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  • 1. CEP /ParikramaInstitute of Internal Auditors, India – Bombay ChapterDate: 27th April, 2013By: Amit ShahInternal Audit - Construction of Real Estate Properties
  • 2. InternalAudit
  • 3. DefinitionIntegrated control is amanagement processdesigned to achieveEffectiveness andefficiency of operationsReliable financial reportingCompliance with laws andregulationsObjectives Relating to effective andefficient use of the entity’sresourcesRelating to preparation ofreliable published financialstatementsRelating to entity’scompliance withapplicable laws andregulationsWhat is Internal Control?Slide # 4
  • 4. • Control environment: Tone of an organization• Risk assessment: It includes identification of internal and external vulnerable areasof the entity• Control activities: It includes policies and procedures which ensure that the actionsidentified by management as necessary to address risks to achievement of theentitys objectives are effectively carried out• Information and communication: Information to be identified, captured andcommunicated in a form and timeframe that enables people to carry out theirresponsibilities• Monitoring: A process that assess the quality of the system’s performance over atime.Components of Internal ControlSlide # 5
  • 5. ControlEnvironmentRiskAssessmentControlActivitiesInformation andCommunicationMonitoringEffectivenessand Efficiencyof OperationFinancialReportingCompliancesFor Procurement to Payment ProcessCOSO MethodologySlide # 6
  • 6. About Construction BusinessSlide # 7
  • 7. Demand of power and energy is changing the direction of constructionExisting infrastructure is seen as inadequate to support growingurbanization, population growth and changing demographicsProcurement and Supply chain play a critical role in future successCost reduction remains on the agendaIT needs to set up a levelForces Shapingthe IndustryDrive for GreaterEfficiencySource: Survey by KPMG in 2012Slide # 8
  • 8. History of Indian Construction Industry• In India, construction has accounted for around 40% of the development investment duringthe past 50 years.• Around 16% of the nation’s working populations depends on construction for its livelihood• The Indian construction industry comprises 200 firms in the corporate sector• In addition to these firms, there are about 2,00,000 Class A contractors and thousands ofsmall contractors and sub contractorsStarted in1950’s in India(DevelopingCountryConcept)GovernmentRole inDevelopmentSet up ofNationalIndustrialDevelopmentCorporation(NIDC)IRCON, NBCC,RITES, Etc.1960s GOIencouragedForeignCollaborationsSource: ICAI Technical Guide and wikipediaSlide # 9
  • 9. Brief and Generalized Process in Construction BusinessSlide # 10
  • 10. Market Study and LandIdentificationLand ApprovalsMarket Research &Product FeasibilityLand AcquisitionProduct & Design BriefDesign DevelopmentMaster Cost Budget andCost EstimationRegulatory ApprovalsNext PageProcurementSelection of ContractorProject PlanningConstruction ActivitiesConstruction of Real Estate Business (End to End Project)Slide # 11
  • 11. Project Launch Sales and Marketing Construction Activities On Site Safety MeasuresMaterials Quality ReviewLabour ManagementSales Product LaunchSales AgreementsPossession of AssetReceipt in Finance andAccountsCollection of MoneyRevenue RecognitionConstruction of Real Estate Business (End to End Project)Slide # 12
  • 12. Sample Cost Sheet of Construction ProjectsSrNoDescriptionTotalDevelopmentBudgetTotal WorkOrder IssuedBudgetUtilisedInvoiced andCertified tilldateYet to beInvoicedPaid till datePaid till date(as apercentage ofinvoiced andcertified)A Land CostB Hard Costs- -#DIV/0!- - -0%C Soft Costs- -#DIV/0!- - -0%D Finance Costs- -#DIV/0!- - -0%E Brokerage Cost- -#DIV/0!- - -0%TOTALSlide # 13
