Audit Planning Memorandum

1. Introduction: This memorandum sets out our proposed strategy for auditing the
Karnataka State Khadi and Village Industries Board (KVIB) for the year ended 31
March 2006.
2. Background of the entity: KVIB is a Statutory Board established by an Act of the
State Legislature. It was established in 1957. The Board was established by the State
Government with the objective to organize, develop and regulate Khadi and Village
industries in the state. The main objective of the Board is to give priority for Khadi
and Village Industries in rural areas and to develop, provide assistance, generate
employment opportunities in rural areas and improve the economic status of the
rural artisans.
3. Respective Responsibilities: The CEO is ultimately responsible for maintaining
proper accounting records; preparing annual Accounts that give a true and fair view
of the state of affairs of the Board; and ensuring that these Accounts have been
properly prepared in such manner as prescribed under the Karnataka State Village
Industries Act, 1956. He is also responsible for ensuring that the expenditure and
income presented in the annual Accounts has been applied to the purposes intended
by the State Legislature and the funding agencies and that the financial transactions
conform to the authorities which govern them. The audit of the Board is entrusted to
the CAG under the provisions of Section 19(3) of the CAGs DPC Act. There may
be certain matters on which C&AG may decide to communicate to Legislature in a
separate report. Such matters may include comments on the internal controls and
accounting records and may be intended to provide additional information alongside
any matters referred to in the audit certificate.
4. Objectives of audit: Our work is constructed around producing, for the C&AGs
consideration, an audit certificate that he will then address to the Legislature
through the Government. The audit certificate follows a standard form (based on
auditing standards) in which the C&AG provides Legislature with an opinion on two
matters. First, the C&AG will state whether, in his opinion, the Accounts give a true
and fair view of the state of affairs of the Board and of its income and expenditure,
total recognised gains and losses for the relevant year. This part of the opinion will
also indicate whether the Accounts have been properly prepared in such manner as
prescribed under the Karnataka State Village Industries Act, 1956 and/or Karnataka
Finance Code (KFC).
Second, the C&AG will also indicate whether, in his opinion, the expenditure and
income presented in the Accounts have, in all material respects, been applied to the
purposes intended by the Legislature and funding agencies and whether the financial
transactions conform to the authorities which govern them.
In arriving at this two part opinion, we will consider the following matters:
whether the Department has kept proper accounting records and
whether proper returns adequate for the audit have been received
from any third parties;
whether effective systems of internal control are in place;
whether the Accounts are in agreement with the accounting records
and returns; and
 whether we have obtained all the information and explanations
which we consider necessary for the purposes of our audit.
Where we are not satisfied with any of the above matters, then we will consider how
our audit conclusion might impact upon the C&AG's audit certificate. In deciding
the impact on his opinion, the C&AG may decide to refer to such matters in his audit
certificate and/or in a separate Report to Legislature.
4. Risk Assessment: Based on the assessment of external and control environment of
the Board, the overall inherent risk assessment of the account areas is made as high,
medium or low and significant audit areas identified are as follows
a. Non-plan expenditure - salary: There is a specific risk that the expenditure
incurred during the year may exceed the budget and thus there may be the
risk that salary component of non-plan expenditure is met out of plan grants,
ie expenditure without specific approval of government as Board cannot
reappropriate from plan heads.
b. Debtors: The main activities of the Board are to extend financial loans to the
rural sector. Hence debtors is identified as a major risk area. Recoveries have
to be affected on the Khadi and Village Industries Commission (KVIC) loans
advanced under various schemes. The risk is that debt will become bad as
the loan recovery period is over in the PBS/CBC which are closed schemes.
Further the risk also lies in the possibility that there could be delays in
remittance of loan amount to the KVIC, as a result leading to a difference in
the demand by the KVIC and remittance by the Board. Whether regular
reconciliation between the Board and the KVIC is being done will also be a
risk area.
c. Provisions for depreciation, bad and doubtful debts: There may be the risk of
the Board not providing for depreciation, as a result leading to misstatement
of assets. Further if the Board provides, whether it provides sufficiently for
bad and doubtful debts is another area to be examined.
d. Recovery of interest on loans: Repayment of interest may not be as per the
guidelines. In addition to this, there may be delay in repayment of interest
amount to the KVIC.
e. Exhibition account: Non adherence to the conditions imposed by the KVIC
may cause them to reduce the grant and thus may impose additional financial
burden on the Board. Further whether the resource sharing is as per the
guidelines prescribed by KVIC may be another area of risk.
f. Pension: Whether the Board is providing enough to meet its pension liability.
Inability to do so may impact on the discharge of its pension liability. Further
whether the Board is remitting the pension contribution to government is
another risk area.
g. Plan grant: The risk is that the grants may not have been discharged as per
the terms and conditions and may not have been utilized for the purpose and
within the period for which they were sanctioned and that they may have
been lapsed.
5. Materiality: Since the main business of the Board is disbursal of loans received
from the State government and the KVIC and other funding agencies and these
loans are not routed through the state budget, the level of Legislature interest is
 low. Further, public interest is also low. Hence the accounts of the Board can be
considered as not sensitive account.
Therefore 2% of GROSS EXPENDITURE is set as materiality for the Board.
The term ASSURANCE FACTOR refers to the level of assurance required from
sampling .The assurance Factors for different levels of substantive testing are:-

Level of Testing Assurance Factor

Focused 3.0
Standard 2.0
Minimum 0.7

As a general rule, the risk factor is proposed to be taken as 0.7, which may be
subject to revision for specific account areas based on the results of substantive
testing. This may also depend on the time available.

The formula for calculating sample size :-

Sample size = (Account area population / Precision) X Assurance Factor.

The sample sizes is calculated as follows:

Gross Expenditure

Materiality Base x
Materiality (2% of Materiality Base) 0.02x
Less Most likely Error (10% of Materiality) 0.002x
0.018x
Precision is 90% 0.0162x
Sample size =(account area population X 0.7)/ 0.0162x

6. Audit Approach for each account area: Our audit approach is a risk based one,
informed by our understanding of the Boards business and the accounting and the
internal control systems as well as our assessment of the risks associated with the
financial statements. As a part of our audit, we will determine the extent to which we
can rely on detailed control procedures and managements monitoring activities to
prevent or detect specific material misstatements and address all potential errors by
conducting walk through tests of all the identified significant audit areas. Where it is
found that the accounting systems and controls are sound, we will seek to take audit
assurance from them. In respect of those significant audit areas where either the
controls dont exist or are weak, further substantive procedures are designed.

7. Resources and timing: The audit is to be completed in a period of 4 weeks. The audit
team will comprise the following members
Shri. Gopinathan, AG Team leader
 Shri. Ravindra Pattar, Sr. DAG
Shri. L.Hangsing, Sr. DAG
Ms. Chanda Pandit, Sr. DAG
Shri. Sr. A.O
Ms. Elizabeth, AAO,
Shri. Vijay Kumar, SO,
Shri. 2 Auditors.

11. Key contacts at the entity: The key contacts include Shri. R.Rameshappa, Chief
Executive Officer and Shri. Shariff, the FA & CEO.