payments as per the main cashbook, bank book and petty cash with
the relevant vouchers and verify that proper identification/acknowledgement of
the payee has been obtained for all payments.

8.

All bank charges, interest debited on CC account, interest received on


Company's investment / holdings have been accounted for promptly in the
cash/bank book and have been verified/checked and a suitable record of such
checking is also kept by the Cash Accounts Section.

9.

The cash payments/receipts do not exceed the limit as provided under Income
Tax Act 1961. As a matter of practice all payments to suppliers, contractors
should be made through "Accounts Payee" cheques only or through Electronic
Clearing Systems.

10.

Wherever feasible and advantageous to the company electronic funds transfer


shall be used.

11.

While reviewing the vouchers verify that:

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a)

Vouchers are suitably numbered and stamped as "Paid" to prevent the


same from being used again.

b)

There is no delay in making out cheques for payments and where there is
a delay the reasons stated are valid.

c)

Cash discount offered by the suppliers/contractors, etc. for early payment


has not been lost / forgone by the Company due to delay in making
payments.

d)

There is proper system of dispatch of signed cheques to the parties


concerned and there are no signed cheques lying undespatched.

12.

Verify that the account for stamps purchased, issued and stock in hand has
properly been maintained.

13.

Check whether surplus funds have been invested in securities or fixed deposits,
etc. and if so whether it is in accordance with the policy guidelines issued by the
Management (At CO only).

14.

Review the system relating to management of funds with particular attention to


the Statement of Sources and Application of Funds. Review the systems relating
to cash management with particular attention to (a) statement of cash flow, (b)
cash budgets and forecasts.

15.

Dishonour of Cheques - Verify that in case any cheque is dishonoured the fact
of dishonour is documented and that a cheque dishonour notice to the defaulting
party is issued and that immediate steps for necessary action are initiated.
Note: Under section 138 of the Negotiable Instruments Act (covering penalties in
case of dishonour of certain cheques for insufficiency of funds in the accounts)
where any cheque drawn by a person on an account maintained by him with a
banker for payment of any amount of money to another person from out of that
account for the discharge, in whole or in part, of any debt or other liability, is
returned by the bank unpaid, either because of the amount of money standing to
the credit of that account is insufficient to honour the cheque or that it exceeds
the amount arranged to be paid from that account by an agreement made with
that bank, such person shall be deemed to have committed an offence and shall,
without prejudice to any other provisions of this Act, be punished with
imprisonment for a term which may extend to two years, or with fine which may
extend to twice the amount of the cheque, or with both:
Nothing contained in section 138 shall apply unless

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(a) the cheque has been presented to the bank within a period of six months from
the date on which it is drawn or within the period of its validity, whichever is
earlier;
(b) the payee or the holder in due course of the cheque, as the case may be, makes
a demand for the payment of the said amount of money by giving a notice, in
writing, to the drawer of the cheque, within thirty days of the receipt of
information by him from the bank regarding the return of the cheque as unpaid;
and
(c) the drawer of such cheque fails to make the payment of the said amount of
money to the payee or, as the case may be, to the holder in due course of the
cheque, within fifteen days of the receipt of the said notice.

C.

CONTROLS OVER ELECTRONIC FUNDS TRANSFER (EFT)


Definition - Electronic fund transfer is defined as any transfer of funds, other
than a transaction originated by cheque, draft, or similar paper instrument, which
is initiated through an electronic terminal, telephonic instrument, or computer or
magnetic tape so as to order, instruct, or authorize a financial institution/bank to
debit or credit an account. Such term includes, but is not limited to, direct
deposits or withdrawals of funds, point-of-sale transfers, automated teller
machine transactions, (ATM) and transfers initiated by telephone.
Electronic funds transfers carry a number of risks particularly, operating risk,
liquidity risk, credit risk, reputation risk and compliance risk. The main elements
of operating risks are errors and omissions risk, technical and fraud risks. In
order to minimise the risks present during transfer of funds electronically the
internal auditors will ascertain whether adequate and effective internal controls
and procedures are in place and are being followed. Significant and important
controls in this regard as follows;
i.

Authority to generate electronic funds transfers shall be restricted to two


senior management executives one of whom shall be the functional head
of the F&A department.

ii.

Per transaction control limits shall be set at reasonable levels (e.g. Rs. 1
lac). Limits established shall be properly documented and intimated to the
bank. Any revision in the limits shall also be intimated to the bank in
writing.

iii.

Electronic transfer amounts shall be related to the actual amounts that


need to be transferred in order to minimise the risk of errors and per
incident risk exposure.

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iv.

Agreements with the banks for electronic funds transfers shall be kept on
record.

v.

The bank agreements shall clearly state/detail conditions for liability


associated with the electronic transfer of funds, any limitations on the
amount of liability, and any notification requirements related to potential
losses associated with the electronic transfer of funds. Based on those
conditions, NFL shall decide what level of insurance (fidelity) coverage is
sufficient.

vi.

A daily record/log of electronic funds transfers shall be maintained giving


all necessary particulars such as purpose of the transfer, amount
transferred, name of the bank, date and time of transfer etc.

vii.

Till such time the units achieve a technically strong, ICT security
environment, Electronic Funds Transfers shall preferably be made from a
stand-alone computer.

viii.

IT security policies regarding use of passwords, logging in etc. shall be


observed.

ix.

All funds electronically transferred shall be accounted for on a daily basis.

x.

An employee who is not responsible for initiating or authorising electronic


fund transfers shall perform the EFT reconciliation on a periodic basis
(monthly).

D.

BANK RECONCILIATION

1.

Verify that bank reconciliation is carried out promptly and correctly and there is
no delay in adjustment of debits/credits in the Bankbook. Ensure that the bank
reconciliation statements are prepared on a monthly basis by 7th of the following
month.

2.

Check that necessary adjustment entries are made in the case of stale cheques
as well as cancelled cheques.

3.

Verify that the register of cancelled cheques is properly maintained.

E.

REGISTER OF UNPAID WAGES

1.

Ensure that the register of unpaid wages has been prepared correctly from salary
bills/payment vouchers, etc.

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2.

Ensure that proper and timely action is taken in respect of unpaid cash vouchers
lying in the Cash Office by transferring the entries to concerned section from time
to time.

F.

REGISTER OF COLLATERAL SECURITIES & VALUABLE DOCUMENTS

1.

Check that a register of valuables for record of cheques/drafts received and their
disposal is maintained and that chequebooks are kept in the safe custody of a
responsible official nominated in this behalf.

2.

Verify that collateral securities such as bank guarantees, fixed deposit receipts,
bonds, etc. are kept in safe custody and also recorded in a register to be
maintained for such purposes. Physical verification of these securities may also
be conducted once in a year.

3.

Check that in case of refund of collateral securities, a proper procedure is being


followed for taking clearance from the Department concerned about the release.

G.

BANK CONFIRMATION CERTIFICATES


Ensure that Balance confirmation certificates are obtained from the bank at the
annual closings.

H.

QUANTUM AND PERIODICITY


Quantum of checks to be carried out will be as under:

a)

Cash and Bank Books

One month in each half year

b)

Other items

Once in a year

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9.3

PURCHASE ACCOUNTS SECTION

9.3.1

Introduction
Purchase Accounts Section is concerned with the payment to suppliers on
account of supply of raw-materials, packing materials and other items of capital
nature and accounting thereof.

9.3.2

Audit guidelines / checklists


Internal Audit will exercise the following checks:

A.

PAYMENT AGAINST PURCHASE INVOICES

1.

Check that the particulars on the Purchase Invoice agree with the purchase
order, with reference to the rates, specifications, date of supply, mode of
transport, quantity ordered and where there are deviations these are supported
by proper amendments. The bill is supported by the Material / Stores Receipt
Voucher and Inspection Report duly signed by Competent Authority.

2.

Check the invoices for the purchase of imported material with reference to bank
advices, bill of entry, clearing agents' bills, bill of port trust charges, in addition to
the documents mentioned in para 1 above. Also verify that bank charges for
opening of Letters of Credit (LCs), amendments thereto and for making payment
against LCs and on retirement of documents are properly verified and checked
before booking of the same. The correctness of payment of customs duty,
demurrages, if any, paid should be verified to ascertain whether proper analysis
has been made, and the payment of demurrage if any, regularized with the
approval of the Competent Authority.

3.

Check the bills of clearing agents to ensure that they have been passed as per
the terms of contract with them and necessary recoveries in respect of
demurrage etc. have been duly made.

4.

Examine whether LCs issued are kept open only to cover the period of supply as
per agreement. In case of extension of LC, ascertain whether extension of time
stipulated in agreement for supply is granted by the Competent Authority.

5.

Verify that after payment is made bills are cancelled/voided by marking 'Paid' on
them and that endorsement in respect of payments are also made on copies of
the respective Purchase Order and SRV to avoid any double payment.

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6.

Check that items like packing and forwarding charges, excise duties, sales
tax/VAT, etc. for which rates are not shown in the purchase order have been
billed correctly and concessional rate of sales tax is availed of wherever
applicable.

7.

Check that discount offered by the suppliers has been availed of.

8.

Verify that the penal clause in the purchase order has been duly invoked or the
Competent Authority allows extension of time.

9.

Scrutinize the Purchase Bill Register and ascertain the reasons for bills lying unpassed or unadjusted for over 15 days.

10.

Ascertain whether supplies were received within the stipulated dates of delivery.
In case of delays it may be examined whether the extension of time of delivery is
given after due consideration at the appropriate level and with financial
concurrence and whether non-enforcement of claims for liquidated damages was
as per the exigencies of the work.

B.

ADVANCE AGAINST PURCHASE

1.

Check that the advances to the suppliers are allowed strictly in accordance with
the terms stipulated in the purchase order and that advances are adjusted before
suppliers bill/s for payment are passed. Any advance, whether to a foreign
vendor or local supplier should not be given without obtaining bank guarantee as
a sound internal control system. Internal auditor should point out this aspect if it
is not followed.

2.

Check the Suppliers Advance Ledger and scrutinize cases of old outstanding
advances to suppliers lying unadjusted.

3.

Confirm that the total advances to suppliers as per the Advance Ledger are
reconciled with the Control Accounts maintained in the general ledger. The
above reconciliation should be made by the Purchase Accounts Section when
the periodic print outs of ledgers are taken or earlier if necessary.

C.

SALES TAX / VAT

1.

Examine the sales tax registration certificate / VAT registration certificate granted
by the authority giving exemption and / or concessional rate in respect of
materials purchased for the direct manufacturing process. Do the certificate
covers all the materials purchased for direct use in the process of manufacture?

2.

To check the cases of accounts recoverable.

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3.

To check the schedule of security deposits / earnest money deposit and refund
thereof.

4.

To review the bank guarantees submitted by the suppliers and its follow-up.

5.

To check the foreign exchange transactions at the end of each year.

6.

To check the deduction and timely deposit of taxes.

D.

CONFIRMATION OF BALANCES
RECONCILIATION THEREOF

IN

CREDITORS

ACCOUNTS

AND

For confirming creditors balances, internal audit will verify that the following
procedures are in place.
1.

Whether steps are taken to obtain confirmation of credit balances in various party
accounts such as sundry creditors, etc. on the following basis.
(i)

Credit Balances Where creditors statements are received from creditors


and are reconciled with the units/offices books/ledger account,
confirmation of account balance by direct communication may not be
insisted upon.

(ii)

Where statements are not received, accounts are delinquent/irregular the


unit/office should request for submission of account statements. In
situations where statements are not forthcoming despite reminders, a
designated executive from the section should arrange to visit the
premises of the party and reconcile the two sets of records, if amounts
owed by NFL are large/ and significant. Large / significant amount can be
taken as in excess of Rs.1 lakh.

(iii)

Creditors and other accounts with debit balances As a standard


practice the department should obtain confirmation of amounts owed by
such parties as per the frequency and the time schedule as decided from
time to time.

(iv)

Ascertain that where on receipt of confirmations discrepancies are


observed these are thoroughly investigated and reconciled.

(v)

Examine the sales tax registration certificate / VAT registration certificate


granted by the authority giving exemption and / or concessional rate in
respect of materials purchased for the direct manufacturing process. Do

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the certificate covers all the materials purchased for direct use in the
process of manufacture?
E.

QUANTUM AND PRIODICITY


Quantum and periodicity of checks to be exercised will be as under:
a)

Invoices above Rs.3 lacs

100% of one month randomly selected


in each half year.

b)

Invoices for Rs.1 lacs to


Rs.3 lacs

50% of one month (excluding the month


selected under a) above) randomly
selected in each half year.

c)

Invoices less than Rs.1 lacs

10% of one month in each half year


(excluding the months selected in a) and
b) above.

d)

Others

Once in a half-year

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9.4

SALES ACCOUNTS SECTION

9.4.1

Introduction
The Sales Account Section deals with raising of invoices in respect of dispatch of
fertilizers, industrial products to Institutional buyers, private dealers and
maintenance of accounts relating to sundry debtors, advances received from
customers against sales, security deposit, sales tax and excise duty etc.
The following checks should be considered and be exercised while conducting
the internal audit of Sales Accounts (Units) and of D&C Cells of the Units,
Area/Zonal Offices/CMO.

9.4.2

Audit guidelines / checklists

A.

TERMS & CONDITIONS

1.

See that the terms and conditions of sales are as per the Sales Policy of the
Company and are in keeping with the Sale of Goods Act, Fertilizer control order,
Essential Commodities Act and other statutory laws and rules.

2.

See that all terms of sales communicated to the Units are duly concurred by F&A
Dept. and approved by the Competent Authority.

B.

INVOICING

1.

Verify that the invoices for road and rail dispatches have been raised correctly at
prevailing prices for the quantity mentioned in the Delivery Challan and RRs /
GRs.

2.

Verify that control procedures are effective and ensure that all the required invoices
are correctly raised using the appropriate prices and discounts, and that they are
recorded, despatched, and accounted for within the accounting system in a timely
manner.

3.

Check that the invoices in respect of industrial products in the Units have been
prepared on the basis of Cash Sale Advices received from D&C cell and
weighment / loading statement received from the plants/store indicating the
actual quantities issued. Also see that the prescribed procedure with regard to
sale of industrial products is being strictly adhered to.

4.

In case of sales to Institutional buyers/private dealers, check that invoices have


been prepared and presented as per the terms of credit sales.

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5.

Verify that rebates and secondary freight have been allowed as admissible and
shown correctly in the invoices.

6.

Verify that VAT/Sales Tax has been charged in the invoices, wherever
applicable.

7.

Check that the invoicing/stock transfer note of the material dispatched has been
made promptly and as per the prescribed procedure.

8.

Ensure that the rake disposal statements are received by Unit concerned from
Area Offices within prescribed period.

9.

Check that the delivery orders for sales from godowns and platforms are
received from Area Offices by CMO/Zonal Offices within prescribed period
keeping in view the date of revised rates and the date of DOs issued to avoid
incorrect billing and invoices thereof are promptly prepared and issued to the
dealers by Finance & Accounts Department and fed into the computer
immediately for preparation of Sales Day Book and Dealers Ledgers.

10.

Verify that the Cash Receipt Voucher No. is mentioned on the Delivery Order by
the Area Offices in respect of cash sales from warehouses.

11.

Verify that the Delivery Order for platform sales is issued by the Area Officer to
the dealer who has made the payment in advance / as per approved terms terms
for the quantity of fertilizers required.

12.

Test Check the arithmetical accuracy of the invoices and also see that invoices
are issued/approved by the authorized official.

C.

CREDIT POLICY & CONTROL

1.

Check whether the terms and conditions of sales to institutional buyers are
comprehensive and in accordance with the sales policy in force and approved by
the Management.

2.

Verify that the sales on credit to Institutional buyers/dealers are approved by the
competent authority and/are in accordance with the approved credit policy of the
Company. It should also be verified that credit is not allowed for a period more
than what has been agreed to.

3.

Check that interest on delayed payments have been debited/accounted for and
the amounts recovered or alternatively approval of the competent authority has
been obtained for waiving the interest due on delayed payments.

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D.

RECONCILIATION OF DISPATCHES WITH THE SALES INVOICES

1.

Confirm and verify that the total dispatches made as per loading statement
received from the Transportation Dept. in a month are reconciled with the
quantity shown in the Sales Day Book.

2.

Check that the total sales made as per the godowns statement, rake statement
and delivery orders received from Area Offices by CMO/Zonal Offices are
reconciled with the quantity shown in the Sales Day Book maintained by
CMO/Zonal Offices for sales made from Field godowns and buffer godowns.

3.

Verify that all invoices for sales are made on the basis of quantity actually
delivered to the parties and shortages, if any, has been dealt in as per company
policy.

4.

Check that the quantity of various industrial products, etc. intimated by


Production Dept. are reconciled with the quantity shown in the Sales Day Book at
Units.

E.

SUNDRY DEBTORS / ADVANCES LEDGERS

1.

Review the ledgers of the accounts of Institutional buyers/dealers and In case


there are overdue and old balances, the reasons thereof should be
ascertained/analysed.

2.

Verify that there is a system of periodical review of the sundry debtors and
advances accounts of the dealers as per audit programme.

3.

Check that the age-wise analysis of the Sundry Debtors is prepared on a monthly
basis and prompt action taken for the recovery of overdue outstanding. Also
verify whether there is a regular and effective system of reconciling these
accounts with the dealers.

4.

Cases of outstanding for more than six months should be scrutinized and
reasons thereof should be ascertained from the CMO/Zonal Offices. Also check
that statement of debtors outstanding for more than one year is submitted to
competent authority for taking appropriate action.

5.

Check that the advances received are correctly accounted for and adjusted.

6.

Verify that confirmation of balance is obtained and reconciled with the balance in
the books periodically as per the frequency and the time schedule decided from
time to time.

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F.

SECURITY DEPOSITS

1.

Check that all the dealer as well as sub-dealers have furnished the security
deposits of the prescribed amount and proper records thereof are kept.

2.

Review the status and scrutinize the bank guarantees and follow up thereof.

G.

SALES TAX / VAT

1.

Check whether all sales tax payments are reconciled with the recoveries as
reflected in the Sales Day Book of unit/ Area offices.

2.

Check the correctness and timely deposit of Sales Tax amount and submission
of the sales tax return. In case any excess payment of sales tax has been made,
see that refund/claim has been preferred with the sales tax authority within the
prescribed period.

3.

Verify that 'C'/D forms respectively are collected from the dealers and linked up
with the sales for which concessional rates or exemption from Sales tax have
been allowed in the invoices.

4.

Check that follow up action with the parties for the pending 'C'/D' forms has been
taken.

5.

Highlight in the internal audit report all cases of C / D form remaining pending
for more than three months.

6.

Check that VAT is deposited after setting off the input tax with output tax, as
applicable.

7.

Check that VAT is charged as per appropriate rate prescribed in all the sales
invoices.

8.

Check that VAT Returns are timely filed after correctly computing taxable
turnover.

9.

Verify that proper records are being maintained as required under the Act.

10.

Review whether the collection of sales tax / VAT and payment to government are
in accordance with the relevant laws and rules.

11.

Is there a reconciliation between sales tax / VAT paid / payable amount shown in
the return and the amount as recorded in the respective Control Account in
General Ledger?

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12.

Examine the sales tax registration certificate / VAT registration certificate granted
by the authority giving exemption and / or concessional rate in respect of
materials purchased for the direct manufacturing process. Do the certificate
covers all the materials purchased for direct use in the process of manufacture?

13.

In case of the failure of the customer in submitting the VAT declaration form,
examine whether there is a procedure to raise supplementary invoice / debit note
to recover the concessional or exemption tax already allowed in the sales
invoices.

14.

Review how the VAT declaration forms are kept in safe custody and whether
receipt of said forms promptly recorded in the VAT register.

15.

Review the assessment orders for the completed assessment years and
ascertain the reasons for any disallowable items / amounts.

H.

EXCISE DUTY

1.

Verify that the excise duty, wherever applicable, is paid correctly as per the laws,
rules and regulations and the proper records thereof are being maintained as
required under the Act.

2.

Scrutinize that the excise duty is being paid as becoming due and also see that
the large balances are not kept in this account for unduly long periods. Also see
that refund claims have been preferred wherever required and are being followed
up regularly.

I.

BAGGING, LOADING, TRANSPORTATION & SHORTAGES IN TRANSIT

1.

Check and review the award of contract pertaining to internal handling and
transportation of urea at units as per procedure.

2.

Review the contract agreement regarding bagging, loading transportation of


fertilizers and handling of materials at various places and verify that they are
properly executed after following the prescribed procedure in regard to NIT,
Earnest money and Security Deposits etc. Also see that payments are being
made as per the terms of the contract approved by the competent authority.

3.

Check that where fertilizer has moved by Rail, for shortages in transit noticed by
the Field Officers at the destination station, claims have been lodged with the
Railways and the shortages in transit have been accounted for as per Companys
policy. Also verify that claims, which have been rejected by the Railways have
been adjusted in accounts with the approval of competent authority.

Finance & Accounts

9. 17

INTERNAL AUDIT MANUAL

4.

Verify that for shortages noticed at the warehouses for dispatches by road, the
necessary recoveries have been made by the unit concerned from the
Transporters, at the retention price of the product.

5.

Examine cases of demurrage and wharfage paid to the Railways and see that
the same have been adjusted with the approval of competent authority.

J.

WAREHOUSES

1.

Confirm that the spaces reserved in the warehouses with the approval of the
competent authority have not been under utilized.

2.

Verify that rent for various godowns is being paid in accordance with the
approved agreement.

3.

Check that private godowns are not normally hired and wherever hired are as per
the laid down policy of the company and with the approval of the competent
authority. Fertilizers stored in the godowns are insured adequately and
despatched/sold on a FIFO basis as quickly as possible. Ensure that CWC/SWC
where our fertilizer has been stored has taken proper insurance cover.

4.

Verify that there is a system of periodical physical verification of stocks lying in


the godowns of CWC/SWC and in private godowns at least twice a year /
company policy, and stock balance as per stock register maintained by the Area
Office is reconciled with the stock register maintained by the concerned
warehouse Manager indicating ageing of stocks.

5.

See that the fertilizer received and sold from the godowns in a month is
reconciled by CMO/ZO periodically with the debit advices received from the Units
for transfer of fertilizers to a particular godown and the delivery orders received
from the Area Offices.

K.

OPERATION OF COLLECTION ACCOUNT

1.

Verify that the DDs received from the dealers/CSS are promptly deposited in the
collection accounts with the banks and credit given to the correct dealer and
proper record in this regard is maintained at Area Office.

2.

Verify that the bank statement from bank in respect of collection account is
received regularly and bank reconciliation is completed latest by 15th of the
following month. Reasons for Cheques / DDs stated to have been presented to
the bank but not credited in our account should be enquired into diligently. Also
verify that bank charges levied by the bank are as per the terms agreed with
them.

Finance & Accounts

9. 18

INTERNAL AUDIT MANUAL

3.

Confirm and verify that all the amounts credited through Collection Accounts are
transferred to Centralized Collection Account of CMO with State Bank of India,
New Delhi on the close of every day or as instructed by Corporate Office.

4.

Check if the value dating statements are being sent on monthly basis by
Area/Regional / Zonal offices to CMO so that timely claim for recovery of interest
on account of delayed credit by more than prescribed time in central collection
account is lodged with SBI, New Delhi.

5.

Check whether electronic funds transfer and direct deposit facilities are used
where feasible and advantageous.

6.

Ensure that cash derived from collections and cash used for disbursements is not
commingled.

7.

Check that collections (instruments collected) are adequately safeguarded until


deposit is accomplished.

8.

Check that credit entries in the bank statement are reconciled on daily basis as
the bank statement can be generated on daily basis by making use of netbanking facility where available.

L.

CENTRAL STOCKIST SCHEME (CSS)

1.

Check if credentials of the dealer appointed under Central Stockist Scheme


(CSS) as laid down in the selection process were in order.

2.

Examine if the CSS dealer has met his contractual obligation during the
preceding six months and has deposited the specified security amount according
to the category of the dealer.

3.

Check if CSS dealer has got adequate storage space as defined in the stocking
process.

4.

Examine if storage arrangements have not been violated in any way and godown
space as determined earlier is available for NFL material.

5.

Check on a random basis if the CSS dealer is adhering to the FIFO method for
despatching goods.

6.

Check if committed rebate was being allowed to CSS dealer only when the
dealer was meeting the required obligations.

Finance & Accounts

9. 19

INTERNAL AUDIT MANUAL

7.

Confirm and verify that statutory taxes and levies are deducted from
remuneration payable to central scheme stockists.

8.

Verify that Mktg. Division has taken requisite insurance cover of stocks of
material kept with the CSS dealer and the quantity stored and its actual value
was being intimated to CMO for monitoring insurance policy.

M.

GENERAL

1.

Check that the publicity expenditure on wall painting advertising and hoarding
etc. have been incurred with the approval of competent authority after following
the prescribed procedure and Memoranda record is maintained to identify their
location etc.

2.

Check that Office-cum-residential buildings for Area / Regional Offices have been
hired with the approval of the competent authority as per scale laid down after
following the prescribed procedure and memoranda record with proper deposit is
maintained for proper checking and control.

3.

Verify that DIs in respect of road despatches and cash sale advices in respect of
industrial products have been issued after having received the sale proceeds in
advance and the CRV No. and DD No. have been mentioned on the DIs/Cash
Sale Advices. Despatch against credit, if any, need to be examined/verified with
reference to companys policy/ approved sales terms.

4.

Verify that the imprest register is maintained as per prescribed procedure and
imprest expenditure statements are sent to CMO/Zonal Offices for recoupment in
time as per instructions in this respect.

5.

Check that proper records of Capital Items/Asset Register are being maintained
(Item Identification No., date of purchase, Bill No. Amount, location etc.) and
there is an effective procedure to check items physically at the end of each year.

6.

The internal auditor is to keep himself updated with the guidelines, policies,
instructions and clarifications given by the Government / FICC with regard to
subsidy applicable to NFL.

7.

Examine whether records required to be maintained with regard to subsidy have


been correctly and adequately maintained.

8.

Examine whether claim for subsidy has been correctly raised and timely
submitted to the appropriate authority with full documentary evidence.

9.

Review whether all the terms and conditions and guidelines of FICC for claim for
subsidy have been fulfilled.

Finance & Accounts

9. 20

INTERNAL AUDIT MANUAL

10.

Examine whether payment against claim is timely received and for that vigorous
follow up is being made.

11.

Examine whether subsidy has been accounted for as per accounting policy
followed by the company and in full compliance to the provisions of Accounting
Standard (AS 12) issued by ICAI.

N.

QUANTUM AND PERIODICITY


a)

Invoices

10% of a month in each half year

b)

Reconciliation of Dispatches

One month in each half year

c)

Age-wise analysis of sundry


debtors

Half yearly

d)

Physical verification of stocks in


Ware houses

10% once in a year

e)

Review of Collection Accounts

Once in each half year

f)

Appointment of dealers under


CSS

10% cases every year

g)

Other items

One month in each half year

h)

Contract of internal handling and Once in a year.


transportation of urea

i)

Subsidy bills & claims

Finance & Accounts

100%

9. 21

INTERNAL AUDIT MANUAL

9.5

STORES ACCOUNTS SECTION

9.5.1

Audit Guidelines / Checklist


The checklist given below is designed to facilitate the conduct of the internal
audit of Stores Accounts Section responsible for accounting of stores (pricing of
Stores Receipt Vouchers, Material Return Notes and other related transactions
connected with stores accounting).

A.

RECEIPTS

1.

Ascertain whether there is an adequate and effective system to control the


receipt of SRVs (Store Receipt Vouchers) from time to time and whether prompt
action is taken for missing SRVs.

2.

Check whether pricing of Stores Receipt Vouchers is done correctly and posted
chronologically in the Register "Provisional Liability for Stores".

3.

Whether there are abnormal differences between the actual liability as per
supplier's bills and the provisional liability created by Stores Accounts Section?
Ascertain that differences are promptly reconciled and adjusted.

4.

To ensure that in case of any recovery on account of demurrage / wharfage /


freight etc. the fact of recovery is immediately conveyed to the Purchase
Accounts Section to recover the same at the time of payment/adjustment of
SRVs.

5.

Check that SRVs are approved by the competent authority.

6.

Inter Unit receipt of materials - Check that inter unit receipt of material is first
entered in the books by the Stores Department and issued to depts. only after
preparation of the SRV.

B.

ISSUES

1.

Verify that the Issue Notes are signed by officials authorized in this regard.

2.

Verify the correctness of Chargeable Heads of Account.

3.

Review the Issue Note Summary to see if any issue note is left out/omitted.
Inquire into the reasons thereof.

4.

Check pricing of Issue Notes done by the Computer Center to ensure that the
Computer Program is working satisfactorily.

Finance & Accounts

9. 22

INTERNAL AUDIT MANUAL

5.

Ascertain whether Stores are issued to Contractors and other outside parties
only with the sanction of the competent authority and that recoveries are
promptly effected.

6.

In case of issue of materials on loan verify that proper records are maintained to
ensure timely return/recovery. Also ensure that materials given on loan have the
approval of competent authority and the same has been issued against adequate
security. Report old outstanding cases where amounts involved are material.

7.

Inter Unit Issue of Materials Check that material issued to other units is against
approved issue voucher from Stores wing of Material Department and ensure
verification of corresponding debit advice.

8.

Segregation of capital items and capitalization thereof Capital items are not
charged to revenue or vice versa.

C.

MATERIAL RETURNED NOTES

1.

Verify that reference of Issue Notes under which the material was issued
originally is indicated in Material Returned Notes.

2.

Verify that material/goods returned unused are valued at cost.

3.

Verify that used materials having useful life and returned to stores are valued as
per certificate of the engineer and technical valuation has been approved by the
competent authority.

D.

PRICED STORES LEDGER

1.

Review the priced stores ledger and scrutinize on a test check basis irregular
balances appearing therein viz. (a) whether there are any negative balances
either in quantity or value; (b) whether any account shows value without quantity
or quantity without value.

2.

Review the Stores Inventory to identify non-moving, slow moving and surplus
items. Whether such items are reported timely to the Management.

3.

Identify and check key items of inventory for prices that once tested, can be used
as a basis to test the reasonableness of pricing of other items in stores inventory.
For example, if the cost of eleven-gauge steel is tested, the internal auditor can
normally scan the costs of other gauges of steel and determine if variations from
the item tested are reasonable.

4.

Ensure that pricing is in sync with the AS-2

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9. 23

INTERNAL AUDIT MANUAL

E.

MISCELLANEOUS

1.

Review that the physical verification reports relating to stores are promptly
attended to and action for adjustment of excesses/shortages has been taken
after obtaining sanction of the competent authority.

2.

Examine the procedure of booking of the overheads such as freight, handling,


insurance charges in the Stores Accounts.

3.

Error reports generated by computer after each month's processing are to be


specifically checked/reviewed by Internal Audit Team.

4.

To verify the raising of invoices of sale of scrap, deposit of SD and payments as


per terms of the sale order.

5.

Examine the method of fixation of price for sale of scrap (drums, packing
material, etc.) to employees.

6.

Ensure that proper memoranda record has been maintained, at sub-stores, of


department's ledger so as to check that excess material has not been issued
from main stores and lying unconsumed with concerned department.

7.

Check that in case of allotment of a new code whether code master is updated
by the Stores Department immediately with complete nomenclature of item.

8.

Ensure that the new code number is given by stores only after the approval of the
same by the competent authority.

9.

Verify that indent control no. is given by the stores only after checking the code
number or after issue of the new code number as the case may be.

10.

Review and check the award of contracts in respect of material handling,


unloading of oil and coal including the contract for supervision of coal at colliery.
Also see that payments are released as per terms and conditions of the contract.

11.

Review of SD/EMD including the system and follow up of the bank guarantees.

12.

Review of missing and diverted wagons/rakes of coal and oil and settlement
thereof.

13.

Review the other recoverable/ claims particularly long outstanding cases.

14.

Review the system of Physical Verification and procedure for accountal of


shortages/ discrepancies.

Finance & Accounts

9. 24

INTERNAL AUDIT MANUAL

15.

Review the system of providing services to outside parties for heavy equipments
including fixation and recovery of the charges.

16.

Deduction and deposit of taxes e.g. income tax including TCS on scrap, service
tax, entry tax/purchase tax /VAT as applicable.

F.

QUANTUM AND PERIODICITY


Quantum of checks to be exercised will be as under;

S. No.
1.
2.
3.
4.

Particulars
Pricing of stores receipt vouchers &
issue notes
Register of Provisional Liability for
Stores
Priced stores ledger

5.

Valuation of stores returned by user


department
Stores inventory

6.

Other items

Finance & Accounts

Extent of Checking
One months transactions in
each year.
One months transactions in
each year.
One months transactions in
each year.
One months transactions in
each year.
One months transactions in
each year.
One months transactions in
each year.

9. 25

INTERNAL AUDIT MANUAL

9.6

BUDGET & MR ACCOUNTS SECTION

9.6.1

Introduction
Budget Accounts Section is concerned with the preparation of Capital, Revenue,
Cash, Inventory and other Overhead budgets besides production and sales plan
The Budget Accounts Section has to also ensure that all the concerned
departments adhere to the targets laid down in the budgets.

9.6.2

Audit guidelines / checklist


The following checks will be exercised while conducting the audit of Budget
Accounts Section:
1.

Examine whether budgets are planned comprehensively and in sufficient


detail indicating quantitative and monetary targets to the extent possible for
subsequent effective control. Ensure that there is a realistic and accurate
budgeting framework and plan in place across all units/offices, which
accurately reflects the structure and operations of NFL.

2.

Verify that budgetary systems are effective and adequately meet the control
objective, of providing an accurate and reliable budgeting system, as a means
to ensure that agreed financial and business objectives are achieved.

3.

Verify whether the initial data for the preparation of budgets have been
worked out by the concerned departments with adequate supporting details
and in accordance with the time schedule.

4.

Check whether production plan/sales plan have been prepared in sufficient


detail.

5.

Verify that the subsidiary budgets viz. Cash Budget, Inventory Budget,
Working Capital Budget and Repairs & Maintenance Budget etc. have been
prepared as per norms prescribed.

6.

Verify that the relevant portions of the approved budgets have been
circulated to the concerned departments.

7.

Verify whether the plant managers are comparing the actual with the
budget allotments for the period and the budgets are actually being used as
instruments of control.

Finance & Accounts

9. 26

INTERNAL AUDIT MANUAL

9.6.3

8.

Check that corporate office has accorded item-wise approval for


procurement of items over and above the approved budget for Repairs &
Maintenance.

9.

Also ensure that the capital and replacement expenditure is being


compared with and watched against budget allocations as well as against
the sanctioned estimates.

10.

Monitoring progress against financial targets - Verify whether actual


performance and results have been reviewed periodically and reasons for
variations particularly quantity variations are analysed and budget
estimates for the remaining budget period modified accordingly at
appropriate intervals.

11.

Verify that all appropriation of the provisions made in the budget from one
head to another have been approved by the Competent Authority and no
re-appropriation has been made between capital and revenue allocations.

12.

Verify that Inter Unit comparison of consumption norms, major controllable


expenses/per unit cost and level of inventory etc is being done by the Unit.

13.

To see that cost review meetings are being regularly held and verify the
implementation of the decision taken.

14.

The internal auditor is to keep himself updated with the guidelines, policies,
instructions and clarifications given by the Government / FICC with regard
to subsidy applicable to NFL.

15.

Examine whether records required to be maintained with regard to subsidy


have been correctly and adequately maintained.

16.

Examine whether claim for subsidy has been correctly raised and timely
submitted to the appropriate authority with full documentary evidence.

17.

Review whether all the terms and conditions and guidelines of FICC for
claim for subsidy have been fulfilled.

18.

Examine whether payment against claim is timely received and for that
vigorous follow up is being made.

QUANTUM & PERIODICITY


Items 1 to 18 Twice in a financial year.

Finance & Accounts

9. 27

INTERNAL AUDIT MANUAL

9.7

INSURANCE ACCOUNTS SECTION

9.7.1

Audit guidelines / checklists


The internal audit shall exercise the following checks. In addition, internal
auditors should also refer to the Handbook on Insurance attached at Appendix
- 4 which has been developed for use as a reference tool. The handbook
contains a broad framework of the insurable risks for which cover is available, a
description of the various insurance policies available, guidelines on insurance
cost control and guidelines for evaluating, controlling, treating and managing
insurance risks.

A.

INSURANCE POLICIES

1.

Internal audit while making an assessment of the adequacy of insurance


coverage at various offices and plants of NFL for all insurable-type risks will
ensure /ascertain;
 That Insurance cover has been taken in respect of all assets and additions
made thereto during the year and any fixed assets yet to be installed and
lying under capital work in progress are also covered by insurance.
 Whether existing insurance limits are adequate for worst case loss,
 The seamless integration of various policies to the extent practicable,
 Whether other risks not presently covered need to be brought under
insurance cover and a conscious decision to this effect has been taken.

2.

Review all the insurance policies ensuring that these have been taken as per
directions of the Corporate Office.

3.

Check that wherever called for assets like Buildings. Plant etc are insured on a
replacement cost basis subject to the terms, conditions, and exclusions of the
policy.

4.

Insurance Values - Examine the basis of valuation of insurance policies and that
there are no cases of under insurance so that average clause is not invoked in
case of a claim. Test check the procedure being followed and forms being used
to collect details of insurable coverage /values from the concerned departments
and examine some of the reports submitted to insurance companies to:

Ascertain the manner of linking the original cost of assets with the
insurable value, and to

Finance & Accounts

9. 28

INTERNAL AUDIT MANUAL

Check as to how a change in insurable value is adjusted in the insurance.

5.

Premium Payments - Verify the premium payments with reference to the


insured values and policies. Also check Invoices for premiums are reviewed and
approved by the competent authority before payment.

6.

Renewal of Policies Verify that all the policies are renewed timely and that
there is no break in insurance. Assess whether controls on renewal are
adequate.

7.

Extension period of transit policies - To check that extension in period of


transit policy (imported) is taken only for the required period to avoid payment of
extra premium.

8.

Check that assets written off/retired during the year are excluded from the list of
insurable assets and that these are not insured.

9.

Proactive management of insurable risks Evaluate whether insurable risks


are proactively managed. This assessment may be undertaken once every two
years or at lesser intervals if circumstances so warrant. For this purpose a lineby-line evaluation of each existing insurance policy wording, examination of each
exclusion, condition, restriction, basis of loss determination and settlement and
insuring agreement for its potential effect shall be conducted. In addition whether
all commercially available coverage extensions incorporated are evaluated.

10.

Check that Insurance cover is obtained from commercial insurers (public and
private) who have strong financial ratings and a good track record for
settlement of claims.

11.

Verify if competitive bids have been used in the procurement of insurance when
the premium cost is estimated to exceed any Rupee limits that may be set by the
management and revised from time to time.

12.

Making the best possible arrangements ahead of time so that serious


financial harm does not result when a loss occurs through unforeseen,
unintended or accidental loss: Apart from a periodic review of existing policies
and as a part of the risk management process the periodic assessment shall also
take into account the need to control other insurable risks (hitherto not under
coverage). Whether the best possible arrangements are made ahead of time so
that serious financial harm does not result when a loss occurs through unforeseen,
unintended or accidental loss

Finance & Accounts

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INTERNAL AUDIT MANUAL

B.

INSURANCE CLAIMS

1.

Verify that the declarations in respect of transit insurance are made correctly and
well in time.

2.

Verify if there are any cases, which were included in the Insurance Declaration
statement but were the liability of the supplier as per the terms of the purchase
order?

3.

Verify that the claims for shortages, breakages, damages, non- delivery, short
delivery etc. are promptly lodged with the underwriters/carriers.

4.

Check the figures in the Register of Claims and reconcile the amount thereof with
the amount actually booked in the accounts.

5.

Ensure that there is no avoidable delay in furnishing the documents asked for by
the insurers.

6.

Quarterly ageing of claims Check that quarterly age-wise list of claims is


being prepared and ascertain the reasons for non-settlement. The position of
outstanding claims for more than six months will be ascertained.

7.

Appraise the procedures and the adequacy thereof for the reporting of accidents
and losses by operating departments to claims section.

8.

Test check a few cases of current and processed claim files beginning with
original reports of loss and following through the final settlement of claims which
are closed. Due attention is to be given to compliance with policy and procedures
with regard to:

Promptness in reporting of loss by the concerned department,


Completeness and accuracy of documentation,
Values claimed in relation to terms of insurance policy,
Reduction of losses through recovery of salvaged material,
Accounting of realised claims,
Accounting treatment of pending and closed claims.
Follow up action and adequacy thereof on pending claims.
Verifying that safeguards as required in terms of the policy are in place so
that claims cannot be denied.

Finance & Accounts

9. 30

INTERNAL AUDIT MANUAL

C.

FIRE CLAIMS UNDER MEGA POLICY


Checklist to minimize risks to life and property from fire

1.

Identify and remedy everything in the premises that could interfere with ability of
workers and staff to get out quickly in an emergency including windows that are
stuck, heavy objects blocking an exit and broken and dangerous locks.

2.

Always keep escape routes clear of clutter.

3.

Replace two-keyed deadbolt locks (require a key inside) which can delay a quick
exit, and made sure that security bars on doors and windows have a quick
release mechanisms.

4.

Ensure smoke alarm sound is recognizable to all.

5.

Ensure that copies of the escape plan sketches are posted in a visible areas of
the premises.

6.

Hold fire drills frequently and at various times so that escape plans become
second nature.

7.

During fire drills, also practise what it would be like to escape through smoke by
getting down on hands and knees and crawling below the smoke to the nearest
exit.

8.

All flammable items, such as turpentine, gasoline, paints etc., kept in their
original containers in a locked and separate storage areas approved for such
storage.

9.

Proper inspections of all boilers, chimneys, central furnaces and other equipment
by professionals to be done on a periodic basis.

10.

Ensure that No Smoking Zones signs are clearly visible

11.

Ensure that electrical outlets, cables extension cords and power strips are not
overloaded.

12.

Check all wires, cables and cords for damage, periodically and ensure all unused
electrical outlets are covered.

Finance & Accounts

9. 31

INTERNAL AUDIT MANUAL

Smoke Alarms
13.

Ensure smoke alarms are on every level and at each critical area of the
premises.

14.

Ensure smoke alarms are mounted high on walls or ceilings away from windows,
doors and ducts where drafts might interfere with their operation.

15.

Smoke alarms should be located well away from the path of steam, which can
result in false or nuisance alarms.

16.

Smoke alarms to be tested periodically preferably monthly to make sure they are
in good working order.

17.

Where necessary, smoke alarms should be interconnected with battery back-up


so that if one alarm operates, they all signal together.

18.

Are smoke alarms replaced at intervals prescribed by the manufacturer.

Fire Escape Plans


19.

Ensure that all exit points are clearly marked.

20.

Ensure that sketch of floor plans of the premises including all offices, rooms,
windows, interior and exterior doors, stairways, fire escapes and smoke alarms
are available and that personnel are made familiar with the layout.

FIRE CLAIMS CHECKLIST


(a)

The insured shall give immediate written notice to the Company of any loss,
protect the property from further damage, forthwith.
The company shall prepare a record of the following:

(b)

Prepare details pertaining to all the policies involved in fire accident as follows:
Policy No.

Finance & Accounts

Risk
covered

Location

Sum
insured

Estimated
amount of loss

9. 32

INTERNAL AUDIT MANUAL

(c)

The date, time and origin of the loss,

(d)

Period of Insurance,

(e)

Nature and Cause of Loss (Describing the circumstances leading to the loss)

(f)

Details of insurance with any other insurance company on the risk involved in the
fire/accident (this includes all other contracts of insurance, whether valid or not,
covering any of said property).

(g)

The interest of the insured in the property - If insured is not sole owner, the
nature of his/their interest in the property and details of other interests.

(h)

Whether loss intimated to:


(i) Police
(ii) Fire Brigade
(Documents/Reports in this regard to be kept in proper custody and properly
filed)

(i)

In case any claim was reported in the past on the same property during current
policy period, the following details to be documented:
(a)
(b)
(c)
(d)
(e)

Cause
Date of incident
Claim
Policy Issuing Office
Amount of claim paid/Outstanding Rs.

(j)

The actual value of each item thereof and the amount of loss thereto; all
encumbrances thereon,

(k)

Any changes in the title, use, occupation, location, possession or exposures of


said property since the issuing of the policy,

(l)

It shall keep on record the descriptions and schedules in all policies and, if
required, verified plans and specifications of any building, fixtures or machinery
destroyed or damaged.

(m)

Where practicable, separate the damaged and undamaged property, put it in the
best possible order and a complete inventory of the destroyed, damaged and
undamaged property, showing in detail quantities, costs, actual cash value and
amount of loss to be claimed within the time period stated in the policy, unless
such time is extended in writing by the Insurance Company.

Finance & Accounts

9. 33

INTERNAL AUDIT MANUAL

D.

DISCOUNT ON PREMIUM

1.

Insurance companies allow some discount on complying with Tariff Advisory


Committee's requirements /stipulations. Ascertain whether such discounts are
being availed.

E.

INSURANCE COST CONTROL


The following steps shall be considered to control insurance costs:

1.

Minimizing incidence of premium: Through the setting of premiums and


coverage conditions, insurance markets sometimes induce improved safety
measures and offer effective protection against the financial consequences of
such accidents. Check that all necessary steps to comply with changing
requirements of insurers in order to negotiate reductions in premiums in future
have been taken.

2.

Loss control measures: The best way is by preventing or controlling losses.


Verify that units/plant has taken steps to reduce insurance premiums by stepping
up effective loss control measures to cut down on claims.

3.

Examining scope for increasing deductibles: NFL may also increase


deductibles in future to reduce premiums by considering adoption of risk
retention or self-insurance in appropriate cases. With an excellent loss record, for
instance, it may be possible to increase deductibles and thereby take on greater
risk.

4.

Considering multi-year policies: A potential cost-saving measure is a multiyear policy, in which the premium is set for several years, instead of one. This
option, though not widely available can allow for NFL to plan on a set premium
for a number of years. The possibility of obtaining insurance cover on this basis
for some of the policies can be explored.

5.

Claims Management: The company should comply at all times with


requirements of insurers, as stated in the policies, to ensure that claims are
promptly and adequately settled. Any special requirements stated in the policies
shall be documented and circulated to all concerned departments to ensure
compliance with the policy. Internal Audit shall ensure that this is done.

Finance & Accounts

9. 34

INTERNAL AUDIT MANUAL

F.

QUANTUM AND PERIODICITY


Insurance Claims (refer para B) will be audited once in a half year while all
other areas will be covered by internal audit annually or as otherwise specified in
any para above.

9.8

CENTRAL ACCOUNTS SECTION

9.8.1

Introduction
This section is responsible for the upkeep of central/sub-ledgers, Assets ledger,
compilation of periodical returns i.e. monthly trial balance, monthly accounts,
inter-unit adjustments and reconciliation thereof, calculation of depreciation,
annual accounts and income tax returns.

9.8.2

Audit guidelines / checklist


The checklist given below contains a reference to various important audit checks
which internal auditors should apply while conducting the audit of the section.
The checklist should not be viewed as close ended and internal auditors are
encouraged to make further inquires/verifications as may be necessary during
the course of the internal audit.

A.

UP-KEEP OF MAIN-LEDGER / SUB-LEDGER

1.

Review that all the ledgers are prepared regularly and are up-to-date.

2.

Check that the accounts in the Central Ledger are reviewed monthly and
irregular balances, if any, are probed into and rectified/appropriate action taken
for their rectification.

B.

UP-KEEP OF ASSETS LEDGER AND CALCULATION OF DEPRECIATION

1.

Review the Asset Ledger to ascertain that complete details of all assets are
recorded therein monthly and are reconciled with the central ledger.

2.

Check that adjustments in the case of assets transferred, sold or otherwise


disposed of are correctly recorded on a monthly basis and orders/sanctions for
transfer/sale/disposal (as the case may be) of the competent authority are
obtained and acted upon.

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3.

Ascertain and check that the assets have been verified physically at the
prescribed intervals and proper action has been taken for missing/unserviceable
items after observing the correct procedure.

4.

Ensure that the system of numbering/coding of each asset to enable


identification and easier stock verification is implemented fully.

5.

Test check the depreciation charged to ensure correctness at the approved


rates.

C.

PERIODICAL RETURNS

1.

Verify whether periodical returns i.e., monthly trial balance, monthly accounts,
inter-unit adjustments and reconciliation are prepared and reviewed.

2.

Check that timely action is taken to eliminate the possibility of delay in


compilation of quarterly, half-yearly and annual accounts.

D.

COMPLIANCE WITH ACCOUNTING STANDARDS ISSUED BY THE


INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA WHICH ARE
MANDATORY IN NATURE
The accounting standards are developed by the Institute of Chartered
Accountants of India (ICAI), being the premier accounting body in the country in
order to harmonise and improve standards of financial accounting and reporting
in the country so that the users of financial statements can make well-informed
decisions.
Section 211 (3A) of the Indian Companies Act 1956 requires that every Profit and
Loss Account and Balance sheet shall comply with Accounting Standards issued
by the Institute of Chartered Accountants of India (lCAl)/ National Advisory
Committee on Accounting Standards (NACAS). However, as per Section 211
(3B) of the Company Law where compliance of requirement of Accounting
Standards cannot be made the disclosure should be made stating:
a)

Deviations from Accounting Standards

b)

The reasons for such deviations and

c)

Financial effect, if any, arising due to such deviation.