  • 13. Land Cost:Soil Investigation WorkAcquisition of LandBrokerage for Land AcquiredProfessional Fees paid on LandAcquisitionCivil & Hard Cost:Material CostExcavation CostProject site officeLandscaping workIrrigation workTemporary Electrical, drainage, water,roads, etc.Sample Flat CostLabour Work CostSecurity CostSoft Cost:Professional Consultant CostStructural consultant CostArchitectural CostMaster Plan ConsultantPollution Board and EnvironmentalClearanceGovernment Approval for Land, Fire,excavation, etc.Legal consultantsMarketing and Advertisement CostAdmin and AccountsFinance Cost:Bank ChargesInterest on LoanBrokerage CostBrokerage Fees to BrokersCost Sheet of Construction ProjectsSlide # 14
  • 14. Key Risks in Construction BusinessSlide # 15
  • 15. Key Risks in Construction Business• Mismatch of liquidity• Inadequate project planning, monitoring and execution leading to time and costoverrun• Revenue recognition• Non compliance with regulatory requirements• Fraud and integrity issues – Local procurement, contract hiring, cash dealings, etc.• Non tracking /recognition of price escalation, claims, variation in works contract• Human safety riskSlide # 16
  • 16. Slide # 17
  • 17. The recent construction mishap at Mumbra-Shilphata of 7-storeyedbuilding which was built with inferior materials and which flouted allconstruction engineering norms was built in record time of 2months.Death toll – 74 people, which include maximum from the age bracket of16~20.Monitoring quality of construction materials like curing of cement blocks,testing steel strength, Concrete batch mixing process, all should be donereligiously to avoid any compromises.Undertaking Peer Review of Architectural Designs & Value Engineering isrecommended.Risk of Avoiding RisksSlide # 18
  • 18. Specific Areas of Internal Audit in Construction of Real Estate BusinessSlide # 19
  • 19. Land Clearance Verification• Title deed /certificate of title of the land – Legal documents which proves the ownership of theland• Encumbrance certificate – Any liability or charges created on any property in terms of anysecurity which is not discharged as on date. This is a legal document issued by registeringauthority• Measurement of property• Sales Agreement – Agreement between buyer and seller• Property registration – Registration at sub registrar or sub district magistrate• Stamp Duty – Legal document gets evidentiary value and is admitted as evidence in courts.• Changing the title in village office – 7/12 or Namantran (changing the name in the records ofgram panchayat)Slide # 20
  • 20. Approvals from local authorities• Building plan that complies with National Building Code of India, 2005 issued by BIS and adoptedby infrastructure department, municipal administrators, public bodies and private agencies• Layout approval• Basic amenities• No Objection Certificate – Water and Pollution Board• Completion certificate• Occupancy certificate• Approval from conversion of land, if necessarySlide # 21
  • 21. Contractor Selection Process RFQ Floating and Tendering process Evaluation criteria and related documentation (Technical Bid and Financial Fid) Bank guarantee details Value of tender Specification of requirement Delivery schedule Mobilisation and retention details Safety, health and Environment Details of products used / services catered at other prime sites, past experience details. Correspondence details Market knowledge about vendor performance, etc. Contract agreements - terms and conditionsPlease suggest the view on Internal Audit point of view… and analysis can bedone on the same.Slide # 22
  • 22. Case 1 – RA Bill AuditBackground of the Company: The Company is into construction of Morden township in theremote area of Mumbai. The company has appointed a contractor who in-turn will help thecompany in constructing the buildings as per the design. The company has entered into anagreement at a rate of Rs XXX per sq. ft. for constructing the building as per the design andplan prepared and mutually agreed.Current Situation: The contractor has submitted an invoice i.e. RA Bill number 23rd to thecompany of Rs XX Cr. till the period of August, 2012.The company had supplied material worth Rs XX Cr on behalf of contractor.Please suggest the view on Internal Audit point of view… and analysis can be done on thesame.Slide # 23
