Technical Guide on Internal Audit of Textile Industry
Technical Guide on Internal Audit of
Textile Industry
Preface
Internal Audit is an independent function involving continuous and critical appraisal of the functioning of the entity with a view to suggest improvements in governance mechanism of the entity including entity’s strategic risks and management checks and internal control systems.
The aim of the internal control evaluation is to add value to organizational control systems with a systematic, disciplined approach to the risk mitigation effort. This evaluation includes accounting and reporting policies and compliance with the applicable legal framework and regulatory standards and standard operating procedures.
Acknowledgements
This Technical Guide has been prepared under the overall guidance of Mr. Sunil Kumar Bhargava & Mr. Rajkumar Adukia. It is based on the practical experience in addition to the material in public domain.
It is proposed to revise the Technical Guide every three to four years to reflect changes in the audit methodology and techniques and bring it up to date in all respects. It is requested that the users of this Guide and others who might have gone through it casually may please bring to the notice of Internal Audit Cell, ICAI any shortcomings in this guide so that they may be made good in its next edition. Similarly, any suggestions for its improvement would also be welcome.
Technical terms related to textile industry (Glossary)
Bales:- In countries where the fleece traditionally has been shipped, the fleeces are packed into bales -- which load better in the ship holds for export abroad. Depending on the country, the bales weigh different amounts. Australian and New Zealand bales weigh 150 kg (330 lb), whereas South American bales weight approximately 1,000 lb (454 kg).
Bobbin:- Bobbin the cylinder or spool upon which yarn or thread is wound. An option to buying lots of bobbins for your wheel is using “Storage Bobbins”.
Combing:- An operation in the worsted system of fiber preparation that removes the short fibers and foreign impurities. The long fibers are strengthened and laid parallel.
Count:- The number given to a yarn of any material, usually indicating the number of hanks per pound of that yarn. May also refer to the fineness to which a fleece may be spun.
Cotton Count is another measure of linear density. It is the amount of skein material measured in hanks (840 yards) needed to create one pound. Under this system, the higher the number, the finer the yarn. In the United States a cotton count between one and 20 are referred to as coarse counts. A regular single knit T-Shirt can be between 20 and 40 count, fine bed sheets are usually in the range of 40 to 80 count.
Denim:- A well-known basic cotton or blended fabric in a right- or left-hand woven twill. Generally, the warp is dyed blue with a weft.
Ends per inch (or E.P.I.) is the number of warp threads per inch of woven fabric. In general, the higher the ends per inch, the finer the fabric is
Fabric:- Any cloth woven or knitted from fibers. Fall Wool, Wool shorn in the fall following 5-6 months of growth.
Greige Goods - Term used to describe cloth woven on a loom with warp and filling yarns that have not been dyed. The woven fabric may be dyed later after weaving, as in piece dyed fabrics.
Picks per inch (or P.P.I.) is the number of weft threads per inch of woven fabric. A pick is a single weft thread, hence the term. In general, the higher the picks per inch, the finer the fabric is.
Spindle: According to the dictionary, "A rounded rod, usually of wood, tapering toward each end, used in hand spinning to twist into thread the fibers drawn from the mass on the distaff, and on which the thread is wound as it is spun.
There are a variety of loom styles for hand weaving and tapestry. In tapestry, the image is created by only placing weft in certain areas, rather than in the weave structure itself.
Viscose - A special form of rayon that is produced by putting wood pulp or cotton linters through a specialized spinning and chemical process. Viscose yarn is popular in high end upholstery fabrics, particularly viscose chenilles, because of the yarn's lustrous appearance and strength.
Warp - The yarns which run vertically or lengthwise in woven goods. The warp yarns are threaded through the loom before weaving begins. In upholstery fabrics, the warp yarns are typically finer than the fill or weft yarns, but not always.
Weft - The crosswise or filling pick yarns in a woven cloth, as opposed to the warp yarns. This term is popular in hand weaving circles in the USA, while in the industry the term filling is more popular, however both words have the same meaning.
Winding:- This spinning term refers to winding the finished yarn onto a bobbin and secured to prevent unraveling.