As of April 2008, the following Accounting Standards have been issued by the
Institute of Chartered Accountants of India (lCAI), which are mandatory in nature.

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Some of these are not applicable in NFLs case these are marked in bold text.
Some others may not be presently applicable but can become applicable at a
future date e.g., Accounting for Amalgamations..
Sl.
AS No. Title of the Standard
No.

Status

1.

AS 1

Disclosure of Accounting
Policies

Mandatory - Issued in 1979

2.

AS 2

Valuation of Inventories

Mandatory - 1.4.1999
Issued June 1991, Revised in
1999

3.

AS 3

Cash Flow Statements

Mandatory 1.4.2001
Issued Jun 1981, Revised in
1997

4.

AS 4

Contingencies and Events


Occurring after the Balance
Sheet Date

Mandatory 1.4.1995
Issued Nov. 1982, Revised in
1995

5.

AS 5

Net Profit or Loss for the


Mandatory 1983
Period, Prior Period Items and Issued Nov. 1982, Revised in
Changes in Accounting Policies 1997, limited revision in 2001

6.

AS 6

Depreciation Accounting

Mandatory - 1.4.1995
Issued Nov 1982, Revised in
1994

7.

AS 7

Construction Contracts
(AS 7 not applicable to NFL)

Mandatory 1.4.2003
Revised in 2002

8.

AS 8

Accounting for Research and


Development

Issued in 1985. This standard


stands withdrawn from the date
of Accounting Standard
(AS) 26, Intangible Assets,
becoming mandatory, for the
concerned enterprises (see AS
26).

9.

AS 9

Revenue Recognition

Mandatory. Issued in 1985

10.

AS 10 Accounting for Fixed Assets

Mandatory. Issued in 1985

11.

AS 11 The Effects of Changes in


Foreign Exchange Rates

Mandatory
Issued in 1989, Revised in
1994 and again revised in
2003

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Sl.
AS No. Title of the Standard
No.

Status

12.

AS 13 Accounting for Investments

Mandatory. Issued 1993,


Limited Revision in 2003

13.

AS 14 Accounting for Amalgamations

Mandatory in 1.4.1995
Issued in 1994, Revised Feb in
1997

14.

AS 15 Accounting for Retirement


Benefits in the Financial
Statements of Employers
(recently revised and titled as
'Employee Benefits')

Mandatory in 1.4.1995

15.

AS 16 Borrowing Costs

Mandatory 1.4.2000

16.

AS 17 Segment Reporting

Mandatory 1.4.2001
Issued in 2000

17.

AS 18 Related Party Disclosures

Mandatory 1.4.2001
Issued in 2000

18.

AS 19 Leases

Mandatory 1.4.2001
Issued in 2001

19.

AS 20 Earnings Per Share

Mandatory 1.4.2001
Issued in 2001

20.

AS 21 Consolidated Financial
Statements

Mandatory 1.4.2001
Issued in 2001

21.

AS 22 Accounting for Taxes on


Income

Mandatory 1.4.2001
Issued in 2001

22.

AS 23 Accounting for Investments in


Associates in Consolidated
Financial Statements

Mandatory 1.4.2002
Issued in 2001

23.

AS 24 Discontinuing Operations

Mandatory 1.4.2004
Issued in 2002

24.

AS 25 Interim Financial Reporting

Mandatory 1.4.2002
Issued in 2002

25.

AS 26 Intangible Assets

Mandatory 1.4.2003
Issued in 2002

Finance & Accounts

Issued in 1995, Revised Feb in


1997

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Sl.
AS No. Title of the Standard
No.

Status

26.

AS 27 Financial Reporting of Interests Mandatory 1.4.2002


in Joint Ventures
Issued in 2002

27.

AS 28 Impairment of Assets

Mandatory 1.4.2004
Issued in 2002

28.

AS 29 Provisions, Contingent
Liabilities and
Contingent Assets

Mandatory 1.4.2004
Issued in 2003

With regard to the above, Internal Audit should exercise the following checks:
1. Check that compliance has been made with the Mandatory Accounting
Standards AS-l to AS-29 to the extent applicable to the Company. If
compliance with the requirements of any applicable accounting standard has
not been made whether the disclosure has been made as stated above.
2. Check that change in accounting policy, which has a material effect has been
disclosed to reflect the effect of such a change in financial statements of the
current period.
3. Check that the nature and amount of each extraordinary item although shown
in net profit or loss for the current period, separately disclosed in the
statement of profit and loss in a manner that its impact, on current profits or
loss can be perceived.
4. Check that Foreign Exchange rates prevalent as on 31st March, of the year
have been adopted as a basis for accounting for Foreign Exchange
transactions for the purpose of purchase/sale of foreign exchange.
5. Check that depreciation has been provided for in conformity with provisions of
schedule XIV to Company's Act 1956 on SLM by leaving a residual value of
5% in respect of plant and machinery and Re. 1/- for each item in respect of
other fixed assets.
6. Check that leasehold property is amortized over the lease period.
7. Ascertain that present value of future liability towards gratuity and encashable
EL / HPL, is accounted for, on the basis of year end actuarial valuation.

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8. Deferred Taxes - Show deferred tax assets and liabilities separately from
assets and liabilities representing current tax for the period under a separate
heading in the balance sheet. Disclose major components of deferred tax
assets and deferred tax liabilities along with their balances in the notes to
accounts.
9. Discontinuing Operations - Any disclosures required by this Standard should
be presented separately for each discontinuing operation.
10. Intangible Assets Check that the information is available for disclosure in
the financial statements for each class of intangible assets, distinguishing
between internally generated intangible assets and other intangible assets.
Rates of amortization are also to be disclosed.
11. Impairment of Assets Amount of impairment loss is recognized in the P/L
account verify that has been computed for various assets which may have
suffered impairment and also that details of line items of P/L account in which
impairment losses are included are disclosed.
Impairment of Assets (AS) 28
The objective of the Standard on Impairment of Assets is to prescribe the procedures that a
company applies to ensure that its assets are carried at no more than their recoverable
amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds
the amount to be recovered through use or sale of the asset.
This Statement should be applied in accounting for the impairment of all assets, other
than:
a)

Inventories (AS 2, Valuation of Inventories);

b)

Assets arising from construction contracts (AS 7, Accounting for Construction Contracts
which pertains to Construction Companies);

c)

Financial assets, including investments that are included in the scope of AS 13,
Accounting for Investments; and

d)

Deferred tax assets (AS 22, Accounting for Taxes on Income).

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Assets Usually Covered for Consideration of Impairment of Losses


i.
ii.

Cash generating units or assets (e.g. Machinery and Equipment).


Corporate Assets These include group or divisional assets such as the building of a
headquarters or a division of the enterprise, EDP equipment or a research centre.
The structure of an enterprise determines whether an asset meets the definition of
corporate assets. Key characteristics of corporate assets are that they do not
generate cash inflows independently from other assets or groups of assets and their
carrying amount cannot be fully attributed to the cash-generating unit under review.

iii.

List of other assets which suffer impairment are provided


Patents, Know how, Goodwill, Databases, Computer Softwares (Other than Operating),
Mining Rights, Trade Secrets, Trademark, Trade name, Service mark,Internet domain
names, Non-compete agreement, Licenses and Copyrights, Royalty agreement, Lease
Agreement, Franchise Agreement, Service or Supply Agreement, Process and Recipes,
Other Intangible Assets

12. Provisions, Contingent Liabilities, and Contingent Assets Ensure that


appropriate recognition criteria and measurement bases are developed and
applied to provisions and contingent liabilities and that sufficient information is
disclosed in the notes to the financial statements and similarly that
appropriate accounting for contingent assets is done in the accounts.
E.

SIGNIFICANT ACCOUNTING POLICIES


Ascertain that significant accounting policies on the issue given below, as
adopted by Company, have been kept in mind by the Unit at the time of
preparation of Unit accounts:

FIXED ASSETS
1.1
1.2
1.3

Capitalization
License and know-how fee
Depreciation

INVESTMENTS

CURRENT ASSETS LOAN & ADVANCES


2.1
2.2
2.3

Inventory
Claims
Pre-paid expenses

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LIABILITIES & PROVISIONS


4.1

Provisions

5.

PROFIT & LOSS ACCOUNT

5.1

Escalation claims (under the Retention Price Scheme)

5.2

Sales

5.3

Retirement benefits

5.4

Prior period items

5.5

Research & development

5.6

Allocation of CO expenses

6.

ACCOUNTING POLICIES
Significant accounting policies followed by the Company are as under:
SIGNIFICANT ACCOUNTING POLICIES
1.1
Basis of Preparation of Financial Statements
The financial statements are prepared as a going concern, under the historical
cost convention in accordance with the generally accepted accounting principles
in India (GAAP) and the provisions of the Companies Act, 1956.
1.2
Use of Estimates
The preparation of the financial statements in conformity with GAAP in India
requires management to make estimates and assumptions, wherever necessary,
that affect the reported amount of assets and liabilities and contingent liabilities
as at the date of financial statements and the amounts of revenue and expenses
during the period. Actual results could differ from those estimates. Any revision
to such estimates is recognized in the period in which the results are
known/materialized.
1.3
Fixed Assets
Fixed Assets are stated at cost of acquisition (including expenses allocated
wherever applicable) less accumulated depreciation and impairment loss, if any.
Fixed Assets acquired out of capital grants are accounted for net of grants
received.
Expenditure during construction attributable to the fixed assets incurred upto the
date of commercial production are capitalized.

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1.4
Borrowing Costs
Borrowing costs directly attributable to the acquisition or construction of
qualifying assets are capitalized. A qualifying asset is one which necessarily
takes a substantial period of time to get ready for intended use. Other borrowing
costs are charged to revenue.
1.5
Depreciation
Depreciation on fixed assets is provided at the rates specified under Schedule
XIV of the Companies Act, 1956 on straight line method retaining residual value
of five percent in respect of plant and machinery and computer systems and
rupee one in respect of capital spares and other fixed assets.
Leasehold land and buildings are amortized over the lease period. Buildings
constructed over leasehold land are depreciated as per the provisions of
Schedule XIV of the Companies Act, 1956.
Addition to items of fixed assets costing up to Rs.5,000/- is depreciated fully in
the year of acquisition
License and process know-how fee having future economic benefits is amortized
on straight line method over a period of ten years.
1.6
Investments
Long term investments are carried at cost, after providing for diminution in value
if it is of a permanent nature. Current investments are valued (individually) at
lower of cost and quoted/fair value.
1.7
Inventories
Raw Materials, packing materials and stores & spares, are valued at lower of
weighted average cost and net realizable value.
In case of stores and spares not moved for more than two years and upto five
years, provision is made at five percent per annum (on straight line basis) and
charged to revenue. In case of stores and spares not moved for more than five
years/identified as surplus or obsolete, value is taken as certified by an
Engineering Valuer and diminution, if any is charged to revenue.
Finished and semi-finished goods are valued at lower of weighted average cost
and net realizable value based on the applicable Retention Price/Sale Price. The
plant- wise finished stocks lying at warehouses are determined on first-in-first-out
basis.
1.8
Foreign Currency Transactions
Transactions in foreign currency are accounted at the exchange rate prevailing
on the date of the transaction.

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The value of assets and liabilities expressed in foreign currency are translated at
the exchange rate prevailing at the end of the year.
Exchange Gain/Loss on conversion of foreign currency transactions is
recognized as income/expense.
1.9
Employees Benefits
Provision towards encashable leave, gratuity, long service award, social security
scheme and benefits under post retirement medical and settlement schemes,
are made based on the actuarial valuation as at the end of the year.
Companys contribution under Provident Fund and Employees Family Pension
Scheme are accounted for on accrual basis.
1.10 Adjustments pertaining to earlier years and prepaid expenses
Income/Expenditure relating to prior period up to Rs.50,000 in each case is
considered as income/expenditure of current year.
Prepaid expenditure up to Rs.10,000 in each case is charged to revenue in the
year in which it is incurred.

1.11
Revenue Recognition
Sales include excise duty wherever applicable and are net of rebates.
Subsidy under Fertilizer Pricing Policy is recognized based on quantity sold.
Equated freight subsidy is recognized on quantity despatched from the plants.
Subsidy is estimated taking into account the guidelines, policies, instructions and
clarifications given by the Government, pending notification from Fertilizer
Industry Coordination Committee (FICC).
Sale of scrap/ waste materials is recognized on disposal.
1.12 Claims
Pending settlement, claims on underwriters/railways/others as assessed by the
Company are recognized in the year of lodgement. Claims for grade variation of
coal are recognized on the basis of company's laboratory analysis.
1.13 Deferred Tax
The deferred tax resulting from timing differences between book profit and
taxable profit for the year is accounted for applying the tax rates and laws that
have been enacted or substantially enacted as on the Balance Sheet date.

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Deferred tax assets are recognized to the extent there is a virtual certainty that
the assets can be realized in future and are reviewed for the appropriateness of
their respective carrying values at each Balance Sheet date.

F.

CHECKLIST FOR REVIEW OF INCOME TAX RETURN

1.

Return is to be filed in Form ITR 6 for AY 2008-09 and the last date for filing is
30th September 2008

2.

Deduction u/s. 10A, 10B, 80-IA, 80-IAB, 80-IB & 80-IC shall not be allowed
unless the return has been filed on or before the due date. Likewise, the losses, if
any, shall not be allowed to be carried forward unless the Return has been filed
on or before the due date.

3.

Form No. ITR 6 and schedules forming part thereof are very much in detail and
to facilitate filling of the return, it will be necessary that the company maintains
heads of accounts as given in ITR 6 and schedules thereof.

4.

Classify all items of income under the following heads of income

(a)

(A) Income from house property, (B) profit and gains from business or profession,
(C) capital gains, and (D) Income from other sources.
Compute taxable income of the current year (i.e., the previous year) under each
head of income separately in the schedules which have been structured so as to
help in making these computations as per provisions of the IT Act. These
statutory provisions decide what is to be included in your income, what you can
claim as an expenditure or allowance and how much, and also what you cannot
claim as an expenditure / allowance.
Set off current years head-wise loss(es) against current years head-wise
income(s) as per procedures prescribed by the law. A separate schedule is
provided for such set off.
Set off, as per procedures prescribed by the law, losses, allowances or earlier
assessment year(s) brought forward. Also compute losses and / or allowances
that could be set off in future and is to be carried forward as per procedures
prescribed by the law.
Aggregate the head-wise end-results as available after (d) above; this will give
gross total income.
From gross total income, subtract, as per procedures prescribed by the law,
deductions mentioned in Chapter VIA of the Income Tax Act. The result will be
the total income.

(b)

(c)
(d)

(e)
(f)

5.

Computation of income tax, surcharge, education cess including secondary and


higher education cess and interest in respect of income chargeable to tax-

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(a)
(b)

(c)
(d)
(e)
(f)

6.

Compute income tax payable on the total income. Special rates of tax are
applicable to some specified items.
In case the tax liability computed as above is less than 10% of book profit, the
company is required to pay minimum alternate tax (MAT) under section 115JB at
the rate of 10% of the profit. The excess tax so paid is allowable to be carried
forward for credit in the year in which tax liability under the normal provisions of
the Act is more than MAT liability. Such carry forward is allowable up to 5 years.
Add surcharge at the rate of 10% of the tax liability computed as explained in (a)
& (b) above. No surcharge will be levied if net income of the company is less
than Rs.1 crore.
Add education cess including secondary and higher education cess at the rate of
3% on the tax payable plus surcharge.
Add interest payable as prescribed by the law to reach total tax, surcharge and
interest payable.
Deduct the amount of prepaid taxes, if any, like tax deducted at source,
advance tax and self assessment tax. The result will be the tax payable or
refundable.
This forms has to be compulsorily furnished to the Income Tax Department in
any of the following manners:
(i)
(ii)

Furnishing the return electronically under digital signature


Transmitting the data in the return electronically and thereafter, submitting
the verification of the Return in Form ITR V

7.

No document including TDS / TCS certificate, tax audit report etc. should be
attached to this Form.

G.

CHECKLIST FOR REVIEW OF FBT PORTION OF INCOME TAX RETURN

1.

Chapter XII-H of the Act relates to income-tax on fringe benefits paid to deemed
to have been paid by an employer to his employee.
Section 115WB provides the list of fringe benefits provided or deemed to have
been paid by an employer to his employees which are chargeable to tax. Section
115WC provides as to how to compute the value of the fringe benefits provided
or deemed to have been provided.
Additional income tax (fringe benefit tax) is required to be paid by every specified
employer at the rate of 30% on the value of such fringe benefits. Surcharge and
education cess including secondary and higher education cess at specified rates
are also to be paid on fringe benefit tax. FBT is payable by an employer even if
no income tax is payable by him on his total income.
The CBDT had issued an exhaustive circular No.8/2005 dated 29.8.2005
explaining the provisions relating to fringe benefit tax. In case of any doubt, the
assessee may refer to the said circular.

2.

3.

4.

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H.

CHECKLIST ON CENTRAL EXCISE

Central Excise duty is an indirect tax levied on goods manufactured in India. Excisable
goods have been defined as those, which have been specified in the Central Excise
Tariff Act as being subjected to the duty of excise.
H.1

Basic Procedures

1.

Registration is compulsory for (a) every manufacturer or producer of excisable


goods (b) warehouse where goods are stored without payment of duty. As per
Rule 9 of Central Excise Rules (Earlier rule 174), every person who produces,
manufactures, carries on trade, holds private storeroom or warehouse or
otherwise uses excisable goods shall get registered. Application for registration
should be made in prescribed form A-1. Separate registration is required for each
separate premises. Every person who produces or manufactures excisable
goods, is required to get registered, unless exempted. [Rule 9 of Central Excise
Rules]. If there is any change in information supplied in Form A-1, the same
should be supplied in Form A-1. Registration is not transferable. Change in
constitution of company should be intimated within 30 days of change. In case of
such change, fresh registration is not required. If the manufacturer ceases to
carry on operations for which he is registered, he should apply for de-registration.
If there is any change in information given in form A-1, the change should be
informed in form A-1 itself.

2.

Manufacturer is required to maintain Daily Stock Account (DSA) of goods


manufactured, cleared and in stock. [Rule 10 of Central Excise Rules].

3.

Goods must be cleared under Invoice of assessee, duly authenticated by the


owner or his authorised agent. [Rule 11 of Central Excise Rules].

4.

Duty is payable on monthly basis through TR-6 challan / Cenvat credit by 5th of
following month, except in March the duty shall be paid by the 31st day of March.
[Rule 8].

5.

Cenvat records and return by 10th of following month [Cenvat Credit Rules].

6.

Monthly return in form ER-1 should be filed by 10th of following month. [Rule 12
of Central Excise Rules].

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7.

Every Assessee is required to submit Annual Financial Information Statement for


each financial year by 30th November of succeeding year in prescribed form ER4 [rule 12(2) of Central Excise Rules].

8.

Every assessee is required to submit Information relating to Principal Inputs


every year before 30th April in form ER-5, to Superintendent of Central Excise.
[Rule 9A(1) to Cenvat Credit Rules]. Any alteration in principal inputs is also
required to be submitted to Superintendent of Central Excise in form ER-5 within
15 days [rule 9A(2) to Cenvat Credit Rules]. Only assessees manufacturing
goods under specified tariff heading are required to submit the return. The
specified tariff headings are 22, 28 to 30, 32, 34, 38 to 40, 48, 72 to 74, 76, 84,
85, 87, 90 and 94; 54.02, 54.03, 55.01, 55.02, 55.03, 55.04. Even in case of
assessees manufacturing those products, only assessees paying duty of Rupees
one crore or more through PLA (current account) are required to submit the
return.

9.

Every assessee who is required to submit ER-5 is also required to submit


monthly return of receipt and consumption of each of Principal Inputs in form ER6 to Superintendent of Central Excise by tenth of following month [rule 9A(3) to
Cenvat Credit rules inserted w.e.f. 25-11-2004].

10.

Every assessee is required to submit a list in duplicate of records maintained in


respect of transactions of receipt, purchase, sales or delivery of goods including
inputs and capital goods, input services and financial records and statements
including trial balance [Rule 22(2)].

11.

Inform change in boundary of premises, address, name of authorised person,


change in name of partners, directors or Managing Director in form A-1.

12.

Large assessees who paid duty over Rs.1 crore through PLA are required to
submit on-line data of production, clearance and revenue every week [Required
by a circular not a statutory provision]

H.2

Following are the returns to be filed:

Form of Return

Description

ER-1
[Rule 12(1) of Central
Excise Rules]
ER-2
[Rule 12(1) of Central
Excise Rules]
ER-3
[Proviso to Rule 12(1)

Monthly Return
by large units

Finance & Accounts

Return by EOU

Who is required to
file
Manufacturers not
eligible for SSI
concession
EOU units

Quarterly Return
by SSI

Assessees availing
SSI concession

Time limit for


filing return
10th of following
month
10th of following
month
20th of following
quarter

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Form of Return

Description

Who is required to Time limit


file
filing return

of Central Excise
Rules]
ER-4
[Rule 12(2) of Central
Excise Rules]

Annual Financial
Information
Statement

ER-5
[Rules 9A(1) and 9A(2)
of Cenvat Credit Rules]

Information
relating to
Principal Inputs

ER-6 [Rule 9A(3) of


Cenvat Credit Rules]

Monthly return of
receipt and
consumption of
each of Principal
Inputs

Assessees paying
duty of Rs.1 crore
or more per annum
through PLA
Assessees paying
duty of Rs.1 crore
or more per annum
through PLA and
manufacturing
goods under
specified tariff
headings
Assessees required
to submit ER-5
return

H.3

for

Annually by 30th
November of
succeeding year
Annually, by 30th
April for the
current year (e.g.
return for 2005-06
is to be filed by
30-4-2005].

10th of following
month

Storage and Accounting of Goods


Since excise is a duty on manufacture of goods, duty liability is fastened as
soon as goods are manufactured. However, under Rule 4(1) of Central Excise
Rules, goods cannot be removed from the place they are produced or
manufactured without payment of duty. Thus, finished goods can be stored in
place of manufacture without payment of duty. This only defers the liability till
clearance of goods from factory.
There is no time limit within which goods must be removed from the place of
manufacture or production (that time it was store room). Duty is payable only
when goods are removed.
1. Daily Stock Account of stored goods - A daily stock has to be maintained
by every assessee. [Rule 10(1) of Central Excise Rules]. [earlier rule 53(1)].
The records should be maintained on daily basis, in a legible manner,
indicating particulars regarding (a) Description of goods manufactured or
produced (b) Opening Balance (c) Quantity produced or manufactured (d)
Inventory (i.e. stock) of goods (e) Quantity Removed (e) Assessable Value (f)
Amount of duty payable (g) Particulars regarding amount of duty actually paid.

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The first page and last page of such account book shall be duly authenticated
by the producer or manufacturer or his authorised agent. All such records shall
be preserved for 5 years.
2. Remission of duty on lost/destroyed goods - Goods which are fully
manufactured and entered in Daily Stock Account (DSA) are liable for duty.
However, if these are lost or destroyed in storage, by natural causes or by
unavoidable accident or are unfit by consumption for marketing, remission of
duty can be given by Commissioner on application. Section 5 provides that
Central Government can provide for remission of duty of excise payable on
excisable goods, which due to any natural cause, are found to be deficient in
quantity, by making rules in that behalf.
If the goods were not entered in 'daily stock account' as they were not fully
manufactured, question of remission of duty does not arise at all as there is no
duty liability.
The application for remission has to be made before removal of the goods from
factory. [Rule 21 of Central Excise Rules].
3. Penalty for not maintaining records - Not accounting for excisable goods
manufactured, produced or stored by assessee is an offence under Rule
25(1)(b) of Central Excise Rules. Penalty up to duty payable on goods can be
imposed and offending goods can be confiscated.
Goods can be confiscated and penalty can be imposed if DSA is not
maintained up to date and there is overwriting and cutting in the accounts.
4. Clearance of Goods from factory
Excisable goods can be removed from factory only under an Invoice.
Requirements of Invoice are as follows:
(a) Contents Of Invoice - As per Rule 11(2) of Central Excise Rules, invoice
shall contain (a) Registration Number (b) Name of consignee (c)
Description and classification of goods (d) Time and date of removal (e)
Quantity and Value of goods (f) Rate of duty (g) Duty payable on the
goods.
(b) Serial Numbered - Invoice should be serially numbered. Hand written
serial numbers shall not be accepted. The serial number should start from
1st April and will continue for the whole financial year.
(c) Invoice In Triplicate With Suitable Marks - Invoice should be in triplicate
and should be marked as follows (i) Original shall be marked ORIGINAL
FOR BUYER (ii) Duplicate copy shall be marked DUPLICATE FOR

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TRANSPORTER (iii) Triplicate shall be marked TRIPLICATE FOR


ASSESSEE.
(d) Serial Numbers To Be Informed - Before making use of the invoice book,
serial numbers shall be intimated to Range Superintendent.
(e) Rounding Up Of Duty - As per section 37D, duty, interest, penalty etc.
should be rounded off to nearest Rupee. Part less than 50 Ps shall be
ignored.
(f) Pre-Authentication Of Invoice - Each foil of the Invoice shall be preauthenticated by the assessee - by owner, working partner, Managing
Director or Secretary or any person duly authorised for this purpose, before
being brought into use. Copy of letter of authority should be submitted to
Range Office.
(g) Provisions in respect of computerisation of Invoices - Computerisation of
Invoices is freely permitted and no permission is required. If running
stationary is used, the stationary should be pre-printed with distinctive
names and marks of the assessee. After invoices are prepared, triplicate
copy shall be retained in bound book form. If invoices are prepared on
computer, generation of serial number by computer at the time of printing
of invoice on blank stationery of computer is permitted. However, this is so
only if the software is such that computer automatically generates number
and same number cannot be generated more than once.
(h) Relevant Date for determination of duty and tariff valuation Rule 5 of
Central Excise Rules provides that rate of duty and tariff valuation
applicable for excisable goods shall be decided as follows :
 Date of actual removal from factory or warehouse Duty will be
payable at rate and valuation as applicable at the time of actual
removal from factory or warehouse, except in case of khandsari
molasses.
 Date when goods cleared for captive consumption If excisable goods
are used within the factory (captive consumption), the date of removal
will be the date on which the goods are issued for such use within the
factory.
5. Payment of Duty
Goods have to be cleared from factory (or under bond for export or Chapter X
procedure without payment of duty), under an Invoice. Duty is payable on
monthly basis. Duty can be paid through current account (PLA) and/or Cenvat
credit.

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SPECIAL PROVISIONS FOR MONTH OF MARCH - Since Government


accounts close on 31st March, special provisions are made for payment of duty
in March. Duty in respect of clearances in the month of March are payable by
31st March only and not in the following month.
CENVAT CREDIT AVAILABLE INSTANTLY - Even if the manufacturer pays
duty on monthly basis, the buyer of goods is entitled to get Cenvat credit as
per Cenvat rules as soon as goods are received in the factory, as if the duty
has been already paid on the goods.
Maintenance of PLA Assessee should pay duty through account current
(Popularly known as PLA Personal Ledger Account). Any assessee who has
obtained 15 digit ECC number from Superintendent can operate a current
account. No specific permission is necessary.
The PLA is credited when duty is deposited in bank by TR-6 challan and duty
is required to be paid by making a debit entry in the PLA on monthly basis.
PLA and Cenvat credit should be used only for payment of excise duty and not
for other payments like rent, fines, penalties etc.
PLA contains following details : (a) Serial No. and date, (b) details of credit like
TR-6 challan number, date and amount - separately for each subhead of
excise duty like basic duty, special duty, additional duty etc. (c) details of debit
and (d) balance. PLA has to be maintained in triplicate using indelible pencil
and both sided carbon. Each entry should be serially numbered and should be
made on a separate line. The running serial number should start from 1 every
financial year. Both debit and credit entry should not be on same line and there
should be separate line for each debit or credit entry. Mutilations or erasures of
entries once made in PLA are not allowed. If any correction is necessary, the
original entry should be neatly scored out and attested by assessee. Two
copies of PLA and copies of TR-6 receipted challans shall be submitted along
with monthly / quarterly ER-1 return.

H.4

General highlights of Cenvat Scheme

1.

Credit of duty paid on input and input services - The Cenvat scheme is
principally based on system of granting credit of duty paid on inputs and input
services. A manufacturer or service provider has to pay excise duty and
service tax as per normal procedure on the basis of Assessable Value, which
is mainly based on selling price. However, he gets credit of duty paid on inputs
and service tax paid on input services.

2.

Input goods eligible for cenvat to manufacturer - Credit will be available of


excise duty paid on (a) raw materials (excluding few items) (b) material used in

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or in relation to manufacture like consumables etc. (c) Paints, packing


materials, fuel etc. used for any purpose. However, duty paid on high-speed
diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol) is not available
as Cenvat credit, even if these are used as raw materials or as fuel. The input
may be used directly or indirectly in or in relation to manufacture.
3.

Inputs goods eligible for cenvat to service provider - Credit will be available of
excise duty paid on inputs used for providing output services, except highspeed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol).

4.

No input credit if final product/output service exempt from duty/ service tax - No
credit is available if final product is exempt from duty or final service is exempt
from service tax. If the manufacturer/service provider uses common inputs both
for exempted as well as un-exempted goods/services, he should maintain
separate records for inputs/input services used for manufacture of exempted
final products and should not avail Cenvat on such inputs/input services.
However, if he does not maintain separate records and inventories of
inputs/input services used in exempted final products/services, he has to pay
an amount of 10% of price of exempted goods. In case of exempt services, he
can utilize Cenvat credit only up to 20% of service tax payable on output
service.

5.

Credit on basis of specified documents - Credit is to be availed only on the


basis of specified documents as proof of payment of duty on inputs or tax on
input services.

6.

Credit available instantly - Credit of duty on inputs can be taken up instantly,


i.e. as soon as inputs reach the factory is received. In case of input services,
credit is available only after the amount of Bill is paid to person who had
provided the service.There is no provision for refund of the excess Cenvat
credit. However, the only exception is in case of exports where duty paid on
input material or services used for exported goods is refundable. Other
exception is Tribunal can order refund when Cenvat credit could not be availed
due to fault / wrong action of the department.

7.

Cenvat on capital goods - Credit of duty paid on machinery, plant, spare parts
of machinery, tools, dies, etc., is available. However, upto 50% credit is
available in current year and balance in subsequent financial year or years.

8.

Waste and scrap is final product for Cenvat - As per Cenvat provisions, waste
or scrap is treated as a final product and its clearance is as if it is a final
product.

9.

No Cenvat if goods exported and exporter claims duty drawback An


assessee can get export incentives only once. Thus, if he avails Cenvat credit,

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he cannot claim excise portion of All India duty drawback rate. However, he
can avail customs portion of duty drawback rate even if he avails Cenvat.
10.

Service Provider eligible for Cenvat credit


As per rule 3(1), provider of output service shall be allowed to take Cenvat
credit of specified duties and taxes.
As per rule 2(p), output service means any taxable service provided by the
provider of taxable service, to a customer, client, subscriber, policy holder or
any other person, as the case may be, and the expressions provider and
provided shall be construed accordingly.
Thus, only a person who is providing taxable output service will be eligible to
take Cenvat credit.

11.

Duty paying documents for Cenvat


As soon as a manufacturer/service provider receives an input, he can avail
Cenvat credit of the duty paid on the inputs. However, in case of input service,
he is entitled to service tax credit only when he makes payment to service tax
provider. Documentary evidence is required regarding payment of duty on
inputs/tax on input services.
Rule 9(1) of Cenvat Credit Rules prescribes that Cenvat Credit can be taken
on the basis of


Invoice of manufacturer from factory

Invoice of manufacturer from his depot or premises of consignment agent





Invoice issued by registered importer


Invoice issued by importer from his premises or consignment registered with
Central Excise
Invoice issued by registered first stage or second stage dealer

Supplementary Invoice

Bill of Entry

Certificate issued by an appraiser of customs in respect of goods imported


through foreign post office

Challan of payment of tax where service tax is payable by other than input
service provider

Invoice, bill or challan issued by provider of input service on or after 10-92004

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12.

I nvoice, Bill or Challan issued by input service provider under rule 4A of


Service Tax Rules.

Provisions for sending inputs / capital goods for job work/testing/repairs Provisions contained in Rule 4(5)(a) of Cenvat Credit Rules for this purpose
are as follows:
i) Removal for processing/test - The inputs / capital goods can be removed as
such or after partial processing to job worker for further processing, testing,
repairs, reconditioning or any other purpose.
ii) Goods should be returned to factory/premises of service provider - After
carrying out the operation/test/repair etc., the goods should be returned to the
factory or premises of service provider within 180 days. If these are not
received back within 180 days of their being sent out, manufacturer/service
provider should pay an amount equivalent to Cenvat credit attributable to
inputs / capital goods. Payment can be through Cenvat credit or PLA. If the
inputs / capital goods come back after 180 days (say after 220 days),
manufacturer/service provider can take Cenvat credit of duty paid by him.

13.

Procedures and Records for Cenvat


I. The main procedures are





Maintaining records of inputs and capital goods


Mintaining records of credit received and utilised
Submit returns of details of Cenvat credit availed, Principal Inputs and
utilization of Principal Inputs in forms ER-1 to ER-6
Returns by dealer/service provider/input service distributor

II. Record of inputs and capital goods - The manufacturer of final products or
provider of output service or input service distributor shall maintain proper
records for the receipt, disposal, consumption and inventory of the inputs and
capital goods. The record should contain relevant information regarding (a) value
(b) duty paid (c) the person from whom inputs / capital goods have been
procured.
Burden of proof regarding admissibility of Cenvat credit is on the manufacturer or
provider of output service taking the credit.
III. Record of input services The manufacturer of final products or the provider of
output service shall maintain proper records for receipt and consumption of the
input services. The record should contain relevant information regarding
(a) Value of service
(b) Tax paid

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(c) Cenvat Credit taken and utilised


(d) Person from whom input service has been procured
IV. Cenvat Credit Record - Cenvat Credit record should be maintained, which is
similar to PLA. It is a current account of Cenvat credit received, credit utilised and
credit balance. This should give details of (a) credit availed against each input /
capital goods (b) credit utilised against clearance of final products or removal of
input as such or after processing or removal of capital goods as such (c) Balance
credit available.
Returns A manufacture has to be submit returns to Range Superintendent of
Central Excise in the prescribed forms ER-1 to ER-6 in respect of Cenvat Availed,
Principal Inputs, utilization of Principal inputs etc.. These are discussed in earlier
chapter and hence not reproduced here. Others have to submit returns as follows





Quarterly return by first stage/second stage dealer within 15 days from close
of quarter.
Half yearly return within one month from close of half year, by provider of
output services
Half yearly return within one month from close of half year, by Input Service
Distributor

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I.

CHECKLIST FOR COMPUTATION OF SERVICE TAX

Who is liable to
pay Service
Tax?

Provider of Services
Providing taxable services
in various sub-clause of
section 65 (105) of the
Finance Act, 1994

Recipient of Services
Liable to pay tax u/s.68(2) of
the Finance Act, 1994 read
with rule 2(1)(d) of Service
Tax Rules including importers
of services u/s.66A

Step 1 : Identification of Services


Step 1.1

Identify whether the service rendered or received is a taxable service within


the provisions of section 65 (105) of the Finance Act, 1994.

Step 1.2

If yes, what is its classification, i.e., appropriate sub-clause of section 65


(105) under which the service falls.

Step 1.3

Identify each service provided and received and make separate sheet for
every service provided and / or received for the purpose of service tax
return.

Step 1.4

Are you eligible for value based exemption (up to Rs.10 lacs in a financial
year w.e.f. 1.4.2008) and opting for the same.

Step 2 : Computation of taxable value of service rendered / received


Step 2.1

Payment of service tax depends upon taxable event of the service provided
or received. Taxable event of any service is Service provided or to be
provided.
Though taxable event is Service provided or to be provided, yet liability to
pay tax arises on receipt of payment including advance (even before
rendering of service).

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In case of transactions between associate enterprises (inserted vide


Finance Act, 2008), service tax shall be paid on receipt of payment or
crediting / debiting of the amount in the books of account, whichever is
earlier.
Liability to pay tax by importer of services u/s.66A and by recipient of
services are separately discussed.
If you are liable to pay tax on monthly basis, then computation shall be
made on monthly basis; otherwise on quarterly basis (hereinafter referred as
tax payment period)
Step 2.2

Computer the gross amount of taxable services during the tax payment
period as per the Service Tax (Determination of Value) Rules, 2006.
Separate calculations shall be made for amount accrued and amount
received / paid during the tax payment period for the purposes of Service
Tax Return.
The value of consideration received (or paid in case of service receiver),
other than in the form of money, shall be estimated in its equivalent money
value.
Gross amount includes:
a) Amount towards exported service,
b) Amount towards exempted service (other than export), and
c) Amount received as pure agent.
Gross amount excludes:
a) Service tax
b) Education cess
c) Secondary and higher education cess, and
d) Any other amount in terms of rule 6(2) of the Valuation Rules, 2006.

Step 2.3

Compute the value of export of services (It is not applicable for importer of
services u/s.66A).

Step 2.4

Compute the amount of general or specific exemption available under any of


the notifications.
This step does not include the value of export and abatement.
It includes the value-based exemption (up to Rs.10 lacs in a financial year
w.e.f. 1.4.2008). If claimed, then no entitlement for Cenvat Credit.

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Step 2.5

Compute the amount of abatement (partial exemption) available.


Abatement refers to the portion of value of taxable service which is exempt
in terms of a notification (such as notification No.1/2006).

Step 2.6

Compute the value of goods sold (notification No.12/2003 dated 20.6.2003).

Step 2.7

Compute the amount of taxable value.


It is the gross amount (amount received) computed in step 2.2 as reduced
by deductions as computed in steps 2.3to 2.6.
Note that in case of transactions between associate enterprises, it is receipt
of payment or crediting / debiting of the amount in the books of account,
whichever is earlier.

Step 2.8

Repeat the step 2 in relation to every service provided and every service
received.

Step 3 : Computation of Service Tax


Step 3.1

Compute the amount of service tax payable on the taxable value computed
in step 2.8.
Calculate tax at the prescribed rates:
General rate of tax 12%
Optional rates:

Step 3.2

Insurer carrying on life insurance business 1% of the gross amount of


premium charged by such insurer.
Air travel agents services 0.60% of basic fare in case of domestic
booking and 1.2% of basic fare in case of international booking.
A foreign exchange broker, including an authorised dealer in foreign
exchange or an authorised money changer, referred to in sub-clauses
(zm) and (zzk) of Section 65(105) In relation to purchase or sale of
foreign currency, including money changing 0.25% of the gross
amount of currency exchanged (w.e.f. 10.5.2008).
Works contractors 4% (2% from 1.6.2007 to 29.2.2008) of the gross
amount charged for works contract.

Compute the amount of education cess, which is 2% of the amount of


service tax computed in step 3.1.

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Step 3.3

Compute the amount of secondary and higher education cess, which is 1%


of the amount of service tax computed in step 3.1.

Step 4 : Computation of amount of service tax payable


Step 4.1

Amount of service tax as per step 3.

Step 4.2

Reduce the amount of Cenvat credit in relation to capital goods, inputs and
input service.
The term inputs, capital goods, input services shall be understood as
defined in the Cenvat Credit Rules 2004.
Recipients and importers of services cannot avail Cenvat Credit for payment
of service tax. However, the service tax, so paid, can be availed against the
inability to pay service tax arisen from providing the output services.

Step 4.3

Reduce the amount of Self Adjustment of tax in accordance with Rule 6(3),
6(4A), 6(4B) and 6(4C) of the Service Tax Rules.

Step 4.4

Balance amount is service tax payable for the return period.

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J.

CONTINGENT LIABILITY

1.

Contingent liability is defined in Accounting Standard (AS) 29 as under:

(a)

Contingent liability is a possible obligation that arises from past events and the
existence of which will be confirmed only by the occurrence or non-occurrence of
one or more uncertain future events not only within the control of the enterprise;
or
A present obligation that arises from past events but is not recognised because:

(b)

(i) it is not probable that an outflow of resources embodying economic benefits


will be required to settle the obligation; or
(ii) a reliable estimate of the amount of the obligation cannot be made
2.

An obligation is a present obligation if, based on the evidence available, its


existence at the balance sheet date is considered probable, i.e., more likely than
not. An obligation is a possible obligation if, based on the evidence available, its
existence at the balance sheet date is considered not probable.

3.

An enterprise should not recognise a contingent liability. A contingent liability is


disclosed at the balance sheet date giving a brief description of the nature of the
contingent liability and, where practicable:
a) an estimate of its financial effect;
b) an indication of the uncertainties relating to any outflow; and
c) the possibility of any reimbursement

4.

Where any of the information required is not disclosed because it is not


practicable to do so, that fact should be stated.

5.

In extremely rare cases, disclosure of some or all of the information required can
be expected to prejudice seriously the position of the enterprise in a dispute with
other parties on the subject matter of contingent liability. In such cases, an
enterprise need not disclose the information, but should disclose the general
nature of the dispute, together with the fact that, and reason why, the information
has not been disclosed.

6.

Examples of contingent liabilities are:

(a)
(b)
(c)
(d)
(e)

Claims against the company not acknowledged as debts


Disputed sales tax demand under appeal
Disputed excise demand under appeal
Disputed income tax demand under appeal
Disputed customs demand under appeal

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(f)
(g)
(h)
(i)
(j)

K.

Disputed liability relating to workman compensation for reinstatement and back


wages matter pending in the High Court
Guarantees given by companys bankers and outstanding
Counter-guarantees given by the company to the bankers of third party including
subsidiary or associate party
Guarantees given to banks and financial institutions for credit facilities /
performance guarantees extended by them to associate / group companies
Amount outstanding in respect of indemnities given by the company to banks for
loans given to third parties for companys business
QUANTUM AND PERIODICITY
a)

Up-keep of control ledger / sub-ledger

Once in each half year

b)

Up-keep of assets ledger & calculation of


depreciation

Once in a year

c)

Periodical returns

Once in each half year

d)

Quarterly, half yearly, annual accounts

Once in a year

e)

Accounting Standards Compliance

Annually

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9.9.

COST ACCOUNTS SECTION

9.9.1

Introduction
The Cost Accounts Section is responsible for computation of cost of fertilizers
and industrial products manufactured in NFLs Units. The section also compares
the actual cost of production for a month with the standard cost, and
consumption of materials and services with the norms laid down by the
Management. The Cost sheet is a tool for analysing the profitability and
productivity of semi-finished and finished products in the Units.

9.9.2

Audit guidelines / checklist


The following checks will be exercised while conducting the audit of Cost
Accounts Section;

1.

Check that "input and output statements" are being sent to HODs duly signed by
the person authorized by the Competent Authority in this behalf.

2.

Verify that salaries and wages are booked in the cost statements with reference
to the computerised department-wise analysis statement given by EDP
department.

3.

Verify the cost of raw material, utilities, stores consumed as shown in the cost
statements with reference to the input and output statements and issue notes as
given in the summary of issue notes received from the computer section. The
correctness of the prices may be verified/cross-checked from the priced stores
ledger.

4.

See that proper records are maintained showing various items of over-heads and
these have been analysed, classified and grouped into "Works, General
Administration and Selling and Distribution Overheads and properly allocated to
various products/utilities. Also ascertain that expenses such as insurance, rent
and rates etc. are properly allocated and included in the cost of production
statement.

5.

Check that depreciation and interest have been calculated on approved basis
and allocated in various cost centres/service centres in the prescribed proportion.

6.

Ensure that rates of Depreciation have been incorporated and considered


correctly.

7.

Ensure that periodically at the units level cost review meetings are conducted
and proper action as suggested in the meetings are implemented from time to
time to cut the cost of production.

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8.

Ensure that cost centre-wise accounts are prepared and tallied with the Main
Accounts Head (each plant) on quarterly basis.

9.

Verify that the costs of catalysts etc. are allocated to the finished products
depending upon their useful life by the constituted committee as approved by the
Management.

10.

See that cost of service departments has been properly allocated to various cost
centres in the approved proportions.

11.

Check that monthly variation (quantity and price-wise) statements have been
prepared to show variations between standard cost and actual cost and that
cause-wise analysis of variations is recorded with reference to norms of
consumption, production plan and budgeted expenses.

12.

Verify that the material at site account as indicated by the various plants is tallied
periodically with the books being maintained by the Accounts Section.

13.

See the 13th cost statement with reference to the basic documents and check the
reconciliation between the 13th cost statement and the Profit and Loss Accounts
for the year.

14.

Verify that profit/loss, variable and fixed expenditure reported to Management


through Management Returns/Reports are being reconciled with those shown on
the cost sheets every month and in case there are variations, suitable remedial
action is taken by the department to avoid their recurrence.

15.

Verify that the quantity produced as shown in the stock Register maintained by
Production Department tallies with the figures mentioned in the Monthly
Management Report.

16.

See that the finished products and work in process (W-I-P) are valued, for the
preparation of Profit & Loss Account, as per the policy laid down by the
Management.

17.

Verify the maintenance of Cost Accounting Records as prescribed In the Cost


Accounting Records and Report rules.

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9.2.3

QUANTUM AND PERIODICITY

S. No.
1.
2.

9.10

Particulars

Extent of Checking

Monthly cost statement and other


records
13th Cost Statement

Twice a year
Annually

WORKS ACCOUNTS SECTION

9.10.1 Introduction
Works Account Section is concerned with the payment to the contractors for
various Civil, Mechanical, Electrical Works and accounting thereof. This could
take the form of both Capital Expenditure (CAPEX) as well as Revenue
Expenditure (OPEX).
During the course of the contract, works accounts section exercises control over
the following activities.
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.

Execution of works
Recording of measurements and standards of test checking
Preparation & checking of bills (R/A and final bills)
Advance payments
Payment to contractors/project management consultants/engineering
firms & architects
Payment for sub-standard work
Extra / substituted items
Escalation
Payment for secured advance, security deposit
Various statutory (TDS) and other deductions like Liquidated Damages,
non-conforming work etc.
Extension of time
Receipt consumption & control of materials
Completion and capitalization (in respect of capital expenditure)

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9.10.2 Audit guidelines / checklist


The following checks outlining the specific elements that need to be considered
during the internal audit covering the above, may be exercised and given due
consideration to.
A.

AWARD OF WORK

1.

Whether each work has been awarded on an approved estimate against budget
provision keeping in view the justification/necessity of jobs. Check that work
awarded is covered in the list of works to be awarded as per C.O. guidelines.

2.

Whether administrative, technical and financial sanctions have been obtained as


per delegation of power for each work.

3.

Whether a register is maintained to record particulars of work contracts awarded.

4.

Verify that tenders are called for in accordance with the prescribed procedure.
Further check that approved list of contractors has been prepared as per norms.
Check that all contracts have been awarded in accordance with company rules.

5.

Examine the comparative statement for its correct compilation. Check that major
contracts have not been extended time and again without following normal
tendering procedure.

6.

Verify that work has been awarded to the lowest tenderer, if not, justification for
awarding the work other than the lowest has been recorded and financial
concurrence/approval of the competent authority obtained.

7.

Check that in case of works like white washing, repair of roads, cleaning of ash
ponds etc. contracts are awarded as per prescribed time period norms.

8.

The agreement on non-judicial stamp paper as required is executed with the


contractor.

9.

Check that budget provision under capital/revenue is available and is recorded in


the proposal indicating revenue budget utilized to date and balance available
budget for subject proposal.

10.

Check the bills for payment of technical fee, travel expenses of foreign experts
and baggage charges to ensure that they are correctly passed in accordance
with the provisions of the agreement or with the approval of competent authority.

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11.

Review that the tendering procedures and directives issued for the works
contract procedures are properly followed. Check that subsequent amendments,
if any, were imperative due to technical considerations of the design consultant
and additional financial implication, if any, has the financial concurrence and
approval of the competent authority.

12.

Test check completed works for detailed scrutiny. Correlate the expenditure with
the physical achievement and critically examine the reasonableness of the
expenditure. Significant deviations, if any, may be specially investigated.

B.

RECORDINGS OF MEASUREMENTS

1.

Full name of work as given in estimate/sanction of work/name of contractor,


number and date of work order, date of written orders to commence work, date of
completion of work, date of measurement, etc. is recorded in the measurement
book / measurement sheets in Form F.

2.

Sketches are given for odd measurement, stone chips or moorum stacked and
measured.

3.

All measurement sheets are serially numbered and register thereof is maintained
for its control.

4.

Check that works are not got done in piece-meal violating delegation of powers
etc.

5.

Test checks the measurement books for the works measured.

C.

RELEASE / PAYMENT OF ADVANCES TO CONTRACTORS


It is to be verified whether:

1.

Mobilisation advance - Mobilisation advance/initial advance is paid as per the


work order against adequate security such as bank guarantee etc with the
approval of competent authority.

2.

Bank guarantees - Bank guarantees are kept valid and there is a proper system
of watching the validity. Examine that validity of Bank Guarantees has been
extended in time, wherever necessary.

3.

Secured advance - Secured advance is paid only for non-perishable items and
against prescribed Indemnity Bond.

4.

Tax at source deductions - Income Tax and other statutory dues are deducted
at source before payments are released.

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D.

PAYMENT TO CONTRACTORS - GENERAL


It is to be verified whether:

1.

Payments for all work done are made on the basis of measurements recorded in
the Measurement Sheets.

2.

Whether the measurements are test checked by a higher authority as per the
delegation of powers.

3.

Whether contractor's signature is taken after each measurement in token of


acceptance of the measurements.