  • 23. Few of the Analysis:• Check the agreement and analyse whether the bill is as per the milestone define in theagreement• Check the rate from agreement and area from the field book. Area completed in the fieldbook (Measurement Book) should be the same as per the BOQ and Invoice• Quality certificate should be checked / No defect certificate should be checked• Physical measurement of cubic meter completed by the contractor on independent basis andcompare the same with invoice quantity and BOQ• All the deduction (as mentioned in the agreement) should be checkedCase 1 – RA Bill AuditSlide # 24
  • 24. The Company has entered in contract with ABC Earth Movers (Vendor) for the execution of infra projects. Forvarious infra works, cost estimates or BOQs are prepared which are approved and accepted in its LOE. Facts: While verifying RA bill -1, we have observed the following issues –a. Quantities mentioned in the BOQ are exceeding in the actual bill.b. No approvals are sought for such excess quantities billed. Such extra quantities billed to the company has led to a cost hike of Rs xx Lakhs in first RA bill itself.Approvals and work orders for excess quantities billed are not executed by the company and there is nomanagement justification provided for excess quantity.Detailed computation attached:Sr.No. asper R.A.BillDescription Unit Rate (`.)Qty asperBOQQtyActual BilledExcess Qty. Amount (`)1Excavation in all types of soil up to anydepth including soft murum bymechanical means as well as ….Cum Xxx 5000 12720.27 7720.27 xxx3Same as item no.1 above, but in HardRock by Controlled Blasting.Cum Xxx 5000 Xxx xxxXxx7Same as item no.1 above, but in HardRock by Poclain with needle rockbreaker….Cum xxx 5000 xxx Xxx xxxTotal xxxxCase 1 – RA Bill AuditSlide # 25
  • 25. On review of contractor’s Running Account (R.A.) bill # xx, it was found that the Total Quantity (Area ofConstruction) fixed as per Agreement with the contractor for Building A1 was not matching with one item billed tothe company.The Total Area fixed as per Agreement for Building A1 is – 81,022 sq. ft.. However the area billed to the companywas 87,513 sq. ft.The said error in the total area of construction has resulted in an excess billing of Rs.xxx/- to the company.The Detailed computation is as follows –It was further observed that, in spite of mismatch of the quantities in the RA bill which resulted for an excessbilling of Rs.1.86 lakh, the project manager & contractor officials had approved the bill.Description RateTotal Quantity (sq. ft.)Qty.Excess amountbilled (Rs.)As perAgreementActualbilledDifferenceFinishing worksTiling againstmaterial Xxx 81,022 87,513 6,491 3.50% XxxxCase 1 – RA Bill AuditSlide # 26
  • 26. Procurement Audit Scope of Work Purchase order authorizations comply with Authority Limits Design and Operating Effectiveness of automated application controls related to authorizationand payment run Segregation of Duties for procurement ordering and payment authorization / service receipt Emergency procurements are Review of Requisitioning & Purchasing Process and Reporting Material receipt documentation (GRN, TC, DC, Weigh Slip, etc.) Reviewing operational effectiveness and ensuring requisitions are approved on a timely basis Review of Payments Processing & recording of Cash DisbursementsSlide # 27
  • 27. Procurement Observation:Background: Singapore based private equity player had invested 60% of money and formed a SPV forconstruction of modern township project along with local real estate player. The project was managed by thecontractor which was selected by SPV company (Indian Company). The procurement was the primeresponsibility of contractor. Following trend was observed.• On review of Steel & other work orders issued, we observed that in case of Xx transactions aggregating to₹xx Crore, the contracts were awarded without• Inviting quotations• preparing comparative statements (CST).• There was no gate inward entry of such materials• Invoices have been processed without proper documentation like GRN, Test Certificates, Weigh slips,etc.• The trend was shown in few common vendors where not frequent purchase was made by the contractor.• The trend was shown in the same month when there was a money infusion by the private equity players• We reviewed the consumption pattern of steel from BOQ and found that the contractor had used excesssteel in the construction activities than mentioned in BOQ.Procurement Audit - ObservationSlide # 28
