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Rupafab LimitedFor the period from April 2014 to July 2014
Internal AuditReportSales
and Receivables
QAVI & CO.Chartered Accountants
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CONTENTS
Sr. # Particulars Page #
1. Executive Summary 3
2. Process Overview 6
3. Scope of Work 8
4. Procedures Performed 9
5. Overview of Sales 10
6.Detailed Internal Audit Findings, Risks, Recommendations, Action
Plans and Follow up11
7. Improvement Ideas 22
8. Definition of Issue and Report Ratings 29
9. Annexures 30
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Sub-Process FindingsIssue
RatingDetailed Report
Reference
Grey receiving
Inward Gate Pass (IGP) is manually prepared;
Original copy of IGP not retained at gate office;
No seperate record of cancelled IGPs;
High 6.3
Invoicing
Invoices are not electronically prenumbered, and date is enteredmanually;
Invoices are not stamped as paid;
Invoices issued with back dated serial numbers;
Some Invoices are not being prepared according to OGPs and PackingLists;
Lack of control over invoice generation;
Late approval of Invoices;
Late posting of invoices in General Ledger.
High 6.4
Despatch of goods
Manual preparation of Outward Gate Passes (OGP);
Lack of control over reports prepration;
Lack of adequate control over entering date on packing list.
High 6.5
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Improvement Ideas
The following table exhibits the summary of improvement ideas:
Sub-ProcessPotential Problem
Improvement IdeasDetailedReport
Reference
Marketing Can not overcome work load.
No concept of commission.
Should hier more personnel.
Concept of commission should be introduced.7.1
Recording Sales viaJournal Voucher (JV)
Sales invoices are posted in accountingsoftware through JV.
Sales invoice should be posted through Sale Invoice(SI)number and Journal Voucher (JV) should not be usedfor this purpose.
7.2
Data Entry andAccounts prepration
Accounting software is outdated and is difficultto use resulting in loss of time.
The accounting software should be upgraded to newerversion or new software should be purchased which iseasy to use.
7.3
Revenue Recognition Management recognized the revenue too late. Revenue should be recognized at the time of dispatch. 7.4
Categorisation of fabric No proper evidence about the category offabric
There must be a physical evidence to verify thecategory of fabric.
7.5
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2. Process Overview
Two types of processes are conducted by Rupafab
Commercial; and
Roll on Tube (ROT).
Order Placing
The marketing department contacts the customers and obtains orders from them. Initial negotiation with customers is done by marketing
department, but the rate is finally approved by CEO.
Formation of Sales Contract
After approval of rate by CEO, a written contract is formed by marketing department and is communicated to customer via e-mail to document the
terms and conditions. Major terms specified in sales contract includes Shipment, Mode of paymentand Delivery Time.After confirmation of
sales contract by the customer via e-mail, marketing department sends an intimation to production department to start processing of relevant lot.
Receiving Function
In case of Commercial Process, when the material arrives at the premises of the company, gate office informs marketing department and greigh
receiving department. Delivery note and packing list etc., are checked at the gate by Assistant Store Keeperand IGP is generated. One of the
security personnel guides the carrier to the grey department. Delivery note and packing list is handed over to supervisor of grey department by the
security personnel. Unloading of fabric is done by the grey department's labour, under the supervision of supervisor and security personnel.
Supervisor matches the quantity of packed rolls with the packing list.
Packing Department
After processing, the fabric is inspected by quality control department and finished fabric is sent to folding department for packing. At this stage, the
fabric is categorised into A, B and C Grade fabric and packing list is prepared and sent to PPC and PPC then send it to marketing department.
Marketing department communicates the list to customer to intimate that the fabric is ready for delivery.
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Loading
After packing, the fabric is loaded on vehicle and packing list is handed over to driver.
Dispatch
A request for gate pass is prepared by packing department and sent to assistant store keeper at gate. Assistant store keeper generates OGP
according to particulars mentioned on request for gate pass and a copy of OGP is handed over to driver.
Invoicing and Receipts
On the basis of packing list and OGP, sales invoice is generated by the accounts department and sent to the customer. According to payment
terms, accounts department follows the customer for remaining receipt against sales invoices issued.
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3. Scope of Work
Our role as internal audit is to provide independent assurance that Rupafabs risk management, governance and internal control processes are
operating effectively.
Moreover, our Scope is to:
Based on the scope of work and the audit procedures carried out, by us and to the best of information and explanations provided to us by themanagement, we report details of our findings in section 6 to the report. The format of our report is such that we only report on the short comingsand exceptions noted by us. Therefore, the observations noted in the report are where control objectives are not met or where we believeimprovements can be made in the efficiency or effectiveness of procedures.
