Volume V PDF

E- 6389
1. Industry Specific

Internal Audit Guides
E- 6390
Contents
Foreword ..................................................................................... iii
Preface ......................................................................................... v
Volume I
I-1 Technical Guide on Internal Audit in

Aluminium Industry ................................................... 1-84
I-2 Technical Guide on Internal Audit in Upstream

Oil & Gas Companies ............................................ 85-195
I-3 Technical Guide on Internal Audit in

Telecommunications Industry ............................ 197-271
I-4 Technical Guide on Internal Audit

of Stock Brokers .................................................. 273-531
I-5 Technical Guide on Internal Audit of

Sugar Industry ...................................................... 533-613
Volume II

Educational Institutions ...................................... 615-805
E- 6391
I-7 Technical Guide on Internal Audit of BPO

Industry ................................................................. 807-927

Retail Industry .................................................... 929-1093

of Life Insurance Business ............................. 1095-1399
Volume III

Mutual Fund ...................................................... 1401-1498

of Infrastructure Industry ................................ 1499-1567
I-12 Technical Guide on Stock and

Receivables Audit ............................................ 1569-1717
I-13 Technical Guide on Internal Audit of Mining

and Extractive Industry ................................... 1719-1829

Not-For-Profit Organisations (NPOs) ............. 1831-1997
Volume IV
I-15 Technical guide on Business Control,

Monitoring and Internal Audit of
Construction Sector......................................... 2001-2205
viii
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Textile Industry ................................................. 2207-2446

Pharmaceutical Industry ................................. 2447-2547

Petrochemical Industry ................................... 2549-2648
Volume V
I-19 Internal Audit in Oil & Gas Refining &

Marketing (Downstream) ................................. 2649-2770
I-20 Technical Guide on Auditing Waste

Management ..................................................... 2771-2922

Beverages Industry .......................................... 2923-3119

IT software industry ......................................... 3121-3236
Note : Detailed contents of each of these Guides is given at

the beginning of the respective Guide.
ix
E- 8949
I-19
TECHNICAL GUIDE ON
INTERNAL AUDIT IN
OIL & GAS REFINING
& MARKETING
(DOWNSTREAM)
ENTERPRISES
E- 8950
Compendium of Industry Specific Internal Audit Guides
Abbreviations
APM Administrated Pricing Mechanism
ASTM American Society for Testing and Materials
ATF Aviation Turbine Fuel
ATU Amine Treatment Unit.
BBU Bitumen Blowing Unit
BIS Bureau of Indian Standards
BPCL Bharat Petroleum Corporation Limited
BRPL Bongaigon Refineries & Petrochemicals

Limited
CIF Cost, Insurance and Freight
CPCL Chennai Petroleum Corporation Limited
CST Central Sales Tax
CVD Countervailing Duties
DCS Digital Control System
DGH Directorate General of Hydrocarbons
E&P Exploration and Production
EIL Engineers India Limited
FDZ Free Delivery Zone
FO Furnace Oil
FOB Free On Board
GAIL Gas Authority Of India Limited
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Internal Audit in Oil & Gas Refining & Marketing (Downstream)...
GDP Gross Domestic Product
GNP Gross National Product
GOHDS Gas Oil Hydro De-sulphurisation Unit.
GOI Government of India
HPCL Hindustan Petroleum Corporation Limited
HRD Human Resources Development
HSD High Speed Diesel Oil
IBP IBP Co. Limited
IIP Indian Institute of Petroleum
ILP Industry Logistic Plan
IOCL Indian Oil Corporation Limited
IQCM Industry Quality Control Manual
JVC Joint Venture Company
KL Kiloliter
KM Kilometer
KRL Kochi Refineries Limited
LDO Light Diesel Oil
LOBS Lube Oil Base Stock
LPG Liquefied Petroleum Gas
LSHS Low Sulphur heavy Stock
MDPM Market Determined Pricing Mechanism
MI Main Installation
MMT Million Metric Tonnes
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MMTPA Million Metric Tonnes Per Annum
MOP and NG Ministry Of Petroleum and Natural Gas
MRPL Mangalore Refineries & Petrochemicals Limited
MS Motor Spirit
NOC National Oil Company
NSU Naphtha Splitter Unit
OCC Oil Coordination Committee
OCRC Oil Cost Review Committee
OEB Oil Economics Budget
OIDB Oil Industry Development Board
OIL Oil India Limited
OISD Oil industry Safety Directorate
ONGC Oil and Natural Gas Corporation Limited
OPC Oil Pricing Committee
OPEC Organization of Petroleum Exporting Countries
OPRC Oil Prices Review Committee
PCRA Petroleum Conservation Research Association
POL Petroleum, Oil and Lubricants
PPAC Petroleum Planning and Analysis Cell
PSA Pressure Swing Absorption
PSF Price Stabilization fund
PSU Public Sector undertaking
R&D Research and Development
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RIL Reliance Industries Limited
ROI Return on Investment
RON Research Octane Number
RPO (RO) Retail Pump Outlet
RR Railway Receipt
RSP Retail Selling Price
RTD Round Trip Distance
SKO Superior Kerosene Oil
SRU Sulphur Recovery Unit
ST Sales Tax
SWS Sour Water Stripper Unit
TAIPP Tariff Adjusted Import Parity Price
TMT Thousand Metric Tonnes
TOP Tap Off Point
VBU Visbreaker unit
WTO World Trade Organisation
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Glossary
Additive A chemical added to oil, gasoline, or other

products to enhance certain characteristics or
to give them other desirable properties.
Alkylation A chemical conversion process to form

gasoline from lighter fractions using catalysts
like sulphuric and hydrofluoric acids.
Aromatics A class of organic compounds, related to

hydrocarbons, which is used to raise the octane
quality of gasoline.
Basin A synclinal structure in the sub-surface, once

the bed of a pre-historic sea. Basins,
composed of sedimentary rock, are regarded
as good prospects for oil exploration.
Bitumen Any of various mixtures of hydrocarbons

together with their non-metallic derivatives,
asphalts and tars.
Black Oil A term denoting residue oil. Oil used in ships’

boilers or in large heating or generating plants;
bunker oil.
Blending The process of mixing two or more oils having

different properties to obtain a lubricating oil
of intermediate or desired properties. Certain
classes of lube oils are blended to a specified
viscosity. Other products, notably gasoline(s),
are also blended to obtain desired properties.
Block An area of land made up of a number of

contiguous leaseholds large enough to drill an
exploratory well.
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Catalyst A substance that hastens or retards a chemical

reaction without undergoing a chemical change
itself during the process.
Cat Cracker A large refinery vessel for processing reduced

crude oil, naphtha, or other intermediates in
the presence of a catalyst.
Condensate Liquid hydrocarbons produced with natural gas

are separated from the gas by cooling and
various other means. Condensate generally
has API gravity of 50 degrees to 120 degrees
and is water white, straw, or bluish in colour.
Corrosion The eating away of metal by chemical action

or an electrochemical action. The rusting and
pitting of pipelines, steel tanks, and other metal
structures caused by a complex electrochemical
action.
Cracking The refining process of breaking down the

larger, heavier, and more complex hydrocarbon
molecules into simpler and lighter molecules.
Cracking is accomplished by the application
of heat and pressure and, in certain advanced
techniques, by the use of a catalytic agent.
Cracking is an effective process for increasing
the yield of gasoline from crude oil.
Crude oil Oil as it comes from the well; unrefined

petroleum.
Cut A petroleum fraction; a product such as

gasoline or naphtha distilled from crude oil.
Demurrage The charge incurred by the shipper for

detaining a vessel, freight car, or truck.
Deposit An accumulation of oil or gas capable of being

produced commercially.
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Diesel fuel A fuel made of the light gas-oil range of refinery

products. Diesel fuel and furnace oil are
virtually the same product. Self-ignition is an
important property of diesel fuel, as the diesel
engine has no spark plugs; the fuel is ignited
by the heat of compression within the engine’s
cylinders.
Distillate Liquid hydrocarbons, usually water-white or

pale straw colour and of high API gravity
(above 60 degrees), recovered from wet gas
by a separator that condenses the liquid out
of the gas stream.
Distillation The refining process of separating crude oil

components by heating and subsequent
condensing of the fractions by cooling.
Distillation A tall, cylindrical vessel at a refinery or

column fractionating plant where liquid hydrocarbon
feedstocks are separated into component
fractions, rare gases, and liquid products of
progressively lower gravity and higher viscosity.
Downstream Downstream are the operations after

production of crude oil, i.e. refining and
marketing.
Exploration The search for oil and gas, including surveying,

geological studies, geo-physical surveying,
coring and drilling of wildcat wells.
Ex bond Imported products kept in the customs bonded

warehouse by executing INTO bond bill of
entry, shall be discharged on payment of
appropriate customs duty through Ex bond bill
of entry.
Feedstock The raw or semi-finished material that is

processed in a refinery or other processing
plant.
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Flare gas Gaseous hydrocarbons discharged from safety

relief valves on process units in a refinery or
chemical plant. Should a unit go down from
an electrical or cooling water failure, making it
necessary to dump a batch of liquid feed or
product, the flare stack is equipped to handle
such an emergency. If it were impossible to
dump both gases and liquids in an emergency,
the plant personnel and the operating units
would be in danger. With the recovery
equipment larger plants are installing flare
gases as well as the dumped process fluid
are recovered. The gases are used as fuel;
the liquids are reprocessed.
Flash point The temperature at which a given substance

will ignite.
Floating storage A large, converted, permanently moored oil

tanker that holds production from offshore wells
for transfer to seagoing oil transport vessels
or to lighters for transport to shore stations.
Fluid Catalystic A large refinery for processing reduced crude,

Cracking Unit naphtha, or other intermediates in the presence
(FCCU) of a catalyst. Catalytic cracking is regarded as
the successor to thermal cracking as it
produces less gas and volatile material; it
provides a motor spirit of 10 to 15 octane
numbers higher than that of thermally cracked
product. The process is also more effective in
producing isoparaffins and aromatics that are
of high antiknock value.
Fractionator A tall, cylindrical refining vessel where liquid

feedstocks are separated into various
components or fractions.
Free Delivery Each strategic point i.e. Depot/ Installation/

Zone (FDZ) Refining is having a zone with a radius of 19.5
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km i.e. one way on all directions, called free

delivery zone. Whenever the loaded tank lorry
leaves the depot/installation/refining to a retail
outlet the vehicle on its way travels through
this zone during its upward journey and re-
enters this zone on its return after the delivery
of the product. Therefore, the round trip
distance of this zone works out to 39 kms
known as FDZ.
Fuel oil Any liquid or lequifieble petroleum product

burned for the generation of heat in a furnace
or for the generation of power in an engine,
exclusive of oils with a flash point below 100
degree F.
Furnace oil Heating oil; light gas oil that can be used as
diesel fuel and for residential heating.
Gas Any fluid, combustible or noncombustible,

which is produced in a natural state from the
earth and which maintains a gaseous or
rarefied state at ordinary temperature and
pressure conditions.
Gas condensate Liquid hydrocarbons present in the casing head

gas that condense upon being brought to the
surface; formerly distillate, now condensate.
Gasoil/ A refined fraction of crude oil somewhat

gasoline heavier than kerosene, often used as diesel
fuel. Motor gasoline is a blend of different cuts
or fractions in the gasoline range.
Heavy ends In refinery parlance, heavy ends are the

heavier fractions of refined oil- fuel oil, lubes,
paraffin, and asphalt- remaining after the lighter
fractions have been distilled off.
Hexane A hydrocarbon fraction of the paraffin series.

At ordinary atmospheric conditions hexane is
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a liquid, but often occurs in small amounts of

natural gas.
Hydrocarbons Organic chemical compounds of hydrogen and

carbon atoms. There are a vast number of
these compounds, and they form the basis of
all petroleum products. They may exist as
gases, liquids or solids.
Hydrocracking A refining process for converting middle boiling

or residual material to high octane gasoline,
reformer charge stock, jet fuel, and/ or high
grade fuel oil. Hydrocracking is an efficient,
relatively low – temperature process using
hydrogen and catalyst. The process is
considered by some refiners as a supplement
to the basic catalytic cracking process.
Hydrodesulphu A process to reduce the sulphur content in

risation products by converting sulphur compounds to
hydrogen sulphide which is then removed.
Hydrogen An odorous and noxious compound of sulphur

Sulphide (H2S) found in ‘sour’ gas.
Import Parity Landed cost of a product at a given port

Price location based on specified supply location
outside India.
Integrated oil A company engaged in all phases of the oil

company business i.e. exploration, production,
transportation, refining, and marketing; a
company that handles its own oil from wellhead
to gasoline pump.
INTO bond On import of the products, the products are

being kept in customs bonded premises under
INTO bond bill of entry executed with customs
authorities ie; products are being kept in the
customs warehouse without payment of import
duties
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Jet fuel A specially refined grade of kerosene used in

jet-propulsion engines.
Joint venture Business or enterprise entered into two or more

partners. Usually the partner with the largest
interest in the venture will be the operator.
Kerosene Kerosene cut from the distillation of crude oil,

not treated or ‘doctor tested’ to improve odour
and colour.
Light crude Crude oil that flows freely at atmospheric

temperatures and has an API gravity in the
high 30s and 40s, a light coloured crude oil.
Light ends The more volatile products of petroleum

refining, e.g. butane, propane, gasoline.
Liquefied Natural Natural Gas that has been liquefied by severe

Gas (LNG) cooling (-160 degrees C) for the purpose of
shipment and storage in high pressure
cryogenic tanks. To transform the liquid to a
usable gas, the pressure is reduced and the
liquid is warmed.
Liquefied Butane, propane and other light ends

Petroleum Gas separated from natural gasoline or crude oil
(LPG) by fractionation or other processes. At
atmospheric pressure, liquefied petroleum
gases revert to the gaseous state LPG.
Liquid Petroleum components that are liquid at normal

Hydrocarbons temperatures and atmospheric pressure.
Manifest A document issued by a shipper covering oil

or products to be transported by truck.
Methane A colorless, odorless flammable gas (CH4).

Methane is the main constituent of natural gas,
which is produced as free gas, and also
associated with crude oil as it comes from the
well. The simplest saturated hydrocarbon.
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Methanol Methyl alcohol; a colourless, flammable liquid

derived from methane (natural gas).
Methyl Tertiary An additive used in unleaded gasoline to

Butyl Ether improve the octane quality. One of the
(MTBE) important oxygenates for use in reformulating
gasoline to reduce noxious emissions.
Metric ton A unit of weight equal to 1,000 Kilograms.
Middle distillates The term applied to hydrocarbons in the so-

called middle range of refinery distillation, e.g.,
kerosene, light diesel oil, heating oil, and heavy
diesel oil.
Round Trip Round trip distance is the distance from the
Distance (RTD) depot/ installation /refinery to the retail outlet
and back. Gross RTD is the combination of
round trip distance of FDZ and the round trip
distance of beyond FDZ.
Motor octane The measures of a gasoline’s antiknock

number qualities, whether or not it will knock or ping in
an engine with a given compression ratio.
Motor octane number of a gasoline is
determined by test engines run under
simulated conditions of load and speed.
Motor spirit A highly volatile fraction in petroleum refining,

an ingredient of motor gasoline, commonly
referred to as petrol.
Multibuoy A tanker loading facility with five or seven

Mooring System mooring buoys to which the vessel is moored
as it takes on cargo or bunkers from
submerged hoses that are lifted from the sea
bottom. Submarine pipelines connect the
pipeline-end manifold to the shore.
Naphtha A volatile, colour less liquid obtained from

petroleum distillation used as solvent in the
manufacture of paint and as dry-cleaning fluid.
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Natural gas Gaseous forms of petroleum consisting of

mixtures of hydrocarbons gases and vapours,
the more important of which are methane,
ethane, propane, butane, pentane, and
hexane; gas produced from a gas well.
Octane number A measure of Gasoline’s propensity to ignite

under compression. The higher the octane
number the less flammable a gasoline is.
OECD Organisation for Economic Cooperation and

Development. Member countries are Australia,
Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Greece, Iceland, Republic
of Ireland, Italy, Japan, Netherlands, New
Zealand, Norway, Portugal, Spain, Sweden,
Switzerland, Turkey, the United Kingdom and
the United States of America.
OPEC Organization of Petroleum Exporting Countries.

Oil producing and exporting countries in Middle
east, Africa and south America that have
organized for the purpose of negotiating with
oil companies on matters of oil production,
prices, and future concession rights. OPEC in
1984 had 13 members: Algeria, Ecuador,
Gabon, Indonesia, Iraq, Iran, Libya, Kuwait,
Nigeria, Qatar, Saudi Arabia, the United Arab
Emirates and Venezuela. The oraganisation
was created in November 1960.
Oxides Mineral compounds characterized by the

linkage of oxygen with one or more metallic
elements such as Cuprite, CU2O or Spinel,
MgAl2O4.
Oxygenates Additives for motor gasoline to promote cleaner

burning in the engine and thus reducing
polluting emissions, unburned hydrocarbons,
and carbon monoxide. An oil industry term
employed to describe a blending component
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capable of rapidly increasing the oxygen

content of motor car fuels.
Petrochemicals Chemicals derived from petroleum; feed stocks

for the manufacture of variety of plastics and
synthetic rubber.
Petroleum In its broadest sense, the term embraces the

whole spectrum of hydrocarbons-gaseous,
liquid, and solid. In the popular sense,
petroleum means crude oil.
Pour point The temperature at which a liquid ceases to

flow or at which it congeals.
Propane A petroleum fraction; a hydrocarbon, gaseous

at ordinary atmosphericconditions, but readily
converted to a liquid. When in a liquid state,
propane must be stored in a high –pressure
metal container. Propane is odourless,
colourless, and highly volatile. It is used as a
household fuel beyond the gas mains.
Refinery A modern refinery is a large plant of many

diverse processes. A refinery receives its
charge stock, or crude oil, from the field via
pipeline or from a tanker if the plant is located
on a waterway. By processes that include
heating, fractionating, pressure, vacuum,
reheating in the presence of catalysts, and
washing with acids. The crude is divided into
hundreds of components: from exotic light
gases to volatile liquids down through gasoline,
naphtha, kerosene, gas oils, and light and
heavy lubricating oil stocks to heavy bunker
fuel, residue oil, and finally petroleum coke,
the bottom of the barrel.
Reforming The use of heat and catalysts to effect the

process rearrangement of certain hydrocarbon
molecules without altering their composition
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appreciably; the conversion of low-octane

gasoline fractions into higher octane stocks
suitable for blending into finished gasoline; also
the conversion of naphtha to obtain volatile
product of higher octane number.
Reid vapour A measure of volatility of a fuel, its ability to

pressure vaporize. Reid vapour pressure, the specific
designation, is named after the man who
designed the test apparatus for measuring
vapour pressure.
Retail outlet Point of sale of petroleum products, primarily

MS and HSD, for use as fuel for road
transportation, commonly referred to as petrol
pump.
Retail sales Sales through retail outlets.
RON Research Octane Number; a measure of a

gasoline’s antiknock quality determined by
tests made on engines running under moderate
conditions of speed and load.
Sedimentary An extensive area (often covering thousands

basin of square miles) where substantial amounts of
un- metamorphosed sediments occur. Most
sedimentary basins are geologically depressed
areas (shaped like a basin). The sediment is
thickest in the interior and tends to thin out at
the edges. There are many kinds of such
basins, but it is in these formations that all the
oil produced throughout the world has been
found.
Single-buoy An offshore floating platform (20 to 35 feet in

mooring system diameter) connected to pipelines from the
shore for loading or unloading tankers. The
SBM system is anchored in deep water, thus
permitting large tankers to offload or lift cargo
in areas where it is impractical to build a
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loading jetty or the close-in water is too shallow

for deep-draft vessels.
Strategic Crude oil/ petroleum products stored as a fuel

reserves reserve in the event of a national emergency
or a prolonged oil embargo by foreign suppliers.
Stream A stream – whether oil, gas, or product-is what

is being pumped through a pipeline, moved
from one process unit to another.
Sweet crude Crude oil containing very little sulphur and

having a good odour.
Tail gas Residue gas from a sulphur-recovery unit; any

gas from a processing unit treated as residue.
Tank farm A group of large riveted or welded tanks for

storage of crude oil or product. Large tank
farms cover several square miles.
Tap off point The place at which petroleum products carried

by a cross country pipeline are drawn off into
storage tanks for distribution therefrom by
various modes.
Turnkey A contract in which a contractor agrees to

contract furnish all materials and labour and do all that
is required to complete a well in a workmanlike
manner. When on production, he delivers it to
the owner ready to ‘turn the key’ and start the
oil running into the lease tank, all for an amount
specified in the contract.
Ullage The reserve space in a storage tank between

the top of the oil and the top of the tank. This
space or ullage allows for expansion of the oil
when it warms up from the sun or artificial heating.
Upstream Pertaining to exploration and production of

crude and natural gas.
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Contents
Abbreviations. ............................................................... 2654
Glossary .................................................................... 2658
Chapter 1 Introduction ............................................... 2671
Chapter 2 Technical Aspects of Refining and

Marketing Activities ................................... 2675
Chapter 3 Internal Audit of Refining Activities .......... 2697
Chapter 4 Internal Audit of Marketing Activities ........ 2718
Chapter 5 Internal Audit of Special Areas ................ 2740
Chapter 6 Cost Audit ................................................. 2764
Chapter 7 Information Systems Audit ....................... 2766
Appendices
Appendix A Process of Refining................................... 2768
Appendix B Refinery Block Diagram ............................ 2769
Appendix C Types of Products Produced from

Crude Oil ................................................... 2770
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Chapter 1
Introduction
1.1 The petroleum sector plays a vital role in the economic growth
of the country as every economy is largely dependent on petroleum
products for its day-to-day activities. Out of the total energy mix of
oil, natural gas, coal, hydroelectric and nuclear/ others, the
petroleum component occupies a major share. The demand for
the petroleum products is increasing year by year thereby putting
pressure on exploration and production of crude oil and refining
and marketing of petroleum products. The increasing trend in the
population and growth in the individual consumption has multiplied
the demand for petroleum products manifolds. With economic
growth and modernisation, the demand for petroleum products
has been on the rise and is expected to rise further.
1.2 Petroleum has emerged as the world’s most useful source

of energy and a vital commodity in international market. The use
of crude oil as a source of energy started around 1890 only. Till
early forties, demand of petroleum products was low but with
worldwide growth of industry there was a sudden shift in favour of
petroleum as energy source as compared to coal. Major expansion
and development in automobile industry also took place during
this period. Oil dominated as a source of energy for transportation,
electricity generation, etc. It also becomes essential as a
petrochemical feed stock.
1.3 India is one of the countries, which have the highest growth
rate in the consumption of petroleum products. The country’s
indigenous production of crude oil is, however, not sufficient to
meet the overall demand for petroleum products, consequently,
the country is heavily dependent on import of crude oil. Production/
import of crude oil, refining and marketing of petroleum products
(with the exception of lubricants to a certain extent) was till recently
done only by the Public Sector Undertakings (PSUs). A noticeable
change has, however, taken place in the petroleum sector over
the last couple of years, for example, oil fields have been offered
for exploration to foreign/ Indian companies in the private sector,
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private sector has been allowed to set up refineries, import of a

number of products has been decontrolled, parallel marketing of
LPG under free pricing has also been allowed to the private sector.
As the demand for petroleum products is growing, the extent to
which the same is being met out of indigenous production is
declining and only about 30 per cent of the oil and gas demand is
likely to be met out of indigenous production. Consequently, the
increased level of import of crude oil has serious repercussions on
the country’s balance of payment position and energy security,
particularly in the background of increasing oil prices in the
international markets.
1.4 The Oil sector is founded on two major activities, one,

exploration and production (E and P) and two, refining, distribution
and marketing. Whereas exploration and production of crude oil
and gas is an upstream activity, refining, distribution and marketing
are classified as downstream activities. Exploration and Production
encompasses discovery and production of oil and gas by
undertaking geological and geophysical surveys like remote
sensing, airborne magnetic and field gravity surveys to identify the
principal areas of adequate sediment cover, seismic surveys, drilling
exploratory well, economic evaluation of the project, entering into
agreements with the state, formulation of field development and
production plan, decommission of the well.
1.5 Refining activity, involves receiving the crude through

pipelines/ coastal tankers from the indigenous/ imported destination,
for refining the crude into different products at different temperature
on the basis of demand/ requirement of respective product. Refining
is an important activity since the crude, which was produced has
to be refined into different products for the final use of products by
the consumers. India can perhaps claim to have established one
of the earliest refineries in the world.
1.6 Marketing activity involves the process of receiving the

finished products or refined crude oil products, through pipeline,
costal tankers, rail wagons and tank trucks for storing the products
in the Installation/ Terminal/ Depot for onward distribution to final
consumers.
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1.7 In India, the operations of petroleum companies can be

grouped into:
i) Exploration and Production
ii) Refining and Marketing
iii) Pure Refining
iv) Pure Marketing.
The following diagram brings out the oil industry’s structure in

India, the major players in the various upstream and downstream
activities as on January 1, 2007.
Industry Structure
Exploration & Production Natural Gas & Pipelines Refining & Marketing
● Public Sector Gas Distribution Refining & Marketing

● ONGC GAIL Public Sector
● OIL ONGC
IOCL
LNG Projects HPCL
Private Sector (Shell Petronet IBP*@$
(Reliance, HOEC, LNG, BG, IOC, MRPL***
Shell, BG, Cairn etc. NRL**
etc.) CPCL*
Pipelines BRPL*
IOCL KRL#
Private Sector
BPCL
Reliance
HPCL Essar
Petronet India Shell @
GAIL
Note:
* Majority stake acquired by IOCL
** Majority stake acquired by BPCL
*** Majority stake acquired by ONGC
@ Exclusive Marketing Company
$ Being merged with IOCL
# Fully merged with BPCL
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1.8 This Technical Guide provides an insight with regard to:
1) Refining and marketing activities
2) Internal audit for refining and marketing activities.
The Guide will be useful to the readers in ascertaining various

technical aspects and internal audit requirements of a downstream
oil company. Since the size, functioning and nature of activities
may vary from one company to another, the Guide cannot cover
all the intricacies that might be involved in all practical situations.
The various aspects/ principles enunciated in this Guide, m i g h t ,
therefore, require appropriate modification/ adjustments depending
on size, function and nature of activities of a company under audit.
The Technical Guide therefore does not touch upon internal audit
of other aspects such as payroll, finance, etc., which are more or
less common in all types of industries.
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Chapter 2
Technical Aspects of Refining
and Marketing Activities
Refining
2.1 Crude petroleum oil is a complex mixture of alkaline
hydrocarbons with water, salt and earth particles. Hence, before it
can be used for specific purposes, it has to purified or refined. The
process of separating the crude petroleum oil into more useful
fractions is called refining.
2.2 Petroleum refining is a continuous process industry wherein

several products carrying different boiling points and molecular
compositions are produced from crude oil. The refinery units
comprise of the Distillation Unit, Secondary processing Unit like
Lube stock, FCCU, hydro finishing units for fuels, Diesel Hydro
De-sulphurisation Units, Sulphur Units, Petrochemical feed stock
Units, Wax Unit etc., with associated facilities – offshore and utilities.
The refining of crude oil is done by process of fractional distillation.
In other words, petroleum is separated into its constituents by the
process of fractional distillation. The refining of petroleum into
different components is based on fact that the different components
of crude oil have different boiling point range.
2.3 The crude petroleum oil is heated to a temperature of about

400 degree Centigrade in a furnace and the vapours thus formed
are passed into a tall fractionating column from near its bottom. As
the mixture of hot vapours rises in the column, it starts getting
cooled gradually. Due to this, the vapours of the higher boiling
fractions of petroleum condense first in the lower part of the tower,
whereas the vapours of the low boiling fractions rise up into the
tower and condense later. In this way, the fraction of petroleum
having highest boiling point range is collected in the lowest part of
the fractionating tower whereas the fraction having lowest boiling
point range is collected in the top-most part of the tower. The
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gases, which do not liquefy, are taken out from the top of the
fractionating column. The fractional distillation is continued until
the crude oil is separated into five or six hydrocarbon fractions,
each fraction having different boiling point over a different range
of temperature. In this way, the fractions having different boiling
ranges are collected separately. The residual oil or liquid residue,
which does not vaporise under these conditions, is collected and
subjected to further fractional distillation by heating above 400o C
to get more useful fractions. The various fractions obtained by the
fractional distillation of crude petroleum oil are petroleum gas,
gasoline or petrol, kerosene oil, diesel oil, fuel oil, lubricating oil,
paraffin wax and asphalt. The three fractions - lubricating oil, paraffin
wax and asphalt - are obtained by the further fractionation of
residual oil which collects at the bottom of the fractionating column.
APPENDIX A contains a diagrammatic representation of the basic
refining process.
2.4 Each fraction obtained from petroleum after refining is not a

single compound but a simpler mixture of compounds. The various
fractions of petroleum differ in the number of carbon atoms in their
molecules. The various fractions of products obtained by the
fractional distillation of petroleum will differ in their molecular
compositions and boiling point ranges. APPENDIX B shows details
of refinery block diagram with various refining units. The core
issues involved in processing the crude include:
a. Improving the yield of the distillates;
b. Producing high value products;
c. Optimising the energy consumption;
d. Minimising the loss of hydrocarbons;
e. Environmental management issues; and
f. Product quality issues.
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Cost of Refining
2.5 The cost of refining consists of the following elements:
A. Delivered cost of crude oil – This includes expenditure

incurred in respect of:
(i) cost of crude;
(ii) transportation of crude to refineries;
(iii) marine/ transit insurance;
(iv) ocean loss/ pipeline loss;
(v) wharfage;
(vi) other landing charges;
(vii) customs duty or excise duty;
(viii) auxiliary duty; and
(ix) other levies.
B. Refining cost – This includes expenditure incurred in

respect of:
(i) Chemicals and catalysts;
(ii) Consumables;
(iii) Utilities like water and power;
(iv) Salaries and wages;
(v) Overheads;
(vi) Repair and maintenance;
(vii) Depreciation;
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(viii) Finance charges on working capital; and
(ix) Normal production loss.
Technical Parameters in Refining Activity

2.6 The technical parameters in the refining activity comprise
the following:
● Types of crude;
● Oil Industry Safety Directorate (OISD) norms;
● Explosives Norms – Petroleum Act, 1934 and Rules;
● Pollution control norms;
● Petroleum products and their usage; and
● Quality control.
Types of Crude
2.7 There are three types of crude namely,
● Sweet;
● Sour; and
● Heavy crude.
Processing of sweet crude involves lesser complications while

producing the finished petroleum products as compared to
processing of sour and heavy crudes. The refining configuration is
built to take care of processing any type of crude. Sour and heavy
crudes are cheap but require superior metallurgy and treatment.
Pre and Post treatment of sour and heavy crude and precuts
leads to higher capital and operation costs. The finished petroleum
products obtained as a result of processing of the crude can be
classified as:
a. Light distillates;
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b. Middle distillates; and
c. Heavy ends/ distillates.
2.8 Light distillates are high value products consisting of LPG,

Naphtha and Petrol. Middle distillates have lesser product value
than light distillates, and consist of Kerosene, ATF, HSD and LDO.
Heavy distillates are lesser value products as compared to light
and middle distillates, and consist of FO, LSHS, HHS, lube oils
and Bitumen. The trend world over is towards higher conversion of
crude into light and middle distillates to obtain 85 per cent and
balance of 15 per cent for heavy distillates/ ends. The consumption
mix in India is tilted in favour of middle distillates as shown below.
POL Consumption Mix

Heavy
18%
Light
30%
Middle
52%
Out of total the consumption of petroleum products, middle distillates

account for 52 percent consumption, light distillates account for 30
percent and Heavy ends/ distillates accounts for 18 percent.
Oil Industry Safety Directorate (OISD) Norms

2.9 Hydro-carbon processing and handling plants are inherently
hazardous. Large and complex plants present substantial risk
potential. The industry over the years has learnt lessons from fires
and explosions and mishaps and also updates plant safety norms
on a regular basis. The norms lay down minimum requirements of
layouts within the plant boundary for petroleum refining, oil/ gas
production and processing plants, LPG filling plants and other
petroleum storage installations/ depots including inter distances
between facilities and their relative locations. The facilities too are
constructed as per the layout and distance norms laid down by
OISD.
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Explosive Norms
The Petroleum Act, 1934
2.10 The activities relating to import, transport, storage, production,
refining and blending of petroleum are to be in compliance with
the provisions of the Petroleum Act, 1934, which extends to the
whole of India. Petroleum means any liquid hydro-carbon or mixture
of hydro-carbons and any inflammable mixture (liquid, viscous or
solid) containing any liquid hydro-carbon. The Act classifies
petroleum products in the following classes:
Class “A” - Flash Point < 23° C
Class “B” - Flash Point >= 23° C < 65° C
Class “C” - Flash Point >= 65° C < 93° C
The Act deals with control over petroleum, testing of petroleum,

penalties and procedure.
The Petroleum Rules 1976

2.11 The Petroleum Rules, 1976 came into force with effect from
August 1, 1976 and deal with the procedures to be followed for
import, transport, storage, electric installation licences, refining and
blending of petroleum and testing. The Rules also contain general
provisions on restriction, delivery and despatch of petroleum,
approval of containers for storage, prevention of escape of
petroleum, prohibition on employment of children and intoxicated
person, prohibition of smoking, fires, and special precautions against
accident and payment of fees, etc.
Gas Cylinders Rules 1981

2.12 These Rules deal with provisions relating to filling, possession,
import and transport of cylinders, valves, safety devices, etc., for
use in LPG.
Pollution Control Norms

2.13 The oil industry needs to comply with the pollution control
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norms while discharging effluents into water bodies, air and earth
etc. Emissions to atmosphere become a problem especially while
processing sour and heavy crudes and burning high sulphur fuels.
The main legislation relating to environment protection includes:
(i) Water (Prevention and Control of Pollution) Act, 1974
(ii) Water (Prevention and Control of Pollution) Cess Act, 1977
(iii) Air (Prevention and Control of Pollution) Act, 1977
(iv) Environment (Protection) Act, 1986
(v) Forest (Conservation) Act, 1980
(vi) Wildlife (Protection) Act, 1972
(vii) Motor Vehicles Act and Rules, 1989.
Petroleum Products and their Usage

2.14 The petroleum products generated from the refining process
normally have the following use:
Petroleum gas is used as fuel as such or in the form of liquefied

petroleum gas. Petroleum gas is also used in the production of
carbon black (needed in the tyre industry) and of hydrogen (needed
in the fertilizer industry) and also used in the manufacture of
gasoline (petrol) by the process of polymerization. LPG is also
used for cooking.
Gasoline or Petrol is used as a fuel in motor cars, scooters, motor

cycles, and other light vehicles. Petrol is also used as a solvent for
dry cleaning of clothes and for making petrol gas.
Kerosene oil is used as household oil, as an illuminant in hurricane

or petromax lamps, also used for making oil gas. A special grade
of kerosene oil is used as aviation fuel in aero planes.
Diesel oil is used as a fuel for heavier vehicles like buses, trucks,
railway engines and ships. It is also used to run water pumps
required for irrigation in fields and in diesel generators to produce
electricity on small scale.
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Furnace oil is used in industries to heat boilers and furnaces. Fuel

oil is a better fuel than coal because fuel oil burns completely and
does not leave any residue.
Lubricating oil is used for lubricating machinery to reduce the

friction and wear and tear of the same under severe operating
conditions. It is used for both industrial and automotive applications.
Paraffin wax is used for making candles, Vaseline, ointments, wax

paper, toilet goods and grease.
Asphalt/ Bitumen is a black sticky substance used for making road

surfaces and the final residue of petroleum.
Light Diesel Oil is used for slow speed diesel engines in agriculture/
marine industrial sectors. Also as a fuel in certain specialised
industrial applications.
Low Sulphur Heavy Stock is used as fuel for industrial boilers and
furnaces as well as feed stock in manufacture of fertilizers.
Grease is a semisolid product of dispersion of thickening agent in

liquid lubricant.
Naphtha is used as feed stock for manufacture of fertilizer,

Petrochemicals and power generation.
Mineral Turpentine Oil used as solvent for textile printing, dry

cleaning, polish and insecticides.
APPENDIX C shows the types of products produced from crude

oil.
Quality Control
2.15 The quality of petroleum, oil and lubricants (POL product) is
controlled keeping in view the requirements of the end users and
is in conformity with the BIS specifications. The Ministry of
Environment, BIS and other agencies of Petroleum Ministry such
as Indian Institute of Petroleum (IIP), Centre for High Technology
(CHT) are jointly developing standards for products.
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2.16 There is world wide concern about environmental pollution

caused by emissions from automobiles. These emissions contain
lead and benzene which are carcinogenic and adversely affect the
health of the people. Sulphur and Suspended Particulate Matter
(SPM) from diesel vehicles cause breathing problems such as
asthma. Specifications of MS and HSD also have undergone
changes and more stringent pollution control norms in the form of
Bharat II and Bharat III (like Euro II and Euro III) are in place.
Meeting these norms involve huge investment especially for those
companies in the oil industry which processes sour and heavy
crudes.
DOWNSTREAM SUPPLY CHAIN
Inland / Tap Off

Refinery terminals Depots
Terminals
Port Terminals
Customers Retail Outlets
2.17 The quality control measures begin at the refinery itself at

the time of transfer of product from the refinery to the TOP of the
marketing company or loading of the tanker directly from the refinery
to another port location. The concerned refinery provides its report
confirming that the product in the tank for which transfer is proposed
meets the quality specifications. Quality control labs are also set
up at the refinery, TOPs, depots, port installations etc., to ensure
that the products conform to the required specifications.
Marketing Process
2.18 Petroleum products being mostly liquid in nature require
special facilities for storage, transportation and distribution. Most
of these are volatile in nature and require special care in handling
delivery. Marketing and distribution of the products is done by oil
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companies normally through a large network of storage and

distribution facilities as given below:
2.19 Marketing of petroleum products demands finer marketing

skills in as much as the market leader is company, which can
make products available to consumers in the most efficient manner
at all times at right price, in right quantity, of right quality and at
the right place. The marketing image can only be enhanced by
extending excellent customer service and ensuring consumer/ public
satisfaction. Further, market share can be improved vis-à-vis that
of others by being pro-active and meeting customers’ needs.
2.20 The marketing and distribution activity in an oil company

normally falls under the following heads:
(i) Installation: This consists of storage tanks and product

handling facilities for receipt of products from port and/ or
refineries for onward despatch to direct customers in bulk
and inland depots.
(ii) Distribution: This consists of depots and transportation

facilities for onward movement of products to retail outlets
and direct customers.
(iii) Administration: For efficient management of the all India

network of installations, depots, LPG bottling plants, etc., oil
companies have head office, regional and divisional offices.
(iv) Air Field Stations: Oil companies have infrastructure at the

airfield stations consisting of storage tanks, hydrants,
pipelines, hoses etc., for fuelling aircraft.
(v) Retail Pump Outlets: This is the last link in the distribution
and the oil companies have dedicated dealer network for
retailing MS and HSD.
(vi) LPG Filling: Bulk LPG imported or from the refineries is

bottled at the LPG bottling plants before being marketed to
the domestic and industrial customers.
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Transportation
2.21 Transportation cost plays a vital role in determining the final
selling prices for the consumers. The various modes used for
transportation of petroleum and crude to consumers include coastal
tankers, river barges, multi-product cross country pipelines, branch
pipelines, railway wagons, road tank-trucks, etc. Crude oil is
transported to the refineries either by tankers or by pipelines. The
product from the refinery/ port installation are moved by rail, road,
pipeline and coastal vessels. The centers of consumption and
production and the points of import of petroleum could be at places
separated by hundreds of miles. Surplus products at a location
also need to be transported to areas facing deficit. Refineries
could be anywhere in between the consumption and production
centers. With the economics of refinery location determining the
exact position, crude has to be transported from production centers
or points of import to the refineries and refined petroleum products
have to be transported from refineries or points of import to the
consumption centers.
2.22 All modes of transportation of petroleum products complement

each other and form essential components of the logistics system.
For bulk transportation of petroleum products, pipelines are the
most energy efficient, convenient and preferred mode of
transportation. With deregulation, the oil companies and shippers
have multiple options in selecting the mode of transportation and
there is an increased emphasis on quality and reliability of service.
Market Intelligence
2.23 It may appear that oil companies are operating in the seller’s
market, the fact is that oil companies engaged in marketing gives
rise to a healthy competition among the companies. Collecting
market information is a critical factor for sustaining and improving
operational efficiency. Being well informed also helps in knowing
the pulse of the market, which would in turn, help in taking pro-
active decisions and also in anticipating events before the actual
occurrence and taking corrective action before the events become
a part of history. The market intelligence can also be acquired by
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systematic and timely collection and collation of some important

facts about various markets such as:
(i) Geographic details of area with number of States, districts,

cities/towns, talukas and villages.
(ii) Population of various districts, talukas / villages, main

occupation of the people and important crops/ agricultural
seasons.
(iii) Vehicular population and important fleet operators, workshops

and garage.
(iv) Road map showing important roads, such as national

highway, state highway, MDR (Major District Roads) and
village roads and their starting and terminalling points and
also showing depots/ terminals/ ROs.
(v) Road, rail, airline connection and road development, present

and future.
(vi) Competitors’ activities/ strength.
(vii) Industrial developments, number of major and minor

industries and their locations, existing and expected/projected
industries.
(viii) Agricultural developments – minor and major irrigation

projects, World Bank sponsored schemes.
(ix) Infrastructure and other development of the area, housing

as well as commercial.
(x) Master plans for improvement in cities/ talukas.
(xi) Government set up, important and concerned Ministers,