  • 28. Quality of MaterialsSteel: Bureau of Indian Standards (BIS) – Structural SteelGeneral requirements relating a supply of structural steelshall conform IS 8910Chemical Test:Mechanical Test:Tensile Test: One tensile test shall be made from the finishedproduct for every 40 tonnes or part thereofBend Test: One bend test for every 20 tonnes of material orpart thereofSlide # 29
  • 29. Quality of MaterialsCement: Bureau of Indian Standards (BIS)Slide # 30
  • 30. Quality of MaterialsFly Ash Lime Bricks: Bureau of Indian Standards (BIS)Slide # 31
  • 31.  Review the physical stock take, verification and its reconciliation with books Review the inventory valuation Review store transactions Review compliance with the inventory planning Review consumption of materials viz a viz work completion and compare the actualconsumption with standard consumption (wherever possible) Review inventory ageing Scrap generation and record maintenance processInventory Management Internal Audit ScopePlease suggest the view on Internal Audit point of view… and analysis canbe done on the same.Slide # 32
  • 32. Background: Audit of construction of Hydro Electric Power Plant Project• Total steel consumed during the period from April to Sept. 12 was 5,373 MT. However, The steelscrap sold during the same period and closing stock available at site was approximately 36 MTwhich is 0.68% of material consumed for that period.• We referred Indian Standard Code under CWC (Central Water Commission) guideline, (2ndrevised addition, Page No. 5) for River Valley Projects which states that steel scrap generationshould be 2.5% of steel consumed. So, it should come to 134 MT as per the working.• We further analysed the scrap sales ledger and found that all the scrap sold was in cash and thecompany had not invited multiple bids and defined approval mechanism.Observation Scrap ManagementSlide # 33
  • 33. • Point of consumption not defined. This mean valuation is done only for stock lying atstores and stocks lying at site is neither valued nor considered as a part of consumption.• Valuation of scrap stock is not considered• Actual vs. standard consumption of Steel, Cement and other key materials• Quantity difference in steel issued by stores and steel received by the site contractors• Improper material storage /security of materialsKey Observation for Inventory ManagementSlide # 34
  • 34.  Review of sales agreement and KYC documentation Broker appointment process Customer receipt and its booking Cash collection and its accounting Customer feedback and complaints Debtors ledger scrutiny and un realized debtorsPlease suggest the view on Internal Audit point of view… and analysis canbe done on the same.Sales Process Internal Audit ScopeSlide # 35
  • 35. Background: Audit of Township of approximate Rs 300 Cr. project• As per Maharashtra Ownership Flats Act, 1963, if builder /company fails to provide flat on scheduleddate (which is mentioned in the agreement), he (builder /company) will be liable to pay 9% intereston the amount which have been collected from the client. There is a provision of grace period of 6months which is allowed by the Act.• On review of flat sale agreements, it was observed that flat completion date from construction dateis 18 months, i.e. completion by July 2012, with a grace period of 6 months, extending possession toclient date as 31st December 2012.• As on March, 2013 the company had not completed the buildings number A1 & A2. Total approx.price for A1 & A2 collected till date is ₹ xx Cr & ₹ xx Cr respectively and Interest for delay of 3months from December, 2012 to March, 2013 will be ₹xx Cr @ 9% per annumMOFA Act, 1963 on possession of flatsSlide # 36
