Internal Audit in Manufacturing Companies

1. Internal Audit in Manufacturing Companies

2. How to keep it interesting? • Interactive • Some new thoughts • Practical Approach – Less of Theory • Last but not least

3. How to keep it interesting? • Interactive • Some new thoughts • Practical Approach – Less of Theory • Last but not least • -Keep it Short !!

4. Agenda • What is Internal Audit? • Relevance of Internal Audit for manufacturing Companies • My experience and Few thoughts for consideration

5. What is Internal Audit ?

9. Why the Wording “Also do Auditing” • Perception - Ticking or Checking - Fault finding - A necessary evil in life

10. Why the Wording “Also do Auditing” • Perception of Audit • - Ticking or Checking - Fault finding - A necessary evil in life • Is this Wrong perception or Truth ? • We get answer by Asking our self - What is the real nature of Audit?

11. Wrong perception or Truth • What is the real nature of Audit? - A Toll for Quality Improvement process - Comparable with TQM, 6 Sigma etc. - Not properly marketed!! - Hence the problem in - Attracting Talent - Recognition • What is the proof ??

12. Why the Wording “Also do Auditing” • What is the real nature of Audit? - A Toll for Quality Improvement process - Comparable with TQM, 6 Sigma etc. - Not properly marketed!! • What is the proof ?? • Deming has said it!!!

13. What is Audit Vs Deming’s Famous Quotes • What is Audit?- DOES • Management's job is to know which systems are stable and which are not. • The aim should be to work on the method of management. • We want best efforts guided by theory.

14. What is Audit Vs Deming’s Famous Quotes • What is Audit? DON”T • Manage the cause, not the result. • Management by results is confusing special causes with common causes. • Judging people does not help them. •  Meeting specifications is not enough.

15. What is Audit Vs Deming’s Famous Quotes • What is Audit?- HOW • Management of outcomes may not be any more than a skill. It does not require knowledge. • You do not find knowledge in a dictionary, only information.

16. What is Audit Vs Deming’s Famous Quotes • What is Audit?- ROLE •  Role is a coach, not a judge. •  We are being ruined by the best efforts of people who are doing the wrong thing.

17. What is the real nature of Audit? • Quality Process -Science - Analytical Skills - Logical Approach - Technical knowledge

18. What is the real nature of Audit? • Quality Process - Is it just a science? - NO

19. What is the real nature of Audit? • Quality Process -Science (Intelligence) - Business acumen - Different from intelligence - Outstanding examples C V Raman’s bank deposit Einstein’s investment in shares - Ability to differentiate

20. What is the real nature of Audit? • Quality Process -Science (Intelligence) - Business acumen - Different from intelligence - Outstanding examples - Ability to differentiate - Losers & Winners - Big & Small - Good & Bad - Combination of science & art

21. What is the real nature of Audit? • Quality Process -Science (Intelligence) - Business acumen - Different from intelligence - Outstanding examples - Ability to differentiate - Combination of science & art - Is it just Science & Buss. Acumen? • NO

22. What is the real nature of Audit? • Quality Process – Also An Art!! -Science (Intelligence) - Business acumen - Art - Judgment - Inter-personal skills - Communication skills • Hence wrong Perception Only

23. What is “Internal Audit” • Double whamming

24. What is “Internal Audit” • Why Double whamming? • By adding “Internal” – Another value diluting adjective to “Audit”

25. What is “Internal Audit” • Double whamming • “Internal” – Another value diluting adjective • Better adjectives - Experts - Specialists

26. What should be the name? Need a fancy title

27. What should be the name? ESOP

28. What should be the name? ESOPEvaluation by Specialist of Operations & Processes

29. What is Internal Audit? Evaluation by Specialist of Operations & Processes Inernal Audit is an evaluation of an organization, system, process, project or product. It is performed by a competent, independent, objective, and unbiased person or persons, known as auditors. The purpose is to verify that the subject of the audit was completed or operates according to approved and accepted standard or practice

30. Internal Audit in Manufacturing Companies

31. Internal Audit in Manufacturing Companies Evolution of commercial activity Agriculture Trade Manufacture

32. Internal Audit in Manufacturing Companies • As we progress complexity Increases • Increase in Activity (number, frequency and short time gap) • Inter-dependence • Coordination • The need and the difficulty • Leads to greater risk • Hence greater importance of internal audit

33. Internal Audit in Manufacturing Companies • Nature of Internal Audit • - Transaction audit • - Systems audit • - Management audit • Each has different Role

34. Internal Audit in Manufacturing Companies • Nature/Role of different type of Internal Audit • - Transaction audit : C R Das • - Systems audit : Rahul Dravid • - Management audit : M S Dhony

35. Internal Audit in Manufacturing Companies • Transaction audit - Can be pre, concurrent or post - Necessary evil - Help discipline in the organization - Systems cannot totally replace this

36. Internal Audit in Manufacturing Companies • Systems audit - Backbone to the process/operations - Vital for efficiency & control - Necessary for survival

37. Internal Audit in Manufacturing Companies • Management audit - Judgmental - Hence controversial • Requires - In-depth knowledge - Technical capabilities - Credibility • Difficult to identify the areas for application

38. Internal Audit in Manufacturing Companies • Management audit Requires In-depth knowledge / Technical capabilities Credibility • Difficult to identify the areas for application • Prerequisite - Mutual respect of management & auditors • Different Attitude - Mistakes are common in management - Getting it right 100% is inefficient

39. Internal Audit in Manufacturing Companies Some of my experiences • Transaction Audit - Selection - Type of Audit - Coverage - Resources - Cost / Benefit analysis

40. Internal Audit in Manufacturing Companies Some of my experiences • Systems Audit - Resources -Multi Function skills -Availability - Attitude of -Auditor -Management - Evaluation of Performance

41. Internal Audit in Manufacturing Companies Some of my experiences • Evaluation of Performance of Systems Audit • What can’t measured can’t be improved • A must for any Quality Process • Hence the need for measurement

42. Internal Audit in Manufacturing Companies Some of my experiences • Pre requisite for Evaluation Performance of Systems Audit • Change of mindset both for Management and Internal Auditor • Not a cost center but a value contributor • Agree in advance -Target -Audit Process -Evaluation Process • Auditors’ knowledge of the Business, Industry and Environment • Technical Skill

43. Internal Audit in Manufacturing Companies Some of my experiences • Evaluation of Performance of Systems Audit • Measure Against -Agreed Objectives -Other Tools -Cost Vs Benefit

44. Internal Audit in Manufacturing Companies Some of my experiences • Management Audit - Tricky Role For CFO!! - Often don’t Find the Champion - Mutual Suspicion - Legal /Statuary Requirements - Management commitment / Attitude - Adverse Findings - Fear of impact - Not a Black & White case

45. Internal Audit in Manufacturing Companies Conclusions • Internal Audit is Quality Tool • A must for Manufacturing Companies • Manufacturing Companies need - All 3 Audits • Should have robust measurement System • Lead Role to be taken by CFO • Commitment of Management

46. Internal Audit in Manufacturing Companies Thank you