Q 1.

Using your work experience, please answer followings while including relevant cross-references to your work,
responsibilities and achievements as set out in your CV.

Currently I am employed as Manager Internal Audit. The Company is one of the largest manufacturers of textile products
(mainly Yarn and Fabric)
As per organizational hierarchy, I report to the Head of Internal Audit, who is reportable to the Chairman of Board of
Director’s Audit Committee.
My job responsibilities include ensuring implementation of controls on business cycles and operations as well as
continuous review of business processes to identify risks and recommend mitigating controls.

The activities and respective responses narrated below are a result of coordinated team activity of internal audit
department

a) Describe how you identified two different business or professional issues.

i. Audit of revenue business cycle

Issue: Audit of sales transaction

At the time of my joining the organization, audit of revenue business cycle was limited to 100%
verification of sales invoice. This was done by matching system generated invoice with approved sales
contract, mills gate & godown dispatch documents including dispatch order, gate pass, weigh bridge,
delivery chalan etc.

Risk identified:

This verification technique pays limited attention to occurrence of transaction and origination of source
documentation. There was a risk that any transaction, if not reported from mills, may miss from being
recorded by the accounts department and ultimately miss from review of internal audit. (completeness
assertion)
Thus, Auditor’s foresightedness was limited to the invoice / data provided by the accounts department
and audit function was merely confirming the procedures of accounts team instead of adding qualitative
value and additional assurance.
As an example, if godown and gate team of the Company collude with customer, they could easily
transfer items out of mills without forwarding transaction documentation to other departments for
recording transaction in ERP system.

Issue identification procedure:

This matter came into attention when a review of revenue business cycle was performed as per
department’s Internal Audit Plan.
The review activities included the following;
 Review of sales documentation including sales order, sales contract, dispatch order, freight bilty,
weight slip etc.
 Review of godown record to ascertain In / Out activity from godown
 Review of mills gate record to ascertain recording of In / Out movement of vehicles from mills
premises
 Review of security department checks on prevention of embezzlement
 Review of vehicle weighing procedure and weigh bride documentation to ascertain chances of
fabricating weight slip
 Interviews of staff responsible for godown, gate, security, administration, marketing and accounts
department
 Performing walkthrough sample transactions

Performing above mentioned activities helped to obtain a clear understanding of all functions. While
performing our procedures, several inconsistencies were noted which required management attention as
well as designing and implementation of new controls to cover un-addressed risks. Some of the
significant observations were as follow;
 The materials dispatch order system had following shortcomings;
o Dispatch order did not include information about transporter, vehicle and driver.
 o For some sales types (e.g. waste sale), dispatch order was made manually as inventory
was not maintained in ERP system. Thus, quantity in addition to actual allowed could be
dispatched.
 The gate activities and departmental documentation was being done manually. Preparation of
documentation was at discretion of the gate in-charge and there existed a risk that in-charge may
fail to record any dispatch especially for that inventory which was not maintained in ERP system.
 Manual gate passes were not prenumbered serially. Number was punched at the time of dispatch.
 For sales invoice preparation at Head office accounts department, copies of dispatch documents
(dispatch order, outward gate pass, freight bilty, weigh slip etc.) were sent. Original documents
were kept at mills gate department. Hence there was always a risk of duplication and fraud due to
mal intent.
 The head office accounts department did not prepare a global reconciliation of inventory to
identify anomalies and errors.

ii. Management of Accounts Receivable balances

Issue: Inconsistencies in accounts receivable balances management

The Company is a large-scale manufacturer so its customers mainly comprise reputed / seasoned textile
manufacturers. Sale are mostly done on advance payment or is secured through letter of credit. Credit
sales are made to regular customers only. The deals are brokered through agents hence risk of bad debts
is considered very low by the management.
Best practices of receivable management were not given high importance.

Risk identified:

As management was not rigorously following up receivables, following areas were identified where un-
addressed risk were present;
 Pre-approved credit limits
There were no pre-approved credit limits. For some customers, some approvals were available
but these were limited to marketing department only and not communicated to the accounts
department. Hence, accounts department would prepare and forward materials dispatched order
on email request from marketing department without monitoring credit limits.

 Balance reconciliation with customers

Most of the credit sale is being done with running customers. Payment are not received invoice
wise hence receivable balances were not consider overdue. However, upon reconciling balances
through customer ledgers, it was found that some invoices were either disputed as well as
duplicate receipts in different units were also found.