  • 36. Cancellation and Refund• As per Maharashtra Ownership Flats Act, 1963, the builder /company can not charge processingfees for cancellation of flat. However, on review of the sales agreement, the company has putclause on cancellation of flat which states that there would be 5% processing charge levied on thecustomer if they cancel the flat. This indicates non compliance with the Act.• 25 Instances of cancellations were observed during the audit period out of which in two instancesprocessing fees of flat cancellation have been collected.• In 2 instances (A1-101 & A2-102) amounting to ₹ xxx Lacs, the amount was refunded 2 & 9 daysprior to actual cancellation dateSlide # 37
  • 37. • The management of the company has set minimum net sale price as ₹ 3,180 per sq.ft. as a pro-forma price.• On review of pro-forma versus actual sales, we observed that there was an average downwarddifference of ₹ 35.14 per sq.ft as on 31st March 2012, which does not include discounts.• Also, it was observed that the price has been consistently lower than the targeted sales price setby the management, for the period September 2011 to March 2012 as per the below table*:Month Gross priceper sq ftSq ft sold Gross priceper sq ftDifference Rate Difference AmountSep-11 3,180.29 - NO SALEOct-11 3,180.29 22,331.00 3,141.52 (38.77) (865,861.82)Nov-11 xxx xxx xxx xxx xxxDec-11 xxx xxx xxx xxx xxxJan-12 xxx xxx xxx xxx xxxFeb-12 xxx xxx xxx xxx xxxMar-12 xxx xxx xxx xxx xxxTotal Loss xxxxLoss as against Pro-forma Sales PriceSlide # 38
  • 38. • Absence of existing address proof of customers and out of which, there is an outstandingamount for more than 75% of such cases• Brokerage analysis (Preferred broker, broker empanelment, maximum brokerage, etc.)• Discount analysis• Debtors outstanding analysis• KYC / debarred entity verificationSales Process – Other IA ObservationsSlide # 39
  • 39. • Building & other construction Workers (Regulation of Employment and Conditions of Service)Act, 1996 (BOCWA)• Building and Other Construction Workers (Regulation of Employment and Conditions ofService) Central Rules, 1998 (BOCWR)• Petroleum Act, 1934 (PA)• Petroleum Rules, 2002 (PR)• Explosives Act, 1884 (EA)• Explosives Rules, 1983 (ER)• Gas Cylinder Rules, 1981 (GCR)• Static & Mobile Pressure Vessels (Unfired) Rules, 1981 (SMPVR)• Electricity Act, 2003 (EA)• Indian Electricity Rules, 1956 (ER)• The workman compensation Act, 1923• The ESIC Act and Rule• Contract Labour (Regulation and Abolition) Central Rule, 1971• The Child Labour (Prohibition and Regulation) Rules, 1988• Safety norms provided by BISKey Safety RegulationsSlide # 40
  • 40. • Child labour working on site• Labor working on the edge of the building were not wearing safety harness• Females, working on the edge of 5th and 6th floors, were observed without wearing safetyhelmets• Garbage chute was not available• Insufficient and inadequate first aid boxes• The company should have Ambulance Van in case if there are more than 500 labors areworking on the site.• It was observed that safety net had a gap of at least 2 feet from the side of the walls, which canbe a safety breach in case of fall of any man or material• The signboards at the site were mostly in English language which cannot be understood bylabors at site.• No training calendar available on safety, important training like firefighting and falling fromheight was not doneOther Observations on SafetySlide # 44
  • 41. Summary of Delay as on 31st March, 2012 - Building WiseBuildingNameHandingover toContractorScheduledstart ofworkActualstart ofworkScheduledcompletion oflatest activityActualcompletion oflatest activityTotalDelay asof todayAccountabilityDelay inHanding Overof siteattributable toCompanyDelay Attributable tonon availability ofsteel, late issuanceof drawings, badcash flow, etc.Net Delayattributableto contractorA1 17-Feb-11 30-Dec-10 17-Feb-11 15-Nov-11 30-Mar-12 xxx xxx xxx xxxA2 17-Feb-11 30-Dec-10 17-Feb-11 17-Aug-11 27-Mar-12 xxx xxx xxx xxxA3 11-Aug-10 06-Sep-10 11-Aug-10 23-Jul-11 19-Feb-12 xxx xxx xxx xxxA4 10-Jun-11 20-Jan-11 10-Jun-11 01-Jun-11 14-Mar-12 xxx xxx xxx xxxA5 08-Oct-10 17-Oct-10 08-Oct-10 2-Aug-11 14-Mar-12 xxx xxx xxx xxxA6 08-Oct-10 30-Oct-10 08-Oct-10 28-Aug-11 17-Mar-12 xxx xxx xxx xxxA7 16-Oct-10 17-Nov-10 16-Oct-10 05-Sep-11 23-Feb-12 xxx xxx xxx xxxA8 17-Feb-11 20-Dec-10 17-Feb-11 20-Jul-11 01-Mar-12 xxx xxx xxx xxxA9 05-Nov-11 20-Jan-11yet