E.

ON ACCOUNT & RUNNING BILLS [(R/A) BILLS]

1.

Examine the relevant contracts.

2.

Test check the arithmetical accuracy of measurements to find out whether the
same are completely checked and correctly carried forward to the abstract.

3.

Whether rates/items of work are as per the work order.

4.

Whether the measurements were test checked as required under the extant
rules.

5.

TDS - Check that income tax has been deducted at source and deposited as per
provisions of Income Tax Act. In addition, check for deduction of works contract
tax/sales tax/VAT and other statutory levies, wherever applicable.

6.

Extra Items - Review that the rates of extra items of work were analysed in
terms of work order and sanction of the competent authority obtained before
hand. Also check that an item admitted as an extra escalation item was not
actually covered by the scope of the contract.

7.

Verify that the basis for additional charges for an extra item is also in agreement
with contract provisions, paying particular attention to any overhead items that
might have been included as additional charges.

8.

Check the reasons for surplus materials procured on a project's account with
reference to laid down criteria and that they have been disposed off
expeditiously.

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9.

Recoveries - That necessary recoveries towards security deposit, water and


electricity charges, hire charges of equipment, stores issued, advances paid
have been properly effected and recovered as per contract terms and conditions.
Also verify that proper records have been kept for controlling all such recoveries
and the in-built checks in this regard are adequate.

10.

Cost of materials recovered as per contractual stipulations - That cost of


materials issued to the contractors has been recovered as per the rates
stipulated in the work order.

11.

Rates of materials not provided in the contract - Also see that materials not
provided in the Contracts have not been issued to the contractors without
approval of the competent authority and that the rates for such materials have
been fixed in consultation with the Finance & Accounts Deptt.

12.

Work for which there is no authorized unit price - Verify that work, for which
there has been no authorised unit price, is not paid for by applying an arbitrary
rate. Also ensure that where there is (reduction in scope or work arising from
technical or other reasons, the value of contract is also reduced correspondingly.

13.

Duplications in unit prices - Verify that there are no duplications, or other


discrepancies, in applying unit prices to similar types of work (e.g. applying the
cubic meter rate for manual excavation to cubic meter rate for machine
excavation).

14.

Reconciliation of material issued free / on chargeable basis - All material


free/chargeable is issued from Central Store (not partly/fully from site/stores
dept.) indicating full detail of work order, contractor's name, nature of material
issued i. e. chargeable/free on the respective MIVs duly reconciled with
respective Accounts heads.

15.

Proper accounting of free of cost material supplied to contractor - Whether


account of material supplied to the contractor free of cost has been obtained and
properly accounted for? See that unused material is returned to stores timely.

16.

Examine that the materials consumption statement submitted with each bill does
not show any excess consumption vis-a-vis estimates, all the materials issued
have been accounted for and that the surplus or salvages are duly returned and
accounted for.

17.

Verify that recoveries for any other facility/services rendered/stores and spares
issued to contractor etc. are duly effected as per the terms of the contract.

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F.

FINAL BILLS

1.

Apply all the checks as in case of on account/running bills.

2.

Whether quantities of work done are as per approved work order and the work
has been competed within the time allowed.

3.

Whether 'item-wise deviation statement' for bills of quantity as per work order and
as per final bill has been prepared and justification for abnormal deviation has
been given? Also see whether revised estimate (in case of more than 10%
deviation) has been prepared and sanction of the competent authority has been
obtained.

4.

Theoretical Consumption Whether theoretical consumption statement is


prepared and reconciled with actual consumption.

5.

Has the contractor accepted the measurements and the bill in full and final
settlement of all claims?

6.

Examine in depth the cases where contractors have abnormally delayed


submission of final bills even after the completion of work.

7.

Whether "no demand certificates" are obtained from all concerned before release
of final payment? Completion certificate obtained from contractor

8.

Has the contractor returned all the empties, like cement bags, cut pieces and
scraps etc? If not whether the cost is recovered at agreed rates?

9.

Whether the total security deposit has been recovered as per the work order?

10.

Whether objections raised during the running bills have been cleared?

11.

Whether statement of stores issued and consumed have been prepared and
compared with the norms fixed for the purpose?

12.

Whether recovery at penal rate has been made for excess consumption of
cement, steel and other items provided in the contract.

13.

Check that wherever there is delay in completion of work, necessary liquidated


damages have been recovered as per the terms of the contract or extension of
time has been granted by the competent authority after certifying on record that
no loss had incurred.

14.

Completed work is within the administrative approval and technical sanction.


Whether progressive payments have been fully accounted for and the final bill is
in line with the agreement.

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15.

Whether the contractor has vacated and handed over the company's land given
to him for use during execution of work.

G.

CONTROL OVER VARIATIONS AND NON-CONFORMING WORK

1.

Verify that changes of any sort, regardless of any size are recorded, approved by
the competent authority and documented before implementation.

2.

Check that there is proper justification for the variation/change. Under the
following circumstances changes to the baseline plan may be warranted and
justified.
i.

Over-optimistic estimating time for the work.

ii.

Omission of one or more stages/activities/tasks.

iii.

Lack of available resources at the critical time when needed.

iv.

Loss of resource(s) part way through some critical work.

v.

Strategic change of priorities during project implementation.

vi.

Change of financial emphasis/availability of funding.

vii.

Discovery that designs were flawed;

viii.

Contractor advises of a more advantageous solution to a problem or


method of work;

ix.

Stakeholders change of mind about objectives during the construction


stage;

x.

Process overload interference due to increase of other workload.

xi.

Process system failure authorisations/decisions not made on time.

3.

Check numerical control exists over change request documents for motivating a
scope change and that the document describes the scope change proposed, list
of associated drawings and documents together with the reason for the change.

4.

Check that the request has been initiated by competent authority before
necessary action is taken.

5.

Verify that once a scope change is authorized an impact statement to quantify


the implications of making the proposed change is prepared before authorization
of the competent authority is given for going ahead with the change. Numerical
control should exist over this document as well.

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6.

Check that a summary of all changes recorded and approved during the
implementation and execution of the project is maintained for effective project
control and monitoring and for promoting communication to those involved.

H.

REFUND OF SECURITY DEPOSIT


Verify that:

1.

The amount due from the contractor has been recovered from the security deposit.

2.

Refund has been made strictly in terms of the provisions of the contract and the
refund has been made after obtaining "no claim/demand" certificate from the
contractor.

3.

Ensure that security deposit is released on the recommendation of the competent


authority after defects liability period is over.

I.

ABANDONMENT OF WORK

1.

Cases of works left incomplete by contractors and got completed at the risk and
cost of the defaulting contractor should be examined thoroughly.

J.

OTHER ITEMS

1.

Check that bank guarantees are kept validated and claims, if any, are
lodged/settled before their expiry.

2.

Verify that the information received from other sections for effecting recoveries
e.g. medical charges, rent, electricity, etc. from contractors is being recovered
and adjusted.

3.

Verify that the list of pending final bills is being prepared periodically and pursued
with the respective departmental heads for information and final settlement.

4.

Verify whether the following records are being maintained properly:









Contractors ledger and Works register.


Bank guarantee register.
Security deposit register.
Earnest money deposit register
Party-wise recovery ledger.
Material issued to contractor ledger.

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K.

Hire charges recovery ledger.


Miscellaneous registers/records.

ACCOUNTING AND CAPITALISATION


ACCOUNTING

1.

Test check entries in contractors ledger and works register to see that these are
correct and records are up to date.

2.

For departmental work, verify that proper records of materials and labour are
maintained.

3.

Check the following for purpose of quarterly and yearly closing of accounts:
i.

Promptness of receipt of documents and information.

ii.

Verification of codes, heads of account, arithmetical accuracy of debits


and credits.

iii.

Accuracy in posting of ledgers, sub-ledgers and observance of IT


controls.

iv.

Periodic reconciliation of works register with contractors ledger.

v.

Prompt inquiry/investigation and follow up of discrepancies.

vi.

Basis of provision of outstanding liabilities at the year-end.

4.

That running and final payment of each work along with the departmental cost
incurred, if any, are recorded work-wise in a 'work-in-progress ledger' and cost
ledger' to the Asset A/c as and when finally completed, as per norms fixed from
time to time.

L.

CAPITALISATION OF EXPENDITURE
Internal Audit shall check the following:

1.

Capitalization statements/documents with the percentage completion certificate


received from Engineering Department under project estimate heads.

2.

Work-in-progress account heads in respect of each stage and a review of on


adverse/old balances, if any.

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3.

If project estimate is revised during the year, see that the adjustments to
capitalized value of Plant & Machinery have been carried out as per the
prescribed procedure.

4.

Check that various requirements with regard to capitalization of fixed assets as


per AS-10, allocation of expenditure during construction, unallocated expenditure
etc. are complied with.

5.

Check whether there are instances where expenses, which should have been
rightly booked to repairs and maintenance but have been booked to the project,
account and vice-versa. (This can especially occur in the case of projects
executed departmentally where major repair and maintenance work is running
concurrently with the project).

6.

Check that the expenditure on completed or partly completed projects has been
correctly capitalised, considering different contractors for equipment supply, civil
work, erection etc. from the date of putting the assets into use after the same has
been determined with proper approval.

M.

SERVICE CONTRACTS (FOLLOWING A PERFORMANCE BASED


APPROACH) Ascertain that to the extent feasible whether service contracting
should be structured around the purpose of the work to be performed as opposed
to the manner in which the work is to be performed. The objective control here is
to ensure that the work conforms to per-determined standards and that
appropriate quality levels are achieved.
The advantage of following a performance based approach, in appropriate
situations, in the case of service contracts is elucidated below by way of an
explanation. Internal auditors after reviewing service contracts may recommend
that as the awarded work is convertible to performance based contracting and it
is essential to have performance based standards, the said work in future may be
awarded following a performance based approach as this would be more suitable
and in the interests of the company. If agreed to measurable performance
standards should be defined for their incorporation in agreement/contracts in the
future.
Explanation: Service contracts involving the performance of regular work are
generally stated in the nature of broad imprecise statements of work - which
precludes an objective assessment of the contractor. For e.g. a horticulture
service contract may be worded overgrown branches of trees shall be cut
regularly; which is an indication only of the manner in which the work for removal
of overhanging branches is to be performed, and not the actual purpose of the
work. Using a performance based approach the contractual terms could be
restated as follows overgrown branches of trees shall be cut regularly so that
no branches hang over the overhead electric wires - accordingly, ensuring that:

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 the main objective of awarding the work is met,


 the work conforms to per-determined standards
 appropriate quality levels are achieved, and
 payment is made only for services that meet pre-defined standards/
levels.
Basic Developmental Elements in Performance Based Service Contracting:
The following model may be followed when implementing a performance based
service contract the steps being:
a. performing a job analysis in the form of a performance work statement
(PWS),
b. writing performance work statements and quality assurance plans
concurrently these standards would include such elements as "what,
when, where, how many, and how well" the work is to be performed, and
c. performing diligent contractor surveillance after award.
The recommended control procedures for service based contracting seek
to achieve the following control objectives


Reduction in contract price,

Improved contractor performance,

Improvement in satisfaction with the contractors work, for both non-technical


professional and technical services.

More efficient evaluation of contractors where past performance is a


significant evaluation factor.

Vendor pricing is based on a more accurate and realistic profile of work to be


performed.

Faster proposal evaluation and award process.

Correcting problems commonly associated with services contracts, including


cost overruns, schedule delays, failure to achieve specified results, and other
performance problems.

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9.10.3 QUANTUM AND PERIODICITY


Quantum and periodicity of check to be exercised will be as under:
A

Contracts above Rs.20 lakhs

Contracts above Rs.5 lakhs and up to Rs.20 20%


lacs
Contracts below Rs.5 lakhs
10%

C
D
E

9.11

Review of work in progress and other


schedules
Other items

100%

Once in each half-year


Once in each half-year

ESTABLISHMENT ACCOUNTS SECTION

9.11.1 Introduction
The internal audit of the Establishment Section mainly consists of the
examination, scrutiny and review of the following categories of bills;
i.

Salaries & Wages

ii.

Overtime payment

iii.

TA Bills

iv.

Medical Reimbursement Bills

v.

LTC Claims

vi.

Reimbursement of LTE

vii.

Encashment of leave salary

viii.

Conveyance, House Building and Education Loan

ix.

Statutory bonus and production incentive

x.

Other miscellaneous payments to employees

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9.11.2 Audit guidelines / checklist


A.

PAY BILLS
Besides the detailed scrutiny of pay bills for the selected month, the following
additional checks may be exercised:

1.

Check the input data for preparation of the salary bill, the controls and checks in
force to prevent double/wrong payments.

2.

Review the procedural instructions and confirm that they broadly cover
adequately the processes and controls expected for the system.

3.

Verify whether bills are prepared as per computerized attendance records/time


cards, orders of appointment/promotion, LPC etc.

4.

Test check the absentee reports with the computerized attendance records/time
cards.

5.

Check that all statutory deductions such as provident fund, income tax and other
recoveries i.e. Life Insurance premium, house rent, water and electricity charges,
conveyance/house building/household/other advances, if any, are made regularly
in such manner and at such rates as are prescribed under the relevant
rules/orders and there are no abnormal delays in affecting recoveries.

6.

Review the control on unpaid wages. Are such amounts recorded separately in a
register? Ensure that payments from unpaid amounts are properly authorized
and that there is an effective system of preparing separate vouchers for
payments against unpaid amounts and cross-referencing the same in the register
of Unpaid Wages to prevent any double payment.

7.

Verify that unpaid wages as per the Register is reconciled to the control account
periodically.

8.

Check whether the house rent allowance is paid after due verification of the
house rent receipts as required under the rules.

9.

Check that recoveries from the employees for whom accommodation has been
taken on lease/tripartite basis are correctly made.

10.

Verify whether reimbursement of shift allowance and other allowances is made


as per company rules.

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11.

Review that the men in position have not exceeded the total sanctioned strength.

12.

Examine the last payroll or employee listing, which was checked by departments
and confirm that it evidences that the validity of the listed employees was
checked.

13.

Select a sample new start on a random basis from payroll output and confirm that
a properly authorised notification of appointment was received.

14.

Select a sample of a few bank detail amendments from payroll output. Ensure
that written notifications were received and that the payroll change matches the
notification.

15.

Select a sample of leavers on a random basis and ensure there is evidence that
pay staff/time office confirmed their timeous removal from the payroll.

16.

Select a sample of new starts /leavers and ensure there is evidence that each
has been checked to authorised source documents by officers independent of
processing staff.

17.

Examine the computer application documentation which identifies the nature of


events and circumstances which will be rejected on input or highlighted in
exception reports and confirm that these are adequate.

18.

Confirm by examining a sample of a few exception reports that these evidence


that they have been timeously followed up and that action has been taken where
appropriate.

19.

Confirm by observation and enquiry that segregation of duties precludes a


member of staff being involved in both payroll processing and distributing pays
(cash/cheque) (this check may not be applicable if there are no manual
payments).

B.

OVER-TIME PAYMENT

1.

Verify that the overtime paid is duly sanctioned by the Competent Authority and
is in accordance with the rules in force.

2.

Vet the basis of overtime hours with relevant records and the hourly rate.

3.

Ensure that the statutory limit of number of hours for a worker is not exceeded
and where this has happened, the matter has been reported to the appropriate
authority and approval obtained.

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4.

Identify incidences of high overtime costs and verify whether appropriate


operational controls are in place. Examine whether alternative options could be
used to mitigate the costs incurred.

5.

Comment if the overtime payment to an employee or a particular class of


employees is abnormally high.

6.

Study the monthly overtime amount of different departments and ascertain


reasons for abnormally high overtime in any particular department.

7.

Check that Revenue Budget of Overtime is not exceeded during the year and
approval of CMD is obtained in case the same exceeds the budget provision.

C.

TRAVELLING ADVANCE (TA) / BILLS

1.

Check that travelling advance is paid only on sanction by the competent authority
and the amount paid is duly posted in the TA advance ledger.

2.

Verify that second advance is not paid unless TA bill against the first advance
has been submitted.

3.

Examine if any T A advance has remained outstanding for an unduly long period.
Comment on old outstanding TA advances.

4.

Ascertain whether the employee is advised promptly to deposit the outstanding


advance after adjustment of TA bill and in case of failure on the part of the
employee, whether the amount is recovered from the salary.

5.

Check entitlement, Railway Fare, DA etc. and verify whether Railway Ticket
number has been recorded in the TA Bills. Where the journey is undertaken by
bus verify whether bus tickets are attached with the vouchers.

6.

Ascertain that tour programmes were got approved by the Competent Authority
before undertaking the tour.

7.

Check whether tour reports have been submitted.

8.

Ensure that TA bills are passed expeditiously.

9.

In case of travel by a higher mode of conveyance, to which an employee is not


entitled under the normal rules, verify that approval of the competent authority
was obtained.

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10.

Check transfer T A bills to see that the disturbance allowance on transfer,


charges for transportation of personal efforts and other payments have been
made in accordance with the rules in force.

11.

Ascertain that no DA/ Lodging charges are paid for leave period during the tour.

12.

Check that Lodging charges are paid as per entitlement of Star category of hotel
/ ceiling limit of non-star hotel or guesthouse.

D.

LTC (LEAVE TRAVEL CONCESSION) CLAIMS

1.

Ensure that the employee has completed one-year continuous service on the
date of commencement of journey.

2.

Verify the required option for availing the LTC either on actual or encashment.

E.

REIMBURSEMENT OF LTE (LOCAL TRAVEL EXPENSES)

1.

Check that reimbursement of LTE has been sanctioned by the competent


authority.

2.

Report cases where the employee is paid LTE / used Company's vehicle for
official journeys within a radius of 10 Kms.

F.

ENCASHMENT OF LEAVE

1.

Check that encashment of earned leave is not allowed more than twice in a year.

2.

Ascertain that encashment of earned leave less than 15 days is not granted.

3.

Ensure that encashment of leave is granted for not more than 50% of the leave
balance as on 1st January subject to a minimum balance of 30 days (except on
cessation of employment).

G.

HOUSE BUILDING
ADVANCE ETC.

1.

Check the authority for sanctioning advances, terms of repayment, charging of


interest etc.

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CONVEYANCE /

EDUCATION LOAN, SALARY

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2.

Verify that proof of purchase of conveyance/household articles or title deed in


case of house building advance, etc. was produced and photocopies of the
ownership documents are on record.

3.

Verify whether proper and adequate surety, hypothecation/mortgage was


obtained and kept in safe custody.

4.

Check that a proper register of surety is maintained.

5.

Ensure that recoveries are commenced promptly and is regular.

6.

Check that personal ledger account for each employee is maintained for control
purposes and the balances are reconciled with the General/Central Ledger.

7.

Ensure that all prescribed conditions for the grant of above advances are fulfilled.

8.

Review the possibility of any advances becoming doubtful of realization.

H.

STATUTORY BONUS AND PRODUCTION INCENTIVE

1.

Verify that the statutory bonus has been paid only to those employees whose
monthly pay including dearness allowance (VDA) does not exceed Rs. 10,000/-.

2.

Check that bonus has been calculated at the prescribed percentage rate on the
pay (including dearness allowance) limiting the same to Rs. 3,500/- p.m. (i.e. the
amount of bonus does not exceed Rs.3,500/- per annum if the bonus declared is
8.33%).

3.

Ensure that other relevant statutory provisions as contained in the Payment of


Bonus Act 1965 and amendments made thereto are fulfilled.

4.

Check that production / profit linked incentive for workers and officers
respectively have been calculated based on the relative factors as laid down in
the schemes notified on 22nd December 2000 as amended from time to time.

I.

OTHER MISCELLANEOUS PAYMENTS

1.

Other payments to employees such as honorarium, ex-gratia payments, etc. may


be checked for arithmetical accuracy and sanction of the competent authority.

J.

PERKS & ALLOWANCE

1.

Check that payment on account of all perks i.e. Conveyance Allowance /


Reimbursement, Transport Allowance, LTC, Canteen subsidy/coupon, kit

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maintenance, professional journals /periodicals


Facilities does not exceed 50% of the BASIC PAY.
2.

Where basic pay is Rs.10000 p.m. or less


Where basic pay is Rs.10001 to Rs.15000 p.m.
Where basic pay is Rs.15001 p.m. and above

50%
45%
40%

Check that payment of entitled perks and allowances w.e.f. 1.4.2000 is as under
and does not exceed the following limits:
Sl.No.
1
2
3
4
5
6

4.

Education/Transport

Check the perks as percentage of Basic Pay are further restricted as follows:
(i)
(ii)
(iii)

3.

and

Reimbursement of expenses
LTC
Local transport conveyance /
reimbursement
Canteen Tea, snacks & lunch coupons
Kit maintenance
Professional journal / periodicals
Education / Transport facility
Total

Workmen
14%
12%

Executives
14%
12%

10%
8%
4%
2%
50%

8%
8%
4%
4%
50%

Ensure that following types of perks and allowances discontinued as on


31.3.2000 are not being paid:
a)

Conveyance allowance to orthopaedicaly handicapped employees.

b)

Dust Allowances

c)

Physical Attendance allowance

d)

Matching Grant/Subsidy/allowance on account of maintenance of Dish


Antenna.

e)

Children Education Assistance Scheme/Transport Subsidy for school going


children.

f)

Existing Scheme of reimbursement of expenses on newspaper/journals

g)

Any other perks/allowances not specifically mentioned in wage revision


circulars.

h)

Boiler Allowance, Welder Allowance (Shift Allowance, Cash Handling


Allowance, Reimbursement of Protective Safety Clothing not payable to
Executives).

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i)

House Maintenance allowance.

5.

Check that perks listed in the above para 2 & 3 are not calculated/paid to
PP/PP/SP/INPA etc.

6.

Check that perks listed at above referred para are paid on reduced Basic Pay if
reduced due to HPL, EOL and absence etc.

7.

Check that perks listed at above referred para are not paid during suspension
period except Education/Transport facility to be calculated on subsistence
allowance.

8.

Check the final settlement of employees due to retirement or otherwise on


cessation of employment.

9.11.3 QUANTUM & PERIODICITY


S. No.
1

Particulars
Salary bills

Extent of Checking
One months bill in each year

Overtime payments

One months bill in each year

TA bills

4
5

Medical reimbursement bills


(exceeding Rs.10000)
LTC claims

Reimbursement of LTE

Encashment of leave

Random checking of 10% bills


once in six months
Random checking of 10% bills
once in six months
Random checking of 10% bills
once in six months
Random checking of 10% bills
once in six months
5% bills once in six months

8
9

Conveyance, house building &


education advance
Salary advance

25%

10

Statutory bonus

10%

11
12

Incentive
Final settlements

Once in each year


100%

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9.12

PROVIDENT FUND & EMPLOYEES PENSION ACCOUNT SECTION

9.12.1 Introduction
Provident Fund Accounts Section is responsible for the efficient maintenance of
Provident Fund Accounts of the employees of the company and the timely
remittance of the recoveries relating to Employee's Pension to the appropriate
Government authority. The section also deals with the investment of the
Provident Fund accumulations in various securities etc. as prescribed by the
Government of India from time to time as well as the payment of refundable/nonrefundable advances to the members of the Provident Fund as per the rules laid
down in this regard.
9.12.2 Audit guidelines / checklist
The checklist given below is accordingly designed for conducting the internal
audit of this Section:
A.

PROVIDENT FUND

1.

Check whether contribution at the prescribed rates (presently 12%) is being


regularly recovered from the employees eligible to contribute to the fund.

2.

Ascertain that Company's contribution has been correctly worked out and
credited to the members' account.

3.

Check that the interest has been allowed at the rate as approved by the Central
Board of Trustees of the National Employees Provident Fund. Also test check
calculation of PF interest periodically.

4.

Examine the file/register of the nominations to see that the nominations on the
prescribed form have been made by all the members in time and accepted by the
competent authority in accordance with the rules. Also ensure that the
nomination forms are kept in safe custody.

5.

Check that the refundable / non-refundable loans to the employees have been
sanctioned in accordance with the rules and regulations and prompt advices sent
to the Establishment Account Section (Personnel Accounts Branch) so that there
is no delay in the recovery of the instalments and interest etc.

6.

Verify that in the case of refundable/non-refundable loans necessary documents


as required under the rules have been obtained and all conditions prescribed for
the purpose have been satisfied before the loan is given.

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7.

Review the LIC policies of the employees financed out of their Provident Fund to
see that policies stand duly assigned in favour of National Fertilizers Employees
Provident Fund and the premiums are being regularly remitted to LIC.

8.

Check the register of investments to see that;


(a) Investments are in approved securities,
(b) The investments are all current,
(c) The securities are kept in the safe custody,
(d) The investments in the securities and other deposits are up to the prescribed
percentage as laid down by Government from time to time, and
(e) Check the calculation of interest on investments and see that interest due
has been realized in time.

9.

Physically verify the securities; if they are with the bankers, obtain a certificate
giving in details all the necessary particulars of the securities.

10.

Check the final withdrawal to see that


(a) Forfeiture of company's contribution and interest thereon is according to the
prescribed slabs specified in the National Fertilizer Employees Provident
Fund rules and is correctly made,
(b) The final settlement is otherwise in order, and
(c) There is no delay in final settlement.

11.

Review the transfer of balances to Provident Fund Trusts of other organizations


in case of employees who have left the services of NFL to join other companies
to ensure that transfer made is correct and is as per rules.

12.

Scrutinize the inspection charges paid to the Government to ensure that the
same are correct and have been paid in time.

13.

Verify that proper returns have been submitted in time to the Provident Fund
Commissioner/other prescribed authorities and the information given therein is
correct and complete.

14.

Examine/Review the Inspection Report of the Inspector of Provident Funds and


verify/confirm that necessary action as required in the report has been taken.

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15.

Examine the minutes of the meetings of the Board of Trustees and verify whether
action has been taken as per decisions taken by the Board of Trustees.

16.

Review the bank book of the National Fertilizer Employees Provident Fund with
reference to the payments authorized and the receipts of contributions etc. and
also ensure that the balances as per bank book and bank account have been
regularly reconciled.

17.

Scrutinize the interest accrued account to ensure that the interest amounts
accrued on the various investments have been realized timely.

B.

EMPLOYEES PENSION SCHEME


Employees Pension Scheme has been brought into effect from 16.11.1995 and is
regulated by the Pension Scheme 1995. The following points may be verified
during the course of the internal audit;

1.

Verify that employees who have become members of Provident Fund Scheme on
or after 16.11.1995 have been taken as members of the Employees Pension
Scheme.

2.

Check whether the amount at the prescribed percentage of employee


contribution is remitted to the Regional Provident Fund Commissioner in time.

3.

Check that contributions are correctly calculated and recovered from all the
employees who are members of the Pension Scheme.

4.

See whether the records required to be kept as per Employees Pension Scheme,
1995 are properly maintained and all the prescribed returns are being submitted
to the Provident Fund Commissioner in time.

5.

In case of deceased members of the scheme, examine whether the nominees


entitled to pension have duly filed the requisite applications and these have been
processed with due efficiency to secure the benefits available to the entitled
persons expeditiously.

6.

Verify that transfer cases of Employees Pension Scheme from other regional
offices are expeditiously made and review status of pending cases.

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9.12.3 QUANTUM
1.
2.
3.
4.
5.
6.
7.

Position in the individual Computerized


5% - of members Accounts
Ledger Accounts of the members.
Calculation of interest credit to the members
5%
accounts
Nominations of the members
10%
Loan Sanctioned
10%
Investment/Deposit of accumulations
10%
Final Settlement /Transfer of members
20%
accounts
Pension Applications
10% of Members of
Accounts

Finance & Accounts

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CHAPTER 10

CAPITAL EXPENDITURE (CAPEX)

10.1

Introduction
Capital Expenditure at National Fertilisers Ltd. encompasses outlays on the
following;

Setting up of new plants facilities,


Making additions and modifications to existing facilities,
Modernization /Replacement of the existing plants and facilities
Civil construction

The execution of the capital schemes is either contracted out or undertaken


departmentally. This chapter contains / outlines the specific elements that need to
be considered while conducting the internal audit of the Capex projects
undertaken at NFL.
10.2

CAPITAL EXPENDITURE CYCLE

1. Activities related to capital expenditure may be viewed as a cycle passing through


various broad phases, of which the important ones are:

Conceptualisation - Identification of the project and decision in principle to


undertake detailed formulation of the project after proper appraisal and
prioritisation. This stage entails;





Concept Capture,
Clarification of purpose,
Concept elaboration,
Concept evaluation.

Documentation - Detailed working culminating in a feasibility study and the


detailed project report including determining appropriate milestones.

Sanction - Sanction in accordance with limits of authority.

Budgeting and funding - Budgeting and funding of the project - Capital

Capital Expenditure

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INTERNAL AUDIT MANUAL

commitments, which entail examine the financing arrangements made and


adequacy thereof (internal accruals, external borrowings etc.).

Entering into contracts or department execution - Entering into contracts


and / or undertaking the work departmentally, fully or partially after obtaining
necessary approval from government and other authorities for imports and
release of foreign exchange wherever applicable. An important element of
contracting would be (a) defining contractual terms and conditions and (b)
assessing the implications, financial and otherwise of contract conditions.

Clearances
clearances.

Execution - Progressive execution of the project, progress reporting and


control (using PERT/CPM or other project/construction management
techniques/ software).

Progressive payments - Progressive payments against running bills and


reporting against budget. Maintenance of appropriate and necessary ledger
accounts for effective control and decision making, revision of the project
scope (if this becomes necessary, though normally there should be adequate
front end planning as part of the overall project control framework to ensure
that drawings and designs are frozen before commencement of work),
forecasting of cost and time under-runs/over-runs in terms of cost and time
schedules; obtaining supplementary approvals, as necessary, on an ongoing
basis.

Testing, Commissioning, Acceptance - Project completion, testing,


commissioning and acceptance (both preliminary and final) etc.

Financial settlements - Financial settlements (extras, escalation, liquidated


damages, penalties etc.)

Timely Capitalisation in the books of account - Capitalisation of


expenditure item work-in-progress account to appropriate asset account.

Project Closure - Project completion appraisals and project closure report.

Capital Expenditure

Obtaining

environment,

pollution

and

other

statutory

10.2

INTERNAL AUDIT MANUAL

10.3

INTERNAL AUDIT PREPARATORY WORK & WORKING PAPERS


PREPARATORY WORK

The internal auditors responsible for conducting the review should familiarise
themselves with all the above-mentioned phases of a project, prior to commencing the
audit. The auditors will note down all weaknesses, risk and control issues that may have
surfaced. Particular attention will be give to

Systems, sub-systems and procedures laid down for decision-making,


approvals, execution and control of the activities for each phase of the capital
expenditure cycle as mentioned above under Capital Expenditure Cycle.

Feasibility studies report and the detailed project report, the capital and
operating cost estimates, scope of work, contract specifications, cost benefit
analysis, etc. contained therein.

The method of recording the cost over-runs under-runs and the immediate
reflection of the same in the estimated cost on a component-wise basis and
the methods and controls used to contain costs over-runs/under-runs within
the overall sanctioned project cost.

Various clauses in the contract documents in regard to company's obligations


to the contractor and contractor's obligations with respect to physical and
financial progress, revisions in architectural and structural designs/plans if
any, causes of under-runs/ over runs and other significant clause having a
material bearing on performance.

Financial settlements, justifications for extra items and escalation claims


admitted as well as liquidated damages, penalties recoverable from the
contractor. Waivers of liquidated damages and other penalties need to be
examined in terms of justification and sanction of the competent authority.

WORKING PAPERS
In order to develop the audit programme in a systematic manner and keeping in
aspects of materiality in the area of Capex the working papers should be set up
separately for each project to be examined and these should contain the
following information.
i.
ii.

Capital Expenditure

Project Ref.
Type of Work (Modification, Replacement, Additions, New P&M)

10.3

INTERNAL AUDIT MANUAL

iii.
iv.

v.
vi.
vii.
viii.
ix.

Type of Contract i.e. Item Rate, Lump Sum, Cost Plus etc
Original contract prices and subsequent increases as may have been
authorised due to change in scope of work, escalations etc. with brief
description.
Stipulated completion date and extension of time granted.
Amounts authorized against various components.
Amount expended and committed to date against various
components.
Particulars of major vendors, contractors, sub-contractors.
Purchase order number references, work order nos. etc.

Internal audit should thereafter proceed in accordance with the guidelines and
check-lists delineated in the succeeding paragraphs.
10.4

Audit guidelines / checklist

10.4.1 PROJECT INITIATION, APPROVALS, DETAILED WORKINGS ETC.


Internal Audit will verify that;
1.

The approved procedures for establishing the need for the Capex project as also
for carrying out detailed work thereon are being adhered to.

2.

The projects are classified according to their respective types i.e. additions,
modifications, replacements, etc. in line with the Capital Budget/Annual/ Long
term Plan.

3.

The project estimates are specific and detailed enough with regard to aspects
such as;

Capital and operating cost,

Cost-benefit analysis (payback period, Net Present Value (NPV), Internal


Rate of Return (IRR) etc.),

Specifications and physical quantities involved, quality requirements, time


schedules (start up and finishing dates), expenditure phasing, dislocations,
if any of current operation,

Capital Expenditure

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INTERNAL AUDIT MANUAL

Manpower requirement and sources of deployment,

Budgetary provisions and


components etc., if any.

Testing and acceptance criteria.

source

of

financing

foreign

exchange

4.

The department or group entrusted with the responsibility of preparing project


estimates, maintain current well structured schedule of rates for the repetitive
types of activities, past project historical costs, materials and equipment cost
date, and other information useful for purposes of estimation.

5.

Estimates are in sufficient detail for facilitating planning and control processes.
Abnormal increases/deviations in the physical components of an estimate and
extra items arising during execution should be examined in depth along with the
original estimates/tenders as.

6.

In the case of supplementary requests for funds to cover changes proposed to


the original project, during the course of execution as well as to cover any cost
over-runs or for other reasons, the financial indices and implementation
schedules are re-drawn and approvals from the competent authority are obtained
with promptitude.

7.

The outlays on the project which are to be charged off to revenue /deferred
revenue, if any, are separated from those to be capitalised with justification for
charging the expenditure to revenue/ deferred revenue as the case may be. This
is particularly important in the case of replacement /modification type projects.

10.4.2 REVIEW OF CONTRACTS


Internal Audit shall check that:
1.

In deciding on the extent of jobs to be done through outside agencies, the


facilities available in-house have been fully considered.

2.

Time taken in inviting bids and finalising the contracts for the jobs to be executed
and equipment and supplies to be procured was according to bar charts and time
schedules as have been approved.

3.

A Turnkey or a non-turnkey approach has been decided with the approval of

Capital Expenditure

10.5

INTERNAL AUDIT MANUAL

competent authority. Guidelines presently in force for inviting open, limited or


single tenders have been strictly followed.
4.

The departments/authorities empowered to enter into contracts on behalf of the


company, maintain a list of approved vendors/ contractors, with updated history
of their performance. Also whether the background, reputation, past history,
financial strength, on time delivery and execution capabilities etc. of new
contractors are checked before empanelment.

5.

Examine that the company's policies/ procedures in regard to negotiation and


award of work have been adhered to.
.

6.

The relevant contract documents clearly define the terms of preliminary and final
acceptance, quality of work, performance requirements, penalties for shortfall in
performance, etc.

7.

The purchase orders/work orders etc. have been issued in the prescribed
formats. In the case of additions to/ deletions of any standard terms and
conditions, check that justification for the same was recorded and approved by
the competent authority in consultation with Finance and Legal Departments.

8.

In respect of procurement of equipment, stores and spares for execution of


capital projects, where the expenditure is significant, guidelines laid down in the
Chapter on "Materials Management" are strictly followed.

9.

Whole Life Cycle Costing To examine whether there is a case of adopting


whole life cycle costing method in any particular contract involving plant &
machinery or equipment acquisition, and if so making recommendations for the
adoption of such techniques in the future if so warranted. The recommendations
should be supported with detailed workings. For such evaluation, the annual
running, operating and maintenance costs shall be worked out based on the
technical specifications received from the suppliers. Based on the above
workings, the cash outflows over the life of the asset should be projected in the
case of each bid and the outflows shall be discounted at the prevailing bank term
loan rate of interest to arrive at the net present value (NPV). The net present
values arrived at in the case of each bid should then be evaluated for purposes
of making a determination of the lowest bidder.
Explanation: In the case of items of plant and machinery, and equipment
initial capital cost generally ranges from 25% to 35% of the whole life cost of
asset. Thus, consideration of the cost on a whole life basis (i.e. by including
operating, running and maintenance costs over the life of the asset) may be
more appropriate method of evaluation of the bids.

Capital Expenditure

10.6

the
the
the
the

INTERNAL AUDIT MANUAL

10.4.3 PROJECT IMPLEMENTATION AND CONTROL


1.

Determine that NFLs contractual obligations to the contractor in regard to


making the site available on the scheduled dates, providing the requisite permits,
licences, equipment, materials, support services, etc. have been duly fulfilled and
non-compliance has not resulted in claims for extras by the contractor and delay
in implementation schedules. Examine and comment on extensions of time
granted to the contractor/s.

2.

Verify that projects / jobs are not undertaken before the sanctioning of the
scheme.

3.

Examine the constraints that have been experienced which have hindered timely
completion of projects and verify whether timely and adequate action has been
taken to overcome the same. Highlight and report losses due to time over-runs.

4.

Check that where premium costs are authorised for acceleration of work (e.g.
airlifting of equipment etc. instead of surface transportation as specified in the
original contract) the contractor is not reimbursed for inefficiency or negligence
on his part.

5.

Are construction schedules coordinated with production schedules of units


already under operation to minimise hold-ups in the latter.

6.

Are various techniques e.g. CPM, PERT, PM Software etc. being used and kept
updated for control purposes and timely corrective measures taken in respect of
critical activities, in case of slippages in the project.

7.

Determine that the status and control and other MIS reports submitted to
management are timely and reasonably accurate.

8.

Analyse the reasons for abandoning any project/scheme and examine the
treatment of expenditure on it in accounts. Highlight and report on the cost of
abandonment to the company giving justification thereof.

9.

Check that storage and erection insurance cover is adequate and valid.

10.

CAPEX MIS REPORTS With regard to MIS reports internal audit will verify
that Reports highlight and pinpoint root causes of deficiencies instead of only
broadly stating reasons. Recommendations regarding possible preventive /
corrective action are also stated for managements consideration;

Capital Expenditure

10.7

INTERNAL AUDIT MANUAL

 Reporting to higher levels is on the basis of management by exception


whereby only criticalities are reported for action by higher management;
 All relevant information is contained in the reports with the required level of
accuracy, in particular the baseline parameters and significant deviations.
Reporting is factual and objective and based on reliable data and does not
lead to unnecessary efforts in controlling insignificant variances;
 Reports contain feed back and feed ahead information on critical aspects;
 Project performance reports to the extent feasible are presented graphically in
the form of charts since these are more easily remembered;
 Control thresholds are predetermined for various cost components;
 MIS and communication within NFL is well coordinated so that the information
generated by the system is carried and distributed effectively;
10.4.4 ESCALATION
In case of escalation, internal audit will check that:
1.

The escalation formula is specific and unambiguous. The base indices for labour,
material etc. and linkages with statutory levies have been clearly defined and the
same are based on scientific study and methods and not on ad-hoc basis.

2.

The contracts clearly provide that no escalation will be payable due to extension
of time if the delay is attributable to the contractor.

3.

Supporting documents to be furnished by the contractor in support of the


escalation claims are mentioned in specific terms.

10.4.5 TESTING AND COMMISSIONING


1.

Check adherence to the contract clauses for trial runs for important components,
assemblies and sub-assemblies so that the stipulated capacity is operationally
achievable.

2.

Check observance of the contract provisions regarding rectification cost, bonuses


and penalties, wherever applicable.

3.

Verify that the operation and commissioning and insurance spares received
along with the equipment are accounted for properly.

Capital Expenditure

10.8

INTERNAL AUDIT MANUAL

10.4.6 ACCEPTANCE
1.

Check that the preliminary and final acceptances are in accordance with all
contractual terms. Examine the observations, if any, in respect of qualified
acceptance (these are significantly important in the event of subsequent
malfunctioning or non-performance of the equipment! facilities and claims for
damages arising there from).

2.

Verify that the warranties contained in the contract document have been duly
fulfilled in case of completed works where warranty period has expired.

10.4.7 PROJECT CLOSE OUT REPORTS


Project close out reports - For all project beyond thresholds that may be
determined by management and revised from time to time, the engineering
department should prepare consolidated project close out reports or post
completion reports within the time limits established by management.
Data from past projects provide valuable insights into what went right and what
went wrong - learning from previous experiences being the most basic form of
development. It is also necessary to learn progressively during the present
project. With regard to historical data there may exist limitations as the correlation
between different projects may sometimes be tenuous - the scope of work is
unlikely to be the same and management style and build methods may be
different. However, making allowances for any limitations there would also be a
wealth of similarities as well. The same mistakes are often repeated particularly if
the cause has not been addressed.
Project closeout reports should be compiled to provide information on systemic
and other weaknesses, which impinged on the progress of the project. Also
strengths would be highlighted so that best practices are retained and transported
to other projects.
Internal audit should check that:
1. A project closeout report is generated at the conclusion of each major
individual contract (plumbing, erection and installation of P&M etc.) before all
the project participants have dispersed.
2. At the end of the project, these reports are consolidated and a
comprehensive project report summarising all significant mistakes and
successes compiled for the project as a whole.
3. The post completion reports or project close-out reports are comprehensive.

Capital Expenditure

10.9

INTERNAL AUDIT MANUAL

Also compare the estimates of time, cost, physical and financial benefits with
the actual achievements and that they bring out reasons for major variations,
if any.
4. The closeout report evaluates the performance of the current project against
the project objectives along with recommendations for future projects. In
addition the close out report may also contain a compilation of historical data
from previous projects, if any, and the current project to predict trends and
problem areas on the current project.
5. Document any learning experiences so as to make use of lessons learnt from
the post completion reviews, in future audits.
10.5

QUANTUM AND PERIODICITY


Quantum and periodicity of checks to be exercised by internal audit in respect of
Capex projects will be as under. For other normal and routine works expenditure
the quantum and periodicity as contained in the chapter on Works Accounts
Section will be followed.

Projects above Rs.1 crore

100%

Projects above Rs.50 lacs

50%

Projects above Rs.25 lacs

25%

Projects above Rs.10 lacs

10%

Projects below Rs.10 lacs

5%

The above review will be conducted once in each half year.

Capital Expenditure

10.10

INTERNAL AUDIT MANUAL

CHAPTER 11

PERSONNEL & ADMINISTRATION

11.1

INTRODUCTION
These Departments look after the work of general administration, recruitment,
personnel policies, schools, canteens, guest houses, hospital and welfare
activities of the company The following checks will be exercised while conducting
the audit of the Personnel Dept. Audit checks with regard to Guest House,
Township, Schools and welfare activities are covered in the Chapter Township
Administration.

11.2

GENERAL ADMINISTRATION Audit guidelines / checklist

1.

Where payment of electricity and water bills, telephone bills etc are controlled by
Administration Dept. ascertain whether:
(a) Proper registers are maintained and entries are recorded therein as and
when bills are passed for payment and forwarded to Accounts Dept. so as to
guard against duplicate payments.
(b) Meter readings are got verified and in case of telephone bills they are got
verified by the officers concerned before bills are passed for payment.
Actuals are compared with the budgets.
(c) Officers certifying the telephone bills maintain suitable records of STD calls
made by them for official/private purposes.

2.

Where Administration Department is responsible for the purchase, custody and


maintenance of miscellaneous assets comprising furniture, office equipment,
electrical fittings to buildings, vehicles etc. Verify a) Whether appropriate stocks registers are maintained for all such assets under
its charge with information regarding their price and location/distribution.
b) Whether the existence of the assets in serviceable condition is physically
verified periodically (at least once a year) by an officer authorized for this
purpose and a certificate to this effect is recorded in the register.

Personnel & Administration

11. 1

INTERNAL AUDIT MANUAL

c) Whether discrepancies noticed during verifications are reconciled promptly


and whether sanction of the Competent Authority is obtained for write off of
unserviceable / lost items.
d) Whether action is taken to dispose off unserviceable items to the best
advantage of the Company.
e) Whether history sheets showing date of purchase, cost, suppliers' name,
period of guarantee/warrantee and the particulars of expenditure including
repairs to the office equipments, are maintained.
3.

Where maintenance of staff cars and vehicles is the responsibility of


Administration Dept.:
a) Check the log sheets of each vehicle and verify details of all the repairs/
service, spare parts replaced and petrol consumed etc. are recorded therein
and whether they have been written up to date & complete.
b) See that insurance for vehicles is renewed in time.
c) Registration certificate books are kept under the custody of an office and the
ownership of car / vehicles by the company is clearly mentioned therein
d) Analyse the consumption of petrol/diesel per km. vehicle-wise and examine
the reasons for variations over a period for the same vehicle as well as when
compared with similar vehicles. Check also whether periodical reports
regarding consumption of petrol, mileage done, expenditure on repairs etc
have been put up to appropriate authorities.
e) Review the trip sheets to see that they are properly written up; signatures of
the officers using the vehicles are obtained. Wherever required, the trips are
made for official purposes and deviations, if any have got the approval of the
Competent Authority.

4.

Check the award of various contracts such as Hiring of Taxies, Reimbursement


of Coupons, Canteen, Sanitation, Horticulture and procurement of medicines etc
including execution there of

11.3

PERSONNEL DEPARTMENT

1.

Check that recruitment is made against sanctioned posts only and periodical
review is undertaken for posts not filled up for a long time and action is taken to
surrender the posts.

2.

(a) Check if certain jobs have been given on contract even though manpower has
been assigned in the set up.

Personnel & Administration

11. 2

INTERNAL AUDIT MANUAL

(b) Check if all statutory stipulations in regard to contract labour are being
adhered to e.g. P.F. Deduction, ESI etc.
3.

Cases of fixation of pay, pay protection, sanction of special allowances, advance


increments, special pay etc. are reviewed to see that these have been
sanctioned by the authority competent to sanction the same and financial
concurrence has been obtained where necessary

4.

Check that in case of trainees, service bonds in the prescribed form are obtained
promptly and cost of training is recovered from trainees who discontinue their
training.
a) Check manpower productivity every quarter in respect of production and
sales and examine reasons for increasing/decreasing trends.
b) Check if recruitment, mandatory as per Govt. regulations ratio is not resulting
in over staffing and not affecting the manpower productivity.
c) Check if final settlement of retiring /resigning employees are made within a
reasonable time and there is a safeguard of having sureties at the stage of
final settlement.
d) Checking of statutory reports being sent to State Govt./Central Govt./Labour
Commissioner as per guidelines of Dept. of Personnel / labour, of the
respective State/Central Govt. Office where the particular plant/office
including Area Office is located and also to examine if the same are being
sent as per schedule.
e) Check if Joint Management Committee/Works committee meeting is as per
laid down procedure and follow up action on the approved minutes is taken.
f)

6.

Check if grievance redressal committee / suggestion committee meets


periodically for motivation of employees and redressal of their grievances
(though these may be different forums and audit team can ascertain the facts
from Personnel Dept. before submitting the report.

Examine the personal files to see that they area) Properly maintained and all information relating to employees' date of birth,
date of appointment, home-town etc. are recorded therein
b) Updated family particulars, nomination forms for gratuity, pension etc. have
been obtained wherever necessary.

Personnel & Administration

11. 3

INTERNAL AUDIT MANUAL

c) All events during the employment of the individual like revision of pay,
promotion, increments, suspension, EOL, break in service if any, etc are
available in the Personal tiles.
d) See that abstract sheet is updated from the master files.
11.4

LEAVE ACCOUNTING

1.

Check whether leave account of each employee has been maintained up to date
and correctly as per rules of the Company.

2.

Check whether grant of maternity leave, CSL, Extra Ordinary leave etc. are in
accordance with the rules of the Company and are correctly recorded.

3.

Examine whether leave on medical grounds is supported by medical certificate


and fitness certificate of authorized medical attendant.

4.

Check that leave encashment has been allowed as per rules i.e. (a) Not more
than twice in a year (b) Not for less than 15 days (c) Not more than 50% of leave
to the credit of employee as on 1st January subject to a balance of 30 days etc.

5.

Check that casual leave has not been combined with any other type of leave.

6.

Check that effect of EOL has been taken for deferment of increment, promotion
etc. as per company rules.

7.

Check that credit has not been given to the employee for HPL for the period of
the absence of the employee.

11.5

MEDICAL ADVANCE & REIMBURSEMENT OF MEDICAL BILLS

1.

Verify that the advance for medical expenses is paid on the recommendations of
the authorized medical attendant.

2.

Examine the overdue outstanding advances.

3.

Check that the bills for reimbursement are duly supported with Doctor's
prescription and cash memo etc.

4.

Test check the admissibility of medicines and other expenses as per rules of the
Company.

5.

Ensure that treatment is taken at the company approved hospitals/clinics.

Personnel & Administration

11. 4

INTERNAL AUDIT MANUAL

6.

In case of claims for dependants, check the list of dependants with the records
maintained by the Personnel Dept.

7.

Ensure that room charges, diet charges, etc. have been correctly reimbursed.

8.

Verify that medical reimbursement bills are processed within reasonable time and
outstanding advance, if any, is refunded forthwith.

9.

Where both husband and wife are employed in NFL/other organization, verify
whether the person (i.e. husband or wife) preferring the bill entitled to claim
reimbursement in terms of a valid option exercised for the purpose.