1. Determine the accuracy and propriety of financial transactions;
2.Evaluate financial and operational procedures for adequacy of internal controls and provide advice and guidance on control aspects of newpolicies, processes and systems;
3. Verify the existence of assets and ensure that proper safeguards are maintained to protect them from loss;
4. Determine the level of compliance with the company policies and procedures, and Government laws and regulations;
5. Evaluate the accuracy, effectiveness, and efficiency of the electronic information and processing systems; and
6.Determine the effectiveness and efficiency of company in accomplishing mission and identify operational opportunities for cost savings andrevenue enhancements.
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4. Procedures Performed
Following procedures were performed in order to evaluate process from sales to receipts:
We have evaluated controls over maintenance of customer file;
We have evaluated credit management system, i.e. credit policy, credit risk evaluation policy and aging analysis;
We have matched 'Sales Contracts' with 'Sales Invoices', 'OGPs', and 'Packing Lists;
We have performed review procedures to overview greigh receiving function;
We have matched Rates in 'Sales Contract' with 'Sales Invoices;
We have traced receipts against 'Sales Invoices' into 'Bank Statements;
We have evaluated 'Internal Controls' over sales and receivables area for efficiency and effectiveness;
We have matched fabric despatched with invoice generated;
We have evaluated B Grade Productions and C Grade Productions that give rise to opportunity costs;
We have performed a walkthrough and checked that whether invoices are generated against every OGP.
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5. Overview of Sales
During the month of April 2014, Rupafab made sales amounting to Rs.16,930,102. During April 2014, significant customer that contributed, the most, to achieve
the above stated amount of sales include Rajby Industries, representing approximately 83.97% of total sales during the period. The customer that contributed the
least include Ambition Apparel, representing 0.6% of total sales during the period.
While in May 2014, revenue of Rs.25,258,535 was achived, which shows a 45.17% increase as compared to the last month. The increase in actually due to
selling greater quantity of Roll On Tube fabric to Rajby Industries. in this month Rajby Industries contribute 77.2% and 13.58% of the total sales made to Shafi
Texcel limited, remaining part of sales were made to other customer.
In June2014, total reported revenue was of Rs. 4,760,320 out of which 58% was made to Shafi Texcel Limited, amounting to Rs. 2,827,976 and remaining 42% of
the sales are made to others customers.
During July 2014, reported revenue was of Rs.17,242,008. The customer that contributed a significant share in achiving this amount of sale include Rajby
Indusries.
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6. Detailed Internal Audit Findings, Risks, Recommendations, Action plans and Followup:
Process Sales Issue Rating Medium
Sub Process Customer database maintenance
6.1 Controls over maintenance of customer database
Finding:
Customer history is maintaining customers past record of purchased quantities, payment
patterns, bad debts, if any. Maintaining customers past history helps in continuance &
strengthening business relationship with customers
While analysing control over maintenance of customers history ,we observed
a. There is no formal process of maintaining customer past history.
b. There is no bifurcation between new and old customers.
c. Customers with good past history are not identifiably separated from other
customers.
d. There is no ongoing activity of customers past history analysis.
e. There is no feedback mechanism in place.
Recommendation:
a. Management should maintained a proper file that
should at least include the following information:
Name,
Summary of transaction history,
Summary of payments made against each
transaction,
Bad debts, if any, Disputes, if any,
Total volume of transactions at the end of the
period.
b. Management should categorize the customers baseabove information as key customers.
c. Customers should encourage to give promptfeedback.
d. A mechanism of feedback analysis should bedeveloped.
e. Customers grievances should immediately beaddressed.
f. Management should seriously considerrecommendations given in feedback.
Risk:
a. As customers past history is not maintained hence its relevant controls could not be
effectively reviewed
b. Management may not be able to identify and respond to business risk effectively.
c. Customers with good past history may be ignored as there is no bifurcation for
identifying customers having good history.
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Process Sales Issue Rating Medium
Sub Process Customer database maintenance
6.1 Controls over maintenance of customer database
d. Risk of bad debts may increase.
e. Needs of customers may not be satisfied.
f. Upon need, it may be difficult to contact customer on timely basis.
Management Comments: Responsible Official(s):
Sales and Marketing department.
Followup:
The findings discussed in this section were also reported
in our previous correspondence and are still
unimplemented.