 Invoice wise ageing analysis

As payment received against outstanding balance was matched with sales invoice on FIFO basis,
balances were considered current and the management was not preparing invoice wise aging
analysis. Hence, any overdue balance could not be identified

Issue identification procedure:

This matter came into attention when a review of accounts receivable business cycle was performed as
per department’s Internal Audit Plan.
The review activities included the following;
 Review of marketing department’s procedure from order to payment receipt
 Review of accounts department procedures with respect to dispatch order processing
 Review of accounts department procedures on collection against outstanding balances
 Review of customer ledgers to identify long outstanding balances

Upon performing above mentioned procedures, we identified that management was paying low intention
on establishing best practices for receivable management.
As approved credit limits were not prepared and monitored, receivable balances would inflate as per
market trend, without approval from higher management. Thus, risk exposure of bad debts was not
limited.
 Through understanding of accounts department procedures and customer ledger scrolling, it was found
that receipts were not matched invoice wise. Hence, some old invoices remained pending since long and
payments were not demanded.
Customer ledgers were not reconciled on regular basis hence any disputes / errors could not be identified.
Based on recommendation of audit department, process of customer balance reconciliation was started
and at least three parties were identified whose outstanding balance was disputed.
The management also started monitoring balances on invoice basis. Hence, invoice wise ageing balances
also started to prepare leading to timely reconciliation of differences.

b) Describe how you have used your technical expertise and/or business knowledge to analyse a business or
professional situation.

Knowledge and understanding of International Financial Reporting Standards (IFRS)

IFRS provide the basis of financial accounting and reporting of financial transactions.

With respect to revenue recognition, main requirement for recognizing sale is when significant risk and
reward associated to goods sold are transferred from seller to buyer. In case of my company, all local
sales contracts are ex-mills. Hence, sale is recorded in accounting system when goods leave mill
premises. Thus, preparation of delivery note (DN) signifies that sale transaction is executed. For exports,
sale is not recorded till the time bill of lading is prepared.
Similarly, when risks and reward of goods is transferred to buyer, the Company establishes the right to
receive cash against the value of goods sold. So, trade receivables are recorded as per provisions of
financial reporting standards.
In absence of understanding and knowledge of these accounting principles, one can not fairly establish
the timing and treatment of recording transactions. It can be safely said that knowledge and
understanding of IFRS is vital for proper accounting treatment of transactions.

Knowledge and understanding of International Standards on Auditing (ISA)

ISAs provide the framework to audit financial information. These provide the audit assertions to evaluate
financial information for reliability and accuracy. Any financial information that does not meet respective
audit assertion may come under scrutiny of an auditor.

With respect to issues stated in part (a) (i) above related to audit of revenue business cycle, it was
observed that audit assertion of “Completeness” was not being addressed. Although sales invoice was
being verified along with supporting documents however it was not made sure that all sales transactions
are being recorded in ERP system and subject to audit.
This assertion was met when audit technique was changed to audit of source documents and related
controls. Now 100% ERP sales transactions are cross matched with godown, gate and security record
(which are all independent functions). An automated gate management system is implemented which
monitors and records all In / Out gate activity.

With respect to issue stated in part (a) (ii) above related to management of accounts receivable, it was
observed that audit assertion related to “Existence” and “Valuation” was not being addressed. Although
management understood with their business sense that all receivables are current and good, still there
were balances whose existence was question or their valuation was not correct.
This assertion was met when customer balance reconciliations were done and receivable ageing analysis
was done to identify and provide for aged balances.

