Internal Auditing BY CDR ALOK MOHAN Internal auditing

Internal Auditing BY CDR ALOK MOHAN

Internal auditing IA is an independent, objective assurance & 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 of processes. Internal auditing is a catalyst for providing insight and recommendations based on analyses and assessments of data and business processes

What is Quality Audit ? A systematic independent and documented process for obtaining audit evidence and evaluating it objectively to determine the extent to which Audit criteria is fulfilled What is Audit Criteria ? Set of policies Procedures or requirements used as reference Purpose To collect evidence to permit informed judgment about status of QMS

Audit Evidence Records Statement of facts or other information which are relevant to audit criteria and are verifiable based on actual observations Audit Findings Results of evaluation of the collected audit evidence against audit criteria Non conformity Is non fulfillment of audit criteria ie condition adverse to quality of product or services

Types of Audits First Party Audit - By Company on itself Second Party Audit – By Customer on its Supplier Third Party Audit – By an independent Organization Adequacy Audit - An exercise to determine to which documented system address the applicable requirements Compliance Audit – An audit to establish the extent to which the documented system is implimented

Features Of Audit Independence Randomness Objectivity Reporting Format Corrective action follow-up Suggestions remedy

Audit frequency should depend on: Results of Previous Audits Changes to QMS Any serious concern ie part of investigations Any specific customer requirements

Internal Audit Preparations 1. Planning: Gather relevant information & QMS documents – understand documented QMS, Prepare Check list, Collect working documents, Confirm availability of auditee as per the audit schedule 2. Use Check lists Prepare bullet points, questions & use check lists as guide points For example check list for purchase process is: Process-input-output-interfaces, product specifications, process for vendor evaluation, list of approved vendors, evidences of vendor evaluation, action on evaluation results, purchase planning process, purchase policy, purchasing information on purchase orders – orders on approved vendors, product specifications, quantity & delivery details, inspection & dispatch details, packing & commercial details accompanying documents, packing details, Authorizations on purchasing, process of ensuring receipt of material on time, purchase order amendment processwhen required, Post material receipt activities, rejections payment release etc

Conduct of IA Basic aim is to determine the Existence of operation ie knowledge & understanding, resources, controls Effectiveness of QMS ie Visible & demonstrable, Known & understood 1. Describe scope of audit to auditee 2. Ensure entire scope of IA is covered 3. Seek proof for objective evidence 4. Investigate to the necessary depth 5. Control and run audit as per plan 6. To & fro checking 7. Satisfy about effectiveness 8. Take representative random samples

Audit Performance Some important points 1. Follow sampling technique 2. Read observe listen 3. Observe facility, general housekeeping, condition of equipment, documents & their consistency 4. Observe people their knowledge, skill expertise etc 5. Do not try to have a policeman attitude

Auditing Techniques Following techniques are used for gathering audit evidence Discussion with people Verification of facilities & environment Verification of documents and records Observation of work in progress Product Audit as appropriate

Six Honest Men If we use they give definite response (Rudyard’s kipling) They are WHO, WHAT, WHEN, WHERE, HOW, WHY Bur 7 th Servant is highly effective That is SHOW ME

Questioning Techniques 1. Use open Questions ie questions which can not be answere with simple yes or no For example “can you please tell me what you do” 2. Use closed questions rarely ie when you need a simple definite answer to clear uncertainty For example “Are you responsible for this” 3. Use combinations with seven servants for example What if Who else then what etc 4. Other techniques – For example I do not understand can you explain or Silence & give nods motivating auditee to provide useful info

Internal Audit Reporting If there is no fulfillment of audit criteria by the auditee or if There is a condition adverse to the quality of product or service then there should be Oral reporting or written reporting The Audit report must be Concise, Complete, Clear, Correct & Appropriate NCR should contain details of department, Auditor, Auditee, Date of audit, NCR details, Corrective Action, Signatures of Auditor & Auditee & a provision for follow up actions

Audit report may contain five elements, sometimes called the "5 C's": Condition: What is the particular problem identified? Criteria: What is the standard that was not met? The standard may be a Company policy or other benchmark. Cause: Why did the problem occur? Consequence: What is the risk/negative outcome (or opportunity foregone) because of the finding? Corrective action: What should management do about the finding? What have they agreed to do and by when?

Corrective Action 1. 2. 3. 4. 5. Cause Analysis – Why NCR occurred Action on objective evidence Action on other items which might have similarly got effected Action to ensure that the Non conformity does not occur again Target date for corrective action

Benefits: IA is a powerful tool to aid continual improvement & is used as a control mechanism by top management • Provides senior management with an efficient management process • Sets out areas of responsibility across the organization • Mandatory if you want to tender for some public sector work • Communicates a positive message to staff and customers • Identifies and encourages more efficient and time saving processes • Highlights deficiencies • Reduces your costs • Provides continuous assessment and improvement • Marketing opportunities

Some of the benefits to customers: • • • Improved quality and service Delivery on time Right first time attitude Fewer returned products and complaints Independent audit demonstrates commitment to quality

Benefits what shipyard look for • To assure customer satisfaction • To continually improve safe reliable products & services that meet or exceed customer & statutory & regulatory requirements • To globify & unify the standard to avoid redundancy & varying quality expectations from different suppliers & requirements by OEM • Increased opportunities & acceptance within the supply chain • Improved product and process quality • Potential reduction in variation of quality

Principles of Auditing Ethic Conduct Fair Presentation Due professional care Independence Evidence based approach

Desirable Traits of an Auditor Fact Finding, Polite, Direct, Persistent, Independent, Tactful, Decisive, Prepared, Honest, Patient, Unbiased, Communicative Undesirable Traits of an Auditor Fault finding, Rud 3 e, Meandering, Lazy, Gullible, indecisive, unprepared, dishonest, impatient, biased, aggressive, uncommunicative

Objectives of Auditing Following objectives: 1. 2. 3. 4. 5. 6. 7. 8. Management priorities Commercial intentions QMS requirements Statuary Regulatory & Contractual requirements Need for supplier evaluation Customer requirements Need of other interested parties Risks to the organization

Defining Audit Objectives The audit objectives define what is required to be accomplished during the audit 1. Determination of extent of conformity of auditee QMS 2. Evaluation of capability of QMS to ensure compliance of statuary & contractual& regulatory requirements 3. Evaluation of effectiveness of QMS in meeting objectives 4. Identification of areas of potential improvement of QMS

4. 5. Observant –Actively aware of surroundings activities Perceptive –instinctively aware & able to understand situations 6. Versatile Adjusts readily to different situations 7. Tenacious – Persistent focused on achieving objectives 8. Decisive – Reached conclusions timely 9. Self reliant – Acts & functions independently while interacting with others 10. Knowledgeable – Should posses good knowledge & skills

What is Quality ? Degree to which a set of inherent characteristics fulfill requirements Characteristics include Distinguishing features Inherent & or Assigned requirements Qualitative or Quantitative Stated implied or Obligatory requirements

Many Facets of Quality of Work Quality of services Quality of information Quality of process Quality of system Quality of People Quality of Objective Quality of Company

Quality Criteria Technically correct On time To Budget Safe Legal Reliable Maintainable Usable by all Less or no adverse environmental impact