Deputy Commissioner, Collectors, Police officials, PWD
Engineers, Fire Force Officers, pertaining to each district.
Strategic Reserves
2.24 The marketing/ refining companies have to maintain strategic
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reserves of petroleum products in the country since an oil supply

crisis can disrupt the economic life of the country. It is therefore
desirable to have a buffer to cope with the difficulties and manage
the crisis should it reach a critical stage. However, before this
stage is reached, it is desirable to intervene in the course of the
crisis, for as supplies begin to dry up, there is a risk of speculation
which fuels price increase and, to a certain extent, the crisis itself.
It, therefore, makes good economic sense to have a means of
defusing the crisis by off-loading the reserve stocks on the market
before the crisis develops. Further, this buffer itself is a powerful
deterrent for those who might be tempted to unleash a supply
crisis.
Sharing Arrangements
2.25 Memorandums of Understanding (MoUs) are a common
feature in the oil industry, wherein one oil company enters into an
MoU for sharing product supply, storage facilities with other oil
companies which have product availability and infrastructure at a
given place. As one company cannot have its own source of supply
and infrastructure throughout the country, this type of arrangement
is necessary for oil companies for effective utilisation of their product
and facilities.
Product Sharing Arrangements

2.26 MS, HSD, SKO and LPG are mass consumption products.
Each marketing company has created extensive retail network to
satisfy the consumer’s needs. In case of LPG, customers are
enrolled by each company in all demand centres and the product
requirement is met out of the production of the nearest refinery
and/ or out of imports.
Sharing of Other Infrastructure Facilities

2.27 It is difficult for a single oil company to have all the facilities
throughout its marketing network for storing and distribution of
products. It is, therefore, a normal practice in the oil industry to
utilise the facilities of other company at the place where it does not
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have one and in turn lend its own facilities where the other company
does not have such facilities.
Sharing of Product Pipelines

2.28 The product pipelines are natural monopolies. The pipelines
are shared by industry to protect consumer interests. This results
in avoiding wasteful use of resources of the country, by cutting the
need to build a second parallel pipeline one to the existing one.
Sharing of Port Facilities

2.29 Like sharing of pipelines, the port facilities are also shared
by the Industry.
Supply to Remote Areas

2.30 There are several parts of our country which are remotely
located and do not consume enough volumes of petroleum products
to warrant setting up of storage and distribution facilities. Marketing
companies due to socio-economic reasons are required to supply
petroleum products to these areas even at losses.
Technical Parameters in the Marketing

Activity
2.31 The technical parameters involved in the marketing activity
undertaken by the oil companies comprise:
(i) Facilities - Storage tanks, under ground (UG) tanks/ above

ground (AG) tanks, pipelines, products pump house/ loading
pump house, fire fighting system like water and foam
(ii) OISD Norms
(iii) Petroleum Act and Rules – Explosive norms
(iv) Pollution control
(v) Quality control
(vi) ISO requirements
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(vii) Marketing guidelines
(viii) Transport discipline guidelines
(ix) Types of markets
(x) Types of distribution channels.
Facilities
2.32 The important factors to be noted in respect of the facilities
of the oil companies include:
a) Product Storage Tanks – The crude and petroleum products

at the refineries/ terminals/ depots are stored in bulk in
suitably calibrated storage tanks of capacity, which is related
to the throughput of the location. The storage tanks are
invariably installed above the ground level and are constructed
on sand bed/ concrete foundation. These tanks are vertical,
cylindrical in shape and either have a fixed cone roof or a
floating roof. The floating roof tanks are installed to control
the product losses due to evaporation. At times, the
underground tanks of suitable capacity are also used for
storage of petroleum products at depots. Apart from this,
special types of tanks are also installed for specific uses.
b) Inlet and Outlet pipelines - The inlet and outlet pipes are
provided to the tanks to facilitate receipt and withdrawal of
products. These lines are provided at the bottom of the tank
to avoid splashing of the products at the time of receipt and
ensure maximum withdrawal of product. The delivery lines
invariably have pumps to guide operations. Receipt lines are
also provided with pump wherever necessary.
c) Rail Wagon/ Tank Truck Filling Sheds - Bulk of supplies to

depots/ customers are effected by rail wagon/ tank truck.
Each refinery/ depot/ installation are provided with rail wagon/
tank truck filling sheds to facilitate loading of tank trucks/ rail
wagon. The number of bays provided at the rail wagon/ tank
truck filling shed is commensurate with the daily/seasonal
peak volumes handled at the refinery/ installation/ depot.
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Rail wagon/ tank truck filling bay is connected to the tanks

by pipeline of requisite diameter.
d) Observance of safety regulations – As mentioned earlier,

the petroleum products are classified according to their closed
cup flash point as follows:
Class “A” – Liquids which have a flash point below 23°C
Class “B” – Liquids which have flash point of 23°C or above

but below 65°C
Class “C” – Liquids which have flash point of 65°Cor above

but below 93°C Unclassified liquids have a flash point of
93°C and above. Thus, depending on the class of petroleum
products, which is required to be stored in the tank, the
fabrication of the tank is carried out and required safety
regulations are observed at the installation/terminal, while
installing these tanks.
e) Product pump house/ Loading pump house - This consists

of pipeline from storage tanks, together with pumps for each
products for loading the product into Tank Wagon and Tank
Truck.
f) Fire fighting systems- consists of water pipelines, pump

house, fire engines, water storage, foam storage for
controlling and putting off any fire hazards.
Oil Industry Safety Directorate (OISD) Norms

2.33 (Please refer paragraph 2.9 for details).
Petroleum Act and Rules - Explosives Norms,

Petroleum Rules 1976 and Gas Cylinder Rules
1981
2.34 (Please refer paragraphs 2.10 to 2.12 for details).
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Pollution Control Norms

2.35 (Please refer paragraph 2.13 for details).
Quality Control
2.36 The petroleum products marketed by the oil Industry conform
to the Indian Standard Specifications which is followed as a
marketing specification for each product. The concerned refinery
provides its report confirming that the product in the tank for which
transfer is proposed meets the specifications. Thereafter, required
quality control measures are taken at all stages, i.e., receipt of
product at TOPs through pipelines, through rail wagon, through
tank trucks etc. Required procedures are followed to ensure quality
control checks at various stages till the product is finally delivered
to the consumer. For this purpose, quality control labs are set up
at the refinery, TOPs, depots, port installations etc., to ensure that
the products conform to the required specifications. Mobile
laboratories are also set up to check the quality of the products
while it is in transit from the supply location to the premises of the
consumer (in case of delivered supplies). The mobile laboratories
are also established for checking the quality of the product being
dispensed from the Retail Outlet.
2.37 Product quality and specifications conform to the Industry

Quality Control Manual. Petroleum products are received, stored
and delivered at the Installation/ Depot as per the quality control
manual for non-aviation products. The responsibility of ensuring
proper quality control in various terminals/ installations and depots
etc., rests with Operations Department of the respective oil
company.
Motor Spirit and High Speed Diesel Order, 1990

2.38 In exercise of powers conferred by Section 3 of Essential
Commodities Act 1955, the Central Government has passed this
Order. The Order extends to the whole of India and its objective is
to prevent malpractices in the supply and distribution of MS and
HSD. For the purpose of the Order, adulteration, pilferage, stock
variation, unauthorised exchange, unauthorised purchase and
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unauthorised sale are considered as acts of omission and

commission in respect of Motor Spirit and High Speed Diesel.
ISO Requirements
2.39 The main requirements for getting ISO – 9002 certification
on the performances and working of a marketing terminal/ depot/
tap-off/ retail outlet with a total commitment on quality of services
render to customers is driven by the following goals:
a) To maintain internationally benchmarked Quality Management

and Environment Management system.
b) To maintain growth in marketing of products.
c) To train all employees for products knowledge, right attitude

and customer satisfaction and loyalty for improving image of
the company.
d) To organize oil conservation and quality awareness programs

at regular intervals.
e) To train employees and dealers for overall management and

dealer’s staff in customer service as well as to launch new
products and schemes developed by the company.
2.40 The ISO certifying agency normally looks at the following

aspects before certifying that the particular marketing terminal/
depots/ tap-off point/ retail outlet meets ISO -9002 requirements:
(i) Specifications as to the responsibilities and authority of

personnel as they apply to quality.
(ii) Structures of the quality system, the various levels of

documentation used and the indented use of each level of
documentation.
(iii) Whether the customer requirements are understood and

reviewed prior to processing orders.
(iv) Whether design control is ensured.
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(v) The control information that affects quality by ensuring

whether the relevant documents, both internal and external,
are reviewed and approved by authorized personnel prior to
release, and whether all relevant personnel have access to
pertinent issues and whether revisions receive the same
level of authorization as the originals.
(vi) Whether the company has established and maintained a

system for ensuring that purchased items and services
conform to specific requirements.
(vii) Whether it is ensured that all customer supplied material

and services are verified, stored and maintained.
(viii) Whether the company has established and maintained a

system for identifying the product by suitable means.
(ix) Whether the company has established and maintained a

system for ensuring that activities are carried out under
controlled conditions.
(x) Whether the company has established and maintained a

system for the inspection and testing, to ensure compliance
with customer requirements.
(xi) Whether the company has established and maintained a

system to control, calibrate and maintain inspection,
measuring and test equipments.
(xii) Whether the company has implemented and maintained a

system for indicating the inspection status of goods.
(xiii) Whether the company has ensured that goods or services

containing any non conformity to specification are promptly
identified, documented and auctioned in accordance with
company procedure.
(xiv) Whether the company has established and maintained a

system for implementing corrective and preventive action to
eliminate the causes of actual or potential non conformity.
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(xv) Whether the company has implemented and maintained a

system for the handling, storage, packaging, preservation
and delivery.
(xvi) Whether the company has established and maintained a

system for identification, collection, indexing, filing, storage
and disposition of quality records.
(xvii) Whether the company has established and maintained a

system for planning and implementing internal quality audits.
(xviii) Whether the companies has established and maintained a

system for identifying training needs and provide for the
training to all personnel performing activities affecting quality.
(xix) Whether the company has established a servicing system.
(xx) Whether the company has established and maintained a

system for applying statistical techniques a basis for the
assurance and Control of Quality.
2.41 The above requirements have to be complied with, by the

Marketing terminal/ depot/ tap-off off point/ retail outlet as it pertain
to the area of operations, for getting ISO – 9002 Certification.
Marketing Discipline Guidelines (MDGs)

2.42 The Marketing Discipline Guidelines are formulated by the
Ministry of Petroleum and Natural Gas and all the marketing
activities of the oil companies are governed by these Guidelines.
The basic objective of the Marketing Discipline Guidelines is to
protect the ultimate customers’ interests, so that they get the full
value for their money in terms of correct price, quantity and quality.
The Guidelines deal with the following:
I. Handling of MS/HSD/SKO at the oil company’s storage point

such as depots, terminals and installations.
II. Handling of products at retail outlets by dealers.
III. Maintenance of company equipment at retail outlets.
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IV. Inspection of retail outlets/SKO dealerships.
V. Prevention of adulteration at retail outlets - checks/actions to

be taken.
VI. Prevention of malpractices/irregularities at retail outlets.
VII. Prevention of malpractices/irregularities at SKO/LDO

dealerships.
Transport Discipline Guidelines

2.43 The purpose of these guidelines is to ensure that:-
a. petroleum products are delivered in tank trucks in accordance

with quality control manual for non aviation products as per
specifications;
b. petroleum products are transported and delivered to dealers/

customers and other storage points in good condition
confirming to the specification; and
c. a well defined system of checks exists at various stages of

handling of petroleum products.
Under the transport agreement with the company the transporter

are responsible for offering fit tank lorry to carry petroleum products
and transporting/ delivering the same in good condition, as per
specifications to the dealers/ customers, other storage points and
are held accountable for any malpractice/ adulteration enroute.
Types of Markets
Retail Market Classification
2.44 This is mainly to identify the class of market in which an
outlet has been set up.
“A” Class Market – Metropolitan cities and other cities having a

population over 8 lakh as per the 2001 census.
“B” Class Market – Cities having a population below 8 lakh as per
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the 2001 census excluding North Eastern States, Himachal

Pradesh, Jammu and Kashmir and Uttarakhand.
“C” Class Market – All other towns/ cities not covered under “A”,
“B” and
“E” markets excluding locations on National/ State Highways. “D”

Class Market – Retail outlets on National/ State Highways.
“E” Class Market – Remote areas not covered by National/ State

Highways and pockets of consumptions having no retail outlet
within 10 KMs radius and to cater to the requirements of the
agriculturalists etc., in the remote areas i.e., areas which are not
on National/ State Highways, North Eastern States, Himachal
Pradesh, Jammu and Kashmir, Lakshadweep and Uttarakhand.
Types of Distribution Channels

2.45 There are two channels of marketing in selling of petroleum
products, one, retail and second, direct. The retail channel
comprises the following three:
a. Retail outlets for MS, HSD, Lubricants, Greases. Under the

category, the following types of retail outlets are further
identified:
“A” site – which are Company owned and company controlled.
“B” site – which are Dealer owned and company controlled.
“C” site – which are Dealer owned and Dealer controlled.
b. Utility pumps for HSD.
c. Agency for Kerosene, LDO, Lubricants/ Greases.
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Chapter 3
Internal Audit of Refining
Activities
3.1 The objective of internal auditing is to assist members of

management at all levels in the effective discharge of their
responsibilities by furnishing them with analysis, constructive
appraisals, recommendations and pertinent comments concerning
the activities reviewed.
3.2 Management is a process by which the affairs of an enterprise

are conducted in such a manner that its goals and objectives are
attained through optimum utilization of all available resources, within
the legal, social, economic and environmental constraints. To
achieve optimum utilization of resources, the management should
determine the goals and objectives of the concern, quantify them
to the extent possible, develop major policies and plans, implement
them and exercise control over such implementation. The internal
auditor should constantly review each of the aforesaid managerial
functions. Hence, the scope of internal audit covers the following:
● Appraising the reliability and integrity of financial and

operating information by evaluating the means developed by
management to identify, classify, measure and report such
information.
● Appraising the systems, management has established to

ensure compliance with policies, plans, procedures, laws and
regulations that could have a significant impact on operations
and reports.
● Appraising the means, management has established to

safeguard assets, and, as appropriate, verifying the existence
of such assets.

ensure economical and efficient use of resources.
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ensure results are consistent with established objectives/
goals and operations or programs are carried out as planned.
Crude
3.3 Crude is the main input for producing refined petroleum
products. Crude purchase may be indigenous or imported. The
significant elements of the cost of the crude purchase includes the
cost of crude, freight, customs duty, demurrage, wharfage or the
port trust dues, ocean loss, other taxes and duties, insurance, etc.
Cost of Crude
3.4 It includes the price paid for indigenous/ imported crude.
FOB cost of imported crude is paid according to the rates as per
Term/ Spot contract with the supplier. The FOB cost of indigenous
crude is paid at the rates at par with international crude prices.
Freight
3.5 Crude is generally transported through oil tankers of shipping
companies and the freight is payable according to the terms of the
contract of affreightment signed and entered into with the shipping
companies.
Customs Duty
3.6 Customs Duty is paid on imported crude at the prescribed
tariff rate. In case there is bonded storage facility, duty is payable
only at the time of removal of crude oil for processing/ refining.
Demurrage
3.7 Demurrage refers to the compensation payable by the
Refinery to the shipping company in case of any delay in unloading
crude from the vessel, over and above the lay time as stipulated in
the contract of affreightment. The holder of the Bill of Lading is
required to pay demurrage at the agreed rate to the owner of the
vessel.
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Wharfage (Port Trust Dues)

3.8 Wharfage on crude, both imported and indigenous unloaded
at the port location, is payable as per respective Port Trust rate.
Ocean Loss
3.9 This is applicable for both imported and indigenous crude. If
ocean loss in a voyage is more than the prescribed limit, a claim is
lodged with the shipping company for the ocean loss.
Other Taxes and Duties

3.10 Cess, royalty and sales tax, if any, is payable on indigenous
crude.
Insurance
3.11 Insurance is arranged with insurance companies for an open
insurance cover for crude oil shipments while in transit from foreign
load points or coastal loading points till the crude oil is actually
discharged at the refinery.
Internal Audit of Crude

Cost of Crude
3.12 In respect of cost of crude, the internal auditor would verify:-
(i) Whether the crude purchase of imported/ indigenous crude

is calculated as per the crude purchase agreement.
(ii) Whether the quantity received as per the crude intake

certificate corresponds with the surveyor’s report.
(iii) Whether in case the difference in the quantity loaded at the

port of loading and the quantity received at the destination
port is more than the specified limit, claim for transit loss
(Ocean loss) is made with carrier as per the terms of the
Chartered Party agreement.
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(iv) Whether the comparison of the on board quantity at the

destination port with actual shore receipt has been made to
ascertain the difference as a percentage of the Bill of Lading
quantity. If the percentage so calculated is more than the
specified limit, whether the carried quantity, if any, has been
discharged in the next voyage or recovered from the carrier.
(v) Whether the carrier has preferred protest notes with the
supplier of the crude for huge difference between the gross
Bill of Lading quantity and load port onboard quantity.
(vi) Whether the difference is claimed from the supplier in case

the supplier accepts the protest note.
(vii) The Entry Tax, handling and survey charges and their
accounting.
(viii) Whether in case of imported crude, payment is made for net

Bill of Lading quantity.
(ix) Whether there is an adequate system of monitoring the due

dates for payment of crude purchase whether the same is
functioning properly.
(x) Whether the payment of cost of imported/ indigenous crude

is made within due dates.
(xi) Whether correct exchange rate has been adopted while

utilising the buyer’s credit.
(xii) Whether correct exchange rate have been adopted for

imported crude.
Freight
3.13 In respect of freight, the internal auditor would:-
(i) Examine the arrangements as regards transportation of crude

based on terms of the purchase contract like FOB, Cand F,
Time Chartered Vessel to verify whether the payment of
freight made to shipping company is as per the contract of
agreement signed and entered.
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(ii) Verify whether overage benefit in freight has been availed.
(iii) Verify whether lighterage dues have been properly computed

for C and F vessels and Chartered Vessels.
(iv) Verify whether the dead weight freight paid is as per terms
of agreement.
(v) Verify computation of address commission and commission

payable to private/ Government agencies.
(vi) Verify whether the payment is made within stipulated time.
(vii) Verify whether the exchange rate adopted for calculation of

freight is as per the chartered party agreement for the
Voyage.
(viii) Verify whether provision for liability has been made for the
amount due at the end of financial year.
(ix) Verify accounting treatment for the above in annual account

closing.
Insurance
3.14 While auditing the insurance aspect, the internal auditor
would:
(i) Verify whether the provisional tanker details are intimated to

the insurance company before the actual loading takes place
as per the terms of the marine open declaration policy.
(ii) Verify the calculation of insurance premium with regard to

the FOB quantity, freight and insurance and rate of insurance.
(iii) Verify whether the insurance certificate is received for each

Voyage.
(iv) Verify whether the provisional amount deposited with the

insurance company is adjusted against the final payment
towards the Voyage and the balance is carried forward for
adjustment in the subsequent payments.
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(v) Verify whether sufficient balance is maintained with the

insurance company to ensure that the crude in transit is
always covered.
(vi) Verify that appropriate policies to be covered for employee’s

mediclaim, group accident cover; public liability cover and
transit cover for incoming and outgoing cargos.
(vii) Verify whether any no-claim bonus in case of nil – claim,

has been accrued and if so, whether claimed in time. This is
generally applicable in case of mega risk policies, since basic
amount deductible in the policy claim is kept substantially
high; hence the number of claim would normally be few or
nil.
Customs Duty
3.15 While verifying customs duty, the internal auditor would verify
whether:
(i) Assessable value on the basis of which customs duty is paid

has been calculated with regard to FOB cost, insurance,
freight and landing charges.
(ii) The rate of exchange notified by the customs authorities as

on the date of filing of INTO Bond, is adopted for calculation
of assessable value.
(iii) The actual cost of crude paid is considered at the time of

finalization of customs duty payments.
(iv) The payment is made as per the customs duty rates

applicable as on the date when the Ex-Bond is filed with the
customs authorities.
(v) The payment is made for crude processed on the basis of

FIFO assumption.
(vi) The sum of the quantity drawn for production as per the Ex-
Bond filed on the various dates is equal to the quantity as
per the crude intake certificate for each shipment.
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(vii) Proper distinction is made between indigenous crude and

imported crude, as customs duty is applicable only for
imported crude.
(viii) A periodic reconciliation of “Current Account with Customs”

as per the current account monthly statement given by
customs authority and general ledger is done.
Demurrage
3.16 In respect of demurrage, the internal auditor would need to
verify:
(i) The exchange rate adopted for payment of demurrage is as

per the chartered party agreement.
(ii) The reasons and the calculation of excess hours for which
demurrage payment is made from the shipping documents
given by the carrier.
(iii) Whether the payment is withheld if the carrier makes the

claim after the stipulated period, as per the Chartered Party
agreement.
Wharfage
3.17 In respect of wharfage, the internal auditor would verify
whether:
(i) The wharfage is paid for the gross quantity of crude

discharged by the tanker as shown in the crude intake
certificate.
(ii) The rate is paid as per terms of MOU with port trust.
(iii) The provisional amount deposited with port trust is adjusted

against the final payment for each vessel.
(iv) A periodic reconciliation of current account with port trust as

per the current account monthly statements and general
ledger is done.
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Clearing Agents and Surveyors

3.18 Clearing agents are appointed to co-ordinate the process of
compliance with the port trust and customs formalities. Surveyors
prepare the survey report giving details of quantity of crude oil
received, based on which the payment is effected. In this respect,
the internal auditor would need to verify whether the payment
made to clearing agents and surveyors are as per the terms of the
contract and also whether the contract is renewed on expiry.
Crude Oil Ledger

3.19 Oil companies also maintain Crude Oil ledger showing the
details of receipt of crude oil tanker wise and all components of
crude cost. The internal auditor would need to verify the following
information in the Ledger:
(i) Whether the cost is maintained separately for imported and

indigenous crude.
(ii) Whether all the components of cost of crude like FOB cost,
freight, customs duty, insurance, wharfage is entered properly.
(iii) Whether the throughput as shown in COL is the same as

the throughput shown in the monthly production statement.
(iv) Whether the COL is maintained on FIFO basis.
Verification of other Aspects in Refining

3.20 In addition to the above aspects, the refining process involves
certain other significant processes/ aspects which need to be
subjected to internal audit. These aspects include:
(i) Licencing.
(ii) Raw water facility.
(iii) Bitumen drum fabrication
(iv) Bitumen plant operation.
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(v) Oil movement and storage.
(vi) Captive power plant activities.
(vii) Maintenance.
(viii) Shut down activities.
(ix) Energy consumption.
(x) Laboratories.
(xi) Operations.
3.21 The internal auditor’s procedures for verification of these

aspects are discussed in the following paragraphs.
Licensing
3.22 The internal auditor would need to verify the validity of the
following licences:
(i) Waste heat recovery boilers and fired boilers of captive power
plant
(ii) Explosive licences under Petroleum Act and Rules and Gas
cylinder rules and SMPV rules.
(iii) DGCA approval to store ATF under category D and E.
(iv) Pollution Control Board Licence for air-consent, water

consent, hazardous waste management licence.
(v) For tanks under legal metrology.
(vi) For storage of petroleum products.
(vii) Factory licence including approval of plant.
(viii) Weighbridge licence including plant approval.
(ix) State sales tax registration and renewal.
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Raw Water Facility

3.23 Broadly, following need to be seen by the internal auditor in
respect of raw water facility.
(i) Whether the required levies like right of way, insurance

charges, raw water cess etc., have been paid.
(ii) Whether the water pumped at the facility and water received
at the refinery is being periodically monitored.
(iii) Where the raw water facility is shared with other

organisations, whether the water pumping costs and fixed
costs that are required to be shared with hinterland
organisations are being shared fully and recovered.
Bitumen Drum Fabrication

3.24 In respect of bitumen drum fabrication, the internal auditor
would need to verify the following:
(i) The related contract and the bank guarantees.
(ii) Whether the fabricator has been issued steel coils beyond
the bank guarantee limits.
(iii) Any additional costs reimbursed to the fabricator and whether

the same are as per the contract.
(iv) Whether the insurance cover available at shop floor of the

fabricator is sufficient to protect client’s interest.
(v) Whether the fabricator keeps stocks other than that of client.
If so, how the distinction is being maintained physically.
(vi) The results of physical verification of steel coils at fabricator

and recovery action for shortage.
(vii) The records for defective drums and lids and their
replacement.
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(viii) Whether the fabricator is giving the correct number of drums

for the coils supplied. If not, whether he has made good the
shortage, else recovery made from him.
(ix) Whether there are any product losses due to drum leakage
and if so, whether recovery action has been taken.
Bitumen Plant Operation

3.25 Bitumen is a category of organic liquids that are highly
viscous, black, sticky and wholly soluble in carbon disulfide. Asphalt
and tar are the most common forms of Bitumen. Bitumen in the
form of asphalt is obtained by fractional distillation of crude oil.
Bitumen being the heaviest and being the fraction with high boiling
point, it appears as the bottom- most fraction. Bitumen is primarily
used for paving roads. Its other uses are for the general water
proofing products, including in the production of roofing felt and
for sealing flat roofs. In a Bitumen plant, manufacture of Bitumen
takes place as also filling of the Bitumen into drums for dispatch
and sale. The internal auditor would need to verify the following
aspects of bitumen plant operation:
(i) Capacity utilisation, whether the same has been optimised.
(ii) Fuel/ electricity etc. consumed vis-a-vis norms.
(iii) Efficiency of operation as per the management’s laid down

norms.
(iv) Idle time and reasons therefor.
(v) Consumption of chemicals/ catalysts with laid down norms.
(vi) Production planning vs. actual execution.
(vii) Matching of production schedule with sales
(viii) Reasons for off-spec production and remedial measures

taken.
(ix) Where there is manufacturers’ guarantees are in place, verify

whether the guaranteed outputs/ consumption etc., are matched.
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Oil Movement and Storage

3.26 This activity is an offsite management facility, which deals
with:
(i) Entire stock accounting of crude oil.
(ii) Analysing the stock loss on crude oil.
(iii) Payment of statutory levies on crude oil.
(iv) Verification of calibration of storage tanks.
(v) Stock accounting of refined petroleum products.
(vi) Payment of statutory levies on finished products.
(vii) Sludge generation and disposal there off.
(viii) Verifying fuel loss accounting.
(ix) Verifying the actual production with the budgeted production.
(x) Filing of returns of excise and customs duty with statutory

authorities.
3.27 In respect of the oil movement and storage, the internal

auditor would need to undertake the following procedures:
(i) Verify water drainage from crude tank/ other tanks –

production losses.
(ii) Verify operation Loss (other than fuel and loss).
(iii) Verify crude receipts.
(iv) Analyse ocean loss – loading losses, transit losses, and

unloading losses.
(v) Verify surveyor’s gauging for tanks.
(vi) Verify production planning – crude composition Vs yield

composition and RTP Vs demand forecast.
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(vii) Verify calibration chart of tankages and their validity.
(viii) Verify flow meter reading vis-à-vis tank gauges for receipt/
despatches.
(ix) Verify slop generation (dry-wet slop).
(x) Verify sludge generation/ disposal record of sludge generation

(in storage tanks).
(xi) Verify list of contaminated products received/ treatment.
(xii) Verify PLT losses – dispatch Vs receipt.
(xiii) Verify dormant tanks loss (Refer RG1 and AR3As).
(xiv) Verify inter tank transfer losses.
(xv) Verify operation loss (export) from these tanks (loaded Vs

received at ship).
(xvi) Verify gauge tickets for serial no., signatures, dips in dip
register, corrections, and cancellation.
(xvii) Verify fuel and loss accounting.
3.28 Additionally, following aspects of the production planning are

also required to be verified by internal audit:
(i) Dip Stock Statement.
(ii) Production Report-internal format.
(iii) Daily deviation report.
Captive Power Plant (CPP) Activities

3.29 Captive power plant provides uninterrupted power and steam
supply for running the pumps, compressors and other equipments.
For meeting any emergency, alternative source of power supply
from outside is also lined up. Super heated and saturated steam
at various pressures is also supplied for process units and offsite
area from this system. Steam is used for heating, striping in
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columns, atomisation of fuel oil before burning in furnace, fire

fighting, driving steam turbines and power operation. A steam
turbine is a mechanical device that extracts thermal energy from
pressurized steam and converts it into useful mechanical work. A
Turbo generator is a Turbine directly connected to an electric
generator for generation of electric power. Steam powered Turbo
generators provide a majority of world’s electricity and are also
used by steam powered.
3.30 The procedures for internal audit of CPP activities would

include:
(i) Verification of capacity utilisation, whether optimized.
(ii) Verification of fuel/ electricity etc., consumed vis-a-vis norms.
(iii) Verifying the efficiency of operation as per the Management’s

laid down norms.
(iv) Verifying the idle time and reasons therefore.
(v) Verifying production planning Vs actual execution.
(vi) Where there is manufacturers’ guarantees are in place,

verifying whether the guaranteed outputs/ consumption etc.,
are matched.
Maintenance
3.31 In a refinery there is an increased emphasis on sustaining
high level of throughput and low level of down time. To achieve
this it is necessary that the plant and equipment be maintained in
good working order. Successful maintenance operations assist in
maximizing efficiency and postponing or reducing future Capital
expenditure. Maintenance can be preventive maintenance or
corrective maintenance. The preventive maintenance refers to the
efforts to avoid damages/ breakdown prior to the any noted damage
or brake down. The corrective maintenance refers to efforts to rectify
a breakdown or imminent breakdown of equipment in the Refinery.
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3.32 The scope of internal audit in respect of the maintenance

activity includes verification of:
(i) Schedule of preventive maintenance.
(ii) History cards of equipments – due date for maintenance.
(iii) Segregation of equipments as per nature – critical/ non-

critical.
(iv) Monthly performance of rotating equipment.
(v) Maintenance suggested by inspection department.
(vi) Recommendations by annual internal safety audit vis-à-vis

compliance thereof.
(vii) Completion time Vs planned time.
(viii) Actual cost Vs planned cost.
(ix) Actual job done Vs planned scope.
(x) Utilisation of cranes/ compressors – idling time.
(xi) Idle equipment.
(xii) Budget Vs actual expenses.
Shutdown Activities
3.33 The throughput of major Refinery units declines as the
catalyst becomes spent and the corrosion resulting from heat and
minerals reduces product flows. Production overtime is closely
monitored and plans are set to ‘Turnaround” or “Shutdown and
Overhaul” a unit. This requires a major effort on the part of the
Refinery and has significant financial impacts in terms of both cost
and short term loss of revenue. In a turnaround or shutdown and
overhaul, the units are completely overhauled. Pumps are replaced,
trays are repaired or replaced, and, in catalytic units, the catalyst
is refurbished and replaced and all corrosion is removed. Major
turnarounds or shutdowns are required to be performed on an
annual or bi-annual basis.
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3.34 Internal audit of the shut down activities involves verification/

analysis of the following aspects:
(i) Periodicity of shutdown.
(ii) Recommendations made by inspection for turn around vis-

à-vis compliance.
(iii) Unit-wise planned shut down duration vis-à-vis actual period

and reasons for variations.
(iv) Unit-wise records maintained during shutdown.
(v) List of POs placed by maintenance for shutdown work.
(vi) Utilisation of procured items as well as surplus generation.
(vii) Local cash purchases in turnaround.
(viii) Crane hiring Vs crane utilization at garage.
(ix) Price for items purchased during shutdown vis-à-vis price

for regular purchase.
(x) Material received after shutdown.
(xi) Budget Vs actual expenditure.
(xii) Creation of fixed assets.
Energy Consumption (Encon)

3.35 Every refinery consumes fuel/ energy while refining the crude
oil into refined products. Energy efficient processors/ equipment
such as furnaces, pumps, exchanges are to be examined and
monitored for optimum consumption of fuel/ energy. Continuous
updation of energy consumption techniques for efficient utilization
of fuel/energy is required.
3.36 The internal auditor’s procedures in respect of audit of Encon

include:
(i) Verification of the records maintained for consumption of the

fuels.
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(ii) Verification of the consumption of the fuel vis-à-vis the pattern

and the reasons for higher consumption and remedy
therefore.
(iii) Verification of the reasons for the unidentified losses/ gains.
(iv) Examining the abnormal variation in case of higher fuel and

loss.
(v) Verifying the envisaged benefits of the upcoming ENCON

projects.
(vi) Verifying the benefits of the completed ENCON projects.
Laboratories
3.37 After the crude oil is refined into the finished products and
the products are taken to the product tanks, samples of the finished
products are sent to the laboratory for testing. Once the product
meets the quality specification as per BIS or customer requirement,
then the certificate of quality is issued by the laboratory. Thereafter,
the product is dispatched to market.
3.38 The following is an illustrative set of procedures for the internal

audit of laboratories:
(i) Verify quality control – testing as per specifications/ cancelled/

revised test reports.
(ii) Verify time taken to release test reports.
(iii) Verify treatment to off-spec batches.
(iv) Verify monthly MIS/ statutory reports.
(v) Verify whether the activities of R and D centre are in line

with the proposal.
(vi) Verify utilisation of all the equipment/ facilities.
(vii) Verify idle facilities/ equipment.
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Internal Audit of Operations

3.39 Internal audit of the operations covers the following aspects
of the refinery:
(i) Crude distillation unit.
(ii) Hydrocracker unit.
(iii) Hydrogen unit.
(iv) Gas oil hydro-desulphisation unit.
(v) Visbreaker unit.
(vi) Sulphur recovery unit.
(vii) Consumption of chemicals and catalysts.
Crude Distillation Unit

3.40 This unit is used for distillation of crude oil which is carried
out in the column and Gas oil, Kerosene and Heavy Naphtha are
withdrawn as side draw-offs. The unit is based on the principle of
fractional distillation as discussed earlier in the publication. Crude
oil is separated into fractions by fraction distillation. The fractioning
column is cooler at the top than at the bottom so the vapours can
condense more easily while moving up the column. The heavier
fractions that emerge from the bottom of the fractionating column
are often broken up (cracked) to make more useful products.
Hydrocracker Unit
3.41 The purpose of Hydrocracker unit is to crack (split) crude oil
into different types of products at different ranges of temperature.
Hydrocracking is a catalytic cracking (splitting) process. The
products of this process are saturated hydro carbons. Major
products from hydro cracking are Jet Fuel, Diesel, relatively high
octane rating gasoline fractions and LPG. All these products have
a very low content of sulphur and contaminants.
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Hydrogen Unit
3.42 The need of Hydrogen is increasing day by day for treating
the products like Petrol (Motor Spirit), HSD, fuel oils and feeds for
FCC (Fuel Catalytic Cracking) and other plants for bringing down
the sulphur. The purpose of Hydrogen plant is to produce Hydrogen
for meeting the requirement of various Hydro treatment process of
crude oil. The feed for Hydrogen plant is Refinery fuel gas, saturated
LPG, Natural Gas and light Naphtha.
Gas Oil Hydro-Desulphurisation Unit

3.43 The purpose of the unit is to remove Sulphur and Nitrogen,
convert olefins/ aromatics1 to saturated compounds; and remove
contaminants like oxygenates and organometallic compounds. This
unit is used for the production of extra low sulphur diesel with a
sulphur content of less than 0.25 per cent, which results in positive
environmental protection in the control of automotive emissions.
Visbreaker Unit
3.44 It is an operation that converts high viscosity Petroleum stocks
to lower viscosity Petroleum stocks suitable as heavy fuel oil.
Viscosity is a measure of resistance to flow and is an important
parameter for desalting. It is also highly dependant on temperature.
Higher viscosity crude needs high temperature for effective
desalting. There is a limit for temperature in de-salters operation.
Viscosity is an important property for lube oils because it gives the
lubricating property to the oil. This is required to prevent wear and
tear in the moving parts of a machine on occurrence of metal to
metal contact. For fuel oils, it gives flow properties which are
needed for pump selection for transporting. The process of
removing salts from crude oil is called desalting. These salts cause
severe corrosion in crude refining units. The de-salters are designed
for removal of 99 percent salt in crude oil. De-salters remove salts,
sludge and mud from crude to avoid corrosion and fouling in
exchangers’ columns and down stream equipment.
1 Olefins/ Aromatics are unsaturated Hydrocarbons.
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3.45 A visbreaker is a chemical plant where thermal cracking in a

furnace reactor (at high temperature) is used to transform heavy
Hydro carbons (e.g., vacuum distillation residue) into lighter hydro
carbons (LPG, Gasoline). Heavy hydro carbons are generally used
as fuel oil in chemical plants. The product of the visbreaker has
lower viscosity.
Sulphur Recovery Unit

3.46 Sulphur is a mixture of ‘Sourness” and “Sweetness” of crude,
sweet grades have less than 0.5 per cent of Sulphur whereas sour
grades will have greater than 0.5 per cent of Sulphur. Sulphur,
besides being corrosive to the fuel systems, is a pollutant to the
air and affects life. Global efforts are being made to minimize the
sulphur content in Petrol, High Speed Diesel and fuel oils. The
objective of Sulphur recovery unit is to convert Hydrogen Sulphide
(H2S) into elemental Sulphur. Sulphur recovery is required because
of increasing demand for environmental friendly fuels, increased
use of High Sulphur and heavier crudes in future as also tightening
of emission of standards by government/ regulatory bodies.
3.47 Internal auditor’s procedures in respect of the crude distillation

unit, hydrocracker unit, hydrogen unit, gas oil hydro-desulphisation
unit, vis breaker unit and sulphur recovery unit are more or less
similar and include:
(i) Verifying whether there is optimum capacity utilisation.
(ii) Verifying fuel/electricity etc. consumption vis-a-vis norms.
(iii) Verifying efficiency of operations as per the Management’s

laid down norms.
(iv) Verifying idle time and reasons therefore.
(v) Verifying consumption of chemicals/ catalysts with laid down

norms.
(vi) Reviewing production planning Vs actual execution.
(vii) reviewing production schedule vis a vis sales
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(viii) Examining reasons for off-spec production and remedial

measures taken.
Where there are manufacturers’ guarantees in place, the internal

auditor would verify whether the guaranteed outputs/ consumption
etc., are matched.
Consumption of Chemicals and Catalyst

3.48 During the refining process of crude oil, various chemicals
and catalysts are used. The purpose of chemicals is mainly to
improve the quality of products so as to meet the desired
specifications. Catalysts are used in various reformers and other
secondary processing facilities. A catalyst is the substance that is
introduced into the refining process, which initiates a chemical
reaction that cracks (splits) the crude oil molecules into its
components. Catalysts used in the refinery process are usually
various metals including precious metals.
3.49 In respect of the consumption of chemicals and catalysts,

the internal auditor would normally verify the following:
(i) Inventory of chemical/ catalyst.
(ii) Slow moving chemicals and verify their shelf lives.
(iii) Status of temporary items/ regular items/obsolete items.
(iv) Disposal of obsolete items.
(v) Procurement of chemical/ catalyst Vs consumption.
(vi) Issue Vs consumption.
(vii) Consumption versus budget and consumption versus norms.
(viii) Excess consumption of chemical catalyst.
(ix) Catalyst replacement activity and disposal process of spent

catalyst.
(x) New catalyst procurement activity vis-à-vis the performance

criteria adopted and the guarantees obtained.
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Chapter 4
Internal Audit of Marketing
Activities
Purchases
4.01 Marketing companies purchase the refined products from
the refinery/other marketing companies for the storage and
distribution of products to the ultimate consumers. The purchase
accounting between the Oil Companies is termed as Inter Oil
Company transaction/ product exchange, which includes not only
purchase of products, but also rendering storage assistance, by
one company to another company. The product exchange, storage
assistance and other hospitality arrangements are entered into
between oil companies with a view to eliminate the avoidable cross-
haul of products and reducing the strain in the transportation
network and as well as to bring down the distribution cost.
Quantity Determination
4.02 Quantity delivered by the refinery is determined in terms of
KL at 15 degree centigrade by converting the dip reading into
volume by using valid calibration charts issued by the CPWD.
Where the products are to be billed in MT basis, the volume is to
be converted into MT quantity by using the ASTM tables by duly
applying the volume reduction factor and density.
Types of Inter Company Transactions

4.03 The inter oil company transactions (sourcing of products)
among marketing oil companies normally take the following forms:
● Outright purchase/ sales.
● Hospitality assistance.
● Safe keeping assistance.
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● Loan transaction.
● Decantation of Tank wagons.
Outright Purchase/ Sale

4.04 These transactions take place at the industry locations viz.,
refinery supply points, pipeline tap off points and marketing
company’s terminals put up near a refinery. The produce is
transferred from the seller to the buyer company, ordinarily, by
means such as tank wagon (TW), tank trucks (TT), tank to tank
transfer through pipelines, tanker or barge. It is also important for
the internal auditor to understand that where such outright purchase
takes place at the refinery, the costs involved in such transactions
at the refinery include the refinery transfer point (RTP) or the
import parity price (IPP), the excise duty, inland freight upto inland
refinery from the nearest port, terminalling charges and other
applicable taxes and statutory dues. If, however, the purchase
takes place at a point other than the refinery then the freight upto
the depot/ tap off or installation point from nearest port as well as
the inventory carrying costs would also be included in the cost as
mentioned afore.
Hospitality Assistance
4.05 Hospitality arrangement envisages extending storage
assistance by the company owning the facilities to another company
who may or may not have storage facilities at that location. The
hospitality assistance involves costs in terms of terminalling charges
and the stock loss as per norms.
Safe Keeping Assistance