Yarn - A generic term for an assemblage of fibers or filaments, either natural or man-made, twisted together to form a continuous strand that can be used for weaving, knitting, braiding, or the manufacture of lace, or otherwise made into a textile material. In upholstery fabrics, the most commonly used yarns are made of cotton, polyester, acrylic, rayon, and polypropylene.
Yarn Dyed Fabric - Fabric woven with yarns that have been dyed prior to the weaving of the goods. This is as opposed to piece dyed fabrics, which are woven with undyed warp and fill yarns.
Contents
Overview of Technical Guide…………………………………………………………………………………
Part I : Internal Audit Function – Theoretical Framework………………………………………….
Chapter 1 Internal Control framework & Internal Audit……………………………………………………….
Chapter 2 Internal Audit Charter……………………………………………………………………………………
Part II –Introduction to Textile Industry…………………………………………………………………
Chapter 1 Overview of Textile Industry…………………………………………………………………………………
Chapter 2 Structure of Indian Textile industry………………………………………………………………………..
Chapter 3 Regulation regarding textile in India………………………………………………………………………
Chapter 4 SWOT analysis of Indian textile industry…………………………………………………………………..
Chapter 5 Spinning………………………………………………………………………………………………………..
Chapter 6 Weaving……………………………………………………………………………………………………….
Chapter 7 Apparels………………………………………………………………………………………………………….
Part III: Practice Guide for Internal Audit……………………………………………………………………
Chapter 1 Working Papers………………………………………………………………………………………………..
Chapter 2 Planning the audit………………………………………………………………………………………………
Chapter 3 Conducting the Audit……………………………………………………………………………………….
Part IV – Risk Assessment & Internal Audit Function in Textile………………………………………………………..
Chapter 1 Risk assessment & Mitigation Plan…………………………………………………………………………….
Chapter 2 Identification of Major Risks in Textile Industry…………………………………………………….……..
Chapter 3 Checklist for Internal Audit………………………………………………………………………………..
Part V Concluding the audit & reporting audit findings…………………………………………………………..
Overview of Technical Guide
Part I: Internal Audit Function – a Theoretical Framework
For an internal auditor to effectively discharge his function, he must have a sound conceptual understanding of internal controls framework of various types of audits, auditing standards, audit risk, materiality and so on. While audit may be performed based on checklist and internal control questionnaires, a good understanding of underlying concepts helps the auditor perform a qualitatively better job. It is expected that this part of Technical Guide would give those additional inputs to internal auditor that would make him aware of the theoretical underpinnings to what he is doing.
Part II- Introduction to Textile Industry
Contains brief overview & history of textile industry & detailed process cycle of Spinning, Weaving & Apparels.
Part III - Practice Guide to Internal Audit
The practice Guide is divided into three sections viz. Working Papers, Planning Phase, and Conducting Phase, which are briefly discussed below.
Working Papers: maintenance of working papers is an important responsibility that the internal audit should follow with discipline.
Planning Phase This section deals with various steps involved in planning - from planning the annual audit programme to a more detailed plan for individual audits. The annual audit programme would require the head of Internal Audit to match the requirement of audit with the resources. To illustrate, Internal Audit section of any textile industry may have more than 30 auditable areas. It may not have resources to audit all of them during the course of one year. The annual programme would then have to select areas in such a manner that those entities representing higher risk are audited on priority. On the other hand, individual audit plan deals with planning the audit of selected areas. It involves gaining understanding of the organization and its operations, controls and management assertions, desk review including analytical review, assessment of inherent risk and controls risks and so on. At the end of this phase auditor determines the nature, timing and extent of audit procedures to be applied.
Conducting Phase Having broadly identified the risks, in this phase the auditor goes through audit procedures in areas identified for audit, gathers evidence applying different techniques including sampling. A Work Breakdown Structure (WBS) of audit is prepared and resource allocation (audit staff) is done. A well documented audit program helps auditor to delegate and supervise audit project efficiently.
Part IV: Check lists and Questionnaires
Standardized questionnaire for broad areas are provided in this part. Brief introduction of risk assessment & mitigation plans & identification of 15 anticipated risk areas in textile industry & their possible mitigation plan as per the Global industry practice.