Knowledge of business

Having thorough knowledge of business activities and proper understanding of business processes is the
most important factor in discharging responsibilities efficiently and effectively.
As has been stated in part (a) above, any shortcoming and related recommendations could not be
identified till the time a sound understanding of all processes of the selected activity was obtained. For
understanding the business completely, we had to meet all relevant staff, review entire documentation
and study verbal and written instructions followed in respective process.
 As in the case of recording sale, one has to go through the complete flow of documentation to understand
mechanism of recording sales. The process starts by recording a sales order in ERP system by the
marketing department which is followed by generation of a sales contract. Next is dispatch order
generated by the accounts department against the contract and sent to finished goods godown for dispatch
of goods. The finished goods godown incharge generates a dispatch note which creates an automated
inventory accounting entry in the ERP system. Upon receipt of dispatch documents at head office
accounts department, a sales invoice in the name of respective customer is generated which automatically
generates a receivable accounting entry as well.
So without understanding the procedure, it would not have been possible to identify the shortcoming that
in case ERP documentation is not created, godown and gate staff may collude with customer and may not
report any dispatch of goods that is not authorized.
Additionally, the responsibilities and rights assigned to respective staff also need to be understood
properly so that principle of segregation of duties and segregation of non-compatible functions can be
ensured. In order to implement a sound control environment, responsibilities have been divided amongst
several departments of the organization namely marketing, accounts, administration, godown, gate and
security. Internal Audit is also placed in the monitoring role to make sure that all departments operate risk
free. All these functions team up to achieve organizational objectives in a robust manner.

Similarly, having a clear understanding of Company’s receivable management function was necessary to
point out the weak areas that needed management’s attention. Until the time we understood that
marketing department does not have approved credit limits for credit customers, we could not
recommend the need to necessarily have an approved list.
Also the need to have a system of reconciling balances with customers was not noticed till we scrolled
customer ledgers and identified long outstanding balances that need to be discussed with customer and
get resolved.

Use of technical expertise

Auditing techniques get a technical edge when the auditor has a sound knowledge of automated tools
such as worksheets (MS Excel) and word pad (MS Word) etc.
The use of MS Excel can help develop data analysis and data trends. Use of formulas and techniques such
as look-up and pivot table help to convert raw data into meaningful information.
From a list of outstanding invoices, we developed an invoice wise ageing analysis using MS Excel which
helped us identify aged outstanding invoices.
Similarly, by sampling sorting data of dispatch orders into serial number sequence in MS Excel, we could
identify missing DOs against which dispatch was somehow not done.
MS Word was used to prepare a summarized report for onward presentation to the management.

c) Describe how you have used your professional judgement in choosing between options.

Choice between selecting internal audit methodology for auditing revenue business cycle

Option 1 100% pre-audit of sale invoices along with supporting documents

Option 2 Post audit 25% invoices on sample basis and 100% verification of sales transactions
(ERP Sales ledger) with godown, gate and security record

OPTION 1
Benefits
 System implemented since long and all
staff was used to.
 Pre-audit provides extra confidence to
management on validity of recorded
transaction.
 Required lesser man hour and efforts
as all data was received in compiled
form
 Good assurance level as 100%
invoices were subject to audit before
sending to customers
OPTION 2
 Completeness of sales transaction
could be ensured as 100% dispatches
are cross matched with ERP sales
ledger
 Value addition by audit department by
covering risk of un-recorded sale
 Data is cross matched with
independent departments including
security, gate and godown hence any
deficiency in any of department’s data
management is timely identified.
 Shortcomings
 Can not ensure completeness of  Requires more man hours than existing
recording 100% dispatch in Sales procedure
ledger  Data is required from multiple
 Risk of unauthorized dispatch without departments which may result in
knowledge of concerned department. delays in auditing procedure
 Complete reliance on data received
from accounts department

Decision factors considered

Following factors were considered in making decision between the two options available

 Availability of audit department human resource in performing additional tasks

 Training of audit staff to adopt to new procedure
 Cooperation of other departments in provision of additional data
 Changes required in existing gate management system
 Conversion of manual documents into system generated reports including Dispatch orders,
Outward gate pass etc.
 Any adverse impact in abandoning pre-audit of sales invoice (Option 1).
 Convincing of higher management to approve change in audit procedure.
 Resolving higher management’s queries on new method (if any).
 Time period required for parallel running of both audit methodologies till the time confidence is
developed on new system
 Communicate changed auditing method to management

Conclusion reached

The highlighted risk of not ensuring completeness is of grave importance and must be adhered. The
matter was informed to the higher management for the purpose of obtaining approval for change in
auditing method (Option 2) for revenue which was granted.

The ancillary matters were addressed as follows;

 Through discussion with management, all types dispatch orders and gate outward pass were
started to be issued from ERP system so that no dispatch miss from recording.
 Work allocation between audit department staff was re-arranged to share additional work load
among the existing staff.
 Staff was provided adequate training to get understanding of change in audit method and
familiarization with new work technique.
 New reports were developed in the ERP system to help staff discharge duties efficiently.

d) Describe how you have applied professional judgement to prioritise issues.