4.06 Safe keeping assistance can be rendered by a marketing oil
company to another marketing oil company at negotiated terms at
the assisting company’s storage location at the port or upcountry
installation. It can also be extended at depot location where assisted
company’s own storage facilities are inadequate to handle additional
volume. Safe keeping assistance also involves costs in terms of
terminalling charges as well as stock loss as per norms.
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Loan Transactions
4.07 Such transactions are entered into on spot basis to tide over
the emergent situations of product shortage or slippage of the
arrival of TT and TW. All loan transactions are repayable by the
borrowing company from out of the subsequent purchases by it.
Decantation of Tank Wagon

4.08 At times, tank wagon originally consigned to up-country
location of a marketing oil company might be diverted or wrongly
placed at the siding of other marketing companies or their bulk
customers. Industry has in place a procedure to trace these
transactions and to find out the original dispatch details. On
ascertaining the original information of dispatches, the settlement
of accounts between marketing oil companies is effected. Valuation
of product decanted is based on the source of the product for
TAIPP and destination for excise duty/ sales tax, freight and
terminalling charges. Quantity received at the decanting location
should be as per dispatch quantity. All transit losses should be
borne by the decanting company. There should not be any under
recovery for the original consignee company on any account.
Product Accounting
4.09 All product accountings are done at 15OC. For products
pumped in the local pipelines, accounting thereof is based on the
following factors:
(i) The actual quantities pumped from the mother tanks, in

case of marketing terminals of one oil marketing company to
Marketing terminals of other oil marketing companies.
(ii) The actual quantity received in Marketing terminals tanks of

one oil marketing company from the Refinery tanks of other
oil marketing companies.
(iii) Actual quantity pumped from the Refinery tank of one oil
marketing company to Refinery tanks of other oil marketing
companies.
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(iv) In case of coastal movement, the billable quantity is

determined on the basis of quantity of products delivered as
measured in the shore storage tanks at the loading location.
In case of import of product, all import related cost, including
ocean losses, is normally shared in the ratio of quantity
received by each party.
Settlements
4.10 Inter oil company transactions take place reciprocally (i.e.,
purchase and sale of petroleum products takes place between the
marketing oil companies at different locations simultaneously).
Hence, to avoid multipoint settlement work, a centralised net
settlement system has been established by the oil industry. These
centralized settlements take place every month. Local Sales tax
payable on sales/ purchase transaction, if any, is paid by the
assisted company to assisting company on the due date of payment
as per the applicable sales tax law. Monthly settlements among
the companies are based only on Joint Certificates (JCs). Separate
JCs are prepared for the current month and for prior period
transactions. Based on the JCs, monthly billings for all elements of
price, duty, freight, taxes and other charges are exchanged and
final settlement thereof effected. Payment for the terminalling
charges is made on a monthly basis on receipt of the claims from
an oil marketing company. Cost of coastal tanker movements
including ocean losses and other associated costs incurred as per
ILP are shared by the oil marketing companies. It should be,
however, noted that in case of oil companies marketing their own
refined products, the above purchase accounting would not apply.
4.11 The internal auditor needs to verify the following aspects of

purchase accounting:
(i) The type of inter company transaction made.
(ii) Whether the elements of purchases are recorded as per the

type of inter company transactions.
(iii) Whether the product accounting are done as per paragraph

4.09.
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(iv) Whether the quantity billed is as per the joint certificate
(v) Whether TAIPP price as prevalent at the time of despatch

has been charged.
(vi) Whether Excise Duty at prevailing rate as on the date of

despatch has been charged.
(vii) Whether relevant Railway Freight/ Siding/ Coastal Freight/

Pipeline Freight has been paid.
(viii) Whether relevant inventory holding charges/installation

charges are paid as per the MoU with other companies.
(ix) Whether the product despatched from the loading base has
been received at the receiving location and look into the
same if not received.
(x) Whether other amounts paid are in line with MoU between
the Companies.
(xi) Whether the payments are made as per payment terms

specified in the MoU between the companies.
Sales Accounting
4.12 After producing different products from crude, the Refinery
undertakes sale of products through the marketing companies/
units or directly to the customers. The sales may take place in the
form of Sales to marketing companies/ units in respect of mass
consumption products like MS, HSD, SKO (D), LPG (D), ATF, in
line with marketing arrangement and also other petroleum products
or direct sale by refinery in respect of LDO, FO, LSHS, Naphtha,
LPG (B), Base Oil (for Lube manufacturing), Wax, Bitumen, Hexane,
Propylene, Hydrogen and other industrial petroleum products. The
transfer of product takes place by way of coastal tanker, pipeline,
rail wagon, tank lorries and trucks.
4.13 A Product Outturn Certificate (POC) is the basis of preparation

of invoice for sale of petroleum products. This certificate indicates
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opening and closing dip measurement of oil and water, temperature,

density, volume correction factor and gross oil, free water, net oil
at observed temperature, net oil at 15OC in volume and weight
and quantity of oil transferred worked out after applying volume
correction factor.
4.14 Sales are affected through a supply distribution network

comprising of installation, despatch unit, depots, LPG bottling plant,
from where the products are sold to dealers, distributors as well as
direct consumers. Products are sold either directly to the consumers
or through a network of dealers. In case of bulk purchasers,
deliveries are affected through pipeline or through other modes of
transport. In case of MS and HSD the sales are affected through
Retail Pump Outlet (RPO), which are either operated by dealers
appointed by the Company or by the companies themselves. The
prices chargeable to Retail Outlet Dealer/ Direct Consumer are
intimated to respective Depots/ Installation on a regular basis and
as and when there is a change in the prices. The sales invoice
package is installed at the Depot/ Installation for raising the invoices
and receiving the payments thereof. The sales invoice is raised
from the supplying location like Depot/ Installation and payments
are collected at the location itself. In case of sales to dealers, the
payment is against supply of products. In other words, the sales
are on “Cash and Carry” basis. Since the amount is collected
immediately on sale of products, there are no debtors in this case.
However, Government consumers and certain major consumers
are extended credit facilities.
Types of Sales
4.15 Sale of finished petroleum products falls into two categories –
retail and industrial/ direct consumers. The following table gives
the details of product, type of sale, type/ mode of payment:
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Product Type of Sale Type/ Mode Of Payment Remarks
MS Retail/ Credit Advance Payment/ For sales through

Payment against Supply / Retail Pump
Extension of credit Outlets only.
RetailIndustrial/ Advance Payment/
HSD
Direct Customers Payment against Supply/
Advance Payment/
Payment Against Supply/
Extension of Credit.
SKO PDS Advance Payment/ This kerosene is
Payment against Supply doped with Blue
Dye for PDS
SKO (I) Industrial/ Direct Advance Payment/

Customers Payment against supply/
Extension of Credit.
LDO/FO/ Industrial/ Direct Advance Payment/
Naphtha/ Customers Payment against supply/
LSHS/ Extension of credit
Bitumen
LPG Domestic Advance payment/
Payment against supply
LPG Industrial/ Direct Advance payment/ Payment
Customers against supply/ Extension of
credit
ATF Aviation Sector Advance payment/
Payment against supply/
Extension of credit
Other Industrial/ Advance payment/
Heavy DirectCustomers payment against supply /
Crude of Extension of credit.
Petroleum
Products
Base Oil Industrial/ Advance payment/
DirectCustomers payment against supply/
Extension of credit.
4.16 The internal auditor’s procedures with regard to the sales

accounting would include:
a) Verifying the type of sales affected, whether cash or credit

and Retail or Direct Customer.
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b) Verifying that the appropriate price is charged to each

customer/ dealer, as applicable to them depending on the
delivery point.
c) Verifying, in case of credit sales, that proper approval has

been given by the competent authority, as per Credit Policy,
after appropriately evaluating the credit worthiness of the
Customer/ Dealer.
d) Verifying that price change, whenever it occurs, is properly

billed to Customer/ Dealers and accounted for.
e) Verifying that each Customer/ Dealer is paying the invoice

amount through such mode of payment (as approved by the
competent authority).
f) Verifying the age-wise analysis of debtors on regular basis.
g) Verifying that the discounts/ rebates charged to customers/

dealers are as per the rates approved by the competent
authority, as applicable to each customer/ dealer or category
of customers/ dealers.
h) Verifying that short-payments are received from the

customers/ dealers within a reasonable time.
i) Whether a periodic report of customer dues, invoice wise

taken and analysed for overdue payment.
j) Whether periodic reconciliation of customer balances is done.
k) Whether ‘balance confirmations’ are obtained from customers.
l) Verifying that outstanding dues are collected as per due

dates and in case of collection beyond due dates, interest
and penalty, in case the sales contract so provides, are
collected.
m) Verifying that the appropriate sales tax rates are applied and
necessary concession forms in respect of Sales Tax are
collected.
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n) Verifying that appropriate concessional excise duty rates are

applied and the necessary concessional forms in respect of
Excise Duty collected.
4.17 In respect of the export sales, the internal auditor would

need to verify the following:
● Advance Licenses/ Duty drawback and utilisation of same.
● Duty free replenishment certificates.
● Liabilities provided and the end of the accounting year towards

the above.
Sales Tax
4.18 Sales Tax is paid to respective State authorities on or before
the due date on the basis of tax register generated on a monthly
basis. The monthly returns are filed along with the payment made
every month. In addition, an annual return is also filed before the
prescribed dates. Yearly assessment is taken up immediately after
the close of the yearly account and completed at the earliest.
4.19 In respect of the sales tax, the procedures of the internal

auditor would include verification of the following:
(i) Whether the monthly turnover as per the books reconciles

with the turnover as per monthly sales tax return.
(ii) Whether sales tax return is filed with sales tax authorities
within due dates.
(iii) Whether the approval of competent authority has been taken

for charging concessional sales tax to customers.
(iv) Whether the concessional forms are filed with sales tax
authorities along with monthly returns.
(v) Whether the applicable taxes are charged to customers
(vi) Whether the revision in tax rates are applied from the due
date.
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(vii) Whether in addition to monthly returns, annual returns are

filed with sales tax authorities.
(viii) that in the case of any disputes in sales tax demanded by

tax authorities, whether necessary appeal is filed with
Appellate Authority and are shown as Contingent Liabilities.
Value Added Tax (VAT)

4.20 The Value Added Tax (VAT) concept has been adopted by
all the States Sales Authorities except Tamil Nadu and Uttar
Pradesh. The concept of Value Added Tax is that at each stage of
sale of goods/ products, the subject goods/ products will be taxed
at the applicable VAT rate. The reseller of the goods will be entitled
to get a set off of the tax paid on purchase of goods against the
sales tax payable on resale of goods. With the introduction of
VAT, multiplicity of taxes levied by State Sales Tax Authorities like
Turn over tax, surcharge on sales tax, additional surcharge are
abolished.
4.21 In respect of VAT, the internal auditor would examine the

following aspects:
(i) That VAT registration has been applied and obtained the
registration number.
(ii) That Input Tax Credit has been availed in case of purchase
of products/ goods which are eligible for Input Tax Credit.
(iii) The list of products/ goods which are eligible for Input Tax
Credit.
(iv) That Tax payer Identification Number (TIN) has been shown
in all invoices.
(v) That Returns to be filed monthly/ quarterly as specified in

the State VAT Act/ Rules are complied with.
(vi) That VAT rates are applied at applicable rates
(vii) That the VAT payable on sale of goods are paid after set off
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of the Input Tax on purchases of goods and paid to authorities

as per due dates.
(viii) That Self Assessment returns are filed as per the VAT Act.
(ix) Whether there is any demand for tax/ penalty from VAT
authorities for non payment of VAT tax with in due dates
and for non filing of returns with in due dates.
Excise Duty
4.22 Excise Duty becomes due as soon as manufacture of a
product is completed. Accordingly, after refining of crude oil is
completed, duty has to be paid on all products at the applicable
rates. The duty is charged at the time of removal of products from
refinery. While verifying the excise duty, the internal auditor would
need to verify:
(i) Whether excise returns are filed with department within the
stipulated time as per the Act.
(ii) Whether the Cenvat credit available for a particular month is

set off against excise duty payable, to arrive at the balance
amount payable to excise department.
(iii) The action taken in case of show cause notices received

from the excise department.
(iv) Whether the product list is periodically filed with Excise

department as and when there are changes in the same.
(v) Whether there are instances where the excise duty is

collected from the customers but the same has not been
remitted to excise authorities.
(vi) Whether there is any disputable duty demanded by the excise

authorities, if yes, then whether in that case appeal is filed
with the appellate authorities and are shown as Contingent Liability.
(vii) Whether there is a list maintained classifying various items

as cenvatable or non-cenvatable so as to facilitate availing
of Cenvat credit
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(viii) Whether the documents received are properly maintained in

Cenvat Section to facilitate preference of claims and for
further reference.
(ix) The accounting of Cenvat claims, including the details of

total Cenvat claimed, utilized and expunged and balances to
be claimed.
(x) Whether there is any time delay in preference of Cenvat

claims.
(xi) Whether RG23 Part C is prepared as required under Statute

and the same is submitted to central excise before the due
date for the respective month.
Collection Accounting
4.23 Operations of an oil company are normally spread out
throughout the length and breadth of the country, treasury activities
being centralised at the corporate head quarters. As such, the
sales proceeds are remitted to the head office, from all the selling
points. Most of the major payments are handled at the head office.
Consequently, the process of collection of funds at the up-country
locations (Depots, Installation, LPG Bottling Plants) and its
subsequent movement to head office assumes considerable
importance.
It normally covers all the operations from the time the sale is
affected till the monies are received and used. It commences from
the point the instruments are lodged at the up-country locations
and it covers the movement of the funds and ends with the ultimate
use at head office. Collections are generally in the form of demand
draft, pay order, cheques, electronic transfers, etc.
4.24 The internal auditor, while carrying out internal audit of the
collection accounting aspect would need to look into the following:
a) Whether the payment instruments are deposited in the

designated bank on a daily basis at the product supply point.
b) Whether the designated bank transfers the amount deposited
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on a daily basis, to the Main Collection Account at the Head/

Corporate Office, as per the agreement with the respective
banks.
c) Whether the bank charges collected by the bank are as per

the agreement.
d) Whether in case of delay of transfer of funds, the banks are

paying interest for the delayed transfer, as per the agreement.
e) Whether all the bank statements are received as on a regular

basis.
f) Whether monthly reconciliation of all the bank accounts is

being done to find out the missing credits to be given by
banks.
g) The correspondence with the banks for getting missing

credits.
h) The control measures adopted over the dishonoured

instruments and subsequent receipt of amount together with
interest and penalty.
i) Age-wise analysis of amounts not credited by the bank.
Sales Tax
4.25 Sales tax collected on sale of products are paid to the
respective State authorities on monthly basis depending on due
dates of respective tax authorities. The payment of sales tax is
based on the sale tax summary obtained on monthly basis from
sales accounting. The internal auditor’s procedures in this regard
would be similar to those in paragraph 4.19.
Value Added Tax (VAT)

4.26 The concept of VAT and the internal auditor’s procedures in
that regard has been discussed in paragraphs 4.20 and 4.21.
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Excise Duty
4.27 Excise duty is payable on the products only when the products
received from the refinery are under bonded movements. In other
words, duty is payable when the refinery transfers the products to
marketing terminal/ installation/ depot under Bond without payment
of duty.
4.28 The areas to be covered by the internal auditor in this regard

include:
a) Verifying whether duties have been paid at the applicable

rates.
b) Verifying whether assessable values have been properly

ascertained.
c) Verifying whether duties have been debited to PLA Register

on the due date only i.e., 5th of the following month for the
previous month removals.
d) Verifying whether RG1 Register is kept up to date with all

the information.
e) Verifying whether re-warehousing of AR3As for bonded

movements have been done within permissible time limit.
f) Verifying that monthly returns are filed in time.
g) Verifying that the condonable limit of storage/handling/in

transit losses as per Excise Act have been availed, were
applicable.
h) Verifying whether all the show-cause notices have been

replied within a reasonable time and proper action taken
thereon.
i) Verifying issue of invoices subjectable to cenvat.
j) verifying the availment of cenvat on raw materials, base oils

and additives (for Lube Plants).
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k) Verifying that in case demand raised by authorities is not

accepted, appeals have been filed with appellate authorities
and shown as contingent liability.
Customs Duty
4.29 Customs duty is payable when finished products are imported,
for example, in case of shortage and also in case of shut down of
refinery for maintenance.
4.30 The internal auditor’s procedures in this regard would include:
a) Verifying INTO Bond BOE-Rate declaration quantity.
b) Verifying certification by surveyors/ CE authorities – receipts.
c) Verifying payment of duty (ex-bond) Vs actual clearance –

delay and impact.
d) Verifying holding of customs product over a year in bond

and filing for codonation, where required.
e) Verifying final BOE (scrutinised by authorities).
f) Verifying removal of Customs Product Vs Duty Payment.
g) Verifying the terms and conditions of the contract with the

clearing and forwarding agents, if any.
h) Verifying the ocean losses analysis and claim status.
i) Verifying review of other payments to Port, Customs, etc.
j) Verifying that where in case demand raised by authorities

are not accepted, appeals are filed with appellate authorities
and are shown as Contingent Liability.
k) Verifying the extent of duty paid stocks held and funds

blocked over and above consumption requirement.
Stock Accounting
4.31 A sound stock accounting system enables timely preparation
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of Balance Sheet and Profit and Loss Account, submission of

accurate monthly statements in a timely manner to bank(s) for
hypothecation of goods where necessary, submission of accurate
monthly returns in a timely manner to insurance company under
Declaration Policy, accurate assessment of adventitious gains/
losses on account of changes in ex- Refinery price/ Excise Duty/
Freight, follow up of consignment in transit and prefer timely claim
on Railways/ Transport contractors, maintenance of records as
stipulated by the Excise authorities, and last, but not the least,
managerial control for optimizing profit.
4.32 Since the sales are affected from Depot/ Terminal, all the
products are stored at the storage tanks kept at Depot/ Terminal.
Stock Accounting is done separately for Bonded and Duty paid
stocks, Bulk and Packed stocks and products and packages. Each
stock location maintains stock records giving details of:
a) Opening stock.
b) Receipts, Transfers, purchases – local and imported.
c) Operating gains/ transit gains.
d) Inter tank product movement receipts.
e) Total of receipts side.
f) Sales.
g) Transfers to other locations/ other companies.
h) Inter tank product movement issues.
i) Transit loss/ Operating loss/ Accident and other losses.
j) Own issues, issues for manufacturing/ blending/ samples.
k) Total of issues.
l) Closing stock.
Each location sends the monthly summary of the stock report to

the regional/head office for the ultimate accounting of the stocks.
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Physical Verification of Stocks

4.33 Physical stock of crude and finished petroleum products is
calculated by taking dip measurement of each tank. The
measurement of dip is referred to calibration chart of each tank to
find out the volume of the product. The calibration chart, which is
certified by CPWD contains the details of volume of the products
corresponding to dip measurement. The quantity ascertained by
physical measurement is verified with books stock to find out actual
loss/ gain on daily basis.
Product Losses/ Gains

4.34 The petroleum products are highly volatile products and
susceptible to losses during transit, storage and handling and also
due to variation in temperature. Transit losses or gains occur during
transportation of products by way of pipelines, coastal tankers,
tank wagons, by road (by tank lorries). The losses are minimal in
case of transit through pipelines. Operating or handling losses/
gains occur when the storage tanks are operated for deliveries/
cleaning. During storage of products in tanks, loss/gain may arise
due to evaporation/ temperature variation.
Valuation of Stocks
4.35 Stocks are valued at cost or net realisable value, whichever
is lower. The cost is determined as under:
● Crude/ Intermediates – At cost on FIFO basis.
● Base Oils – At Ex-Refinery price.
● The finished stock at refinery is valued at cost which is

calculated in the following manner:
● Total sales value of production based on applicable actual

incurred IPP of all the products for the month is calculated
which is reduced by crude cost and operating cost to get the
net margin percentage.
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● The above net margin percentage is applied on refinery

transfer price of each product and the same is reduced from
the refinery transfer price to get the cost of the product.
The stocks of the refined products are valued as follows:
● Mass Consumption Products like MS, HSD, SKO, LPG (D) -

at cost (IPP + Excise Duty + Freight)
● Industrial Products Products like FO, LDO, LSHS, Naphtha,

LPG (I), SKO (I), Bitumen, ATF, Base Oil - at IPP + Excise
Duty + Freight.
● Lubricants – Bulk and Packages – at weighted average

manufacturing cost
Products for own use, samples and losses :
a) at the Port Installation – at IPP + Excise Duty.
b) At the Depots – at IPP + Excise Duty + Freight for the

location.
Recovery of Losses
4.36 During the transportation of products from the Refinery to
Installation/ Depot, if the transit losses are more than the normal
percentage of loss, the same is normally recovered from the
transporters like Coastal Tankers, Railways and Tank Lorry
Contractors.
4.37 While examining the stock accounting aspect of the oil

company, the internal auditor would look into the following areas:
(i) Whether stock reports are received from the Supply/

Distribution locations on daily/ weekly/ fortnightly/ monthly
basis, as the case may be.
(ii) Whether various stocks are valued as per elements discussed

above.
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(iii) Whether the stock/ product dispatched by the supply locations

are received at receiving locations.
(iv) Whether stocks are physically verified on a periodical basis.
(v) Whether in case of movement of product by coastal tankers,

tank wagon and tank trucks that stock in transit at the end of
each month are subsequently received by the receiving
locations.
(vi) Whether stocks/ products are valued as per the Accounting

Standard (AS) 2, Valuation of Inventories, issued by ICAI.
(vii) Whether various stock losses discussed above are within

the normal norms of losses.
(viii) Whether stocks at all locations are adequately insured.
(ix) Whether monthly stock declarations are filed with the

insurance company in order to avail stock declaration policy,
thereby reducing the quantum of premium.
(x) Whether losses to be recovered from various transporters

like coastal tanks, railways and tank truck contractors are
received on a regular basis.
(xi) Whether an age-wise analysis of stock held, particularly

lubricants and greases are periodically done.
(xii) Whether slow moving and obsolete stocks/ products are

identified and properly accounted for.
Railway Claims
4.38 Railways are an economic, convenient and reliable mode of
transportation of petroleum products. The oil industry, therefore,
normally uses tank wagons provided by the Indian Railways for
transporting its bulk products. These tank wagons are calibrated
by the Oil Industry on behalf of Central Tank Wagon Calibration
Committee. Sometimes, tank wagons loaded at the loading location
do not reach the receiving location due to various reasons. The
consignor oil company can raise a claim in respect of credit for the
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products decanted wrongly by other Oil Company/ Railways or the

value of the product for non-receipt of such wagon within a
reasonable time. If any wagon is not received for more than a
month, all efforts should be made to trace the wagon and to obtain
necessary product credit or lodge claim on Railways for
compensation as the case may be. Following are some of the
situations under which claims are normally lodged with Railways:
● Interception: The product tank wagon, mostly with HSD, is

intercepted by loco foremen of Railway for Railway’s
consumption at any of the stations enroute to the destination
station. Although the Railways have got the consumer supply
arrangement with oil companies, yet at times, some of their
locations likely to become dry due to delay in receipt of
wagons despatched on Railway’s account and the loco
foremen may decide to pull out few wagons from the rack of
wagons moving on the line and decant into their storage
tanks.
● Non-Delivery: If any of the tank wagon in a rack is not

received beyond three months and the same is not traceable,
then a “Partial Delivery” certificate is obtained from the
destination station for non- delivery of the tank wagons and
claim lodged with Railways for compensation for the value
of products contained in the wagons non-delivered.
● Short Receipt : Short receipt of the products arise due to:
● Leakage of products due to defective/ tampered/

missing seals.
● Transshipment of products enroute from the original

tank wagons into some other tank wagons due to the
original tank wagon becoming defective and declared
sick.
● Rail accidents and while salavaging the products from

the wagons met with an accident and transshipped into
some other wagon or tank truck for transportation to
the nearest depot location.
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● Excess Freight: Some times the freight charged are paid in

excess due to application of wrong rate. Necessary
documents with claim are lodged with Railways for refund of
excess freight.
4.39 Notice for claim for compensation in respect of all claims is

required to be lodged with the Railways within six months from the
date of booking or date of the Railway Receipt. The claims lodged
after six months period are declared as Time Barred claims. The
following documents need to be furnished to the Regional Railways
Officer for lodging the claim notice:
● Copy of Railway Receipt.
● Loading/ Despatch Advice or Challan.
● Joint Dip Measurement and Shortage certificate issued by

the Railways in case of Short Delivery claim.
● Partial Delivery or Non-delivery Certificate.
● Transhipment Certificate, if any.
● Laboratory Certificate, if any tests have been conducted.
4.40 For verifying the claims raised against the Railways, the
internal auditor should:
a) Verify that stocks are reconciled on a periodical basis i.e.,

weekly, fortnightly and monthly basis to find out the non-
receipt of products at receiving locations, after a reasonable
time.
b) Verify that the claims lodged with railways are covered under
any one or more of the situations mentioned above.
c) Verify that efforts are made to trace the non-receipt of

products and obtaining necessary product credit or lodge
claim on the Railways for compensation, as the case may
be.
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d) Verify that claims are lodged to the jurisdiction of respective

Railway Zones.
e) Verify that claims are lodged with the Railways within six
months from the date of loading or date of Railway Receipt,
failing which the claims would become time barred.
f) Verify that claims are made in prescribed form separately

since claim forms for non-delivery and claims for short receipt
differ.
g) Verify the MIS maintained for recovery of claims.
h) Verify the necessary accounting entries made while loading

the claim and after receipt of claim.
i) Verify that all the necessary documents required for lodging

claim notice are filed with the Railways.
j) Verify the age-wise analysis of Railway claims.
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Compendium of Industry Specific Internal Audit Guides Chapter 5
Internal Audit of Special Areas
5.1 Operations in the oil refining and marketing companies are

vast, comprising numerous and extremely complex processes.
Effective internal audit in such companies requires an in depth
technical knowledge of these processes. It is also necessary for
the internal auditor to understand and devote specific attention to
certain special areas in such companies, which have a lasting
impact on the effective and efficient functioning of the company.
The areas requiring special attention in the refinery are (i) standard
and throughput production patter; (ii) fuel consumption and loss;
(iii) optimization of product mix; (iv) apportionment of joint costs;
and (v) oil accounts. The aspects of marketing needing special
attention of the internal auditor include (i) pricing of products; (ii)
installation or terminals; and (iii) transportation. The following
paragraphs provide a brief insight into internal audit of these critical
areas.
Refinery
Standard Throughput and Production Pattern
5.2 The fixing of standard throughput and standard product
pattern of each refinery is important as it is at this level of throughput
that the refinery gets full compensation for the cost incurred and
capital investment. Any refinery processing less than the standard
refinery throughput is likely to incur loss whereas a refinery
processing more than the standard refinery throughput will get an
extra margin. The internal auditor’s procedures with regard to
internal audit of standard throughput and production pattern would
include verification of the following aspects:
a) Whether the standard throughput level has been fixed.
b) Whether a standard product pattern of the refinery is defined.
c) Whether the refinery achieves the standard throughput to

get full compensation for the fixed cost and capital investment.
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d) Whether the refinery achieves more than 100 percent of the

standard throughput to get more margins.
e) Whether the actual yield is commensurate with the expected yield.
f) The trend of production in the last few years Vs ILP (Industry

Logistic Plan).
g) ILP Vs actual upliftment.
h) Gross Refinery Margin (GRM).
Fuel Consumption and Loss

5.3 Some crude oil is consumed as fuel and lost in the process
of refining. The ceiling fixed for fuel consumption and loss in
refineries is generally high, higher than even the actual figures.
Thus, there is no deterrent against fixing higher percentage of fuel
consumption and loss. Since both these factors ultimately reduce
the net availability of crude oil for refining, they should be minimised
with reference to a given pattern of production to achieve the
maximum efficiency.
5.4 Internal audit of fuel consumption involves verification of the

following aspects:
a) Whether ceilings are fixed for fuel and loss are comparable
with other refineries of similar nature.
b) Whether the actual loss is not more than the ceiling fixed.
c) Whether the quantum of consumption of crude oil as a fuel

in the refining process is pre-defined.
d) Whether the actual consumption of crude oil as a fuel is not

more than the ceiling fixed so that the net availability of
crude oil for refining is maximised.
Optimisation of Product Mix

5.5 The next aspect in oil and gas refining companies requiring
special attention of the internal auditors is the optimisation of the
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product mix. The optimisation of the product mix is an operational

parameter with fine tuning of temperature controls and cut points
being used to produce excess quantity of one product over another.
The degree of automation in controls and the experience of control
technicians would determine the operational efficiency on the
product mix front. In addition to flexibility in determining the product
mix, the ability to process various kinds of crude helps in exploiting
the trading differentials between various grades of crude.
5.6 The internal auditor’s procedures for examining the aspects

related to optimisation of product mix include:
a) Verifying that there exists an operational parameter for fine

tuning of temperature controls for production of a product to
a desired extent.
b) Verifying the automation in controls and experience of control

technicians to determine the operational efficiency on product
mix front.
c) Verifying the flexibility in determining the product mix to

maximise the efficiency and profitability.
d) Verifying the facility of processing of various grades of crude.
e) Verifying that the various utilities like water, steam, or power

are optimally used.
Apportionment of Joint Cost

5.7 The total cost of production of refinery is required to be
allocated to individual products on a reasonable basis to determine
the cost of production of each product. In petroleum refining the
numerous units like distilling units, cracking units, alkylation and
polymerisation plant are involved. Each of these units produces
intermediate product streams, which require extensive reprocessing,
heating and blending. The effect of these processing and
successive stages multiplies the difficulty in allocating the joint
cost of raw materials and processing charges to the refined products
with any degree of reasonable accuracy. Even assuming that with
difficulty the cost of different products can be worked out from the
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joint and common costs, the end results may not be in tune with
market preferences for different petroleum products and their
prevalent prices. Strict application of conventional process costing
method will result in low cost for high value products, such as MS,
Naphtha and ATF and comparatively higher cost for low value
products, such as FO and bitumen.
5.8 Since all the final products come from the same raw material,
the final products can be termed as joint products. Joint products
may be defined as products which are by very nature of production
process cannot be produced separately, and which have equal
economic importance. The basic problem in respect of joint products
is that of apportionment of the cost incurred upto the point of split
off. Since all the processes are very complex and interlinked, it is
very difficult to have any accurate method of apportionment and
allocation of cost. Apportionment and allocation, is therefore, done
by employing various joint costing methods available viz.,
● Physical measurement.
● Selling prices a separation point or after further processing.
● Marginal cost technique.
● Working back from sales to an estimated cost.
5.9 Normally, apportionment of joint cost to the final products by

physical measurement or, alternatively, by selling prices at
separation point, is adopted as method(s) for allocation of cost
since the production of petroleum products involves various
processes and produced from various types of crude, making it
difficult to find out the number of processes a particular product
undergoes before it is finally separated. In other words, till a
particular products meets its specification, it has to go through
several processes repeatedly which makes it difficult to find out
the actual number of processes undergone and computation of
cost thereof under process costing techniques.
5.10 Examination of the joint costs requires verification of the fact that:
a) All refining costs are collected and collated.
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b) Apportionment of joint costs is done to know the cost of

production of each product.
c) The methods used for allocation of joint costs can reasonably

determine the cost of each product.
Oil Accounts
5.11 This department is responsible for consolidation of dip
readings in the Daily Dip Statement (DDS) based on dip memos,
preparation of Daily Transfer Sheet (DTS), Daily Production
Statement (DPS), Excise returns, Crude Intake certificate, Product
Outturn Certificate (POCs), Product Intake Certificate (PICs) and
calculation of loss percentage based on information from technical
services department and co-ordination with clearing agents for
filing of INTO and EX bond with Customs authorities.
5.12 Internal auditor’s procedures for verifying the oil accounts

normally include:
(i) Verifying whether the POCs are prepared correctly based

on the dip readings.
(ii) Verifying whether the details of production and calculation of

fuel and loss are proper.
(iii) Verifying whether the reconciliation of opening of stock of

crude processed, crude received and closing stock of crude
is properly done.
(iv) Verifying whether the details of production/ inter-tank transfer/

despatch as per the Daily Transfer Sheet (DTS) for the day
matches with the difference between the closing dip as per
the Daily Dip Statement (DDS) of the previous day with the
closing dip as per the DDS for the day.
(v) Examining the reconciliation of the closing and opening dip with
the quantity of receipt/ despatch as per the dip memos
received from the pump house i.e., whether the quantity of increase
or decrease as per the dip memo is equal to the quantity of
increase or decrease as shown in the dip statements/ DTS.
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(vi) Verifying whether the product-wise total of dispatches for a

day as per the POC is equal to the dispatch as shown in the
DTS for the day.
(vii) Verifying whether the dip readings as per the automatic radar
gauging system are comparable with the dip readings as per
the dip memo.
(viii) Verifying whether the despatches as shown in the DTS are

equal to the dispatch as shown in the Daily Production
Statement (DPS).
(ix) verifying whether the following details as recorded in the dip

memos and the POC are the same:
a. Tank number.
b. Product description.
c. Batch number.
d. AR3A number.
e. Installation to which the product is despatched.
f. Pumping time – start time and stop time.
g. Gross opening and closing dips of product and

water level.
h. Temperature etc.
(x) Verifying whether the details of production, dispatch and

receipt as shown in the excise return RT-12, AR3A forms,
are in agreement with DTS, DPS and POC.
(xi) Verifying whether there is any movement of product/ crude

from tanks designated for maintenance.
(xii) Verifying whether the dip memos are maintained in the order
of the serial number.
(xiii) Verifying whether in case of alterations of dip memos, they

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are cancelled and new dip memos prepared and the cancelled
dip memos retained.
(xiv) Verifying whether supplementary POCs are prepared in case

of alterations of POCs.
(xv) Verifying whether the actual production (total throughput and

products produced) is comparable with the budgeted
production estimates as given by Production Planning
Department.
Marketing Activity
Pricing of Products
5.13 Selling prices are fixed with reference to nearest source of
supply. The products are moved from refinery in a regulated manner
so as to ensure that the customers get the product at the most
economical cost i.e., from the nearest source of supply by cheapest
practical mode of transport. The product movement from refineries
to customers as well as the mode of transports commonly employed
is given below:
Refinery
Pipelines / Bunkers
Main Installations
Railways / Tank Trucks Tank

Trucks
Depots
Tank
Trucks Tank Trucks
Retail Outlets
Dispensing Pumps
Customers
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Pricing Area
5.14 There are various refineries in the country refining the product
to meet the petroleum products’ requirement. The supplies to the
ultimate consumers have to be from nearest port attached to the
refinery/ inland refineries by demarcating specific boundaries for
each port refinery/ inland refineries. Bulk products are moved from
nearest refinery attached to a port, in a regulated manner so as to
ensure that the customers get the product at the most economical
cost i.e., from the nearest source of supply by the cheapest practical
mode of transport. All the port refineries/ inland refineries are
known as Primary Pricing Points. The oil industry computes the
final selling prices to be charged to the consumers taking into
consideration the nearest primary pricing point (Port)/ secondary
pricing point (inland location), irrespective of the actual source of
supply. The general guiding principle for the above is that the
price to the consumer should be cheapest from the pricing base. It
may be noted here that for deciding the pricing base for retail
outlet, the various alternate sources of supplies are considered.
The price to consumer should be the cheapest being the guiding
principle, the freight economics from various pricing points is
considered for working out the RPO price.
Selling Prices
5.15 The selling prices of petroleum products MS, HSD consist of
the following elements:
a) Ex-refinery gate price/ Refinery Transfer Price (RTP)/ Import

Parity Price (IPP).
b) Marketing cost plus margin.
c) Siding and shunting charges at MI.
d) Rail/ pipeline freight.
e) Siding and shunting charges at Depot.
f) State Specific Cost.
g) RPO charges/ RPO surcharges.