11.6

QUANTUM AND PERIODICITY

1. Administration Department

Once in a year

2. Personnel Department

Once in a year

3. Leave Accounts

Two months in a year

4. Contracts

Once in a year

Personnel & Administration

11. 5

INTERNAL AUDIT MANUAL

CHAPTER 12

FIRE & SAFETY

12.1

Introduction
Stress should be given on developing and maintaining safety as regular working
culture.

12.2

Audit guidelines / checklist

1.

Check that the system of on-line monitoring of ambient air in the plants is
recorded and counter checked by taking samples/dragger tube.

2.

Check that unsafe areas, improper working conditions/ practices are pointed out
and action taken on them.

3.

Ascertain that personal protective equipment such as gas masks on line


breathing apparatus, breathing cylinders etc. are maintained in good working
condition and check records maintained.

4.

Ascertain that persons are repeatedly given regular training/practice to use the
above-mentioned equipment.

5.

Verify that regular checks are made on the working of eye showers etc.

6.

Check that working persons use hand gloves/helmets earplugs etc. whenever
and wherever required.

7.

Check that SWP, system is strictly followed and updated if required.

8.

Check that Emergency Disaster Plan (EDP) is in order and mock drills are
conducted for updating.

9.

Ensure that an effective system exists to record the functioning of pillboxes and
local alarm systems.

10.

Check whether Fire Engines are in order.

11.

Check whether the unit is performing mock drill (artificial fire).

Fire & Safety

12. 1

INTERNAL AUDIT MANUAL

12.

Check that an effective system exists for remote area alarms at places like lift,
railway siding etc. Check that fire extinguishers are tested as per procedure.
Ascertain that right types of extinguishers are placed at various locations.

13.

Check the availability of First Aid Safety Boxes at all necessary locations.

14.

Ascertain that control rooms remain under positive pressure.

15.

Ascertain if proper procedures are in place to heighten awareness and promote


safety among staff/facilities handling hazardous/inflammable substances.

12.3

PERIODICITY
Internal Audit will verify that the above checks are in place on yearly basis.

Fire & Safety

12. 2

INTERNAL AUDIT MANUAL

CHAPTER 13

MATERIALS MANAGEMENT

13.

PURCHASES

13.1

Introduction
Materials Management Department is responsible for the timely procurement of
material, components etc. in the required quantity and quality both from within
and outside the country at most economical rates.

13.2

Criterion on effective procurement function


From the standpoint of good internal control an effective procurement function
should satisfy the following objectives:

To evaluate and select vendors on the basis of their ability to supply materials
and services as per the specified requirements,

To monitor vendor performance on a continual basis,

To establish responsibility for acquisition of required materials, services &


equipment within the defined procurement parameters,

To ensure the procurement of goods and services at optimum cost, as per


indents and within the allocated budget,

To ensure timeliness in procurement,

To ensure procurement of the desired level of quality at all times,

To develop harmonious relations with suppliers/ vendors

To resolve disputes with the suppliers/vendors (if any)

To ensure timely payment to vendors

Materials Management

13. 1

INTERNAL AUDIT MANUAL

13.3

Audit guidelines / checklist


During the course of Audit of Purchase function it has to be verified that various
provisions of Purchase Manual were followed scrupulously in procurement
activities. Some of the indicative provisions of Purchase Manual requiring
verification /examination during the audit of the records of Materials
Management Dept are mentioned below:

1.

Selection of New Vendors - Verify that new vendors are selected considering
various factors viz. financial resources, infrastructure, technical competence,
quality control and inspection facilities, ISO certification, and customer base.
Bankers report where feasible may be obtained and kept on record. Copies of
the vendors bank statements, VAT/ST Returns, Income Tax Returns etc. if
available may be examined to assess the financial position of the vendor.

2.

Vendor evaluation Verify that a vendor evaluation is done on a periodic basis.


Vendor evaluation should be based on parameters of quality of the materials
supplied and adherence to delivery schedules.

3.

Approved List of Vendors / Suppliers - Verify that approved list of suppliers of


indigenous, imported items are maintained by the Materials Dept. for various
categories of items to be purchased and reviewed by the committee once in
three years. The list is periodically up dated with reference to Market conditions
and on the basis of their performance and other relevant factors Also check that
names of black listed supplier/vendor is removed from the list as per the
guidelines given in the Purchase Manual.

4.

Purchase procedure and Indents Ascertain that proper purchase procedures


exist and have been followed. Verify that indents have been raised by the
Competent Authority and that they contain the necessary details of stock
position, average consumption, previous P.O reference if any, last purchase
rates etc.

5.

Indents for Proprietary Items & Capital Items Verify that indents for
proprietary items have been approved by the competent authority certifying that
the proprietary items have to be purchased from the manufacturers/suppliers
mentioned in the indent. See that budget provision is available.
Capital Items - Indents for capital items have been raised only after prior
financial concurrence and approval of competent authority and budgetary
provision.

6.

Tenders - Examine that open tenders, limited tenders, single tenders have been
invited as per purchase procedure and tenders were opened by a committee
consisting of representatives of Material Department and Finance Dept. in the
presence of tenderers.

Materials Management

13. 2

INTERNAL AUDIT MANUAL

7.

EM Deposit - That the Earnest money was deposited by the tenderers invariably
along with the tender as per NIT.

8.

Comparative Statement - Check that comparative statement has been prepared


by bringing the tenders at par, after adding elements of duties, taxes, freight and
deducting discount/rebate if any and has been signed by the concerned officials.

9.

Award to lowest tenderer - Ascertain that the contract/work was allotted to the
lowest tenderer and if not, the reasons for ignoring the lowest quotation have
been recorded in detail in writing and got approved by the competent authority.

10.

Vetting POs - Check that the purchase order has been properly and thoroughly
vetted and placed by an authority delegated with powers to do so. In case a
technical evaluation is required to be undertaken ensure that this has been
done.

11.

Terms of supply - See that terms of the supply are not disadvantageous to the
company.

12.

Repeat Orders - Verify that repeat orders have been placed after following the
proper purchase procedure.

13.

Emergent purchases -Review the cases of emergent purchases for their


reasonableness. The indents for emergent purchases may be checked with
reference to their actual consumption to see whether purchase at a higher cost is
justified. Such checks may also be exercised on items air-lifted for emergency
reasons.

14.

Lead time -Ascertain the lead time for processing the order and examine
whether in any case there has been any unreasonable delay. Review the
procedure to see whether internal lead time can be reduced.

15.

Stipulated dates of delivery - Ascertain whether supplies were received within


the stipulated dates of delivery. In case of delays it may be examined whether
the extension of time of delivery is given after due consideration at the
appropriate level and with financial concurrence and whether non-enforcement of
claims for liquidated damages was as per the exigencies of the work.

16.

BGs for advance payments - See that advance payment, to any party except a
PSU, have not been agreed without obtaining a bank guarantee for equivalent
amount from a Nationalised / Scheduled Bank.

17.

Indent on emergent basis - Ascertain that in case of emergent indent that


situation warranted purchases on an emergent basis and that the requirement

Materials Management

13. 3

INTERNAL AUDIT MANUAL

could not have been predicted under normal circumstances. It should also be
ensured that approval of competent authority is taken for emergency purchases.
18.

Check if limited tender enquiry in lieu of press tender has the approval of the
Competent Authority.

19.

Tender Committee - Check if tender committee constituted for finalization of


purchase/work order and is as per guidelines in the purchase Manual and all the
Officials/Members have signed the proceedings without any note of dissent and
in case there has been any dissent, proper care has been taken before issue of
purchase order.

20.

As per guidelines of CVC negotiations can only be held with the lowest tenderer.
See if the lowest tenderer has executed the order in line with the negotiations
which enabled the party to get the order.

Materials Management

13. 4

INTERNAL AUDIT MANUAL

13.4

QUANTUM AND PERIODICITY


Quantum of checks to be exercised will be as under:

3
13.5

Purchase Orders / Contracts


Upto Rs.1 lakh
Above Rs.1 lakh & up to Rs. 3 lacs
Above Rs.3 lakhs
Emergency Purchases
Up to Rs.50000/ Above Rs.50000/Approved list of Suppliers

10%
20%
30%
25%
50%
Once in a year

MATERIAL MANAGEMENT - RAIL TRANSPORTATION


The following checks should be exercised in connection with Rail Transportation:
1.

Check if wagons are getting unloaded within the free time allowed for
different types of wagons. Whether system for expected date/time of rake is
known to the Rail Transport Department to line up the resources in
advance.

2.

Investigate causes for demurrage on outward rakes. Delays should be


analyzed according to causes e.g. labour, breakdown of scrapper/dozer
etc.

3.

Check the Contract for transportation of Urea by road for timely award and
compliance to the procedures.

4.

Check the claims on Railways for excess freight, under loading, missing /
diverted wagons for coal and oil and follow up/settlement there of.

5.

Check the Contract for Maintenance of siding for compliance to the


procedures.

6.

Check Registers (RT-I, RG-12) prescribed by Authorities for deduction of


Excise duty at source.

7.

Check if Advance for PLA Account is as per forecasted sales and funds are
not unnecessarily blocked with Excise Authorities.

8.

Surprise check weighment of Industrial Product tankers.

Materials Management

13. 5

INTERNAL AUDIT MANUAL

13.6

9.

Surprise Check of loaded urea bags wagons vis-a-vis empty wagons by


counting the bags loaded.

10.

Surprise check of cleaning of wagons/ sealing and tonnage of wagons.

QUANTUM & PERIODICITY FOR RAIL TRANSPORTATION

Contracts

100%

Cases of demurrage

10% cases once in each half year

Checking of wagons

Once in each quarter

Other items

Once in a year

Materials Management

13. 6

INTERNAL AUDIT MANUAL

CHAPTER 14

STORES

14.1

Criterion for effective Stores Management


From the standpoint of good internal control effective stores management should
address the following objectives:
 To ensure proper inspection of materials received.
 To ensure proper recording of materials received.
 To keep materials in safe custody.
 To correctly account for issue and consumption of materials.
 To ensure suitable insurance coverage.
 To ensure proper fixation of inventory levels and adherence thereof
 To periodically review inventory levels.
 To ensure adequate physical control over inventory.
 To identify and highlight surplus/excess, fast and slow moving inventory and
abnormal consumption.

14.2

Audit guidelines / checklist


While auditing the records of Materials Management Dept. the following should
be verified/examined.

1.

Delivery Orders/ Standing contracts - Examine all the Delivery Orders/


Standing contracts made for procurement of large quantities of stores of regular
consumption (bags, Fuel, Chemicals etc.) and see that stock levels are as per
norms and that the terms of the supply are not disadvantageous to the Company.

2.

Goods Inward Register - Ascertain that the Goods Inward Register has been
maintained properly and kept up to date.

3.

Timely Delivery - See that Delivery of all incoming consignments have been
taken from Railways / Road Transporters without incurring demurrage, wharfage

Stores

14. 1

INTERNAL AUDIT MANUAL

etc. by the Stores Dept. and discrepancies, if any, noticed have been dealt with
in accordance with the procedure for lodging of claims with the insurance
Company / Railways etc.
4.

Proper Inspection of Material - See that inspection of material is arranged by


the Stores Dept. at the earliest. The cases where inspection of the material has
not been completed within the prescribed period may be looked into and
commented upon.

5.

Bin-cards - Verify that receipt, issue and balance are shown correctly in the Bincards after every transaction and the balance in the Bin card is periodically tallied
with physical balance of each item.

6.

Stock Verification - Ascertain that periodical physical stock verification had


been carried out.

7.

Check that the stock in hand in case of raw-material is commensurate with the
normal consumption.

8.

Check the accuracy of Stores receipt vouchers keeping in view the receipt of
material vis-a-vis stipulations in the purchase order.

9.

Check for timely issuance of imported stores/indigenous consignments coming


by air, which could otherwise be moved by cheaper modes i.e., sea / road but
due to emergency are moved by air. Whether the material was got issued
immediately on receipt to justify dispatch by Air to meet emergencies

10.

Surplus Inventory - Check surplus inventory of Stores and progress made for its
disposal.

11.

Classification of Non-moving and Slowmoving Inventory Verify if stores


inventory is periodically classified into non-moving, slow-moving and regular
stocks and that appropriate steps are taken for their disposal/despatch to other
units etc.
The following basis of classification may be considered:
Basis of Classification
No receipt and issue within a period
of two years preceding the date of review
No receipt and issue between 1 and 2 years preceding the
date of review
Others

Stores

Nature of
Inventory
Non moving

Slow Moving
Moving

14. 2

INTERNAL AUDIT MANUAL

Note: Rectification of coding errors of stores issued and returned shall be


ignored and shall not be considered as receipts or issues for purposes of
classification as per the above table.
12.

Comparative study of Inventory - Comparative study of Inventory at the close


of the year with that of previous years to observe an increasing trend, if any.

13.

Procedures in the Stores Manual Ensure that the procedures provided in the
Stores Manual are followed while sending material to fabricators for repairs and
maintenance. Also ensure that all important control procedures laid down in the
stores manual are adhered to.

14.

To check that sale of scrap is effected as early as possible within one year to
avoid deterioration of quality of material and loss of interest on sale value.

Some important checks in case of BAGS:


15.

Samples in conformity with specifications - Check if samples for testing the


bags are in conformity with the specifications laid down in Sampling and Criteria
for Conformity' in the tender document.

16.

Testing empty urea bags - Testing of empty urea bags on random basis is done
as per audit program.

17.

Procedure for rejecting bags - Verify from the records that procedure for
rejection of bags is strictly followed and supplier lifts the ruptured bags from NFL
units within stipulated date of sending information to this effect.

18.

Defacing of rejected bags - Check if rejected bags have been defaced to


ensure that same bags are not sent back to NFL again.

19.

Random Checks - Ascertain if random checks to ensure stipulations in the


clause "Branding" are conducted at regular intervals in the interest of quality
control and the companys image.

Stores

14. 3

INTERNAL AUDIT MANUAL

14.3

QUANTUM & PERIODICITY

Stores

Contract for sale of scrap


Up to Rs.1 lakh
Above Rs.1 lakh & up to Rs.5 lakhs
Above Rs.5 lakhs
Bin Cards

10%
30%
50%
Once in a year

Testing of Urea Bags

Quarterly

Stores Inventory

Once in a year

Other items

Once in a year

14. 4

INTERNAL AUDIT MANUAL

CHAPTER 15

MARKETING FUNCTIONS

15.1

INTRODUCTION
Well-defined systems and procedures aimed at clarity of the role, responsibility
and accountability of all concerned contributes a great deal towards overall
marketing operational efficiency.
In order to achieve the objectives mentioned above, the following points should
be checked/examined/reviewed while conducting the audit of marketing
functions.

15.2

APPOINTMENT OF DEALERS Audit guidelines / checklist


It is to be verified whether:

1.

Survey - Regular survey has been carried out to assess the market potential of
the concerned market centre / Mandi.

2.

Assessment of Survey Report - Survey report has been assessed by the


approved committee, and the type of dealership necessarily required is
recommended, before the vacancy of dealership is declared.

3.

Wide circulation of vacancy for dealership - Vacancy for dealership has been
widely circulated in the surveyed area.

4.

Appointment of dealer is as per the laid down procedures of the Company.

5.

Application in the prescribed format - Application is submitted in the


prescribed proforma.

6.

Scrutiny of Applications received - Applications received have been


scrutinized by the Committee duly appointed by the Competent Authority wherein
Finance representative examines the net worth, financial position/profitability,
market reputation and bank reference etc.

7.

Selection recommended by Selection Committee - Selection of dealer has


been recommended by a Selection Committee and based on their
recommendations probationary dealer appointed.

Marketing Functions

15. 1

INTERNAL AUDIT MANUAL

8.

Dealers to be initially appointed for a probationary period - Dealers have


been appointed for a probationary period of 15 months and confirmation of
appointment has been made after a performance review.

9.

Ad-hoc appointments - Ad-hoc appointment of dealers resorted to only.


(i)

In Areas where dealership does not exist but ECA allocation has been
received.

(ii)

To liquidate the stocks where existing dealers are not forthcoming to take
up the responsibility.

(iii)

In unrepresented areas where inspite of the best efforts of the marketing


department suitable dealers could not be identified.

(iv)

To ensure if proper justification for appointment of Ad-hoc dealers as laid


down in the manual have been taken care of.

(v)

To ensure if all guidelines for ad-hoc appointment have been adhered to.

(vi)

To ensure that ad-hoc dealers do not continue for more than 12 months
from date of appointment.

(vii)

Whether performance was reviewed for extension of dealership beyond


12 months.

10.

Ad hoc dealers not to exceed 10% of the existing dealership structure - At


no point of time, the number of ad hoc dealer is more than 10% of the existing
dealership structure.

11.

Up-to-date list of Ad-hoc dealers at Area Offices - See that Area Office is
maintaining an up to date list of black listed dealers. Terminated/debarred
dealers are not to be given fresh/ad-hoc or probationary dealership.

15.3

CREDIT ADMINISTRATION Audit guidelines / checklist


Internal Audit will verify whether:

1.

Signing of credit applications - Credit application form has been signed by all
the partners of the firm, and by the Managing Director along with a copy of Board
resolution authorizing the Institution to draw the supplies on credit in case of
Corporate Bodies.

Marketing Functions

15. 2

INTERNAL AUDIT MANUAL

2.

Certified copy of registered partnership deed has been submitted along with the
application. Internal auditor shall also check-up that in the marketing manual,
there is a provision about any changes in the Partnership Deed to be intimated to
NFL immediately duly signed by the Managing Partner and in case there is no
Managing Partner, by all the Partners, failing which, it may invite termination of
dealership. There should be another provision in the Marketing Manual that
within one week after financial year closing, a declaration is taken duly signed by
the Managing Partner and in his absence by all the Partners that there is no
change in the Partnership Deed. In case of change, fresh deed of partnership is
to be submitted.

3.

Credit worthiness of the Applicant - Zonal Committee has examined credit


worthiness of the applicant based on the financial status, market reputation of the
party. Zonal Committee has also examined credit worthiness/limit that the party
enjoys with the other manufacturers and has established credit limit of the dealer
based on the above.

4.

Aging analysis and line monitoring of credit sales - Statement of


Accounts/aging analysis and exceptional reports are being scrutinized on a
monthly basis and on line monitoring of credit sales is regularly being done.

5.

Completeness of documents provided - To check if all the documents


stipulated in the Marketing Manual for sanction of credit limit have been provided
by the dealer and overall credit limit is consistent with the credit appraisal of the
dealer.

6.

Effective tracking of expiry dates of Bank Guarantees / Letters of Credit Whether system exists for keeping track of expiry date of BG/LC & claims (if any)
are preferred within the stipulated period.

15.4

HANDLING & TRANSPORT OPERATIONS Audit guidelines / checklist


It is to be verified that -

1.

Contents of NIT - Contents of NlT (notice inviting tender) are concurred by


Finance, vetted by legal and approved by Competent Authority.

2.

NIT to be issued to per qualified parties - The NIT for H&T contract has been
issued to pre-qualified parties after the due approval of GM (Mktg.)/Marketing Incharge.

3.

All the supporting documents such as -

i)

EMD

Marketing Functions

15. 3

INTERNAL AUDIT MANUAL

ii)

Certificate of experience

iii)

Affidavit of proprietorship in case of individual ownership

iv)

Copy of partnership deed

v)

List of immovable assets standing in the name of proprietor/partners / Firm

vi)

Copies of RC books of owned vehicles, if any.

vii)

Income Tax Returns for the last 3 years and income tax clearance certificate.

viii)

Certificate from the Bank confirming financial status of the party and to extend
working capital facility.
have been submitted by the tenderer.

4.

Opening of tenders - The tenders have been opened by a Committee


comprising of Regional Manager, representative of Finance and a representative
of Logistic Department and recommendations given.

5.

Negotiations with L-I if required - Negotiations Committee consisting of ZM


(Mktg) / Chief Manager (Mktg) Chief Manager/ Incharge (Finance) made
negotiations with L-I, if required and made recommendations for approval of
Competent Authority.

6.

Demurrage & wharfage for delayed clearance - Demurrage and wharfage is


being paid by the H&T contractor for delayed clearance of goods except under
force majeure conditions.

7.

Recovery from H&T contractor - Damage caused due to usage of hooks is


recovered from H&T contractor, as applicable.

8.

Shortage of material while handling - Shortage of material while handling is


recovered from Contractor at retention price.

9.

H&T Bills are submitted along with material acknowledgement. Cost of


unacknowledged material is being recovered from H&T contractor.

10.

Road distance to destinations - Road distance to destinations is on the basis


of latest certification by approved authorized competent authority e.g. National
Highways, State Highways/SRTC/PWD/CPWD.

11.

Material from rake point to dealer is not unjustifiably routed through warehouse.

Marketing Functions

15. 4

INTERNAL AUDIT MANUAL

12.

Movement of material to be strictly as per least cost movement plan Movement of material from Unit to rake point, Unit to Mandi, Unit to warehouse,
rake point to warehouse, rake point to dealer and warehouse to dealer is strictly
as per the least cost movement plan duly approved by Competent Authority.

13.

Approvals of deviations from least cost movement plan - Deviations, if any,


from the least cost movement plan are with the due approval of Competent
Authority.

14.

Validity of H&T contract not to exceed one year - Validity of H&T contract
does not exceed one year. Extension, if any, is allowed on the same terms and
conditions for one more year on the proposal of Area Manager.

15.

Validity of Ad hoc H&T contracts - To see that efforts are made to avoid
awarding of Ad-hoc Contracts. In any case such contracts are to be valid only
for the period specified as prescribed in Companys policy.

16.

Surprise checks of rakes - At least 5% of rakes despatched should be


subjected to surprise checks.

15.5

HIRING OF GODOWNS / WAREHOUSING Audit guidelines / checklist


It is to be verified that:

1.

Warehousing Budgets - Warehousing budget is prepared on the basis of


annual district wise warehouse plan, which can be revised on the basis of ECA
for Kharif and Rabi.

2.

Hiring of warehouses - Based on warehousing budget Regional Offices are free


to hire warehouse space from Govt. agencies (CWC/SWC & State Institutional
Agencies). For hiring private warehousing approval of competent authority is
taken.

3.

Warehouses appearing on the hired list of Marketing Offices are actually hired.

4.

Warehouses to be hired directly from the owner - Warehouses have been


hired directly by NFL from the owner and not through the third party or any
contractor.

5.

Warehouses, which are no more with NFL because of expiry/termination of


contract, do not appear in the hired warehouse list.

6.

Warehousing rates - Warehouses hiring rates are reasonably competitive with


Govt. warehouses

Marketing Functions

15. 5

INTERNAL AUDIT MANUAL

7.

Materials in warehouses to be fully insured and issued on FIFO basis Materials stored in warehouses are fully insured and material issued on First in
First out basis (FIFO)

8.

Random check of 25% of the private warehouses is being done.

9.

Warehouses hired to conform to FCO specifications - Warehouses hired are


as per FCO specifications to ensure proper storage safety and security of
material.

10.

Double lock system to be followed by Area Offices in case of private


godowns - See that the double lock system is being followed by the Area offices
in the case of private godowns hired by the company to guard against theft /
pilferage.

11.

Surprise checks of private godowns - See that surprise checking of the private
godowns is being done by the constituted committee.

12.

Receipt and disposal reports - Warehouses are sending receipt and disposal
reports (R&D) regularly every month.

13.

Adhoc hiring of warehouses - Adhoc hiring of warehouse is being done after


the review by a Committee consisting of Marketing/Finance representatives and
approval of GM (Mktg).

14.

Period of hiring of ad-hoc warehouses - Adhoc warehouse should not be for a


period of more than 3 months which, can further extended for another 3 months
after approval of Director (Mktg.).

15.

Warehouse space utilization report - Warehouse space utilization report is


prepared every six months indicating operating efficiency of each warehouse in
respect of stock rotation, warehousing expenses and services rendered, by the
area offices and forwarded through regional office to CMO.

16.

Check if standardization of material is carried out as per laid down procedure.

17.

Whether proper procedure has been laid down in case warehouse operator has
also been assigned the role of H&T Contractor.

15.6

TERMS OF SALE Audit guidelines / checklist

1.

Approval of Sale Terms - Whether approval of Executive Committee was taken


for finalizing the sale terms.

Marketing Functions

15. 6

INTERNAL AUDIT MANUAL

2.

Delivery orders must contain sale terms - Check if Delivery orders contain the
sale terms approved by Competent Authority and within the validity period.

3.

It is to be verified that i)

Delivery Orders (DO) are in line with despatch instructions (DI) and sales
terms.

ii)

The Cash receipt voucher (CRV) has been raised with reference to Delivery
Orders (DO) and sales terms.

iii)

Bank guarantees/DD have been received towards EMD/Security deposit.

iv)

Bank Accounts are reconciled on a monthly basis.

v)

Letter of Credit is opened strictly as per the terms and conditions settled by
NFL with foreign vendor.

vi)

Advance payment if any to foreign vendors is released as per the terms of


contract and made only against receipt of proper bank guarantee.

vii)

Material is fully covered under transit insurance before despatch.

15.7

SALES ACCOUNTING & SUNDRY DEBTORS Audit guidelines / checklist

1.

Recording Input documents - Check if all input documents are recorded by the
Computer Services. Cancelled pre-numbered documents should also be entered
to run validity check by Auditors.

2.

Outstanding Debtors - Examine if proper follow up of outstanding debtors is


done by Executive Department.

3.

Interest - Check interest chargeable (if any) from the customers is charged

4.

Check for all unusual/irregular sundry debtor balances.

5.

Confirming debtors balances - Check if at least 25% debtors confirm the


outstanding balances against letters of confirmation issued by Accounts
Department.

6.

Examination of the Dealer Master - Check on random basis Dealer Master for
Type of Party, Duplication of Party Code, Credit limit etc.

Marketing Functions

15. 7

INTERNAL AUDIT MANUAL

Records
It is to be verified that -

15.8

i)

Guidelines issued by the Company from time to time for maintenance of


records are being adhered to strictly.

ii)

Detailed status about the location of particular records are maintained in


area/Regional/ Zonal Offices and CMO.

iii)

Check List of the activities being performed at Area/Regional offices are


being maintained by Zonal Offices and CMO.

IMPORT OF FERTILIZERS & OTHER TRADABLE ITEMS Audit guidelines /


checklist
Following checks may be exercised in the course of audit of import of fertilizers:

1.

Assessment of requirement and marketability - To see that assessment of


requirement and marketability along with economic liability of imported fertilizers
is properly ascertained and duly approved by the competent authority.

2.

Global Tendering Procedures to be followed - To see that Global Tendering


Procedures regarding Global NIT / Advertisement in the press, sale! receipt of
tenders within stipulated period, EMD of specified amount, opening of tenders on
due date by duly constituted & approved committee, are followed.

3.

Placement of LOI on successful bidders - To see that the tender committee


has recommended the placement of LOI on successful bidders based upon
quoted price vis-a-vis negotiated price as per the international ruling price.

4.

Approval of LOI / International Corporate Purchase Order (ICPO) - LOI /


International Corporate Purchase Order (ICPO) has been duly approved by the
competent authority and it indicates specific quantity, firm price & supply
schedule along with the requirement of submitting Performance Guarantee (PG)
Bond and proof of stock duly attested by the Chamber of Commerce of the
respective Exporting country or its Prime Bank by the stipulated date.

5.

Validity of P.G. Bond - P G Bond received from supplier should be valid for 90
days enforceable till six months after its effective date and is strictly as per (he
approved proforma supplied by the company to safeguard the interest of the
company.

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INTERNAL AUDIT MANUAL

6.

Relaxation, if any, in the form of exemption of EMD/proof or stock and relaxation


in P G Bond amount has been given only to the original manufacturers and not to
the traders with the approval of the competent authority.

7.

Letters of Credit - That an irrevocable, confirmed, divisible, assignable &


transferable Letter of Credit is opened only on receipt of valid P.G. Bond and
proof of stock. Also examine that L/C kept opened is restricted to cover the
maximum value of shipment quantity as opening of L/C for the whole of the
amount under the contract may entail payment of unnecessary commission.

8.

Import Contracts - Check that the import contract is duly approved and covers
all the vital terms & conditions governing the supply/ purchase arrangements
between buyer & seller.

9.

Adherence to RBI/Foreign Exchange Management Act - To verify that in line


with the guidelines of RBI/Foreign Exchange Management Act, no advance
payment in foreign exchange is released beyond the specified amount in any
commercial transaction without proper security in the form of valid bank
guarantee. All commercial remittances should be made through valid L/Cs only.

10.

Appointment of inspection agency - That inspection agency has been duly


appointed at load port to supervise and ensure the receipt of specified quantity
and quality as per standard norms provided in the contract.

11.

Marine insurance - That proper comprehensive marine insurance has been


taken covering entire risk of any damage occurring to the loaded cargo while in
transit and up to the discharge port.

12.

Non-performance by the supplier - In the event of non-performance by the


supplier even on establishing valid L/C by NFL, see that PG Bond furnished by
the supplier is forfeited to cover the losses incurred by the company due to the
default on the part of supplier.

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INTERNAL AUDIT MANUAL

CHAPTER 16

TOWNSHIP ADMINISTRATION & GUEST HOUSE

16.1

INTRODUCTION
Township administration including guest house is essentially a service
department. The internal audit should exercise all normal financial checks on
their activities as would be applicable in the case of a service department. The
audit check list below highlights all important checks necessary for an effective
internal audit of this function.

16.2

TOWNSHIP ADMINISTRATION
Audit Guidelines / Checklist
Township administration is basically a service department. The internal audit
should exercise normal financial checks on their activities.

1.

Maintenance of proper records for land, buildings etc. - Check whether


proper records for land, buildings, quarters, shops, etc. owned / leased by the
company are being maintained. Check the relevant registers with reference to
supporting documents for completeness and accuracy.

2.

Audit the records of land procured, source of procurement (i.e. rented land from
Govt/land from individuals etc.) rates and values of land procured with reference
to original documents like deeds/ intimation from Collectorate etc.

3.

Safe custody of registration documents - Examine and appraise the system of


safe custody of registration deeds and other permanent documents. Also check
reasons for non-registration of deed for land/flats etc. in favour of the company.

4.

Procedures for allotment of land/buildings - Review and appraise the


systems, procedures and rules for allotment of land/buildings/ quarters/ shops,
etc.

Allotment Registers - Verify the registers for recording allotments and


examine whether such records are adequate.

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5.

Unoccupied properties - Ascertain that there are proper internal checks on


properties remaining unoccupied for long.

Delays between construction and allotment - Examine and highlight cases


of delays between the construction of new houses and their allotment or
between the taking over of possession from previous allottees and fresh
allotment in respect of old houses.

Delays in occupancy - Report unreasonable delays in occupancy of


buildings/quarters by allottees thereby resulting in loss of revenue to the
company. Abnormal gaps between vacation and handing over of old house
and occupation of new house by the allottees and cases of multiple
occupations, if any, should be also be examined.

Out of turn allotments - Check and review out of turn allotments of houses
and see whether such allotments are in conformity with the relevant rules and
regulations.

Reconciliation of allotments and vacant houses - Check whether the total


allotments along with vacant houses are reconciled periodically with the total
number of houses.

Test checking of allotment orders issued - Check a certain percentage of


allotment orders issued since last audit review cut off date to verify that such
orders are in conformity with allotment rules in force and the laid down
procedures.

Encroachments Controls in existence and system followed to keep a watch


over encroachments on company's land or property should be examined. In case
of encroachments examine what steps have been taken and if these are timely
and adequate.
Also examine if there have been any lack of safeguards in the beginning itself
resulting in the 'unauthorized occupation of land / property and that measures
taken to evict the unauthorized occupants are adequate.

6.

Concessional Rent - Cases of concessional rent charged to outsiders should be


examined for justification and adequate authorization.

7.

Audit of the billing system of recoverable from outsiders - Audit the billing
system for recoverable from outsiders in respect of land/ buildings
/quarters/shops etc. allotted to them. Test check documents in respect of
recoveries for two months with reference to the lease agreements/rules of the
company to verify the following:

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Regular recoveries are being made from allottees.

Rent and other charges are being assessed and recovered correctly in all
cases.

Adequate action has been taken against defaulters.

8.

Appraise the system for raising bills for electricity consumed by employees and
outsiders.

9.

Ageing analysis - Age-wise analysis of old outstandings should be looked into


and the effectiveness of realization examined.

10.

Accruals of income - Review the system of intimation to the finance and


accounts department regarding accruals of income on account of rent, premium,
ground rent, service charges, annual rental charges etc. Frequency of such
communication and delays, if any, should be examined. A test check on such
communication with the accounting records should be made.

11.

Terms of Lease - Check the terms of lease of land allotted to co-operatives,


institutions like schools, clubs, religious committees, and various other parties
and that the allotments have been approved by the competent authority. Special
attention to be given to disputed cases which have not been settled.

12.

Examine the system of reconciliation for:

Rent assessed, rent recovered and under recovery, if any.

Electricity consumed vs. billed and billed vs. recovered/under -recovered.

13.

Fixation of rent for new construction and revision of rent - An overall review
of computation of fixation of rent for new construction or revision of the same for
old buildings.

14.

Review of the computation of charges for services which do not pay for itself
should be carried out by the internal auditor.

15.

Control over collections at various entertainment avenues which are contracted


out.

16.

Adequacy of the complaint redressal system.

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16.3

TOWNSHIP MAINTENANCE
Audit Guidelines / Checklist

1.

Major contracts / work orders - Review award and operation of major contracts
/ work orders to outside agencies for township maintenance, in particular to those
awarded without financial concurrence, if any. Also examine as to why the work
could not be done departmentally.

2.

Examine the system of budgetary control being exercised.

3.

Stores - Check the accounts of stores for important items like cement, steel,
bricks and costly electrical and mechanical items. Undertake surprise physical
verification of some of these items. Examine cases of shortages, if any.

4.

Issue and Consumption of Stores - Check the issue and consumption of stores
to contractors.

5.

Non-moving/Slow-moving stores - Review the stocks of stores and highlight


any significant cases of non-moving and slow-moving items.

6.

Identify and bring out cases of over-indenting, if any.

7.

Examine the records of issued and returned tools etc. and check entries in the
relevant register maintained for this purpose.

8.

Demolition of buildings/structures - Examine the system and test check a few


items for custody, accounting and disposal of materials obtained from demolition
of buildings (temporary/ permanent), replacement of old electric wiring systems,
unserviceable fittings or materials, etc.

9.

Examine cases of emergency purchases.

10.

Reconciliation of electricity received and consumed - Review the


reconciliation between electricity received for township and consumption thereof
on various counts and report distribution losses or any unaccounted for losses.

11.

Collectibles - Review all outstanding recoverable on this account and see that
adequate action has been taken for recovery.

12.

Imprest Accounts - Check the imprest account and temporary advances and
reports cases of non-adjustments or where there have been unreasonable
delays.

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13.

Complaints Register - Check the complaints register and comment on the


effectiveness of attending to complaints in terms of speedy disposal/redressal
thereof.

16.4

TOWNSHIP INCOME
Audit Guidelines / Checklist
Township income includes income from the following sources:









16.5

Rent from employees and outsiders


Sale of electricity to employees and outsiders
Water charges
Service charges from outsiders
School fees
Licence fees from outsiders
Guest house charges from employees and outsiders
Others

RENT AND SERVICE CHARGES


Audit Guidelines / Checklist
Internal audit should verify that:

1.

Recovery of rent, electricity and water charges are being made regularly and
promptly on the basis of the following:
i)

Occupation and Vacation reports;

ii)

Electricity meter reading statements;

iii)

Rates of water charges fixed;

iv)

Intimations from Personnel Department regarding any changes in the pay


of the employee.

In all cases of remission of rent /services charges, sanction of the competent


authority taken.
2.

All cases where the dues remain outstanding for a period of more than 3 months,
should be brought out.

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INTERNAL AUDIT MANUAL

3.

Billing of income and deposition of cash- All income are properly billed and
accounted for and that ash collected at various points in the township are
deposited in the main cash section timely.

4.

Adequacy of rates charged from outsiders - Rates charged from outsiders for
rent, electricity, water, guest house etc. are reviewed at regular intervals and
suitably revised if circumstances so warrant. Check that the revisions from time
to time are based on and in sync with the rates charged by the local distributing
agencies to the public.

5.

Verify that outside parties are prompt in depositing their dues. In case there are
delays whether action taken in this regard is adequate.

6.

Rates of recovery of purchased services like electricity etc. - Examine rates


of recovery of purchased services like electricity, water etc. and that the company
is not suffering any revenue loss on this account. The extent of loss, if any, borne
by the company on this account should be highlighted.

7.

Test check the basis of fixation of house rent and other service charges both in
respect of employees and outsiders, so as to ensure that the rent has been fixed
in accordance with the companys rules.
TOWNSHIP CONSTRUCTION
For audit guidelines pertaining to Township Construction, the guidelines as
appearing in the Chapter on 'Capex (Capital Expenditure) may be referred to.

16.6

PUBLIC HEALTH
Audit Guidelines / Checklist
Internal Audit will refer to the following checklist on Public Health and will report
any shortcomings in the systems and procedures followed.

1.

Public Health jobs contracted out - If any jobs have been contracted out, these
may be examined for necessity, contractual terms, authorization and
performance.

2.

Garbage disposal - Check that the garbage disposal/removal and environment


disinfection programmes are working satisfactorily in case of both departmental
working and through contractors.

3.

Water sampling - Check that water sampling is done regularly for bacteriological

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INTERNAL AUDIT MANUAL

analysis and potability and suitable action is taken, wherever found necessary
4.

Pest control - Check the adequacy of steps taken to control insects and pests
and insects borne diseases in the township.

5.

Any need for Pest Management Plans- Determine whether Pest Management
Plans (PMP) that outlines any sampling, testing, treatment and cultural practices,
best management practices, or other control measures need to be developed for
any plant/site or whether present practices are sufficient and provide pest
control.
A PMP refers to a written description of procedures or processes designed to
control a pest population, either to eliminate it or to suppress it to a level that
meets the high sanitary standards.

6.

Review the functioning of the various immunization programmes.

7.

Review the system and adequacy of health services carried out in the schools at
the units.

8.

Imprest accounts - Check that the imprest accounts and temporary advances
are accounted for promptly.

9.

Store records - Store records and stores consumption be checked on a random


basis.

16.7

GUEST HOUSE OWNED / LEASED


Audit Guidelines / Checklist

1.

Register of Visitors - Verify that the register of visitors is being maintained


properly and is up to date. Also verify from the register that no unauthorized
person has occupied the Guest House without the approval of management.

2.

Test checking bills - Test Check the copies of the bills with entries in the
Visitor's/Occupancy Register, statements for depositing the cash/cheques with
the Cash Section.

3.

Amounts received from guests - See that the amounts collected from the
Visitors are promptly remitted to Accounts Dept. Cases of unusual delays should
be brought out along with reasons thereof. Also ascertain the reasons for
outstanding amounts against guests, the progress of recovery and also report on
the follow up of old and exceptional cases.

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INTERNAL AUDIT MANUAL

4.

Stock Registers - Check the stock registers of the following items and also see
whether the periodical verification and reconciliation of the following assets have
been carried out;
i)

Furniture

ii)

Crockery, cutlery, blankets, mattresses, electrical appliances, bed sheets


etc.

iii)

Office appliances and equipment.

iv)

Miscellaneous equipments

v)

Safety equipment.

Also verify that the total quantity in the register are duly tallied periodically. The
actual life of these items in comparison to norms to be checked to ascertain
whether there is any premature retirement/abandonment.
5.

Procurement (leased/rented guest houses) - Examine the procedure for


purchase of furnishings, linen, appliances, carpets, curtains, bed sheets/covers,
pillow covers, towels, crockery and cutlery etc. Frequency of purchase and
quality norms may be examined.

6.

See that the Trunk Calls Register is maintained and recovery is effected from the
Visitors for private trunk calls, if any, made by them.

7.

Leased Guest Houses - Scrutinize the lease agreement for guest house
accommodation taken on lease or on rent. Check the terms and conditions in
respect of allotment to guests and ascertain whether these are being followed
and dues are recovered accordingly.

8.

Occupancy rate - Occupancy rate should be examined, especially in the case of


leased/rented guest houses. Low occupancy rates should be reported.

9.

Scrutinize the conditions of the contract with outside caterers and point out
deviations, if any.

10.

In case of departmental catering, records maintained for purchase and


consumption of provisions should be checked.

11.

Check that the food charges to guests in case of departmental catering are
adequate.

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INTERNAL AUDIT MANUAL

12.

Examine the service contract for upkeep and maintenance including electrical
maintenance for its adequacy and efficiency where the same has been entrusted
to an outside agency.

13.

Imprest Account - Check the imprest account and advances drawn by the incharge. Guest House in-charge shall ensure that the expenditure is within the
limits and advances are adjusted expeditiously. Examine that the imprest
account is being maintained properly.

14.

Look into the procedure for disposal of used / unserviceable articles and
comment if the laid down procedure has not been followed. Cases of write- off, if
any, may also be seen.

15.

Whether complaint book is maintained and the complaints are regularly attended
to.

16.8

HORTICULTURE
Audit Guidelines / Checklist
The Audit Checklist outlining the specific elements that need to be considered by
internal audit is as given below:

1.

Coverage - Review the actual coverage of plantation with the planned


programme with particular reference to:
i.
ii.
iii.

Area covered
No. of trees (considering type of trees)/saplings (considering type)
planted
Survival percentage etc. (tree-wise).

2.

Afforestation work - Review the afforestation work done through contractors


and comment on the performance with specific reference to terms of the contract.

3.

Procurement of tools - Examine the system of procurement and accounting for


tools and implements as well as disposal of scrapped/condemned tools and
implements.

4.

Sale by auction or otherwise - Review the sale (by auction or otherwise) of


items like timber wood, fuel wood, etc. in all aspects, including method of price
fixation.

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INTERNAL AUDIT MANUAL

5.

Imprest Accounts - Check the imprest accounts and temporary advances and
comment on any major non-adjustments pending beyond prescribed time limits.

6.

Casual labour - Verify casual labour records and payments thereof and compare
present data with historical data. Ensure records are proper and adequate.

7.

Expenditure on maintenance of parks - Audit expenditure on maintenance of


parks and ensure that these are within budgeted or other limits established for
such expenditure.

8.

Vet the expenditure incurred on flowers/vegetables shows, if any, conducted.

16.9

QUANTUM AND PERIODICITY

1.

Township Administration, Maintenance


and Income

Once in a year

2.

Public Health

Once every six months

3.

Guest House (Owned/Leased)

Once in a year

4.

Horticulture

Once in a year

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CHAPTER 17

SCHOOLS & HOSPITALS

17.1

SCHOOLS
Audit guidelines / checklist

1.

Check Fee Collection Register in order to verify that all amounts due from the
students have been received by the prescribed date.

2.

Ensure that various funds collected by the school are properly accounted for and
expenditure incurred there from as per the budget provision is as per the relevant
rules and orders of the competent authority.

3.

Check the various School Equipment and Stores Registers and ensure that all
the stores issued to the schools have been taken on stock register.

4.

Check that there is a system of regular physical verification of the school


Equipment and Stores. Test check physical existence of some of the items.

5.

Imprest Account in the name of Principal / Headmaster (if any) should be


checked with respect to its correctness and completeness regarding the
expenditure incurred there-from.

6.

Check the Library Register and ensure that all the books have been entered
therein. Ensure that there is a proper system of periodical check of the books.
See that proper write-off action is taken for the books lost / mutilated.

7.

Scrutinize Register of Periodicals and Newspapers. Ensure that the purchases


are sanctioned by the competent authority and the used newspapers, periodicals
etc., are sold regularly after adopting the prescribed procedure.

8.

Ensure that the rate of fee prescribed for students other than the children of
employees have been fixed by the competent authority after considering the
relevant factors and examine if any subsidy is being given by the company.

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17.2

HOSPITALS
Audit guidelines / checklist
Internal Audit should examine the following matters:

17.2.1 HOSPITAL HOUSEKEEPING


Check that requisite standards of good hospital housekeeping in the following
areas are met.
(1)

Waste Disposal (solid, liquid, pathological etc.)

(2)

Safety

(3)

Sanitation and Odour Control

(4)

Pest, Rodent and Animal Control (Prevention , Control and eradication thereof)

(5)

Interior Decoration (lighting, ventilation, and an environment pleasant to patients,


staff and visitors).

(6)

Hospital Linen Services (Procurement, Preparation, Safety and Control,


Processing, Condemnation and Incineration and Replacement). (Rather than
rigid rules, common sense and hygienic approaches for handling, processing and
storage of textiles are recommended to reduce the risk of cross-infection.)

(7)

Equipment Maintenance (Operational Procedures, Safety measures, Preventive


maintenance)

(8)

Environmental Hygiene

(9)

Infection Control

(10)

Maintenance of Records and Documents

17.2.2 ESTABLISHMENT ADMINISTRATION


(1)

Review sanctioned strength and. the actual deployment of manpower in the


hospital/health centre.

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INTERNAL AUDIT MANUAL

(2)

Verify records and compliance of company procedures in regard to establishment


matters of the staff.

(3)

Check that the system of budgetary control is sound.

(4)

Expenditure approved and included without concurrence/consultation with


finance may be examined.

(5)

Check the Register of persons (Employees as well as others) who have been
issued Medical Cards for treatment in the Hospital in order to verify that these
have been correctly issued as per the existing orders. In the case of persons like
shop- keepers who are required to pay certain fee before the Card is issued, it
may be ensured that requisite amount of fee has been recovered regularly.

(6)

Check the procedure of passing of bills for reimbursement of cost of medicines


purchased from outside by the employees and whether the rules in this regard
are strictly observed.

(7)

Check that the established procedure for referring patients for outside treatment
and passing of their bills for travel treatment has been followed.

(8)

Examine the arrangement/expenses incurred on visit of / reference to specialists


from outside.

(9)

Examine the system of passing of bills for payment to suppliers/contractors and


release of security deposits. Cases of undue delay may be highlighted.

(10)

Check the inventory records of movable and non-moveable assets. Ascertain


whether physical verification of all stocks of medicines in hospital, furniture,
fixtures, hospital /office equipment, Blankets etc. is done periodically.

(11)

Check the system followed for disposal of waste materials, such as used X-ray
films, empties etc.

(12)

Health Sanitation Register should be checked in respect of Sanitary Stores, DDT


and other chemicals in order to ensure that these have been drawn from the
Stores and used in the prescribed manner under the orders of the competent
authority.

17.2.3 MEDICINES AND MEDICAL STORE


(1)

Check the system and basis of raising requisitions for procurement of medicines
and medical stores. Ensure adherence to the companys contracting provisions.

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INTERNAL AUDIT MANUAL

(2)

The audit guidelines under chapter on 'Materials Management' should be


followed in the internal audit of procurement, receipts, issues and accounting of
medicines and medical items and other miscellaneous stores to the extent these
are applicable.

(3)

Review the system of identifying the slow-moving, non-moving, short-expiry and


expired/dead stock of medicines, injections, medical stores, vis-a-vis their shelf
life. Report on any weaknesses in controls in this regard.

(4)

Check the stock of expired medicines/register of medicines and examine as to


what special care is taken so that medicines, injections, etc. are utilized within
the expiry dates and loss on this account is minimised. Verify that medicines with
very short expiry periods from date of purchase are not accepted.

(5)

Examine the arrangements with medicine suppliers in respect of replacement of


time- expired medicines.

(6)

Whether stock verification reports show any major discrepancy, and what action
has been taken on these reports.

(7)

Linen Account - Register of Hospital Stores such as Blankets, Sheets


mattresses may be checked in order to see that all issues by the Stores have
been taken into account. Also ensure that linen procurement is not in excess of
requirements, not made prematurely and unserviceable linen is disposed off
quickly.

17.2.4 DIETARY STORES


(1)

Check the award of contracts for supply of dietary articles and their operation.

(2)

Examine the system of receipt and issue of dietary articles to the kitchen staff
and verity that the consumption of materials is as per norms.

(3)

Check the daily statements of meals prepared and distributed' to identify


abnormal wastages, if any.

(4)

Wherever dietary charges are recoverable from the employees, verify that
prompt intimation for recovery is sent to the Salary Section.

17.2.5 HOSPITAL EQUIPMENTS/MACHINES


(1)

Procurement - Verify that procurement of equipment/machines/appliances made


during the period under audit have been appraised for necessity with reference to
existing stocks and price paid. Check entries in the inventory record.

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INTERNAL AUDIT MANUAL

(2)

Asset Inventory Records - Ensure that an exhaustive duly codified fixed asset
inventory record is maintained showing locations of all equipments /machines
with the Hospital/Health Centre is maintained. The internal auditor should
examine the same as to its completeness.

(3)

Idle Equipment - Check the reasons, if any, for equipment/machines which are
lying idle. Report on whether these were purchased without adequate scrutiny
and what action is being taken for their effective use/disposal.

(4)

Equipment Breakdown - Check whether prompt action has been taken in case
of breakdowns of equipment/machines. The internal auditor should enquire into
cases of equipment/machines sent out for repair long back but not received back.

(5)

Preventive Maintenance Verify that preventive maintenance charts have


been drawn up for all-important equipments/machines and that these are
adhered to. Service/Maintenance contracts, if any, should be examined.

(6)

Ensure that all equipment installed in the hospital are in working order.

(7)

Check if the facilities provided in the hospital e.g., X-ray machine Ultra-sound,
ECG etc. are being utilized to the maximum.