to be identified xxx xxx xxx xxxA10 05-Nov-11 20-Jan-11Total xxx xxx xxx xxxReasons for Delay:No. Reasons1 Delay on account of late handing over of site2 Delay on account of non availability of steel3 Delay on account of late issuance of drawings4 Delay on account of shortage of cement:5Delay on account of late clearing of area for carrying out theexcavation work6 Delay on account of shortage of manpower7 Delay on account of bad cash flow8 Delay on account of hindrancesScheduled CompletionDateNovember,2011New Completion Date March, 2013Delay in Days xxxxDelay from ContractorDelay from CompanyProject Management – IA ObservationSlide # 45
  • 42. AS 7 – Revenue Recognition of Construction ContractsYEARIYEARIIYEARIIIInitial amount of revenueagreed in contract9000 9000 9000Contract Costs incurredupto the reporting date2093 6168 8200Contract costs to complete 5957 2032 0Total Estimated costs 8050 8200 8200Stage of Completion 26% 74% 100%The stage of completion of contract can be determined• The proportion that contract costs incurred for work performed upto the reportingdate bear to the estimated total contract costs; or• Surveys of work performed; or• Completion of a physical proportion of the contract work.Slide # 46
  • 43. UptoReporting dateRecognised inprior yearRecognised incurrent yearYear IRevenue (9000 x 0.26) 2340 2340Expenses (8050 x 0.26) 2093 2093Profit 247 247UptoReporting dateRecognised inprior yearRecognised incurrent yearYear IIRevenue (9000 x 0.74) 6660 2340 4320Expenses (8200 x 0.74) 6068 2093 3975Profit 740 247 345UptoReporting dateRecognised inprior yearRecognised incurrent yearYear IIIRevenue (9000 x 1.00) 9000 6660 2340Expenses (8200 x 1.00) 8200 6068 2132Profit 1000 740 208AS 7 – Revenue Recognition of Construction Contracts
  • 44. Other Standard Internal Audit AreasSlide # 48
  • 45. Scope Area Check PointCash & Bank Physical verification of cash Cash payment - supporting and authorization Bank payment - supporting and authorization Bank reconciliation statement Review of the Cash flow forecasting process and working capitalmanagement Monitoring of cash movements (sources and application of cash) /Review cash flow statementFixed Assets Fixed Assets Acquisition, capitalization, transfer and disposal process Review the actual expenditure against the capital expenditure budgetand plans. Segregation of Duties for procurement ordering and paymentauthorization / service receipt Review the payment as per the progressive payment and retentionterms Physical verification of fixed assets (on sample basis)Standard Scope of Internal Audit in Construction BusinessSlide # 49
  • 46. Scope Area Check PointAccountingSoftware &System Adequacy of Accounting Software in light of the volume and nature oftransactions and business. Back up procedure. Security Features. Various MIS reports embedded therein.availability of log recording the audit trail of changes and deletion madein the Vouchers after the close of daily day book Any other issue, which needs to be reported.Books of Accounts Review of period end adjustments, closing entries, recording ofoutstanding and accruals Review of book closure process and controls & cut-off procedures Review of revenues and expenses matching criteria Review of Balance sheet and Profit and Loss Accounts Compliance with accounting standards and other financial reportingframeworksStandard Scope of Internal Audit in Construction BusinessSlide # 50
  • 47. Scope Area Check PointHuman Resource& Payroll Review of payroll computations by re-performance Monthly variance in payroll amounts is checked to identify month tomonth variations Controls over Full and Final settlement Review of statutory payments and government dues i.e. PF, ESIC,Payment of bonus act, Labour act, etc. Review compliances with the HR policies Headcount reconciliation between HR & Payroll Employee joining and leaving processSafety, Health &EnvironmentManagement Review audit plan and scheduling of SHE audits Review implementation effectiveness of recommendations given by theSHE auditors Define and monitor KPIs for SHE auditors Review number of hazardous events / accidents occurred in the plantsand root causes for the sameStandard Scope of Internal Audit in Construction BusinessSlide # 51