Process Sales Issue Rating High
Sub Process Sales Contract formation
6.2 Controls over sale contract formation
Finding:
A review of controls over Contract formation has determined the following:
Recommendation:
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Process Sales Issue Rating High
Sub Process Sales Contract formation
6.2 Controls over sale contract formation
a. Contract is formed using initial quantity that is received by the company
and, on this basis, forthcoming receipt is estimated, therefore, shrinkage
level is not taken into account while making this estimate.
b. A distinctive, serial wise, number is not assigned to most of the contracts, in
order to trace the progress of fabric.
c. Contracts are not valid because that are not signed by buyers. For details
please see - ANNEXURE A.
d. There is considerable lack of control over entering date of contract .While
observing the contracts we found 7 instances where contract date was after
the date of invoice. For details of instances, Please refer to - ANNEXURE
B.
e. Lack of control over implementing terms of contract. For details please see
ANNEXURE C.
a. A distinctive number should be assigned to every
contract, so that the quantity dispatched, relating to that
contract, could be traced easily.
b. The contract should be signed by both parties.
c. All contracts should be dated.
d. While forming contract, business name of client must
be clearly stated in order to establish the parties to the
contract.
Risk:
a. The Company may not have a legal recourse in case of any disagreements withthe client.
b. In the absence of distinctive contract number, management may not be able totrace the quantity dispatched in relation to that that contract.
c. As critical terms, described in finding above, are not mentioned in contract. Thismay result in dispute between client and Rupafab. Ultimately company may
lose its customerd. In the absence of Signatures of either party, the contract may lack its legalgrounds.
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Process Sales Issue Rating High
Sub Process Sales Contract formation
6.2 Controls over sale contract formation
Management Comments: Responsible Person:
Marketing and Sales Department
Follow up:
Following are the issues that were reported in our previous
report and are still unresolved:
a. A distinctive, serial wise, number is not assigned to
most of the contracts.
b. Lack of Control over entering date of Contract.
Process Sales Issue Rating Medium
Sub Process Grey Receiving
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6.3 Lack of Control over grey receiving function
Finding:
The company carries out two types of Processes:
Commercial: in this process company receives fabric from customer andreturn back after processing on it
Roll on tube: in this process company purchase the fabric, process on it &
sale it out to customer.
While performing review procedures on both processes, it was observed that:
a. IGPs are prepared manually.
b. Same IGP is used for both process.
c. While preparing reports, IGP is simply ignored.
d. Original copy is retained at gate office.
e. No seperate record of cancled IGPs is maintained.
Recommendation
a. Company should use separate IGP for
Commercial; and Roll on Tube processes.
b. A distinctive number should be assigned to fabric received
the time of its receipt. That will also help in tracing the
progress of fabric during process. The same numer should
be assigned to contract and should be included in any
reports prepared and on OGP.
c. IGPs should be made electronically in order to avoid any
discrepancy.
In addition to this,
d. The date on IGP should be either pre-printed or should be
entered via Stamp or it should be electronic posted,e. Management may consult IT Department in order to develop
a electronic system for Inward Gate Pass
f. The original copy of IGP should remain at gate office in
order to avoid any fraudulent amendment..
g. Accounts department should maintain a separate record of
cancelled IGPs and should update it on timely basis via
specifying the reason of cancellation.
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Process Sales Issue Rating Medium
Sub Process Grey Receiving
6.3 Lack of Control over grey receiving function
Risks
a. Tracing the current status of fabric, in process, is too difficult.b. IGP can be replaced easily.
c. IGPs can be altered.
d. It may results in lack of data backup.
e. Fabric can be misplaced and will be difficult to tace if IGP also misplaced.
f. The current system is inclined towards fradulent activities.
Management Comments: Responsible Person:Gate Office / IT Department/marketing department
Agreed Date of Implementation:
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Process Sales Issue Rating Low
Sub Process Invoicing
6.4 Lack of control over invoicing process
Finding:
Following the despatch of fabric to party, invoice is generated by Accounts
Department. While analysing controls over invoicing process, we observed the
following:
a. Invoices are not pre-numbered, although a distinctive number is assigned to
invoice but the fact is that, it is manually entered
b. There are considerable delays in approving sale invoices. We noted 10
instances of this and for detail of instances, please refer ANNEXURE D
c. Invoices are not stamped as paid at the time of receipt.
d. Invoices are not posted in ledgers on timely basis.While discussing the invoicing process with management, we were explained that
invoice is generated after conforming the supporting evidences and B gradefabric
is charged at a rate of 50% of A grade fabric andC grade fabric is dispatched at
free of cost.