17.2.6 NON-ENTITLED PATIENTS


(1)

Examine that the prescribed procedures for treatment of non-entitled patients


with regard to treatment billing / recovery are strictly followed.

(2)

Check that treatment given to non-entitled persons has the sanction of the
competent authority and recoveries thereof have been made as per the schedule
of rates approved by the competent authority. Outstanding bills for long periods
should be highlighted.

(3)

Verify that bills are raised promptly and whether treatment charges realised are
deposited with central cash department without delay.

(4)

Also ascertain whether the schedule of charges from non-entitled patients is


revised periodically in line with the increases in costs.

17.3

QUANTUM AND PERIODICITY


1.

Hospitals & Medical Services

Once in a year

2.

Schools

Once in a year

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CHAPTER 18

OPERATION AUDIT INCLUDING PRODUCT QUALITY

18.1

INTRODUCTION
This chapter deals with the Production Department. The system of working /
reporting should be studied for the purpose of improving efficiency and
profitability. Wherever possible economic benefits /losses should be quantified
and highlighted.

18.2

AUDIT GUIDELINES / CHECKLIST


Internal audit executives should exercise following checks while conducting the
audit:

1.

Determining consumption of input materials - Ascertain the actual specific


consumption of input materials such as feedstock, steam, power and chemicals.
Items mentioned in the cost sheets should be considered. Consumption and
production data should be checked for accuracy and promptness of figure
reported/recorded. When checking consumption, the period considered, should
cover consistent and uninterrupted operation of the plant. When monthly
consumption is considered comments on the performance for the smooth run
period and interrupted period should be given.

2.

Feed stock consumption per ton of actual ammonia produced should be


compared with flow sheet figures every month after correcting the same for such
factors as H2 and S in feedstock, C/H ratio in natural gas and CO slip after coshift conversion. Similarly consumption of raw materials, steam power and other
chemicals etc. should be done for all other plants after considering the variations
with flow sheet/design.

3.

Reasons for high consumption of input material to be inquired into Reasons for high consumption of input material based upon actual figure should
be ascertained and suggestions for improving the same should be given. In case
actual consumption of an item is not available because of deficiency in
measuring instrument, then total consumption based upon opening stock,
receipts and closing balance should be calculated. For example, if feed stock
consumption in ammonia production is not available then total oil consumption

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18. 1

INTERNAL AUDIT MANUAL

(feed stock + fuel + oil for power) can be evaluated. Similarly the total natural
gas/Naphtha used as feedstock + fuel to Primary Reformer should be monitored.
4.

Stack temperature monitoring - All the furnaces, reformers and Heat recovery
Units should be closely monitored for Stack temperature, Oxygen in the flue
gases for optimum energy efficiency. Wherever possible losses should be
quantified and highlighted.

5.

Recovery efficiency of Sulphur Plant - Check the availability of Sulphur


Recovery Plant and its overall recovery efficiency. Also check the Sulphur
Recovery efficiency on day to day basis.

6.

Unit operation equipment - All unit operation equipments such as mass transfer
towers in gas purification section, package units such as Absorption Refrigeration
Unit, Inert Gas Unit, Air separation Unit etc. should be studied for efficient
operation. Special attention should be paid to CO2 slip from gas purification units,
of towers/ packing.

7.

Factors that can cause loss of efficiency - Various parameters such as CH4
(methane) slip in ammonia plant, steam & CO (carbon monoxide) ratio in shift
conversion section, water balance and ammonia losses in urea plant,
combustibles in the fly ash etc. are some of the examples that cause loss in
efficiency. Such activities need to be looked into with care and pointed out with
facts and proper laboratory analyses if required.

8.

See that available resources and assets are used to maximize the operating
profit. Purge gas recovery unit should be kept operational 'to the extent possible,
keeping overall corporate profitability in view.

9.

Start up activities - Study the start up activities and evaluate the delays that
may have caused excessive expenditure. Avoidable losses should be worked
out. Suggestions to avoid such losses may be incorporated in the audit reports.

10.

Changes in operational practices - Whenever any major changes are made in


the operational practices these should be backed by cost and benefit analysis
and have the approval of the Competent Authority.

11.

Replacement of catalysts - To ascertain that decisions taken on replacement of


catalysts, resins etc. are taken after proper application of optimization
techniques. It should be specifically checked that 'life cycles' are considered.
Incremental benefits should not be considered.

12.

Steam Balance - Check the steam balance every fortnight and ascertain that
unprofitable operations are being looked into for rectification during the
planned/unplanned shut downs.

Operation Audit

18. 2

INTERNAL AUDIT MANUAL

13.

Boiler efficiencies - Check that boiler efficiencies are evaluated every month
(either by direct or indirect method) and corrective action is taken.

14.

Checking cooling water flow - Cooling water flow in each plant should be
checked every fortnight and reasons for keeping higher flow than required
(depending upon CW temp) should be considered. Alternatively, C.W. Pumping
energy may be evaluated. Also efficiency of C.W. pumps should be comparable
with the design value. It may also be ensured that proper performance
parameters such as Cycles of Concentration, Corrosion rate and Fouling factors
are demanded and monitored in case of Cooling Water Treatment Program.

15.

Checklists for day-to-day plant activities - Ascertain that checklists for day-today plant activities are being filled sincerely and records are being maintained.

16.

Calibration of important instruments as per ISO 9001 (2000) manual Check that important instruments such as analyzers, flow meters are
calibrated/checked as per the agreed practice or as per ISO 9001 (2000)
manual.

17.

Check that monitoring of process parameter and follow up action is done


regularly or according to ISO 9001 (2000) manual.

18.

Instrument interlocks to be simulated after major shut-down/break down Check that instrument interlocks are simulated, after major shutdown and after a
break down. Also, ensure that that all safety interlocks are in-line. Bypassing of
safety interlocks should have approval of the competent authority and ascertain
that it has been reviewed once a year.

19.

Revision of diagrams, drawings and manuals - Ensure that proper system


exists for revision of P&I diagrams, Interlock drawings and Manuals for
incorporation of all modifications. Check that revised P&I, flow diagrams
interlocks are available in the respective control rooms for ready reference.

20.

Annunciation panels - Annunciation panels' checking should be recorded. All


the recorders should be marked for date and paper charts should move at the
rated speed.

21.

Quality of urea - Quality of urea is checked and necessary checks are made in
the Prilling Section of the Urea plant every month. Ensure that condition of
distributors/Prilling Bucket is sound and these are changed as per requirement.
Molten urea temperature is maintained as per requirement.

22.

Maintenance of log books - Check, that log books, log sheets etc. are
maintained and preserved for reference. Verify that these records are destroyed
after the expiry of stipulated period as specified in ISO-9002.

Operation Audit

18. 3

INTERNAL AUDIT MANUAL

23.

Plant history records - Check on quarterly basis that plant history records are
maintained.

24.

Corrective/follow up action - Check, that corrective/follow up action is taken on


performance and break down reports generated by Technical Services.

25.

Financial justification of modifications carried out - Ascertain that


modifications etc. carried out are justified financially or have safety enhancement.
These should have the approval of Competent Authority. Check the 'efficacy of
the modifications so carried out.

26.

Control over plant effluents - Check once a year that proper control is
maintained over generation of effluents from each plant.

27.

Protective personal equipment - Examine and observe that protective personal


equipment is used by plant personnel while performing their duties.

28.

NDT Reports - See that NDT reports such as thickness of pipes or equipments,
vibrations of rotating machinery are looked into and similarly rotating machinery
efficiency calculations and fouling factors calculations are given due importance
by operating staff.

29.

Quality and quantity of bowl mill coal rejects - Check the quality and quantity
of bowl mill coal rejects and their reasonableness.

30.

Environment monitors - Check that environment monitors are in working


condition and working atmosphere is safe.

31.

Check that steam is not wasted in unloading of FO, LSHS etc. Proper care is
taken in steam heating of wagons and is properly accounted for.

32.

Weight checking of filled urea bags - Ascertain that weight checking of filled
urea bags is done as per ISO 9001 (2000) and general house keeping activities
are in order.

33.

Check that off grade urea in silo is segregated and recycled back timely.

34.

Specific consumption of inputs is as per design norms - Ascertain that


specific consumption of inputs is as per design norms.

35.

Accounting/Actual consumption of raw materials - Accounting/Actual


consumption of raw materials, chemicals and lubricants etc. (quarterly) to be
compared with actual receipts/issues.

Operation Audit

18. 4

INTERNAL AUDIT MANUAL

36.

Reconciliation of Receipts and Consumption of Urea bags - Receipts and


Consumption of Urea bags should be reconciled with dispatches and rejected
quantities (if any) on yearly basis.

37.

Rejection of bags should be with-in the specified limits.

38.

Cleaning of wagons and laying of polythene sheet if required.

39.

Ascertain whether possibility of use of common items between different Units,


such as catalyst etc. is explored as a matter of practice.

An overview of the production process for both FO and Gas based Urea Plants is
described in Appendix - 7 This may be referred to for a full understanding of the
production process.

Operation Audit

18. 5

INTERNAL AUDIT MANUAL

CHAPTER 19

REPAIRS & MAINTENANCE (PLANT)

19.1

OVERVIEW
The nature of the process manufacturing industry is characterised by high capital
investments. Maintenance costs are high and constitute a significant component
of fixed cost .
Proper and timely maintenance of plant & machinery and equipment is critical to
the successful operation of the plants, driving a better return of net assets
(RONA) and for meeting top managements strategic objective of plant reliability
management for business success.
NFLs maintenance programmes are designed to meet the following business,
strategic and competitive objectives:










prevent failures and sustain plant reliability,


Improve safety and meet environmental responsibility
More time operating less downtime
Meet output per hour yield
Highest first pass quality insignificant or no rejects,
Low maintenance costs
Adequate documentation of maintenance issues
Ensuring a safe environment before maintenance takes place.
In order to have the desired impact on the entire organisation, maintenance
systems need to support inter-organisational communication and
collaboration, and be accessible to the procurement, inventory, operations,
technical, safety and maintenance teams in a company.

Maintenance is generally classified into preventive and breakdown maintenance


(diagnostic or corrective maintenance). An ounce of prevention is worth a pound
of cure. This dictum also holds good in a business context and therefore the
emphasis is and has to be on preventive maintenance so that breakdowns are
only an exception, plant life is maximised and operational stability is ensured.
Effective preventive maintenance programmes help in achieving: best quality
lowest cost Shortest Lead Time Best Safety High Morale.

Repairs & Maintenance

19. 1

INTERNAL AUDIT MANUAL

19.2

MECHANICAL, INSTRUMENTATION AND ELECTRICIAL


Audit guidelines / checklist

(1)

Examine the effectiveness of the overall control systems prevalent within the
maintenance department. In this regard controls over work order planning and
timely execution of jobs is important.

(2)

Examine the statistics of down time due to maintenance delays and highlight the
cost/revenue losses from such delays. Analyse bottlenecks and remedial steps
taken/required.

(3)

Compare the approved maintenance schedules with the actuals and ascertain
reasons for deferment of any shutdowns.

(4)

Whether equipment sent for repairs in-house or outside agencies have been
allowed to lie with them for an unduly long time.

(5)

Appraise the quality of maintenance with reference to frequent breakdowns of the


same machinery.

(6)

Extent of involvement of maintenance personnel in the selection of equipment at


the design and procurement stages should be ascertained.

(7)

Whether drawings/manuals required for maintenance and manufacture of spares


captively / within the company are obtained/available in all cases.

(8)

In respect of major capital repairs, whether proper estimates have been


prepared, sanctions obtained, the execution monitored with the help of network
charts and control over expenditure is exercised.

(9)

Check the equipment utilisation at various maintenance shops, identify the idle
equipments and bring out system failures responsible for their purchase and
make suggestions for their gainful disposal.

(10)

Contracts for repairs and maintenance by outside agencies should to be


examined for their terms and conditions, particularly in regard to performance
guarantees and also ascertain reasons as to why such jobs could not be done
departmentally.

(11)

Examine the indenting/procurement of stores and spares for maintenance jobs to


see whether there were any stock outs, excessive additions to inventories in
stores as well as at shop floor, quality complaints etc. Emergency purchase
should be evaluated critically.

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INTERNAL AUDIT MANUAL

(12)

Ascertain whether imports are continuing even when indigenous substitutes have
been developed.

(13)

Ascertain extent of standardisation of spares.

(14)

When specialists are engaged / hired for a particular job ascertain that adequate
preparatory work is done before their arrival so that their services are effectively
and optimally utilised.

(15)

Check that all important details viz, equipment detail, frequency and type of
maintenance, parts repaired on different occasions, reasons for replacements,
hours run etc. are duly built into the database.

(16)

Examine the extent of application of sophisticated computer techniques like


condition based monitoring (CBM), fault diagnosis etc. for better control and
analysis.

(17)

Examine the systems being practiced for scrapping of plant and equipments
whose maintenance cost has become uneconomic.

(18)

Examine the comparison of budgeted expenditure provided in the approved


maintenance budget with actual expenditure and the analysis of variations.

(19)

Appraise the maintenance cost with reference to the relevant production and
highlight trends. Data for this purpose may have to be obtained from Cost
Accounts/F&A.

19.3

MECHANICAL MAINTENANCE
Audit guidelines / checklist

(1)

Preventive Maintenance Schedules - Examine the preventive maintenance


schedule for various equipments wherever applicable and ensure its compliance.
It should be ensured that based upon experiences it is reviewed for minimizing
the costs and breakdown of equipments and machinery.

(2)

Utilisation of available resources of manpower and spares - Ascertain that


available resources of manpower and spares are utilized efficiently and necessity
to award the same on contract.

(3)

Monitoring consumption of spares - Monitor the consumption of spare parts


applying principles of materiality. If life of spare parts is less and frequent failures
are taking place, check the reasons and remedial measures taken.

Repairs & Maintenance

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INTERNAL AUDIT MANUAL

(4)

NDT Records - Examine the NDT records of rotary/static equipment/critical


pipeline and check that recommendations are implemented. Sample checks can
be done half yearly.

(5)

Efficiency Reports - Examine the efficiency reports of rotating equipments


prepared by Process/ Production departments. Check Mechanical Maintenance
plans for corrective action, keeping in view all the aspects including
costs/benefits.

(6)

Allotment of Separate Codes on change in specification - To ascertain that


when any separate code is allotted for a sub-assembly/ assembly/ major
equipment on account of any change in specifications to affect the process
efficiency, it should be vetted by an\ other dept such as Process Engineering /
Production. The benefits should be clearly justified and approved by the
Competent Authority.

(7)

To see that daily or other periodic checks as decided are done sincerely and
records maintained. Sample check of these reports should be done.

(8)

History Records of Equipment - To see that history records of all equipments


are maintained in format for ISO 9001 (2000) and the name of concerned
supervisor along with other information are recorded.

(9)

To ascertain that when consumables are procured, efforts are made to


improvise, wherever possible and use the existing inventory e.g. pipes, fittings,
valves etc.

(10)

Implementation of new schemes or modifications - When a new scheme or


modification is implemented, it should be critically examined that efforts are made
and available material is used to the maximum. If a material has not moved since
long and it is expected that it shall not be required in future, then efforts should
be made to use the same after undertaking a cost benefit analysis, including
inventory carrying cost or proper action be taken for disposal thereof

(11)

Control over used spares/equipment/scrap - To check that usable


spares/equipment are returned to the Main Stores after reconditioning. Scrap
should be properly segregated and returned to stores regularly.

(12)

Jobs awarded on Contract - To assess the necessity of the jobs awarded on


contract as per corporate office guidelines in order to curtail the abnormal
expenditure on various contracts.

(13)

Steam Traps - Ascertain that right types of steam traps are used and the traps
monitoring and management is up to the mark so that no energy loss is there.

Repairs & Maintenance

19. 4

INTERNAL AUDIT MANUAL

(14)

Usage of proper material during repairs - Check that right material is used
during repairs/replacement so that safety is not sacrificed and environment
pollution is not ignored.

(15)

Safety Procedures - Ascertain that safety procedures are not bypassed in doing
jobs and (Personal Protective Equipments) PPEs are used.

(16)

Check whether possibility of use of similar material in other Unit/s of NFL has
been explored. If so whether necessary action has been taken

(17)

Control over inventory - Check that inventory lying in the sub-stores of the plant
is controlled.

(18)

Painting jobs are in conformity with work order and painting codes - in To
ascertain that painting jobs are awarded as per work order and painting codes.
Line numbers on pipes should be painted and date of painting is marked and
after ensuring the necessity of the job itself.

(19)

Specification of spare parts - Ascertain that specifications of all the spare parts
are available and prepared/certified if required. Competent Authority should
approve changes in specifications.

(20)

Consumption of frequent use items - Ascertain that consumption of frequentuse-items such as pump seals and compare with other units. Ascertain that
similar practice is followed at other units. Similarly, other repeatedly failing
machines should be dealt in.

(21)

See that efforts are made to develop drawings of the spares, if required, for
developing vendors to avoid the proprietary procurement as far as possible.

(22)

While procuring spares, data of last used/withdrawal, last Purchase Order


reference including quantity and value should be mentioned in the indent. It
should be ascertained that in-use item is not under warranty.

(23)

Levels of critical spares inventory items should be fixed - Level of all critical
items, which can cause stoppage of operation should be fixed, even when the
life of the equipment is uncertain or the spare equipment is installed.

(24)

To check the insulation of piping and equipments every month, section-wise.

Repairs & Maintenance

19. 5

INTERNAL AUDIT MANUAL

19.4

INSTRUMENTATION MAINTENANCE
Audit guidelines / checklist

(1)

Instruments should remain in working order and should satisfy the need of
process.

(2)

All input/output/intermediate flow measurement devices should be in working


order and reliable. The calibrations should be according to agreed periodicity / or
ISO 9001 (2000) requirement.

(3)

Availability of Critical instruments to operation departments - All the critical


instruments should be available to operation departments. It should be
ascertained that whenever reported to be out of order/malfunction, these are
promptly attended to. Instruments not available but affecting process/profitability
should be pointed out

(4)

All the analyzers should have high reliability.

(5)

Availability of Record of bypassed interlocks - Instrumentation dept. should


have a record of bypassed interlocks and the approval of Competent Authority.

(6)

Check that instrument interlocks are simulated, after major shutdown and after a
break down and records maintained

(7)

If available, 'Event Sequence Recorder' should always be in working order and


the information should be accessible immediately to the operating staff

(8)

One code for similar items across all plants - There should be one code for
same item being used in different plants.

(9)

9 All the instruments (field/control room) should have a readable tag.


Multiplication factor and units.

(10)

It should be ascertained that new spares are purchased only after considering
the improvisation, and use of non-moving items must be stressed.

(11)

History of instruments - Ascertain that history of the instruments is available


for reference.

(12)

Instruments installed and abandoned - Ascertain that instruments installed


and abandoned in field are removed and are considered for alternate use and
record of the same is maintained.

Repairs & Maintenance

19. 6

INTERNAL AUDIT MANUAL

(13)

Ascertain that periodic checklists are made, filed and a record maintained.

(14)

All the control valves should have the agreed colour code.

(15)

Standards of House Keeping - To ascertain the general house keeping and


quality of job behind the panel, in the control rooms and in the field.

(16)

Access to logic diagram/circuits - Ascertain that working staff in shifts have


access to logic diagram/circuits.

(17)

Maintenance Planning - Ascertain that maintenance planning is done for day-today activities and for the annual shutdown.

19.5

ELECTRICAL MAINTENANCE
Audit guidelines / checklist

(1)

Control over consumption of electrical energy - See that efforts are made to
reduce electrical energy. Provide Energy saving equipments, if cost economics
justifies.

(2)

See that motors/ generators are operated on higher load as far as possible.

(3)

Maintenance of routine daily records to pre-empt equipment failure Record of routine (Daily / Weekly / Fortnightly) checks of the substation and
switchyard equipments, rotary machines is maintained to pre-empt failure on the
equipment/machine.

(4)

Control over township site stores - Township, site stores should be under the
control of responsible officer to avoid pilferage.

(5)

Procurement specifications - Complete specifications should be made for


procurement to avoid purchase of substandard equipment /spares.

(6)

Carrying out Quality Maintenance - Ascertain that quality maintenance is


carried out to avoid repeated failure, thereby saving loss of spares, equipment
outage and consequent production loss.

(7)

Analysis of repeated machine - If there is a repeated failure on any machine,


that must be analyzed and remedial measures be taken to avoid recurrences.

(8)

Plant Tripping - Any plant tripping leading to production loss/equipment loss


must be analyzed thoroughly to avoid recurrences.

(9)

Inventory list of all operating test apparatus and tools be maintained.

Repairs & Maintenance

19. 7

INTERNAL AUDIT MANUAL

(10)

Control over costly spares - Costly spares should not be kept in the plant as
loose items and if it demands, so these must be kept under lock and key.

(11)

Draw the spares from stores only when they are required. Used spares and
scrap material is returned to the main stores.

(12)

Counter check relay settings as per the schedule framed for isolation of faulty
equipment.

(13)

Serialisation and record of Test Equipment - All test equipment available in


testing lab must be serialized with a complete record indicating model, type and
Sl. No.

(14)

Ascertain that for the better output of men, single line diagrams (SLD), drawings
and documents are, displayed or kept at conspicuous locations in the substation /
shift office/ or other plant offices.

(15)

Persons engaged for the operation and maintenance of electrical system must be
suitably qualified/trained for the work assigned to them.

(16)

Ensure that for electrical isolation/Energisation do not depend on verbal


communication and safety rules are complied with.

(17)

Monitoring of the running equipment/machines should be as per the schedule


framed.

(18)

Use the inventory available to its fullest before resorting to fresh indenting.

(19)

For high-value spares, attempts should be made, as far as possible, to have


common spares across different units.

(20)

House keeping - House keeping should be a regular activity.


Equipment/machines prone to corrosion must be painted as per the schedule
framed to enhance their life.

(21)

History registers / records be maintained / updated.

(22)

Check interlock functioning as per the schedule framed.

(23)

Control over cost of spares - Check that efforts are made to reduce the cost of
spares, by import substitution, innovation or improvements, without
compromising quality.

(24)

Ensure availability of the plant equipments/machines.

Repairs & Maintenance

19. 8

INTERNAL AUDIT MANUAL

(25)

Conformance of Electrical fittings with ISI/International Standards - To


ensure that all electrical fittings are conforming to ISI/ International/relevant
standards.

(26)

Controlling power consumption - Judicious power consumption by minimizing


use at peak load time and maximum use of in-house resources.

19.6

CIVIL MAINTENANCE
Audit guidelines / checklist

(1)

Maintenance work on cooling towers - Ascertain that maintenance work on


cooling towers is planned according to requirement of operating departments and
the performance is evaluated.

(2)

Ascertain the necessity of jobs done.

(3)

Ascertain that routine jobs such as painting, whitewashing etc. is done according
to schedule.

(4)

Executing the job as per Capital / Revenue Budget.

(5)

Consumption of vital material - Consumption of vital material e.g. cement /


steel / wood / epoxy etc. is as per standards/norms.

(6)

Cost estimates - Verification of cost estimates of civil contracts of


plants/townships.

(7)

Sample check of painting jobs of Company Townships e.g. thickness.

(8)

Checking of Measurement Books/Progressive Invoices.

Repairs & Maintenance

19. 9

INTERNAL AUDIT MANUAL

CHAPTER 20

INFORMATION & COMMUNICATION TECHNOLOGIES FUNCTION

20.1

PRESENT STATUS
Considering the multi-locational nature of the company's business operations and
also the need to assess risk through cost-effective and speedy auditing tools, the
Internal Audit personnel should possess adequate ICT skills as part of their core
competencies.
At present the ICT internal audit is conducted by executives from the EDP
department, not for their own but for other units i.e., on an inter unit basis. This is
because the Internal Audit Department presently has not inducted audit
specialists extensively trained and equipped to conduct audits of ICTs i.e.
personnel CISA/DISA backgrounds. It is desirable that the ICT function be
reviewed by qualified persons independent of the EDP/ICT function. While this
arrangement may continue for some more time, in due course when a much
higher degree of day to day reliance will be placed on ICTs, on a company wide
basis, it would become necessary to induct suitably trained and qualified persons
in the internal audit department to conduct the internal audit more professionally
and with due regard to generally accepted auditing principles.

USE OF COMPUTERS IN AUDITING


1.1
The ability to use computers in auditing has now become a necessity for
each internal auditor on account of the increasing computerization of the
accounting and other processes in the organization and to conduct analytical
reviews in a more timely manner and more efficiently. The IA function needs to
make use of the presently available software / databases and carry out
meaningful analysis and interpretation of data. Use of computer assisted
auditing tools is fast gaining momentum and has become a necessity for auditing
by optimizing audit skills and resources to execute the assignment with
enhanced efficiency and effectiveness.
1.2
Use of CAAT in conducting audits: Computer Aided Audit Tests
(CAAT) refer to processing test data through computer and evaluating results

Information & Communication

20. 1

INTERNAL AUDIT MANUAL

against pre-determined criteria. These include testing of general ICT controls to


assess integrity of data and programme logic. This technique allows
comprehensive testing of the selected data and its stratification for further
applications and hence is a highly resource-efficient and dynamic tool of auditing.
It is necessary that as we go forward we induct Internal Audit personnel with the
required expertise and skills in conducting audits of the IT and related functions.
20.2

NEED FOR AUDITING THE FUNCTION OF COMPUTERS & INFORMATION


TECHNOLOGY
Computerization in National Fertilisers is at a reasonable level and the need to
audit the function on a regular basis cannot be underscored. The reliability of
computerised data and of the systems that process, maintain, and report these
data is of major concern. Therefore adequate IT controls and systems should be
in place to help reduce the risk of loss due to errors, illegal acts and disasters or
other incidents that cause the systems to be unavailable.
Going forward there will be great need to integrate Information Security best
practice into the day to day operations of the company through the adoption of an
extensive range of information security policies (which are the cornerstone of
Information Security effectiveness) upon which an Information Security culture
may be built in the future.
Para 20.4 below describes the detailed computer-related information security
policies and controls that should be in place for maintaining the integrity,
confidentiality, and availability of its computerised data and systems and
communication technologies and keeping in mind the current limitations i.e. lack
of specialist IT auditors also provides guidelines for conducting the internal audit.
A description of all important computer-related information security policies and
internal controls, serves the following purposes:


keeping the EDP personnel informed about computer-related policies and


controls that should be in place and related issues while maintaining its
systems so that they can better plan their work and minimize information
security risks, and

provide guidance to them on the scope of issues that generally should be


considered in any review of computer-related controls covering the integrity,
confidentiality, and availability of computerized data.

Information & Communication

20. 2

INTERNAL AUDIT MANUAL

20.3

ICT CONTROLS
Information systems form a critical part in the overall delivery mechanism and in
all front and back end activities. Its information systems policies commit the
company to be cost effective and efficient in various aspects of its operations and
allow it to focus on immaculate delivery to create and provide the best value to its
stakeholders.

20.3.1 Control Objectives

To ensure work related and professional usage for ICTs.

To ensure physical and environmental security of ICTs.

To ensure that information is accessible only to those authorised to have


access.

To ensure that purchases of new systems hardware or new components for


existing systems are made in accordance with technical standards (structured
evaluation process), as well as Information Security and organisational
policies

To maintain ICTs as per vendor requirements.

To ensure purchase of authentic business applications and ensuring usage


as per specifications.

To provide for work related and professional usage of telecommunication


systems

To manage authentic, reliable and useable records, supporting business


functions and activities, for as long as they are required.

To ensure that classification standards exist for information according to its


level of sensitivity or confidentially.

To ensure that information ownership is specified for each piece of data,


document, spreadsheet or other information, so as to manage and control
access to that information.

To ensure the identification and preservation of permanently valuable records


and the destruction of all other records in a timely, secure and
environmentally sound manner.

To ensure backup of data for speedy recovery in the event of any disaster.

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INTERNAL AUDIT MANUAL

To have in place a Business Continuity Plan to ensure continuation of key


business services in the event of an unexpected occurrence, which seriously
disrupts the business process.

20.3.2 Key Control Processes


Key control processes related to the Information Systems of NFL cover.





20.4

Physical and environment security of ICTs


Logical security of ICTs
Maintenance
Data back up
Disaster recovery

KEY ICT POLICIES FOR KEY CONTROL PROCESSES


Information Security Policies are the foundation the bottom line of information
security and communication technologies systems. The information security
policies described in the ensuing paragraphs are tailored to meet all security
needs of NFLs IT systems and communication technologies. All staff members
who handle information should be aware of and conversant with these policies.
Further the EDP officials entrusted with the responsibility for conducting the
internal audit shall also consider whether one or more of these policies should be
made applicable at any of the units or offices they audit keeping in mind the
present and proposed future levels of the technology of computerization and the
attendant security concerns.

20.4.1 PHYSICAL AND ENVIRONMENT SECURITY OF INFORMATION AND


COMMUNICATION TECHNOLOGIES (ICTS)
(1)

ICTs shall be kept physically secure.


 ICTs shall be located in a way to avoid risk of potential threats including
theft, fire, smoke, water, dust, electrical supply interference and
electromagnetic radiation.
 Eating, drinking and smoking in proximity of information systems shall not
be allowed.

Information & Communication

20. 4

INTERNAL AUDIT MANUAL

(2)

Removable disks shall be selectively allowed.


 Use of removable disks shall be permitted only on workstations
authorized by a member of senior management of the EDP group.
 All removable disks shall be marked with the name of the Organization.
 Log of removable disks shall be maintained.

(3)

Disposal of ICTs and media shall be authorized by a member of senior


management.

(4)

Environmental conditions shall be monitored to avoid adverse affect on the


operation of information systems.

(5)

The information created and stored by the companys information systems must
be retained for the minimum period that meets both legal and business
requirements.

(6)

All computing equipment and other associated hardware belonging to the


organization should carry appropriate insurance cover against hardware theft,
damage or loss.

20.4.2 LOGICAL SECURITY OF ICTs


(1)

Logical Access (user IDs and passwords) to ICTs systems shall be


provided on requirement basis.
 Logical access should be allowed / disallowed only after authorization from a
member of senior management / IT Head / any other person duly authorised
for this.
 Temporary passwords should be granted to new users and shall be changed
at the time of first login by the user.
 Passwords shall follow specified norms:

Minimum of six characters.

Not generic in nature for example names, telephone numbers, dates of


birth, spouses name etc.

Alphanumeric.

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(2)

Passwords shall not be kept recorded / written on paper or disclosed to


/shared with, anyone.

Passwords shall be changed every 90 days or at any other reasonable


time interval as communicated by the management.

Data sharing shall be allowed on need-to-use and event-by-event basis.


 Restricted sharing shall be allowed.

(3)

ICTs shall be adequately guarded against computer viruses, malicious


external intrusion and other malfunctions.
 Antivirus software shall be installed in all information systems and updated as
per developers specifications.
 Real time protection scans and scheduled scans shall be performed.
 The companys network shall be safeguarded from malicious external
intrusion, spam attack by deploying, as a minimum, a configured firewall, antispam solution.
 EDP must ensure that all personnel with Internet access (including e-mail)
are aware of, and will comply with, an acceptable code of conduct in their
usage of the Internet in addition to compliance with the companys
Information Security Policies.
 Removable disks shall be scanned before use.

(4)

(5)

Clean desktops shall be kept by all employees to the extent possible.




All critical files shall be protected by passwords.

Critical files shall not be saved on desktops environment.

Security mechanisms or integrity of ICTs systems resources not to be


interfered with knowingly or willingly.
 Any unauthorized use of information systems not to be attempted, be
participated in or encouraged.
 Software, data or hardware not to be modified or reconfigured without the
permission of designated authority.

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 Any malicious code or another surreptitiously destructive program not to be


knowingly created, installed, executed or distributed on any information
systems resource.
(6)

Approved login procedures to be strictly observed and users leaving their


screens unattended must firstly lock access to their workstations or log
off.

20.5

ICT RESOURCE USAGE


Information and communications technologies (ICTs) (consisting of all
hardware, software, emails and other internet usage) shall be used for work
related business and shall be consistent with professional code of conduct
and applicable compliances.

 Copyright and other intellectual property rights in relation to both programs and
data shall be respected.
 All emails shall be appended with disclaimer regarding its confidentiality,
intended recipient, restricted forwarding or copying.
 All emails shall be scanned for viruses, spam, phishing attack etc. (this could be
through an automated process)
 Organizations confidential information shall not be divulged, shared or
compromised.
 Data retention periods for e-mail shall be established to meet business
requirements and must be adhered to by all staff.
 Emails or attachments belonging to another user shall not to be sent without
acquiring permission from the originator.
 Identity shall not be disguised when sending emails.
 ICTs shall not be used for commercial solicitation or conducting or pursuing their
own business interests or those of another Organization.
 Large distribution lists concerning non-business related matters shall not be sent,
forwarded and/or replied to.
 Hoaxes, chain letters, advertisements, shall not be forwarded.
 Rude, obscene or harassing messages shall not be forwarded.
 Unsolicited e-mail is to be treated with caution and not responded to.

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 Employees must avoid accessing internet sites carrying offensive material.


 Messaging forums (e.g., Internet Relay Chat, internet newsgroups) shall be used
only for work-related activities or to exchange technical or analytical information.
 ICTs may be used for personal purposes provided such use does not jeopardize
the productivity, integrity and security of ICTs and/or harm the Organization's
reputation. All applicable legislation, regulations, policies and standards shall be
complied with
 Information classified as Highly Confidential or Top Secret, may never be sent to
a network printer without there being an authorized person to safeguard its
confidentiality during and after printing.
20.6

MAINTENANCE
ICTs shall be maintained in accordance with vendor's recommended
service intervals.
 ICTs shall be kept under maintenance contracts with qualified and
reputed vendors, wherever required.
 Continuity of power shall be ensured through installation of uninterruptible
power supply to ensure continuity of services during power outages.
 Records of all faults and corrective action taken shall be maintained for
proactive and reactive maintenance.
 Secondary and backup power generators are to be employed where
necessary to ensure the continuity of services during prolonged power
outages.
 Information systems shall be adequately insured against insurable risks
such as fire, theft etc.

20.7

BUSINESS APPLICATION ACQUISITION


Business applications shall be purchased from authorized suppliers only.
 Purchase or removal of business applications shall be authorized by a
member of senior management.

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 All requests for new applications systems or software enhancements must be


presented to senior management with a Business Case with the business
requirements presented in a User Requirements Specification document.
 Licensed applications shall be purchased, wherever applicable.
 Licenses for business applications shall be kept securely.
 Number of users using the business application shall not exceed the
maximum number of users as per license.
 To comply with legislation and to ensure ongoing vendor support, the terms
and conditions of all End User Licence Agreements (EULA) are to be strictly
adhered to.
 The selection of business critical software which, in the opinion of
management, has not been adequately proved by the early adopters of the
system shall generally be avoided. The selection process for all new business
software must additionally incorporate the criteria upon which the selection
will be made. Such criteria must receive the approval of senior management.
 All office software packages must be compatible with the companys
preferred and approved computer operating system and platform.
 The implementation of new or upgraded software must be carefully planned
and managed, ensuring that the increased Information Security risks
associated with such projects are mitigated.
 Patches to resolve software bugs may only be applied where verified as
necessary and with approval of official by management. They must be from a
trusted source and are to be thoroughly tested before use.
 Testing of equipment before installation - All equipment before installation
shall be fully and comprehensively tested and formally accepted by users
before being transferred to the live environment so that the following risks are
prevented.


Failure and damage to both data and other linked systems through the
use of inadequate testing of critical functions before being used.

Inadequate testing can threaten the integrity and availability of data.

Compromising the confidentiality of the companys data through poor or


inadequate security procedures during equipment testing.

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 Upgrades to software must be properly tested by qualified personnel before


they are used in a live environment.
 The decision to upgrade software is only to be taken after consideration of
the associated risks of the upgrade and weighing these against the
anticipated benefits and necessity of such change.
20.8

TELECOMMUNICATIONS
Telecommunication systems shall be used for work related business and
shall be consistent with professional conduct
 Personal long distance calls should not be made from official telephones,
except in emergencies and authorised by a member of senior management
functionary
 Personal Local Telephone Calls should be avoided allowed except in
emergencies.
Messages for other employees shall be taken accurately and in detail:


20.9

Following details shall be recorded:


 Date and time of the call
 Name of the caller
 Telephone number where the caller can be reached
 Message left by the caller
 Name or initials of the person taking the message

MAINTAINING CONTACT WITH OFFICE


Temporary and permanent absence from office shall be communicated

 IN and OUT register shall be signed when leaving the business premises during
work hours.
 Message of absence shall be left at the office prior to availing leave.
20.10 RECORDS MANAGEMENT
All Organization records maintained by EDP shall be maintained and kept in
proper condition.
 Records should be labelled and indexed.

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 Control of records shall remain with the department of origin.


 Records should not be stored in attics, basements, closets, stairwells, etc.
 Records should not be released or referenced for persons outside the
company (except auditors) without express permission by a member of senior
management.
 Important records should be maintained in accordance with the procedures
laid down by the management.
 Records should be stored in a Records Center.
 Records stored in the Records Centre shall not be transferred or destroyed
without prior written notice to the department of origin.
20.11 ELECTRONIC RECORDS MANAGEMENT
(1)

Electronic records shall be maintained and kept in usable condition


 Records shall be guarded against storage media deterioration.
 Records shall be protected against hardware or software obsolescence.

(2)

Data backup shall be taken on a regular basis.


 Backup of critical files should be taken on daily basis.
 Backup of non-critical files should be taken on weekly basis.
 Backup data shall be stored in an offsite storage
 Backup media should be tested every three months to ensure their workability

20.12. GUIDELINES FOR CONDUCTING THE AUDIT


Guidelines given below for conducting the audit are in the form of a check list
covering various aspects of the ICT control environment which the Internal Audit
Staff are expected to review.

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Internal Audit Checklist


(1)

Terms and Conditions of Employment: The terms and conditions of


employment are to include requirements for compliance with Information
Security.

(2)

Establishing Ownership of Intellectual Property Rights: Check that at the


time of joining the HR Department it is ensured that all employees sign a formal
undertaking regarding the intellectual property rights of work undertaken during
their terms of employment / contract respectively.
All intellectual property rights over work done by employees of NFL as part of
their normal or other duties is to be owned by NFL. Whenever NFL wishes to
own the Intellectual Property Rights over work done by third parties or
contractors, then it shall be ensured that the agreement or contracts with third
parties covers this issue.

(3)

Check that the Systems Administrator formally plans authorizes and documents
systems operations schedules. Necessary documentation is also essential for
system maintenance.
NFL systems require a combination of routine maintenance as well as processing
runs or batch jobs in view of interfaces which have been developed which
require the export from one system to become the import to another system. This
necessitates more detailed scheduling to avoid processing snarl ups.
Scheduling at NFL is an important adjunct of the control process and is designed
to address the following control issues:


If jobs are not planned and scheduled properly, updates and


processing may fail or only partially be completed.

Resource contention can cause delays or errors in processing.

Unauthorised / unscheduled system processing can result in


errors, failure and / or fraud.

(4)

EDP Head / System Administrator shall ensure that suitably qualified staff are
engaged for ongoing management of the companys network, and to preserve
the integrity of the network in collaboration with the nominated individual system
owners.

(5)

Check that operational audit logs are reviewed regularly by trained and
knowledgeable staff deputed by the EDP Head / Systems Administrator and all
discrepancies noticed shall be reported to the owner of the information system.

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(6)

Check that the segregation of incompatible duties within the department is


proper.

(7)

Span of Computerisation - The span of computerization (e.g. Accounting,


Payroll, Inventory Management, Process control, etc.) keeping" in mind the various
constraints/opportunities in the organization.
Check the extent of computerization achieved in the following areas:
I.

Finance and Accounts (e.g. financial accounting, payroll, purchase and


creditor's accounting, sales invoicing, debtors, budgeting, cost accounting,
treasury and etc.)

II.

Materials Management (e.g. inventory level determination, purchase


requisitioning, ordering, stores accounting receipt/issues, stock ledgers etc.)

III.

Human Resource (HR) Management (e.g. personnel data bank, employee


statistics, leave records, internal and external reporting, availing of LTC /
LLTC, employment of Scheduled Caste / Scheduled Tribes, employee
turnover, voluntary retirement scheme etc.)

IV.

Project Management (e.g. cost estimation BOQs, cash flows and profitability
of projects, equipment ordering, contractor follow up and accounting, physical
and financial progress etc.)

V.

Technical areas (e.g. production planning and control PPC, input and output
control in the process areas, maintenance schedules, downtime planned /
unplanned etc.)

VI.

Other areas MIS etc.

Suggest new, innovative and useful applications that can be adopted on a


company-wise or unit basis bringing out their rationale and usefulness and also
report on the progress of implementation of approved ICT projects.
(8)

Compliance with Security Policy


Review the ICT Security policy in the backdrop of the suggested policies as given
above. Important focus areas are:

Security policy development, methodology and documentation.

Issues covered under security policy and adequacy of coverage.

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(9)

Methodology of training employees on the importance of the security policy


and its compliance.

Staff Resignations: On resignation of a staff member using the companys


information systems, whether continued system access rights, constitutes an
unacceptable level of risk to the company and whether access rights shall be
revoked. Note system and information access rights of employees who are
transferring to competitors should be terminated immediately.

Policy on building controls in application system and compliance with the


same.

Mechanisms in place and adequacy thereof, for fixing of responsibilities to


check compliance with the security policy.

Policy on disposal of assets and check on loss of data at the time of disposal
of tapes, CDs, hard disks etc.

Any formal written anti-virus policy and has such policy been effectively
communicated to individuals in the organisation. Is anti-virus software
installed on all microcomputers?

Regular updation of anti-virus software for new virus definitions?

Whether authorised software is installed on microcomputers

Systems, Design and Programme Development




Review the existing systems and sub-systems in each major sphere of


activity.

Ensure that the systems are adequate under the existing conditions. If not,
suggest changes.

Are the requirements of the user properly defined, documented and kept on
record?

Check the number of existing programs from the point of view of adequacy in
meeting the users needs and make recommendations for programme
modification/upgradation.

Verify the adequacy of programme controls to ensure completeness and


accuracy of data at each stage of processing.

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Verify that checkpoint restart capability is built into long runs such as master
file updates.

Has each system been authenticated by appropriate systems authority?

Are the subsequent changes in the system accepted both by the user as well
as EDP Department and kept on record?

Are the edit messages adequate to prevent errors in important files?

Are proper procedures in force for backing up data (transaction and master
files) and is data backup taken on a regular basis. The following backup
routine may be considered sufficient;
i. Backup of critical files shall be taken on daily basis.
ii. Backup of non-critical files shall be taken on weekly basis.
iii. Backup data shall be stored in offsite storage to avoid loss due to
fire/ theft.
iv. Backup media shall be tested every three months to ensure their
workability

(10)

Is the report distribution file maintained and reviewed periodically by a


senior executive?

Are there procedures addressing controls over selection, testing and


acceptance of packaged software and is adequate documentation
maintained for all software purchased.

APPLICATION SYSTEM REVIEW

Review of documentation,
specifications.

Review system of development of application systems and extent of


involvement of users

Check Access control system review, vis-a-vis delegation of powers and


organization structure.

Check Implementation of access control system through passwords etc. and


education of users. Test access controls on a sample basis.

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user

manuals,

technical

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(11)

Implementation of input controls in the application system like numeric


alphanumeric checks etc., and testing of input controls on a sample basis.

Implementation of process controls, in applicable cases, between two


processes like reconciliation checks, hash total checks etc. and testing of
them on a sample basis.

Implementation of output controls like report generation, report distribution


and testing them on a sample basis.

Review of exceptional reports e.g. accuracy of the information provided.

Utilisation of exceptional reports generated and their disposal and security.

Check that adequate validation checks exist in the software and also check
that all major and critical applications have an adequate trail.

SOFTWARE/HARDWARE PROCUREMENT, MAINTENANCE


DISPOSAL SYSTEM REVIEW

AND

Check the Software procurement system review. Ensure that cost benefit
analysis has been done for acquisition of new software / hardware and
sanctions are in accordance with delegation of powers for procurement.
Requests for new applications systems or software enhancements must be
presented to senior management with a Business Case with the business
requirements presented preferably in a User Requirements Specification
document.

NFL shall generally avoid the selection of business critical software, which, in
the opinion of management, has not been adequately proved by the early
adopters of the system. The selection process for all new business software
must additionally incorporate the criteria upon which the selection will be
made. Such criteria must receive the approval of senior management.

The implementation of new or upgraded software must be carefully planned


and managed, ensuring that the increased Information Security risks
associated with such projects are mitigated.

Comparative analysis of software available in the market, comparative


analysis of vendor quotes, terms, conditions, training formalities, after-sales
support etc. should also be verified.

Ensure that all office software packages are compatible with the companys
preferred and approved computer operating system and platform.

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(12)

Check that Licensed applications are purchased, wherever applicable and


that Licenses for business applications shall be kept securely.

Examine the License management of software procured and software


inventory management.

Utilisation of software procured.

Disposal system of software not required further/ unused.

Hardware procurement systems review, resources planning system, cost


benefit analysis for acquisition. Procurement to be in accordance with the
delegation of powers.

Comparative analysis of performance of hardware, hardware vendors,


benchmark testing etc.

Check the adequacy of Hardware usage training, maintenance


programmes/schedules, helpdesk support from vendors, vendor track record
and compliance with the terms and conditions.

Contract for maintenance of hardware and review of consumption pattern of


consumables, stores, spares etc.

Identification and retirement, of idle hardware assets and the system of their
disposal.

Security checks before the disposal of hardware assets in terms of


permanent removal/deletion of company data etc.

BUSINESS CONTINUITY PLANNING, TESTING AND REVIEW

Review of existing Business Continuity Planning (BCP)/ Disaster Recovery


Planning (DRP) from the point of view of:
 Is a comprehensive contingency plan developed, documented and
periodically tested to ensure continuity in data processing services.
 Does the contingency plan provide for recovery and extended processing
of critical applications in the event of catastrophic disaster?
 Are all recovery plans approved and tested to ensure their adequacy in
the event of disaster

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 Are disaster recovery teams established to support disaster recovery


plan?

(13)

Physical safety procedures and equipment in the information processing


facility.

Environmental safety procedures and review of information processing


facilities.

Backup procedures, coverage, frequency, storage etc. and their adequacy


(described elsewhere).

Composition of various recovery teams (in-house, external), adequacy of


training imparted to internal staff and track record and reputation of external
organization.

MASTER FILE CONTROL


Master files are computer files containing relatively permanent information,
usually updated periodically, such as customers/vendors records etc. They are
used as an authoritative source of data in carrying out a particular job on the
computer. Hence the need for effective controls cannot be underscored.


Check that specific responsibility has been assigned in respect of master


files for safe custody.

Check movement under proper authority and check the system being
followed for ensuring that all the records in the master files are being
processed properly, reconciliation is done and integrity of master files
is maintained at al times. Examine from the point of view of the
following risks:

Master files may contain erroneous data that cause errors in all
transactions using those data.
Master file data may be altered to allow the processing of
fraudulent transactions.
Master file data may be altered prior to the preparation of
statements or confirmation.
Alteration of master files can be done only by a senior member of
EDP who is authorize do so.

Check that there is a laid down policy on the retention of the files (linked
with a fixed period or for a purpose) and that the same is periodically
reviewed.

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(14)

Verify the existence of a well-managed database warehouse to ensure


availability of accurate and updated data. .

COMPUTER FACILITIES

Check that optimal use of the various facilities installed is made.

Check the schedules of maintenance i.e. routine maintenance and major


overhauls.

Check whether preventive maintenance is being practiced, if not, reasons and


remedies for the same.

Check that ICTs are kept under maintenance contracts with reputed vendors,
wherever required. Also check that maintenance contracts with specialised
vendors are unambiguous and the maintenance expenditure does not show any
abnormal increase.

Check that continuity of power is ensured through installation of uninterruptible


power supply to ensure continuity of services during power outages.

Check that Records of all faults and corrective action taken are maintained for
proactive and reactive maintenance.

Check that ICTs are maintained in accordance with the vendors recommended
service intervals.

Whether the frequency of the breakdowns and their durations are recorded and
analysed for each equipment for suitable action and guidance for future.

Check that Information systems are adequately insured against insurable risks
such as fire, breakdown etc.

(15)

ADMINISTRATION AND ORGANISATION

Appraise the organisation structure/framework of EDP department

Whether the department is adequately staffed. Report on shortcomings, if


any.

Are operational staff are rotated to ensure better exposure, flexibility and
development of skill sets.

Whether responsibilities of all key EDP officials employees are defined.


Check that the inventory of computer stationery and consumables is not

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excessive.

Verify that the fire precautions and standby arrangements for stored data are
adequate and effective.

Controls for managing Higher Risk System Access: The Head of


EDP/System Administrator is responsible for implementing stringent access
controls safeguards for high risk systems or highly sensitive information (e.g.
any funds transfer system with banks). Such controls should be set in
accordance with the value and classification of the information assets being
protected. Controls may take one or more of the following forms as may be
decided by the Head of EDP:
 Limiting or forbidding access to a critical system from a workstation
external to its designated business area. Not doing so can threaten the
integrity and safety of such high risk systems.
 Setting access controls both physical and logical measurably higher
than for other systems.
 Establishing dual control or segregation of duties for all such functions.
 Selecting personnel carefully after vetting their records for suitability of
such jobs.
 Reducing privileges to the lowest level to reasonably perform the job
concerned.
 Sensitive system isolation
The responsibility of Internal Audit would be to examine from the point of view
of the above controls and checks and where necessary make suitable
recommendations. As a general guideline access should be limited only to
authorized personnel.