Setting priority to any business issue is a complex matter and needs several matters to be taken into
consideration before setting its priority. Any business issue can be prioritized based on the minimum
following scales but not limited to;

 Degree of risk associated with an issue

 Value of loss to be sustained due to issue
 Expected cost to be incurred on issue resolution
 Likely benefits from resolving issue
 Required reporting / correction time period
 Strategic vs operational issues
Identify and enlist all outstanding issues

First step in prioritizing issues is to identify issue and prepare a list. An easy method to identify business
issues is to identify obstacles that are hindering achievement of personal, departmental and organizational
goals. An issue visible in front as a single issue may have several small issues hidden beneath. Similarly,
resolution of many small issues may result auto resolution of a bigger issue.
All identified issues should be listed and preferably be classed into sub categories based on similar
nature.

Determine degree of risk with each issue

Priority of an issue is directly proportional to the associated risk. High risk issue is more important to
resolve than low risk issue.
A business risk can be stated as threat that has the ability to cause a financial loss or undermine ability to
achieve organizational goals.
High risk issues tend to cause a bigger financial loss therefore their resolution is an important matter. As
an example, for finished goods stock of fabric, risk of destruction due fire is a much riskier matter than
quality deterioration from weather impact. Hence, arranging a fire tender system is much important than
making godown safe from weather conditions.
In another example, ensuring health & safety of workers in machine sheds is more important than
providing air conditioned environment at a work place.
So resources will be channel to high risk matter first and then to low risk matter.

Calculate value of probable financial loss due to an issue

An issue that can cause a bigger financial loss is high in priority thus these are directly proportional.
Immediate attention should be given to an item that can cause more financial loss.
As an example, placing a close monitoring system is more important at cashier room than ensuring
adequate security at a yarn godown as cash is much easier to embezzle than to steal a 100 Lbs bag of yarn
from godown.
An organization is always short of resource hence their application should be very careful and well
planned. More resources should be deployed at high financial risk item than lower risk item.
Subsequent to determine plausible financial loss associated with each issue, these should arranged in
priority from higher loss to lower loss.

Estimating expected cost to be incurred on issue resolution

Each resource employed has a monitory and non-monitory cost. In a world of resource shortage, easier to
resolve are those issue which can be resolved at a lower cost.
Additionally, cost – benefit analysis is much important when deploying resources to resolve issue. As an
example, shipping cargo through airliners may not be beneficial when other channels such as sea-liners is
available. Although air shipment will reach destination much faster than from sea but high shipment cost
of airliner may make whole transaction loss making.
In a similar manner, an issue which can be resolved by applying 1 man hour is more beneficial than from
an issue which may take 4 man hours to resolve.
So there is an indirect proportion between issue priority with incidental cost. Issues that cost less to
resolve are high in priority.

Calculating likely benefits of issue resolution

Issues whose resolution yield higher economic benefits tend to have high priority than those which yield
low benefit.
As an example a production machine and an administration vehicle may need same amount of repair cost
however priority will be allocated to repair of production machine as it will add to overall production and
shall earn economic benefits for the organization. Whereas the administration vehicle may solve
transportation problem however will result in outflow of economic benefits.
In a same manner, investing in new automated system will have priority over resorting existing old
manual system as new system are more efficient and require lower costs to run. Old systems tend have
lower yield although may need lower restoration cost.
 Hence priority will be determined as per the expected economic yield of issue resolution.

Calculating required time period for issue resolution

Response time against any issue is a key factor in determining priority of an issue. Matters that need to be
resolved on urgent basis are up on priority list than those where extensive time is available.
As an example, non-schedule production shut down are a high priority item and need urgent management
attention to restore production in minimum time period. In such downtimes, there are not only production
losses but also delivery schedule to customers is affected. Hence the management always pay high
priority to such issues.
Contrary, reducing worker strength per machine is a non urgent matter and can be resolved over a period
of time detailed working and analysis although higher labour cost may be resulting in reduced margins.

Strategic issues vs operational issues

Although operational issues are important in short term to ensure smooth functioning of the Organization
however importance of strategic issues always remains high. Strategic issues are normally long term and
impact the overall sustainability of the organization.
Even if management may temporarily shift its focus on operational issues however progress on strategic
issue may continue in planned manner so that organizational goals are successfully achieved.
Hence, strategic issue are always on priority than operational issues.