While performing valuation procedures on sales invoices;
e. We found 3 instances where B grade fabric is invoiced as A grade;
Recommendation
a. Invoices should be posted in ledgers on daily basis so
that accurate balance of the customer is available on
daily basis.
b. Invoices must in sequence. Any cancelled invoice
should be stamped as cancelled and a separate file of
cancelled invoices must be maintained.
c. Packing list should be made for every delivery so that
the invoice is correctly generated.
d. Due diligence is required in preparation of invoices.
e. Balance Invoices should be pasted in relevant ledger ondaily basis so that accurate of customers is available.
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Process Sales Issue Rating Low
Sub Process Invoicing
6.4 Lack of control over invoicing process
This difference is due to the rate charged to the customer and as a result
revenue is overstated by Rs. 1,764. This also have a direct impact on sales tax
submitted to Tax authorities.
f. There is some unusual variation in invoice number and date of invoice. It seems
that some invoices are prepared on back dated serial number. For details,
please refer to -ANNEXURE E.
g. Some Invoices are not prepared according to quantity dispatched. We noted 2
instances where there is a difference. For details of instance please refer to -
ANNEXURE F.
Sr#
Invoice#
Quantity(Meters)
SalesAmountRecorded(Rs.)
SalesAmountthatshouldhavebeenrecorded(Rs.)
Diff(Rs.)
1 18319 91 2,457 1,2291,228
2 18324 28 756 378 378
3 18352 63 2,142 1,984158
Total 182 5,355 3,5911,764
Followup:
Following matters were also communicated in our previous
correspondence and are still not considered by
management.
a. Invoices are not stamped as paid.
b. Invoices are not posted in General Ledger on timely
basis.
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Process Sales Issue Rating Low
Sub Process Invoicing
6.4 Lack of control over invoicing process
Moreover, Lack of control over invoice generation was observed. While performing
completeness procedures on a two month period data, from April to May, we
observed;
h. A total of 88.5 meter fabric, altough samples, is uninvoiced . For details, Please
refer to - ANNEXURE G
Risk:
a. Delay in invoicing may result in improper credit control & aging analysis.
b. Non availability of pre numbered invoice may provide an opportunity to involve in
fraudulent activity.
c. data backup issue may arise due to non posting of invoices in ledger.
d. There may be duplication in invoicing.
e. Customers may loose trust.
Management Comments: Responsible Person:
Accounts Department
Agreed Date of Implementation:
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Process Sales Issue Rating Medium
Sub Process Despatch of goods
6.5 Lack of control over goods dispatching process
Finding:
We have reviewed the dispatch process and observed the following:
a. OGPs are manually prepared and date on these are also entered manually.
b. There is significant delay in delivery of fabric.
c. Lack of controls over preparing reports were observed. The date of dispatch entered by
marketing department is before packing date. For details please see following:
Sr # Party name Quantity Inward Date Packing date Dispatch date
1 Shafi Texcel 10,001 4/8/2014 5/24/2014 5/5/2014
d. Delivery challan is not prepared and ultimately not sent to the customers.
e. Late deliveries of fabric as compared to agreed date. We noted 2 instances where
delivery is made late. For details of instances, Please refer toANNEXURE C
Recommendation
a. OGPs should not be prepared manually instead
these should be printed through computer. If it is
not possible for the time being, the management
should issue date stamps to gate office so that
the dates are stamped on OGP and no one can
change it afterwards.
b. The OGPs should be computerised so that no
one can generate OGPs in back dates.
c. Reports should be prepared with due care.
d.
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Process Sales Issue Rating Medium
Sub Process Despatch of goods
6.5 Lack of control over goods dispatching process
Moreover,
f. Lack of adequate internal control on overall dispatch process was observed. We found 2
instances where date of dispatch is before packing list date. For details of instances,
Please see following:
Sr # Invoice # Party NameDispatch date
(OGP)
PackingList Date
1 18390 Shafi Texcel Ltd 11 July 14 July
2 18389 Shafi Texcel Ltd 30 June 14 July
Risk:
a. As date is entered manually, OGPs can be changed easily.
b. There may be loss of customer satisfaction which may in turn result in loss of
revenue.
c. It may be difficult to take stratic decisions as reports prepared lack proper controls.
d. No proper evidence of receiving of fabric by customer in the absence of delivery challan
Management Comments:Responsible Person:
Gate Office / IT Department
Agreed Date of Implementation:
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Process Sales Issue Rating Medium
Sub Process Despatch of goods
6.5 Lack of control over goods dispatching process
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7. Improvement Idea(s):
Process Sales
Sub Process Marketing
7.1 Analysis of Marketing department
Finding:
Major activities of Sales and Marketing department include:
Develop and Implement marketing strategies and
Initiate free sample to indulge new customers,
Search for new customers,
Cold calling to arrange meetings with potential customers. Co-Ordinate with existing Customers,
Negotiating terms with customers,
Sales Contract formation,
Prepare reports,
Monitors and track the status of fabrics work in pocess.