Verify the availability of documented and tested Disaster Recovery Plans.

Department-wise segmentation of data files exists that there is clear-cut policy


for access by Directors/General Managers/Other ranks.

Inter Unit/Office access right of information are well defined.

Productivity of IT resources

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20.13 QUANTUM & PERIODICITY


a)

Manuals/Procedures

b)

Security Arrangements
Compliance with Policies

Twice a year

c)

Other activities

Twice a year

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CHAPTER 21

ENTERPRISE RISK MANAGEMENT (ERM)

21.1

DEFINITION OF ERM
Risk is the potential for loss caused by an event (or series of events) that can
adversely affect the achievement of a companys objectives.
Enterprise-wide risk management (ERM) is a structured, consistent and
continuous process across the whole organisation for identifying, assessing,
deciding on responses to and reporting on opportunities and threats that affect
the achievement of its objectives. Enterprise risk management (ERM) is an
integrated, forward-looking and process-orientated approach to managing all key
business risks and opportunities - not just financial ones - with the intent of
maximizing value for the enterprise as a whole.
The ERM process is effected by the board of directors, management, and other
personnel, applied in strategy setting and across the enterprise, designed to
identify potential events that may adversely affect the entity, and manage risk to
be within its risk appetite, to provide reasonable assurance regarding the
achievement of entity objectives.

21.2

NEED FOR ERM


1.
To support value creation - Every entity, whether for profit or not, exists
to realize value for its stakeholders. Value is created by informed and inspired
management decisions in all aspects of an entitys activities, from strategy setting
to operations. Entities that fail to recognize the risks from both external and
internal sources, and fail to manage those risks effectively can destroy value
in absolute or relative terms for shareholders and other stakeholders,
including the community and society at large. Among the many outcomes of
organizations inability to effectively manage risks are bankruptcies, restatements
of earnings, plummeting stock values, frauds,and loss of customers, careers,
business partners, and overall credibility. Of course, managing risks optimally
implies a balance between risk and reward and clarification of acceptable risk
thresholds.
ERM supports value creation by enabling management to:

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Deal effectively with potential future events that create uncertainty.

Respond in a manner that reduces the likelihood of downside outcomes and


increases the upside.

2.

More informed risk-taking and decision-making.

3.
To help ensure effective reporting and compliance - ERM helps
ensure effective reporting and compliance with laws and regulations and helps
prevent losses whether in the form of revenues or reputation.
4.
To comply with Clause 49 of the listing agreement - Clause 49 of the
listing agreement has also been revised by SEBI, which inter-alia includes Risk
Management and provides as under:
The Company shall lay down procedures to inform Board members
about risk assessment and minimization procedures. These procedures
shall be periodically reviewed to ensure that executive management
controls risk by means of a properly defined framework.
The Board of Directors has overall responsibility for ensuring that risks are
managed. In practice, the board will delegate the operation of the risk
management framework to the management team, who will be responsible for
completing necessary activities. There may be a separate function that coordinates and project-manages these activities and brings to bear specialist skills
and knowledge.
Everyone in the organisation plays a role in ensuring successful enterprise-wide
risk management but the primary responsibility for identifying risks and managing
them lies with management.
21.3

NFL - RISK MANAGEMENT POLICY


NFL recognizes the importance of Risk Management and is taking suitable
measures to mitigate risks. Accordingly, a risk management policy has been
framed and approved by the Board.
Careful analysis of the business environment, corporate plan and business
practices followed by the Company, the foreseeable potential risks in the present
context and inbuilt risk mitigation mechanism practiced by the Company formed

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the basis in structuring the Risk management Policy.


The Risk Management Policy of the Company has been formulated to put in
place a framework for:
a.
b.
c.
d.
e.
f.
g.

Identification and grouping of potential risks.


Classification and grading of risks on the basis of their impact.
Indicators or triggers for risks.
Framing strategies for mitigation of identified risks.
Procedure for monitoring and systematic reporting to the Board /
Committee of Directors.
Periodic review of the risk matrix.
Communication of the risk management policy across the company.

The Risk Management Policy of NFL was approved by the Board in their meeting
held on 30.01.2006 (Refer Appendix-6). As per this policy, the Audit Committee
has been vested with the powers to review the financial and risk management
policies.
Risk Management shall also be one of the items for consideration at the unit
Heads Meet for review of risk profile of the Company. Executive Director
(Technical) is the Coordinating Officer to implement Risk Management Policy
across the entity.
Senior executives concerned shall send Quarterly Compliance Report in the
prescribed format for each quarter to Executive Director (Technical) so as to
reach him by the first week of the following month.
The Risk Management Policy along with risk matrices developed for the following
major risks are placed at Appendix 6.
A.

Feed / Fuel Risk


Different type of feed / fuel identified for risk assessment are Coal, Fuel
oil, naphtha, Coal, Natural Gas and RLNG, The risk can be associated to:

1.
2.
3.

Availability in adequate quantity


Quality
Price

B.

Operational Risks

1.
2.

Machine / System breakdown & timely availability of spares.


Obsolescence of instruments, technology and other equipment and
machinery etc.

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3.

Risk of Labour Compliance of various labour legislations as prevalent.

C.

Utilities Risks

1.
2.

Water availability
Uninterrupted Power supply

D.

Environmental Risks
Environmental & Pollution Control Regulations, etc.

E.

Project Implementation Risks

1.
2.
3.
4.
5.

Suppliers / Agencies not meeting the project schedules


Manpower management
Technological changes
Availability of skilled manpower for specialized services.
Financial risk specifically regarding disbursement of loan.

F.

Regulatory Risks

1.
2.

Changes in GOI policy / Legal Framework/Statutory levies


Change in environmental criteria

G.

Business Risks

1.
2.
3.

Business portfolio Risk


Customer Risk Revenue Realization.
Entry in newer business areas

H.

Competition Risks affecting

1.
2.
3.

Costs
Revenue
Customer Preferences

I.

Market Risks

1.
2.
3.

Govt. Policy on regulation


Sale proceeds realization.
Climatic conditions uneven/delayed monsoon, floods, draught, etc.

J.

Asset Risks

1.
2.

Natural calamities like storm, hurricane earthquake, flood etc.


Fire explosion/implosion and other major accidents

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K.

Financial Risks

1.
2.

Funding Risk
Financial Frauds

Embezzlement of cash
Misappropriation of bank balances
Others, such as false journal entries, dummy procurements etc.

L.

Human Resource Risk

1.
2.

Attrition / Retention of quality people


Safety and Security

Unsafe practices by contractors


Terrorist attack
Sabotage by disgruntled elements

M.

IT Risks

1.
2.
3.
4.

Failure of servers for Business Applications


Failure of Business Applications
Attack. Hacking or instruction into internal system or defacing of website
Communication network.

N.

Legal Risks

1.
2.
3.
4.

Contractual Liability
Frauds.
Judicial Risks
Insurance Risks

O.

Internal Control Risks

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21.4

THE ROLE OF INTERNAL AUDIT IN ERM

Organizations that are most effective and efficient


in managing risks to both existing assets and to
future growth will, in the long run, outperform those
that are less so.

If a risk is both relevant and has extremely high


impact, it should be addressed, regardless of
remote likelihood.

The under noted guidelines are framed to assist senior audit executives in
responding to ERM (Enterprise Risk Management) issues in NFL. The guidelines
also suggest ways for internal auditors to maintain the objectivity and
independence required when providing assurance and consulting services.
Internal Auditings core role with regard to ERM is to:

provide objective assurance that the major business risks are being managed
appropriately, and

providing assurance that the risk management and internal control framework
is operating effectively,

Internal Audits Core Role in ERM


(Recommended Roles)
The Core Internal Auditing Roles in regard to ERM
In the initial stage the internal audit function will be to give assurance on risk
management covering the activities given below. Also an internal audit function
complying with the International Standards for the Professional Practice of
Internal Auditing can and should perform at least some of these activities.

Giving assurance on risk management processes.

Giving assurance that risks are correctly evaluated.

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Evaluating risk management processes.

Evaluating the reporting of key risks.

Reviewing the management of key risks.

The above activities are all assurance activities. At a later stage when the
Internal Audit Department is more equipped to do so, internal audit may also
provide consulting services (of the nature highlighted in table 2) that improve
the entities risk management processes. A decision to this effect will be taken by
the Audit Committee.
The extent of internal audits consulting in ERM will depend on the other
resources, internal and external, available to the board and on the risk maturity of
NFL and it is likely to vary over time.
Internal audits expertise in considering risks, in understanding the connections
between risks and governance and in facilitation mean that in due course it
should be well qualified to act as champion and even project manager for ERM,
especially in the first few years of its introduction.
As the NFLs risk maturity increases and risk management becomes more
embedded in the operations of the business, internal audits role in championing
ERM would progressively reduce. For the present internal audit will give value by
concentrating on its assurance role, then also by undertaking consulting
activities.
Table 1
Legitimate internal auditing roles with safeguards
Facilitating identification and evaluation of risks.
Coaching management in responding to risks.
Coordinating ERM activities.
Consolidating the reporting on risks.
Maintaining and developing the ERM framework.
Championing establishment of ERM.
Developing risk management strategy for board
approval.

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Safeguards
Should internal audits involvement be extended in ERM to encompass
consulting services as well the following conditions would apply:

It should be clear that management remains responsible for risk


management.

The nature of internal audits responsibilities should be approved by the Audit


Committee.

Internal audit should not manage any of the risks on behalf of management.

Internal audit should provide advice, challenge and support to managements


decision making, as opposed to taking risk management decisions
themselves.

Internal audit cannot also give objective assurance on any part of the ERM
framework for which it is responsible. Such assurance should be provided by
other suitably qualified parties.

Any work beyond the assurance activities should be recognised as a


consulting / advisory engagement and the International Standards related to
such engagements should be followed.

Whenever internal audit acts to help the management team to set up or to


improve risk management processes, its plan of work should include a clear
strategy and timeline for migrating the responsibility for these activities to
members of the management team.

Roles Internal Auditing should NOT undertake


The following roles shall not be undertaken by Internal Auditing.

Setting the risks appetite.


Imposing risk management processes.
Management assurance on risks.
Taking decisions on risk responses.
Implementing risk responses on management's behalf.
Accountability for risk management.

It is emphasized that management remains responsible for risk management.


The role of Internal Audit is to provide advice, and challenge or support
management's decisions on risk, as opposed to making risk management
decisions.

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21.5

ERM INTERNAL AUDIT CHECKLIST


It is to be noted that a checklist can never be exhaustive as it can never
anticipate every corporate nuance for every situation. The under noted checklist
is also not designed to
a. Create a sense of boundaries,
b. Convey an implicit set of necessary and sufficient conditions for sound risk
management.
1.

Obtain an understanding of the ERM principles, the grading of risks etc.


as stated in the NFLs risk management policy.

2.

Ascertain that what is expected of the risk management process in light of


NFLs strategic and other objectives is well known by the participants in
the risk management process. This presupposes the need for regular
interplay between front line risk managers, and the companys senior
management

3.

Have risk exposures identified exceeded risk tolerances (this may happen
despite all the preventive measures) during the course of the review.

4.

In light of audit findings for risks identified and documented does the
grading of risks need to undergo any change e.g. low impact, high
likelihood to medium impact high likelihood.

5.

Is an effective organization and operational framework in place that


emphasizes the importance of risk management rules and regulations
(e.g. limits on credit exposure).

6.

Verify whether the planned series of mitigation actions that have been put
in place to contain the risk to an acceptable level (these include but are
not limited to new systems or practices, physical risk improvements, staff
training, continued assessment) have achieved the desired objective.

7.

Ascertain whether risk management is being integrated with the business


planning process and that the evolving risk management culture is
appropriate.

8.

As a part of the internal audit, evaluate that the Risk Matrices are an
appropriate reflection of the risks facing the organization in terms of
impact and likelihood. Have any new risks been identified during the audit

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which need to be incorporated in the Risk Register or Matrix.


Recommend best practices to mitigate new risks.
9.

Evaluate if levels of risk awareness among senior and middle


management are being effectively raised and that NFL as a whole is
aware of the importance of risk management and of the Risk Priorities.

10.

Evaluate that risk management is being carried out in a way that really
benefits the entity,

11.

Check that appropriate ownership of risk is in place.

12.

Ascertain whether there are any process ownership issues: Who


decides, who designs, who builds and who monitors? Suggest steps to
resolve this.

13.

Conduct on a periodic basis an enterprise risk assessment (ERA) to


assess and re-prioritize if necessary the critical or greatest risks identified
and facing the company (in terms of impact and likelihood) and an
evaluation of the effectiveness of controls in place to mitigate those risks.
Where appropriate recommend improvements to ERM processes.
An ERA identifies and prioritizes the organizations risks and provides
quality inputs for purposes of formulating effective risk responses,
including information about the current state of capabilities around
managing the priority risks. Using the entitys priority risks to identify gaps
provides the basis for improving the specificity of the ERM value
proposition.

14.

Report on the implementation of the risk management across NFL and


report progress on a periodical basis.

15.

Evaluate whether management interventions are having the desired


outcome on NFLs risks.

16.

As a part of the Risk Management Process are effective Contingency


Plans or arrangements in place to decide the action to be taken for risks
which have been assessed as either Critical or catastrophic i.e. high
risk/high impact.
It is recognised that any risk could suddenly be realised and become a
critical issue, even those that have been assessed as having relatively
low likelihoods. The assessments could be wrong, circumstances might
change before there is time to respond or external events could alter
NFLs view of situations and the nature of risk.

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There is a need to consider in advance what action to take if a risk


develops or a crisis occurs and these contingency arrangements should
form and are an essential part of the risk management process.
Contingency plans or arrangements should be considered for all risks,
which have been assessed as either High Risk / High Impact, irrespective
of the potential likelihood, and any plans developed should be rehearsed
or validated to ensure they cater for the eventuality

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CHAPTER 22
OFFICE NETWORK AUDIT

22.1

INTRODUCTION
Fertilizer is a capital intensive industry. Companies have a widely spread and
well-organized network of offices, plants, warehouses and dealer network. NFL
has also well-organized network of offices having the following units:
a) Registered office / Corporate Office
b) Manufacturing Units:





22.2

Nangal Plant
Bathinda Plant
Panipat Plant
Vijaipur Plant

REGISTERED OFFICE / CORPORATE OFFICE


The registered office is mainly concerned with the compliance of Corporate Laws
applicable to the company. It is this office, which is instrumental in framing of
NFLs policies, plans, systems, programmes, procedures etc. Overall
administration, finance, accounts, manufacturing plans, marketing and other
functions of management emanate from this office and all feedback from various
plants / units are received by this office for appropriate analysis and necessary
action. The overall coordinating and controlling activities of the management lie
in the exclusive domain of this office.

22.2.1 Scope of internal audit of Corporate Office


(a) Review of compliance with the provisions of all Corporate Laws applicable to
the company to the extent the same are applicable to Registered Office, like
maintenance of statutory records, preparation of periodical returns and their
filing with the appropriate authorities, organizing of meetings required by law,
arranging and overseeing share issues etc. Normally, these activities are
looked after by the Secretarial Department and are covered within the ambit
of secretarial audit, which usually lies in the domain of the Company
Secretary. However, the internal auditor is also expected to review such

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matters from time to time in view of the contemporary view of internal audit as
a consulting activity.
(b) Review of organization structure
(c) Review of internal control system
(d) Review of planning and control mechanisms
(e) Review of aspects of financial management
(f) Review of production planning, marketing, warehousing and transport
management.
(g) Review of materials management
(h) Review of Management Information Services (MIS)
(i) Review of Research & Development management
(j) Review of other management activities such as special investigations,
systems and methods studies etc.
22.2.2 Audit Guidelines / Checklist
A.

Secretarial functions


Examine and review whether notices and other documents are received at
the appropriate time

Examine and review whether minutes are duly prepared, entered in the
minute book and signed by the appropriate authority.

Examine and review whether various registers under the law are properly
maintained.

Examine whether the annual accounts and annual returns are filed within the
prescribed time.

Examine whether the various forms and documents required to be submitted


to the Registrar of Companies under the Companies Act are filed within the
prescribed time.

Examine whether requirements of Listing Agreement including Corporate


Governance are complied with.

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B.

Examine and review whether the Companys Memorandum & Articles of


Association are strictly followed.

Examine whether the common seal and other important documents are kept
under safe custody.

Examine whether the dividend warrants are properly drawn up and dividend
is paid in time.

Study the correspondence of the secretarial department for letters etc.


received from the shareholders, CLB, ROC, SEBI and Stock Exchange, if any
as to the complaints and non-compliances with the statutory laws and rules.

Organization Structure
Understanding the organization structure of NFL is essential for an effective and
efficient internal audit. The internal auditor is to review the organization structure
for improvement in productivity, enhancement in achieving higher internal
economies and overall improvements in profitability.

C.

Internal control system


Assessment of the existing internal control system is the prime task to be
executed by the internal auditor and is a pre-requisite for an effective and
efficient internal audit. The internal auditor, in order to fairly assess the internal
control system in a fertilizer industry must have fair knowledge of its
organizational, technical, financial, accounting, marketing and other aspects. The
internal auditors objective is to evaluate the performance, method and systems
of working on a continuous basis. In order to help the management as to the
effectiveness of control, the auditor is to report to:
(i)
(ii)

whether there are signs or symptoms of breakdowns of the control


systems; and
whether necessary changes are warranted to make management control
system more effective so as to ensure, that results are obtained for which
the controls are established.

The following financial ratio analysis would be useful to assess the business
performances:
Measures of performance
Profit margin, Assets turnover, Debtors turnover and Stock turnover.

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Measures of financial status


Debt equity ratio and current ratio.
Measures of investment
Return on equity, Earnings per equity share, Dividend cover, Price / Earning
ratio.
D.

Financial Management
Review of financial management by the internal auditor is of paramount
importance and it is linked strongly with the other functions of management.
Apart from the general principles and practices relating to audit of finance
functions of management, there are certain areas like management of funds,
capital expenditure, investments, loans etc., which need particular emphasis in
the internal audit. For this, auditor is to apply the following checks:

E.

(i)

Review of information system relating to management of funds with


particular attention to the Statement of Sources and Application of Funds

(ii)

Review of the system relating to cash management with particular


attention to Statement of Cash Flow and Cash Budgets and Forecasts.

(iii)

Review of the system of sending remittances to Plants.

(iv)

Review of utilization of credit facilities given by the Institutions / Banks at


the Head Office level and their allocation to Plants / branches.

(v)

Review of the system of minimizing idle funds at all levels of the


enterprise.

(vi)

Review of deposits with Excise and other Authorities and also dues with
FICC to ensure that they are kept at an optimally low level.

Claims
There arise numerous claims in the fertilizer industry. Most important claim is for
subsidy from FICC for which detailed note is given separately. There are
insurance claims, excise rebates, duty drawbacks, Modvat / Cenvat claims etc.
Internal audit of this area should lay particular emphasis on the following aspects:
(i)

Verification of claims for insurance, excise rebates, modvat / cenvat, duty


drawbacks etc. with reference to relevant rules and procedures, assessor
certificates, carriers shortage certificates, bills, insurance policies and
other relevant documents and records.

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F.

(ii)

Reviewing follow-up action for realization of claims and results thereof.

(iii)

Examining accounting treatment of claims lodged and / realized in order


to ensure that the same is consistent with the accounting policy of the
company and Generally Accepted Accounting Principles, Practices &
Standards.

(iv)

Review of major claims outstanding.

(v)

Critically examining the circumstances relating to rejection of the


enterprises claims.

Loans
Loans are taken from financial institutions / banks for many purposes like asset
creation, working capital finance etc. Internal audit of this area involve the
following aspects:

G.

(i)

Examining end-utilization of loans with reference to the purpose for which


they were obtained.

(ii)

Examining loan documentation for their legal veracity and enforceability.

(iii)

Examining repayments with reference to relevant loan documents


particularly delays, causes for delay and possible prevention of delays so
that penal provisions are not attracted or are reduced to the minimum.

(iv)

Examining terms and conditions of loans to ensure that they conform to


the overall interest of the enterprise.

(v)

Examining expenditure on debt servicing to ensure that they within


acceptable limits and have been adequately provided for.

Liabilities
Liabilities arise for a variety of reasons relating to capital as well as revenue
expenditure. Internal audit of liabilities should lay particular emphasis on the
following aspects:
(i)

Review of all liabilities including disputed and contingent, such as


creditors and their interest claims, accrued expenses, advances received,
statutory liabilities etc. from time to time.

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H.

(ii)

Critically review current as well as overdue statutory liabilities like those


for PF dues, income tax, FBT, sales tax / VAT, cess, excise duty etc. and
their accounting treatment.

(iii)

Scrutiny of all major liabilities.

Taxation
Efficient and prompt handling of tax matters is of paramount importance. Land
revenue, cess, entry tax, sales tax / VAT, import duties, income tax, FBT, local
taxes and licence fees are some of the taxes that are levied on the fertilizer
industry. Internal audit of this area should lay particular emphasis on the
following aspects:

I.

(i)

Reviewing overall administration of all taxes, duties, cess etc. applicable


to NFL.

(ii)

Examining whether all tax returns are filed in time and are properly
prepared taking in due consideration various benefits, rebates,
deductions etc. available under the relevant statute(s).

(iii)

Examining whether all tax dues are paid promptly and in time to avoid
attraction of penal provisions under the relevant statute(s).

(iv)

Examining that tax at source is correctly and timely deducted and


deposited with the government.

(v)

Examining tax disputes in detail to ensure that occurrence of disputes is


minimised and the disputes are satisfactorily, economically, efficiently and
properly resolved in the shortest possible time.

(vi)

Examining that deferred tax is correctly calculated and provided for in


accordance with Accounting Standard (AS 22).

Foreign exchange transactions


As per annual report of NFL for last two years i.e., 2005-06 & 2006-07, it is
gathered that company incurs expenditure in foreign currency to the tune of Rs.8
crore to Rs.9 crore. Internal audit of this area should particularly include the
following aspects:
(i)

Examining procedural formalities and their proper execution in respect of


transactions involving foreign exchange.

(ii)

Examining remittances made to redeem liabilities payable in forex.

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J.

(iii)

Examining recognition of forex fluctuations in the value of loans / liabilities


payable in forex in the financial statements.

(iv)

Examining import transactions involving forex and their documentation.

(v)

Examining compliance with the relevant forex laws for the time being in
force.

Inter-Plant comparison
Inter-plant comparison of condensed accounting data particularly financial ratios,
goes a long way in improving working efficiency of the management besides
giving a good insight to the internal auditor. Internal auditors work in this area is
largely based on financial ratios and their analysis and more particularly the
analysis of the following ratios:
(a) Sales to capital employed
(b) Net profit to capital employed
(c) Operating profit to capital employed
(d) Individual components of cost to total production in physical terms
(e) Per unit price realisation
(f) Debt-equity ratio
(g) Working capital turnover ratio

K.

Research & Development


R&D activities is carried out in NFL for
(a) Increasing plant availability
(b) Saving use of energy in different forms
(c) Better recovery of saleable bye-products
(d) Process improvement / development
(e) Increasing efficiency utilisation on a sustained basis in the application of
chemical fertilizers in combination with other agricultural inputs.

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Internal audit of R&D activities involve the following steps:

22.3

(i)

Reviewing the existing research and development activities undertaken


by the enterprise with particular emphasis on its costs, appropriateness
and adequacy.

(ii)

Reviewing the impact of R&D activities of the enterprise on its operations,


efficiency level, profitability and competitiveness.

(iii)

Reviewing potential areas where the enterprise could undertake R&D.

(iv)

Reviewing strength and weaknesses of the enterprise research and


development efforts.

(v)

Examining availability of appropriate tax benefits and whether the same


have been satisfactorily availed of promptly.

MANUFACTURING UNITS
NFL has got Manufacturing Units at 




Nangal Plant
Bathinda Plant
Panipat Plant
Vijaipur Plant

The internal auditor may carry out the following checking:


(a) Verify that guidelines / instructions issued by HO are truthfully complied with
by the branches.
(b) Verify the authenticity of figures tabulated in the various MIS reports / returns
from the basic records.
(c) Prepare month-wise statistical tabulation of finished products for all the
plants. Make an assessment of the production value and study the reasons
for fall in production.
(d) Critically examine performance of each plant by applying various financial
ratios and compare the same with the norms fixed by HO and highlight
abnormalities in the report.
(e) Analyse the cause of any abnormal delay between one report and the other.

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CHAPTER 23

ROLE OF AUDIT COMMITTEE OF BOARD & INTERNAL


AUDIT RELATION WITH STATUTORY & GOVT. AUDITORS

23.1

BACKGROUND
NFL was given the Mini Ratna Category - I status by Govt. of lndia in July 1998,
based on the company's overall performance during the preceding years. As
such it then became imperative on the part of NFL to improve its Corporate
Governance practices by constituting an Audit Committee with four non-official
directors as Members. It was also one of the mandatory recommendations of
Kumar Mangalam Committee on Corporate Governance that a qualified and
independent audit committee should be set up by the Board of the company,
which would go a long way in enhancing the credibility of the financial disclosures
of the company, more corporate accountability and promoting transparency.
One of the primary results of the emphasis on corporate accountability has been
the increased attention to the audit committees as guardians of financial integrity.
With the passage of time audit committees have become more involved in the
review of corporate accountability and governance, particularly as the focus on
risks and controls expands to include not only financial integrity, but also
compliance systems and processes needed for a company to meet legal and
ethical standards.
Listed companies are also required to comply with Clause 49 of the Listing
Agreement with stock exchanges wherein such companies are required to have
a Qualified and Independent Audit Committee. Besides the requirements of
Clause 49, Section 292A of the Companies Act also requires every public
company having paid up capital of Rs.5 crores or more to constitute a committee
of the board to be known as Audit Committee
Given the present Corporate Governance environment it is clear that activities
that the audit committees perform will continue to expand especially in being
more proactive in overseeing risks and controls related to financial and nonfinancial information.
The role of the audit committee and various legal provisions relating thereto are
highlighted in the ensuing paragraphs.

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23.2

AUDIT COMMITTEE OF THE BOARD


STATUTORY PROVISIONS
Section 292A of Companies (Amendment) Act 2000 states as follows;


Every public company having paid-up capital of not less than Rs.5 crores of
rupees shall constitute a committee of the aboard known as Audit
Committee which shall consist of not less than three directors and such
number of other directors as the Board may determine.

Two-thirds of the total number of the members of the committee shall be


directors, other than managing or whole-time directors.

The Audit Committee constituted as above shall act in accordance with terms
of reference to be specified in writing by the Board.

The chairman of the Audit Committee shall be elected by the members from
amongst themselves.

The annual report of the company shall disclose the composition of the audit
committee.

The audit committee shall have authority to investigate into any matter in
relation to the items specified in this section or referred to it by the Board and
for this propose, shall have full access to information contained in the records
of the company and external professional advice, if any.

The auditors, the internal auditor, and the director-in-charge of finance, shall
attend and participate at the meetings of the audit committee but shall not
have the right to vote.

The Audit Committee shall have discussions with the auditors periodically
about internal control systems, the scope of audit, including the observations
of the auditors, and review the half-yearly and annual financial statements
before submission to the Board and also ensure compliance of internal
control systems.

The recommendations of the audit committee on any matter relating to


financial management including the audit report, shall be binding on the
Board.

If the Board does not accept the recommendations of the audit committee, it
shall record the reasons therefor and communicate such reasons to the
shareholders.

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The Chairman of the Audit Committee shall attend the annual general
meeting of the company to provide any clarification on matters relating to
audit.

PENALTY FOR NON-COMPLIANCE


Penalty for non-compliance with the above provision is that company and every
officer in default shall be punishable with imprisonment for a term, which may
extend to one year or with fine, which may extend to Rs. 50,000 or with both.
SCOPE OF AUDIT COMMITTEE OF THE BOARD
The scope of Audit Committee of Board would cover all commercial aspects of
the organization including, inter-alia:









Review of financial statements


Periodical review of internal control system
Review of Govt. Audit and Statutory Auditor's reports
Review of projects and other capital schemes
Review of operational performance vis-a-vis standard parameters
Review of internal audit findings / observations
Development of an effective internal audit function commensurate with the
size and nature of the activities of NFL.
Special studies / investigation of any matter including issues referred by
Board.

Audit Committee will have access to financial and other data / information of the
Company including its subsidiaries. The important observations, as deemed fit by
the Audit Committee, would be reported to the Board as and when necessary.
The Internal Audit Department of Corporate Office will assist the Audit Committee
in their functioning. The statutory requirements relating to the meetings of Audit
Committee will be looked after by the Company Secretary, NFL.
TERMS OF REFERENCE
Stock Exchanges following SEBIs directives have included Clause 49 - Audit
Committee in the Listing Agreement with Companies. Accordingly the Stock
Exchanges have included this clause in the listing agreement, which is required
to be complied with by NFL since it is a listed company. The terms of reference
of the Audit Committee of the Board of Directors of NFL, stipulated in line with
this clause and adopted by the Board are provided below:

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PURPOSE
The primary function of the Audit Committee is to assist the Board of Directors in
fulfilling its oversight responsibilities by reviewing the financial reports and other
financial information provided by the Company to any Govt. body or the investors
or the public; the Company's systems of internal controls regarding finance,
accounting and legal compliance that management and the Board have
established; and the Company's auditing, accounting and financial reporting
process generally consistent with this function; the audit committee should
encourage continuous improvement of and should foster adherence to the
Company's policies , procedures and practices at all levels. The Audit
Committee's primary duties and responsibilities are to:


Serve as an independent and objective party to monitor the Company's financial


reporting process and internal control system.

Review and appraise the audit efforts of the Company's statutory auditors and
internal audit department.

Provide a conduit of communication among the statutory auditors, senior


management of the F&A department, the internal audit department and the Board of
Directors.
The Audit Committee will primarily fulfil these responsibilities by carrying out the
activities detailed in the ensuing paragraphs.

COMPOSITION


The Audit Committee shall have minimum three directors as members, all being nonexecutive directors, two thirds of the members of audit committee shall be
independent directors.

All members of audit committee shall be financially literate and at least one member
shall have accounting or related financial management expertise.

The Chairman of the Audit Committee shall be an independent Director, to be


appointed by the members of the Committee from amongst themselves.

The Audit Committee may invite such of the executives, as it considers appropriate
(and particularly the head of the finance function) to be present at the meetings of
the committee, but on occasions it may also meet without the presence of any
executives of the company. The finance director, head of internal audit (presently Dir
Fin at NFL is also the head of IA) and a representative of the statutory auditor may
be present as invitees for the meetings of the Audit Committee.

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MEETINGS OF AUDIT COMMITTEE

The audit committee should meet at least four times in a year and not
more than four months shall elapse between two meetings.

The quorum shall be either two members or one third of the members of
the audit committee, whichever is greater, but there should be a minimum
of two independent members present.

The minutes of meeting of Audit Committee shall be placed before the


Board.

The Company Secretary shall act as the Secretary to the Committee.

POWERS
The Audit Committee shall have powers, which should include the following:

To investigate any activity within its terms of reference and referred to it


by the Board.

To seek information from any employee.

To obtain outside legal or other professional advice.

To secure attendance of outsiders with relevant expertise, if it considers


necessary.

ROLE OF THE AUDIT COMMITTEE OF THE BOARD


The role of the Audit Committee shall include the following:
1. Oversight of the company's financial reporting process and the disclosure of
its financial information to ensure that the financial statement is correct,
sufficient and credible.
2. Recommending to the Board, the appointment, re-appointment and, if
required the replacement or removal of the statutory auditor and the fixation
of audit fees.
3. Approval of payment to statutory auditors for any other services rendered by
the statutory auditors.

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4. Reviewing with the management the annual financial statements before


submission to the board for approval, with particular reference to:
a. Matters required to be included in the Directors Responsibility Statement
to be included in the Boards report in terms of clause (2AA) of section
217 of the Companies Act, 1956
b. Changes, if any, in accounting policies and practices and reasons for the
same
c. Major accounting entries involving estimates based on the exercise of
judgment by management
d. Significant adjustments made in the financial statements arising out of
audit findings
e. Compliance with listing and other legal requirements relating to financial
statements
f.

Disclosure of any related party transactions

g. Qualifications in the draft audit report.


5. Reviewing, with the management, the quarterly financial statements before
submission to the board for approval.
6. Reviewing, with the management, performance of statutory and internal
auditors, adequacy of the internal control systems.
7. Reviewing the adequacy of internal audit function, if any, including the
structure of the internal audit department, staffing and seniority of the official
heading the department, reporting structure coverage and frequency of
internal audit.
8. Discussion with internal auditors any significant findings and follow up there
on.
9. Reviewing the findings of any internal investigations by the internal auditors
into matters where there is suspected fraud or irregularity or a failure of
internal control systems of a material nature and reporting the matter to the
board.
10. Obtaining an update on the Risks Management Framework and the manner
in which risks are being addressed.
(SEBI has revised clause 49 of the listing agreement, which inter-alia,
includes Risk Management and provides as the company shall lay down
procedures to inform Board members about risk assessment and

Role of Audit Committee

23.6

INTERNAL AUDIT MANUAL

minimization procedures. These procedures shall be periodically reviewed to


ensure that executive management controls risk by means of a properly
defined framework)
11. Discussion with statutory auditors before the audit commences, about the
nature and scope of audit as well as post-audit discussion to ascertain any
area of concern.
12. To review Government Audit Reports.
13. To look into the reasons for substantial defaults in the payment to the
depositors, debenture holders, shareholders (in case of non payment of
declared dividends) and creditors.
14. To review the functioning of the Whistle Blower mechanism, in case the
same is existing.
15. Carrying out any other function as is mentioned in the terms of reference of
the Audit Committee.
REVIEW OF INFORMATION BY AUDIT COMMITTEE
The Audit Committee shall mandatorily review the following information:
1. Management discussion and analysis of financial condition and results of
Operations;
2. Statement of significant related party transactions (as defined by the audit
committee), submitted by management;
3. Management letters / letters of internal control weaknesses issued by the
statutory auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief internal
auditor shall be subject to review by the Audit Committee
OTHER MATTERS


The annual report of the Company shall disclose the composition of the Audit
Committee.

The chairman of the Audit Committee shall be present at Annual General Meeting to
answer Shareholder queries.

Role of Audit Committee

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INTERNAL AUDIT MANUAL

23.3

GOVERNMENT AUDITORS
The office of the Principal Director of Commercial Audit and Ex-officio Member
Audit Board, with headquarters at Indraprastha Bhawan, IP Estate, New Delhi, is
responsible for the Audit of NFL and its units.
Audit parties at field locations continuously conduct audits pertaining to propriety
and regulatory aspects through the test audit of various transactions of the
respective plants/units/offices. The preliminary audit queries are issued to the
auditee departments seeking comments of the management. Inspection Reports
containing audit observations on points which have either not been replied to at
the preliminary stage or where Government Audit party is not satisfied with the
replies given are sent to the Chief of the plant/unit concerned with a copy to the
Chairman of the Company. The replies to the inspection report paragraphs are
coordinated by internal audit unit of the concerned plant/unit.
For exercising proper control over audit observations and the managements
responses it is necessary to keep a chronological record of all the Inspection
Report paragraphs. Such record shall be kept in a register and shall at the
minimum contain the following particulars;








Serial number,
Inspection report number with date of report,
Dates of receipt by Plant/Unit Chief, and Internal Audit Wing,
A brief description of each paragraph,
Follow-up particulars and results with auditee departments,
Date of obtaining approval of Chief of the Unit,
Date of sending comments to Regional Audit Officer.

Replies to the Government Audit Inspection Report paragraphs shall be made


based on the facts and circumstances of each observation. The time schedule
given by Audit for receipt of replies shall be observed. The management's point
of view should be explained in an effective manner so that government audit is
satisfied and can drop the observation made at that stage itself. With a view to
minimise delays in replying to outstanding paragraphs of inspection reports the
Internal Audit Head of the concerned plant/unit should interact with the heads of
auditee departments and in case replies are not received promptly the fact of
delays should be brought to the notice of senior unit/plant management.
Consequent upon obtaining the draft replies from the auditee departments the
draft reply/ies along with a covering letter should be forwarded to the Chief of the
Plant/Unit for approval. A status report of disposal/pending Inspection Report
paragraphs shall also be sent to Corporate Internal Audit every month.

Role of Audit Committee

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DRAFT AUDIT PARAS (DAPs)


The more important audit points which have material or significant financial
involvement/implications or important policy implications are issued by the
Principal Director of Commercial Audit & Ex-officio Member, Audit Board as draft
audit paras. These paras are initially addressed to the Chairman of the company
and are to be replied within one month. The work relating to draft audit paras
shall be co-ordinated by Corporate Internal Audit and shall be diarised in a
register and receipt acknowledged.
The DAP along with list of key documents is to be referred to the Chief Officer of
the respective Plant/Unit for confirmation of facts and figures contained in the
para/s and for comments on the points raised within four weeks so that a final
reply is sent within the stipulated period.
The plant/unit Internal Audit shall coordinate with the concerned departments to
obtain replies and shall send the same to Corporate Internal Audit after the
replies have been approved by the Chief Officer of the plant/unit. It should be
ensured that replies given are factually correct, realistic and cover all the points
raised in the paras. On receipt of the replies from the concerned plant/unit the
same shall be scrutinized by Corporate Internal Audit Department and the final
replies sent to Government Audit. In case of audit paras where Technical/
Operations/Commercial
points
are
raised,
views
of
Projects/
Operations/Commercial Departments shall be obtained as may be necessary.
Concentrated efforts shall be made to adhere to the time schedule given by Audit
for sending the replies to draft audit paras.
In case the Government Audit is not satisfied with the replies given to a draft
audit paras, a revised DAP is issued by the Government Audit to the Ministry of
Chemicals & Fertilizers (Department of Fertilizers) which is again referred to NFL
by the Ministry of Chemicals and Fertilisers for final comments. Corporate
Internal Audit shall obtain copies of all key documents at this stage and examine
the revised paras in consultation with the plant/unit and send a final reply to the
Ministry after obtaining approval of Chairman. This is the final stage for taking
steps to get the DAP dropped. As such, diligent efforts should be made at
Unit/Corporate Office level to send the replies to the Ministry with all justifications
and full facts and figures so that draft audit para can be dropped by Government
Audit. Status of Draft Audit paras outstanding as at the end of each month shall
be reviewed and a report put up to the Head of Corporate Internal Audit.
Wherever there are delays, the matter shall be taken up at appropriate levels of
management.
Up to the Statement of Facts stage it is addressed to Director (Finance). Draft
audit paras are initially addressed to Ministry of Chemicals & Fertilizers
(Department of Fertilizers) with a copy to the Chairman of the company.

Role of Audit Committee

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INTERNAL AUDIT MANUAL

23.4

STATUTORY AUDITORS
The role of the internal audit function is determined by the company management
and its prime objectives differ from that of the external auditors who are
appointed by the Shareholders to report independently on the annual financial
statements in accordance with the Companies Act.
However, as the means of achieving their respective objectives are often similar,
some part of the internal audit work is also useful and relied upon by the statutory
auditor. It is, therefore, necessary that internal audit builds up necessary
documentary records and evidence to satisfy the statutory auditors that the
Internal Audit system is commensurate with the size and nature of business of
the company.
The important aspects considered by the statutory auditor in evaluating the
internal audit function are its organisational status, scope of its functioning,
professional competence of the persons undertaking the internal audit work and
the exercise of due professional skill, care and diligence by the internal auditors.
The statutory auditors also evaluate the extent to which management considers
and, where appropriate, acts upon internal audit recommendations. Also as
required under section 227(4A) of the Companies Act 1956, as amended from
time to time, statutory auditors are required to include in their report a statement
on the matters specified in the Companies (Auditors Report) Order, 2003
issued by the Central Government of India. The text of the said order is as per
Appendix - 5.

23.5

COMPREHENSIVE APPRAISAL REPORT


Government audit periodically carries out a comprehensive long-term trend
review/ appraisal of various activities of a plant/unit and sends the appraisal
report to Chairman of the company for verification of facts and para-wise replies
to the observations made. Replies to the Appraisal Report are to be submitted
to Government Audit within six weeks. On receipt of the appraisal report, the
Corporate Internal Audit shall coordinate with the respective plant/unit and the
different offices concerned. After getting details on various observations raised in
the appraisal report, a final reply shall be prepared at the Corporate Office. The
replies shall be approved by the Chairman, after which it shall be sent to
Government Audit.
Exacting efforts are to be made to submit the reply within the prescribed period.
However, regular requests for extension of time are to be made in case delays
are foreseen. Efforts should be made to give factual replies to various points
raised in the report with a full and proper justification for the actions taken by
management so that final report issued by the C&AG contains the factual
position and the Management's point of view. The Management replies to the
Appraisal Report are examined by the Audit and important points are discussed

Role of Audit Committee

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between the Audit Board and the top management. Based on the replies of the
management and discussions, a final report is tabled by C&AG in Parliament.
Three annual reports on the accounts of Central Government companies and
corporations issued by the C&AG to the Central Government are as follows:

23.6

Report No.1 (Commercial) - Review of accounts which gives an overall


position of the performance of the companies and corporations as revealed
by their accounts and on the basis of information obtained during audit.

Report No.2 (Commercial) - Comments on accounts containing extracts from


the important comments of the C&AG on the accounts of the companies and
corporations and a resume of the reports submitted by the Statutory Auditors
(Chartered Accountants) on the audit of the companies in pursuance of the
directions issued by C&AG.

Report No.3 (Commercial) - Transaction Audit Observations containing the


observations on individual topics of interest noticed in the course of audit of
the companies and corporations and short reviews on aspects of their
working.

Additional Reports containing the comprehensive reviews by the C &AG are


also prepared by the C & AG and tabled in Parliament.

Action taken notes in the prescribed format are to be sent to the C &AG
through the of Department of Fertilizers in the Ministry of Chemicals &
Fertilizers on all the paragraphs included in the various Reports of the C
&AG. This will also be coordinated by Corporate Internal Audit following the
same procedure as for Draft Audit Paras.

THE COMMITTEE ON PUBLIC UNDERTAKINGS (COPU)


A Parliamentary Committee examines the reports of the Comptroller and Auditor
General of India (C&AG) on the public sector undertakings. Out of the various
reports tabled in the Houses of Parliament by the C&AG, COPU selects some
Paras / Reviews for their study. The process starts with issuance of list of points
seeking further information/clarifications from the Administrative Ministry/PSU
and may lead to taking oral evidence from the Ministry/ Chairman of the PSU.
Internal Audit , in association with the concerned officials of NFL, coordinates the
submission of all explanations / clarifications / defence to the COPU Secretariat.

Role of Audit Committee

23.11

INTERNAL AUDIT MANUAL

CHAPTER 24

CONFLICTS OF INTEREST
24.1

INTRODUCTION
NFL has sound system of Corporate Governance. The integrity, transparency
and compliance with laws in all dealings with government, customers, suppliers,
employees and other stakeholders are the objectives of good Corporate
Governance. NFL is guided by its Vision & Mission Statement Corporate
Governance Code.

24.2

AUDIT GUIDELINES / CHECKLIST


(1) Review whether an employee or a director has an interest as owner, partner
or any other similar interest with supplier, competitor, customer from whom
the company buys goods or services and vice versa.
(2) Whether there is a compliance of code of conduct adopted by management.
(3) Review whether the employee or director connected in any activity in any
form which may subvert the companys interest, reputation, goodwill or
prejudicial to the interest of the company.
(4) Review whether suitable clause provided in the agreement / employment
contract with the employee / director to debar them from any activities,
whether financial or otherwise, which may be prejudicial to the interest of the
company.
(5) Whether there is proper disclosure of relationship or connection with
interested parties at the time of employment or during the tenure of
employment.
(6) Review whether any member of the family of an employee or of a director
have any substantial interest in any transaction entered into by the company.
(7) Review whether director has disclosed interest if any, in any transaction
entered into by the company as required under section 301 of the Companies
Act.

Conflicts of Interest

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INTERNAL AUDIT MANUAL

CHAPTER 25

DISPUTE RESOLUTION

25.1

Disputes Between Audit Staff & Audit Management


The exercise of professional judgement involved in determining reportable
conditions and the expression of conclusions in audit reports may lead to
differences in professional opinions.
A process is needed to resolve such differences while respecting both the chain
of command within audit management and the obligation of the staff to exercise
independent professional judgement.
This process applies only to disagreements having to do with the contents and
conclusions in audit reports. It is not intended for personnel matters such as job
assignments and performance appraisals where separate procedures and
policies exist. It is likewise not intended for administrative matters such as
departmental management matters.

25.2

Dispute Resolution Process


In the event that there is a disagreement of professional opinion between audit
staff and an audit manager/in-charge, Internal Audit or equivalent, in the normal
course of providing supervision/direction, shall reach an independent conclusion
on the matter and attempt to forge a consensus or compromise among the
members of the engagement team. No specific record of dispute resolution at
this level needs to be created or maintained.
If this process is unsuccessful, Director (Finance) or any senior executive
nominated by Dir. (Finance) shall be consulted. For this purpose Director
(Finance) or the senior executive nominated will review draft reports and other
written materials, interview the disputing parties and/or convene a meeting for the
purpose of forging a consensus or compromise among the disputing parties. A
written record of this dispute resolution process, efforts, and outcomes shall be
created and maintained outside of the working papers. The judgement of the
Director Finance will be final and will prevail insofar as the issuance of the audit
report is concerned. However, no individuals rights as an employee of the
company will be compromised by invoking this process or by its outcome.

Dispute Resolution

25. 1

INTERNAL AUDIT MANUAL

25.3

Disputes between the Company & Auditors


Disputes which may arise between internal auditors and audit clients i.e. auditees
can be generally categorized into those regarding the factual accuracy of
reported findings, and those dealing with the appropriateness of conclusions or
recommendations (the "fairness" of the audit report in total or specific matters).
Such disputes are separate from scope limitations imposed by audit clients /
auditees, which are discussed in an ensuing paragraph.

25.4

Policies & Procedures for Scope Limitations


Every effort shall be made to resolve all questions of factual accuracy before the
final audit report is issued.
Conclusions and recommendations represent the professional judgement of
internal auditors and cannot be overridden or unduly influenced by auditees. The
judgement of the local Internal Audit in-charge is the prevailing position.
Therefore, audit clients do not have the authority to "appeal" an audit report to
the In-charge Audit or the management of NFL. The written response to the audit
report is the recourse and appropriate vehicle for audit clients / auditees to
communicate their views.
However, in exercising their professional judgement, Internal Audit In-charge
should aggressively seek compromise and consensus views that communicate
issues clearly and completely and deal with identified audit issues effectively.

25.5

Scope Limitations
Definition - Scope limitations include situations in which a client / the auditee is
uncooperative, attempts to limit the scope of planned work or denies access to
records, personnel, assets or other information necessary to complete the audit.
The Charter provides Internal Audit unrestricted access to all assets, information,
reports, records, and personnel required to perform their work.
Resolution Process - The auditor should bring all matters involving scope
limitations to the attention of the local/unit head/in-charge of the Internal Audit. If
Internal Audit head is unable to resolve the matter at the local level, In-charge
Internal Audit should be notified and involved in the process to assist in its
resolution. The matter should be brought to the attention of the Audit Committee,
as warranted.
All scope limitation discussions should be documented in the audit work papers.
Impact on Audit Report - In the event a scope limitation significantly impacts
the planned scope of the audit and is not resolved to the satisfaction of Internal

Dispute Resolution

25. 2

INTERNAL AUDIT MANUAL

Audit, the audit report should state that the audit team was unable to perform the
planned tests.
Audit reports with significant limitations on scope will be put up to Director
(Finance) for direction.

Dispute Resolution

25. 3

INTERNAL AUDIT MANUAL

CHAPTER 26

RECORD RETENTION & LONG TERM STORAGE

26.1

RECORD RETENTION
Audit guidelines / checklist
(1)

Verify that archived records are stored in locked storage areas


designated for this purpose and that access to these areas is limited.

(2)

Verify that Permanent records are maintained in metal fire-resistant file


cabinets. Non-permanent files will be stored in cardboard file boxes and
each file box will be labelled on the front with the contents, dates covered,
and destruction date if applicable.

(3)

Verify that files are stored only in boxes with similar items, dates and
retention periods to allow for easier access and purging of records.

(4)

Check that the listing and categorization of records files is as per the
procedures framed for this purpose.

(5)

Verify that files are maintained for as long as is necessary but only to the
extent they serve a useful purpose or satisfy corporate or legal
requirements and are as per the norms of the prescribed policy of the
Company on Record Retention Periods.

(6)

For better internal control copies of critical records that are vital to the
daily operations of the Company should also be kept off site, where
practicable, in case of possible disasters. This may include information
needed to file insurance claims (assets lists, insurance contacts, policy
numbers), financial data for tax purposes, contacts lists to inform or
restart the operations (vendors, customers, investors and employees),
and other data that would assist in rebuilding the business (business
plans, intellectual property, or proprietary information).

Record retention & Long term storage

26. 1

INTERNAL AUDIT MANUAL

26.2

RECORD DESTRUCTION
Audit guidelines / checklist
(1)

Verify that three to six months after each year-end the department
responsible for this purpose has proceeded with destruction of all files
that have exceeded their recognized holding period.