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h) Excise duty.
i) FDZ delivery charges (at the rate of Rupees per kilo litre).
j) Delivery charges beyond FDZ (at the rate of Rupees per kilo
litre per kilo metre).
k) Toll taxes.
l) Sales tax as applicable.
m) Dealers’ commission.
n) Shrinkage allowance (in case of high altitude markets).
o) Rounding off differential.
5.16 The ceiling selling prices of petroleum products SKO – Public

Distribution System consist of the following elements:

Parity Price (IPP).
g) Excise duty.
h) Toll taxes.
i) Sales tax as applicable.
j) Transportation costs.
k) Wholesalers commission.
l) Retailers commission.
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m) Rounding off differential.
5.17 The prices for other products comprise the following elements
of cost:

Parity Price (IPP).
g) Excise duty.
h) Local Levies and Sales Tax.
5.18 The pricing of petroleum products like MS, HSD, SKO (D),
LPG (D), ATF upto 31st March, 2002, used to be fixed by the Oil
Co-ordination Committee (OCC) under Ministry of Petroleum and
Natural Gas under Administrative Pricing Mechanism (APM),
thereby the margin per KL of these products was fixed by OCC
and other elements of sale price/purchase cost were surrendered/
claimed to/ from the Pool Account operated by OCC. The oil
companies had to follow the price fixed by OCC and they had no
role to play in price fixation. However, with effect from April 1,
2002, the prices are being fixed by oil companies on Industry
basis and margin per KL fluctuates according to changes in
international crude price.
5.19 The pricing of petroleum products like FO, LSHS, LDO,

Naphtha are fixed by the Industry since April 1, 1998. The prices
charged in these cases by the oil companies may differ ultimately
when they finally sell to direct/ industrial customers depending on
the discounts/ rebates given by individual oil company. The
techniques of marginal costing are applied in case of these products
if supply of product is more than demand. The price of lubricants/
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greases was also decontrolled from November 1993. The prices

of these products are fixed by individual oil companies on their
own. The marginal costing concepts are equally applied in pricing
of lubricants as well for industrial sector.
5.20 The procedures of the internal auditor for examining the

aspects related to pricing would include verifying:
(i) That fixation of port-based prices is based on agreed norms.
(ii) That the prices fixed for various retail outlets are with special
reference to cheapest source of supply.
(iii) Analysing the international price movement of crude.
(iv) That products are sourced from the most economic supply
source.
(v) That appropriate excise duty rates are charged in RSP and
incorporated the changes wherever there is revision of excise
duty.
(vi) That appropriate sales tax rates are charged in RSP and
incorporated the changes wherever there is revision of sales
tax rates.
(vii) That appropriate distances to the retail outlets from the supply
location are determined for the fixing up the selling prices
for each outlet.
(viii) That round trip distances are updated wherever there is

change in the source of supply.
(ix) That the pricing of outlet has been determined based on the
set guidelines.
(x) That all local taxes like octroi/ toll tax have been included
wherever applicable
(xi) Whether price revisions have been implemented/ communicated

on time and correctly.
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(xii) That in case of any new depot, the depot rate built-up is as
per the prescribed guideline.
(xiii) That the consumer rates are determined as per the

guidelines.
Installations/ Terminals
5.21 Installations/ Terminals consist of storage tanks and product
handling facilities for receipt of products from port and/ or refineries
for onward despatch to direct customers in bulk and inland depots.
5.22 The internal audit procedures in this regard comprise verifying

that:
(i) All the facilities are utilised to the optimum extent.
(ii) There are no idle assets.
(iii) The product is received into the tanks as per the invoice
raised by the supplying company.
(iv) All the excise formalities are complied with in case of bonded
location for storage and distribution of products.
(v) Daily physical stock dips are taken and calculations of stocks
are as per the calibration chart of each tank.
(vi) The product tanks are calibrated and calibration charts are
certified by the CPWD.
(vii) The receipt losses, storage/ handling and transit losses are
kept to the minimum extent possible.
(viii) Applicable changes like rent, electricity are collected from

the companies, as per agreement, to which the space is
provided for.
(ix) The safety norms are complied.
(x) All the fire fighting facilities are available and monthly fire
drills are carried out.
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(xi) All quality control tests required as per industry quality control
manual are carried out.
(xii) All the MIS, accounting returns are sent to Head Office on
regular basis.
(xiii) Adequate security arrangements are available.
(xiv) All the assets and product stocks are adequately insured.
(xv) Appropriate controls are exercised over the contaminated

products and its accounting thereof.
(xvi) All the statutory licences/ approval required for the location
are obtained.
(xvii) The operating cost/ profitability as a cost centre and profit

centre.
(xviii) Demurrage is paid for delay intake of product from the coastal
tankers.
(xix) Short receipt of product in respect of coastal tankers is

claimed from the shippers.
(xx) Tankage hiring facility, if applicable, including the terms of

hiring, product losses in transit and settlement etc.
Depots
5.23 A depot normally consists of storage tanks and product
handling facilities for receipt of products for onward despatch and
transportation facilities for onward movement of products to retail
outlets and direct customers.
5.24 The internal audit of a depot ordinarily comprises the following

procedures:
a) Verifying all the points mentioned in paragraph 4.22 except

points xviii and xix.
b) Verifying whether demurrage charges are paid to Railways

(for delayed decantation of product from wagon or (for
delayed filling of product into the wagon.
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c) Verifying that in case of short receipts of product through rail

wagon, a certificate to that effect has been received to lodge
claim with Railways.
d) Verifying that product shortage in case of tank lorry receipts

are fully recovered from the transport contractors.
Tap Off Points (TOP)

5.25 Internal audit of tap off points involves the same procedures
as mentioned in paragraph 4.22 except points xviii and xix.
LPG Bottling Plants

5.26 Bulk LPG imported or from the refineries is bottled at the
LPG bottling plants before being marketed to the domestic and
industrial customers. Following are some of the procedures for
internal audit of LPG bottling plants:
a) Verifying that bulk LPG receipt at the bottling plant is as per

the invoice raised by the supplying location.
b) Verifying that the applicable changes like rent, electricity are

collected as per the agreement, from the companies to whom
the space is provided.
c) Verifying that confirmation of approval from LPG area office

is received for releases of regulators to dealers.
d) Verifying the control exercised over stock of valves/ regulators

and releases to the dealers.
e) Verifying that appropriate pricing is applied for domestic and

non domestic sales.
f) Verifying that appropriate sales tax rates are applied for

domestic and non-domestic sales.
g) Verifying the inventory of bulk LPG and accounting of

receipts/ filling losses.
h) Verifying the stock of filled and empty cylinders and

reconciliation of stock of cylinders.
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i) Verifying that monthly returns are prepared in time and sent

to area office.
j) Verifying that all the safety norms applicable to plant are

adhered to.
k) Verifying the accounting of cylinders from fabricators and

treatment of defective cylinders.
l) Verifying the calibration and accuracy of Weigh Bridge for

receipt of bulk LPG.
m) Verifying the accuracy of weighing scales for filling of LPG

into various types of cylinders.
n) Verifying that the plant is utilised to its installed capacity.
o) Verifying the control executed over loss or theft of cylinders,

valves and regulators.
p) Verifying that all the assets and product stocks are adequately
insured.
q) Verifying that all the statutory licence/ approval required for

the plant are obtained.
r) Verifying the operating cost/ profitability as a cost centre and

as a profit centre.
Taluka Kerosene Depot

5.27 Taluka Kerosene Depot is a depot for storing Kerosene for
delivery to Public Distribution System. Needless to say that such
depots hold an important place in the economy and society as a
whole. The internal auditor therefore needs to pay special attention
to audit of such depots.
5.28 The internal auditor’s procedures for carrying out audit of

taluka kerosene depots involve verifying:
a) The validity of agreement/ renewal of agreement
b) The payments are made to contractors as per terms of

agreement.
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c) Control over manual records maintained.
d) Utilisation of facilities at the location.
e) That all the assets and product stocks are adequately insured.
f) That the product tanks are calibrated and calibration charts

are certified by CPWD.
g) That all the statutory licences/ approval required for the

location are obtained.
Aviation Service Facilities

5.29 Oil companies normally also have infrastructure at the airfield
stations consisting of storage tanks, hydrants, pipelines, hoses
etc., for fuelling aircrafts. Internal audit of aviation service facilities
involves examining:
a) The agreements entered into various airlines for fuelling of

product.
b) Whether invoices are raised and payments received are, as

per agreements.
c) Whether appropriate prices are charged to respective airlines.
d) Whether the applicable sales tax rates are charged to

respective airlines.
e) Whetherall the excise formalities and related records are

maintained in case the location is bonded warehouse.
f) Whether the product tanks are calibrated and calibration

charts are certified by CPWD.
g) Whether physical stocks dips are taken on daily basis and

reasons for variation in stocks, if any, are appropriately
recorded.
h) Whether all the safety norms are adhered to.
i) Whether all the assets and product stocks are adequately insured.
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j) Whether all the facilities are optimally utilised.
k) The operating cost and profitability as a cost centre and

profit centre.
Lube Depot
5.30 The lube depot stores blended lubricants and greases for
automotives and industrial needs. The internal auditor’s procedures
for auditing the lube depots would differ from one product to
another. Illustrative procedures for the products are discussed
below.
Base Oil
a) Verifying the receipt of base oil with respect to invoice
received or bill of lading received.
b) Verifying the base oil AR3A quantities Vs pipeline receipts

ex- refinery.
c) Verifying the control on loss of the product received.
d) Examining the mode of payment for imported cargo.
e) Verifying whether daily physical dips of all the tanks are

taken and reasons for variation, if any, appropriately recorded.
Chemicals and Additives

a) Verifying the receipt of chemical and additives vs indent
pattern.
b) Verifying the stock holding vs actual utilization, slow and

surplus stocks.
c) Verifying the shortages in receipts and recoveries control.
Containers
a) Verifying the indents on fabricators Vs purchase order quantity
and terms.
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b) Verifying the execution of call ups by the fabricator and time

delay in execution.
c) Verifying the receipt confirmation and inspection reports of

the same.
d) Verifying the control over rejects and receipts without GRNs.
Cartons, Packing Materials and Consumables

a) Verifying the indents on suppliers Vs Purchase Order quantity
and terms.
b) Verifying the quality testing and sample test reports.
c) Verifying the control over damages in cartons and control

over wastage.
d) Verifying the inventory control system at the blending plant.
e) Verifying the accounting and treatment of rejected materials.
Blending/ Production
a) Verifying the adequacy of control in production process.
b) Verifying the utilisation of materials and consumption pattern.
c) Verifying quantity mix ratios Vs actual mix ratio on test check

basis.
d) Verifying the production plan and market demands/ indents.
e) Verifying the filling Vs empty drums/ containers.
f) Verifying the accounting of the finished goods.
g) Verifying utilisation of blending facilities – idling assets and

unutilised facilities.
Repacking/ Small Fillings

a) Verifying the agreements/ Purchase Order with re-packers
for small filling.
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b) Verifying control over the finished product stocks sent to

small packs and receipt of filled packs thereof.
Transportation
5.31 Transportation cost plays a vital role in determining the final
selling prices for the consumers. Crude oil is transported to the
refineries either by coastal tankers or by pipelines. All modes of
transportation of petroleum products complement each other and
form the essential components of the logistic system. For bulk
transportation of petroleum products, pipelines are the most energy
efficient, convenient and most preferred mode of transportation.
Efficient and economic transportation of petroleum products to the
consumption centers is a major challenge. In order to ascertain
the source of supply to a particular area, it is vital to examine and
ensure that there will not be any price disparity in the neighbouring
areas of each pricing area boundaries therefore; the equivalent
cost norm plays a vital role in demarcating economic supply zone.
Different supply zones of each port or inland refineries are thus
demarcated on the basis of equivalent cost of one of the major
product.
5.32 The principle of distribution is to plan and execute the

movement of petroleum products from the refineries/ main ports to
various distribution centres in a systematic and organized manner.
The bulk petroleum products are required to be moved by one or
more of the following mode of transportation:
Coastal Tankers/ Barges

5.33 These are used for carrying petroleum products from port
refineries to port terminals. At the receiving location, an oil jetty is
available for discharging the tanker through a pipeline, which runs
from the oil jetty to the terminal. The discharge of the product is
carried out with the help of high capacity pumps. The internal
auditor’s procedures with regard to coastal tankers involve:
a) Verifying whether the payments to shippers are done as per

the agreement/contract with them.
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b) Verifying whether the quantity base on which charges have

been levied is correct.
c) Verifying that if the coastal tanker cost is being reimbursed

to any other oil company then whether it is as per agreement.
d) Checking whether the parcel sizes are as per assumed parcel

size.
e) Verifying whether the lay time is as per agreed terms
f) Examining whether the demurrage claims is as per agreed

terms
g) Verifying whether the detention, exceptions, lay time is as

per agreed terms
h) Verifying the charter hire, bunker cost and port charges
i) Verifying wharfage, survey fees, agency fees etc.
j) Verifying insurance payments
k) Examining the idling cost of vessels
l) Verifying whether the ocean is prorated as per final receipt

quantity
Pipelines
5.34 Some of the mainland installations are connected through a
pipeline from the refinery to the installation. Such installations are
called Pipeline Terminals. In case of long pipeline running through
the mainland, receiving, storing and distribution facilities are set
up at suitable locations enroute. These are called Tap-off points
since product is tapped off here from the main pipeline. Internal
audit procedures for examining the transportation through pipelines
involve:
● Verifying whether the contract of agreement for transportation

of products has been entered to with owner of pipelines.
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● Verifying whether the freights is paid as per the agreed

terms of the contract.
● verifying whether there are any transit losses
Tank Wagons
5.35 By far the most common mode of product movement to
inland depot locations is through railway tank wagon. For receiving
the product through tank wagons, each depot is provided with a
siding of suitable capacity and the products are discharged through
a pipeline, which runs from the railway siding to the depot tank.
The procedures employed for internal audit of transportation by
means of railways include the following:
● Verifying whether the payments are released as per due

dates agreed in the agreement with the Railways.
● Verifying whether the payment is released as per the amount

mentioned in the Railway Receipts (RR).
● Verifying whether the freight charged and calculations in RR

is in line with railway tariff table rates.
● Verifying whether appropriate tariff rates are applied as per

the railway tariff table i.e., if a particular consignment is
eligible for charging on train load rates, wagon load rates
are not charged.
● Verifying whether freight paid on behalf of other marketing

companies are recovered within the due dates agreed.
● Verifying whether in case there is excess payment of freight

due to application of wrong rates, the necessary refund claims
are submitted within reasonable time.
● Verifying whether in case there is excess payment of freight

due to short receipt of product, the necessary refund claims
are submitted within reasonable time.
● Verifying whether demurrage charges are paid to railway for

delayed decantation of product or delayed loading of the
product into the wagon.
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Tank Trucks
5.36 Tank trucks are used extensively in transporting products
from a source to the last point of sale i.e., retail outlets/ customer
premises. Internal audit of transportation by means of tank trucks/
lorries involves examination of the following aspects:
● Whether transport contractors are selected as per approved

policy.
● Whether the transport agreement/ contract has been entered

into with contractor.
● Whether the security deposit payable as per the contract

agreement has been received.
● Whether the approved tank lorry vehicle as mentioned in the

contract agreement has been used to deliver the products.
● Whether the contractor complies with transport discipline

guidelines, during transportation of the products.
● Whether the rate and amount claimed is as per the contract

and is within the contract validity period.
● Whether the payment is released after getting

acknowledgement copy of the goods received.
● Whether the RTD kilometers claimed by the contractor tallies

with approved RTD kilometers from that particular location.
● Whether the shortages certified by tank driver have been

recovered from transportation bill.
● Whether the payments are released only to the approved list

of tank lorry vehicles maintained.
● Whether the master data of each approved tank lorry is

maintained.
● Whether the black listed tank lorries have been removed

from the approved list of tank lorries.
2761
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● Whether the payments released for quantities claimed by

the contractors tallies with actual sales made.
● Whether the provision for liability has been provided in case

of amounts payable to contractor, at the time of closing of
books of accounts.
Fleet Cards
5.37 Oil marking companies have started issuing Fleet Cards to
the Fleet Owners/ Operators to facilitate cashless purchase of
Petrol, Diesel and Lubes from the selected Retail Outlets. The
Fleet Cards provide the following features to the Fleet Owners/
Operators:
a) Flexible Prepaid and credit option
b) Fuelling at select quality and quantity assured outlets on all

major highways and halting points
c) Single/ multiple cards loading at all participating retail outlets.
d) Attractive rewards program
e) Free personal accident insurance cover for fleet owners,

drivers, co–drivers and helpers.
f) Free vehicle tracking facility through web site.
g) Option for real time truck tracking at subsidized cost
h) Each fleet owner is issued a fleet card for every vehicle

enrolled. The card is assigned a unique Personal Identification
Number (PIN). The card also bears the name of fleet owner,
vehicle registration number, Card number and card validity
date.
5.38 The internal audit procedures of in respect of the fleet cards

comprise:
a) Examining the policy of fleet card program
2762
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b) Verifying whether the eligible fleet owners are given cards

as per the policy.
c) Verifying whether the amount paid in advance by the fleet

owners are accounted for properly in the books and booking
of sales is done on a daily basis based on the up-liftment of
Petrol, Diesel and Lubes.
d) Verifying whether the card swiping machines are working

properly.
e) Verifying whether the reward points are given to fleet owners

as per entitlement in relation to the up-liftment of Petrol,
Diesel and Lubes.
f) Verifying the periodic account statement of each fleet card.
2763
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Chapter 6
Cost Audit
6.1 Central Government has notified Cost Accounting Records

(Petroleum Industry), Rules 2002 for the financial year commencing
on or after first day of April 2003 to be followed by petroleum
companies. It is applicable to every company engaged in production,
processing and manufacturing of crude oil, gases (including
Compressed Natural Gas or liquefied natural gas and re-gasification
thereof) or any other petroleum product. Every Company to whom
the rules are applicable are in respect of each of its financial year
commencing on or after first day of April 2003, required to keep
proper books of accounts relating to the utilization of materials,
labour and other elements of cost in so far as they are applicable
to any of the products or activities referred in the Rules.
6.2 In case of down stream activities, Cost Accounting Records

(Petroleum Industry) Rules 2002 is applicable only for Refineries/
Lube blending Units. In respect of companies having only marketing
activities, the Rules do not cover such marketing activities. Pipelines
used for transportation of crude would only get covered as part of
refining activity. The pipelines meant for transport of finished
products are considered to be a part of the marketing activity and
therefore not considered for the purpose of reporting as per Cost
Accounting Record (Petroleum Industry) Rules 2002. The Lube
blending plants form part of the manufacturing activity and hence
separate records as per the requirement of Cost Accounting Record
(Petroleum Industry) Rules 2002 need to be maintained. The LPG
bottling plants are part of marketing activities and do not fall under
the definition of manufacturing. Hence, the Cost Accounting Record
(Petroleum Industry Rules) 2002 are not applicable for LPG plants
at marketing locations i.e., outside the refinery.
6.3 Under the above Rules, it is mandatory to maintain proper

books of accounts and records related to manufacturing of product
under reference. Further, information in the prescribed proforma
‘A’ to ‘I’ has to be furnished to the Central Government within 90
days of the close of the financial year. The records are subject to
2764
E- 9061
audit by a Cost Auditor under the Cost Audit Order issued by the
Central Government. The statutory auditor, pursuant to the
requirements of the Companies (Auditor’s Report) Order, 2003, is
required to comment whether the company has maintained proper
cost records in conformity with Section 209 (1d) of the Companies
Act, 1956.
2765
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Chapter 7
Information Systems Audit
7.1 With the advent of the information technology revolution in

every sphere of economic activity, it has also become necessary
to obtain assurance that the IT systems in place are working as
designed since the cost of errors and irregularities in the IT systems
can be very high and detection of the same is also rendered
difficult. Hence, the need for the information systems audit. The
prime objective of information systems audit is to determine whether
the procedures followed and the system design maintains data
integrity and utilises resources optimally.
Information Systems Security

7.2 Information systems security is defined as the “procedures
and practices to assure that computer facilities are available at all
required times, that data is processed completely and efficiently
and that access to data in computer systems is restricted to
authorised people only”. For any organization, the security objective
is met when:
● Information systems are available and usable when required.
● Data and information are disclosed only to those who have a

right to access .
● Data and information are protected against unauthorized

modification.
7.3 Systems security encompasses the various layers of

information systems such as the physical layer and logical layer.
The physical layer would encompass physical and environmental
security. The logical layer would encompass security at various
layers such as Operating System, Network, Database and
Applications Software. The overall nature of business, organisation
structure, Management philosophy and IT deployment would
determine the type of security to be deployed in the enterprise.
2766
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Types of Information Systems Audit

Type of Audit Description
1. Application Review ● Access control
● User management
● Security architecture
● Test of adherence to policies
● Server configuration
● Password policy/ Standards
● System monitoring
● Backup and recovery
2. Desk Top Management ● Software inventory
● Hardware inventory
● Software license management
● DeskTop Support (including
annual maintenance contracts)
3. Computer ● Services Department Review
● Review of changes control
process
● Authorization procedures for
new users
● Process for disabling access for
terminated employees
● Disaster recovery and business
resumption plans
● Inventory and software licensing
procedures
4. Network Review ● Detailed review of network
management
● Server configurations including
security parameters.
● Routers access control list
● User management
● Event logging and system
monitoring
2767
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Appendix A
Process of Refining
Fractionating Column
or Tower Petroleum Gas (Below 40°C)
Gasoline (Petrol) (Below 40°C

to 170°C)
Kerosene Oil (170°C to 250°C)
Crude Oil Vapours Diesel Oil (250°C to 350°C)
Fuel Oil (350°C to 450°C)
400°C
400°C
Residual Oil (Above 400°C)

Crude Oil (This on further fractionation
Furnace
gives; Lubricating Oil, Paraffin
wax and Asphatt)
2768
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Appendix B
Refinery Block Diagram
2769
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Appendix C
Types of Products Produced from Crude Oil
E- 9067
I-20
TECHNICAL GUIDE ON
AUDITING WASTE
MANAGEMENT
2771
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Glossary
Airspace The projected bank cubic yards (BCY) of the landfill
to be filled with waste as determined by survey
and/or other engineering techniques.
Baler A piece of equipment used to compress and form

recycled material into bales.
Boiler A device used to absorb the heat released during

the combustion process of burning waste. This
combustion produces steam that can be sold or
converted into electrical power.
Brownfield Abandoned, idled, or under-used industrial and

Development commercial facility where expansion or
redevelopment is complicated by real or perceived
environmental contamination.
Capping This is the process of placing the final cover

material on the landfill.
Cell Landfills are constructed in phases (cells) that

adjoin one another, separated by a berm to contain
leachate within an area. The entire permitted area
will be divided into separate cells for construction.
Closed Site A landfill that has reached its permitted waste

(Landfill) capacity and has been permanently capped and
certified as closed by the appropriate state
regulatory agency.
Closure The period of time after a landfill has reached its

permitted capacity but before it has received
certification of closure from a state regulatory
agency. During the closure period, certain activities
must be performed to comply with environmental
and other regulations (e.g., capping, landscaping,
etc.).
2776
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Technical Guide on Auditing Waste Management
Commercial A segment of the business that is made up of

Customer commercial and industrial collection.
Construction and A waste stream that is primarily received from

Demolition (C&D) construction sites. Some examples of C&D waste
include, but are not limited to, concrete, rebar,
wood, 2777anelling, linoleum, and carpet.
Container Any receptacle used to accumulate waste from

residential, commercial and industrial sites.
Containers vary in size and type according to the
needs of the customer or restrictions of the
community. Containers are also referred to as
dumpsters.
Chemical Waste The operating name of Waste Management's

Management (CWM) hazardous waste landfills.
Daily Cover The material used to cover the working face of a

landfill at the close of each day.
Disposal Fee A fee charged for the amount of waste disposed of

by customers at a landfill. (also see Tipping Fee)
Drop-off Box or Sectioned containers where individuals and

Centre businesses can put recyclable material or
containers used for waste collection where
individual service is not available.
Dumpster A generic term use for front-load and rear-load

containers
Emission Control A category of equipment used at waste-to-energy

Equipment facilities to meet emission standards and generate
reports required by agency regulators.
Gatehouse A gatehouse is found at a landfill or a transfer

station. All incoming vehicles must stop to be
processed and weighed, and all outgoing vehicles
must stop to be weighed and receive a disposal
ticket for charges.
2777
Compendium of Industry Specific Internal Audit Guides E- 9070
Greenfield A tract of undeveloped property purchased with the

Development intention of obtaining necessary permission on
which to operate a landfill. This would not include
expansions to existing landfills.
Hauling Fee A fee charged to roll-off customers calculated from

the amount of time it takes to pick up their roll-off
container or compactor, dispose of the waste and
return it to the customer.
Hazardous Waste Waste that is designated such by regulatory

agencies either because it has elevated levels of
hazardous chemicals or materials, because it
exhibits a potentially dangerous characteristic (e.g.,
ignitable, corrosive, etc.) or because the material
belongs to a general family of materials which have
been deemed hazardous by regulatory agencies.
Hopper The hopper is the part of a garbage truck or

compactor where trash is emptied before
compaction into the container.
Landfill A modern engineered way to deposit waste into the

ground and still protect the environment.
(Landfill, A landfill that has been permitted by a state

Construction & regulatory agency to accept Construction and
Demolition (C&D) Demolition waste. This type of landfill must have
properties and design features specific to this type
of landfilling that have been established by the
state regulatory agency.
Landfill, Hazardous A waste may be considered hazardous if it is

Waste ignitable (i.e., burns readily), corrosive, or reactive
(e.g., explosive), contains certain amounts of toxic
chemicals.
Landfill, Municipal A landfill that has been permitted by a state

Solid Waste (MSW) regulatory agency to accept municipal solid waste.
This type of landfilling must have properties and
design features specific to this type of landfill that
2778
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have been established by the state regulatory

agency.
Landfill footprint Parcels of land that are designated and permitted to
perform landfilling activities. This would include the
entrance, staging area, buffer area and the area
that will accept waste for disposal (the waste
footprint area).
Leachate Liquids that have come in contact with waste.

Leachate accumulates in the waste footprint of the
landfill. Leachate levels within the landfill must be
monitored and cannot exceed state regulatory
agency established levels.
Liner A clay and/ or synthetic protective layer that is

placed on both the bottom and top of a landfill.
Lock-bar An optional feature of front-load containers. The

lockbar allows a customer to lock the container.
When the container is emptied, and the container is
raised up and over the truck, gravity causes the bar
to drop allowing the container to be emptied.
Materials Recovery Line of business where recyclable material is

Facility (MRF) processed, separated, and sold. This is a facility
where recyclable materials are sorted and
processed for sale. This process includes
separating recyclable materials (manually or by
machine) according to type, and baling or otherwise
preparing the separated material for sale. Operating
costs and revenues for MRF's are accounted for as
a separate line of business.
Methane A gas byproduct generated through natural

decomposition of solid waste in landfills. This gas is
monitored to maintain state regulatory agency
levels. Accumulated gas is either burned off using a
flare or is converted to energy by use of a gas
plant.
2779
Methane Gas Plant A plant where methane gas (generated from

decomposing solid waste) is collected and
transported to a gas-processing facility at the
landfill site. Once processed, the methane gas is
sold directly to industrial users or to an Affiliate of
WM to use as a fuel to power electricity generators.
Municipal Solid "Regular" garbage from non-industrial sources,

Waste (MSW) such as residential homes, restaurants, retail
centers, and office buildings.
Port-O-Let TM The trademarked name for WM's portable toilet line

of business.
Post-closure The period of time after a landfill is certified as

closed by a state regulatory agency, until WM has
no further monitoring responsibility. Environmental
and other regulations require the owner of the
closed landfill to continue monitoring activities and
general maintenance of the site for a specific period
of time
Solid Waste "Regular" garbage from non-industrial sources,

such as residential homes, restaurants, retail
centers, and office buildings. Typical MSW includes
paper, discarded food items, and other general
discards. Green waste is considered MSW and
includes yard clippings, leaves, trees, etc.
Special Waste Any waste that requires special handling. Special

waste is non-hazardous waste generally from an
industrial generator and must be profiled to ensure
that it does not contain elevated levels of potentially
hazardous chemicals or materials.
Transfer Station A facility that consists of a large pad where

residential and commercial collection vehicles
empty the contents of their trucks. Other machinery
(e.g., bulldozers) is then used to push the garbage
into long-haul trailers for transport to disposal
facilities.
2780
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Turbine Generator Device that converts the heat energy of the steam
from the boiler into electrical power.
Waste Stream Specific types of waste found in customer's

disposal (trash, cardboard, aluminium, metal, etc.)
or a more broad definition of disposal type.
Waste-to-Energy The WM waste-to-energy facilities consist of large

Plant incinerator-type operations where trash is
incinerated (burned). The heat from this combustion
process is converted into high-pressure steam,
which can be used to generate electricity for sale to
public utility companies under long-term contracts.
The residue from the incineration process is
disposed of in a Landfill.
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Contents
Glossary ........................................................................................................ 2776

Chapter 1: Introduction ............................................................................... 2783
Chapter 2: General Understanding of Waste Management
Industry ..................................................................................... 2785
Chapter 3: Segments in Waste Management Industry ............................... 2797
Chapter 4: Disposal Methods ..................................................................... 2828
Chapter 5: Laws and Regulations in India .................................................. 2837
Chapter 6: Industry-Wise Analysis .............................................................. 2843
Chapter 7: Risk and Challenges- Waste Management Industry ................. 2850
Chapter 8: Need for Internal Audit .............................................................. 2857
Chapter 9: Specific Issues Related to Internal Audit of
Waste Management Company.................................................. 2893
Chapter 10: International Agreements on Waste
Management ............................................................................. 2902
Chapter 11: Audit Criteria at International Level ........................................... 2906
Appendices
Appendix 1: Internal Audit Checklist on Bio-Medical Waste.......................... 2908
Appendix 2: Environmental Management Audit and
Regulatory Compliance Checklist – Model ............................... 2914
Reference .................................................................................................. 2922
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Chapter 1
Introduction
1.1 According to Basel Convention “Waste” are materials that are not
prime products for which the initial user has no further use in terms of user’s
own purposes of production, transformation or consumption, and which user
wants to dispose. Wastes may be generated during the extraction of raw
materials, processing of raw materials into intermediate and final products,
consumption of final products, and other human activities. Residuals
recycled or reused at the place of generation are excluded.
Waste management is the collection, transport, processing or disposal,
managing and monitoring of waste materials. Waste management is a
process generally undertaken to reduce the effect of waste on health,
environment and resources.
The process of managing waste is generally undertaken either by the
generator of waste or by an entity which is engaged in the business of
providing service by collecting the waste and disposing of the waste subject
to treatment of such waste. Waste managed by the generator is a cost to the
generator and waste managed by service provider is an income to the
service provider.
1.2 Waste management practice may differ for developed and
developing countries, for urban and rural areas and for residential and
industrial producers. Management of non-hazardous residential and
institutional waste is usually the responsibility of the local government.
Management of non-hazardous commercial and industrial waste is the
responsibility of the generator subject to local, national or international
controls.
Depending on the physical state of waste, wastes are categorized into solid,
liquid and gaseous. Solid wastes are categorized into municipal wastes,
hazardous wastes, medical wastes and radioactive wastes. Managing solid
waste generally involves planning, financing, construction and operation of
facilities for the collection, transportation, recycling and final disposition of
the waste.
2783
Objective and Scope of Technical Guide

1.3 This technical guide is intended to assist Internal Auditors in carrying
out internal audit of entities operating in the waste management/ generating
industry. The management in concurrence with the internal auditor with the
various pronouncements of ICAI and other regulatory requirements,
assessment of control environment and business domain knowledge
primarily decides the scope of the internal audit. The technical guide deals
with operational areas of entities operating in this Industry with emphasis on
compliance as mandated as per various regulations as applicable to the
specific entity.
This Technical Guide has been divided into following six parts:
Part I Glossary.
Part II Elaborates the scenario in the Indian Waste Management
Industry and challenges faced by an entity operating in this
Sector.
Part III Segments in Waste Management Industry and Disposal
Methods.
Part IV Laws and Regulations in India regarding Waste Management
Industry.
Part V Industry wise analysis.
Part VI Risks and Challenges for Industry.
Part VII Need for Internal Audit.
Part VIII Appendix.
1.4 This technical guide does not cover the following aspects covered by
other publications and pronouncements by ICAI and which are of specialised
nature and non-operational in essence:
(i) Internal audit of routine operations in finance and other areas/
functions of business;
(ii) Internal audit performed by the associated enterprises;
(iii) Special audits;
(iv) Investigations;
2784
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Chapter 2
General Understanding of Waste
Management Industry
2.1 The term “Waste” refers to materials that are not prime products (i.e
products produced for the market) for which the generator has no further use
for own purpose of production, transformation, or consumption and which he
discards, or intends or is required to discard. Wastes may be generated
during the extraction of raw materials during the processing of raw materials
to intermediate and final products, during the consumption of final products,
and during any other activity.
The following are excluded from the term waste:
 Residuals directly recycled or reused at the place of generation.
 Waste materials that are directly discharged into ambient water or
air.
In other words, waste includes all items that people no longer have any use
for, which they either intend to get rid of or have already discarded. Wastes
are such items which people are required to discard by law because of their
hazardous properties.
Waste originates from many sources, not only from households but also
from industry and commerce.
Types of Waste
2.2 Waste comes in many forms and they are as follow:
Agricultural Waste, Animal by-products, Biodegradable waste, Bio medical
waste, Bulky Waste, Business Waste, Chemical Waste, Clinical Waste,
Coffee Waste water, Commercial waste, Composite Waste, Construction and
Demolition waste, Consumable Waste, Controlled waste, Domestic Waste,
Electronic Waste (E-Waste), Food Waste, Gaseous Waste, Green Waste,
Grey Water, Hazardous Waste, Heat waste, Household waste, Human
Waste (Sewage sludge), Industrial Waste (Slag, Fly Ash, Sludge), Inert
Waste, Kitchen waste, Litter, Liquid Waste, Marine debris, Medical waste,
Metabolic waste, Mineral waste, Municipal Solid waste, Nuclear waste,
2785
packaging waste, radioactive waste, recyclable waste, residual waste, Toxic

waste, waste water, etc.
Impact of Waste on Environment and Health

2.3 The Global Development Research Center, GDRC defines Quality of
Life (QOL) as the product of the interplay among social, health, economic
and environmental conditions which affect human and social development.
QOL reflects the gap between the hopes and expectations of a person or
population and their present experience.
In a country like India, which aspires to be a global economic giant, public
health and quality of life are degrading everyday with the increasing gap
between services required and those provided. India is also considered a
sacred nation by the majority of its inhabitants but the streets and open
lands in Indian cities are filled with untreated and rotting garbage. These
untreated waste leads to lots of environmental and health hazard.
2.4 Disposal of e-wastes is a particular problem faced in many regions
across the globe. Computer wastes that are landfilled produces contaminat
leachates which eventually pollute the groundwater. Acids and sludge
obtained from melting computer chips, if disposed on the ground causes
acidification of soil. For example, Guiyu, Hong Kong a thriving area of illegal
e-waste recycling is facing acute water shortages due to the contamination
of water resources.
This is due to disposal of recycling wastes such as acids, sludges, etc. in
rivers. Now water is being transported from faraway towns to cater to the
demands of the population. Incineration of e-wastes can emit toxic fumes
and gases, thereby polluting the surrounding air. Improperly monitored
landfills can cause environmental hazards. Mercury will leach when certain
electronic devices, such as circuit breakers are destroyed. The same is true
for polychlorinated biphenyls (PCBs) from condensers. When brominated
flame retardant plastic or cadmium containing plastics are land filled, both
polybrominated dlphenyl ethers (PBDE) and cadmium may leach into the soil
and groundwater. It has been found that significant amounts of lead ion are
dissolved from broken lead containing glass, such as the cone glass of
cathode ray tubes, gets mixed with acid waters and are a common
occurrence in landfills.
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Need for Waste Management

2.5 In order to make the world a better place to live, it is pertinent that
the wastes so generated are managed better. Waste management practices
can differ for developed and developing nations, for urban and rural areas
and for residential and industrial producers. Management for non-hazardous
residential and institutional waste in metropolitan areas is usually the
responsibility of local Government authorities, while management for non-
hazardous commercial and industrial waste is usually the responsibility of
the generator subject to local, national or international controls.
2.6 Waste management is the collection, transport, processing or
disposal, managing and monitoring of waste materials. The term usually
relates to materials produced by human activity, and the process is,
generally undertaken to reduce their effect on health and environment.
A solid waste management (SWM) system includes the generation of waste,
storage, collection, transportation, processing and final disposal. Agricultural
and manufactured products of no more value are discarded as wastes. Once
items are discarded as waste, they need to be collected. Waste collection in
most parts of the world is centralized and all kinds of waste generated by a
household or institution are collected together as mixed wastes.
2.7 Solid waste management (SWM) is a basic public necessity and this
service is provided by respective urban local bodies (ULBs) in India. SWM
starts with the collection of solid wastes and ends with their disposal and/or
beneficial use. Proper SWM requires separate collection of different wastes,
called source separated waste collection. Source separated collection is
common in high income regions of the world like Europe, North America and
Japan where the infrastructure to transport separate waste streams exists.
Most centralized municipal systems in low income countries like, India
collect solid wastes in a mixed form because source separate collection
systems are non-existent. Source separated collection of waste is limited by
infrastructure, personnel and public awareness. Indian cities are still
struggling to achieve the collection of all MSW generated. Metros and other
big cities in India collect between 70- 90% of MSW. Smaller cities and towns
collect less than 50%. The benchmark for collection is 100%, which is one of
the most important targets for ULBs at present. This is a reason why source
separated collection is not yet in the radar.
2787
Waste Disposal Mechanism

2.8 The method of waste so generated is categorised into large scale
disposal and small scale disposal. The various method of disposal falling
under these categories are Open Dumps, Landfills, Incineration,
Composting, Recycling, Reuse, Recovery, etc.
The most favoured and least favoured option of
o waste management is best
expressed in the form of below mentioned picture.
Government Initiative and Voluntary Contribution

2.9 The role of Government cannot be understated while thinking in
terms of
o managing the waste be it solid, electronic waste, plastic waste. The
government both central and state have together as well as separately have
introduced various laws for managing the waste.
Some of the laws introduced are as follows:
 Bio-Medical Waste (Management and Handling) Rules, 1998
 E-Waste Management and Handling Rules
 Karnataka State Policy on Integrated Solid Waste Management
 Municipal Solid Waste Management and Handling) Rules
 Plastic Waste (Management and Handling) Rules, 2011
There are corporates and other entities including not for profit organisation
are taking efforts in bringing awareness to the public and also bringing in
policies internal to their organisation for managing the waste. Though the
Government and some entities volunteer to manage waste including
spreading awareness, the onus to manage waste is with every individual
and/or the entity generating waste. Very recent mandate from various ULB’s
2788
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based on the guidance from both state and central government on

segregating the waste at source into dry and wet waste is an indication that
the onus to manage waste is from the place waste is generated and by the
generator of waste.
Statistical Analysis of Waste

2.10 Due to population growth, industrialization, urbanization and
economic growth, a trend of significant increase in municipal solid waste
(MSW) generation has been recorded worldwide. MSW generation, in terms
of kg/capita/day, has shown a positive correlation with economic
development at world scale. Due to rapid industrial growth and migration of
people from villages to cities, the urban population is increasing rapidly.
Waste generation has been observed to increase annually in proportion to
the rise in population and urbanization. The per capita generation of MSW
has also increased tremendously with improved life style and social status of
the population in urban centres. As more land is needed for the ultimate
disposal of these solid wastes, issues related to disposal have become
highly challenging.
2.11 India, with a population of over 1.21 billion account for 17.5% of the
world population (Census of India 2011).According to the provisional figures
of Census of India 2011, 377 million people live in the urban areas of the
country. This is 31.16 % of the country’s total population. The very high rate
of urbanisation coupled with improper planning and poor financial condition
has made MSW management in Indian cities a herculean task.
The quantity of MSW generated depends on a number of factors such as,
food habits, standard of living, degree of commercial activities and seasons.
Data on quantity variation and generation are useful in planning for
collection and disposal systems. The rate of increase of MSW generated per
capita is estimated at 1 to 1.33% annually. MSW generation rates in small
towns are lower than those of metro cities, and the per capita generation
rate of MSW in India ranges from 0.2 to 0.5 kg/ day. The Central Pollution
Control Board (CPCB) had conducted a survey of solid waste management
in 299 cities and has given the data of waste generation for different cities.

Published in “Municipal Solid Waste Management in Indian cities – A Review” accepted on 12
Feb. 2007.
2789
Sl. State Name No. of Municipal MSW Per

No Cities Population (ton/day) Capita
generated
(Kg/day)
1 Andhra Pradesh 32 10845907 3943 0.364
2 Assam 4 878310 196 0.223
3 Bihar 17 5278361 1479 0.280
4 Gujarat 21 8443962 3805 0.451
5 Haryana 12 2254353 623 0.276
6 Himachal 1 82054 35 0.427
7 Karnataka 21 8283498 3118 0.376
8 Kerala 146 3107358 1220 0.393
9 Madhya Pradesh 23 7225833 2286 0.316
10 Maharashtra 27 22727186 8589 0.378
11 Manipur 1 198535 40 0.201
12 Meghalaya 1 223366 35 0.157
13 Mizoram 1 155240 46 0.296
14 Orissa 7 1766021 646 0.366
15 Punjab 10 3209903 1001 0.312
16 Rajasthan 14 4979301 1768 0.355
17 Tamil Nadu 25 10745773 5021 0.467
18 Tripura 1 157358 33 0.210
19 Uttar Pradesh 41 14480479 5515 0.381
20 West Bengal 23 13943445 4475 0.321
21 Chandigarh 1 504094 200 0.397
22 Delhi 1 8419084 4000 0.475
23 Pondicherry 1 203065 60 0.295
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Per Capital Quantity of MSW in Indian Cities

Sl. No Population Waste generation
Rate Kg/Capita/day
1 Cities with a population < 0.1 Million (8 0.17 - 0.54
Cities)
2 Cities with population of 0.1 - 0.5 Million 0.22 - 0.59
(11 Cities)
3 Cities with Population of 1-2 Million (16 0.19 - 0.53
Cities)
4 Cities with population of > 2 Million (13 0.22 - 0.62
Cities)
2.12 It suggests that the average MSW generation from 0.21 to 0.50 Kg
per capita per day in India. The urban population of India is approx. 341
million in 2010. MSW quantities are expected to increase from 34 million
tonnes in 2000 to 83.8 million tonnes in 2015 and 221 million tonnes in
2030. It is also reported that per capita per day production will increase to
1.032 Kg and urban population as 586 million in 2030. Studies have
indicated that for every Indian ` 1000 increase in income the solid waste
generation increases by one kilogram per month
2.13 On the basis of per capita income the states can be divided into
three categories namely - low income, medium income and high income. In
low income group of cities municipal bodies dispose MSW in low lying areas
in the outskirts of the city and fill these areas one after the other
haphazardly due to limited knowledge and awareness regarding
contamination, waste reduction techniques and other aspects of MSW
management. Although MSW generation is high in states of high income,
they are well equipped and have well surveyed mass and material flow data
which are sometimes unavailable for low income states. The quantity of
average MSW generated and the average generation rate of MSW for low,
medium and high Income states suggest that solid waste generation
depends on the economy of the people and per capita generation increases
with the level of income of the family or the individual.
2.14 The quantity of MSW (T/d) and per capita generation rate is high in
high (per capita) income states (Delhi) in comparison to medium (Andhra
Pradesh, Gujarat, Haryana, Himachal Pradesh) and low income states (Uttar
2791
Pradesh, Bihar, Madhya Pradesh, Manipur) in India. This may be due to the
high living standards, rapid economic growth and high level of urbanisation
in comparatively high (per capita) income states.
Collection of MSW is the responsibility of corporations/ municipalities. In
many mega cities the collection is done with the help of NGOs. Some urban
areas are using the welfare association for collection of MSW. The average
collection efficiency of MSW in Indian cities and states is about 72% which
shows the collection efficiency is high in the states where private contractors
and NGOs are employed for collection and transportation of MSW. In low
income states, MSW collection and disposal services are poor as either the
citizens are either unwilling or unable to pay for the service. Citizens throw
away the waste in and around the place of residence or business at different
points in time which makes the collection of MSW difficult. The Central
Pollution Control Board has found that the manual collection accounts for
50% whereas collection using trucks comprises of 49% in a survey of 299
class-1 cities in India.
Waste Management Industry in India – Overview

2.15 Waste collection in India goes back to the 17thcentury, where bones,
rags and paper were among the first commodities to be collected. Solid
waste management was traditionally the responsibility of municipal bodies.
Across the country, the workforce carrying out solid waste collection and
transport activities consisted primarily of socially excluded communities on
the margins of society.
Current Structure of the Informal Waste Sector

2.16 Nowadays, large numbers of people are associated with waste
management in India. Researchers estimate that about 1% of the urban
population in India is active in the informal recycling sector. The informal
waste sector is socially stratified in a pyramid with scrap collectors (waste
pickers and itinerant waste buyers) at the bottom and re-processors at the
top. The majority of retailers are former waste pickers who have managed to
assemble some capital and to take up another activity.Scrap collection is the
first stage in the recycling sector and is undertaken by two categories of
workers: waste pickers and itinerant buyers.
Waste pickers retrieve paper, plastic, metal and glass scrap from garbage
bins or receptacles provided by municipalities for the disposal of garbage on
the street, and from landfill sites where collected garbage is transported and
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dumped. They rudimentarily sort and then sell the collected scrap
commodities to retail scrap establishments by weight or unit. Itinerant buyers
purchase small quantities of scrap from households, offices, shops and
other small commercial establishments.
2.17 The retail traders form the top stratum of the scrap trade and are
most often located in slums with significant populations of scrap collectors.
They have a direct relationship with the scrap collectors from whom they
purchase scrap. Processing and reprocessing industries that source scrap
usually exist in both the informal and the formal economy. Plastics and
electronic waste are typically processed in the informal sector while paper,
cardboard, metals and glass are handled by the formal sector.There are
currently 24 officially recognised waste picker organisations in India, with
various levels of contractual and non-contractual relations to the formal
authorities. They are formed as co-operatives or associations and are
integrated in local source segregation schemes at different levels. Their
tasks vary from door-to-door garbage collection to the management of
recycling centres and scrap trading.
Organisational Developments in the Informal Waste
Sector
2.18 Since 1972, efforts have been made by local NGO‘s to organise the
waste pickers, but the results do not yet extend across India. Due to the
predominant role of women in waste picking, women’s organisations were
the first to cast light on waste pickers and their interests. These early
approaches encouraged waste pickers to transfer to work less demeaning to
their dignity and less hazardous to their health. The key activities were
formation of cooperatives for contract cleaning and housekeeping, collection
of waste paper from government offices and institutions and trade in waste
paper.
In 1990 the Project for the Empowerment of Waste pickers of the Women’s
University in Pune in Western India started organising waste pickers around
their work issues. Amongst other initiatives, the project issued identity cards
to waste pickers and promoted source segregation of waste and its door–to-
door collection by waste pickers.
In subsequent years waste picker organisations were formed in Delhi,
Bangalore and other cities, based on the understanding that waste pickers
have a customary right to recyclable scrap and asserting that waste pickers’
livelihoods could best be protected and enhanced by promoting source
2793
segregation of waste and its door-to-door collection. All of the organisations

underscored the value and the work of informal sector waste recyclers.
2.19 The projects had the following principle aiming to:
 integrate waste pickers into community based, decentralised solid
waste management;
 promote the contribution of waste pickers;
 reductions in municipal waste handling costs, resource recovery;
environment conservation, recycling and economic productivity;
 improve work conditions and livelihoods rather than transferring
waste pickers into other occupations.
Subsequent developments in the following years led to the formation of
different waste management initiatives and included engaging in dialogue
with waste generators to enable them to understand the relevance of
involving waste pickers in emerging waste management initiatives.
2.20 As a result of their increasing involvement, a National Alliance of
Waste Pickers was founded in 2005. The various organisational support
efforts collectively led to high levels of integration of informal waste pickers
into the solid waste management system in various cities. In Pune, for
example, waste pickers have been authorised by the municipal government
to provide household waste collection, providing them with direct access to
recyclables.
In many places, informal sector workers in solid waste management are not
part of a regularised business environment, but work autonomously,
pursuing several parallel economic activities and are, thus, not regularly
active in solid waste collection and recycling. In initiatives to fully integrate
informal waste collectors into waste collection enterprises, the drop-out rate
was high and waste pickers either lost their income opportunities or returned
to individual waste picking activities in poor working conditions. Because of
the unsteady nature of informal worker activity in waste management, these
workers are sometimes perceived as unreliable service providers for waste
collection services.
Informal sector workers can position themselves as regular service providers
by organising themselves in co-operatives and other structures able to
provide a regular collection service, independent of the workforce of
individual informal sector workers. The use of near relatives as
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replacements for waste pickers who are irregular in their waste collection
has been successful in India.
This organisational ability and entrepreneurial capacity is important also in
recycling activities, in order to establish regular business relations with the
administration and clients in the manufacturing and export sectors.
Co-operatives of waste pickers are most durable when they take into
account the specific working habits and conditions of waste pickers but
nevertheless create a minimally structured environment for reliable business
partnership.
Waste Management by Corporates/ NGOs – Case

Study
2.21 NGO‘s often create crucial links between the formal and the informal
private sector. NGO‘s can provide technical expertise, financial and legal
support and advisory services. Due to their humanitarian approach, they
work without self-interest for the development of waste pickers and can
therefore be trustworthy and accepted partners. They can reduce distrust
between the formal and the informal sector and between socially excluded
waste pickers and the general public and can thereby serve as arbitrators
and process facilitators.
2.22 The SWaCH (Solid Waste Collection and Handling) cooperative of
waste pickers and other urban poor was established in 2007 to provide
doorstep garbage collection services across the city of Pune. It was
designed as a professionally managed service delivery organisation within
the broad framework of developing models that are inclusive of the poor.
SWaCH operates in the area of waste management that includes collection,
resource recovery, scrap trading and waste processing. It is, therefore, an
autonomous entity but its operations are being financially supported by Pune
Municipality (PMC) for a period of five years, during which it is tasked with
exploring revenue sources and becoming an independent income-generating
entity. The PMC is committed to supporting the management, equipment,
infrastructure costs and certain welfare costs during the start-up phase. User
fees are to be recovered from service users.
The user fees and income from the sale of recyclables will constitute the
earnings of waste pickers. Structurally, the governance arm of SWaCH
comprises 14 waste pickers/collectors, 2 PMC representatives and 1
representative of the KKPKP cooperative. The management arm of SWaCH
is headed by a Chief Executive Officer, supported by a team of staff for
2795
operations, administration and finance, marketing, customer care and

relations, management, information systems and data management.
Provision has also been made for technical consultants in areas including
citizens’ education, management information systems, composting and
biomethanation.
2.23 In India, for example, the legal framework is generally enabling in
making provisions for incorporating the informal sector in solid waste
management. The Indian experience also shows that the legal
implementation of informal sector integration is a learning process.
The Municipal Solid Waste (Collection and Handling) Rules were issued in
2000 under a federal act. The rules not only acknowledged the importance
of waste segregation and recycling, but also made it obligatory. Yet despite
the vital role of the informal sector in the segregation and recycling of solid
waste, it was not mentioned in the legislation. Various problems occurred as
a result. Waste pickers had to compete with incinerators for waste of high
calorific value. Municipalities outsourced door-to-door collection to large
corporate players, thereby displacing the waste pickers. Ultimately, the
Rules failed to link solid waste management policy to existing good practices
such as segregation and recycling by informal sector actors.
A few years later, in 2006, a national law mentioned the informal sector for
the first time. The National Environment Policy contained clauses
strengthening the capacity of local bodies for segregation recycling and
giving legal recognition to informal sector systems.
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Chapter 3
Segments in Waste Management
Industry
3.1 Waste management industry can be segregated as follows:
 Municipal Solid Waste
 Industrial Waste
 Bio-medical Waste
 Electronic Waste
 Radioactive Waste.
Municipal Solid Waste

3.2 Municipal solid waste (MSW), also called Urban Solid Waste, is a
waste type that includes predominantly household waste (domestic waste)
with sometimes the addition of commercial wastes, construction and
demolition debris, sanitation residue, and waste from streets collected by a
municipality within a given area. They are in either solid or semi-solid form
and generally exclude industrial hazardous wastes. MSW can be broadly
categorized into five broad categories as follows:
(i) Biodegradable waste– food and kitchen waste, green waste
(vegetables, flowers, leaves, fruits), paper (can also be recycled).
(ii) Recyclable material– paper, glass, bottles, cans, metals, certain
plastics, etc.
(iii) Inert waste– construction and demolition waste, dirt, rocks, debris.
(iv) Composite wastes– waste clothing, tetra packs, waste plastics such
as toys.
(v) Domestic hazardous waste (also called "household hazardous
waste") & toxic waste– Medication, e-waste, paints, chemicals, light bulbs,
fluorescent tubes, spray cans, fertilizer and pesticide containers, batteries,
shoe polish.
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Sources and Type of MSW

3.3 The following are some major sources of MSW:
Sources Typical waste Components of solid waste:
generators
Residential Single and Food wastes, paper, cardboard,
multifamily dwellings plastics, textiles, glass, metals,
ashes, special wastes (bulky items,
consumer electronics, batteries, oil,
tires) and household hazardous
wastes.
Commercial Stores, hotels, Paper, cardboard, plastics, wood,
restaurants, food wastes, glass,
markets, office metals, special wastes, hazardous
buildings wastes
Institutional Schools, government Paper, cardboard, plastics, wood,

center, food wastes, glass,
hospitals, prisons metals, special wastes, hazardous
wastes
Municipal Street cleaning, Street sweepings, landscape and

services landscaping, tree trimmings,
parks, beaches, general wastes from parks,
recreational beaches, and other
areas recreational areas
Comparison between the per capita MSW generation rates in Low, Middle
and High Income Countries is as follows–
Country Per capita urban MSW
Generation(kg/day)
1999 2025
Low Income Countries 0.45 - 0.9 0.6 - 1.0
Middle Income Countries 0.52 - 1.1 0.8 - 1.5
High Income Countries 1.1 - 5.07 1.1 - 4.5
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3.4 Municipal Solid Waste (MSW) collection–is the component of waste

management which comprises lifting and removal /passage of a waste
material from the source of production to either the point of treatment or final
disposal. Collection of generated solid waste is the crucial part in MSW
management. Efficiency in collecting solid waste and segregating it decides
how well solid waste is managed. Collection includes not only the gathering
of solid waste, but also the transport of these materials, after collection, to
the location where the collection vehicle is emptied. This location may be a
material processing facility, a transfer station or a landfill disposal site.
3.5 Collection of MSW broadly involves following functional elements:
Stage I– Collection from Non point Source
This stage includes door-to-door collection of waste. Most collection is done
by garbage collectors who are employees or firms under contract to the
government. Garbage collectors employed by local governing bodies
manually collect the waste generated at the household level and dump it in
the community bins at specified street corners. Municipality is not
responsible for door to door collection of waste from houses, offices, small
shops and small markets. Here people are required to deposit their wastes
in communal containers/ community bins (stationary or haul types), from
which it is collected by municipal crew. The vehicle used in this stage for
collection, is small and simple & varies from place to place. It may be two-
wheeled cart pulled by an individual or bell ringing vehicles (ghanta gadi).
Stage II– Collection from Point Source
Waste collected from non–point source is deposited to definite point sources
namely communal bins. Communal bins are placed near markets, in
apartment complexes, and in other appropriate locations. Shopping complex,
hotels, public places like, gardens, religious places are other definite point
sources. Vehicles collect’s large amount of waste from these point sources
and then transport it to transfer stations and disposal sites. Manually or
mechanically loaded compactors are often used in this stage. Placing
communal bins at appropriate locations for deposit and storage of waste is
important to manage waste properly.
For better MSW management garbage should be lifted frequently from these
point sources. Frequency in lifting garbage from these points really matters
otherwise garbage pile up and create other problems. It is challenging task
particularly in metros. In Mumbai 983 Municipal and Private Vehicles are
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used for collection of waste making 1396 number of trips each day
(2009,BMC website).
Stage III: Transportation to Disposal Sites
Transfer refers to the movement of waste or materials from collection points
to disposal sites. Transportation of waste from collection point to disposal
sites is carried out by using different types of vehicles depending on the
distances to be covered by them. Larger vehicles carry the waste from the
collection points to the disposal sites. Comparatively small vehicles
discharge waste at transfer stations where the wastes are loaded into larger
vehicles for transportation to the disposal sites. In metro cities transfer
stations are located at different places to support intermediate transfer of
waste from the surrounding areas upto the dumping grounds.
Transfer stations are centralized facilities where waste is unloaded from
smaller collection vehicles and re-loaded into larger vehicles (including in
some instances barges or railroads) for transport to a disposal or processing
site. The transportation of garbage from the transfer stations is done
generally, using Trailers and Bulk Refuse Carriers. In large cities, open
flatbed trucks, covered trucks, and some compactors are in use, whereas in
smaller cities tractor-trailers, tricycles and animal carts are common. Study
shows that in metros like, Mumbai, around 60 per cent of waste is
transported through stationary compactors, mobile compactors and closed
tempos; 10 per cent is through partially open dumpers whereas 20 per cent
is through tarpaulin covered vehicles, which includes silt and debris.
Segregation and Disposal of Waste
3.6 The waste dumped in community bins is a mixed type of waste, i.e.,
all types of waste biodegradable, recyclable, inert and non-biodegradable
waste is found in one bin, which become very hard to manage. Following
table shows Varity of waste material generally found in a dustbin.
3.7 For disposal of solid waste commonly used methods are open
dumps, landfills, sanitary landfills, and incineration plants. One of the
important methods of waste treatment is composting. Selection of proper
disposal method is necessary and primarily it depends on the ‘quantity of
MSW generated and type of waste to be disposed’. There is, however, no
single technique which is suitable in all situations.
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Collection and Transportation of Municipal Solid Waste
Door-to-door Collection
Community Bins
Collection from Community bins (Carried out once in 24 hrs) requires

manual and multiple handling of waste to dump into transportation
vehicles.
Disposal Sites
Transfer Stations
(TS)
Disposal Sites
Classification of Waste
Biodegradable Wastes Non-Biodegradable Wastes
Organic Waste Recyclable Waste Others (Inorganic
/Hazardous Waste)
• Used Tea Leaves/ • Rubber • Some medicines
powder
• Egg Shells • Shampoo bottles • Paints
• Kitchen waste • Glass • Fluorescent tubes
• Fruit peels • Wires • Spray cans
2801
• Meat • Metal/ Metal objects • Fertilizers and

pesticide
containers
• Bones • Plastic • Batteries
• Flowers • Rags • Shoe polish
• House dust after • Leather
cleaning
• Garden Waste
Industrial Waste
3.8 Industrial waste is the waste produced by industrial activity, such as
that of factories, mills and mines. It has existed since the outset of the
industrial revolution.
In a broad sense, industrial wastes could be classified into following two
types:
(i) Hazardous Industrial Waste
Hazardous wastes, which may be in solid, liquid or gaseous form, may
cause danger to health or environment, either alone or when in contact with
other wastes. Various agencies have defined hazardous wastes in different
ways and as such, there is no uniformly accepted international definition so
far. It is presumed that about 10 to 15 percent of wastes produced by
industries are hazardous and the generation of hazardous wastes is
increasing at the rate of 2 to 5 percent per year.
Hazardous industrial wastes in India can be categorized broadly into two
categories:
(i) Hazardous wastes generated from various industries in India; and
(ii) Hazardous industrial wastes imported into India from Western
Countries for re-processing and recycling.
Inventorisation of hazardous wastes generating units and quantification of
wastes generated in India are being done by the respective State Pollution
Control Boards (SPCBs).
Hazardous waste in particular includes products that are explosive,
flammable, irritant, harmful, toxic, carcinogenic, corrosive, infectious, or toxic
to reproduction.
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Sources of Various Hazardous Waste

Hazardous Waste Source
Component
Heavy Metals
Arsenic Mining, non anthropogenic geo-chemical formation
Cadmium Mining, fertilizer industry, battery waste
Chromium Mining areas, Tanneries
Lead Lead acid battery smelters
Manganese Mining areas
Mercury Chlor-alkali industries, healthcare institutes
Nickel Mining, metal refining
Hydrocarbons
Benzene Petrochemical industries, solvents
Vinyl chloride Plastics
Pesticides Insecticides
Organic chemicals
Dioxins Waste incineration, herbicides
PCBs Fluorescent lights, e-waste, Hydraulic fluid
(ii) Non-Hazardous Industrial Waste

Non-hazardous or ordinary industrial waste is generated by industrial or
commercial activities, but is similar to household waste by its nature and
composition. It is not toxic, presents no hazard and, thus, requires no
special treatment.
In particular, it includes ordinary waste produced by companies,
shopkeepers and trades people (paper, cardboard, wood, textiles,
packaging, etc.). Due to its non-hazardous nature, this waste is often sorted
and treated in the same facilities as household waste.
2803
Treatment Options for Non-hazardous Industrial Waste

3.9 Non-hazardous industrial wastes being diversified in their chemical
nature, physical texture and moisture content and calorific values, etc.,
demand distinct treatment options which are broadly classified as follows:
Industries Prominent Wastes Treatment Application

Generated Option
Sugar Mills Sugar bagasse Combustion Heat and Power
and
Gasification
Pressmud Composting Fertilizer
Sugar molasses Fermentation Ethanol
synthesis
Fermentative Yeast Biomethanation Biogas
biomass production and
digestate
Slaughter Organs, Tissues, Blood, Biomethanation Biogas
houses Hides, Animal excreta production and
and Carcass, etc digestate
Paper mills Pulp Biomethanation Biogas

production and
digestate
Paper shavings Combustion Heat and power
Wood wastes and Paper Combustion Heat and power
boards and gasification
Dairy Plants Whey and Milk cream Biomethanation Biogas
production and
digestate
Sago factories Starch materials and Biomethanation Biogas
peels production and
digestate
Tanneries Hides and skins Acid treatments Biogas
and production and
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Industries Prominent Wastes Treatment Application

Generated Option
biomethanation digestate
Animal Animal excreta and body Biomethanation Biogas
Husbandries fluids production and
digestate
Fruits and Pulp wastes Biomethanation Biogas
vegetable production and
processing units digestate
Treatment options of Industrial waste has been mentioned elsewhere in the

report under the head Disposal methods.
Bio-Medical Waste
3.10 The bio-medical waste is the waste that is generated during the
diagnosis, treatment of immunization of human beings or animals or in
research activities pertaining thereto, or in the production or testing of
biological components. The different location or points of generation of
waste in a health care establishment are:
(i) Operation theatres / wards / labour rooms
(ii) Dressing rooms
(iii) Injection rooms
(iv) Intensive Care Units
(v) Dialysis room
(vi) Laboratory
(vii) Corridor
(viii) Compound of hospital or nursing home
Bio-Medical Waste Rules
3.11 The Government of India as contemplated under Section 6,8 and 25
of the Environment (Protection) Act, 1986, has made the Bio-medical
Wastes (Management & Handling) Rules, 1998.
The rules are applicable to every institution generating bio-medical waste
which includes hospitals, nursing homes, clinic, dispensary, veterinary
institutions, animal houses, pathological lab, blood bank, etc.
2805
Responsibilities of Hospitals
3.12 It is mandatory for such institutions to:
 Set up requisite bio-medical waste treatment facilities like,
incinerators, autoclave and microwave systems for treatment of the
wastes, or ensure requisite treatment of the waste at a common
waste treatment facility.
 Make an application to the concerned authorities for grant of
authorization. A fee as prescribed shall accompany each application
for grant of authorization
 Submit a report to the prescribed authority by 31 January every year.
The report should include information about the categories and
quantities of bio-medical wastes handled during the preceding year.
 Maintain records about the generation, collection, reception, storage,
transportation, treatment, disposal and / or any form of handling of
bio-medical waste.
 Report of any accident to the prescribed authority.
Categories of Waste
The bio-medical wastes are categorized into ten according to its
characteristics taking into account treatment and disposal. The different
categories of waste as per the rule are given in Table 1.
TABLE 1
Categories of Bio-medical Waste
Waste Type of Waste Treatment And Disposal
Category Option
Category No. 1 Human Anatomical Waste Incineration/deep burial
(Human tissues, organs,
body parts)
Category No. 2 Animal Waste (Animal Incineration/ deep burial
tissues, organs, body parts,
carcasses, Bleeding parts,
fluid, blood and experimental
animals used in research,
waste generated by
veterinary hospitals and
colleges, discharge from
hospitals, animal houses)
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Category Option
Category No. 3 Microbiology & Biotechnology Local autoclaving/
Waste (Wastes from microwaving /
laboratory cultures, stocks or incineration
specimen of live micro-
organisms or attenuated
vaccines, human and animal
cell cultures used in research
and infectious agents from
research and industrial
laboratories, wastes from
production of biological,
toxins and devices used for
transfer of cultures)
Category No. 4 Waste Sharps (Needles, Disinfecting (chemical
syringes, scalpels, blades, treatment / autoclaving
glass, /microwaving and
mutilation / shredding
Category No. 5 Discarded Medicine and Incineration / destruction
Cytotoxic drugs (Wastes and
comprising of outdated, drugs disposal in secured
contaminated and discarded landfills
medicines
Category No. 6 Soiled Waste (Items Incineration/ autoclaving/
contaminated with body fluids microwaving
including cotton, dressings,
soiled plaster casts, lines,
bedding and other materials
contaminated with blood.)
Category No. 7 Solid Waste (Waste Disinfecting by chemical
generated from disposable treatment/ autoclaving /
items other than the waste microwaving and
sharps such as tubing, mutilation /
catheters, intravenous sets,
shredding
etc.)
Category No. 8 Liquid Waste (Waste Disinfecting by chemical
generated from the Treatment and discharge
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Category Option
laboratory and washing, into drains
cleaning, house keeping and
disinfecting activities)
Category No. 9 Incineration Ash (Ash from Disposal in municipal
incineration of any landfill
biomedical waste)
Category No. Chemical Waste (Chemicals Chemical treatment and
10 used in production of discharge into drains for
biological, chemicals used in liquids and secured
disinfecting, as insecticides, landfill for solids.
etc.)
Segregation of Bio-Medical Waste

3.14 Colour Coding and Type of Container are as follows :
Colour Type of Waste Treatment
Coding Container Category Options
(Schedule I)
Yellow Plastic bag Cat.1,Cat.2, Incineration/ deep
Cat.3 burial
and Cat.6
Red Disinfected Cat.3, Cat.6, Autoclaving/Micro
container/plastic and waving/ Chemical
bag Cat.7 treatment
Blue/White Plastic bag/ Cat.3, Cat.6, Autoclaving/Micro
Translucent puncture proof and waving/ Chemical
container Cat.7 treatment and
destruction/
shredding
Black Plastic bag Cat.5, Cat.9, Disposal in secured
and landfill
Cat.10 (solid)
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Personnel Safety Devices

3.15 The use of protective gears should be made mandatory for all the
personnel handling waste:
(i) Gloves– Heavy-duty rubber gloves should be used for waste
handling by the waste retrievers. This should be bright yellow in colour. After
handling the waste, the gloves should be washed twice. The gloves should
be washed after every use with carbolic soap and a disinfectant. The size
should fit the operator.
(ii) Aprons, Gowns, Suits or Other Apparels– Apparel is worn to
prevent contamination of clothing and protect skin. It could be made of cloth
or impermeable material such as plastic. People working in incinerator
chambers should have gowns or suits made of non-inflammable material.
(iii) Masks– Various types of masks, goggles, and face shields are worn
alone or in combination, to provide a protective barrier. It is mandatory for
personnel working in the incinerator chamber to wear a mask covering both
nose and mouth, preferably a gas mask with filters.
(iv) Boots– Leg coverings, boots or shoe-covers provide greater
protection to the skin when splashes or large quantities of infected waste
have to be handled. The boots should be rubber-soled and anti-skid type.
They should cover the leg up to the ankle.
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Infectious Waste
Sharp Plastics Pathological Microbiologic Liquid

Waste al Waste Waste
Needles, Contaminated Human Viral and All body fluids –

scalpels, items include tissue, bacterial blood, urine and
syringes, syringes, blood infected waste suctions.
blades and blood & urine bandages, from all
glass which bags, IV soiled sources should
can cause bottles and cotton never be mixed
needle stick tubing. This is dressings, with uninfected
Chemical
injury or be often single etc. waste.
Disinfection.
unwisely use PVC
Liquids usually
reused. which should
collected and treated
not be
with 1% bleach for 1
incinerated
hour after which it
can be discharged to
sewer.
Microwave Sodium Hypochlorite
(not suitable solution is mixed with
Sharps can be Autoclave for blood the liquid to produce
autoclaved and sterilization) bleach concentration
shredded using of
special shredding 1%
equipment. Some
of these metals At Health Centre, the
may be recycled waste goes to on site
Incinerati
when they have waste water
Shredding to on
been properly treatment
treated. prevent reuse
Deep
Burial
Recycling
Incineration
Recycling Landfill
Recycling
Landfill
Landfill
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Treatment options of bio-medical waste have been mentioned elsewhere in

the report under the head disposal methods.
Electronic Waste
3.16 The discarded and end-of-life electronics products ranging from
computers, equipment used in Information and Communication Technology
(ICT), home appliances, audio and video products and all of their peripherals
are popularly known as electronic waste (E-waste).
The ill effects of e-waste could be on soil through leaching of hazardous
contents from landfills; in water due to recycling process, if not carried out
properly, can cause damage to human being through inhalation of gases
during recycling, contact of the skin of the workers with hazardous
substances and contact during acid treatment used in recovery process.
The hazardous and toxic substances found in e-waste include lead and
cadmium in printed circuit boards (PCBs). Lead is primarily found in all
electronic products/ assembly, cathode ray tubes (CRT), etc. Cadmium is
found in monitor/ CRTs while there may be mercury in switches and flat
screen monitors. Mercury is also found in CFL, relays and some other
specific products. Besides the cadmium in computer batteries, cadmium is
also used for plating metal enclosures/ metal parts in sub-assemblies.
Polychlorinated biphenyls are found in capacitors and transformers and as
brominated flame retardant on printed circuit boards, plastic casings, cable
and polyvinyl chloride (PVC) cable sheathing for insulation and PBD/PBDE
in plastic parts of electronics.
3.17 E-waste is not hazardous if it is stocked in safe storage or recycled
by scientific methods or transported from one place to the other in parts or
in totality in the formal sector. The e-waste can, however, be considered
hazardous if recycled by primitive methods. E-waste contains several
substances such as heavy metals, plastics, glass, etc., which can be
potentially toxic and hazardous to the environment and human health, if not
handled in an environmentally sound manner. E-waste recycling in the non-
formal sector by primitive methods can damage the environment.
Greenpeace had undertaken a survey of the environmental pollution during
manufacturing of electronic products in China, Thailand, Philippines and
Mexico. The study is an assessment on pollution due to the use of some of
the hazardous chemicals in the manufacture of electronic products in these
countries. The industries included the printed circuit board and
semiconductor chip manufacturing units and various assembly units of
2811
television, computers, monitors, etc. No such study has been carried out in
India.
Effects of E-Waste on Health
Source of E- Constituent Health effects
wastes
Solder in printed Lead (PB)  Damage to central and
circuit boards, peripheral nervous systems,
glass panels blood systems and kidney
and gaskets in damage.
computer  Affects brain development of
monitors children.
Chip resistors Cadmium (CD)  Toxic irreversible effects on
and human health.
semiconductors  Accumulates in kidney and
liver.
 Causes neural damage.
 Teratogenic.
Relays and Mercury (Hg)  Chronic damage to the brain.
switches,  Respiratory and skin
printed circuit disorders due to
boards bioaccumulation in fishes.
Corrosion Hexavalent  Asthmatic bronchitis.
protection of chromium (Cr) VI  DNA damage.
untreated and
galvanized steel
plates,
decorator or
hardner for steel
housings
Cabling and Plastics including Burning produces dioxin. It
computer PVC causes
housing  Reproductive and
developmental problems;
 Immune system damage;
 Interfere with regulatory
hormones
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E- 9105
Source of E- Constituent Health effects

wastes
Plastic housing Brominated flame  Disrupts endocrine system
of electronic retardants (BFR) functions
equipments and
circuit boards.
Front panel of Barium (Ba) Short term exposure causes:
CRTs  Muscle weakness;
 Damage to heart, liver and
spleen.
Motherboard Beryllium (Be)  Carcinogenic (lung cancer)
 Inhalation of fumes and dust.
Causes chronic beryllium
disease or beryllicosis.
 Skin diseases such as warts.
Management of E-waste
3.18 It is estimated that 75% of electronic items are stored due to
uncertainty of how to manage it. These electronic junks lie unattended in
houses, offices, warehouses, etc. and normally mixed with household
wastes, which are finally disposed off at landfills. This necessitates
implementable management measures.
In industries management of e-waste should begin at the point of
generation. This can be done by waste minimization techniques and by
sustainable product design. Waste minimization in industries involves
adopting:
 Inventory management,
 Production-process modification,
 Volume reduction,
 Recovery and reuse.
2813
Responsibilities of the Government

3.19 The following paragraphs give an overview of responsibilities of
Government in waste management:
(i) Governments should set up regulatory agencies in each district,
which are vested with the responsibility of co-ordinating and
consolidating the regulatory functions of the various government
authorities regarding hazardous substances.
(ii) Governments should be responsible for providing an adequate
system of laws, controls and administrative procedures for hazardous
waste management (Third World Network. 1991). Existing laws
concerning e-waste disposal be reviewed and revamped. A
comprehensive law that provides e-waste regulation and
management and proper disposal of hazardous wastes is required.
Such a law should empower the agency to control, supervise and
regulate the relevant activities of government departments.
Under this law, the agency concerned should
 Collect basic information on the materials from
manufacturers, processors and importers and to maintain an
inventory of these materials. The information should include
toxicity and potential harmful effects.
 Identify potentially harmful substances and require the
industry to test them for adverse health and environmental
effects.
 Control risks from manufacture, processing, distribution, use
and disposal of electronic wastes.
 Encourage beneficial reuse of "e-waste" and encouraging
business activities that use waste". Set up programs so as to
promote recycling among citizens and businesses.
 Educate e-waste generators on reuse/recycling options.
(iii) Governments must encourage research into the development and
standard of hazardous waste management, environmental monitoring
and the regulation of hazardous waste-disposal.
(iv) Governments should enforce strict regulations against dumping e-
waste in the country by outsiders. Where the laws are flouted,
stringent penalties must be imposed.
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E- 9107
(v) Governments should enforce strict regulations and heavy fines levied
on industries, which do not practice waste prevention and recovery in
the production facilities.
(vi) Polluter pays principle and extended producer responsibility should
be adopted.
(vii) Governments should encourage and support NGOs and other
organizations to involve actively in solving the nation's e-waste
problems.
(viii) Uncontrolled dumping is an unsatisfactory method for disposal of
hazardous waste and should be phased out.
(ix) Governments should explore opportunities to partner with
manufacturers and retailers to provide recycling services.
Responsibility and Role of Industries

3.20 The following are major responsibilities and roles of industries is
waste management:
(i) Generators of wastes should take responsibility to determine the
output characteristics of wastes and if hazardous, should provide
management options.
(ii) All personnel involved in handling e-waste in industries including
those at the policy, management, control and operational levels,
should be properly qualified and trained. Companies can adopt their
own policies while handlinge-wastes. Some are given below:
 Use label materials to assist in recycling (particularly
plastics).
 Standardize components for easy disassembly.
 Re-evaluate 'cheap products' use, make product cycle 'cheap'
and so that it has no inherent value that would encourage a
recycling infrastructure.
 Create computer components and peripherals of
biodegradable materials.
 Utilize technology sharing particularly for manufacturing and
de manufacturing.
 Encourage /promote /require green procurement for corporate
buyers.
 Look at green packaging options.
2815
(iii) Companies can and should adopt waste minimization techniques,

which will make a significant reduction in the quantity of e-waste
generated and thereby lessening the impact on the environment. It is
a "reverse production" system that designs infrastructure to recover
and reuse every material contained within e-wastes metals such as
lead, copper, aluminium and gold, and various plastics, glass and
wire. Such a "closed loop" manufacturing and recovery system offers
a win-win situation for everyone, less of the Earth will be mined for
raw materials, and groundwater will be protected, researchers
explain.
(iv) Manufacturers, distributors, and retailers should undertake the
responsibility of recycling/ disposal of their own products.
(v) Manufacturers of computer monitors, television sets and other
electronic devices containing hazardous materials must be
responsible for educating consumers and the general public
regarding the potential threat to public health and the environment
posed by their products. At minimum, all computer monitors,
television sets and other electronic devices containing hazardous
materials must be clearly labelled to identify environmental hazards
and proper materials management.
Responsibilities of the Citizen

3.19 Waste prevention is perhaps more preferred to any other waste
management option including recycling. Donating electronics for reuse
extends the lives of valuable products and keeps them out of the waste
management system for a longer time. But care should be taken while
donating such items, i.e., the items should be in working condition.
Reuse, in addition to being an environmentally preferable alternative also
benefits society. By donating used electronics, schools, non-profit
organizations, and lower-income families can afford to use equipment that
they otherwise could not afford.
E-wastes should never be disposed with garbage and other household
wastes. This should be segregated at the site and sold or donated to various
organizations.
While buying electronic products opt for those that:
 are made with fewer toxic constituents
 use recycled content
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E- 9109
 are energy efficient

 are designed for easy upgrading or disassembly
 utilize minimal packaging
 offer leasing or take back options
 have been certified by regulatory authorities. Customers should opt
for upgrading their computers or other electronic items to the latest
versions rather than buying new equipment.
Recycling
3.20 Today, the electronic waste recycling business is in all areas of the
developed world a large and rapidly consolidating business. Part of this
evolution has involved greater diversion of electronic waste from energy-
intensive down cycling processes, where equipment is reverted to a raw
material form. This diversion is achieved through reuse and refurbishing.
The environmental and social benefits of reuse include diminished demand
for new products and virgin raw materials; larger quantities of pure water
and electricity for associated manufacturing; less packaging per unit;
availability of technology to wider swaths of society due to greater
affordability of products; and diminished use of landfills.
One of the major challenges is recycling the printed circuit boards from the
electronic wastes. The circuit boards contain such precious metals as gold,
silver, platinum, etc. and such base metals as copper, iron, aluminium, etc.
Conventional method employed is mechanical shredding and separation but
the recycling efficiency is low. Alternative methods such as cryogenic
decomposition have been studied for printed circuit board recycling, and
some other methods are still under investigation.
Benefits of Recycling
3.21 Recycling raw materials from end-of-life electronics is the most
effective solution to the growing e-waste problem. Most electronic devices
contain a variety of materials, including metals that can be recovered for
future uses. By dismantling and providing reuse possibilities, intact natural
resources are conserved and air and water pollution caused by hazardous
disposal is avoided. Additionally, recycling reduces the amount of
greenhouse gas emissions caused by the manufacturing of new products. It
simply makes good sense and is efficient to recycle and to do our part to
keep the environment green.
2817
Hazardous Substances
3.22 The following are some of the hazardous substances
Americium: The radioactive source in smoke alarms. It is known to be
carcinogenic.
Mercury: It is found in fluorescent tubes (numerous applications), tilt
switches (mechanical doorbells, thermostats and flat screen monitors. Health
effects include sensory impairment, dermatitis, memory loss, and muscle
weakness. Environmental effects in animals include death, reduced fertility,
slower growth and development.
Sulphur: It is found in lead-acid batteries. Health effects include liver
damage, kidney damage, heart damage, and eye and throat irritation. When
released into the environment, it can create sulphuric acid.
BFRs: It is used as flame retardants in plastics in most electronics. Includes
PBBs, PBDE, DecaBDE, OctaBDE, and PentaBDE. Health effects include
impaired development of the nervous system, thyroid problems, and liver
problems. Environmental effects: similar effects as in animals as humans.
PBBs were banned from 1973 to 1977 and PCBs were banned during the
1980s.
Cadmium: It is found in light-sensitive resistors, corrosion-resistant alloys
for marine and aviation environments, and nickel-cadmium batteries. The
most common form of cadmium is found in Nickel-cadmium rechargeable
batteries. These batteries tend to contain between 6 and 18% cadmium. The
sale of Nickel-Cadmium batteries has been banned in the European Union
except for medical use. When not properly recycled it can leach into the soil,
harming microorganisms and disrupting the soil ecosystem. Exposure is
caused by proximity to hazardous waste sites and factories and workers in
the metal refining industry. The inhalation of cadmium can cause severe
damage to the lungs and is also known to cause kidney damage.
Lead: It consists of solder, CRT monitor glass, lead-acid batteries, some
formulations of PVC.A typical 15-inch cathode ray tube may contain 1.5
pounds of lead, but other CRTs have been estimated as having up to 8
pounds of lead.
Beryllium oxide: It is used as filler in some thermal interface materials such
as thermal grease used on heat sinks for CPUs and power transistors,
magnetrons, X-ray-transparent ceramic windows, heat transfer fins in
vacuum tubes, and gas lasers.
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Radioactive Waste
3.23 Nuclear power is the only large-scale energy-producing technology
which takes full responsibility for all its wastes and fully costs this into the
product. The amount of radioactive wastes is very small relative to wastes
produced by fossil fuel electricity generation. Used nuclear fuel may be
treated as a resource or simply as a waste. Nuclear wastes are neither
particularly hazardous nor hard to manage relative to other toxic industrial
wastes. Safe methods for the final disposal of high-level radioactive waste
are technically proven; the international consensus is that there should be
geological disposal.
3.24 All parts of the nuclear fuel cycle produce some radioactive
waste (radwaste) and the relatively modest cost of managing and
disposing of this is part of the electricity cost, i.e. it is internalised and
paid for by the electricity consumers. At each stage of the fuel cycle
there are proven technologies to dispose of the radioactive wastes
safely. For low and intermediate level wastes these are mostly being
implemented. For high-level wastes some countries await the
accumulation of enough of it to warrant building geological repositories.
Unlike other industrial wastes, the level of hazard of all nuclear waste
- its radioactivity - diminishes with time. The main objective in
managing and disposing of radioactive (or other) waste is to protect
people and the environment. This means isolating or diluting the
waste so that the rate or concentration of any radionuclides returned
to the biosphere is harmless. To achieve this, practically all wastes
are contained and managed – some clearly need deep and permanent
burial. From nuclear power generation, none is allowed to cause
harmful pollution.
All toxic wastes need to be dealt with safely, not just radioactive
wastes. In countries with nuclear power, radioactive wastes comprise
less than 1% of total industrial toxic wastes (the balance of which
remains hazardous indefinitely).
Types of radioactive wastes
(i) Exempt waste and very low level waste
(ii) Low level waste
(iii) Intermediate-level waste
(iv) High-level waste
2819
Exempt Waste and Very Low Level Waste

3.25 Exempt waste and very low level waste (VLLW) contains radioactive
materials at a level which is not considered harmful to people or the
surrounding environment. It consists mainly of demolished material (such as
concrete, plaster, bricks, metal, valves, piping, etc) produced during
rehabilitation or dismantling operations on nuclear industrial sites. Other
industries, such as food processing, chemical, steel, etc also produce VLLW
as a result of the concentration of natural radioactivity present in certain
minerals used in their manufacturing processes.
Low-Level Waste
3.26 Low-level waste (LLW) is generated from hospitals and industry, as
well as the nuclear fuel cycle. It comprises paper, rags, tools, clothing, filters
etc, which contain small amounts of mostly short-lived radioactivity. It does
not require shielding during handling and transport and is suitable for
shallow land burial. To reduce its volume, it is often compacted or
incinerated before disposal. It comprises some 90% of the volume but only
1% of the radioactivity of all radioactive waste.
Intermediate-Level Waste
3.27 Intermediate-level waste (ILW) contains higher amounts of
radioactivity and some requires shielding. It typically comprises resins,
chemical sludges and metal fuel cladding, as well as contaminated materials
from reactor decommissioning. Smaller items and any non-solids may be
solidified in concrete or bitumen for disposal. It makes up some 7% of the
volume and has 4% of the radioactivity of all radwaste.
High-Level Waste
3.28 High-level waste (HLW) arises from the 'burning' of uranium fuel in a
nuclear reactor. HLW contains the fission products and transuranic elements
generated in the reactor core. It is highly radioactive and hot, so requires
cooling and shielding. It can be considered as the 'ash' from 'burning'
uranium. HLW accounts for over 95% of the total radioactivity produced in
the process of electricity generation. There are two distinct kinds of HLW:
 Used fuel itself.
 Separated waste from reprocessing the used fuel
HLW has both long-lived and short-lived components, depending on the
length of time it will take for the radioactivity of particular radionuclides to
2820
E- 9113
decrease to levels that are considered no longer hazardous for people and
the surrounding environment. If generally short-lived fission products can be
separated from long-lived actinides, this distinction becomes important in
management and disposal of HLW.
3.29 In terms of radioactivity, high-level waste (HLW) is the major issue
arising from the use of nuclear reactors to generate electricity. Highly
radioactive fission products and also transuranic elements are produced
from uranium and plutonium during reactor operations and are contained
within the used fuel. Where countries have adopted a closed cycle and
utilised reprocessing to recycle material from used fuel, the fission products
and minor actinides are separated from uranium and plutonium and treated
as HLW (uranium and plutonium is then re-used as fuel in reactors). In
countries where used fuel is not reprocessed, the used fuel itself is
considered a waste and therefore classified as HLW.
Low and intermediate-level waste is produced as a result of operations, such
as the cleaning of reactor cooling systems and fuel storage ponds, the
decontamination of equipment, filters and metal components that have
become radioactive as a result of their use in or near the reactor.
3.30 Waste management for used fuel and HLW from nuclear power
reactors:
Country Policy Facilities and progress towards
final repositories
Belgium Reprocessing Central waste storage at Dessel
Underground laboratory established
1984 at Mol Construction of
repository to begin about 2035
Canada Direct disposal Nuclear Waste Management
Organisation set up 2002
Deep geological repository
confirmed as policy, retrievable
Repository site search from 2009,
planned for use 2025
China Reprocessing Central used fuel storage at
LanZhou
Repository site selection to be
completed by 2020
Underground research laboratory
2821

final repositories
from 2020, disposal from 2050
Finland Direct Disposal Program start 1983, two used fuel
storages in operation
Posiva Oy set up 1995 to implement
deep geological disposal
Underground research laboratory
Onkalo under construction
Repository planned from this, near
Olkiluoto, open in 2020
France Reprocessing Underground rock laboratories in
clay and granite
Parliamentary confirmation in 2006
of deep geological disposal,
containers to be retrievable and
policy "reversible"
Bure clay deposit is likely repository
site to be licensed 2015, operating
2025
Germany Reprocessing Repository planning started 1973
but moving to Used fuel storage at Ahaus and
Direct Disposal Gorleben salt dome
Geological repository may be
operational at Gorleben after 2025
India Reprocessing Research on deep geological
disposal for HLW
Japan Reprocessing Underground laboratory at Mizunami
in granite since 1996
Used fuel and HLW storage facility
at Rokkasho since 1995
Used fuel storage under construction
at Mutsu, start up 2013
NUMO set up 2000, site selection for
deep geological repository under
way to 2025, operation from 2035,
retrievable
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E- 9115

final repositories
Russia Reprocessing Underground laboratory in granite or
gneiss in Krasnoyarsk region from
2015, may evolve into repository
Sites for final repository under
investigation on Kola peninsula
Pool storage for used VVER-1000
fuel at Zheleznogorsk since 1985
Dry storage for used RBMK and
other fuel at Zheleznogorsk from
2012
Various interim storage facilities in
operation
South Direct Disposal, Waste program confirmed 1998,
Korea may change KRWM seet up 2009
Central interim storage planned from
2016
Spain Direct Disposal ENRESA established 1984, its plan
accepted 1999
Central interim storage at Villar de
Canas from 2016 (volunteered
location)
Research on deep geological
disposal, decision after 2010
Sweden Direct Disposal Central used fuel storage facility –
CLAB – in operation since 1985
Underground research laboratory at
Aspo for HLW repository
Osthammar site selected for
repository (volunteered location)
Switzerland Reprocessing Central interim storage for HLW and
used fuel at ZZL Wurenlingen since
2001
Smaller used fuel storage at Beznau
Underground research laboratory for
high-level waste repository at
Grimsel since 1983
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final repositories
Deep repository by 2020, containers
to be retrievable
United Reprocessing Low-level waste repository in
Kingdom operation since 1959
HLW from reprocessing is vitrified
and stored at Sellafield
Repository location to be on basis of
community agreement
New NDA subsidiary to progress
geological disposal.
United Direct Disposal DoE responsible for used fuel from
States but 1998, accumulated $32 billion waste
reconsidering fund
Considerable research and
development on repository in welded
tuffs at Yucca Mountain, Nevada
The 2002 Congress decision that
geological repository be at Yucca
Mountain was countered politically in
2009.
3.31 Waste Generating Top Ten States Waste Generating Top Ten Cities
are as follows:
State WEE (Tones)
Maharashtra 20270.59
Tamil Nadu 13486.24
Andhra Pradesh 12780.33
Uttar Pradesh 10381.11
West bengal 10059.36
Delhi 9729.15
Karnataka 9118.74
Gujarat 8994.33
Madhya pradesh 7800.62
Punjab 6958.46
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State WEE (Tones)

Ahmedabad 3287.5
Bangalore 4648.4
Chennai 4132.2
Delhi 9730.3
Hyderabad 2833.5
Kolkata 4025.3
Mumbai 11017.1
Nagpur 1768.9
Pune 2584.2
Surat 1836.5
Soil Pollution
3.32 Soil pollution is defined as the build-up in soils of persistent toxic
compounds, chemicals, salts, radioactive materials, or disease causing
agents, which have adverse effects on plant growth and animal health.
Soil is the thin layer of organic and inorganic materials that covers the
earth's rocky surface. The organic portion, which is derived from the decayed
remains of plants and animals, is concentrated in the dark uppermost
topsoil. The inorganic portion made up of rock fragments, was formed over
thousands of years by physical and chemical weathering of bedrock.
Productive soils are necessary for agriculture to supply the world with
sufficient food.
3.33 Many different ways soil can be polluted are as below:
 Seepage from a landfill
 Discharge of industrial waste into the soil
 Percolation of contaminated water into the soil
 Rupture of underground storage tanks
 Excess application of pesticides, herbicides or fertilizer
 Solid waste seepage
The most common chemicals involved in causing soil pollution are as
follows:
 Petroleum hydrocarbons
2825
 Heavy metals
 Pesticides
 Solvents
3.34 Soil pollution is caused by the presence of man-made chemicals or
other alteration in the natural soil environment. This type of contamination
typically arises from the rupture of underground storage links, application of
pesticides, percolation of contaminated surface water to sub-surface strata,
oil and fuel dumping, leaching of wastes from landfills or direct discharge of
industrial wastes to the soil. The most common chemicals involved are
petroleum hydrocarbons, solvents, pesticides, lead and other heavy metals.
This occurrence of this phenomenon is correlated with the degree of
industrialization and intensities of chemical usage.
3.35 A soil pollutant is any factor which deteriorates the quality, texture
and mineral content of the soil or which disturbs the biological balance of the
organisms in the soil. Pollution in soil has adverse effect on plant growth.
Pollution in soil is associated with
 Indiscriminate use of fertilizers
 Indiscriminate use of pesticides, insecticides and herbicides
 Dumping of large quantities of solid waste
 Deforestation and soil erosion.
3.36 The following are some effects of soil pollution :
Agricultural Industrial Urban
Reduced Soil fertility Dangerous chemicals Clogging of drains
Reduced nitrogen entering underground Inundation of areas
fixation water Public health problems
Increased erodibility Ecological Imbalance Pollution of drinking
Larger loss of soil and Release of pollutant water resources
nutrients gases Foul smell and release
Deposition of silt in Release of radioactive of gases
tanks and reservoirs rays causing health Waste management
Reduced crop yield problems problems.
Imbalance in soil fauna Increased salinity
and flora Reduced vegetation
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Waste Management in Villages

3.37 If there are some 25000 villagers, then the total waste generation
may go up-to 7500 Kilograms of solid waste per day reveals a survey. Out of
which 34.87% is organic; 61.57% is organic mixed with soil and remaining
primarily consists of plastics on the roadside, vacant land and outskirts of
the village. These non biodegradable waste causes number of problems for
the environment and include
 Hazardous emissions when waste is burnt
 Incorporation of waste into the soil in large volumes causes
suffocation of soil biota
 Waste is often contaminated with biologically hazardous wastes such
as, medical wastes and additional contamination occurs through
materials such as, heavy metals from dry cell batteries.
3.38 The volume and variety of non- bio-degradable wastes will increase
dramatically as average income rise and consumer items, particularly
processed foods become more widespread. This will predominantly occur in
lightweight packaging materials, which are not collected for recycling.
The legal responsibility for collecting, storing and disposing of these wastes
lies with the local municipal authority. This responsibility falls to the local
Panchayats. Unfortunately providing SWM services to village residents has
not caught their attention to date. However, this may change in the short to
medium term. In the meantime residual waste continues to be
indiscriminately dumped throughout villages and surrounding farmlands.
There are certain NGOs like Exnora, Auroville which have taken initiatives in
managing the waste in villages with the co-operation from Panchayat
leaders.
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Chapter 4
Disposal Methods
4.1 Improper and unscientific techniques adopted for MSW disposal are
economically non–viable and socially unacceptable, due to this selection of
proper disposal method is necessary. Quantity and characteristics of the
MSW are two major factors, which are to be considered as the basis for the
design of efficient, cost effective and environmentally compatible disposal
method. One can choose the appropriate disposal method which is generally
categorized on the basis of large scale and small scale disposals below:
For Large Scale Disposal

Open Dumps
4.2 The cheapest and the oldest easy method of MSW disposal is 'open
dumping' where the waste is dumped in low–lying areas on the city outskirts
and leveled by bull–dozers from time to time. Open dumping is not a
scientific way of waste disposal. Open dumps refer an uncovered site used
for disposal of waste without environmental controls. The waste is untreated,
uncovered, and not segregated. In spite of its simplicity in execution, the
financial involvement for this traditional method of waste management has
been quite high particularly for the big metropolis. Uncontrolled, open dumps
are not a sound practice. Open dumps are exposed to flies and rodents. It
also generates foul smell and unsightly appearance. Loose waste is
dispersed by the action of wind. Drainage from dumps contributes to
pollution of surface and ground water and also the rainwater run-off from
these dumps contaminates nearby land and water thereby spreading
disease.
Landfill
4.3 Disposing of waste in a landfill involves burying the waste, and this
remains a common practice in most countries. Landfills are generally located
in urban areas where a large amount of waste is generated and has to be
dumped in a common place. The equipment required to operate is relatively
inexpensive and can be used for other municipal operations as well. Serious
threat to community health represented by open dumping or burning is
avoided in this method. Landfills are often established in abandoned or
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E- 9121
unused quarries, mining voids or borrow pits. Unlike an open dump, it is a

pit that is dug in the ground. The waste is dumped and the pit is covered at
the dumping ground with debris/ soil and spread evenly in layers. At the end
of each day, a layer of soil is scattered on top of it and some mechanism,
usually earth moving equipment is used to compress the garbage, which
now forms a cell. Thus, every day, garbage is dumped and becomes a cell.
The organic waste undergoes natural decomposition and generates a fluid,
which is known a leachate, and is very harmful to the ecosystem. After the
landfill is full, the area is covered with a thick layer of mud and the site can
thereafter be developed as a parking lot or a park.
Sanitary Landfills
4.4 An alternative to landfills or modern landfill which solves the problem
of leaching to some extent is a sanitary landfill which is more hygienic and
built in a methodical manner. Designed “landfill” means a waste disposal
site for the deposit of residual solid waste in a facility designed with
protective measures against pollution of ground water, surface water and air
fugitive dust, wind-blown litter, bad odour, fire hazard, bird menace, pests or
rodents, greenhouse gas (Methane) emissions, slope instability and erosion.
These are lined with materials that are impermeable such as, plastics and
clay, and are also built over impermeable soil. Deposited waste is normally
compacted to increase its density and stability, and covered to prevent
attracting vermin (such as mice or rats). Many landfills also have landfill gas
extraction systems installed to extract the landfill gas. Gas is pumped out of
the landfill using perforated pipes and flared off or burnt in a gas engine to
generate electricity. Fully operated landfills may even enhance property
values. Constructing sanitary landfills is very costly and they are having their
own problems.
4.5 A properly-designed and well-managed landfill can be a hygienic and
relatively inexpensive method of disposing of waste materials. Older, poorly-
designed or poorly-managed landfills can create a number of adverse
environmental impacts such as, wind-blown litter, attraction of vermin, and
generation of liquid leachate. Another common by-product of landfills is gas
(mostly composed of methane and carbon dioxide), which is produced as
organic waste breaks down aerobically. This gas can create odor problems,
kill surface vegetation, and mainly is a greenhouse gas. By and large, crude
dumping of waste is done in the most of the cities without following the
principles of sanitary landfilling. As negligible segregation of waste at source
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takes place, all waste including hospital infectious waste, generally, finds its
way to the disposal site.
4.6 Quite often industrial hazardous waste is also deposited at dump
sites meant for domestic waste. The waste deposited at the dump site is
generally, neither spread nor compacted on a regular basis. It is also not
covered with inert material. Thus, very unhygienic conditions prevail on the
dump sites. Improperly managed and designed landfills attract all types of
insects and rodents that spread disease.
4.7 Sanitary landfills are not properly practiced and waste is dumped
unattended in open sites, resulting in several hazards. In many sites
compaction is not carried out and earth cover is not provided. Leachate if
not treated properly it penetrates the soil and, if not prevented, pollutes the
ground water. Also, flies, mosquitoes and many other pests breed on the
waste and unless properly maintained, the dumps are a public health
hazard. Some authorities claim that often the plastic liner develops cracks
as it reacts with various chemical solvents present in the waste.
Unplanned land fill have caused an environmental disaster posing health
hazards both to workers and to general population. The rate of
decomposition in sanitary landfills is also extremely variable. This can be
due to the fact that less oxygen is available as the garbage is compressed
very tightly. It has also been observed that some bio-degradable materials
do not decompose in a landfill.
Incineration
4.8 The process of burning waste in large furnaces is known as
incineration. Incineration is a disposal method that involves combustion of
waste material. Incineration and other high temperature waste treatment
systems are sometimes described as "thermal treatment".
Incineration is carried out both on a small scale by individuals and on a
large scale by industry. It is used to dispose of solid, liquid and gaseous
waste. Incineration facilities, generally, do not require as much area as
landfills. Waste-to-energy or energy-from-waste is broad terms for facilities
that burn waste in a furnace or boiler to generate heat, steam and/or
electricity. At the end of the process all that is left behind is ash. This
method produces heat that can be used as energy. Incinerators convert
waste materials into heat, gas, steam, and ash. It is recognized as a
practical method of disposing of certain hazardous waste materials (such as,
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biological medical waste). Incineration of waste is a thermal process, which

reduces the waste to 15-20 per cent.
However, due to lower calorific value of waste, this process has not been
fully exploited.
4.9 Both the fly ash and the ash that is left in the furnace after burning
have high concentrations of dangerous toxins such as, dioxins and heavy
metals. Disposing of this ash is a problem. The ash that is buried at the
landfills leaches the area and causes severe contamination.
Incineration is a controversial method of waste disposal, due to issues such
as, emission of gaseous pollutants. Improperly operated incineration plants
cause air pollution. Burning garbage is not a clean process as it produces
tons of toxic ash and pollutes the air and water. Cost of incinerator and
additional investment on pollution control devices make the process capital -
intensive. Under Indian conditions large scale incineration plants are
economically non–viable in view of their capital–intensive character and the
low calorific value of city garbage available.
For Small Scale Disposal

Composting
4.10 Decomposition and stabilization of solid organic waste material has
been taking place in nature ever since life appeared on this planet.
Composting is the process of decomposition and stabilization of organic
matter under controlled condition. Waste materials that are organic in
nature, such as, plant material, food scraps, and paper products, can be
recycled using biological composting and digestion processes to decompose
the organic matter. It is a biological process in which micro-organisms,
mainly fungi and bacteria, convert degradable organic waste into humus like
substance. The resulting organic material is then recycled as mulch or
compost for agricultural or landscaping purposes. In addition, waste gas
from the process (such as methane) can be captured and used for
generating electricity. The intention of biological processing in waste
management is to control and accelerate the natural process of
decomposition of organic matter.
4.11 There is a large variety of composting and digestion methods and
technologies varying in complexity from simple home compost heaps, to
industrial-scale enclosed-vessel digestion of mixed domestic waste. Methods
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of biological decomposition are differentiated as being aerobic or anaerobic

methods, though hybrids of the two methods also exist.
Special Provisions for Hilly Areas
4.12 Cities and towns located on hills shall have location-specific methods
evolved for final disposal of solid wastes by the municipal authority with the
approval of the concerned State Board or the Committee. The municipal
authority shall set up processing facilities for utilization of bio-degradable
organic wastes. The inert and non-biodegradable waste shall be used for
building roads or filling-up of appropriate areas on hills. In view of
constraints in finding adequate land in hilly areas, wastes not suitable for
road-laying or filling up shall be disposed of in specially designed landfills
Reduce
4.13 The most uncontrollable phase in Solid waste management is ‘Waste
generation’. Generated solid waste particularly from Non-point sources is
always a challenge for local administration, so best practice is to reduce the
generation of Solid waste.
 The reduction of waste can happen only when everybody reduces
waste generation in the first place.
 Every individual has to contribute in doing so. There is urgent need
of public awareness about waste generation. There should be
awareness at all levels of society, which will motivate them to
change their casual habits which creates waste.
 Public Private Partnership should be engaged in this awareness
activity.
 Definite Point Sources of waste generation like Hotels, Restaurant,
and Shopping, Complexes, etc should contribute their space for
disposal in their area itself, which ultimately reduces the burden of
Collection.
 For Public Gatherings and Events organized in public places for any
reason (including for processions, exhibitions, circuses, fairs, political
rallies, commercial, religious, socio-cultural events, protests and
demonstrations, etc.), it will be the responsibility of the organizer of
the event or gathering to ensure the cleanliness of that area.
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Reuse
4.14 Utilization value of any item should be known to people who are
using it.
 NGOs working for under privilege society should work for establishing
centres which provides goods for secondary use. Such centres can
be set up at the source.
 Private sector involvement should be encouraged, repairing facilities
should be offered so goods can be used as per its utilization value.
 Large production companies of electronic appliances, gadgets, etc
should establish the collection centres, where damaged items can be
repaired and reused.
 NGOs, Self-help group, etc can organize workshop, seminars which
encourage people to use waste material to create some decorative
articles.
Recycle
4.15 The process of transforming materials into secondary resources for
manufacturing new products is known as recycling.
 Waste recycling leads to less utilization of raw materials, saves on
landfill space, reduces the amount of energy required to manufacture
new products. In fact recycling can prevent the creation of waste at
the source.
 Promoting/ motivating citizens to start segregation of waste at source
involving NGO’s, co-operatives, private, commercial and industrial
sectors for appropriate mass awareness campaigns.
 Source separation should be done by keeping recyclables and
organics waste separate at source, i.e., at the point of generation
facilitate reuse, recycling, and composting.
 Segregate the waste in the house by keeping two garbage bins and
see to it that the biodegradable and the non-biodegradable is put into
separate bins and disposed off separately. Biodegradable waste can
be recycled.
 Dry waste consisting of cans, aluminium foils, plastics, metal, glass,
and paper could be recycled.
 There should be recycling plant at local level.
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 The least technically complex and most cost-effective solution should

be chosen.
 Separation of waste for efficacious recycling and environmentally
friendly purchasing habits are two areas for effective management.
Pyrolysis/ Gasification
4.16 Pyrolysis is a process of chemical decomposition of organic matter
brought about by heat. In this process, the organic material is heated in
absence of air until the molecules thermally break down to become a gas
comprising smaller molecules (known collectively as syngas).
Gasification can also take place as a result of partial combustion of organic
matter in presence of a restricted quantity of oxygen or air. The gas so
produced is known as producer gas. The gases produced by pyrolysis
mainly comprise carbon monoxide (25%), hydrogen and hydrocarbons
(15%), and carbon dioxide and nitrogen (60%). The next step is to ‘clean’
the syngas or producer gas. Thereafter, the gas is burned in internal
combustion (IC) engine generator sets or turbines to produce electricity.
Anaerobic Digestion/ Biomethanation
4.17 In this process, the organic fraction of the waste is segregated and
fed into a closed container (biogas digester). In the digester, the segregated
waste undergoes biodegradation in presence of methanogenic bacteria and
under anaerobic conditions, producing methane-rich biogas and effluent.
The biogas can be used either for cooking/ heating applications, or for
generating motive power or electricity through dual-fuel or gas engines, low-
pressure gas turbines, or steam turbines. The sludge from anaerobic
digestion, after stabilization, can be used as a soil conditioner. It can even
be sold as manure depending upon its composition, which is determined
mainly by the composition of the input waste.
Deep Burial
4.18 A pit or trench should be dug about 2 m deep. It should be half filled
with waste, and then covered with lime within 50 cm of the surface, before
filling the rest of the pit with soil. It must be ensured that animals do not
have access to burial sites. Covers of galvanized iron/wire meshes may be
used. On each occasion, when wastes are added to the pit, a layer of 10cm
of soil be added to cover the wastes. Burial must be performed under close
and dedicated supervision. The deep burial site should be relatively
impermeable and no shallow well should be close to the site. The pits should
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be distant from habitation, and sited so as to ensure that no contamination

occurs of any surface water or ground water. The area should not be prone
to flooding or erosion. The location of the deep burial site will be authorized
by the prescribed authority. The institution shall maintain a record of all pits
for deep burial.
Autoclaving
4.19 The basic objective of autoclaving is to disinfection and treating
biomedical waste.
(i) When operating a gravity flow autoclave, medical waste shall be
subjected to:
(a) A temperature of not less than 121°C and pressure of 15
pounds per square inch (psi) for an autoclave residence time
of not less than 60 minutes; or
(b) A temperature of not less than 135°C and a pressure of 31
psi for an autoclave residence time of not less than 45
minutes; or
(c) A temperature of not less than 149°C and a pressure of 52
minutes.
(ii) When operating a vacuum autoclave, medical waste shall be
subjected to a minimum of one pre vacuum pulse to purge the
autoclave of all air. The waste shall be subjected to the following:
(a) A temperature of not less than 121°C and a pressure of 15
minutes; or
(b) A temperature of not less than 135°C and a pressure of 31
minutes.
(iii) Medical waste shall not be considered properly treated unless the
time, temperature and pressure indicators indicate that the required
time, temperature and pressure is reached during the autoclave
process. If for any reason, time, temperature or pressure indicator
indicates that the required temperature, pressure or residence time
was not reached, the entire load of medical waste must be
autoclaved again until the proper temperature, pressure and
residence time were achieved.
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(iv) Recording of operational parameters– Each autoclave shall have

graphic or computer recording devices which will automatically and
continuously monitor and record dates, time of day, load
identification number and operating parameters throughout the entire
length of the autoclave cycle.
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Chapter 5
Laws and Regulations in India
5.1 Considering the waste generated in various forms and its impact on
the environment, Indian Government has introduced laws and regulations.
The laws and regulations introduced are based on the type of waste
generated. The Government has in such laws clearly mentioned the ways/
methods through which the waste are to be managed or disposed, reporting
requirements, record maintenance, segregation of waste at source.
The provision of some of the laws introduced by the Government and
important aspects of such laws from the internal auditor’s perspective has
been mentioned below.
The laws and regulations covered for this guide are –
 E-Waste Management and Handling Rules
 Plastic Waste (Management and Handling) Rules, 2011.
Bio-Medical Waste (Management and Handling)

Rules, 1998
5.2 These rules apply to all persons who generate, collect, receive, store,
transport, treat, dispose or handle bio-medical waste in any form. Bio medical
waste should not be mixed with other wastes. Such waste has to be
segregated at the point of generation itself prior to its storage, transportation,
treatment and disposal. The containers should be labelled. For the container
to be transported from the premises of generation of waste to waste
treatment plant outside the premises it shall be labelled as prescribed in
schedule III of this Act. Untreated bio-medical waste should not be kept
stored beyond 48 hours provided if necessary permission has been obtained
to store beyond the period specified in this Act. An Annual report in Form 11
be submitted on or before every January 31 providing information about the
categories and quantity of Bio-medical waste handled in the previous year.
This will help the authorities to send the information to Central Pollution
Control Board by 31st March every year. Record relating to generation,
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collection, reception, storage, transportation, treatment, disposal and/or any

form of handling of bio-medical waste in accordance with the rules and
guidelines issued. Record so maintained are subject to inspection and
verification by prescribed authority at any time.
E-Waste (Management and Handling) Rules, 2011
5.3 The aim is reduce the use of hazardous substances in electrical and
electronic equipment by specifying the threshold for use of such hazardous
materials including lead, mercury and cadmium. It shall apply to every
producer, consumer or bulk consumer, collection centre, dismantler and
recycler of e-waste involved in the manufacture, sale, and purchase and
processing of electrical and electronic equipment or components. There are
certain exceptions for applicability of these rules like these rules are not
applicable to micro and small enterprises as defined in Micro, Small and
Medium Enterprises Development Act, 2006. As per these rules the main
responsibility for waste management is on the producers of electrical and
electronic equipment through the introduction extended producer
responsibility.
5.4 Extended producer responsibility requires personal computer
manufacturers, mobile handset makers and white good makers to come-up
with e-waste collection centres or introduce ‘take back’ systems. Records
have to be maintained regarding generation of E-waste and make such
records available with State Pollution Control Boards or the Pollution Control
Committee. State pollution control board will be required to compile and
report an annual report with regard to implementation of these rules by
September 30th of every year. Based on this data, Central Pollution Control
Board shall submit a report to the Government by December 31st every
year.
Municipal Solid Wastes (Management and Handling)
Rules, 2000
5.5 It applies to every municipal authority responsible for collection,
segregation, storage, transportation, processing and disposal of municipal
solid waste. Municipal Authority shall submit an annual report on or before
June 30th to state board or committees. State Board or committee shall
prepare and submit to central pollution control board an annual report with
regard to implementation of rules by September 15th every year. Central
Pollution control board shall prepare a consolidated annual review report on
management of municipal solid waste and forward it to central government
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along with its recommendation before 15th of December every year. Any
municipal solid waste generated in a city or a town, shall be managed and
handled in accordance with the compliance criteria and the procedure laid
down in Schedule-II. The waste processing and disposal facilities to be set
up by the municipal authority on their own or through an operator of a facility
shall meet the specifications and standards as specified in Schedules III and
IV.
Plastic Waste (Management and Handling)

Rules, 2011
5.6 This rule has replaced “Recycled Plastics Manufacture and Usage
Rules, 1999 with effect from February 07th, 2011. Some of the salient
features of this new rule are –
 Use of plastic materials in sachets for storing, packing or selling
gutkha, tobacco and pan masala has been banned.
 Food stuffs will not be allowed to be packed in recycled plastics or
compostable plastics.
 Recycled carry bags shall conform to specific BIS Standards.
 Plastic carry bags shall either be white or only with those pigments
and colorants which are in conformity with the bar prescribed by the
Bureau of Indian Standards (BIS). This shall apply expressly for
pigments and colorants to be used in plastic products which come in
contact with foodstuffs, pharmaceuticals and drinking water.
 Plastic carry bags shall not be less than 40 micros in thickness.
Under the earlier rules, the minimum thickness was 20 microns.
Several state governments have stipulated varying minimum levels
and now 40 microns will become uniform standard to be followed
across the country.
 The minimum size (8x12inches) for the plastic carry bags prescribed
under the earlier Rules has been dispensed with.
 Carry bags can be made from compos table plastics provided they
conform to BIS Standards.
 The new rules require the municipal authority to constructively
engage agencies or groups working in waste management including
these waste pickers.
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 No carry bags shall be made available free of cost to consumers. The

municipal authority may determine the minimum price for plastic carry
bags.
 The municipal authority may also direct the manufacturers to
establish plastic waste collection centres either collectively or
individually in line with the principle of extended producer’s
responsibility.
 The new rules have stipulated provisions for marking or labelling to
indicate name, registration number of the manufacturer, thickness
and also to indicate whether they are recycled or compostable.
Government Initiatives
5.7 "E-Parisaraa" is a project supported by the Indo-German e-waste
initiative. The pilot project is to manage e-waste without causing ecological
damage has been set up with the backing of the Karnataka State Pollution
Control Board in Bangalore city. Most software firms in Bangalore city have
agreements with E-Parisaraa to collect their e-waste. E-Parisaraa pays
these firms for the e-waste and brings it to their processing facility. What
makes E-Parisaraa different is that unlike the backyard handling of e-waste,
there is no melting involved in the sorting. The waste enters the
disassembly-line process where it is dismantled and sorted in plastics,
rubber and metal sheets. The leftover printed circuit boards and glass items
such as tube lights and picture tubes go to the next stage where they are
then cut into strips and powdered
5.8 Processes used by E-Parisaraa are as follows:
 Manual Dismantling
 Hands on Segregation
 Shredding and Density Separation
 Toner Cartridge Dismantling
 Gold recovery from printed circuit boards strips and components
 Silver recovery from silver coated components
 Circuit for reusing fused CFLs
 Printed circuit boards are shredded to 1.5” x 1.5” size and exported
to Belgium for smelting
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5.9 The waste electronic and equipment are converted into raw materials
like Metals, Plastics and Glass. The entire system of recycling is based on
the principles of clean environment. The benchmark of recycling is to recycle
e-waste to about 99% and 1% hazardous materials which cannot be further
recycled or reused goes for scientific and secure landfill to adjacent
treatment and disposal plant. The central government has passed various
laws and regulations in regard to waste management. In line with these
laws, state government has framed policy on integrated solid waste
management. Karnataka state policy on integrated solid waste management
has been mentioned here as an example on state policy as every state
policy cannot be covered comprehensively.
Karnataka State Policy on Integrated Solid Waste

Management
5.10 The goal of effective MSWM services is to protect public health, the
environment and natural resources (water, land, air). An effective MSWM
service can be achieved only by improving the efficiency of MSWM
activities, thereby leading to the reduction of waste generation, separation
of MSW and recyclable material, and recovery of compost and energy.
The objectives of this State Municipal Solid Waste Management Plan are:
(a) Providing directions for carrying out the waste management
activities (collection, transportation, treatment and disposal) in a
manner, which is not just environmentally, socially and financially
sustainable but is also economically viable.
(b) Establishing an integrated and self contained operating frame work
for MWSM, which would include the development of appropriate
means and technologies to handle various waste management
activities.
(c) Enhancing the ability of ULBs to provide effective waste
management services to their citizens.
5.11 The touch stone principles, which govern the future approach to
provision of MSWM services, include the following:
(a) Promoting awareness of waste management principles among
citizens and other stakeholders
(b) Minimizing multiple and manual handling of waste, and designing a
system to ensure that MSW does not touch the ground till treatment
and final disposal.
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(c) Defining the roles and responsibilities of various stakeholders and

putting in place an operating frame work, which would include
appropriate contractual structures.
(d) Developing systems for effective resources utilisation and
deployment.
(e) Promoting recovery of value from MSW; developing treatment and
final disposal facilities, which, while adhering to the statutory
requirements, are sustainable, environmentally friendly and
economical.
(f) Directing the waste management initiatives to the waste generator
level, and entrust the responsibility of our segregation and primary
collection to the relevant community based organisation/ resident
welfare association/ Self-help group(SHG).
(g) Developing and maintaining, at the KUIDFC, details of the
Information, Education and Communication (IEC)activities and
awareness programs designed by the State Resource Center for
planning and designing.
(h) Utilizing the services of non-governmental organisations (NGOs) to
operate and coordinate between the ULB, Community and
SHG/RWA, in order to propagate the awareness program, the IEC
campaign, and to provide support to the informal sector (ragpickers,
wasterecyclers etc.).
(i) Utilizing the services of non-governmental organisations (NGOs) to
operate and coordinate between the ULB, Community and
SHG/RWA, in order to propagate the awareness program, the IEC
campaign, and to provide support to the informal sector (ragpickers,
wasterecyclers, etc.).
(j) Information education and community activity is key to success of
modern MSW management. Materials required for the IEC
campaign like manuals, flipcharts and other media communication
are designed by State Resource Center, Mysore. A detailed Terms
of Reference has been prepared for NGO activity.
(k) Providing necessary equipment, vehicles, apparels for collection
and disposal of MSW.
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Chapter 6
Industry-wise Analysis
6.1 Waste is generated in every industry which is considered as
unavoidable by-product of economic activity. Waste is generated from
inefficient production processes, low durability of goods and unsustainable
consumption patterns. The generation of waste reflects a loss of material and
energy and imposes economic and environmental costs on society for its
collection, treatment and disposal. The impact of waste on the
environment, resources and human health depends on its quantity and
nature. The generation and of waste includes emissions to air (including
greenhouse gases), water and soil, all with potential impacts on human
health and nature. Such waste generated needs to be managed
systematically through assessment of potential hazards, disposal and proper
utilisation of waste so generated. Even though waste is generated in every
industry, limited but important industry with a huge impact on environment
has been considered for the purpose of this guide. The importance of other
industry not covered as part of this guide is in no way under estimated.
The industries covered in the guide are mining industry, iron and steel
industry, automobile industry and garment industry.
Mining Industry
6.2 In mining industry, wastes are generated in every stage of the
operations. The types of waste generated from both the industries are
solid, liquid and gaseous wastes. Waste from the mining or extractive
operations (i.e., waste from extraction and processing of mineral resources)
is one of the largest waste streams in the world. It involves materials that
must be removed to gain access to the mineral resource, such as topsoil,
overburden and waste rock, as well as tailings remaining after minerals have
been largely extracted from the mine.
6.3 Mining waste from the exploration and removal of the minerals cast
challenges for many local inhabitants. Mining extraction and beneficiation
can create environment problems including acid mine drainage, erosion and
sedimentation, chemical release, fugitive dust emission, habitat destruction,
surface and ground water contamination, and subsidence.
The waste generated can be utilized or can be reused as raw material for
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other processes, if not, has to be disposed safely so that it will not affect the
environment.
Mining Waste Disposal Techniques are Terrestrial Impoundments (Tailing
Ponds); Underground Backfilling; Deep Water Disposal (lakes and sea) and
Recycling.
Iron and Steel Industry

6.4 Iron and steel industry characteristically is a heavy industry. All its
raw materials are heavy and colossal. They encompass iron-ore, coking coal
and limestone. Location of this industry is thus governed by its proximity to
raw materials, predominantly coking coal.
Steel production at an integrated steel plant involves three basic steps.
(i) The heat source used to melt iron ore is produced i.e., coke making.
(ii) Next, the iron ore is melted in a furnace.
(iii) Finally, the molten iron is processed to produce steel.
These three steps can be done at one facility; however, the fuel source is
often purchased from off-site producers.
6.5 The operations in an integrated steel plant are very complex.
Several other activities such as, power generation and production of
refractories are also performed in varying degree inside the steel works. A
vast quantity of raw material are handled and processed and solid wastes
are generated at every stage of operation. These wastes have wide ranging
impact on the environment. These solid wastes contain valuable material
which can be recovered and recycled in the process.
Production of steel involves several operations. It starts from the naturally
occurring raw material like, iron ore, coal and flux stones to produce hot
metal in blast furnace, conversion of hot metal into steel and the subsequent
rolling of steel in finished product in the rolling mills. Several other activities
such as, power generation and production of refractories are also performed
in varying degree inside the steel works. Large quantities of wastes are
generated in view of the above activities. These wastes have wide ranging
impacts on the environment. These solid wastes are classified into three
basic categories:
(i) Wastes which are hazardous and must be treated suitably before
throwing them as waste.
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(ii) Wastes which are not hazardous and recovery recycle and reuse of
valuable in it could be done economically.
(iii) Wastes which are not hazardous but recovery recycle and reuse may
not be economical.
6.6 In many cases, these solid wastes contain valuable material which
can be recovered and recycled in the process. Recycling and utilization of
these solid wastes through an integrated waste management has gained
special significance due to several factors such as, economic advantage of
the primary resources, better and cleaner environment, conservation of
energy and water and compliance with the law.
The main solid waste comprises:
(a) Blast furnace slag.
(b) Steel making slag.
(c) Sludge from sinter plant and blast furnace gas cleaning systems.
(d) Dust recovered from de-dusting system.
(e) Mill scale.
(f) Fly ash
(g) Waste refractories.
(h) Raw material spilled out of the carrying system.
(i) Waste consumables
6.7 Major Solid waste generated in Steel Plant are as below:
Plant Solid Waste Generated
Iron Making Air cooled BF slag, Granulated BF slag.
Desulphurization slag, Flue dust, GCP
sludge, Pig iron.
Steel Making BOF slag, BOF sludge, Lime dust, Steel
scrap.
Rolling Mills Mill scale and Silicon steel mill sludge.
Coke Oven Coke Breeze
Coal Chemical department Sulphur sludge, Tar Sludge
Power generation Fly ash, Bottom ash, clinker
Others Used refractory, Oil refining sludge,
Machine shop turning
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Solid waste can be categorised as Ferruginous, Non-ferruginous and Fly

Ash.
6.8 Waste Management in Steel Plant is done as follows:
Solid Waste Liquid Waste Gaseous Waste
 Solid waste  All major and  Recycling of dust
generation is maximum liquid product to the
controlled by efficient wastes should be respective process.
and optimum use of recycled  Online monitoring of
raw material.  Monitoring of the combustion
 Solid wastes should reclaimed water products such as
be disposed properly drawn from the SOx, CO, NOx
through a proper respective plants analyzer at stack
disposal system.  Liquid wastes dust emission level.
 New technologies should be  Monitoring ESP
should be adopted disposed properly efficiency and stack
for eco-friendly solid through the proper volume.
waste disposal. and efficient  Measuring and
 Transportation of disposal system. monitoring of
solid waste from  Transportation of ambient air quality.
generation point to liquid wastes from
disposal point should the generation
be in a controlled and point to disposal
proper way. point should be in
 Displaying the area a controlled and
as solid waste proper way.
disposal area  Displaying the
 If possible, selling area as liquid
some of the solid waste disposal
wastes to be further area.
used in some other  Selling some of
ways converting the liquid waste to
waste into wealth. be used in
beneficial ways.
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Garment Industry
6.9 Waste is generated at various stage in Garment Industry. Such
wastes are considered as normal loss in the business. Some of them are as
follows:
 Fabric Store - Inspection of the incoming fabric is very
important. The fabric which is sourced from outside into the
fabric store should be inspected for defects.
 Cutting Room –Sources for waste generation in cutting room
can be from incorrect marking, roll remnants, etc
 Bundling Room – if the inspection is not 100%, some
defective pieces goundetected and reach the stage of
production.
 Production Floor – The loaders load the line with the bundles which
pass on the line according to the operation. The operator may find
the piece defective at any stage and dispose it off then and there.
 Dyeing and Washing – The wastage happen when the pieces are
misplaced or lost during the transportation to dyeing unit. Similarly,
incorrect dyeing can also lead to wastage.
 Printing/ Embroidery – The printing on the garment does not match
the standard while in the case of embroidery it may not be the
correct place on the garment or the number of threads uses are less
and desired effect is not obtained.
 Sample Production – Mistake in design communication; craftsman
ship problem may lead to wastage.
 Finishing Department – Fitting/ measurement problem will lead to
garment wastage.
Waste management in Garment Industry is undertaken by establishing a
process wherein the focus is on finishing in time, minimum changes in
original design, least rework, optimising usage of materials, enhancing
labour productivity through training, etc.,
Automotive Industries
6.10 Used oil has been classified as hazardous wastes by the Ministry of
Environment and Forests, Government of India which demands its proper
management to avoid serious threat to the environment and for economic
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gains. Used oil could be recovered or reprocessed and reused as base oil
thus, saving the use of virgin oil.
Used oil means any oil derived from crude oil or mixtures containing
synthetic oil including used engine oil, gear oil, hydraulic oil, turbine oil,
compressor oil, industrial gear oil, heat transfer oil, transformer oil, spent
oil and their tank bottom sludge and suitable for re-refining.
6.11 Used oil dumped on the ground, sewers or sent to landfills is capable
of seeping into ground and surface water. Just one litre of used oil can
render one million litres of water undrinkable (NUOMAC, 2004). It is also a
serious threat to plant and animal life. Marine species can be adversely
affected by oil concentrations as low as one ppm. The oil film on water
blocks sunlight thereby, making it harder for plants to photosynthesize.
6.12 The major processes that generate used oil are the machining
operations such as, cutting and drilling. Coolant oil and neat cutting oil are
the major contributors to the used oil generation in these processes. Used
compressor oil and hydraulic oil also contribute to the used oil generation.
This oil used in the machining operations is reused within the same
process several times (for a period of about 3 - 6 months) before being
disposed to barrels.
All the industries send the used oil from their premises to registered
recyclers as per the legal requirements. A portion (about 5–10%) of the
used oil is occasionally sent to construction industries for use as shuttering
oil. To which recycler the used oil is sent from the industry depends upon
the price quoted by the recycler which varies between Rs 6.25 to Rs15 per
litre of used oil.
6.13 The sources for used oil generation are:
Fuel Injection Pumps; Injector Nozzle; Piston (for both diesel and
petrol engine); Rings used in piston; Leaf spring; Steering assembly;
Brake Assembly;
Methods to effectively manage the used oil generation and reduce
used oil generation are as follows:
 Equipment scheduling adjustment
 Practice good housekeeping
 Assign coolant management to one person
 Maintain inventory control.
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6.14 The following is used Oil re-refining chart:
The re-refining of used oil can help in reusing the oil for industrial use.
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Chapter 7
Risks and Challenges — Waste
Management Industry
7.1 Since waste management involves collection, transportation, disposal
of waste collected the entities in this industry face lots of challenges like,
unavailability of land, improper infrastructure facilities, inadequate training
and facilities provided to employees, no proper policy with set goal, etc.,
The internal auditor should make a risk assessment of the entity under audit.
This is extremely important on account of prevention of any non-compliance
or undesirable event. Given below, is a brief of the different risks faced by
the entity operating in the Waste Management Industry.
7.2 The internal auditor needs to verify whether sufficient controls are
available in the entity to detect such risks and prevent them from happening
in the light of overall business environment.
The risks faced by a Waste Management Industry can be broadly classified
as follows:
(i) Business risk
(ii) Political risk
(iii) Inventory management risk
(iv) Environment risk
(v) Brand / Reputation risk
(vi) Systemic risk
(vii) Technology and data security risk
(viii) Business continuation risk
The Internal Auditor may also refer to various Technical Guides on risk
management issued by the ICAI.
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Business Risk
Weak Waste Collection, Transportation and Handling
Infrastructure
7.3 In most countries the existing waste handling capacity is insufficient.
There is need to streamline the waste collection and transportation
operations as intermingling of hazardous waste and municipal waste is not
uncommon. In addition, the efficiency of the sorting process needs to be
improved. Presently, recyclable recovery rate is low. Further, in the absence
of local recycling facilities, there is no alternative except to dump the
otherwise recyclable material at landfills.
Waste Recycling is Expensive
7.4 Though recent years have seen an increase in the number of waste
recycling facilities the economics of recycling is still not very favourable. In
many cases recycling waste is expensive compared to buying the product.
Government support in terms of cheaper land for landfills, subsidies is often
necessary for commercial viability.
Under Developed Market for Recycled Products
7.5 Insufficient demand for recycled products in the local market is
another reason, which has hampered the growth of the waste recycling
industry. There are a few units engaged in recycling waste paper,
paperboard and plastics. Much of the recycled products are then exported to
markets like, India, Pakistan and other Southeast Asian countries.
7.6 The major challenges in the village environment are:
 Lack of responsibility, action and applied resources by local
Panchayats who are legally responsible for providing for the
collection, storage and disposal of waste in the villages.
 Lack of waste disposal infrastructure.
 The widespread practice of keeping private spaces very clean, but
using public spaces as dumping areas for waste.
 Perceptions that waste management work is of low value and low
status, and therefore is not a priority.
 Organic wastes used in fields are often contaminated with plastics,
hazardous wastes such as, dry cell batteries, and medical wastes.
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 Limited awareness that there is a solid waste problem, and general

apathy towards making positive changes.
 Lack of idea initiation or ownership within the village.
 Lack of adequate maintenance leading to overflowing bins. Lack of a
disposal facility where waste can be buried.
 Lack of an adequate public education campaign.
While these problems are common to most of India, Government resources
to provide solutions are usually directed to urban environments, where higher
population densities and rapid urbanisation creates more urgent situations.
7.7 Rural areas receive little attention, despite the reality that
approximately 75% of Indians are living in rural village environments. Apart
from the above business risks specific to the waste management industry,
the following are general business risk which an entity has to face -
(i) A change in the legal environment that imposes new conditions,
costs or restrictions upon the manner of providing the services, the
means by which the services are delivered to the customer;
(ii) A change in the volume of transactions, either to
a) Increase (requiring additional hiring and perhaps a change in
business process); or
b) Decrease (resulting in sub-optimization of dedicated resources
or reallocation of resources).
(iii) Unprecedented increase in the cost of real estate leading to
increased cost of operations and strain on the profitability.
(iv) Increase in workers’ compensation cost and retention of key
employees.
(v) Risks on account of non-compliance with statutes.
(vi) Changing importance for locations might have a significant impact
taking into consideration the initial investment required to be made at
every location and higher rentals that might be paid for them in
comparison to the others in the vicinity.
(vii) Credit risks related to commercial business consumers
(viii) Timely availability of information to enable decision making at the
right time.
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(ix) Risks due to fraud and theft and impact of crime committed in the
location of the entity by miscreants.
(x) Risks due to acts of god such as earthquake, flood, windstorms, etc.
Political Risk
7.8 Political risk represents the degree to which social and governmental
environments may change in the future. This risk may manifest itself in
events over which a government has no control – such as riots, new
elections, etc.
The possibility of local authority or state government not sanctioning the
location which is needed for disposing off the waste resulting in deference of
disposal of the waste or over using the existing location’s capacity.
Inventory Management Risk

