INTERNAL AUDIT OF CONSTRUCTION INDUSTRY - PowerPoint Presentation

1. INTERNAL AUDIT OFCONSTRUCTION INDUSTRYK.K RAO M.Com,LLB.,FCMA,MIMA,FCS

2. K.K.RAO & ASSOCIATESLEGAL & REGULATORY FRAMEWORK : Building and Other Construction Workers Act,1996 - Applicable if 10 or more construction workers, or Construction cost exceeds 10 lakhs (Excluding land cost) Contract Labour Act ,1970 - Applicable if Establishment /Contractor employs 20 or more labours Employees Compensation Act ,1923 Employees Provident Funds and Misc. provisions Act,1952 Fatal Accidents Act,1855 Minimum Wages Act,1948 Employees Liability Act,1938 Payment of Bonus Act,1965 Public Liability Insurance Act ,1991

3. LEGAL & REGULATORY FRAMEWORK: Unorganized Workers Social Security Act,2008 Equal remuneration Act,1976 -Payment of Equal pay for equal work for both man and woman Maternity benefit Act,1961 - Regulates employment of woman before and after the child birth Child labour (Prohibition and Regulation) Act,1986 Environment (Protection) Act,1986 Trade Unions Act,1926 Stamp duty and Registration K.K.RAO & ASSOCIATES

4. INTERNAL AUDIT Internal Audit is continuous and systematic Process of examining and reporting the operation and records of a concern by its employees or external agencies specially assigned for this purpose Internal audit is to provide independent assurance that an organisation's risk management, governance and internal control processes are operating effectively To provide reasonable assurance to the relevant audit committee K.K.RAO & ASSOCIATES

5. Internal Auditor has to look at :Assessing the management of riskAssisting management in the improvement of internal controlsActivities of Internal AuditEvaluating controls and advising managers at all levels Working with other assurance providers Analyzing operations and Confirm InformationEvaluating risks K.K.RAO & ASSOCIATES

6. Internal control : Control Environment Risk Assessment Control Activities Information & Communication MonitoringInternal control is a process, effected by an entity’s board of directors , management and other personnel, designed to provide reasonable assurance regarding achievement of objectives K.K.RAO & ASSOCIATES

7. Risk Assessment :Risk Assessment is a process by which an auditor Identifies and evaluates the Quantity of the Organization risk and Quality of its controls over those risks Assessment typically analyze INHERENT RISK of business/process Assessment should reflect changes to the system of Internal Control Considering thematic control issues, risk tolerance Qualitative & Quantitative factors of event occurring Inclusion of overall auditable entity score Supported with written analysis of risks summary risk assessment provided to audit committee K.K.RAO & ASSOCIATES

8. Value addition to Organization Multi-disciplinary skill set Organizational alignment Data supported insight & analysis Improve the effectiveness risk management ,control and governance processes K.K.RAO & ASSOCIATES

9. Scope of Internal Audit : Verification of fixed asset register and periodic updation Purchase of materials & equipment in terms of a) Invitation of quotations b) Evaluation of quotations c) Selection of vendors d) Receipt of goods & issue procedures Payment process including handling, safe custody of cash & cheques in terms of a) Physical verification of cash b) Safe custody of cash & blank cheques c) Verification of vouchers & their approvals d) Review of Advances e) Review of bank reconciliation statements K.K.RAO & ASSOCIATES K.K.RAO & ASSOCIATES

10. Scope of Internal Audit (Contd): Evaluation of procedures adopted for awarding contracts a) Invitation of Tenders b) Evaluation of Tenders received c) Selection of the contractor Reporting on compliance of provisions of Companies Act,2013 in respect of a) Authorised , Subscribed & Paid-up capital b) Unsecured loans c) Loans & advances d) Board meetings & resolutions e) Filing returns as per legal provisions Scrutiny of statutory compliances like TDS, Advance tax, Service tax, VAT, Works contract tax. K.K.RAO & ASSOCIATES

11. Scope of Internal Audit (Contd): Scrutiny of internal control procedures at project site in respect of a) Record maintenance for receipt & issue of materials b) Storing arrangements for unutilized inventory c) Proper utilization & safe guarding of Assets d) Certification of project work in progress e) Accounting procedures & reporting to head office f) Proper accounting payments including classification Verification of Interest during construction Accounting of loan transactionsMaintaining reasonableness of internal financial controls K.K.RAO & ASSOCIATES

12. Accounting standards AS – 7(Construction contracts) AS – 9(Revenue recognition) K.K.RAO & ASSOCIATES

13. K.K.RAO & ASSOCIATESAccounting standards :AS- 7 Rendering of services directly related to construction of asset Cost and revenue is recognized only when outcome of contract is measured reliably Expected losses should recognize as an expense for the contract AS-9 Recognition of revenue arising in the course of ordinary activities Incase of uncertainty recognition is postponed.