(2)

Verify that a listing of file categories to be destroyed has been circulated


to all Heads of Departments thirty days prior to destruction for review and
comment. The actual listing of records destroyed will be maintained
permanently for future reference.

(3)

Verify that destruction of the files should be done through file shredders.
Disposal of records into the company's general trash is not permitted.

Record retention & Long term storage

26. 2

INTERNAL AUDIT MANUAL

APPENDIX 1

EXPOSURE DRAFT ON STANDARD OF INTERNAL AUDIT (SIA)


REPORTING ISSUED BY ICAI

Introduction
1.

The purpose of this Standard on Internal Audit (SIA) is to establish standards on


the form and content of the Internal auditors report issued as a result of an
internal audit performed by an internal auditor of the systems, processes,
controls including items of financial statements of an entity.

2.

The internal auditor should review and assess the analysis drawn from the
internal audit evidence obtained as the basis for his conclusion on the efficiency
and effectiveness of systems, processes, controls including items of financial
statements.

3.

This review and assessment involves considering whether the systems,


procedures and controls are in existence and are operating effectively.

4.

The internal auditors report should contain a clear written expression of


significant observations, suggestions / recommendations and managements
response based on the policies, processes, risks, controls and transaction
processing taken as a whole.

Basic Elements of the Internal Auditors Report


5.

The internal auditors report includes the following basic elements, ordinarily, in
the following layout:
(a)
(b)
(c)
(d)
(e)

Appendix - 1

Title
Addressee
Report distribution List
Period coverage of the Report
Opening or introductory paragraph

A.1

INTERNAL AUDIT MANUAL

(i)
identification of the processes / functions and items of financial
statements audited
(ii)
a statement of the responsibility of the entitys management and
the responsibility of the internal auditor
(f)

Objectives and Scope paragraph (describing the nature of an internal


audit)
(i)
a reference to the generally accepted audit procedures in India, as
applicable
(ii)
a statement of the objectives and scope of the internal audit
engagement
(iii)
a description of the engagement background and the methodology
of the internal audit together with procedures performed by the internal
auditor

(g)

Executive Summary, highlighting the key material issues, observations,


control weaknesses and exceptions

(h)

Observations, Findings and Recommendations made by Internal Auditor

(i)

Comments from Auditee / Local Management, Comments from Top


management and Management Action Plan for resolution of issues and
internal audit observations

(j)

Conclusions

(k)
(l)

Compliance Report compliances and non-compliances


observations made in previous internal audit reports;
Date of the report

(m)

Place of signature; and

(n)

Internal Auditors signature with Membership Number.

with

A measure of uniformity in the form and content of the internal auditors report is
desirable because it helps to promote the readers understanding of the internal
auditors report and to identify unusual circumstances when they occur.
6.

The internal auditor should exercise due professional care to ensure that the
internal audit report, inter alia, is:
(i)
(ii)

Appendix - 1

clear
factual presents all significant matters with disclosure of material facts

A.2

INTERNAL AUDIT MANUAL

(iii)
(iv)
(v)
(vi)
(vii)

specific
concise
unambiguous
timely
complies with generally accepted audit procedures in India, as applicable.

Title
7.

The internal auditors report should have an appropriate title expressing the
nature of the Report.

Addressee
8.

The internal auditors report should be appropriately addressed as required by


the circumstances of the engagement. Ordinarily, the internal auditors report is
addressed to the appointing authority or such other person as directed.
Report Distribution, Coverage and Opening or Introductory Paragraph

9.
10.

11.

There should be mention of the recipients of the report in the section on Report
Distribution list.
The internal auditors report should identify the systems, processes, functional
lines or other items of the entity that have been audited, including the date of and
period covered by the engagement.
The report should include a statement that the operations of systems, procedures
and controls are the responsibility of the entitys management and a statement
that the responsibility of the internal auditor is to express an opinion on the
weaknesses in internal controls, risk management framework, exceptions and
cases of non-compliance and suggest or recommend improvements in the
design and operations of controls based on the Internal audit.

Scope Paragraph
12.

The internal auditors report should describe the objectives and scope of the
internal audit by stating that the internal audit was conducted in accordance with
generally accepted audit procedures as applicable. The management needs this
as an assurance that the audit has been carried out in accordance with
established standards.

13.

Scope refers to the internal auditors ability to perform internal audit procedures
deemed necessary in the circumstances.

14.

The report should include a statement that the internal audit was planned and
performed to obtain reasonable assurance whether the systems, processes and

Appendix - 1

A.3

INTERNAL AUDIT MANUAL

controls operate efficiently and effectively and financial information are free of
material misstatement.
15.

The internal auditors report, in line with the terms of the engagement, should
describe the internal audit which may include:
(a)
(b)

(c)
(d)
16.

examining, on a test basis, evidence to support the amounts and


disclosures in financial statements;
assessing the strength, design and operating effectiveness of internal
controls at process level and identifying areas of control weakness,
business risks and vulnerability in the system and procedures adopted by
the entity
assessing the accounting principles and estimates used in the
preparation of the financial statements;
evaluating the overall entity-wide risk management framework.

The report should include a description of the engagement background, internal


audit methodology used and procedures performed by the internal auditor
mentioning further that the internal audit provides a reasonable basis for his
comments.

Executive Summary Paragraph


17.

The Executive Summary paragraph of the internal auditors report should clearly
indicate the highlights of the internal audit findings, key issues and observations
of concern, significant controls lapses, failures or weaknesses in the systems or
processes.

Observation (Main Report) Paragraph


18.

The Observation paragraph should clearly mention the process name, significant
observations, findings, analysis and comments of the internal auditor. The
responses and comments from the auditee the local management in charge of
the entity under audit should be included in this section. Further comments from
the internal auditor, in response to the auditee feedback, are to be clearly
mentioned. This paragraph should also contain the internal auditors suggestions
and recommendations to mitigate risks, strengthen controls and streamline
processes with respect to each of the observations and comments made.

Comments from Top Management Paragraph


19.

The Comments from Top Management paragraph should contain the


observations and comments from top management of the entity provided after
giving due cognizance to the internal auditors comments, local management /
auditee response and internal auditors further comments. This should also
include Management action plan for resolution of the issues and compliance to
the internal auditors recommendations and suggestions on the areas of process

Appendix - 1

A.4

INTERNAL AUDIT MANUAL

and control weakness, deficiency. The management action plan, should contain,
inter alia :
(a) the timeframe for taking appropriate corrective action,
(b) the person responsible
(c) resource requirements, if any, for ensuring such compliance.
Compliance Report Paragraph
20.

The Compliance Report paragraph should be appended after the Observations


and findings and should include:
(a)

Status of compliance / corrective action already taken / being taken by


auditee with respect to previous internal audit observations;

(b)

Status of compliance / corrective action not taken by auditee with respect


to previous internal audit observations and the reasons for noncompliance thereof; and

(c)

Revised timelines for compliance of all open items in (b) above and
responsibility fixation of concerned process owner.

Date Paragraph
21.

The date of an internal auditors report is the date on which the internal auditor
signs the report expressing his comments and observations.

Place of Signature
22.

The report should name the specific location, which is ordinarily the city where
the internal audit report is signed.

Internal Auditors Signature


23.

The report should be signed by the internal auditor in his personal name. Where
the firm is appointed as the auditor, the report should be signed in the personal
name of the internal auditor and in the name of the audit firm. The
partner/proprietor signing the internal audit report should also mention the
membership number assigned by the Institute of Chartered Accountants of India.

Communication to Management
24.

The internal audit report contains the observations and comments of the internal
auditor, presents the audit findings, and discusses recommendations for
improvements. To facilitate communication and ensure that the

Appendix - 1

A.5

INTERNAL AUDIT MANUAL

recommendations presented in the final report are practical from the point of view
of implementation, the Internal Auditor should discuss the draft with the entity
management prior to issuing the final report. The different stages of
communication and discussion should be as under:
(a)

Discussion Draft - At the conclusion of fieldwork, the internal auditor should draft
the report after thoroughly reviewing the internal audit working papers and the
discussion draft before it is presented to the entity management for auditee
comments. This discussion draft should be submitted to the entity management
for their review before the exit meeting.

(b)

Exit Meeting - The Internal Auditor should discuss with the management team of
the entity regarding the findings, observations, recommendations, and text of the
discussion draft. At this meeting, the entity management should comment on the
draft and the internal audit team should work to achieve consensus and reach an
agreement on the internal audit findings.

(c)

Formal Draft - The internal auditor should then prepare a formal draft, taking into
account any revision or modification resulting from the exit meeting and other
discussions. When the changes have been reviewed by the internal auditor and
the entity management, the final report should be issued.

(d)

Final Report - The Internal Auditor should submit the final report to the appointing
authority or such members of management, as directed. The periodicity of the
report should be as agreed in the scope of the internal audit engagement. The
internal auditor should mention in the Report the dates of discussion draft, exit
meeting, Formal Draft and Final Report

Limitation on Scope
25.

When there is a limitation on the scope of the internal auditors work, the internal
auditors report should describe the limitation.

Restriction on usage and report circulation otherwise than to the list of Intended
Recipients as per Report Distribution List
26.

The internal auditor should state in the report that the same is to be used for the
intended purpose only as agreed upon and the circulation of the report should be
limited to the recipients mentioned in the report distribution list.

Effective Date
27.

This Standard on Internal Audit is applicable to all internal audits commencing on


or after ______. Earlier application of the SIA is encouraged

Appendix - 1

A.6

INTERNAL AUDIT MANUAL

APPENDIX 2

INTERNAL AUDIT WORK PRODUCT RETENTION

Audit work products are the property of NFL. Internal Audit maintains custody of all audit
work products, which are subject to the retention requirements set forth below.
Audit work products Audit work products include reports and work papers for all
audit (whether in-house, govt. or out-sourced), investigation, and advisory service
projects. They may be in electronic or hardcopy form
Administrative records - Administrative records consist of reports, documents,
analyses, and other materials generated to support the IA departments functions.
Administrative records inter alia include:

Quarterly and annual reports

Audit planning documents

Risk assessment analyses

Training records
Interim performance reviews, etc. details of training programmes.
Retention Periods - The retention period begins with the end of the fiscal year in which
the report is issued.
Audit work products should be retained as follows:

One signed copy of the final report  Permanently

Work papers  5 years

Administrative records should be retained as follows:

Special administrative records, such as Audit Committee minutes, Annual and


Quarterly Reports, audit reports outsourced and audited by CAG/Govt. and
Annual Audit Plans  Permanently

Administrative records that support the audit programmes  5 years

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Other administrative records  At local discretion

All other notes, documents and reports relating to a completed audit that are not
included in the work papers (i.e., retained in auditors desk files) should be destroyed
after the final report has been issued. All versions of the draft audit report should also be
destroyed after the final report has been issued.
Privileged Records - Audit work products and administrative records that are related to
a lawsuit or other court action are not to be destroyed until the lawsuit or other court
action has been closed or the 5 year work paper retention period has been reached,
whichever is later.
Disposition Process - Audit work products and administrative records will be destroyed
by March 31 of the year in which the records have reached the end of their retention
period.
The audit head of the unit / office will be responsible for reviewing the inventory listing of
records scheduled for destruction to ensure that they should be destroyed (i.e., there is
no reason that their retention period should be extended).
Audit work products and administrative records should be destroyed in a manner that
gives appropriate consideration to the sensitivity of the information contained in the
documents to prevent the unauthorized release of proprietary or confidential information.

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APPENDIX 3

SAMPLE OF STATEMENT OF ASSURANCE

Date : ___________
National Fertilisers Ltd.
Unit:________________
____________________
SUBJECT: INTERNAL AUDIT OF CAPITAL EXPENDITURE
Dear Sir,
We have completed the internal audit of the xxx Capex Project regarding the existence of
key project and payment approval process controls and their application by the xxxx
Department. The audit was intended to provide assurance that appropriate systems and
procedures were in place and measures required to implement these key controls were
adequately taken.
The internal audit was carried out in accordance with NFL guidelines on Internal Audit and
the Institute of Chartered Accountants of India Standards for the Professional Practice of
Internal Auditing.
The audit took place between ________ (day month year) and _______ and had two
components: the first reviewed the Capex project approval process and the second, the
payment approval process. Both components covered the period between ______ and
______. The audit included preparing a summary of key controls, and examining project
files. We carried out the tests deemed necessary in the circumstances to allow us to form an
opinion.
In our view, both the audit procedures followed and evidence gathered are appropriate and
sufficient to support the accuracy of the conclusions in this report. The conclusions are
based on an examination of the situations identified in light of the criteria established and
apply to the process/programme audited only. The evidence gathered meets professional
audit practice standards and is adequate to satisfy senior management and the Audit
Committee that the conclusions of the internal audit are well founded.
In our opinion, the systems, procedures and control procedures used by the Department
during the period audited are appropriate for managing the Project efficiently. Furthermore,
during the period audited, Capex payments were made in accordance with the contract and
met NFLs operational requirements in all material respects.
Sd/-

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APPENDIX 4

HANDBOOK ON INSURANCE

1.

INTRODUCTION
This Hand Book on Insurance, which forms a part of the Internal Audit Manual,
has been developed for use as a reference tool by the Internal Audit Department
of National Fertilizers Ltd.
It contains a broad framework of the insurable risks for which cover is available a
description of the various policies. It also describes the significant risks that NFL
is exposed to. Based on a periodic assessment of the exposure to these risks
and the need to control them the Internal Audit may make recommendations to
the management about whether to enhance or obtain insurance if not already
obtained, to cover these risks.
The manual also provides guidelines on insurance cost control and guidelines for
evaluating, controlling, treating and managing insurance risks.

2.

PURPOSE
NFL purchases insurance and has established insured programs for its property
and liability risks, as specific circumstances require. This handbook describes:
a. the various types of insurance coverages that are available to NFL for
mitigating its exposure to insurable risks, and
b. the methodology to be adopted for identifying and analyzing risks, controlling
risks and treating or managing risks.

3.

OBJECTIVES
 To develop a cost-effective environment with respect to NFLs general
insurance practices.
 Risk Profiling: a. Identifying all significant insurable risks;
b. Identifying other risks that are more routine yet could result in
accumulated losses or bad publicity for the company.
 Adequacy of Insurance: Ensuring adequacy of insurance cover for all
significant insurable business risks,

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 Ensuring that insurance, where required by law or contract, is obtained.


 Minimizing/controlling insurance cost through a proactive appraisal of all
business risks and the steps taken internally to minimize those risks to
reduce incidence of future premium.
 To obtain a competitive edge in insurance costs
 Claim settlement: Ensuring that there are no systemic weaknesses in the
procedures followed for lodging, valuing and processing of claims, and that all
safeguards as required in terms of the policy are in place so that claims
cannot be denied.
 To place NFLs insurance coverage with commercial insurers who have
strong financial ratings and a good track record of claim settlement.
4.

TYPES OF COVERAGE
Generically, there are two basic types of insurance;


third-party liability insurance - which serves to compensate damage caused


by the insured to other people and

first-party or personal insurance, which aims to compensate for example the


costs incurred by the insured in remedying a loss.

As per the Indian Insurance Act 1938 adopted by the Insurance Industry there
are three broad classifications of insurance.
a. Fire Insurance
b. Marine Insurance, and
c. Miscellaneous Insurance.
The significant insurable risks that NFL is exposed to are described below.
Based on a periodic assessment of the exposure to these risks and the need to
control them the internal audit may make recommendations to the management
on whether to enhance or obtain insurance to cover these risks.
5.1

INDUSTRIAL INSURANCE

5.1.1

FIRE POLICY (A, B C)


The following properties are covered:
All moveable/ immoveable properties on land (excluding those in transit) broadly
categorised as follows :

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(i)

(ii)

(iii)

Building (including plinth and foundations, if required):

Whether completed or in course of construction (excluding the value


of land).

Interiors, Partitions and Electricals

Plant & Machinery, Equipment


foundations, if required)

Bought Second hand.

Bought New

Obsolete Machinery

&

Accessories

(including

Stocks:

Raw Material

Finished Goods

In process

In trade

Declaration Policy Stocks may be covered under declaration policy to


take care of frequent fluctuations in Stock / Stock Values. Monthly
declaration on any one of the following basis has to be submitted before
the last day of the succeeding month
i Average of the highest values at risk on each day (or)
ii. Highest value on any day of the month.
(iv)

(v)

Appendix - 4

Other Contents such as

Furniture, Fixtures and Fittings

Cables, Pipings

Spares, Tools and Stores

Household goods etc.

Specific Items such as bullion, unset precious stones, curios, work of


arts, manuscripts, plans, drawings, securities, obligations or documents,

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stamps, coins or paper money, cheques, books of accounts, computer


system records, explosives.
PERILS COVERED

5.1.2

Fire

Lightning

Explosion / Implosion

Aircraft damage

Riot, Strike, Malicious and Terrorism damage (hereinafter called RSMTD


Perils)

Storm, Tempest, Flood, Inundation, Hurricane, Cyclone, Typhoon and


Tornado.

Impact by any Rail/ Road vehicle or animal

Subsidence / Landslide including rockslide.

Bursting and / or overflowing of water tanks, apparatus.

Leakage form Automatic Sprinkler Installation.

Missile Testing Operation.

Pollution or contamination resulting from any of the above perils

Any insured peril resulting from pollution and contamination.

Bush Fire

BURGLARY POLICY
This policy is designed to cover business premises only like godown, factory,
office etc.
Scope
a. Loss or damage to the property insured by theft following upon actual,
forcible and violent entry into the premises.
b. Damage to the premises following upon entry as above or any attempt
thereat
The indemnity provided is to the extent of the intrinsic value of the property so
lost or damaged, subject to the limit of the sum insured.

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There are three types of policies available :-

5.1.3

Full Value Insurance: The policy must be effected for the full value of the
property to be insured.

First Loss Insurance: In the event of improbability of total loss, proposer can
opt for a percentage of total stocks to be insured

Stock Declaration Policies: These policies are given where large stocks
frequently fluctuate in quantity during the year. The sum insured is fixed at
the maximum value of stocks, which the insured anticipates he will hold at
any one time. A deposit premium of 100% of the annual premium will be paid
at the beginning of the insurance. Monthly declarations of value are to be
sent to the company and the deposit premium will be adjusted at the end of
the policy period based upon the average of the monthly declarations.

MACHINERY BREAKDOWN POLICY


This is a policy, which covers financial loss incurred by the insurant due to loss or
damage to machinery as a result of accidental electrical and mechanical
breakdown. The policy reimburses the insurant for the cost of repairs or
replacement of machinery of a like nature.
It covers all types of industrial machinery like compressors, pumps, turbine etc.
Electrical machines like transformer, electrical motor, generator etc. can be
covered under this policy. The sum insured or value for which the particular
machine is insured should represent the present day purchase value of a similar
new machine including all incidental expenses like custom duties, taxes, excise,
freight, insurance charges, handling charges etc. In case the sum insured under
the policy is less than as per the above requirement the claim will be paid only in
such proportion as the sum insured bears to the current replacement cost of
similar new machinery.
The policy covers all kinds of electrical and mechanical breakdown subject to the
following exclusions:
a. Faulty material/workmanship of the machine
b. Action of centrifugal forces contributing to disruption of the rotating parts
c. Failure of lubrication due to malfunctioning of lubricating oil pumps or its
breakdown.
d. Malfunctioning or failure of safety devices.

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e. Electrical short-circuiting including electrical fire originating from failure of


insulation and or over voltage or under voltage conditions.
f.

Abrupt and sudden stoppage of other connected machinery.

g. Entry of foreign bodies into running machine.


h. Inexperienced operations causing damage due to error of judgment or error
in operation.
Add on covers This policy can be extended to include the following risks on
payment of additional premium.

5.1.4

(i)

Damage to foundation of machinery

(ii)

Damage to oil in electrical apparatus

(iii)

Express freight (excluding air freight), holiday rates, overtime charges

(iv)

Air freight

(v)

Additional custom duty i.e. the additional percentage of duty payable at


the time of reimport for replacement over and above the percentage of
duty included in the original sum insured.

(vi)

Own surrounding property i.e. damage to the insureds own existing


property or property in his custody or control (not included in the sum
insured of the policy) due to any damage to the insured machines which
is covered under the policy.

(vii)

Third party liability i.e. liability falling on the insured for bodily injury to any
other party other than those covered by the policy or for property damage
belonging to such other party.

ELECTRONICS EQUIPMENT POLICY


This is a specially designed policy which covers accidental loss or damage to the
following types of electronic equipment (which should not be portable or mobile).
This policy can be taken by the owner, lessor or hirer of electronic equipment.
(i)

Electronic data processing machine.

(ii)

Telecommunication equipment.

(iii)

Transmitting and receiving installations(including Radio, TV, Cinema


Sound Reproduction and Studio Equipment).

(iv)

Material testing and research equipment.

(v)

Electro-Medical Installations.

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(vi)

Signal and Transmitting units.

(vii)

Office calculators, duplicating machines and Reproduction machines.

(viii)

Control and supervisory units.

The policy covers sudden and unforeseen physical damage including breakdown
to the electronic equipment covered under the policy due to any reason not
specifically excluded. Damage caused by the following perils is covered:
(i)

Smoke, soot, dust, corrosive gases etc.

(ii)

Water and Humidity.

(iii)

Short circuit and Electrical fire risk.

(iv)

Faulty operations, lack of skill.

(v)

Falling object and entry of foreign bodies

(vi)

Fire, lightning, explosion.

(vii)

Riot and strike and malicious damage and terrorism.

(viii)

Theft and burglary.

(ix)

Natural calamities flood, inundation, storm, cyclone and earthquake

(x)

Subsidence, landslide, rockslide.

Loss caused by the following perils are specifically excluded from the scope of
the policy.
(i)

Normal wear and tear and corrosion of parts arising from use and
continuous operation (limited to parts immediately affected, subsequent
damage to other parts of the unit covered).

(ii)

War, wilful acts, gross negligence.

(iii)

Faults for which third party is responsible by law or contract.

(iv)

Failure due to interruption of gas, water or power supply.

(v)

Aesthetic defects.

(vi)

Consequential loss of any kind.

(vii)

Loss to consumables and operating media etc.

The sum insured or value of the policy should be equivalent to the present day
purchase price of a similar new electronic equipment including all incidental
expenses like cost of installation, duty, freight, taxes etc. If the sum insured is

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less than required as stated above then the claim will only be paid in such
proportion as the sum insured bears to the amount required to be insured.
The policy can be extended to include the following risks on payment of
additional premium.
1. Damage to external data media for example tapes, discs etc. as also the cost
of reconstruction of data on this external media caused by a peril covered
under the policy.
2. The additional expenditure incurred due to use of a substitute computer
system as a result of an accidental damage to the computer insured under
the policy and which is covered by the policy.

5.1.5

CONSEQUENTIAL LOSS POLICY


This policy which is also known as Business Interruption Policy or Loss of Profit
Policy covers the expenses incurred for repairing or replacing the damaged
property and the financial loss suffered due to interruption of business
operations whilst the damaged property is being repaired or replaced. This
policy offers a solution by covering profit lost due to reduction in turnover arising
from interruption of business following damage to the property insured and can
be taken only in conjunction with Fire Policy or Machinery Breakdown policy.
The policy covers:

Loss of gross profit

Increased cost of working

The Fire Consequential Loss Policy can also be extended on payment of


additional premium to cover loss of profit to the insured due to:
(i)

Accidental failure of public electricity/gas/water supply

(ii)

Damage to customer's premises due to perils covered under Fire Policy

(iii)

Damage to Supplier's premises due to perils covered under Fire Policy

Selecting the sum insured: The sum insured under Consequential Loss Policy
should represent the gross profit of the indemnity period selected.
The indemnity period is the maximum period required to put the business back
into normal operation after damage to insured property by an insured peril. The
indemnity period could vary from 6 months to 3 years.
Upto an indemnity period of one year , the annual gross profit should be selected
as sum insured. Thereafter the gross profit should be in proportion to the

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indemnity period selected i.e. for 18 months - 1 1/2 times the annual gross profit
for 24 months - 2 times the annual gross profit for 36 months - 3 times the annual
gross profit
The gross profit should represent the net trading profit plus insured standing
charges (fixed charges). The standing charges which are to be insured have to
be specified. Gross profit can be insured on one of the following basis :

5.1.6

i.

Turnover basis

ii.

Output basis

iii.

Difference basis

iv.

Revenue Basis

MARINE CUM ERECTION / STORAGE CUM ERECTION POLICY


This policy is a comprehensive policy covering all physical risks, which a project
is exposed to right from the warehouse of the supplier of equipments - whether
imported or indigenous - to its erection, testing and commissioning at the site.
In case the supplier has arranged transit insurance upto the site, a storage cum
erection policy can be issued limiting coverage to risks that the project is
exposed to at the site only.
In case the policy period exceeds 12 months, the premium can be paid in
quarterly instalments with the first instalment being more by 5% and the last
instalment being paid 6 months before expiry of the policy. For project value
exceeding Rs.1,500 crores specially designed policies are available.
The policy comprises of 2 Sections:

Section I- Material Damage-covering physical loss, damage or destruction of


the property insured by any cause, other than those specifically excluded in
the policy.

Section II-Third Party Liability-covering the legal liability falling on the insured
contractor as a result of bodily injury or property damage belonging to a third
party.

The policy covers all risk of physical loss or damage of insured property other
than those specifically excluded, including: 

marine voyage for imports

offloading / storage at port

inland transit to site

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storage, handling, erection at site

testing and commissioning at site

The main exclusions are :a. loss or damage due to faulty design, defective material or casting, bad
workmanship other than faults in erection. This exclusion is limited to the
items immediately affected and does not apply to any consequential loss to
correctly executed items.
b. cost necessary for rectification or correction of any error during erection
unless resulting in physical loss or damage.
c. loss or damage due to gradual deterioration, atmospheric condition, rusting
etc.
d. loss discovered only at the time of taking inventory.
e. loss arising out of penalty for delay, non-fulfilment of terms of contract.
Add-ons The policy can be extended to cover the following on payment of
additional premium.

clearance and removal of debris

damage to owner's surrounding property

maintenance visit / extended maintenance cover

additional customs duty

civil works

express freight

air freight

deletion of duration clause under marine

This policy can be taken by the principal, contractor or sub-contractor jointly or


separately. The sum insured selected under section I should not be less than the
completely erected value of the property inclusive of estimated freight, customs
duty, erection costs etc.
In case of long term contracts, there is bound to be escalation in prices i.e. prime
cost. The basic policy will pay only as per the original cost and prices. However
escalation clause can be opted for, under which escalation up to 50%, can be
selected to take care of such increase in prices during the policy period.

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The sum insured shall be adjustable on completion of the erection, on the basis
of actual values incurred by the insured in respect of freights, handling charges,
customs dues, cost of erection etc. and premium adjusted accordingly.
The sum insured under section II should represent the, per accident limit (the
maximum legal liability that may fall on the insured as a result of an accident in
the insured's site). The limit per policy period should be fixed taking into account
the maximum number of such accidents, which can reasonably be expected to
occur.
5.1.7

ADVANCED LOSS OF PROFIT / DELAY IN STARTUP POLICY


This policy can be taken in conjunction with the marine cum erection /storage
cum erection policy or a Contractors all risk policy (MCE/SCE or CAR).
The two policies referred above i.e. MCE/SCE or CAR cover only physical
damage to property, which at best, covers the expenses incurred for repairing or
replacing the damaged property. In case of a financial loss suffered due to delay
in commissioning the project (especially when repayment schedules on loans
taken, are linked to the income earned after the scheduled commissioning) a
policy such as the advanced loss of profit /delay in start-up policy can be taken.
The policy insures the loss of anticipated gross profit due to delay in
commissioning of the project, directly and solely resulting from a physical loss or
damage to property insured and payable under a marine -cum- erection policy,
storage-cum -erection policy or contractor's all risk policy.
The Advance Loss of Profit is designed to cover:

Loss

of

Gross

Profit

Net

Profit

Standing

Charges

or

Loss of Gross Earnings = Turnover-Specified Working Expenses


or

Fixed Operation & Management Costs


 Debt Service Charges
 Increased Cost of Working
 Special Expenses e.g. penalties

The policy pays for the actual loss of gross profit incurred during the period of
delay, commencing from the scheduled date of commencement of commercial
operation up to the actual date of commencement of commercial operation

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subject to a time excess and indemnity period selected. The delay, however
should have occurred due to a claim payable under marine -cum- erection policy,
storage-cum -erection policy or contractor's all risk policy.
The policy does not cover delay due to:


Inventory losses

Delay in shipment of supplies

Normal project schedule slippages

Non -availability of funds for repairs/replacement to damaged items

Cancellation of licence or Govt. restrictions etc

Sum Insured
The sum insured should represent the Anticipated Gross Profit (i.e. Net Profit +
Standing Charges) for the Indemnity Period selected (net profit is the business
profit before taxation).
Standing Charges means fixed charges incurred even in the absence of business
activity e.g. Interest Charges, Salary & Wages, Director's fees, O&M costs,
Liquidated Damages.
Indemnity Period should be selected keeping in mind the maximum period
required for re-importing, re-erecting and/or re-testing any part of the project.
5.1.8

BOILER AND PRESSURE PLANT INSURANCE


Boiler and Pressure Plant Insurance Policy covers damage other than by fire:

a. To boilers & pressure vessels caused solely due to explosion or collapse of the
plant during its normal course of working.
b. To Surrounding Property arising due to explosion and collapse of the pressure
plant during its normal course of working (optional on selected limits of
indemnity).
c. Third party legal liability arising due to explosion and collapse of the pressure
plant during its normal course of working (optional on selected limits of
indemnity).
The following extensions can also be opted for:
a.

Express freight, overtime and holiday rates for wages

b.

Airfreight

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c.

Additional customs duty

Basis of Sum Insured - It is a requirement of the policy that the boiler and
pressure plants are covered for their current / present day new replacement
value with a view to avoid under-insurance.
This Policy does not cover:
a. Fire and related perils
b. War & Nuclear perils
c. Overload experiments / tests imposing abnormal conditions
d. Gradually developing defects not necessitating stoppage
e. Normal wear and tear, corrosion not leading to explosion / collapse.
f.

Wilful act / negligence

g. Loss for which manufacturer is responsible


h. Pre-existing defects & faults
i.

Consequential losses

5.2

LIABILITY POLICIES

5.2.1

PUBLIC LIABILITY POLICY


This policy covers the amount, which the insured becomes legally liable to pay as
damages to third parties as a result of accidental death, bodily injury, loss or
damage to the property belonging to a third party. The legal cost and expenses
incurred in defending the case with prior consent of the insurance company are
also payable subject to certain terms and conditions.
More than one unit situated in different locations under a single policy can be
insured.
The policy offers a benefit of Retroactive period on continuous renewal of policy
whereby claims reported in subsequent renewal but pertaining to earlier period
after first inception of the policy, also become payable.
This policy covers the amount, which the insured becomes legally liable to pay as
damages to third parties as a result of accidental death, bodily injury, loss or
damage to the property belonging to a third party. The legal cost and expenses
incurred in defending the case with prior consent of the insurance company are
also payable subject to certain terms and conditions.
The Public Liability Policy can be extended to cover the following risks on
payment of an additional premium.
a. Natural calamities like flood, earthquake etc.

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b. Pollution Risk subject to NOC from Pollution Control Board


c. Transportation Risk
Selecting the sum insured: In Public Liability Policy, the sum insured is referred
to as Limit of Indemnity. This limit is fixed per accident and per policy period,
which is called Any One Accident (AOA) limit and Any One Year (AOY) limit
respectively. The ratio of AOA limit to AOY limit can be chosen from the
following:
a.

1:1

b.

1:2

c.

1:3

d.

1:4

The AOA limit, which is the maximum amount payable for each accident should
be fixed taking into account the nature of activity of the insured and the maximum
number of people who could be affected and maximum property damage that
could occur, in the worst possible accident in the insured's premises.
In the case of Public Liability Insurance Act 1991, the AOA limit should represent
the paid up capital of the company subject to maximum of Rs.5 crores. The AOY
limit is fixed at 3 times the AOA limit (Max.Rs.15 crores).
5.2.2

PRODUCTS LIABILITY POLICY


The policy can be taken by the manufacturer of any product whether it is the final
product or part of the final product.
This policy covers all sums (inclusive of defense costs), which the insurant
becomes legally liable to pay as damages as a consequence of:
a. accidental death/ bodily injury or disease to any third party.
b. accidental damage to property belonging to a third party.
arising out of any defect in the product manufactured by the insurant and
specifically mentioned in the policy after such product has left the insurants
premises.
The policy offers the benefit of retroactive period on continuous renewal of policy
whereby claims reported in subsequent renewal but pertaining to earlier period
after first inception of policy, also become payable.
Scope
The defect in the product may be a manufacturing defect or may even be due to
faulty packaging, delivery specifications or instructions as to use of the product.

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The policy covers the sales turnover of the company- both domestic and/or
exports. The policy is on a claims made basis i.e. the claims must arise and be
made in writing on the insurance company during the policy period.
The policy does not cover any liability for product recall, product guarantee, pure
financial loss such as loss of goodwill or loss of market. The policy also does not
pay for the cost incurred for repairing or reconditioning or modifying the defective
part of the product.
Add on covers
The policy can be extended to cover liability arising out of judgments or
settlements made in countries which operate under the laws of U.S.A or Canada
(which is an exclusion under the policy) by opting for the North American
Jurisdiction Clause.
The policy can also be extended to cover Limited Vendors Liability for named or
unnamed vendors. Limited vendors liability means liability arising out of the sale
and distribution of named insured products by vendors with original warranties
and instructions of use of the product specified by the manufacturers.
Selecting the sum insured - In Product Liability Policy, the sum insured is
referred to as Limit of Indemnity. This limit is fixed per accident and per policy
period, which is called Any One Accident (AOA) limit and Any One Year (AOY)
limit respectively. The ratio of AOA limit to AOY limit can be chosen from the
following:
a.

1:1

b.

1:2

c.

1:3

d.

1:4

The AOA limit, which is the maximum amount payable for each accident should
be fixed taking into account the nature of product covered and the maximum
number of people who could be affected and maximum property damage that
could occur, in the worst possible accident after sale of the product
5.2.3

Directors and Officers Liability Policy


This policy cover is suitable for those Directors and key officers who are in a
decision -making position. These directors and officers in pursuance of their
duties may take some actions, which may be in violation of certain statutes or
Indian Laws.

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Scope This policy provides cover;


1. Against any loss that the Organization may incur, on account of mistaken
actions taken in their individual capacity as Directors and Officers in
pursuance of their duties under Memorandum and Articles of Association.
2. Against loss arising from claims made against them by reason of any
wrongful Act in their Official capacity.
3. Legal costs and expenses incurred with the written consent of the insurers
arising out of prosecution (criminal or otherwise) of any Director / officer and
attendance at any investigation, examination, inquiry or other proceedings by
the authority empowered to do so.
4. Expenses incurred by any shareholder of the Company in pursuance of a
claim against any Director / Officer, which the Company is legally obliged to
pay, pursuant to an order of a Court.
5. Provide indemnity to the estate of, legal heirs or legal representatives of the
Director / officer in the event of the Director / officer becoming insolvent.
Exclusion
1. Any bodily injury, sickness, disease or death of any person or any damage to
tangible property
2. Dishonest, fraudulent, criminal or malicious act.
3. Personal guarantee.
4. Libel and slander
5. Personal injury and damage to property.
6. Pollution damage
7. Directly resulting from goods or products manufactured or sold by the
company
8. Fines, penalties, punitive or exemplary damages.
9. Any circumstances existing prior to inception date of policy
Premium
The premium depends on profile of the client, the Sum Insured selected, present
and past functioning of the company, information in the balance sheet and
annual report, degree of exposure etc.
Special Conditions

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1. Directors and the Company shall give to underwriters immediate notice in


writing of any claim.
2. Directors and the Company shall not disclose to anyone the existence of the
policy without underwrites' consent.
3. Directors of the Company shall not be required to contest any legal
proceedings. Counsel shall advise that such proceedings should be
contested.
4. Underwriters shall not settle any claim without the consent of the Directors or
the Company.
5.2.4

Employers' Liability Policy


This policy covers statutory liability of an employer for the death of or bodily
injuries or occupational diseases sustained by the workmen arising out of and in
course of employment.
Applicability
Any employer whether as a Principal or contractor engaging "workmen" as
defined in WC Act to cover his liability to them under statute and at common law.
Employer can cover Employees who do not qualify as "Workmen" under separate
table
Scope
1. To pay all sums which the insured is legally liable to pay the employees in
respect of personal injury by accident or diseases 'arising out of and in the
course of the employment'
2. Insured's liability arising either under common law or the laws set out in the
schedule Workmen's Compensation Act 1923.
3. Costs or expenses incurred by the insured with the consent of the company,
to defend any claims are paid in addition.
Exclusions
1. Any injury by accident or disease directly attributable to war and nuclear risk
2. Insured's liability to employees of contactors to the insured
3. Any liability of the insured, which attaches by virtue of an agreement.
4. Any compensation for diseases mentioned in Part 'C' of Workmen's
Compensation Act-1923

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Premium
Premium rating is governed by tariff. It depends on the nature of work carried on
by the insured. Tariff prescribes twp forms of insurance
Table-A: Indemnity against legal liability for accident to employees under
(i)

Workmen's Compensation Act 1993

(ii)

Fatal Accident Act 1855

(iii)

Common Law

Table-B: Indemnity against legal liability


(i)

Fatal Accident Act 1855

(ii)

Common Law

Table A policies may be extended to cover insured's liability for contractor's


workmen.
5.2.5

Liability Insurance Policy (Under Public Liability Insurance Act 1991)


This policy covers the statutory liability of insured arising out of accidents
occurring during the currency of the policy due to handling hazardous substances
as provided in the Public Liability Insurance Act 1991 and the Rules framed
there-under.
A person who owns or has control over handling any hazardous substance at the
time of accident and includes:
(i)

in the case of a company, any of its directors, managers, secretaries or


other officers who is directly in charge of, and is responsible to the
company for the conduct of the business of the company.

(ii)

in the case of a firm any of its partners

(iii)

in the case of an association, any of its members,

Exclusions
This Policy does not cover liability:
1. arising out of wilful or intentional non compliance of any statutory provisions,
2. in respect of fines, penalties, punitive and/or exemplary damages,
3. arising under any other legislation except in so for as provided for in Section
8 Sub Section (1) and (2) of the Act,

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4. in respect of damage to property owned, leased or hired or under hire


purchase or on loan to the Insured or otherwise in the Insured Owner's
control, care or custody,
5. directly or indirectly occasioned by happening through or in consequence of
war, invasion, act of foreign enemy, hostilities (whether war be declared or
not), civil war, rebellion, revolution, insurrection or military or usurped power,
6. directly or indirectly caused by or contributed to by; ionising radiation or
contamination by radioactivity from any nuclear fuel or from any nuclear
waste from the combustion of nuclear fuel,
7. the radioactive, toxic, explosive or other hazardous properties of any
explosive nuclear assembly or nuclear component thereof,
Special Conditions
Besides all usual conditions of liability conditions the following condition is
applicableThe Insured Owner shall keep record of annual turnover, and at the time of
renewal of insurance declare such turnover and all other details as may be
required by the Company. The Company shall at all reasonable times have full
rights to call for and examine such records.
5.3

COMMERCIAL POLICIES

5.3.1

Fidelity Guarantee Insurance Policy


The policy covers the employer in respect of any direct financial loss, which he
may suffer as a result of employees dishonesty.
The Company agrees to indemnify the insured against a direct pecuniary loss
sustained by reason of any act of fraud/dishonesty committed
(i)

On or after the date of commencement of this policy

(ii)

During uninterrupted service with the Insured and discovered during the
continuance of this policy or within twelve calendar months of the
expiration thereof

(iii)

In the case of death, dismissal or retirement of the Employee with twelve


calendar months of such death, dismissal or retirement whichever of
these events shall first happen.

Conditions
The liability of the insurer shall not exceed
i.

Appendix - 4

(a) in respect of any employee the sum insured stated against his
name or as declared herein.

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(b) in respect of all claims under this policy, the total sum insured.
ii.

If this policy shall be continued in force for more than one period of indemnity or if
any liability shall exist on the part of the Company under this Policy and also
under any other Policy in respect of fraud or dishonesty of the employee, the
liability of the Company hereunder shall not be accumulated or increased thereby
but the aggregate liability of the Company during any number of periods of
indemnity and for any number of acts of fraud or dishonesty committed by the
employee shall not exceed the sum insured hereunder or the sum insured under
any other such policy as aforesaid whichever is greater.

iii.

The Insurer shall not be liable to pay more than one claim in respect of the action
of any one employee.
Exceptions
The Insurer shall not be liable in respect of losses arising elsewhere than in
India.

5.3.2

Marine Cargo Policy


This policy covers goods, freight and other interests against loss or damage to
goods whilst being transported by rail, road, sea and/or air.
Different policies are available depending on the type of coverage required
ranging from an ALL RISK cover to a restricted FIRE RISK ONLY cover.
This policy is freely assignable and is basically an agreed value policy.
Scope
Transportation of goods can be broadly classified into three categories:
(i)

Inland Transport

(ii)

Import

(iii)

Export

The types of policies issued to cover these transits are:


For Inland Transit
a. Specific Policy - For covering a specific single transit
b. Open Policy -For covering transit of regular consignments over the same
route .The policy can be taken for an amount equivalent to three months
despatches and premium paid in advance. As each consignment is
despatched, a declaration giving details of the despatch including GR/RR No.
is to be sent to the insurer and the sum insured gets reduced by the amount
of the declared despatch. The sum insured can be increased any number of

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times during the policy period of one year; but care should be taken to ensure
that adequate sum insured is available to cover the consignment to be
despatched.
c. Special Declaration Policy - For covering inland transit of goods wherein
the value of goods transported during one year exceeds Rs.2 crores.
Although the premium for the estimated annual turnover [i.e. the estimated
value of goods likely to be transported during the year] has to be paid in
advance, attractive discounts in premium are available.
d. Multi-transit Policy - For covering multiple transits of the same consignment
including intermediate storage and processing. For e.g. covering goods from
raw material supplier's warehouse to final distributors godown of final
product.
For Import/Export
a. Specific Policy - For covering a specific import/export consignment.
b. Open cover - This policy, which is issued for a policy period of one year
indicates the rates, terms and conditions agreed upon by the insured and
insurer to cover the consignments to be imported or exported. A declaration
is to be made to the insurance company as and when a consignment is to be
sent along with the premium at the agreed rate. The insurance company will
then issue a certificate covering the declared consignment.
c. Custom duty cover - This policy covers loss of custom duty paid in case
goods arrive in damaged condition. This policy can be taken even if the
overseas transit has been covered by an insurance company abroad, but it
has to be taken before the goods arrive in India.
Add on covers
Inland transit policies can be extended to cover the following perils on payment of
additional premium:
(i)
(ii)

SRCC - Strike, riot and civil commotion (including terrorist act)


FOB - Where the inland transit is required to be extended to cover the
goods till they are loaded on board the vessel, this extension can be taken.

Export /Import policies can be extended to cover War and /or SRCC perils on
payment of an additional premium.
Who can take the policy
The contract of sale would determine who buys the policy. The most common
contracts are:

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FOB (Free on Board)

C & F (Cost & Freight)

CIF (Cost, Insurance & Freight)

In FOB AND C&F contracts, the buyer is responsible for insurance. Whereas in
CIF contracts the seller is responsible for insurance from his own premises to
that of the purchaser.
How to select the sum insured
The sum insured or value of the policy would depend upon the type of contract.
Usually, in addition to the contract value 10/15% is added to take care of
incidental cost
5.4

PERSONAL POLICIES

5.4.1

Personal Accident Policy


This policy offers compensation in case of death or bodily injury to the insured
person, directly and solely as a result of an accident, by external, visible and
violent means.
The policy operates worldwide and is a 24 hours cover.
Different coverages are available ranging from a restricted cover of death only, to
a comprehensive cover covering death, permanent disablements and temporary
total disablements. Group personal accident policies are also available for
specified groups with a discount in premium depending upon the size of the
group.
This policy is basically designed to offer some sort of compensation to the
insured person who suffers bodily injury solely as a result of an accident, which is
external, violent and visible. Hence death or injury due to any illness or disease is
not covered by the policy.
Add-on covers
Individual and group personal accident policies can be extended to cover medical
expenses incurred in the treatment of an accident covered under the policy,
subject to a limit of 10% of the sum insured or 40% of the death / disability
compensation claim payable, on payment of additional premium.
The policy issued to Indian personnel working in foreign countries on civilian duty
can be extended to cover War risk on payment of additional premium.
The policy can also be restricted to cover Personal Accident risk during duty
hours only or during off-duty hours only with discount in premium. It is also
possible to issue group P.A. policy excluding the death benefit subject to a group
life policy covering death benefit being taken for the same group of persons for
the same policy period.

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5.4.2

Overseas Mediclaim Policy


This insurance covers Medical Expenses whilst travelling abroad for business /
holiday / employment / studies.
Premium is payable in Rupees and Claims are settled abroad in foreign currency.
Policy is available for frequent corporate travellers.
Medical expenses incurred by the insured persons, outside India as a direct
result of bodily injuries caused or sickness or disease contracted are covered.
Several Plans are available under the policy:
PLAN A-1) For travel to countries excluding USA & Canada for business and
holiday limited to USD 50,000.
PLAN-A-2) Same as (A-1) above except that benefits stand increased to USD
250,000.
PLAN B-1) For travel worldwide including USA & Canada for business and
holiday limited to USD 100,000.
PLAN B-2) Same as (B-1) above except that benefits stand increased to USD
5,00,000.
PLAN C) For travel to countries excluding USA & Canada for employment and
studies limited to USD 150,000.
PLAN D) For travel worldwide including USA & Canada for employment and
studies limited to USD 150,000.
PLAN E-1) For travel worldwide including USA & Canada for corporate frequent
travellers limited to USD 1,00,000.
PLAN-E-2) Same as (E-1) above except that benefits stand increased to USD
5,00,000.
CFT Cover is available for Executives of Corporate clients and Partners of
registered firms annually subject to the duration of any one trip not exceeding 60
days.
Additional add-on benefits: Besides the above additional add-on benefits are
available under Business & Holiday and CFT cover (Except Plan C and Plan D)
1. Personal Accident
2. Loss of checked in Baggage
3. Delay of checked in Baggage
4. Loss of passport

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5. Personal Liability
Premium : The premium will depends on Age-band, Trip-band and Country of
visits.
Coverage: Initially cover up to 180 days is provided under Business & Holiday
Plan Extension is allowed on original policy for further period of 180 days subject
to declaration of good health.
Eligibility
Age Limit: 6 months and above up to 70 years.
Policy is to be taken prior to departure from India.
Travellers over 60 years of age and for those travelling to USA & Canada over 40
years the following Medical reports (from an MD Cardiologist) need to be
submitted along with the proposal form:
1. ECG
2. Fasting Blood Sugar or Urine Strip test
These reports are required if the travel period exceeds 60 days and above.
In case of travellers unable to submit the above Medical reports cover stands
restricted to USD 10,000.
Major Exclusion
All pre-existing disease/illnesses are not covered (known and unknown).
Travelling against Medical advice or for Medical treatment including routine
check-up.
First USD 100 of all claims are to be borne by the traveller.
5.4.3

Motor Policy
This policy covers all types of vehicles plying on public roads such as:

Scooters &Motorcycles

Private cars

All types of commercial vehicles

Motor Trade (vehicles in show rooms and garages)

As per the Motor Vehicles Act, 1988 it is mandatory for every owner of a vehicle
plying on public roads, to take an insurance policy, to cover the amount, which
the owner becomes legally liable to pay as damages to third parties as a result of

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accidental death, bodily injury or damage to property. A Certificate of Insurance


must be carried in the vehicle as a proof of such insurance.
Two types of covers are available:
1. Liability only policy. This covers third party liability for bodily injury liability
and / or death and property damage. Personal Accident cover for Ownerdriver is also included.
2. Package policy. This cover loss or damage to the vehicle insured in addition
to (1) above.
No- claim discounts are available on renewal of policy, ranging from 20% to 50%,
depending upon the type of vehicle and the number of years for which no claim
has been made.
Add on covers
The policy can be extended to cover the following risks on payment of additional
premium:
1. Loss or damage to accessories fitted in the vehicle such as stereos, fans, airconditioners etc.
2. Personal accident cover under private car policies for:
 passengers
 paid driver
3. Legal liability to employees.
4. Legal liability to non-fare paying passengers in commercial vehicles.
Selecting the sum insured
The sum insured of a vehicle in a Motor Policy is referred to as the I.D.V., or the
Insured's Declared Value.
In case of theft of vehicle or if the vehicle is totally damaged and is beyond
repairs in an accident, the claim amount payable will be determined on the basis
of the IDV. The IDV of the vehicle is to be fixed on the basis of manufacturer's
listed selling price of the brand and model of the vehicle proposed for insurance
at the commencement of insurance / renewal and adjusted for depreciation as
per schedule.
IDV of vehicle, which is beyond 5 years of age and of obsolete models of the
vehicles (i.e. models which the manufacturers have discontinued to manufacture)
is to be determined on the basis of an understanding between insurer and
insured.

