Royals India Ltd. (RIL) is an Indian sports equipment manufacturer based in Delhi. RIL makes equipment for multiple sports, among them basketball, football, volleyball, handball, cricket, tennis, rackets, table tennis an

CS Professional · Internal and Forensic Audit · PYQS · June 2024
Royals India Ltd. (RIL) is an Indian sports equipment manufacturer based in Delhi. RIL makes equipment for multiple sports, among them basketball, football, volleyball, handball, cricket, tennis, rackets, table tennis and roller skating as well as fitness equipment. Company has four subsidiaries outside India and regular sale/purchase transactions takes place between RIL and its subsidiaries. One of its subsidiaries, based in Unites States of America, handles retail sales also in USA. The main raw material used for manufacturing equipment is wood which is supplied by Fair Supply Ltd. (FSL) based in Tamil Nadu. Besides this, other raw material like rubber, latex, cotton, wires for badminton racket etc. are procured from various other vendors as per requirement and using Non-PO route basis. Analysis of last three years' procurement data shows that major quantity of badminton wires has been supplied by only one company TAR Ltd. (a distributor of different types of badminton wires). Total business obtained by TAR Ltd. from RIL in last three years has increased from ₹25 crore to ₹100 crore. Board of Directors came to know of this and are suspicious as to why same company is getting repeated orders. Their suspicion got confirmed when one whistleblower raised issue that payments to TAR Ltd. is being made on priority basis and that too with little credit period as against normal credit period of 30 days availed from other suppliers. Possibility of collusive bidding also cannot be ignored in this case. As per consensus, forensic auditor was appointed to investigate in detail the purchases made from TAR Ltd. to identify any fraudulent purchases and review the procurement process in detail to identify the risk associated with procurement process. For the same period of three years, supplies of various sports equipments's manufactured to US subsidiary amounts to ₹750 crore. Analysis of consolidated financial statements for said three years show that the operating margin earned by US subsidiary on same products is more than the margin earned by RIL. Internal Auditors also included the same fact in their audit report and advised the company to check its pricing policy for the future. Management is of the view that no change in pricing is required. In the meantime, Income Tax department after analyzing the exports of same type of goods by other companies has initiated scrutiny for its financial dealings with its subsidiary. Considering the facts above, answer the following: What areas will be the areas of risk which a forensic auditor can consider reporting to the management ?

Answer & Explanation:

Following scope items are generally review by the forensic auditor and can consider reporting to management in case of procurement by non-PO route: Review to ensure that expenses are approved as per company policy or delegation of authority. Review of terms agreed with the vendors. Review of process to ensure desired receipt of goods/services and invoice accuracy. Review of process to ensure compliance to agreed terms and SLAs before processing the invoice and payment, and appropriateness of supporting evidence. This also includes review of levy of any interest, penalty or liquidated damages as per the agreed terms. Review of accounting controls with respect to the expense booking and payment processing. Review process of tracking due date for payments, and reconciliation of prepaid expenses (advance moneys paid). Review of segregation of duties with respect to the expense approval, receipt of goods/ services, accounting and payment processing.

Topics: Forensic Audit

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