Audit Planning Memorandum.doc

audit planning memorandum1. introduction: this memorandum sets out our proposed strategy for auditing the karnataka state khadi and village industries board (kvib) for the year ended 31 march 2006.2. background of the entity: kvib is a statutory board established by an act of the state legislature. it was established in 1957. the board was established by the state government with the objective to organize, develop and regulate khadi and village industries in the state. the main objective of the board is to give priority for khadi and village industries in rural areas and to develop, provide assistance, generate employment opportunities in rural areas and improve the economic status of the rural artisans. 3. respective responsibilities: the ceo is ultimately responsible for maintaining proper accounting records; preparing annual accounts that give a true and fair view of the state of affairs of the board; and ensuring that these accounts have been properly prepared in such manner as prescribed under the karnataka state village industries act, 1956. he is also responsible for ensuring that the expenditure and income presented in the annual accounts has been applied to the purposes intended by the state legislature and the funding agencies and that the financial transactions conform to the authorities which govern them. the audit of the board is entrusted to the cag under the provisions of section 19(3) of the cags dpc act. there may be certain matters on which c&ag may decide to communicate to legislature in a separate report. such matters may include comments on the internal controls and accounting records and may be intended to provide additional information alongside any matters referred to in the audit certificate.4.objectives of audit: our work is constructed around producing, for the c&ags consideration, an “audit certificate” that he will then address to the legislature through the government. the audit certificate follows a standard form (based on auditing standards) in which the c&ag provides legislature with an opinion on two matters. first, the c&ag will state whether, in his opinion, the accounts give a true and fair view of the state of affairs of the board and of its income and expenditure, total recognised gains and losses for the relevant year. this part of the opinion will also indicate whether the accounts have been properly prepared in such manner as prescribed under the karnataka state village industries act, 1956 and/or karnataka finance code (kfc).second, the c&ag will also indicate whether, in his opinion, the expenditure and income presented in the accounts have, in all material respects, been applied to the purposes intended by the legislature and funding agencies and whether the financial transactions conform to the authorities which govern them. in arriving at this two part opinion, we will consider the following matters: whether the department has kept proper accounting records and whether proper returns adequate for the audit have been received from any third parties; whether effective systems of internal control are in place; whether the accounts are in agreement with the accounting records and returns; and whether we have obtained all the information and explanations which we consider necessary for the purposes of our audit.where we are not satisfied with any of the above matters, then we will consider how our audit conclusion might impact upon the c&ags audit certificate. in deciding the impact on his opinion, the c&ag may decide to refer to such matters in his audit certificate and/or in a separate report to legislature. 4. risk assessment: based on the assessment of external and control environment of the board, the overall inherent risk assessment of the account areas is made as high, medium or low and significant audit areas identified are as followsa. non-plan expenditure - salary: there is a specific risk that the expenditure incurred during the year may exceed the budget and thus there may be the risk that salary component of non-plan expenditure is met out of plan grants, ie expenditure without specific approval of government as board cannot reappropriate from plan heads.b. debtors: the main activities of the board are to extend financial loans to the rural sector. hence debtors is identified as a major risk area. recoveries have to be affected on the khadi and village industries commission (kvic) loans advanced under various schemes. the risk is that debt will become bad as the loan recovery period is over in the pbs/cbc which are closed schemes. further the risk also lies in the possibility that there could be delays in remittance of loan amount to the kvic, as a result leading to a difference in the demand by the kvic and remittance by the board. whether regular reconciliation between the board and the kvic is being done will also be a risk area.c. provisions for depreciation, bad and doubtful debts: there may be the risk of the board not providing for depreciation, as a result leading to misstatement of assets. further if the board provides, whether it provides sufficiently for bad and doubtful debts is another area to be examined. d. recovery of interest on loans: repayment of interest may not be as per the guidelines. in addition to this, there may be delay in repayment of interest amount to the kvic.e. exhibition account: non adherence to the conditions imposed by the kvic may cause them to reduce the grant and thus may impose additional financial burden on the board. further whether the resource sharing is as per the guidelines prescribed by kvic may be another area of risk.f. pension: whether the board is providing enough to meet its pension liability. inability to do so may impact on the discharge of its pension liability. further whether the board is remitting the pension contribution to government is another risk area.g. plan grant: the risk is that the grants may not have been discharged as per the terms and conditions and may not have been utilized for the purpose and within the period for which they were sanctioned and that they may have been lapsed.5.materiality: since the main business of the board is disbursal of loans received from the state government and the kvic and other funding agencies and these loans are not routed through the state budget, the level of legislature interest is low. further, public interest is also low. hence the accounts of the board can be considered as not sensitive account. therefore 2% of gross expenditure is set as materiality for the board.the term assurance factor refers to the level of assurance required from sampling .the assurance factors for different levels of substantive testing are:-level of testing assurance factorfocused3.0standard2.0minimum0.7as a general rule, the risk factor is proposed to be taken as 0.7, which may be subject to revision for specific account areas based on the results of substantive testing. this may also depend on the time available.the formula for calculating sample size :-sample size = (account area population / precision) x assurance factor.the sample sizes is calculated as follows: gross expendituremateriality base xmateriality (2% of materiality base) 0.02xless most likely error (10% of materiality) 0.002x 0.018xprecision is 90% 0.0162xsample size =(account area population x 0.7)/ 0.0162x 6.audit approach for each account area: our audit approach is a risk based one, informed by our understanding of the boards business and the accounting and the internal control systems as well as our assessment of the risks associated with the financial statements. as a part of our audit, we will determine the extent to which we can rely on detailed control procedures and managements monitoring activities to prevent or