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5.4.4

Money Insurance
Money Insurance policy provides cover for loss of money in transit between the
insured's premises and bank or post office, or other specified places occasioned
by robbery, theft or any other fortuitous cause.
The policy also covers loss by burglary or housebreaking whilst money is
retained at Insured's premises in safe(s) or strong room
Section I: Covers money in transit under the following heads: Cash, Bank
Drafts, Currency Notes, Treasury Notes, Cheques, Postal Orders and current
Postage Stamps.
Section II: Covers money in safe / on premises
Basis of Sum Insured
Two amounts are specified in the policy:

Limits of liability for any one loss (i.e. maximum liability of the Company)

Estimated amount in transit during the year for the purpose of premium
computation.

Extensions
This policy can be extended to include the risk of infidelity of the employees,
terrorism and disbursement risk.
Exclusions
1. Shortage due to error or omission
2. Losses due to the fraud/dishonesty of the employee of the insured.
3. Losses which are covered by other policies
5.4.5

Mobile/Cellular Phone Insurance


The policy for mobile phones provides cover against
i.

Fire.

ii.

Riot, strike, malicious damage and terrorist activities.

iii.

Theft.

iv.

Accident.

v.

Fortuitous circumstances.

Exclusions
Exclusions under the mobile phone insurance policy are


Appendix - 4

Mysterious disappearance.

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INTERNAL AUDIT MANUAL

Theft from unattended vehicles, except from fully enclosed car that is
securely locked.

Theft, loss or damage during the hire or loan to a third party.

Mechanical and electronic breakdown or derangement.

Overloading and experimentation involving imposition of any abnormal


conditions.

Damage by wear and tear, vermin, atmospheric or climatic condition or


gradual deterioration, inherent defect or from any process of cleaning,
repairing or maintenance.

Loss or damage due to war or nuclear perils, loss by water or from any
water borne craft.

Intentional or wilful act of the insured party.

Compensation
The insurance cover provides compensation equivalent to the the cost of
replacement of the instrument by a new instrument of the same specification and
same capacity, including all taxes and duties.
6.

KEY CONTROLS & MAIN TASKS

6.1

Internal audit while making an assessment of the adequacy of insurance coverage


at various offices and plants of NFL for all insurable-type risks will
consider/ascertain;


whether existing insurance limits are adequate for worst case loss,

the seamless integration of various policies to the extent practicable,

whether other risks not presently covered need to be brought under


insurance cover.

6.2

For this purpose a line by line evaluation of each existing insurance policy wording,
examination of each exclusion, condition, restriction, basis of loss determination
and settlement and insuring agreement for its potential effect shall be conducted.
In addition whether all commercially available coverage extensions are
incorporated shall also be evaluated.

6.3

Determining whether property and business interruption values (where


covered) are adequate: A determination shall also be made whether property and

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INTERNAL AUDIT MANUAL

business interruption values are adequate, but not excessive along with an
evaluation of insurance rates for competitiveness, against both prevailing market
rates and benchmarked peer group rates.

6.4

NFL shall proactively manage insurable risks and shall undertake an assessment
as described above once every two years or at lesser intervals if circumstances so
warrant. However Insured values shall be reviewed annually with the insurance
carrier to avoid under insurance.

6.5

It shall be insured there is no break in insurance and that all renewals are promptly
effected.

6.6

Buildings shall be insured on a replacement cost basis subject to the terms,


conditions, and exclusions of the policy.

6.7

Insurance coverage shall be placed with commercial insurers (public and private)
who have strong financial ratings and a good track record for settlement of claims.

6.8

Competitive bids shall be used in the procurement of insurance when the premium
cost is estimated to exceed any Rupee limits that may be set by the management
and revised from time to time.

6.9

Making the best possible arrangements ahead of time so that serious financial
harm does not result when a loss occurs through unforeseen, unintended or
accidental loss: Apart from a periodic review of existing policies and as a part of
the risk management process the periodic assessment shall also take into account
the need to control other insurable risks (hitherto not under coverage). Whether the
best possible arrangements are made ahead of time so that serious financial harm
does not result when a loss occurs through unforeseen, unintended or accidental loss

6.10 INSURANCE COST CONTROL


The following steps shall be continually taken to control insurance

costs.

6.10.1 Minimize incidence of premium: Through the setting of premiums and


coverage conditions, insurance markets sometimes induce improved
safety measures and offer effective protection against the financial
consequences of such accidents. NFL will take all necessary steps to
comply with changing requirements of insurers in order to negotiate
reductions in premiums in future.
6.10.2 Loss control measures: The best way is by preventing or controlling
losses. NFL shall reduce insurance premiums by stepping up effective
loss control measures to cut down on claims

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6.10.3 Examining scope for increasing deductibles: NFL may also increase
deductibles in future to reduce premiums by considering adoption of risk
retention or self-insurance in appropriate cases. With an excellent loss
record, for instance, it may be possible to increase deductibles and
thereby take on greater risk.
6.10.4 Considering multi-year policies: A potential cost-saving measure is a
multi-year policy, in which the premium is set for several years, instead of
one. This option, though not widely available can allow for NFL to plan on
a set premium for a number of years. The possibility of obtaining
insurance cover on this basis for some of the policies can be explored.
6.10.5 Claims Management: The company should comply at all times with
requirements of insurers to ensure that claims are promptly and
adequately settled. Any special requirements stated in the policies shall
be documented and circulated to all concerned departments to ensure
compliance with the policy.

6.11

GUIDELINES FOR MANAGEMENT OF INSURABLE RISKS


The following insurance risk management guidelines shall be considered while
evaluating risk in the case of insurance.
6.11.1 Identify Risk and probability of risk: Before making a determination of the
best way to handle a risk in a given situation, it would be necessary to
identify risk probability and severity by:




Determining what exposures to loss exist;


Determining the seriousness of exposures; and
Developing a way of minimizing the effect of the loss exposure.

The goal here of the study shall be to evaluate whether the best possible
arrangements are made ahead of time so that serious financial harm does
not result when a loss occurs through unforeseen, unintended or accidental
loss.
6.11.2 The risk management process and practices shall be evaluated by
considering whether the following steps were and remain in place for
identification of risks.
I. Identification of the loss and evaluation of the exposure and
elimination of the severity and frequency;
II. Selection the most economical way of handling the risk;
III. Formulation of a risk management plan; and
IV. Revision and monitoring the risk management plan.
I.

Appendix - 4

Identification of the loss and loss exposures

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Potential property losses include direct and indirect losses; potential liability
losses are those associated with torts or, to a much lesser extent, breach of
contract.
The inventory of all owned real and personal property should be reviewed
along with value to identify the possible property loss exposures that should
be addressed. The possible causes of losses would take into account both
direct physical damage as well as indirect loss. There would also be liability
loss exposures (casualty loss, liability loss (civil/contractual and criminal) in
addition to property loss exposures, which may need to be addressed.
Risks identified should be broken down into intolerable risks, difficult to
tolerate and tolerable risks. From this estimates of both the maximum
possible loss and the maximum probable loss NFL faces can be drawn.
The frequency and severity of loss exposures under the different
insurance categories shall be taken into account to assess how best to
deal with property and liability loss exposures.
II.

Selection of the most economical way of handling the risk


Techniques would include avoidance, retention, loss control, non-insurance
transfer and insurance or self-insurance. When considering which of the
risk management techniques to implement, the following would be
considered;


The possible benefits of taking a risk must be reasonably related to the


possible costs; and

Potential for reducing or preventing the loss through effective loss


control programs.

Based on a consideration of the above as a part of the risk management


programme it is to be assessed whether it is best to reduce, eliminate or
transfer the risk.
III.

Appendix - 4

Implementing a Risk Management Plan


The implementation of the risk management plan shall lead to the
purchasing of insurance coverage the objective being to purchase policies
that will provide the most comprehensive coverage at the most reasonable
cost. Insurance contracts may be one of three types:
i.

primary insurance required by law (e.g., automobile third party


liability insurance) or by contract,

ii.

desirable insurance that provides protection against losses that


could financially harm NFL but that would not completely destroy its
finances, and

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INTERNAL AUDIT MANUAL

iii.

IV

Appendix - 4

catastrophic insurance that provides protection against losses that


could financially destroy NFL (e.g., fire, flood, earthquake and
personal umbrella liability insurance provide protection against
devastating losses).

Monitoring of the Plan


The final step in the risk management process involves a well-planned
program for monitoring and updating the original plan. This consists of
regularly identifying any changes in the loss exposures, net worth, ability to
personally bear financial losses and so forth. All of these are very important
considerations for NFL. Risk management as a process has grown out of
businesses' insurance management, but insurance is hardly the sole
method of treating risk. There are various alternative methods i.e. risks
retention, self-insurance, improving loss prevention measures etc. that may
be considered.

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APPENDIX 5

COMPANIES (AUDITORS REPORT) ORDER 2003

1.

Short title, application and commencement.

(1)

This order may be called the Companies (Auditors Report) Order, 2003.

(2)

It shall apply to every company including a foreign company as defined in section


591 of the Act, except the following:(i)

a Banking company as defined in clause (c) of section 5 of the Banking


Regulation Act, 1949 (10 of 1949);

(ii)

an insurance company as defined in clause (21) of section 2 of the Act;

(iii)

a company licensed to operate under section 25 of the Act; and

(iv)
a private limited company with a paid up capital and reserves not more
than fifty lakh rupees and has not accepted any public deposit and does not have
loan outstanding ten lakh rupees or more from any bank or financial institution
and does not have a turnover exceeding five crore rupees.
(3)

It shall come into force on the 1st day of July, 2003.

2.

Definitions
In this Order, unless the context otherwise requires,(a)

Act means the Companies Act, 1956 (1 of 1956);

(b)

chit fund company, nidhi company or mutual benefit company means


a company engaged in the business of managing, conducting or
supervising as a foreman or agent of any transaction or arrangement by
which it enters into an agreement with a number of subscribers that every
one of them shall subscribe to a certain sum of instalments for a definite
period and that each subscriber, in his turn, as determined by lot or by
auction or by tender or in such other manner as may be provided for in
the agreement, shall be entitled to a prize amount, and includes
companies whose principal business is accepting fixed deposits from, and
lending money to, members;

(c)

finance company means a company engaged in the business of


financing, whether by making loans or advances or otherwise, of any

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INTERNAL AUDIT MANUAL

industry, commerce or agriculture and includes any company engaged in


the business of hire-purchase, lease financing and financing of housing;
(d)

investment company means a company engaged in the business of


acquisition and holding of, or dealing in, shares, stocks, bonds,
debentures, debenture stocks, including securities issued by the Central
or any State Government or by any local authority, or in other marketable
securities of a like nature;

(e)

manufacturing company means a company engaged in any


manufacturing process as defined in the Factories Act, 1948 (63 of 1948);

(f)

mining company means a company owning a mine, and includes a


company which carries on the business of a mine either as a lessee or
occupier thereof;

(g)

processing company means a company engaged in the business of


processing materials with a view to their use, a sale, delivery or disposal;

(h)

service company means a company engaged in the business of


supplying, providing, maintaining and operating any services, facilities,
conveniences, bureaux and the like for the benefit of others;

(i)

trading company means a company engaged in the business of buying


and selling goods.

3.

Auditors report to contain matters specified in paragraphs 4 and 5. Every


report made by the auditor under section 227 of Act, on the accounts of every
company examined by him to which this Order applies for every financial year
ending on any day on or after the commencement of this Order, shall contain the
matters specified in paragraphs 4 and 5.

4.

Matters to be included in the auditors report. The auditors report on the


account of a company to which this Order applies shall include a statement on
the following matters, namely :(i)
(a)
whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of fixed assets;
(b) whether these fixed assets have been physically verified by the
management at reasonable intervals; whether any material discrepancies were
noticed on such verification and if so, whether the same have been properly dealt
with in the books of account;
(c) if a substantial part of fixed assets have been disposed off during the
year, whether it has affected the going concern;
(ii)

(a)

whether physical verification of inventory has been conducted at

reasonable intervals by the management;


(b)

Appendix - 5

are the procedures of physical verification of inventory followed by


the management reasonable and adequate in relation to the size
of the company and the nature of its business. If not, the
inadequacies in such procedures should be reported;

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(c)

(iii)

whether the company is maintaining proper records of inventory


and whether any material discrepancies were noticed on physical
verification and if so, whether the same have been properly dealt
with in the books of account;

(a)
has the company either granted or taken any loans, secured or
unsecured to/from companies, firms or other parties covered in the
register maintained under section 301 of the Act. If so, give the number of
parties and amount involved in the transactions.
(b) whether the rate of interest and other terms and conditions of loans
given or taken by the company, secured or unsecured, are prima facie
prejudicial to the interest of the company;
(c)
whether payment of the principal amount and interest are also
regular;
(d)
if overdue amount is more than one lakh, whether reasonable
steps have been taken by the company for recovery/payment of the
principal and interest;

(iv)

is there an adequate internal control procedure commensurate with the


size of the company and the nature of its business, for the purchase of
inventory and fixed assets and for the sale of goods. Whether there is a
continuing failure to correct major weaknesses in internal control;

(v)

(a)
whether transactions that need to be entered into a register in
pursuance of section 301 of the Act have been so entered;
(b)
whether each of these transactions have been made at prices
which are reasonable having regard to the prevailing market prices at the
relevant time;
(This information is required only in case of transactions exceeding the
value of five lakh rupees in respect of any party and in any one financial
year).

(vi)

in case the company has accepted deposits from the public, whether the
directives issued by the Reserve Bank of India and the provisions of
sections 58A and 58AA of the Act and the rules framed there under,
where applicable, have been complied with. If not, the nature of
contraventions should be stated; If an order has been passed by
Company Law Board whether the same has been complied with or not?

(vii)

in the case of listed companies and/or other companies having a paid-up


capital and reserves exceeding Rs.50 lakhs as at the commencement of
the financial year concerned, or having an average annual turnover
exceeding five crore rupees for a period of three consecutive financial
years immediately preceding the financial year concerned, whether the
company has an internal audit system commensurate with its size and
nature of its business;

Appendix - 5

A. 43

INTERNAL AUDIT MANUAL

(viii)

where maintenance of cost records has been prescribed by the Central


Government under clause (d) of sub-section (1) of section 209 of the Act,
whether such accounts and records have been made and maintained;

(ix)

(a) is the company regular in depositing undisputed statutory dues


including Provident Fund, Investor Education and Protection Fund,
Employees State Insurance, Income-tax, Sales-tax, Wealth Tax, Custom
Duty, Excise Duty, cess and any other statutory dues with the appropriate
authorities and if not, the extent of the arrears of outstanding statutory
dues as at the last day of the financial year concerned for a period of
more than six months from the date they became payable, shall be
indicated by the auditor.
(b)
in case dues of sales tax/income tax/custom tax/wealth tax/excise
duty/cess have not been deposited on account of any dispute, then the
amounts involved and the forum where dispute is pending may please be
mentioned.
(A mere representation to the Department shall not constitute the
dispute).

(x)

whether in case of a company which has been registered for a period not less
than five years, its accumulated losses at the end of the financial year are not
less than fifty per cent of its net worth and whether it has incurred cash losses in
such financial year and in the financial year immediately preceding such financial
year also;

(xi)

whether the company has defaulted in repayment of dues to a financial institution


or bank or debenture holders? If yes, the period and amount of default to be
reported;

(xii)

whether adequate documents and records are maintained in cases where the
company has granted loans and advances on the basis of security by way of
pledge of shares, debentures and other securities; If not, the deficiencies to be
pointed out.

(xiii)

whether the provisions of any special statute applicable to chit fund have been
duly complied with? In respect of nidhi/ mutual benefit fund/societies;
(a)

whether the net-owned funds to deposit liability ratio is more than 1:20 as
on the date of balance sheet;

(b)

whether the company has complied with the prudential norms on income
recognition and provisioning against sub-standard/default/loss assets;

(c)

whether the company has adequate procedures for appraisal of credit


proposals/requests, assessment of credit needs and repayment capacity
of the borrowers;

Appendix - 5

A. 44

INTERNAL AUDIT MANUAL

(d)

whether the repayment schedule of various loans granted by the nidhi is


based on the repayment capacity of the borrower and would be
conducive to recovery of the loan amount;

(xiv)

if the company is dealing or trading in shares, securities, debentures and other


investments, whether proper records have been maintained of the transactions
and contracts and whether timely entries have been made therein; also whether
the shares, securities, debentures and other securities have been held by the
company, in its own name except to the extent of the exemption, if any, granted
under section 49 of the Act;

(xv)

whether the company has given any guarantee for loans taken by others from
bank or financial institutions, the terms and conditions whereof are prejudicial to
the interest of the company;

(xvi)

whether term loans were applied for the purpose for which the loans were
obtained;

(xvii)

whether the funds raised on short-term basis have been used for long term
investment and vice versa; If yes, the nature and amount is to be indicated;

(xviii) whether the company has made any preferential allotment of shares to parties
and companies covered in the Register maintained under section 301 of the Act
and if so whether the price at which shares have been issued is prejudicial to the
interest of the company;
(xix)

whether securities have been created in respect of debentures issued?

(xx)

whether the management has disclosed on the end use of money


public issues and the same has been verified;

(xxi)

whether any fraud on or by the company has been noticed or reported during the
year; If yes, the nature and the amount involved is to be indicated.

5.

Reasons to be stated for unfavourable or qualified answers Where, in the


auditors report, the answer to any of the questions referred to in paragraph 4 is
unfavourable or qualified, the auditors report shall also state the reasons for
such unfavourable or qualified answer, as the case may be. Where the auditor is
unable to express any opinion in answer to a particular question, his report shall
indicate such fact together with the reasons why it is not possible for him to give
an answer to such question.

Appendix - 5

raised

A. 45

by

INTERNAL AUDIT MANUAL

APPENDIX 6

NFL RISK MANAGEMENT POLICY

Long Term implies if the problem persists for longer duration, becomes repetitive or severity increases
NATURE OF
RISK
(GRADING)
A. FEED / FUEL RISK
1. Availability High impact
of
Low
a)
Fuel
likelihood
b)
Coal
TYPE OF
RISK

Appendix - 6

INDICATOR
(Trigger)
Average receipt of
fuel, less than the
requirement OR
reducing Fuel /
Oil/coal stock
(gradually/suddenly)
and the usable Fuel
oil /coal stock
position less than 7
days of full lad
requirement of Plant
for a consecutive

MITIGATION MEASURES
SHORT TERM

LONG TERM

Taking up the issue


with Oil Co. / Coal
Co./ Zonal Railways,
arranging additional
fuel oil / coal through
alternate
arrangements
including diversion of
rakes, etc.

Taking up the issue with


Ministry of Petroleum / Coal/
Suppliers / Railways for
arranging additional Oil/Coal
through linkages/swapping of
sources Diversion of rakes,
Imports, etc.
Some of the major alternative
options for long term solutions
may be as follows:

PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE

Daily reporting
is already in
vogue.

Unit
Head/
ED(P&M)

Special report
by respective
Unit head, in
case of shorter
suppliers or
lesser tocks.

A. 46

INTERNAL AUDIT MANUAL

TYPE OF
RISK

c) Gas (NG /
RLNG)

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)
period of 5 days.

MITIGATION MEASURES

High Impact
Low
Likelihood

Gas receipt less than


contracted quantity

SHORT TERM

Appendix - 6

LONG TERM

Ministry to be
approached for long term
linkages backed by
enforceable FSA.

Captive coal
mining, which may also be
considered through
integrated Projects.

Initiate action
for alternate source of
supply.

Regular follow-up 
with the gas
suppliers and
resolution of
operational
problems at their
end, which may

eventually affect
the suppliers.
Arranging for
appropriate
interventions from
Government.
Identify Potential

Taking up the issue with


DoF / Ministry of
Petroleum & Natural Gas
(MPO & NG involving
Policy issues
Implement schemes for
reduction in energy

PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE

Daily reporting
is already in
vogue and
when plant
availability is
less than 80%
on account of
shortage.
Special report
by respective
Unit head.

Unit
Head/ED
(Tech)

A. 47

INTERNAL AUDIT MANUAL

TYPE OF
RISK

Lining up of
Contracts for
i) Fuel Oil

ii) NG / LNG

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)

MITIGATION MEASURES
SHORT TERM
Natural Gas and
RLNG suppliers,
interested in gas
supplies to NFL
for gas tie ups.

LONG TERM

High impact
low
likelihood.

M/s IOC have


assured to maintain
suppliers till the year
2010. NFL is likely to
change over of
feedstock from FO to
LNG in 3 FO as feed
stock exists.
Extension of existing
contracts for
NG/LNG

High Impact
High
Likelihood

Appendix - 6

Existing Contract is
valid up to Feb 2008.
There is likelihood of
diversion of FO for
hydro cracking by
refineries.

Availability of NG is
shrinking gradually.
LNG is not likely to
be adequate to meet
complete demand and
also its prices are
apprehended to go
high.
Further existing
contracts are valid as
follows :
NG-PMT: 31.3.2006




The action plan for long


term requirement of FO to
be drawn based on
viability of feed stock
change over.
Alternate sources of FO to
be explored and kept
ready.
Explore alternate sources of
gas.
Exploring possibility of
participation in LNG value
chain both domestic and
overseas.
Attempt to acquire acreage
in gas/oil filed by way of
participation in bidding for
exploration of oil and
Natural gas blocks both
domestic and overseas.

PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE

Generation of
status report on
Quarterly basis

ED(Tech)
ED(P&M)
CGM(F&
A)

Generation of
status report on
Quarterly basis

ED(Tech)
ED(P&M)
CGM(F&
A)

A. 48

INTERNAL AUDIT MANUAL

TYPE OF
RISK

2.Quality
a) Fuel oil

b) Coal

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)
NG-APM: 31.12.2007
RLNG : 31.12.2008

MITIGATION MEASURES
SHORT TERM

LONG TERM

High Impact
Low
Likelihood

Take up the issue


with supplier for
improvement in
quality

Attempt to arrange for


alternate suppliers

Low Impact
High
Likelihood

Variation in Analysis
w.r.t. critical
parameters as per
contract

3. Fuel pricing
a) Coal

Low Impact
Low
Likelihood

Appendix - 6

Lower grade of
coal received from
colliery
Presence of stones
in coal rake.

Increase in Average
fuel cost >8% on
annualized basis.

Depute own
personnel at point
of loading.
Contest with
collieries for any
variation in
analysis.

To work out actual


impact and find out
measures to
neutralize it.

Take up the matter with


DoF / Ministry of coal for
remedial actions
Alternate arrangements for
procurement of imported
coal

Taking up with DoF/


Ministry of
Petroleum/Coal.
Lining up of Fuel Supply

PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE

Daily reporting
is already in
vogue.

Unit head
/
ED(P&M)

Immediate- As
and when
significant
deviation is
noticed.
Daily reporting
is already in
vogue.

Unit head
/
ED(P&M)

Immediate- As
and when
significant
deviation is
noticed.
Quarterly
review or
whenever price
is revised

Unit head
/
ED(P&M)
/CGM

A. 49

INTERNAL AUDIT MANUAL

TYPE OF
RISK

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)

b) Fuel Oil

Low impact
high
likelihood

Increase in Average
fuel cost> 8% on
annualized basis.

c) Gas Price

Low impact
high
likelihood

Revision in gas prices


>8% on annualized
basis.

Appendix - 6

MITIGATION MEASURES
SHORT TERM

LONG TERM
Agreements, which shall
provide for appropriate
mechanism in order to cap
any arbitrary increase in
price.
To work out actual
 Taking up with DoF/
impact and find out
Ministry of
measures to
Petroleum/Coal.
neutralize it.
 Lining up of Fuel Supply
Agreements, which shall
provide for appropriate
mechanism in order to cap
any arbitrary increase in
price.
 Identify Potential
 Appropriately taking up
Natural Gas and
the issue with
RLNG suppliers
suppliers/DoF/MOP&NG.
 Lobbying for vesting the
at affordable
Regulator with the powers
prices
to delineate the principles
 Arranging for
appropriate need
of gas pricing. Exploring
possibility of participation
based
interventions from
in LNG value chain both
domestic and overseas.
governments
lobbying for
containment in

PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE
(F&A)

Quarterly OR
whenever price
of gas is
revised.

Unit
Head/ED
(Tech)

A. 50

INTERNAL AUDIT MANUAL

TYPE OF
RISK

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)

MITIGATION MEASURES
SHORT TERM
price hike

PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE

Appropriate spares
planning and procurement.
Ensuring that critical
spares are always in stock;
Predictive maintenance.
Common Inventory control
of all Units to enable inter
unit use in case of
emergency
Understanding with other
companies for exchange of
similar spares during
exigencies.

Quarterly

Unit
Heads/
ED (Tech.)

Procurement and
replacement with new
generation instruments in
phased manner.
Discussion with technology
suppliers for Feasibility of
technology upgradation

Monthly
review. Critical
areas to be
identified and
reported
separately.

Unit
Heads/
ED (Tech.)

Quarterly

G.M.

LONG TERM

B) OPERATION RISKS
1. Machine /
System break
down &
spares
availability

high impact
high
likelihood

Loss of production
Increased energy

Planned
Preventive
maintenance.
Equipment health
assessment.
Plan for
restoration of
Plant operation.
Maintaining
Spares in
adequate quantity
and proper
quality

i)Regular upgradation




2.
Obsolescence
of Instruments
technology
etc.

High Impact
High
Likelihood

3. Labour

High Risk
Low

i) Loss of production
ii) Increased energy





Appendix - 6

1. Employees unrest.

Dialogue with

Proper monitoring at

Immediately
AS and when
breakdown
occurs

A. 51

INTERNAL AUDIT MANUAL

TYPE OF
RISK

C) Utilities
1. Water
availability

2. Interruption
in Power
supply

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)
Low
2. Recourse to legal
Likelihood
remedies

High impact
Low
Likelihood

High Impact
Low
Likelihood




Reduced receipt.
Low reservoir
level

MITIGATION MEASURES

RESPON
SIBILITY
CENTRE
(HR) I/c
and Unit
Head

Unit
Heads/E
D (Tech)

SHORT TERM
employees, their
union/association,
persuasion and
motivation

LONG TERM
Corporate and Unit level by a
professional group.

i) Keep emergency
water conservation
plan ready.

Improved Re-circulation
Capacity enhancement of
Water storage.
Take up the matter with state
irrigation department

Daily reporting
is already in
vogue.

Increase dependence on
captive generation by
installing more systems than
required.
Explore possibility of Power
sale from surplus capacities
during normal running that
can be consumed internally as
and when required.

Daily

Plant interruption due


to power failure from
state grid

Appendix - 6

PERIODICITY
OF
REPORTING

Provide protection
relays
Ensure smooth
operation/change
over of captive
power
Implement Load
management
system

Immediate As
and when
significant
reduction in
water level in
reservoir.
Unit
Heads/E
D (Tech)

A. 52

INTERNAL AUDIT MANUAL

NATURE OF
RISK
(GRADING)
C. ENVIRONMENTAL RISKS
Environmental High Impact
& Pollution
Low
Likelihood
Control
Regulations,
etc.
TYPE OF
RISK

INDICATOR
(Trigger)
Pollutant level
exceeding the
specified limits

MITIGATION MEASURES
SHORT TERM


PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE

Sophisticated pollution
control equipment to be
installed so as to keep the
pollution under the
prescribed standards.
Before implementation of a
new scheme, EIA must be
conducted.
Mutual assistance
agreement with
neighbouring factories.

Regular
monitoring is
carried on &
reported
monthly
Immediate
reporting as
and when the
pollutant level
/ flow
increases.

Unit
Heads/E
D (Tech.)

Tightening of QR, such that


Suppliers/Agencies with
negative net worth to be
disqualified.
Contractors, performance
evaluation system to be
followed.

Adequate
system to be
developed for
regular
monitoring,
reporting and
control.

Concerne
d Project
Team
/Unit
Head/ED
(P&M)

LONG TERM

Continuous
control,
monitoring and
reporting system
to be developed
Action to be based
on deviation in
quality and
quantity of
pollutant at site.
Onsite /offsite
disaster
management plan
to be made ready
in case of any
exigency

Continuous
monitoring
&follow-up with
all concerned
agencies.
Constitution of
Task Force for

D. PROJECT IMPLEMENTATION RISKS


1. Suppliers /
Agencies not
meeting the
project
schedules

High Impact
Low
Likelihood

Appendix - 6

Delay in Suppliers /
inadequate progress
likely to cause
slippages in schedules
Stoppage of work at
site/suppliers
workshop.

A. 53

INTERNAL AUDIT MANUAL

TYPE OF
RISK

2. Manpower
management

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)
Non-payment/delay
in payment to subSupplier

Low Impact
Low
Likelihood

3.
a)Technologica
l Changes
Availability

High Impact
Low
Likelihood

Appendix - 6


i

Deployment of
inadequate
manpower by
Consultant,
Owner or
Contractor.
Slippages in
various
milestones.
Slowdown of
work.
Strike.
Sudden
changes in
availability of feed
stock necessitating

MITIGATION MEASURES
SHORT TERM
expediting at
vendors shop,
port/customs
clearance,
transportation etc.
 Taking up the
matter with top
management of
concerned
agencies
Dialogue with
concerned agencies as
required on case-tocase basis.

LONG TERM
 Putting defaulting agencies
on holiday.
 Invoking Risks and Costs
clauses like L/d, unlimited
liabilities, Performance
Bank Guarantee (PBG) etc.
 Insistence on Joint Deed of
understanding from the
Collaborator and the
bidder.
Regular communication &
better Industrial Relation
practices.
Awareness of related statutory
requirement and their
compliance.

Matter to be
immediately
reviewed and sorted
out with Consultants

i) To build up in-house
database/competence
regarding various aspects of
technology in vogue.

PERIODICITY
OF
REPORTING
Normally on
Monthly basis.
Routine
monitoring and
control on daily
basis.

RESPON
SIBILITY
CENTRE

Monthly
OR
Immediate on
occurrence of
an incident.

Project
Group/
DGM
(HR),
Safety
Officer,
Unit
Head/ED
(P &M)
GM(I/c)HR CO

Brain storming
session to be
held quarterly

Project
Group,
Unit
Head,

A. 54

INTERNAL AUDIT MANUAL

TYPE OF
RISK
price of
feedstock
necessitating in
change in
technology
b) Change in
technology
worldwide
necessitating
corresponding
changes in the
plants

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)
corresponding
change in design
engg.

Low impact
low
likelihood

4. Availability
of skilled
manpower for
specialized jobs

Low impact
low
likelihood

Appendix - 6

Deviation in major
technological
requirements like
production
capacity,
efficiency, product
or effluent
specifications
Necessitation
change in
construction
methodology.

Slippages in various
milestones.
Improper quality of
work.
Manpower Turnover
is critical function

MITIGATION MEASURES

PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE
ED(Tech)
ED(PM)

Brain storming
session to be
held quarterly

Project
Group,
Unit
Head,
ED(Tech)
ED(PM)

SHORT TERM
on case-to-case basis.

LONG TERM

Matter to be
immediately
reviewed and sorted
out with Consultants
on case-to-case basis.

Formulate
qualification criterion
for different
categories of
skilled/semi skilled
personnel.
Make alternate

i) Preparedncess to give
Regular
assignments on contract
monitoring and
business /outsourcing in case
reporting
of Engg. Functions
Suitable HR Policy for building
up competencies.

Selection of appropriate
technology with proven
track record/experience
To build up in-house
regarding various aspects
of technology in vogue.

Project
Group/
DGM
(HR),
Safety
Officer,
Unit

A. 55

INTERNAL AUDIT MANUAL

TYPE OF
RISK

5. Financial
availability

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)

High impact
Low
Likelihood

E. REGULATORY RISK
1. Changes in
High impact
GOI Policy/
Low
Legal
Likelihood
Framework/
Statutory levies
regulations

Appendix - 6

Non-disbursement of
loan as per agreed
schedule
Companys liquidity
position not sound

Increased :
Project Cost.
Cost of Production
Tax liability, etc.

MITIGATION MEASURES
SHORT TERM
arrangements
Suitable incentives for
deployment at project
sites.
 Formulation,
monitoring,
reporting and
control of cash
flow status.
 Discussions with
financial
institutions to
resolve issue

Immediate
Review of cost
estimates
Take up with
MOC
&F/appropriate
authorities
highlighting the
impact on NFL/
Sector

LONG TERM

Keep abreast with the current


financial parameters
Keep action plan for alternate
arrangements in place.

PERIODICITY
OF
REPORTING

Monthly report
to be generated
indicating fund
availability and
cash
expenditure
Immediately, in
case of any
contingency.

Remedial actions to offset the


impact of these changes
Put forth our plea at
appropriate forums.

As and when
such changes
occur

RESPON
SIBILITY
CENTRE
Head/ED
(P &M)
GM(I/c)HR CO
Project
group,
DGM(F&
A), Unit
head,
CGM(F&
A),
ED(P&M)

Unit
Head,
CGM (F &
A
ED(Tech.)
ED (P
&M) Co.
Secy.

A. 56

INTERNAL AUDIT MANUAL

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)
2. Chang in
High impact  Likely difficult in
compliance of
Environmental Low
Likelihood
statutory
criteria
requirement.
 Additional cost
due to change in
norms.
 Threat regarding
stoppage of plant
by statutory
authorities
F. BUSINESS RISK
1.Business
High Impact Negative
portfolio Risk
Low
Contribution of any
i) Urea and
Likelihood
segment.
others
TYPE OF
RISK

ii) Industrial
products

Low Impact
High
Likelihood

Negative
Contribution of any
segment.

MITIGATION MEASURES

RESPON
SIBILITY
CENTRE
Unit
Heads/E
D
(Tech.)/E
D
(Proj.)

SHORT TERM
 Emergent action
plan to comply
with the changed
requirement.
 Take upto with
FIC to recovery of
additional
expenses through
tariff, wherever
applicable.

LONG TERM
 Take up with DoF/MoE&F
where companys long
term interests cannot be
protected.
 To plead for companies
interest at appropriate
forums.

Suitable decisions
on case to case
basis.
Assess the
duration of factors
leading to
negative
contribution.
Suitable decisions
on case-to-case
basis.
Assess the
duration of factors
leading to

i) Decision on the business


based on assessment of the
duration of factors leading the
negative contribution.

Quarterly OR
AS and when
such risk arises.

ED
(Mktg.)
/ED(Tech
) / Co Sec

i) Decision on the business


based on assessment of the
duration of factors leading the
negative contribution.

Monthly OR
AS and when
such risk arises.

ED
(Mktg.)
/ED(Tech
) / Co Sec

Appendix - 6

PERIODICITY
OF
REPORTING
As and when
such changes
are announced

A. 57

INTERNAL AUDIT MANUAL

TYPE OF
RISK

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)

2. Customer
Risk-Revenue
realization

Low Impact
Low
Likelihood

3. Entry in
newer business
areas

low impact
low
likelihood

Customer wise :
i) Outstanding
payment along with
period of default.

Failure/delay to
commence the
business

MITIGATION MEASURES
SHORT TERM
negative
contribution.
 Regulate Supply
of Fertilizer and
reallocate.
 Follow-ups at
various levels for
realization of
sundry debtors.



Consultancy
Outsourcing

Unorganized or
international
competition
impacting margins, as
could counterfeit
products

Rich product
knowledge economies
of scale and efficient
logistics management.






Appendix - 6

RESPON
SIBILITY
CENTRE

Tracking of customer
health-financially and
business wise
Measures such as LS back
up.
Allocation as per past
payment record.
Legal Action.
Development of in-house
expertise in various related
fields like project
management, leadership
etc.
Selection of a JV partner

Quarterly OR
As and when
receivables
accumulate for
over 60 days

CGM
(Mktg.),
CGM(F&
A)

Six monthly

CGM
(Mktg.),

Application engineering
capabilities to customize
products for specific use,
low cost, innovative
packaging, and periodic
market audits.
Representation to
concerned authorities for
levying of antidumping

Half-yearly

LONG TERM


G. COMPETITION RISKS
1. Costs
High impact
2. Revenues
High
3. Customer
likelihood
Preferences

PERIODICITY
OF
REPORTING

GM(CP)

CGM(Mkt
g.)
/ED(tech)

A. 58

INTERNAL AUDIT MANUAL

TYPE OF
RISK

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)

H. MARKETING RISKS
1. Govt. Policy High Impact
on regulation.
Low
2. Sale
Likelihood
Proceeds
realization.
3. Climatic
conditions

Freight limiting
factor because of
low consumption
in periphery of
Vijaipur Unit,
Change in sale
consumption
patter,
Glut and price
war in the market.

MITIGATION MEASURES
SHORT TERM





I. ASSET RISKS
1. Natural
High impact
calamities like
Low
storm,
likelihood
hurricane,
earthquake,
flood, etc.





Outage due to
such events.
Production loss.
Slippage of
milestones of
projects leading to
delay in project
construction




Appendix - 6

Increase market
share by
strengthening
dealers network,
Adopt least cost
movement
Divert to markets
with potential
with additional
cost
Improve brand
image and equity.

PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE

Trading in other related


products like fertilizer,
DAP/MOP and seeds, etc.
Take up promotional
activities and promote
fuller utilization of
available resources for
improving irrigation
facilities like rainwater
harvesting.

Half-yearly

ED(Mktg.)

Adequate Insurance cover.


Design of plant equipment
system as per latest code
and past data on
calamities.
Disaster Control Strategy.

Quarterly OR
Immediately on
occurrence of
the event
depending on
severity.

ED(Tech.)
/ ED
(Proj.)

LONG TERM
duty


Immediate steps

for restoration of

production.
Constitution of
Damage Control
Group.

Lodge Insurance
Claim.
Rescheduling of
project completion
period

A. 59

INTERNAL AUDIT MANUAL

TYPE OF
RISK
2. Fire
explosion/
implosion and
other major
accidents

NATURE OF
RISK
(GRADING)
High Impact
Low
Likelihood

Appendix - 6

INDICATOR
(Trigger)

MITIGATION MEASURES

SHORT TERM
Outage due to such
 Immediate steps
events.
for restoration of
Production loss.
production.
Slippage of milestones  Construction of
of projects leading to
Damage Control
delay in project
Group.
construction
 Creation of Task
Force for
assessment of
damage and
immediate
restoration to
maintain project
schedule. Onsite
and offsite
Disaster
management plan
to be formulated
and mock drills
conducted
frequently Lodge
insurance claim.

LONG TERM
 Adequate Insurance Cover.
 Design of plant equipment
system as per latest code
and past data on accidents.
 Fire station manned by
trained fire and safety
personnel.
 Fire Hydrant system
approved by the Fire
Station Authority.
 Fire extinguishers of fire
sensitive locations.
 Certification of overhead
cranes, hoists and lifting
tackled by approved
personnel.
 Ambulance room and
ambulance to meet and
contingencies.
 The workmen of the
company are covered by
ESI, PF, EPF to meet the
events to death,
disablement and sickness
compensation

PERIODICITY
OF
REPORTING
Quarterly
OR
Immediately on
occurrence of
the event
depending on
severity.

RESPON
SIBILITY
CENTRE
Unit
Head/ED
(Tech.)/E
D
(P&M)

A. 60

INTERNAL AUDIT MANUAL

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)
J. FINANCIAL RISK
1. Funding
Low impact
 Percentage of tied
Risk
Low
loan to total debt
likelihood
component of the
approved
investment
 Increase in the
cost of borrowing
> 5% on
annualized basis
TYPE OF
RISK

2.Financial
Frauds :
i
Embezz
lement of
Cash.
ii
Misapp
ropriation
of Bank
balances.
iii
Others,
such as
false
Journal
entries,

Low Impact
Low
Likelihood

Appendix - 6




Perpetual Noncompliance of
systems &
procedures.
Unadjusted
entries for a long
time.
Non-standard
entries.
Avoidance of
dispute
settlement.
Non-availability
of balance

MITIGATION MEASURES
SHORT TERM

LONG TERM

Interest swaps.
Renegotiation with
Lenders













Periodic surprise
checks.
Insurance
Coverage.
Safe custody of
Cheque Books.
Restrict no. of
authorized
signatories.
Periodic Bank
reconciliation.
Transaction
tracing.
System audit






Explore various debt


options.
Continuous scanning of
Debt Instruments and
various capital markets.
Long term Cash flow
projections and monitoring
important ratios.
Long-term Debt profile to
match the cash flow.

PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE

Quarterly

Unit
Head,CG
M (F&A)

Regular review & System


Quarterly.
audits.
Evaluation of internal audit
quality.
Gradually reduce/stop
cash transactions.
Access to bank transactions
to track/trace major
drawls/debits from the
banks to senior officials in
Finance.
Regular rotation of
staff/officers from
sensitive jobs.

Unit head,
CGM
(F&A)
And
GM(IA)

A. 61

INTERNAL AUDIT MANUAL

TYPE OF
RISK
dummy
procureme
nts, etc.

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)
confirmation

K. Human Resource Risk.


1. Attrition
High impact
/Retention of
High
quality people
Likelihood

2. Safety and
Security





High Impact
Low
Likelihood

Unsafe
practices by
contractors
Terrorist
attack.
Sabotage
by
disgruntled
elements.

Appendix - 6




High executive
attrition rate,
particularly, high
performers/havin
g critical skills.
Low response to
manpower
recruitment
drives.
No. of
accidents/injuries,
stoppage of work.
Frequency of such
occurrences.
Time & cost
involved to bring
normally

MITIGATION MEASURES
SHORT TERM
through internal
audit.

LONG TERM

Job rotation.
Contractual
employment
Outsourcing








Increased

supervision.
Development of
enhanced security. 
Training on safe
practices.


PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE

Succession Planning.
Quarterly
Training & Development.
Systems for outsourcing,
such as identifying/finding
suitable agencies,
empanelment,
Development of such
agencies, etc.

Unit
Head,
GM(I/c)HR

Contractual provisions to
mitigate unsafe practices
by contractors.
Insurance coverage to
losses due to terrorist
attack and sabotage.
Development and
implement a Disaster
Management
Scheme/Plan. A group to
be formed in each location
that shall be trained to

Unit
Head,
GM(I/c)HR

Quarterly

A. 62

INTERNAL AUDIT MANUAL

TYPE OF
RISK

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)

MITIGATION MEASURES

L. IT RISKS
1. Failure of
servers for
Business
Applications

High Impact
Low
Likelihood

2. Failure of
business
Applications

High Impact
Low
Likelihood

Collapse/nonfunctioning of
systems for > 24 hrs.

SHORT TERM

Non-functioning of
critical business
Application for >24
hours (Maintenance,
Finance, Material,
Operations)






3. Attack,
Hacking or
Intrusion into
internal System
or defacing of
website.

High Impact
Low
Likelihood

Collapse/nonfunctioning of
systems for > 24 hrs




Appendix - 6

LONG TERM
manage at the time of
disaster.

PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE

Annual
Maintenance
contracts.
High Availability
features in the
servers.
Backup system.
Maintenance of
backup
In-house
Application
maintenance
team.
AMC

Deployment of Disaster
Recovery System.
Business continuity thru colocated servers

Half-yearly

Dy. GM
(MS), Unit
Head

Deployment and
implementation of robust ERP
System with an independent
audit tool
Parallel connectivity to
collocated servers for Business
continuity

Half-yearly

Dy. GM
(MS), Unit
Head

Isolation by
creating
Militarized and
Demilitarized
Zones.
Elaborate Firewall
systems.
Regular Security

Deployment of Website on the


secure server of NIC as per
Govt. directives.

Half-yearly

Dy. GM
(MS), Unit
Head

A. 63

INTERNAL AUDIT MANUAL

TYPE OF
RISK

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)

4.
Communicatio
n network

High Impact
Low
Likelihood

M. LEGAL RISK
Contractual High Impact
Low
liabilities
Likelihood
Frauds
Judicial
risks

Appendix - 6

MITIGATION MEASURES

SHORT TERM
audit &
vulnerability
system. Gateway
Anti-virus &
content scan
Complete Collapse for Email facility thru
> 24 hours
Internet.

As and when
decisions are
pronounced against
the Company.

To be ensured that
contracts clearly
specify the
contractual liabilities,
deduction, penalties,
interest and force
major conditions
clearly and
unambiguously.
Resolution of disputes
through arbitration
and conciliation.

PERIODICITY
OF
REPORTING

RESPON
SIBILITY
CENTRE

Establish VoIP connectivity


using leased lines for Units &
Zos.
Install VPN connectivity from
third party Service provider
for Area Officers.

Half-yearly

Dy. GM
(MS), Unit
Head

Long Term Policy on contracts.


Review of Purchase,
Marketing, Maintenance,
Personnel Manuals, etc. every
three years.

Every quarter.

Unit
Head/CG
M(F&A)
/ED(P&M
) / GM
(HR) /
Co. Secy.

LONG TERM

Internal Control system to be


put in place to protect against
frauds.

Immediately
when a
fraud/judicial
decision having
wider
implication
comes to notice.

Evaluation of contracts, cases


pending before the judicial
authorities by a Standing
Committee every year.

A. 64

INTERNAL AUDIT MANUAL

NATURE OF
INDICATOR
RISK
(Trigger)
(GRADING)
N. INTERNAL CONTROL RISKS
Weak Internal
High Impact Non-compliance with
Control can
Low
Laid down
jeopardize the
Likelihood
procedures/
Companys
regulations:
financial
 No laid down
position and its
policies
very existence.
/procedures with
regard to key
operations.
 System failures,
frauds, etc.
TYPE OF
RISK

Appendix - 6

MITIGATION MEASURES

PERIODICITY
OF
REPORTING

SHORT TERM

LONG TERM

Proper checks in the


form of internal audit
with regard to plants,
projects, contracts of
importance. Physical
verification of fixed
assets is periodically
done.

Clear policies have been laid


Quarterly
down for approval and control
of expenditure. Investment
decisions are subject to
detailed appraisal and review.
Capital and revenue
expenditure is monitored and
controlled with reference to
approved budgets. The Audit
Committee reviews the
functioning of the Internal
Audit Department. Purchase,
operations, Marketing,
Accounts Manuals are updated
regularly.

RESPON
SIBILITY
CENTRE
Unit
Heads/E
D (Mktg.)
/GM(IA)

A. 65

INTERNAL AUDIT MANUAL

ANNEXURE-I
REPORTING FORMAT (*)

ASSESSMENT
TYPE OF RISK

INDICATOR AS
PROPOSED

CURRENT
STATUS

FUEL OIL/COAL/Naphtha/NG/RLNG
OPERATIONS
UTILITIES
PROJECT IMPLEMENTATION
REGULATORY
BUSINESS
COMPETITION
MARKETING
ASSETS

Appendix - 6

MITIGATION
MEASURES
SHORT TERM

LONG TERM

ED (P&M)/Unit Heads / ED (Tech) CGM


( F&A)
Unit Heads / ED (Tech.)
Unit Heads / ED (Tech.)
Unit Heads /ED (P&M) /CGM (F&A)/GM(I/C)-HR
Unit Heads / ED (Tech.)/ ED (P&M) /CGM (F&A) Co Sec
Unit Head / ED(Tech.)/CGM (Mktg.) /ED (P&M) / HEAD
OF CP
ED (Tech.) CGM (Mktg.)
CGM (Mktg.)
Unit Heads /ED (Tech.) /ED (P&M)/CGM
(Mktg.)/CGM(F&A)

A. 66

INTERNAL AUDIT MANUAL

FINANCIAL
CGM (F&A)
HUMAN RESOURCE
CGM (HR)
IT
Dy. General Manager (MS)/Unit Heads
LEGAL
UNIT HED/ CGM (F&A) /ED (P7M)/CGM (HR)/Co Sec
INTERNAL CONTROL
UNIT HEADS / CGM (Mktg.) / GM (IA)
(*) Responsibility to Report to the Audit Committee and Board of Directors shall rest with ED(Technical).

Appendix - 6

A. 67

NATIONAL FERTILIZERS LIMITED


VIJAIPUR UNIT UREA PLANT PROCESS FLOW DIAGRAM

BATHINDA PROJECT BLOCK DIAGRAM

RAW WATER

COAL

FUEL OIL

RAW WATER
RESERVOIR

FUEL OIL
HANDLING&
STORAGE

RAW WATER
FILTRATION
PLANT

COAL HANDLING
&CRUSHING

AIR

AIR SEPARATION
PLANT

O2

OIL GASIFICATION
&CARBON
RECOVERY

UREA
SYNTHESIS

N2

WATER
DEMINERALIZATION
PLANT

BOILER FEED
WATER

CONDENSATE RETURN
FROM TURBINES
CONDENSERS

STEAM GENERATION
BOILER HOUSE

DESULPHURISATION

CO SHIFT
CONVERSION

CPP

ASH HANDLING
&DISPOSAL
COOLING TOWER
I,II&III

SULPHUR
RECOVERY

SULPHUR

CARBON DIOXIDE
REMOVAL

LIQUID NITROGEN
WASH
GAS COMPRESSION
& AMMONIA
SYNTHESIS

AMMONIA

DECOMPOSITION
&RECOVERY
CONCENTRATION
&
CRYSTALLIZATION
UREA DRYING
& PRILLING
UREA BAGGING &
STORAGE

BAGGED
UREA

Prepared by:

CHATURVEDI & CO.


Chartered Accountants

405-407 Chiranjiv Tower, 43 Nehru Place, New Delhi 110019


Phone: 4665 4600 / 2643 2388 / 2646 3013 / Fax : 2646 7586
email: chaturvedico@airtelmail.in / delhi@chaturvedico.com website: www.chaturvedico.com

Other Offices

Head Office:
60 Bentinck Street,
Kolkata.

Park Centre
24 Park Street
Kolkata.

81 Mittal Chambers,
228 Nariman Point,
Mumbai.

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T-Nagar, Chennai.

24/56 Birhana Road,


Kanpur.

Room No.105,
Prince Complex,
31/62 Hazrat Ganj,
Lucknow.