Part V: Closing & Reporting Phase
Closing Phase The audit is closed once all the audit procedures are completed by collecting the required evidence and the replies to preliminary audit observations have been obtained. Review of work done by the field staff as per audit program is an important closing process as also a review of analytical tests and evaluation of audit evidence gathered. The audit is formally closed with an exit conference with head of the department when the draft findings of audit are discussed and the audit team leader may at his discretion resolve some of the issues based on the explanations furnished.
Reporting Phase: Final deliverable of audit process is the Audit Report. This chapter deals with contents, documentation and quality of audit report.
In this section where ever 'must' and 'should' have been used, it is expected that the internal audit would comply with the procedure without fail unless there is reasonable basis for deviation. Similarly where 'generally should' and 'may' are used compliance is seen as optional or desirable.
Part I: Internal Audit Function – a Theoretical Framework
Chapter 1
Internal Controls and Internal Audit
Internal Controls
Internal Control is an integral process that is operated by an organization’s management and personnel and is designed to address risks and to provide reasonable assurance that in pursuit of organization’s mission, the following general objectives are achieved:
· executing orderly, ethical, economical efficient and effective operations;
· fulfilling accountability obligations;
· complying with applicable laws and regulations;
· safeguarding resources against loss, misuse and damage
The Committee of Sponsoring Organizations (COSO) has developed an internal control framework that has come to be accepted as the standard all over the world. The key concepts of COSO framework include:
· Internal controls are an on-going process, a means to an end, and not an end in themselves;
· Internal controls are affected by people at all levels of an organization and not just policies and their documentation; and
· Internal Controls will never eliminate risks but can provide a reasonable assurance that controls is in place to mitigate risks.
Internal control is not a single measure but a series of prescriptions of do’s and don’ts that touch every activity of the organization. In that sense it is an integral part of the organization. Also, internal control is not something which is separate from the people who operate them. It is part of the roles and responsibilities of the persons working in the organization. As all organizations exist for a purpose, the basic objective of internal control is to ensure that the organization achieves its mission; in other words, it aims to minimize the risks that the organization may not be able to achieve its mission.
Any system of internal control can provide only reasonable assurance as it would be not be economical to provide an absolute assurance. This recognizes the fact that there are costs associated with any internal control and such costs should not exceed benefit derived from it. Moreover, excessive controls may result in employees circumventing them and, they could also result in delays and inefficiencies in operations.
Apart from ensuring ethical, efficient, economical and effective operations, one of the main objectives of internal control in any sector is to safeguard resources which are acquired with invested money. With the extensive use of Information Technology in many organizations, internal controls related to IT have also assumed great deal of importance. Managers of organizations where IT is used should be aware of risks of poor controls in IT systems, particularly where they deal with payroll, procurement, stores, etc.
Any system of internal control is limited by the following factors:
· Human factor: Internal control is susceptible to flaws in design, poor judgment, wrong interpretations, misunderstanding, carelessness and abuse or override as all these involve human involvement.
· Resource constraints: As already mentioned, internal control implies costs and resources could be one other limiting factor. Particularly in smaller organizations very elaborate or sophisticated internal control may not be possible. In such cases, the management should consider whether the lack of one type of control could be compensated by another less expensive control.
· Organizational changes and management attitude also have a very significant bearing on internal control. Ultimately, it is the management’s (the head of office and his team) attitude that determines how seriously are the internal controls taken by the staff. If they see that the management is relaxed or it does not itself follow many of the precepts, they would have little motivation to observe the internal controls. It is therefore very important that the top managers always set an example in this regard.
Internal control system exists to help organizations to meet their goals and objectives. They enable management to deal with the changes in internal and external environments. They also promote efficiency, reduce risk of loss, and help ensure financial statement reliability and compliance with laws and regulations (COSO Internal Control Framework). COSO Framework for internal control system consists of five interrelated and equally important components:
ü Control environment
ü Risk assessment
ü Control activities
ü Information and communication
ü Monitoring
The control environment sets the tone of an organization, influencing the control consciousness of its staff. It is the foundation for all other components of internal control, providing discipline and structure. This is, as already pointed out, determined by the management. Elements of control environment include: