Risk Based Internal Audit Risk Consulting

1. Risk Based Internal AuditRisk Consulting 1

2. Contents

3. 01 REGULATIONS

4. INTERNAL AUDIT - REGULATIONS

5. 02 RISK AND CONTROLS

6. RISK • “Risk is an event which can prevent, hinder, fail to further or otherwise obstruct the enterprise in achieving its objectives.” • Two important parameters; • Likely hood of its occurrence – probability • Remote, unlikely, possible, likely and almost certain • Impact / Severity • Insignificant (not material), minor, moderate, major, catastrophic, simply we can say high, medium and low

7. TYPES OF RISK • STRATEGIC / CORPORRATE • BUSINESS • OPERATIONAL

8. EXAMPLES OF TOP 10 RISKS ?

9. INTERNAL CONTROL SYSTEM • One of a critical success factor for any business is to design & implement an Internal Control Framework which is a best fit to management approach and attitude, business needs and regulatory demands. • It is a management responsibility to design, implement and maintain ICF. • ICF aims to control effectively, efficiently and timely all key business functions of the entity. Internal Control Framework refers to controls being Internal Control Systems to control internal business operations and Financial Reporting Systems for stakeholder interaction. • Internal Control System comprises of control environment, internal audit and control procedures/systems also referred as Standard Operating Procedures (SOP), Manuals, Operating Guidelines etc.

10. EXAMPLES OF CONTROLS ?

11. 03 INTERNAL AUDIT

12. INTERNAL AUDIT • SIA 2, Para 3. 1 = “Internal audit is an independent management function, which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity’s risk management and internal control system.” • SIA 1 – Planning: Objectives of Internal Audit • to suggest improvements to the functioning of the entity; like • Optimum utilization of tangible and intangible resources • Safeguarding tangible and intangible resources • Timely, accurate and adequate compliance framework • Timeliness, adequacy and accuracy of management information systems • to strengthen the overall governance mechanism of the entity, • to strategic risk management as well as internal control system of the entity.

13. Internal Control System / Framework Control check over control functions

14. ORGANOGRAM

15. SCOPE OF INTERNAL AUDIT ?

16. RISK & INTERNAL AUDIT: SIA 13 • The internal auditor should not manage any of the risks on behalf of the management or take risk management decisions. • The internal auditor should not assume any accountability for risk management decisions taken by the management.

17. INTERNAL vs. STATUTORY AUDIT

18. 04 APPROACH - IA

19. IA METHODOLOGY - APPROACH

20. Why an INTERNAL CONTROL FRAMEWORK ?

21. RISK CONTROL MATRIX

22. 05 Deliverables - Report

23. CONTENTS – IA REPORT • REGULAR CONTENTS – TITLE, ADDRESEE, CC List, SCOPE, COVERAGE, PERIOD, SIGNATURE, DATE etc. • ADDITIONAL AND KEY CONTENTS • RISK REGISTER & RISK EVALUATION CRITERIA • PROCESS MAPS / PROCESS FLOWS • RISK IDENTIFICATION, CLASSIFICATION & CRITICALITY • IMPACT ANALYSIS and ROOT CAUSE ANALYSIS • AUDITOR’S RECOMMENDATION / ACTION PLAN • MANAGEMENT RESPONSE • TOP MANAGEMENT REPORTS – EXECUTIVE SUMMARY, ACTION TAKEN REPORT • REPORT SHOULD BE CLEAR, FACTUAL, SPCIFIC, CONCISE, UNAMBIGUOUS, UNBIASED AND TIMELY

24. Risk rating criteria – Risk Map - Reliance Infra Illustrative risk factors / guidelines

25. PROCESS FLOW Annual requirement plan - coal Unit I 225 MW Estimate daily demand in Mt for each Unit based on GCV & heat rate 365 days operations subject to maintenance of one unit per annum for 15 days i.e. (365*2 – 15 days) = 715 days Daily demand * 715 days Coal demand Unit II 225 MW Coal India Limited Maximum quota is fixed as allotted through SECL Maximum 24.52 Lacs Mt per annum Indian Coal supply Across the globe Shortfall of demand over supply from SECL Pricing decided by CPG subject to inventory requirements of DTPS Imported Annual Coal Requirement = Annual Coal Demand + Inventory requirements of DTPS Excess Annual Coal Requirement above coal demand after considering inventory requirements if procured through Imports. • Note: • Coal is a primary fuel for DTPS and its requirements are met through blend of domestic and imported coal. • Domestic coal is a scare natural resource in India and its supply is under the control of government of Indian through Coal India Limited. Coal allocation to various consumers in India is effected by Standing Linkage Committee – Short Term (SLC) of Ministry of Coal. • RInfra has coal linkage of 24.52 Lacs Mt (F Grade) per annum from M/s. South Eastern Coalfields Limited (SECL), Bilaspur (subsidiary of Coal Indian Ltd.) as per Fuel Supply Agreement under New coal distribution policy as per the allotted quota. Prices of domestic coal has shown a 5% compounded annual growth rate over a period of last 15 years and is likely to continue accordingly. • Balance coal requirements of 5 to 7 Lacs Mt is sourced through RNRL from international markets as High Sea Sales. Imported caol procurements are based on advisory / directions of SLC. Generally, RInfra imports coal on forward contracts of 3-12 months duration and also from spot market.

26. Annual requirement plan 2010-11 Source: As discussed with and as per the email communications by O&M Head (DTPS) with CPG.

27. Receipts – Indian coal Outsourced process Process flow Coal washing (at SCPL Coal washery through RNRL) Rail Transport to DTPS (after washing or directly from coalfield) Supply by vendor (Korba coalfields of SECL) Transport by Road for washing at coal washery In-house process Monthly GRN Bunkering Storage in coal yard (4 coal yards at DTPS) Transport to yard via underground conveyer belts Weighment of wagons at DTPS wagon tippler • Note: • RInfra purchases 24.52 Lacs MT of coal (F Grade) per annum from M/s. South Eastern Coalfields Limited (SECL), Bilaspur (subsidiary of Coal Indian Ltd.) as per Fuel Supply Agreement under New coal distribution policy. • Outsourced control: • - RInfra has entered into an agreement with RNRL for liasioning (with South Eastern Railways for getting wagons), loading, supervision, weighment and movement of coal to DTPS i.e. either supply of F Grade coal directly to DTPS from SCEL coalfields OR supply of F Grade coal after washing through Spectrum Coal and Power Limited (SCPL) coal washery (RInfra has separately ordered RNRL for coal washing through SCPL). • - Sainik Mining and Allied Services Limited (SMASL) is responsible for transportation of coal from coalfields to coal washery and from coal washery to railway for ultimate transport to DTPS. • - Inspectorate Griffith India Private Limited is responsible for sampling and analysis of coal, i.e. quality control. • In-house control: RInfra is responsible for coal handling once the coal is received at DTPS coal handling plant i.e. weighed through wagon tippler at DTPS.

28. Receipts – Imported coal Outsourced process Process flow Transport by ship Anchorage ship at Dahanu Port Imported coal supply by vendor to RNRL High sea sales (import) by RNRL to RInfra Transport to Jetty by barges In-house process GRN per Shipment Unloading of coal in coal yard Transport of coal to DTPS coal yard in dumpers Electronic weighment of dumpers Security check & record of dumper movement in DTPS premises • Note: • RInfra imports 5 to 7 Lacs MT of coal, which is approximately 20 to 25% (in Mt) of total annual coal requirement of DTPS. • Outsourced process: • 1. Loading port (Foreign port) to Destination port (Dahanu) – RInfra imports coal from RNRL on CIF basis under High Sea Sales agreement . In transit responsibility of coal (i.e. from Loading to Destination port) belongs to RNRL. Payments is made to RInfra for the quantity received at Dahanu port as per Draft Survey Report from independent expert. • 2. Destination port to DTPS Coal yard - RInfra has entered into an agreement with United Shippers Ltd. (Letter of Award – Order) for stevedoring, barging, loading, unloading, custom clearance, liasioning & follow up, handling etc. and all the associated onshore services for coal imported from RNRL. USL is responsible for taking delivery of coal from Dahanu port and delivering it to DTPS. • In-house process: RInfra is responsible for coal handling once the coal is received at DTPS coal handling plant i.e. weighed through electronic weighment at DTPS.