Making periodic visits.
Reporting to CEO.
Recommendation:
a. Marketing department should use Strategic marketing
stategies. A draft regarding this can be obtained from
audit department.
b. More personnel should be hiered to overcome the work
load and to increase the scope of work.
c. Marketing department should be commission toincrease the volume of sales.
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Process Sales
Sub Process Marketing
7.1 Analysis of Marketing department
While analysing over all sales and sales department we noted the following:
1. Sales and marketing department lack competative research strategies.
2. The department is made up of two individuals that can not properly overcome
the work load.
3. Currently, there is no concept of commission to marketing department.4. There is only one customer to which ROT can be sold, accordingly, more reliance is
placed on one customer that increases going concern threat.
5. Level of sales are not enough to cover the factory overheads.
Management Comments: Responsible Person:
Sales and Marketing department.
Agreed Date of Implementation:
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Process Sales
Sub Process Sales Invoices are not printed from software
7.2 Recording of sales invoices via JVs
Finding:
We have found that sales invoices are entered into accounting software through
Journal Vouchers(JVs). Normally, Journal Voucher (JVs) are only used for
adjustment purposes and not to enter sales or purchase invoices.
Recommendation:
Sales invoices should be posted in accounting software
through Sale Invoice (SI) and not through JVs.
Moreover, Sales invoice should not be prepared in
excel, instead it should be printed from accounting
software.
Management Comments: Responsible Person:
Accounts Department
Follow up;
This matter was also discussed in our previous report
and is still unimplemented.
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Process General
Sub Process Data entry and Invoice prepration
7.3 Outdated accounting software
Finding:
Currently, company is using outdated accounting software and is not compatable
with companys operations. It is not suitable for company to continue its use as it
take much time to enter data.
In addition to this, Sales Invoices are not printed from software , accordingly,invoices lack back up as well as the system is prone towards misstatement.
Recommendation:
Management should take steps to update and improve
accounting software in order to increase the effectiveness
and efficiency of accounting system.
Management Comments: Responsible Person:
Accounts Department
Followup:
This was reported in our previous correspondence and is
still unimplemented.
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Process Sales
Sub Process Revenue recognition
7.4 Late recognition of revenue
Finding:
On taking an overview of sales cycle and applying cutoff procedures we came to
know that management recognise revenue too prudently.
According to IAS 18:
Revenue should be recognised when the seller has transferred to the buyer, the
significant risks and rewards of ownership.
Accordingly, revenue should be recognised when fabric, including samples are
dispatched to customer.
Recommendation:
Revenue should be recognised as soon as critera
explained in IAS 18 is met.
Management Comments: Responsible Person:
Accounts department
Agreed Date of Implementation:
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Process Sale
Sub Process Categorization of fabric
7.5 Lack of evidence regarding categorization of fabric
Finding:
While analysing the process we realized that after the dispatch there is no proper
physical evidence to conform the grade of fabric.
Recommendation:
Packing list is the sole primary evidence about the
category of fabric. There should be some physical
evidence to verify after the dispatch of fabric and, atleast,
the reason for changing the category should also be
mentioned.
Management Comments: Responsible Person:
Folding department
Agreed Date of Implementation:
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Process Sale
Sub Process Budgeting
7.6 Lack of prepration of budgets
Finding:
While discussing anticipation about forthcomming sales we observed,
a. There is no formal procedure for sales budget prepration.
Recommendation:
Management should focus on prepration of Sales budget
that can help in taking strategic decisions and comforting
long-term planning.
In relation to this, management may consult audit
department for perfoming procedures for initial
development of budgeting system.
Management Comments: Responsible Person:
Sales and Marketing department.
Agreed Date of Implementation:
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9. Annexure
S No. DescriptionIssue
ReferenceAnnexure Reference
1. Contracts are not valid. 6.2 AnnexureA
2. Contract date is after the date of invoice date. 6.2 AnnexureB
3. Contract term not followed. 6.2 AnnexureC
4. Late approval of invoices. 6.4 AnnexureD
5. Unusual variations in invoice numbers and dates. 6.4 AnnexureE
6. Invoices are not prepared according to the quantity dispatched. 6.4 AnnexureF
7. OGPs are prepared but invoices are not generated against those OGPs 6.4 AnnexureG
8. Late deliveries. 6.5 Annexure - C