So to summarize it can be stated that there is no pre-determined parameter to prioritize business issues
rather the developing situation dictate the priority of matters. A prudent decision will be that which is
taken after giving proper consideration on all above stated deciding factors.

e) Describe two situations where you have used your technical knowledge and/or practical experience to develop
advice.
Situation 1: Cash Management practices

Problem:
During review of cash management business cycle, it was noted that controls on physical custody of cash
were weak and needed improvement.
As a result of our procedures, following shortcomings were noted;

 Cash was not counted and closed on daily by the cashier and accounts department team
 Cashiers were maintaining manual registers for control purpose. ERP system was updated on
weekly basis hence there was always a difference between physical cash and ERP cash ledger.
 Single Key of cash safe instead of at least two to open safe and single key was in physical
custody of cashier only
 Paid stamp was not marked on cash payment vouchers processed by the cashier
 No limit was assigned for cash in safe for cashier

As a result of weak controls, management has little control over cash and there was always a long list of
reconciling items whenever cash counts were performed. Surprise counts were not possible and cash was
not closed on daily basis rather sometimes pendency extended to over a month period.
Although objectivity of cashier was not questioned however risk of teeming and lading was always
present. Cashiers were always given time to update books before counts so they had enough time and
margin to adjust physical cash. Any deficiency / surplus may be covered by merely hiding cash payment
or receipt voucher.

Recommendations (Advice):
Following best practices were advised to ensure safe custody of cash

 All cash receipts and payments to be entered in ERP ledgers in real-time. Thus, ledger is auto
updated with each cash transaction. For this, purpose-built reports to be developed in ERP so that
subsequent to posting of cash payment voucher by accounts manager, available payments to be
displayed at cashier log-in who mark each payment as “Paid” in ERP. In this way ERP ledgers
would update in real time.
  The Cashier to count physical cash in presence of accounts manager on daily basis and reconcile
with ERP ledger. In case of OK report, cash till be closed daily. The accounts manager to take
print out of daily cash position, sign, keep record and forward to CFO for review of report.

 Cash safe to be locked by two keys. One in the custody of cashier and other in custody of the
accounts manager. Subsequent to cash closing, cash safe to be locked using both keys and be
opened next day.

 After making payment, the cashier would emboss a “PAID” stamp on each cash voucher so that
it can not be presented again for payment. Thus avoiding any chance of duplicate payment.

 A limit to be assigned for keeping physical cash in safe. The same limit along with some
additional safety margin to be insured from insurance company as “Cash in Safe”. Any exceeding
amount to be deposited company’s bank account on daily basis.

 The internal audit department would perform surprise cash counts to check compliance of
standard operating procedure.

All suggestions were adopted by the management. Now internal audit performs scheduled monthly as
well as surprise count. Observations noted (if any) are shared with the management.

Situation 2: Management of waste godown

Problem:
During physical count of waste of weaving unit, we noted several deficiencies which was resulting in
improper godown management as well as financial loss to the Company. Observations noted included the
following;

 Waste bags are not of standard weight. Hence even if these are 100% counted, total weigh can
not be even estimated. Hence there was practically no benefit of physical count.
 Different type of waste are placed mixed, not segregated from each other.
 Physical count was not possible due to improper staking of waste bags and mixing with each
other.
 At the time of transfer of waste from production department to waste godown, weight of waste
not done by the production department.

Waste type’s value varies in amount. Some wastes are sold expensive with comparison to other. So due to
non-segregating was quality wise, there was a risk that expensive waste may be sold at lower rates by
mixing in low quality waste.
As production department was not independently weighing waste at time of transfer to godown, so they
had to rely on waste godown incharge’s data. Hence any mischief by the godown incharge by lowering
production data and illegally transferring out of mills could cause financial loss to the Company.
Physical count is one of the key control in ensuring completeness of stock. In its absence, management
can not certify the actual quantity and value of goods.

Recommendations (Advice):
Following best practices were advised to ensure safe custody of waste

 Boundaries to be erected between physical space of godown to ensure segregation and proper
stacking of different waste types.