29. AUDIT OBSERVATION Root Cause Rating PD OI SL H M L Observations - Evaluate possibilities to Claim short adjusted under loading from SECL • Process: • Raw coal is transported to DTPS from SECL mines by railways racks. Railway charges freight @ Rs. 1313.81 pmt of carrying capacity of racks and not for the actual weight carried. Railway freight is paid by RInfra. • Fuel Supply Agreement with SECL – Clause No. 11.3 Overloading / under loading adjustment. • 11.2 “For all other grades of coal, any idle freight for under-loading below the stenciled carrying capacity, as shown on the wagon or carrying capacity based on actual tare weight, as the case may be, plus 2 tonnes shall be borne by the seller. • 11.3 Idle freight resulting from under loading of wagon, as per clause 11.2, shall be adjusted in the bills. Idle freight shall be reckoned as: • (ii) For all other grades of coal, the difference between the freight charges applicable for the stenciled carrying capacity, as shown on the wagon or carrying capacity based on the actual tare weight, as the case may be, plus 2 tonnes less the actual freight payable as per the actual recorded weight of coal loaded in the wagon. • As per above referred terms of FSA, SECL adjusts freight amount for under load quantity in bills. • Observation: • While reviewing idle freight adjustments Apr. to June’ 2010, we have observed that the under load quantity adjusted in SECL bills under load quantity observed, the details thereof are as under. • After considering qty and freight for actual under load (observed at DTPS), adjusted under load (in SECL bills), the table works out that the freight adjustment by SECL for under load was short by 100094 Mt i.e. Rs. 133.94 Lacs.

30. AUDIT OBSERVATION Root Cause Rating PD OI SL H M L Risk/ Implications Management response • Increase in cost of raw coal due to short adjusted under load freight Root cause • Under load qty adjustments as per SECL bills is less than actual under load quantity. Responsibility & timeline Responsibility : Timeline : Recommendation • Evaluate possibilities to claim (recover) from SECL, the freight value of under load qty short adjusted in bills.

31. EXPECTATION vs. PERFORMANCE Revenue leakages Cost savings / reductions Improvements in Internal Control Environment / Information security / confidentiality Fraud prevention / detection Value addition by process improvements / business process re-engineering Profit improvements through studies of customer preferences / market developments / dynamics / supply chain / product / service features

32. 06 Professional Opportunities

33. INTERNAL AUDIT & PROFESSIONAL OPPORTUNITIES PRACTICE INDUSTRY INDEPENDENT DIRECTOR LEAD INTERNAL AUDITOR LEAD RISK MANAGER PROCESS OWNER / MANAGER FRAUD RISK CONTROLLER • INTERNAL AUDIT – Pre & Post Audits • SYSTEMS / PROCESS REVIEW • STANDARD OPERATING PROCEDURES – MAKING & IMPLEMENTATION • RISK & CONTROL REVIEWS • FRAUD RISK REVIEW • ENTERPRISE WIDE RISK MANAGEMENT

34. SANJAY JOSHI PARTNER GAUTAM JOSHI & CO. M: +91 98798 67470, +91 94272 77837 E-mail: sanjaybjoshi@gmail.com W: www.gjc.co.in Recommended: www.aviratshiksha@wordpress.com Disclaimer: Information and disclosures in this document are for the proposed purpose only and right to use is given to intended person/persons only. In no way it represents marketing or soliciting of the firm/persons under consideration. Unintended or unauthorized use is firmly prohibited and against the law. THANK YOU