  • 48. Scope Area Check PointLegal andComplianceManagement Understand the existing compliance framework to tax legislations andEmployment Laws Evaluate strategic tax planning Decisions and related tax exemptionrequirements Review ongoing compliance to regulationsIdentify penalties (and financial implications), if any, for non-compliancesInsurance Review insurance policies and its coverage Verify that the value of Inventory and Cash balance in hand/Transitshould not exceed the insured amount at any time Verify whether the policy is renewed before expiry Check whether proper claim is made with insurance company in case ofloss to asset Insurance policy selection processStandard Scope of Internal Audit in Construction BusinessSlide # 52
  • 49. Reporting of Internal AuditSlide # 53
  • 50. AreaTotalObservationManagementCommentsReceivedAcceptedNot Accepted/ RequireDiscussionImplementationTimelines GivenReview of Insurance 5 5 5 0After ManagementApprovalReview of Safety, Health & Environment xx xx xx 111 PointsImplementedContractor Selection Review xx xx xx 1 Not GivenReview of RA Bills / Payment toContractorsxx xx xx 1Fixed Asset Review xx xx xx 12 pointsimplementedCash & Bank Review xx xx xx 02 pointsimplementedLabour Compliance Review xx xx xx 0 Response AwaitedAccounts & System xx xx xx 1 Not GivenSales & Marketing xx xx xx 4 Require DiscussionBook Closure Process xx xx xx 0 Not GivenProject Execution Review xx xx xx 0 Not GivenAdmin Expense xx xx xx 0 Not GivenInformation Technology Review xx xx xx 0 Not GivenTotal xx xx xx 9Overall SummaryHigh RiskObservationsSlide # 54
  • 51. Root Cause AnalysisMajor Root Cause AnalysisNo. ofObservation% H M LPeopleExpectation Setting and Awareness xx 16% 9 3 0Poor implementation of defined / not defined jobresponsibilityxx 23% 16 1 0ProcessAbsence of defined control procedures xx 22% 14 2 0Absence of effective monitoring procedures xx 12% 6 3 0Operational ineffectiveness xx 23% 7 6 4Technology Technology inefficiency and awareness xx 3% 0 2 0Slide # 55
  • 52. Generalized Root CausesExpectation Setting and AwarenessPoor implementation of defined / notdefined job responsibilityAbsence of defined controlprocedures• Inadequate FAR• Non display of certificates and extractsas per regulatory requirements• Absence of exhaustive vendor masterlist• Absence of agreement MIS tracker• Tracker for retention money deductionnot maintained adequately• Child labour found at site• Safety harness not given to labourers• Processing of Steel invoices & AirCondition Invoices without properdocumentation• Aged advances to vendors• Pro-forma vs actual sales price• Insurance risk assessment notdone• Fixed Assets Policy not defined• Absence of maker checker inBRS• No policy on cancellation offlats• Absence of standard operatingproceduresAbsence of effective monitoringproceduresOperational ineffectivenessTechnology inefficiency andawareness• Expiry of agreements for admin work• Revision of completion date notsubmitted to Insurance company• Project delay• Periodic physical verification not done• Un-reconciled difference in BRS• Stale cheques more than 6 months• Cheque bounce charges not recoveredfrom client• Refund before cancellation• Ledger created with head "unknown"• Absence of ERP• Accounting system not blockedafter book closure1 2 34 5 6Slide # 56
  • 53. Way AheadRoot Causes Way Ahead Deadline ResponsibilityExpectation Settingand AwarenessOperationalIneffectivenessTopical & Awareness creation sessions from expertsDeveloping policies / guidelines / standard operating proceduresDefining KRA and KPIPoor implementationof defined / notdefined jobresponsibilityDefining job responsiblitiesPerformance linkage with remunerationAccountability needs to be set for each processAbsence of definedcontrol proceduresDefining proper control and compliance frameworkCompliance control self assessmentAbsence of effectivemonitoringproceduresPre-audit of transactionsQuarterly internal auditTechnologyinefficiency andawarenessAn effective ERP System123456Slide # 57
  • 54. Thank YouSlide # 58