14. Revenue/Operational cost : K.K.RAO & ASSOCIATES

15. OPERATING REVENUE : K.K.RAO & ASSOCIATES Revenue from land, plots and constructed properties. Revenue from development charges. Revenue from development rights (net). Revenue from power generation. Rental income. Maintenance or other Service receipts. Amount forfeited on properties. Revenue from other activities of the Company.

16. REASONS OF UNEXPECTED COST : Design development changes. Schedule adjustments. General administration changes (such as wage rates). Differing site conditions for those expected. Third party requirements imposed during construction.Natural Calamities K.K.RAO & ASSOCIATES

17. Project cost allocation : Specific identification method Relative value method Common Expenses i) Value of cost completed to date. ii) Management discretion. iii) Incremental cost during the year. iv) Capital employed for each project (for interest). Or a combination of above. K.K.RAO & ASSOCIATES

18. Application of percentage completion method:Where to apply The duration of such project is beyond 12 months. Most features of the projects are common to the construction contract. The construction activities form a significant proportion of the project activity.Conditions to Apply Total project revenue can be estimated reliably. The probable economic benefits associated with the project will flow to the enterprises. The cost to complete the project and cost up to stage of completion at the reporting date can be estimated reliably. The project cost attributable to the project can be identified and measured reliably for the purpose of comparison with prior estimates. All the approvals required for commencement of the project activity have been obtained. K.K.RAO & ASSOCIATES

19. Construction project models :Public Private Partnership (PPP) ModelReal Estate Development Model EPC Contracting ModelPPP Projects Operation on the basis of BOO ‐ Build Own Operate BOLT ‐ Build Own Lease Transfer BOOST ‐ Build Own Operate Share Transfer BOT‐ Build, Operate and Transfer BOOT‐ Build, Own, Operate and Transfer BOLT ‐ Build Own Lease Transfer BLOT‐ Build, Lease, Operate and Transfer DBFO ‐ Design Build Finance Operate DBFOT‐ Design, Build, Finance, Operate and Transfer OMT ‐ Operate Maintain Transfer K.K.RAO & ASSOCIATES

20. Construction project models (Contd) :Real Estate Development Model : This Includes development of land and construction/ development of everything that is permanently attached to the land & It also Covers i) Green field development (Traditional model) ii) Redevelopment modelEPC Model : EPC model is Engineering, Procurement and Construction Contracts finalized based on Technical and Commercial bidding process. It covers i) LSTK‐ Lump Sum Turnkey contracts ii) Cost plus contracts iii) Item Rate Contract iv) A Combination of above K.K.RAO & ASSOCIATES

21. Potential causes of inefficiencies : Poor quality of planning and engineering design Inappropriate contracts in use Pre-tendering approval process is slow and centralized Land acquisition problems Weak dispute resolution practices Weak performance management Non-availability or paucity of skilled and semi-skilled workers Weak risk management skills Lack of best-in-class procurement practices Low prevalence of lean construction principles K.K.RAO & ASSOCIATES

22. Overcoming Inefficiencies : Board Of Directors and Senior management Oversight Risk Identification and Assessment Role Accountability and Responsibility Improvising Policies and Procedures Internal controls Self monitoring and Remediation Internal Audits framework Proper Utilization of resources K.K.RAO & ASSOCIATES

23. K.K.RAO & ASSOCIATESCompliance:Compliance means ensuring conformity and adherence to regulatory acts, rules, procedures,laws ,regulations Standard on Internal Audit-17 relating to “Consideration of Laws and Regulations in an Internal Audit”

24. K.K.RAO & ASSOCIATESBENIFITS OF COMPLIANCE :To IndustryReduction in penalties Increase in Internal control Reduction of frauds & losses Increase in efficiency Customer satisfaction To Stakeholders Ensures risk containment & safe market placeBetter Investor ConfidenceUniform practices Better Image hence better value for Investor

25. AGE old problems of construction industry cost over run Time over runTechnological changes Environmental changes Political changes Social & Legal changes K.K.RAO & ASSOCIATES

26. Internal Audit Related issuesNot getting land with in stipulated time Paying heavy Compensation to land owner Religious & Sentimental matters relating to locals- temple, masjid, church Purchase of materials without invoices/unauthorized sellers Not paying royalty- sand/bricks Not adhering to standards of construction K.K.RAO & ASSOCIATES

27. Internal Audit Related issues(Contd)Illegal payments to Government and tax authoritiesPolitical contributions Disaster management Risk assessment , management and mitigation plans Non servicing of Interest to the lenders and deposit holders Detection of fraud Diversion of funds Over statement of inventory Default in contractors payment Insurance Legal cases Expiry of warranty ,lease and Insurance K.K.RAO & ASSOCIATES

28. Questions K.K.RAO & ASSOCIATES

29. THANK YOU-K.K RAO & ASSOCIATES2-B,SAMRAT RESIDENTIAL COMPLEXSAIFABAD,HYDERABADPh:9849269020 Website: www.kkraoassociates.comE-mail: kkrao.associates@gmail.comkkrao2008@gmail.com