 Waste to pressed in form of bales at bailing press to ensure standard weight of each bale. This
would not only ensure weight standardization but also help in proper stacking of stock

 Stacking of bales / bags to be made properly so that physical count could be done with accuracy

 The production department should take its independent weight of waste at time of transferring to
godown. This will not only provide independent data for cross check but also limit reliance on
godown incharge’s data
  The internal audit department to reconcile waste production data of production department with
godown incharge’s data on monthly basis so that discrepancies if any could be identified on
timely basis and resolved before undertaking financial loss

 The internal audit department to randomly verify 100% of at least one waste type. The godown
incharge will ready all stock for count however selection by the internal audit will be intimated at
the time of count.

All suggestions were adopted by the management. Now internal audit performs scheduled monthly,
quarterly as well as surprise count. Observations noted (if any) are shared with the management.

f) Demonstrate how you have used numerical techniques to analyse a business or professional situation.

Data analysis is one of the key functions at a managerial role. Raw data can only be converted into a
meaningful information if preparer is aware of data analysis techniques.
Following are example where with the use of formulae in MS Excel, data was converted into meaning
information upon which decision could be taken.

Receivable balances ageing analysis – Use of numeric data classification technique

In this technique, data is grouped into classes with each class depicting certain time period. Older classes
are riskier and may show a probable loss to the Company in form of bad debt. Based on these classes, the
Company may develop an objective criterion for provisioning against bad debt. Older classes need to be
provided more.
A numeric presentation is as below;

Outstanding 1-30 Days 31-60 Days 61-90 Days 91-180 Days 181-360 Days 361+ Days
Number Customer Amount Current Past Due Past Due Past Due Past Due Past Due Past Due
10001 Customer A 6,154,414 - - - - - - 6,154,414
10002 Customer B 5,075,499 - - - - - - 5,075,499
10003 Customer C 4,414,554 - - - - - - 4,414,554
10004 Customer D 3,225,890 - - - - - - 3,225,890
10005 Customer E 12,829,659 10,128,105 - - - - - 2,701,554
10006 Customer F 1,494,893 - - - - - - 1,494,893
10007 Customer G 1,119,360 - - - - - - 1,119,360
10008 Customer H 893,092 - - - - - - 893,092
10009 Customer I 580,539 - - - - - - 580,539
10010 Customer J 12,255,941 8,168,940 3,525,795 - - - - 561,206
10011 Customer K 42,826,509 32,458,690 9,229,353 618,345 - - - 520,120
10012 Customer L 519,906 - - - - 1 - 519,905
10013 Customer M 391,114 - - - - - - 391,114
10014 Customer N 255,454 - - - - - - 255,454
10015 Customer O 246,384 - - (1,192,856) - 1,192,856 - 246,384
10016 Customer P 228,146 - - - - - - 228,146
10017 Customer Q 78,274,444 40,058,914 36,123,473 92,591 41,210 1,733,940 - 224,316
10018 Customer R 220,000 - - - - - - 220,000
10019 Customer S 176,734 - - - - - - 176,734
10020 Customer T 175,409 - - - - - - 175,409

As evident from above, balance that are aged 361+ days are at most risk and their recovery is quite
doubtful. Balances past due 180+ days raise an alarm for the management to take immediate steps for
recovery. It also shows that further dispatches must be halted so that risk factor could be minimized.

Use of MS Excel as tool for data analysis

Data of all pending invoices was obtained from accounts department for analysis.
Following formulae in MS excel were used to make the data meaningful.

Use of “Sort” method

Data was sorted by using parameters of firstly “customer name” and then on “invoice date”.
The sorted was arranged in alphabetical order.
Next, columns were created to arrange data based on a period of time (as shown in above data
analysis)

Calculation of number of days outstanding

By subtracting invoice date from current date, we get the total number of days on which invoice
has been outstanding.
 Use “IF” “AND” formulae
Based on time period parameter, invoice value was arranged in respective column of time by use
pf “IF” “AND” formula.
As an example, to place vaule of invoice in “31 to 60 days” parameter, following formula to be
used
=+IF(AND(J6>30,J6<=60),I6,0)
Cell J6 represents total days invoice is outstanding
Cell I6 represents value of invoice amount

Using “sub-total” to merge

Each customer’s outstanding invoices in one time period category were merge to obtain a single
balance for individual customer.

Hence, a very elaborative analysis of data was prepared in which amount tha was doubtful and
whose chances of recovery was dim, could be identified easily. Also, the management could
know the exact amount upon which provision against doubtful debt need to be created.

Vertical analysis of financial statement – use of ratio

Vertical analysis is the proportional analysis of a financial statement, where each line item on a financial
statement is listed as a percentage of another item. In case of statement of profit & loss, every line item
on P&L is stated as a percentage of gross sales.
An analysis based on quarterly financial statements of Q1 are as below,

Percen
Rupees t
Sales 13,254,857,867 100%
Cost of sales (12,040,964,379) 90.8%
Gross profit 1,213,893,488 9.2%
Selling and distribution
expenses (101,774,101) 0.8%
Administrative expenses (87,002,124) 0.7%
Other expenses (53,950,990) 0.4%
(242,727,215) 1.8%
Profit from operations 971,166,273 7.3%
Share of loss from associates (19,865,140) 0.1%
Finance cost (432,672,828) 3.3%
Profit before taxation 518,628,305 3.9%
Taxation (268,787,700) 2.0%
Profit after taxation 249,840,605 1.9%

This analysis shows that major part of revenue earned is consumed by cost of sales resulting in a quite
lower gross profit margin. This is however in line with competitive market trends. As this is the major
cost, management must focus to reduce costs contributing in cost of sales so that profit margins can be
improved.
From investor’s point of view, only 3.9% of revenue is available that can be distributed among
shareholders. However, a good EPS may attract investors to invest in the Company.

Use of MS Excel as tool for data analysis

The above presented data was punched in MS Excel.
The sales figure was considered as base amount for computing percentage of each line item of profit and
loss account.
For calculating percentage, line item value was divided by base amount and multiplied by 100.
This analysis is one the common and basic analysis to identify cost that consume most of the revenue.

g) Describe a business situation where you used your professional qualification and experience to suggest / draft
SOP resolving such situation.

Business situation: Non-transparent procedure for sale of Company’s vehicle

In a recent occurrence of events, it came to internal audit attention that Company’s vehicle that are worn
out to then extent that these need to be disposed, the procedure for sale of vehicle was not transparent.

Observation:
The administration manager is the responsible person for vehicle fleet management. He is responsible for
repair and maintenance of vehicle. In case vehicle is excessively worn out, he is the person who shall
inform CEO regarding vehicle replacement and getting approval.

It was observed that subsequent to obtaining approval for vehicle disposal, the admin himself calls for
rate quotations (mostly verbal) and arranges for disposal of vehicle to highest bidder.

Risk identified:
 Vehicle sale was not advertised therefore open market rates could not be fetched
 Written quotations / offers were not obtained so documentary proof of highest bid was not
available for subsequent audit
 The principle of segregation of duties was ignored hence single person was responsible for both
management of vehicle and arranging sale
 The responsibility of obtaining quotes and finalizing sale was rested with admin manager only

Recommendations for corrective action:

Following corrective actions were recommended for management’s consideration so that transparency
could be brought in vehicle sale procedure;

 The Administration Manager would be responsible for vehicle management

 For sale of worn out vehicle, a committee comprising members of different departments would
be formed to oversee sale procedure.
 Sale would be advertised in open market (e-commerce website) for obtaining offers
 Written offers would be received in sealed envelopes which would be open in presence of all
committee members on a specific date
 The committee would arrange all bids and forward to CEO for approval of sale to highest bidder

Likely benefits:
These recommendations were forwarded to management for consideration and adoption. The likely
benefits as implementing suggestions are as follows;

 Principle of segregation of duties could be complied as function of vehicle fleet management and
vehicle sale would be bifurcated
 Company may get higher bids when making offer in open market
 Transparency of procedure can be ensured as formal bids are obtained and opened in front of
representatives of various departments
 Sale shall be made to highest bidder

Use of professional qualification and experience

The professional qualification and experience helped in following areas;

 The knowledge of International Standards on Auditing helps to identify un-compatible functions.

These are the functions which if combine under one authority may lead to misuse. In this
situation, person recommending sale and person arranging sale should be two separate persons
 Areas where internal controls are weak are more prone to fraud. Transparency in operations
ensure lower chances of fraud and collusion
 As per experience, it has been noted that unlimited authority leads to misuse of authority and may
also results in higher occurrence of fraud.
 The organization may yield greater benefits if independent functions ensure proper functioning
within assigned area of authority.

Copy of draft SOP

A copy of draft SOP is attached with this file