7.9 This is one of the greatest risks and might have a direct impact on
the profitability of business. The entity’s procedures with regards to
mitigation of risks might be crucial to ensure business competency. The
risks with regards to inventory management might include the following
factors.
(i) Delay in receipt of waste due to poor supply chain management /
supplier management. With the interconnectedness and flow that has
to come to make the chain work well, even the smallest of
disruptions can throw an organization off course.
(ii) Inability to source waste in the right way and at the right prices.
(iii) Inefficient inventory management system wherein the wastes are not
collected at the right time from the customers leading to poor
branding and decline in customer loyalty.
(iv) Rapid obsolescence of inventory.
(v) Technological obsolescence of equipments handling waste disposal.
(vi) Shipping risks due to delicate nature of waste collected.
(vii) Improper handling of waste.
Environment Risks
7.10 Environmental risks associated with the waste management industry
generally fall into one of the following three categories:
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(i) Site acquisition, development, and construction – Considering that

waste management entities buy and develop property to suit the
infrastructural requirement of the business; the entity should develop
an effective due diligence process, and manage environmental risk.
The significant cost would be on account of
 Cleanup Cost Cap for “capping” the cost of cleaning up
known pollution conditions
 Pollution Legal Liability for transferring the risk of cleaning
up unknown preexisting pollution conditions, third-party
claims, and other related exposures
 Loss of Income due to delay in opening / scheduled
completion of the project.
Brand/ Reputation Risk

7.11 Enterprise viability depends on maintaining the goodwill of the
enterprise brand. Damage to reputation might never be recovered, or might
only be recovered at great expense and distraction. Reputational risk is
significant in a waste management industry.
Brand risk management techniques include the use of scripts, supervision,
random audits, ongoing training and customer feedback. Legal issues in
reputational risk can arise where the enterprise customer wishes to
terminate a service provider, redirect its efforts or adjust the pricing to reflect
a loss of goodwill.
Technology Risk
7.12 Technology risk refers to the risk that an entity faces due to change
in technology or obsolescence of existing technology. In the event of change
in technology, the investment made by the entity becomes futile. Technology
could be in the form of purchase/ creation of software or hardware.
Business Continuance Risk

7.13 The major risks which affect the business continuance would include
improper supply chain management, damage of brand and significant
changes in economic situations. The entity must be prepared to mitigate
these risks and ensure successful carrying of business.
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Risks Mitigation Techniques

7.14 An illustrative list of risks mitigation techniques that the management
might opt for would include:
 In the current environment, the entity should have complete
knowledge about those risks and consider all pitfalls, understand the
exposures, and develop risk management practices and programs
that address this evolving exposure.
 Prioritizing the risks, creating a plan to strategically manage the
risks, implementing the plan as necessary, and monitoring the plan’s
implementation for evaluation and improvement purposes.
 Certain risks such as, frauds, environmental damage might be
reduced through visual inspections, carrying on surprise checks and
verification, etc.
 It might be appropriate for the entity to have a comprehensive
insurance policy to cover significant part of risks.
 Training of employees in inventory handling, especially in the case of
managing open/ broken bags, containers, perishable and sensitive
products.
 Proper store maintenance procedure should be implemented.
 A risks identification system would be required to be installed.
Further, the Management Information System should provide for
certain yardsticks which would enable the management identify the
critical risks and its impact on the entity.
 Indemnity clauses with suppliers and external vendors would ensure
that any loss arising due to suppliers and external vendors would be
indemnified.
Internal auditor might be required to make a complete assessment of
enterprise risks and provide an insight on methods of mitigation of risks.
Internal auditor might prepare a questionnaire or a checklist for this purpose.
Opportunities
7.15 In last few years, planning authorities have awarded a number of
contracts to the private sector for setting up and operating Integrated Waste
Management Facilities or waste recycling units. However, opportunities in
the sector are still largely untapped. The following are some major areas:
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(i) Waste Collection and Transportation Services– A number of private

players are active in the waste collection and transportation market. At
present, around 70 percent of the total waste in Dubai is collected by private
sector. There is good growth potential for such services in the market.
(ii) Management of Landfill Operations– At present, municipalities manage
the majority of the landfills; however, it is likely that new facilities would be
built under BOOT or BOT contracts. In fact, Singapore-based Keppel
Corporation is setting up an integrated waste management facility in Qatar.
Once the facility is operational, the company will also be responsible for its
operations and maintenance for 20 years.
(iii) Waste Recycling– Recycling of waste paper, paper board, metals and
glass is already practiced in GCC albeit at very small scale. Currently,
around 80 percent of the total waste generated is sent to landfills, which is
high as per international standards. With only 20 percent of the total waste
being recycled, recycling is set to increase. As waste management practices
become more efficient across the region, waste recycling is likely to be more
attractive commercially.
(iv) Waste to energy opportunity– Planning authorities across the region
are contemplating setting up waste to energy facilities. The market for such
technologies is likely to see rapid growth over next few years.
(v) Equipment Suppliers– Increased focus on waste management
represents a growing market for suppliers of compactor trucks, garbage
bins, incinerators and other auxiliary equipment.
As countries work towards the implementation of next generation waste
management practices to address challenges of global warming,
environmental preservation and sustainability, the waste management
market is set to enter an exciting phase. Recent amendments to various
laws and strict compliance to these laws help to make the world a better
place to live.
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Chapter 8
Need for Internal Audit
8.1 Considering the nature of the Waste Management Industry and the
pace at which the Industry has grown over the past decade, the need for
ensuring proper controls need not be over-emphasized. India waste
management industry is one of the industries in India which require lots of
attention especially with environmental hazards created due to over use of
resources, improper disposal mechanism, especially over the last few years.
Though the waste management industry in India is mostly unorganized, the
governments both central and state have taken lots of significant initiatives
in encouraging this sector to be more organised given the importance of
speed of operations required in waste management industry.
8.2 With increasing volume of wastes generated and considering the
vulnerability of the sector to modification of environment and slowness in
adopting to the change, internal audit becomes significant. Internal audit
also helps in verifying the controls in place within the entity with regard to
sufficient and effectiveness in the light of overall business of managing the
waste generated or collected and in complying with various laws in force in
this regard. Internal audit also helps in assessing the risks faced by the
entity and provide a method for management of the same. Internal controls
and risk management are extremely important activities in an entity
operating in the waste management Industry.
8.3 Effective internal audit provides a tool to ease out all complexities,
ensure that systems and processes are adequate to support the growth and
are adapted to the changes in various regulations, thereby ensuring
sustained growth and development.
Preface to the Standards on Internal Audit, issued by the Institute of
Chartered Accountants of India defines the term Internal Audit as:
“ 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 strategic risk
management and internal control system.”
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8.4 The definition highlights the following facets of an Internal Audit.:

 Internal auditor should be independent of the activities they audit.
The internal audit function is in general considered independent
when it can carry out its work freely and objectively. Independence
permits internal auditors to render impartial and unbiased judgment
essential to the proper conduct of audits.
 Internal audit is a management function, thus, it has the high-level
objective of serving management's needs through constructive
recommendations in areas such as, internal control, risk, utilization of
resources, compliance with laws, management information system,
etc.
 Internal audit's role should be a dynamic one, continually changing to
meet the needs of the organization. There is often a need to change
audit plans as circumstances warrant. These changes may include
coverage of new areas, assistance to management in solving
problems, and the development of new internal audit techniques.
 An effective internal audit function plays a key role in assisting the
board to discharge its governance responsibilities. Thus, it
contributes in accomplishment of objectives and goals of the
organization through ethical and effective governance.
 Risk management enables management to effectively deal with risk,
associated uncertainty and enhancing the capacity to build value to
the entity or enterprise and its stakeholders. Internal auditor plays an
important role in providing assurance to management on the
effectiveness of risk management.
 Internal audit function constitutes a separate component of internal
control with the objective of determining whether other internal
controls are well designed and properly operated. Thus, the
examination and appraisal of controls are normally components,
either directly or indirectly, of every type of internal auditing
assignment.
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Factors Contributing to the Evolution of Internal

Audit
8.5 General Guidelines on Internal Audit issued by the Institute of
Chartered Accountants of India describes the factors contributing the
evolution of Internal Audit in India. A few such factors are:
(i) Increased size and complexity of businesses
Increased size and business spread dilutes direct management oversight on
various functions, necessitating the need for a full time, independent and
dedicated team to review and appraise operations. Complexity of operations
results in requirement of specialists in the field to guide the management.
(ii) Enhanced compliance requirements
Increase in the geographical spread of the businesses has also led to
crossing of political frontiers by businesses in a bid to tap global capital for
improving the technology. This has thrown up compliance with the laws of
the home country as well as the laws of that land as a critical factor for
existence of businesses abroad.
(iii) Focus on risk management and internal controls to manage
them
Internal auditors can carry out their job in a more focused manner by
directing their efforts in the areas where there is a greater risk, thereby
enhancing the overall efficiency of the process and adding greater value with
the same set of resources.
(iv) Stringent norms mandated by regulators to protect investors
The regulators are coming up in a big way to protect the interests of the
investors. The focus of the latest regulations being ethical conduct of
business, enhanced corporate governance and reporting requirements to
various Boards and committees.
(v) Unconventional business models
Businesses today use unconventional models and practices, for example,
outsourcing of non-core areas, such as, collection of waste generated to
another organization rather than dealing with on its own.
(vi) An increasingly competitive environment
Whereas deregulation and globalization have melted the political as well as
other barriers to entry in the markets for goods and services, free flow of
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capital, technology and know-how among the countries as well as strong

infrastructure has helped in better access to the existing best practices
globally and technology and equipment to carry on the business smoothly.
This in turn, has lured more and more players in the existing markets,
thereby, stiffening the competition.
Standard on Internal Audit
8.6 Internal auditor should carefully go through Standard on Internal
Audit (SIA) issued by ICAI. Standards on Internal Audit (SIA) is
recommendatory in nature for the initial period. These standards shall
become mandatory on such date as notified by the Council.
A list of Standards on Internal Audit issued by the ICAI is listed hereunder:
SIA 1 Planning an Internal Audit
SIA 2 Basic Principles Governing Internal Audit
SIA 3 Documentation
SIA 4 Reporting
SIA 5 Sampling
SIA 6 Analytical Procedures
SIA 7 Quality Assurance in Internal Audit
SIA 8 Terms of Internal Audit Engagement
SIA 9 Communication with Management
SIA 10 Internal Audit Evidence
SIA 11 Consideration of Fraud in an Internal Audit
SIA 12 Internal Control Evaluation
SIA 13 Enterprise Risk Management
SIA 14 Internal Audit in an Information Technology Environment
SIA 15 Knowledge of the Entity and its Environment
SIA 16 Using the Work of an Expert
SIA 17 Consideration of Laws and Regulations in an Internal Audit
SIA 18 Related Parties
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Standards on Internal Audit are important for carrying out an Internal Audit of
Waste Management Industry as they codify the best practices. The internal
auditor and the audit team are expected to be updated on the latest
pronouncements issued by the Institute in order to conduct an effective
Internal Audit.
Terms of Audit Engagement

8.7 The client is expected to formally communicate the appointment to
the Internal Auditor. Upon receiving the communication, the Internal Auditor
should send an engagement letter, preferable before the commencement of
engagement so as to avoid any misunderstandings. The Internal Auditor and
the client/ auditee should record the terms of engagement in the letter or
other suitable form of contract this shall also confirm objective and scope of
audit with the Client and thereby fixes the responsibilities of internal auditor.
The internal auditor may refer SIA 8 “Terms of Internal Audit Engagement”
for providing greater clarity on the terms of the internal audit engagement
between internal auditors and the users of the service.
The engagement letter should, generally, include reference to the
 Objective of the Internal Audit
 Management’s responsibilities
 Scope of Internal Audit (including reference to the applicable
legislation, regulation and various pronouncement of ICAI)
 Access to records, documents and information required in connection
with the Internal Audit
 Expectation to receive management’s written confirmation in respect
to representation made in connection with the audit
 Basis on which fees shall be computed and the billing arrangements
thereof
 Industry specific area
 References received from the parent company, if any.
 Undertakings and locations to be covered.
The internal auditor should review the engagement letter with scope of work
performed periodically, to meet the changed circumstances. In case of any
changes in the terms of the appointment, it is necessary that a
communication should be made in written form. Moreover, the internal audit
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may be on a continuous basis, monthly, quarterly or even annual. It is

important for the internal auditor to ensure that the periodicity of the internal
audit is sufficient in the light of overall business condition.
Knowledge of Business and Consideration of Laws and
Regulations Applicable
8.8 Before the commencement of audit assignment, the internal auditor
should have or obtain the knowledge of the business. The internal auditor
should acquire sufficient knowledge to enable him to identify and understand
the events, transactions and practices that can have significant effect on the
internal audit process. Such knowledge shall be helpful to the internal
auditor in assessing the inherent risk and control risk and in determining the
nature, timing and extent of the internal audit procedures. Knowledge of the
business assists the internal auditor in:
 Assessing the risk and identifying the problems
 Planning and Performing the internal audit effectively and efficiently
 Evaluating audit evidence
 Providing better service to the client
The Internal auditor should prepare the flow of events, transactions,
processes and practices within the organisation. This will help in gaining
better understanding of the process and the existence of the internal
controls.
Non Compliance with laws and regulations could result in financial
consequences for the entity such as, fines, litigation, etc. Internal auditor
cannot be expected to detect non-compliance with all laws and regulations;
however this argument shall not apply to engagements where the internal
auditor is specifically engaged to test and report separately on compliance
with specific law and regulations.
8.9 The management is responsible to ensure that the entity’s operations
are conducted in accordance with Laws and Regulations. The responsibility
for prevention and detection of non-compliance shall be that of the
Management; however the internal auditor should plan and perform the
internal audit recognising that the internal audit may reveal conditions or
events that would lead to questioning whether an entity is complying with
Laws and Regulations.
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Audit Planning, Materiality and Sampling

8.10 After acquiring the knowledge of business and various laws and
regulation applicable to the Waste management industry in general and to
the client specific, the Internal Auditor should plan out the internal activity.
Planning helps in achieving the objectives of internal audit function.
Adequate planning ensures that:
 Appropriate attention is devoted to significant areas of audit
 Potential problem are identified
 Skills and time of the staff are appropriately utilised
 Work is carried out in accordance with the applicable
pronouncements of ICAI
 Work is carried out in conformity with the applicable laws and
regulation.
In preparing an internal audit program, internal auditor should obtain an
understanding of the accounting and internal control system prevalent within
the entity, and exercise preliminary judgement regarding the critical areas to
be considered during the internal audit. It also helps the auditor in
determining the audit materiality, and nature and extent of audit procedures
to be adopted.
While designing an audit sample the Internal Auditor should consider the
specific Audit objectives, materiality, population from which the internal
auditor wishes to select the sample, area of audit significance and the
sample size.
Internal Control
8.11 Internal controls are a system consisting of specific policies and
procedures designed to provide management with reasonable assurance
that the goals and objectives it believes important to the entity will be met.
"Internal Control System" means all the policies and procedures (internal
controls) adopted by the management of an entity to assist in achieving
management's objective of ensuring, as far as practicable, the orderly and
efficient conduct of its business, including adherence to management
policies, the safeguarding of assets, the prevention and detection of fraud
and error, the accuracy and completeness of the accounting records, and
the timely preparation of reliable financial information. The internal audit
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function constitutes a separate component of internal control with the

objective of determining whether other internal controls are well designed
and properly operated.
8.12 Internal control system consists of interrelated components as
follows:
 Control (Or Operating) Environment
 Risk Assessment
 Control Objectivity Setting
 Event Identification
 Control Activities
 Information and Communication
 Monitoring
 Risk Response.
The system of internal control must be under continuous supervision by
management to determine that it is functioning as prescribed and is
modified, as appropriate, for changes in environment. The internal control
system extends beyond those matters which relate directly to the functions
of the accounting system.
8.13 The internal auditor should obtain an understanding of the significant
processes and internal control systems sufficient to plan the internal audit
engagement and develop an effective audit approach. The internal auditor
should use professional judgment to assess and evaluate the maturity of the
entity’s internal control. The auditor should obtain an understanding of the
control environment sufficient to assess management's attitudes, awareness
and actions regarding internal controls and their importance in the entity.
The internal auditor should examine the continued effectiveness of the
internal control system through evaluation and make recommendations, if
any, for improving that effectiveness. The importance of internal controls in a
waste management entity need not be over-emphasized. Internal audit plays
a major role in determining the effectiveness of internal controls and
highlight areas for improvement.
The internal auditor may also refer to SIA 12 “Internal Control Evaluation” for
a detailed discussion on Internal Control Evaluation.
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Overview of Compliance
8.14 Compliance means ensuring conformity and adherence to regulatory
Acts, rules, procedures, laws, regulation, directives and circulars.
SIA 17 to “Consideration of Laws and regulations in an Internal Audit“ states
that ‘when planning and performing audit procedures and in evaluating and
reporting the results thereof, the internal auditor should recognize that non-
compliance by the entity with laws and regulation may materially affect the
financial statements. However, an audit cannot be expected to detect non-
compliance with all laws and regulations. Detection of non-compliance,
regardless of materiality, requires consideration of the implications for the
integrity of management or employees and the possible effect on the other
aspect of the audit.’
The term “Non-compliance“ refer to acts of omission or commission by the
entity being audited, either intentional or unintentional, which are contrary to
the prevailing laws and regulations. Such acts include transactions entered
into by, or in name of the entity or on its behalf by the management or
employees. Non-compliance does not include personal misconduct
(unrelated to the business activity of the entity) by the entity’s management
or employees.
Understanding of Laws and Regulations

8.15 Laws and regulation vary considerably in their relation to the
financial statements. Some laws or regulations determine the form or
content of an entity’s financial statement or the amount to be recorded or
disclosures to be made in financial statements. Other laws or regulation are
to be complied with by management or prescribe the provisions under which
the entity is allowed to conduct its business. Non-compliance with laws and
regulation could result in financial consequences for the entity such as fines,
litigation, etc. It also has a potential effect on going concern as an entity.
The internal auditor should plan and perform the audit recognizing that the
audit may reveal conditions or events that would lead to questioning whether
an entity is complying with laws and regulations.
8.16 In order to plan the audit, the internal auditor should obtain
understanding of the legal and regulatory framework applicable to the entity
and how the entity is complying with that framework. To obtain this
understanding, the internal auditor would particularly recognize that non-
compliance of some laws and regulations may have a fundamental effect on
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the operations of the entity and may even cause the entity to cease
operation, or call into question the entity’s continuance as going concern. To
obtain the understanding of laws and regulations, the internal auditor would
ordinarily:
 Use the existing knowledge of the entity’s industry and business.
 Inquire with management as to the laws or regulations that may be
expected to have a fundamental effect on the operations of the
entity.
 Inquire with management concerning the entity’s policies and
procedures regarding compliance with laws and regulations.
 Discuss with management the policies or procedures adopted for
identifying, evaluating and accounting for litigation claims and
assessments.
After obtaining the understanding, the internal auditor should perform
procedures to identify instances of non-compliance with those laws and
regulations were non-compliance should be considered while preparing
financial statements, specifically:
 Inquiring with management as to whether the entity is in compliance
with such laws and regulations.
 Inspecting correspondence with the relevant licensing or regulatory
authorities.
Significance of Compliance
8.17 The Significance of Compliance is:
(a) The benefits to the Industry are:
 Helps in compliance with Legal terms and covenants and
thereby reduces penalties and charges.
 Increased Internal Control
 Reduction of Internal Frauds and Losses
 More time available for other core activities
 Increases efficiency in operations
 Customer satisfaction
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(b) Benefits to the Customers:

 Ensures safer market place
 Safeguards the customer interests
 Quality Assurance
 Enhanced Consumer Protection
(c) Benefits to the stakeholder:
 Ensures risk containment and safer market place
 Better Investor confidence
 Uniform Practices
 Better image, hence, better value for the investor.
As per SIA 17 issued by the ICAI, it requires that when planning and
performing audit procedures and in evaluating and reporting the results
thereof, the internal auditor should recognize that non-compliance by the
entity with relation to laws and regulations may materially affect the financial
statements. However, an audit cannot be expected to detect non-compliance
with all laws and regulations. Detection of non-compliance, regardless of
materiality, requires consideration of the implications for the integrity of
management or employees and the possible effect on other aspects of the
internal audit. Thus, in addition to the various acts, rules, bye laws,
regulations, circulars, pronouncements, etc., the internal auditor is required
to verify of some of the other applicable regulations which includes:
(i) Governance Laws
 The Companies Act, 1956
 Partnership Act, 1932 / Limited Liability Partnership Act, 2008
 Shops and Establishments Act of respective states
 The Sale of Goods Act, 1930
 The Negotiable Instruments Act, 1881
 The Income tax Act, 1961
 Service Tax under the Finance Act, 1994
 The Indian Contract Act, 1872
 Land Acquisition Act, 1894
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(ii) Labour Laws

 Employees Provident Fund Scheme, 1952
 Employee State Insurance Act, 1948
 Payment of Gratuity Act, 1972
 Payment of Bonus Act, 1965
 Professional Tax enacted by the respective states
 The Child Labour (Prohibition and Regulation) Act, 1986
 The Minimum Wages Act, 1948
 The Weekly Holidays Act, 1942
Apart from the above laws, the internal auditor is required to be aware of the
local legislations under which the entity/ undertaking operates. For e.g.,
Under Karnataka Shops and Commercial Establishments Act, 1961, the act
prescribes the daily and weekly hours, extra wages for overtime work,
holidays for all entities established in Karnataka.
The internal auditor is required to ensure the compliance of respective state
legislations too as part of his internal audit procedures.
(iii) Statutory laws applicable to Waste management Industry
 E-Waste Management aand Handling Rules
 Plastic Waste (Management and Handling) Rules, 2011
The excerpts of the rules specific to waste management industry have
already been mentioned in detail hence not covered here.
Major Areas of Internal Audit Significance

8.18 General internal audit procedures that apply to any industry also
apply to an entity operating in the waste management Industry. In this
technical guide, internal auditing procedures pertaining to waste
management Industry have been specified. We have incorporated
procedures and techniques that are unique to this industry and which would
be required to be combined with the internal auditors’ judgment, skill and
experience can perform an effective internal audit.
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These audit procedures are an illustrative list which can be performed in

addition to the regular internal audit procedures performed by an internal
auditor. Entities in waste management industry are classified primarily into
two categories namely –
(i) Entities generating waste as well as disposing it on its own;
(ii) Entities engaged in the business of collection of waste and disposing
it.
Invoicing and Billing
8.19 The Invoicing process varies significantly and is directly based on the
nature of customer from whom the waste is collected. To elaborate, it varies
from a systematic billing process and checking process in the case of
customer being a business unit to non-systematic cash based billing in the
case of customer being a domestic household or small business unit.
The billing and invoicing process in the waste management industry needs
to be simple, systematic, fast, secure and error-free to ensure avoiding
unnecessary waiting time for billing processes and plays a major role in the
success of the organisation. It might be pertinent to note that potential for
omitted/ manipulating income is greater in this industry as the recipient of
cash from customers need not give a bill/ invoice in case of domestic
household/ small business units. It is important for the internal auditor to
check if bill books are printed and whether the amount collected matches
with the number of business units/ household from whom the waste is
collected.
In general, cheques are generally collected only from medium/ large
business unit and 75% of the collection will be in cash.
Cash Pay Outs
8.20 As discussed above, accounting for cash is a primary focus for the
internal auditor. Considering that cash is paid for a significant part of the
billing by the entity, maintenance of proper records is a critical part of the
overall organisation management. It is equally important to ensure that there
is sufficient and appropriate fixing of responsibility in the case of
management of cash and banking of them.
Considering the nature of industry, most of the payments that are made,
including payroll charges, will be paid through cash. The employees
associated may not be from high income group and opening a bank account
will be a burden on the employees. There is a possibility of recording salary
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twice for the same employee. It is important for the internal auditor to check
sufficient control exists in the company.
Fixed Assets
8.21 If the waste management company collects and process the disposal
of waste on its own accord then there is a possibility of having its own fixed
assets. In such case, care needs to be taken by the auditor to check
whether there is any subsidy granted by the government for procuring such
assets. If yes, then the auditor needs to check the amount capitalised in the
books and the related depreciation calculation.
If the company does not own any vehicle for collecting the waste instead it
has hired the vehicle on rent then such rental agreement needs to be
checked. The internal auditor needs to check whether periodical
maintenance of equipment used for treating the waste collected or
generated, vehicles used for transportation are taken up.
Point of Collection
8.22 On collection of waste from business units/ hospitals, it is important
that the company provides a description of waste collected on periodical
basis. This is pertinent especially with regard to bio medical waste collection
and disposal. The hospital is required to provide details of bio medical waste
generated and disposed during the year by January 31st of succeeding year.
Further, the document prepared at the time of collection of waste will act as
a basis for future reconciliation of payments received. Internal auditor needs
to check whether the details are provided regularly to the generator of waste
and also the government department periodically.
Cash Management Policies
8.23 Efficient cash management processes are pre-requisites to execute
payments, collect receivables and manage liquidity. Managing the channels
of collections, payments and accounting information efficiently becomes
imperative with growth in business transaction volumes. This includes
enabling greater connectivity to internal corporate systems, expanding the
scope of cash management services to include “full-cycle” processes (i.e.,
from purchase order to reconciliation). Cash management services targeted
at the needs of specific customer segments. Cost optimization and value-
add services are customer demands that necessitate the creation of a
mechanism to service the various customer groups.
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8.24 Some of the Cash Management Techniques followed by Companies

include the following:
(i) Account reconciliation services– Balancing a cheque book for a very
large business can be quite a difficult process. Banks have
developed a system to overcome this issue. They allow companies to
upload a list of all the cheques whereby at the end of the month, the
bank statement will show not only the cleared cheques but also
uncleared ones.
(ii) Positive pay– It is effective anti-fraud measure for cheque
disbursements. Using the cheque issuance data, updated regularly
with cheque issuance and payment, the bank balances all cheques
offered for payment. In the case of any discrepancies, the cheque is
reported as an exception and is returned.
(iii) Balance reporting services– Balance reporting provides help in
procuring a company’s current banking information from its accounts.
With this service, the banks can offer almost all types of transaction-
specific details.
(iv) Cheque writing– In order to execute the payments faster, banks are
providing cheque writing facility to the corporate customers wherein
customer can print the cheques locally at their own office with the
facility of digital signatures and company logos.
(v) Liquidity management– In order to have efficient utilization of excess
funds corporate today avail the facility of liquidity management.
Liquidity management system prudently manages various assets and
liabilities (on-and off-balance sheet) and ensures that cash inflows
have an appropriate relationship to the approaching size of cash
outflows. The system ensures that necessary funds are available to
entertain all cash outflows as they fall due.
Adequate cash management mechanisms ensure efficient collection
systems, systematic disbursements, and ideal deployment of idle funds,
tiding over immediate cash needs, and compensating the banks that support
these activities of the company. An advanced cash management system
enhances the possibilities of earning high net interest income, creates
efficient balance sheets, minimizes expenses on resources, and reduces the
company’s exposures to potential risks related to seasonality of business
and debt repayments.
8.25 Cash management processes in the waste management sector are
currently in the focus as most of the transactions happen through cash.
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Cash continues to play a dominating role in the Waste management

industry. After the ascent of the cashless payments, still more than 75
percent are cash transactions.
The internal auditor’s key task of cash management is therefore, to identify
the core issues in waste management sector, and to develop processes that
are an optimal fit for their operations.
In order to find the most effective solution in each case, our work is divided
into the following four steps:
 Analysis of structures and processes– Analyse the factors such as,
customers’ payment habits or organization at the point of sale. This
gives an exact picture of the status quo in a company store.
 Development of solution proposals– Parallel to this, the Waste
management company’s intentions and objectives with regard to
cash automation are discussed and specified. Together with the hard
facts from the status quo analysis, these aspects form the basis for
working on concrete solution scenarios.
 Piloting in the store– Recommendations involve not only the POS
hardware but also include redesign and optimization of the entire
cash process in a store. They include return on investment
calculations, which, due to the current situation analysis, already
contain very detailed and realistic pay-back forecasts.
 Decision on the project– With the experiences gained during piloting,
possibly enhanced with a customer survey, the waste management
company has sufficient data and facts on which to take his
investment decision. This is then specified, the project is planned in
detail, and the rollout scope and schedule defined.
The following are advantages of these steps:
 Potential for savings through automated end-to-end handling of the
cash flow from the point of sale to the cash office and on to the
cash-in-transit operator for posting at the bank.
 Considerable reduction in discrepancies (at the point of sale and
between the cash center and store) due to efficient controlling and
better monitoring facilities.
 Fewer interfaces thanks to a closed cash cycle.
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 Cash flow transparency with end-to-end controlling and reporting to

reduce operational risk.
8.26 Model Checklist related to the Billing process is as follows:
PARTICULARS Yes No N/A
1 Verification of Billing Mechanism
1.1 Is there a proper billing system commensurate
with the size of business?
1.2 Have we verified the controls in place to
ensure fixing of appropriate responsibility to
the person? Are there sufficient systems to
ensure periodic job rotation preventing
misappropriation of funds?
1.3 Are the systems inbuilt to detect any billing
mistakes and errors?
1.4 Is there any log maintained by the entity as
regards errors and mistakes in billing?
1.5 Does the entity take sufficient measures in
ensuring prevention of such instances?
1.6 Does the entity have a proper system of
collection of the amount billed?
1.7 Is the collection made in a manner enabling
smooth collection of payments apart from
ensuring that there are sufficient control
processes?
1.8 Is there a routine checking of collections made
at the time of change in billing personnel?
1.9 Is the collection performed by an authorised
person?
1.10 Is the collection verified and reconciled on a
daily basis and approved?
1.11 Are the processes sufficient to ensure
appropriate banking of cash and sending of
coupons to the head office?
1.12 Is there sufficient monitoring by the entity to
ensure prevention and detection of fraud by
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persons collecting cash from household/
business units paying in cash?
1.13 Has there been a sufficient system audit /
verification performed by the internal auditor
to ensure that the billing system is without any
mistakes?
1.14 Has the Internal auditor performed any
statistical function in estimating the queuing
system and area allocation system of the
store?
Collection of Waste and Disposal

8.27 Collection of waste is the most important activity in the waste
management industry. They refer to the waste procured by the concern
either for its sales or disposal. The procurement involves the process of
sourcing of waste based on different categories. The collection of waste
either based on segregation at source or segregation at the point of disposal
plays a vital role in order to determine the method of disposal of waste. In
certain cases, on collection of waste the entity has to pay to the generator of
waste. Also the entity has to incur cost on disposal.
Sourcing can be done directly from the following sources.
 Manufacturers of waste
 Intermediaries - Wholesalers, distributors and dealers.
8.28 Considering that the total cost of waste collected accounts for around
75% of the expenditure incurred by the entity and the entity, generally,
operates in a very small net margin, the importance of procurement of
products at the right time and the right sources plays a significant role in
ensuring the profitability of business and sustainability of business.
The internal auditor needs to verify whether the entity has evaluated each
type of waste for determining the basis and process of evaluation. Further,
the screening process should ensure that the vendor has ethics and has no
track record of any frauds in the past.
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1 Procurement of Waste and Disposal
1.1 Does the entity have a written policy for the
procurement process?
1.2 Is the written policy sufficient and complete in
all aspects?
1.3 Is the policy updated on a frequent basis?
1.4 Are there sufficient controls to trace the
purchase of waste and its status within the
entity to ensure receipt of materials without
delay and to avoid any health hazard?
1.5 Are there any contracts entered by the entity
with suppliers to ensure adequate supply at a
reasonable price?
1.6 Are there sufficient procedures to inspect
materials as regards to specification and
quantity, received by the entity at the site
before unloading and signing of the delivery
note?
1.7 Are there sufficient documentary controls such
as gate pass for entry of goods?
1.8 Has a sample check for compliance of
procedures performed?
1.9 Is the process of receipt of material properly
co-ordinated to the Finance department to
ensure proper accounting?
1.10 Does the material receiving department
maintains sufficient records of receipt and
inspection of material?
1.11 Before making the entry, has the delivery note
been approved by the appropriate level of
authority?
1.12 In cases where materials are supplied by client,
has the internal auditor ensured that there has
been appropriate accounting of such material?
1.13 Does the entity have proper control for
materials received from the client? Are they
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separately identified and demarcated?
1.14 Does the entity have a process of evaluation of
all the waste collected which is sufficient in the
light of overall volume and size of business?
1.15 Has the contract between suppliers made
complete with all terms and conditions and
have the risk been appropriately specified?
1.16 Are there areas where we are risking more
than we are saving by entering into an
agreement with generator of waste?
1.17 What would be the likely financial impact of a
critical operational issue/ disruption to our
operations?
1.18 Does the entity have a system of disposal
booking commensurate to the size of business?
1.19 In the case of credit sales, does the entity have
sufficient measures to book sales at the
appropriate time in accordance with the terms
of sale?
1.20 What would be the likely environmental impact
of a critical operational issue/ disruption to our
operations?
Supply Chain Management

8.29 Supply chain management (SCM) is the management of a network of
interconnected businesses involved in the ultimate provision of product and
service packages required by the end customers. Supply chain Management
spans all movement and storage of raw materials, work-in-process
inventory, and finished goods from point of origin to point of consumption.
The Supply chain function involves vendor management, quality assurance
and transportation. Vendor management assumes critical importance in
waste management business where one has to deal with multiple type of
waste.
Supply chain management is typically viewed to lie between fully vertically
integrated firms, where the entire material flow is owned by a single firm and
those where each channel member operates independ.
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8.30 Six Sigma in supply chain management (SCM) helps in achieving

substantial benefits in terms of costs and quality. Effective implementation of
Six Sigma in supply chain management requires collection of data from
multiple organizations spread across multiple geographical locations.
Six Sigma enables
 Improvement in delivery time.
 Reduction of logistics cost.
 Lesser inventory cost.
 Improvement in the disposal mechanism of waste collected
Supply chain management involves two broad categories i.e. strategic and
operational.
8.31 As the term implies, strategic decisions are made typically over a
longer time horizon. These are closely linked to the entity’s strategy and
guide supply chain policies from a design perspective. On the other hand,
operational decisions are short term, and focus on activities over a day-to-
day basis. The effort in these type of decisions is to effectively and
efficiently manage the product flow in the "strategically" planned supply
chain.
The strategy needs to include four major decision areas in Supply Chain
Management:
(i) Location,
(ii) Production,
(iii) Inventory, and
(iv) Transportation (distribution).
8.32 Typically, a supply chain management would include the following
components
(i) Distribution Network Configuration– Number, location and network
missions of suppliers, production facilities, distribution centers, warehouses,
cross-docks and customers. This froms the perspective of entity collecting
the waste through various associate enterprises from generator of waste.
(ii) Distribution Strategy– Operating control e.g., centralized,
decentralized or shared; collection scheme, e.g., direct shipment, pool point
shipping, DSD (direct store delivery), closed loop shipping; mode of
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transportation and transportation control (e.g., owner-operated, private

carrier, common carrier, contract carrier).
(iii) Trade-Offs in Logistical Activities– The above activities must be
well coordinated in order to achieve the lowest total logistics cost. Trade-offs
may increase the total cost if only one of the activities is optimized. It is
therefore imperative to take a systems approach when planning logistical
activities. This trade-off is key to developing the most efficient and effective
Logistics and SCM strategy.
(iv) Inventory Management– Quantity and location of inventory, work-in-
progress (WIP) and finished goods.This is a major area in the waste
management industry taking into consideration not only the volume of
inventory, but also type of waste collected. Hence, the entity needs to also
ensure that the material are stored at the appropriate place with sufficient
infrastructure facility. To enable this, the system should be comprehensive
enough to track details of all products procured from different suppliers.
(v) Cash-Flow– Arranging the payment terms and methodologies for
exchanging funds across entities within the supply chain.
8.33 Internal audit functions are increasingly important as entities work to
manage its increasingly complex and pervasive supply chain risk. Supplier
disruption can immediately and significantly affect profitability, impair growth
opportunities, shatter shareholder value, and compromise reputation through
a decreased level of public confidence.
The following procedures might be performed by the internal auditor to
estimate the supply chain management system.
1 Analysing the Supply Chain
Management System
1.1 Has the entity made a comprehensive
study on the supply chain?
1.2 Is the Supply chain management system
commensurate with the size of business?
1.3 Has the entity taken steps to evaluate the
cost-benefit of having an in-house system
to an external service provider?
1.4 Are the terms of contract with the external
service provider appropriate in the overall
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business scenario?
1.5 Are there sufficient indemnification
clauses available in the agreement to
enable management of risk to an
appropriate level?
1.6 Is there a clear understanding of the true
cost(direct plus indirect) of supply chain
risk events?
1.7 Is the estimate of the cost made and
reviewed at frequent intervals?
1.8 Are there any pre-defined management
responses corresponding to increased
levels of supplier risk?
1.9 Has the entity focussed on early
intervention and identification of any
default than a crisis management?
1.10 Is there a contingency plan for recovery in
the event the distributor/ distribution
system fails for any reason?
2 Distribution Network Configuration
2.1 Has the entity analysed the benefit of an
external distributor as against an internal
system?
2.2 Considering the importance of the
distribution network, does the entity have
a prescribed network and organised
system of movement of products?
2.3 Does the Company have a written policy
for its distribution network and mobilisation
of goods?
2.4 Does the entity have all its major suppliers
at strategic locations?
2.5 Are the distribution centres located at
strategic locations to enable quick
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movement and timely availability of
products?
2.6 Are there sufficient controls in the entity to
ensure that the decisions are made by the
appropriate personnel and every
movement is authorised by the
appropriate level of authority?
2.7 Does the entity have a process of
identifying frequent delays/ errors/ losses
and rectifying the same?
2.8 Does the entity have a control matrix for
sourcing of good and products from
various production locations, warehouses
and distribution centres?
2.9 Are the controls sufficient to ensure that
sourcing is made from the right suppliers/
distributors and available on a timely
basis?
3 Distribution Strategy
3.1 Does the entity have a strategy for
efficient handling and managing inventory
movement?
3.2 Does the strategy clearly cover all areas
of decision making?
3.3 Is the strategy renewed at a frequent
basis?
4 Trade-Offs in Logistical Activities
4.1 Has the entity made an evaluation of the
cost of alternatives possible?
4.2 Does the entity have a scientific basis of
evaluation of the overall cost of
transportation?
4.3 Has the method of evaluation of cost of
transport between options made in a
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comprehensive manner?
4.4 Do the Logistics Company cause any
critical operational problems? Are they
reliable?
4.5 Has a comprehensive agreement made
between them to ensure that the Logistic
Company would bear the risks related to
transportation of goods?
4.6 If the entity has an in-house logistics
division, are there sufficient controls within
the Company to ensure that there is no
excess cost involved in transportation?
4.7 Are there written policies for logistics cost
to be incurred?
5 Information
5.1 Does the entity have a comprehensive
system to track all the cost incurred for
logistics operations and distribution
system management?
5.2 Does the entity makes a risk analysis
based on such information?
5.3 Has the entity have a comprehensive
system to study the transportation time,
transportation cost per location?
6 Inventory Management:
6.1 Does the entity have sufficient control on
the individual product stock available at
different locations?
6.2 Is there an automated/ semi-automated
system of routing of inventory from
different locations to enable the smooth
disposal of products?
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Payroll
8.34 In a waste management industry, the cost of payroll in relation to the
turnover of the entity might not be very significant. But, the success of the
waste management company depends on the management of personnel and
the availability of personnel. Though the entity individually might be hiring
huge number of employees, but, the collective employment given due to the
waste management industry is quite significant in terms of number of people
employed in this sector across the nation.
Most entities process payroll for the month, based on the records of a
different period. Say payroll for the month of December is processed, the
leave records, performance record for the period 25th November to 24th
December would be considered. The main reason for such processing is to
ensure disbursement of payroll by the specified day of the month. The
internal auditor needs to ensure that proper, adequate and appropriate cut-
off procedures are in place to ensure proper computation and disbursement
of salary to the employees.
8.35 The procedures for computations of amount to be deducted on
various heads also need to be verified in accordance with organisational
policies and procedures. The internal auditor needs to verify the policies and
procedures and compliance of the same on a sample basis.
Compliance with various regulations too is a tedious job especially when the
entity has presence across different states. In such a scenario, the entity
might have to obtain separate registration certifications for different statutes
such as, VAT, Shops and Establishments Act, Professional Tax, Tax
Deduction Account Number (TAN), to name a few. The entity generally has
protocols for ensuring compliance with regulations.
A time sheet is a method for recording the amount of a worker's time spent
at work to enable tracking of details related to leave and absence to enable
the determination of employee’s compensation accordingly. In some
situations, the recording of time sheet is done through an electronic/
automatic process and is driven by software. In such cases, the internal
auditor is required to understand the process in detail and verify the process
on a sample basis. Exceptions if any noted on the project should be taken
seriously by the internal auditor and adequate explanations should be
obtained.
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8.36 The internal auditor may also perform additional analytical

procedures over a period of time and compare them for ascertaining any
inconsistency such as following:
(i) No. of bills raised/ no. of hours
This ratio is determined by the number of bills an employee processes to the
total time taken by him over a period of time. By analysing this ratio, the
internal auditor can understand the skill level of employees, steps taken by
the management towards maintaining efficiency, importance of training and
ability of the management in identifying the right person for the job.
This ratio gains significance especially because, by processing of bills
quickly, customer’s satisfaction can be maintained and thereby enables
development of brand and loyalty.
(ii) Total Revenue per location to number of employees/ employee cost.
This ratio can be computed based on the total revenue of the location in a
particular period to the number of employees/ employee cost in the same
month. This would provide an insight for the internal auditor to understand
the importance of a firm in terms of its significance.
(iii) Employee Turnover ratio
Employee turnover ratio helps the internal auditor to verify the attrition rate
and assess the entity’s effectiveness and steps taken towards prevention of
attrition and retention of key employees. In case of employee turnover ratio
being higher than the industry, the internal auditor must obtain explanations
for the reason for such high turnover ratio.
(iv) Reconciliation with respect to changes in the no. of employees due
to additions, terminations, retirements, etc between various months.
The internal auditor can assess the movement in employees for a month in
comparison with another through tracing the additions and deletions in
month based on each grade and obtain an insight on the plans of the
management.
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8.37 Model Checklist related to Payroll Process is as follows:

1 Specific areas of payroll processing
Does the entity have a payroll process as
1.1
approved by appropriate level of authority?
Is the payroll process complete in all aspects, as
1.2
applicable to the entity?
Does the entity maintain a check-list of statutory
1.3 remittances to be made on account of PF, ESI,
Labour Welfare Fund and alike?
Are cheques prepared and signed by two different
1.4
employees?
If the entity opts for bank transfer, is there
1.5 sufficient Level of Authority to issue to a bank
transfer instruction to the bank?
Is the payroll processing cross checked before
1.6
payment is made?
Are there sufficient manual records maintained by
the entity in regards to their recruitment, offer
1.7
letter, appraisals and increments and all other
correspondences with the employee?
Have the incentive schemes been verified by the
1.8
internal auditor on a test basis?
Are controls in place to ensure that incentives are
1.9
computed in accordance with the schemes?
Have these controls been tested for
1.10
effectiveness?
Have we performed sample testing of incentive
1.11 workings made and paid to the employee to
ensure adherence to the Incentive system?
Is the attrition rate exceedingly high? Have
1.12
justifications for such a high rate, if any obtained?
Does the entity maintain separately all
1.13 complaints, redressals received from the
employees?
1.14 Have the reasons and explanations for any
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failures and control weakness observed on review

of these complaints?
Does the entity have sufficient controls, records
1.15 for cases where disbursements are made to
employees working from various locations?
Fixed Assets
8.38 In general, an entity operating in the waste management industry
would have the following types of fixed assets:.
 Freehold Land and Leasehold Land
 Buildings, warehouses and leasehold improvements
 Plant and Machinery
 Office equipment
 Computer and software
 Furniture and Fixtures
 Electrical Installations
 Vehicles
In the event of a comprehensive distribution system operated by the entity,
the entity might have a large number of warehouses and storage locations
apart from transportation vehicles. The entity might be required to have
sufficient control in such cases to ensure that the assets put into proper
usage and periodic physical verification might be of paramount importance.
8.39 There could be instances wherein the entity might lease certain
assets for installation at the location. The internal auditor might be required
to verify whether there is proper control over such leased assets.
The internal auditor might be required to ensure that there are sufficient
controls within the entity to differentiate between own assets and those
assets provided by the vendors/ manufacturers to promote their product.
8.40 The internal auditor may also perform additional analytical
procedures over a period of time and compared them for ascertaining any
inconsistency such as following:
(i) Ratio of assets installed to area
The internal auditor might verify the ratio of the total value / no. of assets put
to use per square foot across different stores and in case of any significant
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difference arising in such a ratio, the internal auditor needs to seek

explanation thereon.
(ii) Asset utilisation ratio
Asset utilisation ratio is the ratio of total revenue to the total assets. It helps
the internal auditor to assess the effectiveness of assets with respect to the
revenue made by the entity. The greater the asset utilisation ratio, the entity
is operating at a higher efficiency.
(iii) Asset coverage ratio
Asset coverage ratio is a measure of a specific company’s ability to cover
the amount of its existing debts. Essentially, an asset coverage ratio
measures the tangible physical and monetary assets of a company against
its outstanding debts and overall liability to derive a understanding of the
company’s current financial situation. This measure is usually part of a
larger liquidity analysis, which takes into consideration factors like, cash in
hand, long-term financial obligations, and current liquidity assessments.
If the internal auditor is required to perform fixed asset verification
procedures too as part of the scope of his work, the auditor can refer to
Guidance Note on Audit of Fixed Assets.
8.41 Model Checklist related to Fixed Assets is as follows:
1 Audit of Fixed Assets
1.1 If there are assets issued to employees, does the
entity have sufficient control over such assets?
Are these assets verified on a frequent basis?
1.2 Does the entity have sufficient protection for its
assets from both internal and external damage?
1.3 Does sufficient control and process exist to
ensure capitalisation of assets on the appropriate
date.
1.4 Has the entity taken assets on lease and is there
sufficient control on such assets?
1.5 In the case of assets held at mobile/ temporary
location, does the entity have sufficient control
over them and do they make a periodic physical
verification?
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1.6 How are assets received from manufacturers

identified and ensured that they are not disposed
off?
1.7 In the event, the entity is dealing with distribution
are there sufficient controls and procedures to
ensure appropriate classification of assets owned
by the entity and assets owned by the distribution
partner?
Security
Physical Security
8.42 The most important driver for the physical security is the need of
entity to safeguard their property, staff, customers and the waste collected
for treatment/ disposal. Entities also use physical security as a deterrent to
prevent miscreants entering the premises and cause damage to the
environment by adding chemicals which is dangerous to the health and
environment. Entities also view loss prevention as an essential management
tool. Further, to ensure enhanced security, entities are looking towards
technology and automated systems to prevent crime. The tools include video
surveillance and integrated systems.
Ensuring the security of organization would mean protecting customers, staff
and assets, preventing miscreants from creating problems while benefitting
from complete visibility of sales floor, point-of-sale (POS), receiving doors,
distribution centres and parking facilities. It would involve security for the
following areas/ activities.
(i) In-Store
 Ensure integrated surveillance of POS and cash-handling
areas
 Manage access to restricted areas and locked displays
 Protect customers and employees
 Verify fire, intrusion and electronic article surveillance (EAS)
event alarms using video.
(ii) Back Office and Warehouse
 Protect employees and prevent theft
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 Safeguard assets and equipment

 Monitor productivity and safety
 Track time and attendance through access control
(iii) Parking and Outdoor Premises
 Identify suspicious vehicles
 Ensure entry and exit point security
 Protect assets and buildings
 Monitor merchandise delivery
Further, International organizations have also established standards and
guidelines for physical security as part of an overall security management
program that also includes information security and meets governmental
requirements and consumer expectations.
8.43 Certain examples of internationally recognized standards and
guidelines that are used to implement management systems to effectively
manage physical security pertaining to the Waste management industry
would include:
 BS 25999-1:2006: Business Continuity Management Code of
Practice (management system for disaster recovery and business
continuity)
 ISO/PAS 28000: Specification for Security Management Systems for
the Supply Chain (management system specification for physical
security)
 OHSAS 18001: Occupational Health and Safety Management
(specification for health and safety management systems)
The internal auditor might extend his scope of internal audit to verify the
importance given by management to Physical security. Further, he might be
able to understand and correlate the relationship between reduction of costs
related to theft/ shrinkage in relation to the costs incurred for enhanced
physical security.
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8.44 An illustrative list of procedures that an internal auditor might perform

would include following:
1 Physical Security
Does the entity provides sufficient importance
1.1
to physical security and security measures?
Are the security arrangements made reviewed
by the management on a periodic basis to
1.2
ensure that there is sufficiency of security
measures at each location?
Does the management ensure a continuous
1.3 shifting of security personnel from each
location?
How does the management treat intrusion of
1.4 miscreants in the event the miscreant has been
traced?
Does the management believe in periodic
modification of security procedures and
1.5 systems to ensure that there is limited
possibility for external people and employees in
ascertaining failures in internal security?
Does the management make an estimate to
verify as to what would be the maximum
1.6
possible loss in the event of failure of security
measures and systems?
Are there sufficient Disaster recovery systems
within the organisation to act in the event of
1.7 any mishap/ failing of security measures? Are
the employees sufficiently trained in that
aspect?
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Operating Costs
8.45 The significant operating costs in any waste management entity
include the following:
(i) Lease Expenses
Lease expenses could be of the nature of leasing of office building for work
space, or leasing of assets for official purpose or accommodation provided
to employees. This would be a significant part of the expenses considering
that the entity needs to own the location or lease the location for its display.
The success of the entity is based on location of entity and incidentally to
have a entity at the right location would mean incurring higher cost.
(ii) Advertisement and Marketing Expenses
Advertisement expenses are incurred predominantly for the purpose of
creation and development of a strong brand name apart from creating
awareness among the generator of waste. Branding is one of the most
important aspects of any business, large or small, retail or Business to
Business (B2B). An effective brand strategy gives a major edge in
increasingly competitive markets. A brand is something that tells the
customers (existing and prospective) what they can expect from the entity’s
method of working.
There are many strategies that the entity might use for marketing below:
Multi-channel marketing is marketing using many different marketing
channels to reach a customer. In this sense, a channel might be the
employee collecting waste, NGOs associated with the waste management
industry, restaurants, hospitals, public utility places a web site, a mail order
catalogue, or direct personal communications by letter, e-mail or text
message. The objective of the company doing the marketing is to make it
easy for a consumer to connect with the entity whenever they require in
whatever way it is most appropriate.
To be effective multi-channel marketing needs to be supported by good
supply chain management systems, so that the details are displayed
consistent across the different channels. It might also be supported by
detailed analysis of the return on investment from each different channel,
measured in terms of customer response and conversion of sales. Multi-
channel marketing allows the waste management entity to reach its
prospective or current customer in a channel of his/ her liking.
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(iii) Finance Charges

Finance charges are incurred for the purpose of working capital and capital
expenditure of a entity in waste management industry. The entity needs to
ensure cost efficiency in borrowing of funds. The entity might also opt for an
External Commercial Borrowing for the purpose of incurring expenditure in
foreign currency.
Maintenance of Books, Reporting, Management,

Control & MIS
8.46 The internal auditor is required to verify the sufficiency of controls
related to maintenance of books of accounts by the entity. The internal
auditor is also required to verify the controls for allocation of costs between
different departments in every location and whether it is adequate and
reliable in the light of overall business operations.
An entity might have various stores and accounting operations might be
performed centralised, decentralised or may be a combination of both
manner. The entity might find it best suited if the accounting system is
comprehensive enough to provide a Management Information System which
would be sufficient to provide information for decision making and enable the
entity to understand complexities of business, status of implementation of
new ideas and last the true status of operations of the entity.
8.47 The Reporting system should be comprehensive enough and should
be able to provide the following information:
(i) Sales and Collection:
 Daily statement of sales through Cash and credit sales.
 Reconciliation between Bills raised and collection status with
outstanding debtors.
 Benefits of advertisement through additional revenues and customer
loyalty.
(ii) Inventory Management:
 Loss of inventory on account of theft, spillage / perishing of goods.
 Inventory at each location based on type of waste, stage of disposal
of waste.
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8.48 Model checklist related to maintenance of accounts and Documents

is a follows:
Particulars Yes No N/A
1 Books of Accounts and Documents
1.1 Does the Entity have proper accounting system
commensurate with the regulatory requirements?
Does the Entity have specific books of accounts
for each location across states to enable proper
1.2
declaration of turnover in terms of quantity and
value for statutory purposes?
Are the Control Systems in place in estimating
the revenue generated location-wise sufficient to
1.3
ensure that proper books are maintained for the
location?
Does the Entity have location wise employee
1.4 details to ensure proper allocation of payroll cost
to the location?
1.5 Are the books of accounts closed every month?
Whether the time period for the closure of the
books of accounts on a monthly basis is
1.6
reasonable with regards to the operations of the
entity?
Are the controls for re-opening of books proper to
1.7
ensure prevention of manipulation?
Are the books maintained in a manner to provide
1.8 Information to the management for decision
making?
Surprise Verification
8.49 If physical verification or examination is done without prior
information to the management, it is called as surprise check. An element of
surprise is experienced by management or the employee in such cases.
Surprise check is used in physical verification of cash, security items,
inventory etc. Further, the internal auditor might also consider surprise
check towards compliance of required procedures and policies by the
employees of the organisation.
The Internal Auditor might use surprise checks as an effective tool for
finding effectiveness and continuity of internal controls.
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Chapter 9
Specific Issues Related to Internal Audit
of Waste Management Company
Revenue Earned by the Company
9.1 The revenue model of the waste management company will be
different from that of other companies. The company might earn revenue
from waste collections from residential areas which includes organic and
inorganic wastes, industrial waste which includes metal and other scraps
and other commercial wastes like, bio-degradable and non bio-degradable
wastes and wastes which cannot be recycled or reused.
The following is the check list for auditing the revenue model of a waste
management company. This is not an exhaustive check list.
S.No. Particulars
1 Internal Audit of Revenue
1.1 Does the company have any contracts with buildings in
residential areas?
1.2 Does the company processes organic waste into compost? If it
is processing then what is the method used to arrive at the
selling price?
1.3 Does the company sell the compost for both agricultural and
domestic use? If yes, then is it selling at different prices?
1.4 Does the company processes the inorganic waste and sells it
directly to customers or does it sells the inorganic waste to a
third party?
1.5 If the company is selling the inorganic waste by processing then
what is the method used to determine the selling price?
1.6 If the company is selling it to a third party then what is the
method used to determine the selling price? Whether it calls for
a tender or has a contract with few of the parties?
1.7 Does the company enters into contracts with its clients for
collecting and segregation of waste?
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S.No. Particulars
1.8 Are the charges collected by the clients towards collection and
segregation of waste or only towards collection?
1.9 If the company has to segregate the waste does it collect
separate charges towards segregation?
1.10 Is the contract with the clients renewed periodically or is
termination being initiated by the clients?
1.11 Does the company dump the inert wastes (which cannot be
recycled or reused) into landfills?
1.12 If it is dumping it into landfills has it taken the prior approval of
local municipal bodies and the government?
1.13 Has the company entered into an agreement with the local
bodies and the government to fix a tipping fee for dumping of
waste into the landfills?
1.14 What is the frequency at which the company will be paid the
tipping fee, i.e., whether monthly, quarterly, etc.?
1.15 Is the company being paid only the tipping fee or is it also
receiving reimbursements for transportation and other
expenses?
1.16 Does the company processes waste metal and converts it into
scrap used for industrial process?
1.17 If the company is selling the scrap what is the method used to
determine the selling price? Whether it calls for a tender or has
a fixed price in tune with the industry standards?
1.18 Does the company shreds paper, cardboard, textile or recycles
and sells it?
1.19 If the company is recycling the paper and cardboard is it selling
it as finished goods to the end users or is it selling it as raw
material for further processing?
1.20 Does the company undertakes document destruction? If yes,
what are prices charged for wholesale and retail customers?
1.21 Does the company recycles such shredded documents or
incinerate them?
1.22 Does the company buys used furniture, cardboard boxes that
could be recycled and reused? If yes, what is the method used
by the company to determine the selling price of the products?
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S.No. Particulars
1.23 Does the company receives any subsidies or grants from state
or central government?
1.24 Does the company receives any concession for setting up of the
plant or for its operation or renewal or obtaining of licenses?
1.25 What is the weighing measure used for calculating the weight
(eg., kilograms, tons etc)? What is the price per kg/ton of waste
sold?
Verification of Major Expenses

9.2 The major heads of expense that might be incurred in waste
management company would be:
 Labour charges
 Processing charges
 Transportation of wastes
 Disposal expenses.
Labour Charges
9.3 Labour charges refer to the various employee expenses incurred in
order to ensure that the operations of waste management company like,
collection and segregation of waste, processing and incineration of waste,
transportation and disposal of waste, etc., are carried out smoothly. These
are the steps involved in audit of labour charges:
S.No Particulars
2 Labour Charges
Check whether any muster roll or payroll to record the payroll
2.1
expenses employee wise.
Verify if the labour is hired by the company itself of they have been
2.2
hired on contract basis from a third party.
Verify the contracts with the clients to ascertain whether the
2.3 personnel for carrying out the collection, segregation and disposal
should be hired by the company or by the client.
Verify monthly booking of labour charges and check if it is tallying
2.4
with the muster roll.
2.5 Verify if there is any register or log maintained for the quantity of
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S.No Particulars
waste collected and segregated or disposed of by each employee.
Obtain an understanding of the employee benefits and post
2.6 employment benefits like, pension, provident fund, etc. offered to
employees and labour by institutions.
Verify the procedure of valuation and disclosure of employee
2.7 benefits with reference to Accounting Standard 15 “Employee
Benefits”.
Review the personnel file maintained for work records for checking
2.8
hours worked, time reports, payments made, etc.
Check the contracts of employees hired on part time basis and
2.9 ensure that they are paid for the period they are employed as per the
terms of contract.
Processing Charges
9.4 Processing of waste encompasses following major steps:
(a) Treatment of effluents
(b) Processing of scraps for resale
(c) Segregation of solid wastes into organic and inorganic wastes.
(d) Incineration of wastes
The steps involved in audit of processing charges are as follows:
S.No Particulars
3 Processing Charges
3.1 Check for various input of wastes and check the ratio of derivable
output for each unit of input waste.
3.2 Verify if the waste which is processed can be further processed or
should be disposed off as per the rules of Pollution Control Board.
3.3 Verify if the processing is done as per the rules framed by the
Pollution Control Board.
3.4 Review the amount booked under this head under the various
ledgers with supporting documents and vouchers.
3.5 Examine whether the processing expenses have been properly
classified and disclosed under appropriate account heads in the
financial statements in accordance with the recognized accounting
principles.
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Transportation Charges
9.5 Transportation charges include all expenses incurred towards
transporting the waste from the point of collection to the point of treatment
and later to the point of disposal. The process involved in audit of
transportation charges is:
S.No Particulars
4 Transportation Charges
Verify whether the company owns the trucks and tippers or it has
4.1
taken them on hire.
4.2 Review the contract agreements if the vehicles are taken on hire.
Verify whether the vehicles will be hired by the company or by the
4.3
client.
Check whether there are security stamps, check in pass, etc. for the
4.4
waste being transported inside and out of the factory.
Check the entries recorded in books with supporting documents and
4.5
vouchers for expenses relating to transporting charges.
Verify that exact amount of waste sent from one location reaches the
4.6
other location in same quantity.
If there is a difference of quantity the reason for the same has to be
4.7
enquired and verify if it is a normal or abnormal loss.
Examine whether the transportation expenses have been properly
4.8
principles.
Disposal Expenses
9.6 Disposal expenses relates to all the expenses incurred for the final
disposal of the wastes. Different kinds of wastes have to be segregated and
disposed in right ways. Wrong disposing techniques leads to fatal health
issues.
The process of auditing the disposal expenses is as follows:
S.No Particulars
5 Disposal Expenses
5.1 Verify the agreements with third party for disposal of final wastes.
Verify if the wastes have been disposed in proper methods and ways
5.2
as per the rules framed by the Pollution Control Board.
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S.No Particulars
5.3 Check the amount booked under various ledgers with supporting and
vouchers relating to disposal expenses.
Verify if there is any spillage of wastes during the disposal process
5.4
and if there is any spillage; verify the steps taken to clean it.
Examine whether the disposal expenses have been properly
5.5
principles.
Types of Wastes and Disposal Techniques

9.7 Industries are of different kinds using different inputs. Hence, the
output wastes generated by each of the industries would differ. The different
kinds of
o wastes generated would be mainly classified as under:
 Non-Hazardous wastes
 Hazardous wastes
 Radioactive wastes
The following are ways of disposal of different types of wastes:
Non hazardous waste Hazardous waste Radioactive wastes
Chemical container
Physical treatment Vitrification
disposal
Livestock carcass
Chemical treatment Ion exchange
disposal
Waste incineration Biological treatment Synroc
Above ground
Landfill Solidification
disposal
Recycling Incineration Geological disposal
Transmutation
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9.8 The process of audit of disposals is as following:

S.No Particulars
1.1 Check the total waste obtained by the company and how much
waste of is apportioned to be disposed.
1.2 Verify whether such wastes have to be disposed of by burying it in
landfills or by incineration.
1.3 If it has to be filled in landfills verify the documents granting
permission by the government to fill it in that particular landfill or
verify if it is notified by the government as a landfill.
1.4 Verify the documents given by the government to ensure that there
was a landfill in the first place.
1.5 If the company claims that it has filled up a landfill then physically
verify that the landfill is filled completed and it is the same landfill the
permission for which is granted by the government.
1.6 Do reverse calculation: Total Waste collected – Scrap – Recycled –
incineration – treated waste = Waste for disposal.
1.7 Ensure that there are no transportation spills and if there are any,
then verify if any steps are taken to clean the same.
1.8 There should be proper check in and checkout of waste.
1.9 The disposals should have a proper time roll where it shows the
quantity and time at which waste for disposals move out.
Additional Issues
9.9 Apart from the usual procedures undertaken by the internal auditor,
there are certain specific areas that require his attention in case of entities
generating and disposing of the waste on its own. They are:
(a) Whether the waste generated has been collected and stored before
disposal based on its type.
(b) Whether the entity has adequate infrastructure for processing the
waste.
(c) Whether such infrastructure complies with specifications as
prescribed in various laws regarding waste management.
(d) Whether the entity is providing adequate training to its employees
engaged in the waste management process.
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(e) Whether the entity is providing regular health checkups for its
employees and is maintaining a record for the same.
(f) Whether the entity is providing adequate accessories like, gloves, etc
to the employees.
(g) Whether the entity has got vehicles for transporting the waste
generated in the factory to the premises where it is disposed.
(h) Whether the equipments used for processing the waste has been
maintained regularly.
(i) Whether the entity has water treatment plant? If so, how the sludge
created is disposed of.
(j) How are the waste generated treated by the entity for costing/
accounting purposes.
(k) Whether the entity is filing annual report regarding waste
management within the due date specified in the respective acts.
(l) Whether any notice has been served on the entity with regard to
waste generation and disposal by pollution control board? If yes,
what is the action that has been taken by the entity.
(m) Whether the persons engaged in the treatment of waste is
outsourced employees or they are in the pay register of the
company.
(n) Whether the entity has complied with labour laws relating to such
employees.
(o) Whether the entity is conducting awareness program regarding waste
generated and disposed to its employees on regular basis.
9.10 In case of entities engaged in the collection and disposal of waste,
apart from the general areas of internal audit and the specific areas
mentioned above in relation to disposal of waste, the following additional
areas require auditor’s attention. They are:
(a) Whether the entity is engaged in collecting waste for disposal from
business units? If yes, whether the entity has entered into any
agreement with such business units.
(b) Whether the terms of agreement specifies the periodicity of
collection, consideration for collecting the waste, containers for
different type of waste, etc.
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(c) Whether the terms of agreement specifies whether the persons

engaged in the waste collection has to be employed by the entity or
the business unit.
(d) Whether any person has to be placed on the location of the business
unit for segregating the waste on generation.
(e) Whether the entity has signed employment contracts and such
contracts provide for benefits available to employees due to health
hazards arising out of handling waste.
(f) Whether the entity has obtained license for collecting and treating
the waste from the local and statutory authorities.
(g) If the said license is on renewable basis, whether the entity has
renewed the license periodically.
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Chapter 10
International Agreements on Waste
10.1 Environmental care is of global interest and vital importance. The
term pollution has nothing to do with national boundaries, and is freely
transported between countries and continents. The international community
has recognized this fact,
A number of attempts to improve the environment have been recorded on
paper during the last few decades. The most relevant of these agreements
regarding waste are presented below.
Agreements Including Non-Hazardous/ Solid

Waste
10.2 Legislations concerning waste are usually differentiated according to
the type of waste. International conventions often cover nuclear and
hazardous waste, whereas non-hazardous waste, often called solid waste, is
more usually regulated at the national level. However, there are a few
international conventions that also cover non-hazardous waste. These are
presented below
(i) The OECD Decision C(2001)107/FINAL
The Organization for Economic Co-operation and Development (OECD) has
instituted binding agreements for its member countries (30 states) regulating
the transboundary movements of waste destined for recovery operations.
Between 1984 and 1992, eight OECD Council Acts were adopted covering
waste identification, definition, and control of transboundary movements of
waste. Seven of these Acts are currently being consolidated and updated
with the ultimate goal of developing a global control system for waste
movements. The control system aims to facilitate the trade of recyclables in
an environmentally sound and economically efficient manner by using a
simplified procedure and introducing a risk-based approach to assessing the
necessary level of control of material. Waste exported to countries outside
the OECD area, whether for recovery or final disposal, are not subject to this
simplified control procedure.
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The OECD control system is based on two types of control procedures:

 Green Control Procedure: for waste that poses a minor threat to
human health and the environment and are consequently not subject
to any other controls but those normally applied in commercial
transactions
 Amber Control Procedure: for waste that poses a sufficient risk to
justify their control.
(ii ) London Convention
The London Convention on the Prevention of Marine Pollution by Dumping
of Wastes and other matter is a global agreement that was drawn up at the
Inter- Governmental Conference on the Dumping of Wastes at Sea in
London in 1972. The objective of the Convention is to prevent pollution of
the sea by the dumping of waste and other matter that is liable to create
hazards to human health, to harm living resources and marine life, to
damage amenities or to interfere with other legitimate uses of the sea.
(iii) The MARPOL Convention
The MARPOL Convention for the Prevention of Pollution from ships is the
main international convention covering prevention of pollution of the marine
environment by ships from operational or accidental causes. It entered into
force in 1983. The key objectives of the Convention are:
 To eliminate pollution of the sea by oil, chemicals, harmful
substances in packaged form, sewage, garbage and other harmful
substances that might be discharged in the course of operations;
 To minimize the amount of oil that could be released accidentally by
ships, including also fixed or floating platforms.
 To improve further the prevention and control of marine pollution from
ships, particularly oil tankers.
Agreements Including Hazardous Waste

10.3 In the late 1980s, a tightening of environmental regulations in
industrialised countries led to a dramatic rise in the cost of hazardous waste
disposal. Searching for cheaper ways to get rid of this type of waste, "toxic
traders" began shipping hazardous waste to developing countries. There are
few international conventions and agreements that cover hazardous waste.
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They are presented below:

(i) Basel Convention
The Basel Convention on the Control of Transboundary Movements of
Hazardous Wastes and their disposal is a global agreement addressing the
problems and challenges posed by hazardous waste. The key objectives of
the Basel Convention are to minimize the generation of hazardous waste in
terms of quantity and hazardousness, to dispose of them as close to the
source of generation as possible and to reduce the movement of hazardous
waste. It developed criteria for "environmentally sound management". A
control system, based on prior written notification, was also put into place.
Environmentally sound management (ESM) is a central goal and means
taking all practical steps to minimize the generation of hazardous waste and
strictly control its storage, transport, treatment, reuse, recycling, recovery,
and final disposal, for the purpose of protecting human health and the
environment. One of the guiding principles of the Basel Convention is that,
in order to minimize the threat, hazardous waste should be dealt with as
close to where it is produced as possible. Therefore, under the Convention,
transboundary movements of hazardous waste or other waste can take
place only upon prior written notification by the state of export to the
competent authorities of the states of import and transit (if appropriate).
Each shipment of hazardous waste or other waste must be accompanied by
a movement document from the point at which a transboundary movement
begins to the point of disposal. Hazardous waste shipments made without
such documents are illegal.
(ii) Bamako and Waigani Conventions
The Bamako convention prohibits the import of hazardous waste into African
region. The Waigani convention prohibits the import of hazardous waste into
Pacific Island developing countries.
Agreements Regulating Radioactive Wastes

10.4 Radioactive wastes are the most dangerous type of waste that would
harm the environment as well as human lives. These wastes can be fatal if
not handled properly. Some of the agreement related to radioactive wastes
is given below:
(i) Joint Convention
The Joint Convention on the Safety of Spent Fuel Management and on the
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Safety of Radioactive Waste Management was the first legal instrument to

address these issues directly on a global scale. The objectives of this
convention are:
 To achieve and maintain a high level of safety worldwide in spent
fuel and radioactive waste management, through the enhancement of
national measures and international co-operation, including safety-
related technical co-operation where appropriate.
 To ensure that during all stages of spent fuel and radioactive waste
management there are effective defences against potential hazards
so that individuals, society and the environment are protected from
the harmful effects of ionising radiation, now and in the future, in
such a way that the needs and aspirations of the present generation
are met without compromising the ability of future generations to
meet their needs and aspirations.
 To prevent accidents with radiological consequences and to mitigate
their consequences should they occur during any stage of spent fuel
or radioactive waste management
(ii) Convention on Nuclear Safety
The Convention on Nuclear Safety is a global agreement that was adopted
in Vienna in 1994. Its aim is to legally commit participating states that
operate land-based nuclear power plants to maintain a high level of safety
by setting international benchmarks to which states would subscribe. The
specific safety obligations in the Convention are based on what are termed
"fundamental safety provisions" rather than on highly detailed standards,
guidance on the more detailed internationally agreed safety standards are
already available, and these are continually being updated.
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Chapter 11
Audit Criteria at the International Level
11.1 Depending on the audit topic and international agreements, domestic
legislations and policies will be relevant as audit criteria. As EU members
have carried out majority of the reviewed audits, EU directives and
regulations feature often as audit criteria in addition to national legislation
and national policies. The UK National Audit Office audits serve as a good
illustration for the use of both EU and national audit criteria. The 2006 waste
audit focused on progress compared to targets imposed by the EU Landfill
Directive 1999/31/EC, while the 2009 audit on private finance in the waste
sector had both the National Strategy for Waste Disposal and the EU Landfill
Directive as criteria. The 2010 audit on business waste adopted the
Business Resource Efficiency and Waste Programme 2005-2008, the Waste
Strategy 2007, the Landfill Tax 1996 and the EU Landfill Directive as audit
criteria to examine how business waste was reduced.
11.2 Other waste-related EU directives and regulations that have been
applied as audit criteria are as follows:
 Waste framework directive – EU Directive 2008/98/EC
 Shipments of waste - EU Regulation 1013/2006
 Port reception facilities for ship-generated waste and cargo residues
- EU Directive
 2000/59/EC
 End of life vehicles – EU Directive 2000/53/EC
 Packaging and packaging waste – EU Directive 94/62/EC
 Disposal of Animal Waste – EU Directive 90/667/EEC
11.3 Other EU directives that have been adopted as audit criteria in
waste management audits consist of:
 Ambient Air Quality and Cleaner Air for Europe – EU Directive
2008/50/EC
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 Assessment of the effects of certain plans and programmes on the

environment – EU Directive 2001/42/EC
 Urban waste water Treatment – EU directive 91/271/EEC
Among relevant international environmental agreements, the Basel
Convention has been applied as audit criteria in several audits. Other
international agreements applied as audit criteria include the Helsinki
Convention and the Kyoto Protocol. The Helsinki Convention on the
protection of the Baltic Sea was used as criteria in the Estonian audit (2004)
on the organisation of ship waste and management in ports. The Austrian
SAI adopted the Kyoto Protocol as audit criteria in several audits of regional
waste management.
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Appendix 1
Internal Audit Checklist on Bio-Medical
Waste
Name of the Hospital
Address of the Hospital
No. of Beds Date
Basic Requirement for Biomedical waste

Sl. Check OT LR ICU/ Lab
No NICU
1 Adequate no. of BMW Bins as per BMW Yes/ Yes/ Yes/ Yes/
Guide line (Red, Yellow, Blue and NO NO NO NO
Black) & Green Bins for general waste
2 Adequate no. of BMW Bags as per Yes/ Yes/ Yes/ Yes/
BMW Guide line (Red, Yellow, Blue and NO NO NO NO
Black) & Green Bins for general waste
3 Puncture proof containers for sharps/ Yes/ Yes/ Yes/ Yes/
Blue Bags NO NO NO NO
4 Mutilators (needle/ syringe cutters) Yes/ Yes/ Yes/
NO NO NO Yes/
NO
5 Calibrated weighing machine for BMW Yes/ Yes/ Yes/ Yes/
NO NO NO NO
6 Personal protected equipments like Yes/ Yes/ Yes/ Yes/
Gloves, Caps, Masks, Aprons & Gum NO NO NO NO
boots etc as per BMW guidline
7 1% fresh Sodium hypochlorite or Yes/ Yes/ Yes/ Yes/
Bleaching Powder Solution As per BMW NO NO NO NO
Guide line
8 BMW Record Register Yes/ Yes/ Yes/ Yes/
NO NO NO NO
9 Mercury Spill Management, kits Yes/ Yes/ Yes/ Yes/
NO NO NO NO
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10 Blood spill Management kits Yes/ Yes/ Yes/ Yes/

NO NO NO NO
11 Post exposure Prophylaxis Kits Yes/ Yes/ Yes/ Yes/
NO NO NO NO
12 BMW Storage Rooms With Lock & Key Yes/ Yes/ Yes/ Yes/
NO NO NO NO
13 BMW Licenses under State Pollution Yes/ Yes/ Yes/ Yes/
control Board NO NO NO NO
14 Different Forms & Formats (Needle Yes/ Yes/ Yes/ Yes/
Stick Injury & Annual Report, etc.) NO NO NO NO
Manpower for BMW

1 Available of a trained Dedicated person Yes/ Yes/ Yes/ Yes/
for BMW management NO NO NO NO
2 Trained and skilled BMW person for Yes/ Yes/ Yes/ Yes/
BMW collection & transportation NO NO NO NO
3 Dedicated & Trained Infection Yes/ Yes/ Yes/ Yes/
Controlled Nurse NO NO NO NO
Training for BMW
1 Training for BMW management Yes/ Yes/ Yes/ Yes/
Handlers NO NO NO NO
Generation & Segregation
From Wards/ O.Ts/ICUs/ Labs/ OPDs/ Blood Bank/ Radiology etc
Generation
1 Is the waste segregated at the site of Yes/ Yes/ Yes/ Yes/
generation NO NO NO NO
2 Is the sharp infectious waste (needles, Yes/ Yes/ Yes/ Yes/
blades, broken glass etc) to be NO NO NO NO
disposed in white/blue puncture proof
containers?
3 Is the non sharp Infectious material:( Yes/ Yes/ Yes/ Yes/
infected NO NO NO NO
plastics,syringe,dressing,gloves,masks,
blood bags and urine bags) to be
disposed in red plastic bins/bags
2909
4 Is Anatomical Infectious waste(Placenta, Yes/ Yes/ Yes/ Yes/

body parts) to be disposed in yellow NO NO NO NO
plastic bins or bags
5 Is non- infectious (General )waste E.g. Yes/ Yes/ Yes/ Yes/
packing materials.Cartons,Fruit and NO NO NO NO
vegetable pills, Syringe and needle
wrappers, Medicine covers to be
disposed in Green/Black plastic bins or
bags.
6 Is the infectious waste and non - Yes/ Yes/ Yes/ Yes/
infectious waste mixed at the source of NO NO NO NO
generation?
Collection & Storage
1 Is the waste covered in covered bins Yes/ Yes/ Yes/ Yes/
NO NO NO NO
2 Is the bins filled up to more than ¾ Yes/ Yes/ Yes/ Yes/
th level NO NO NO NO
3 Is the bins cleaned with soap and Yes/ Yes/ Yes/ Yes/
disinfectant regularly NO NO NO NO
4 Is the bins overfilled Yes/ Yes/ Yes/ Yes/
NO NO NO NO
5 Is the infectious and non-infectious Yes/ Yes/ Yes/ Yes/
waste filled in same bins NO NO NO NO
6 Is the stored waste kept beyond 48 Yes/ Yes/ Yes/ Yes/
hours NO NO NO NO
Transportation
1 Is the waste transported in closed Yes/ Yes/ Yes/ Yes/
containers NO NO NO NO
2 Are the waste collection Yes/ Yes/ Yes/ Yes/
bins/Trolleys/wheel barrow used for NO NO NO NO
transporting waste
3 Is the Pre defined route available for Yes/ Yes/ Yes/ Yes/
transportation of waste within the NO NO NO NO
health care facility
4 Is the waste transported in open Yes/ Yes/ Yes/ Yes/
container and bags NO NO NO NO
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5 Is the transportation done during the Yes/ Yes/ Yes/ Yes/

OPD time or any Emergency NO NO NO NO
Treatment & Disposal
1 Is your bio medical waste disinfected Yes/ Yes/ Yes/ Yes/
and mutilated before final disposal NO NO NO NO
2 Is the anatomical waste to be deep Yes/ Yes/ Yes/ Yes/
buried /incinerated? NO NO NO NO
3 Are the syringes to be cut and Yes/ Yes/ Yes/ Yes/
chemically disinfected with 1% sodium NO NO NO NO
hypo chloride solution at the source of
generation before final disposal?
4 Is the infected plastics to be chemically Yes/ Yes/ Yes/ Yes/
disinfected or autoclaved ,shredded and NO NO NO NO
send for final disposal
5 Is the General waste to be chemically Yes/ Yes/ Yes/ Yes/
disinfected before final disposal NO NO NO NO
6 Is the infectious waste disposed before Yes/ Yes/ Yes/ Yes/
chemical disinfection and mutilation NO NO NO NO
7 Can the infectious waste and non Yes/ Yes/ Yes/ Yes/
infectious waste be mixed at any point NO NO NO NO
of time
Management of Different waste streams
1 Is the sharp injury reported and is it Yes/ NO
reported within 7 hours.If yes then
please mention the count per month
2 Are the protective gears like gloves Yes/ NO
used while handling and syringe
3 Is the barrel and plunger detached Yes/ NO
before disinfecting the syringe
4 Is the sharp waste mixed with other Yes/ NO
waste
5 Is the practice of recapping or bending Yes/ NO
of needles done
6 Is the sharp discarded in poly bags Yes/ NO
7 Is the sharp disposed in open area Yes/ NO
2911
8 Is the vials and ampoules disposed in Yes/ NO

sharp containers
9 Is the anatomical waste disinfected Yes/ NO
before final disposal
10 Is the anatomical waste disposed in Yes/ NO
unsecured open areas or in any water
bodies
11 Is the personal protective gears like Yes/ NO
mask and gloves used while handling
sputum cups and slides
12 Is the sputum cup or slides disinfected Yes/ NO
with 5 % hypochlorite solution for at
least one hour
13 Is the sputum cups finally disposed Yes/ NO
inside the premises or outside the
premises.
14 Is the slides of the Sputum test Yes/ NO
disposed in sharp container
15 Is the discarded blood bags punctured Yes/ NO
before disinfection in 5 % sodium
hypochlorite solution for at least 1 hour
16 Is the blood bag discarded without Yes/ NO
mutilation and disinfection for final
disposal?
17 Is the plastic waste like IV Yes/ NO
set,bottles,syringes,latex gloves,
catheters etc.cut by scissors before
disinfection in 1% sodium hypochlorite
solution for 1 hour
18 Is the disposable gloves and masks Yes/ NO
reused?
19 Is liquid waste spillage (blood, body Yes/ NO
fluid puss or any discharge) disinfected
by adding 1% hypochlorite solution
before cleaning.
20 Is the blood spill cleaned cloth reused Yes/ NO
21 Is the mercury spill cleaned with bare Yes/ NO
hands
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22 Is the mercury disposed in waste bins Yes/ NO

and drains
23 Is the mercury collected into bottle Yes/ NO
having some water and tightly covered
with the lid
24 Is the mercury droplet collected using 2 Yes/ NO
card board piece /Syringe
25 Is the hand washing done before and Yes/ NO
after any procedure.Eg collecting lab
sample, examination of the patient,
handling blood and body fluid.
26 Is all staff immune to hepatitis B and Yes/ NO
tetanus vaccine?
27 Does the hospital personnel visit the Yes/ NO
final disposal site even if outsourced or
done outside the hospital?
28 Is the medicine and chemicals stored in Yes/ NO
same store?
Observer's Signature Date
2913
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Appendix 2
Environmental Management Audit and
Regulatory Compliance Checklist–Model
Location ……………………………………………….. Date………………
1.0 General - including staff awareness
1 What steps have been taken to publicise the Organisation’s
Environmental Management System and Environmental Policy?
2 Are details of the EMS available? ( via Intranet/Internet, posters,

leaflets, in-house magazine, training, local procedures etc.)
3 Are staff aware of the EMS and their roles and responsibilities?
4 Are staff encouraged to play an active part in improving the
Organisation’s environmental performance?
5 Have staff undertaken adequate training e.g. Mandatory, Induction,
specific training (examine training records)
2.0 Air Emissions

1 What potential or actual sources of polluting emissions to
atmosphere are there? (these would include chimney stacks from
boilers and incinerators, exhaust from CHP plant, medical gases,
halon fire fighting systems, fume cupboard extracts and potential
Legionellae breeding sites such as evaporative cooling towers -
none in Organisation)
2 Does the site comply with relevant legislation

3 Are monitoring, maintenance and control procedures adequate?
3.0 Aqueous Emissions
1 What is the risk of contaminating storm water drainage by spillages
of chemicals, fuels etc?
2 In the event of fires in chemical or materials storage areas, could
fire sprinkler water contaminate the storm drains? (LGF at UHW
only)
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3 Are any environmentally harmful wastes disposed of to a sewer

(e.g. mercury amalgam, radio-isotopes, solvents)?
4 Are there adequate safeguards to prevent pollution of ground or
surface waters by site effluents?
5 Are there storm and foul water drainage systems drawings for the
site, and is the identification of each known?
6 Have gullies, grids and manhole covers been colour coded to aid
identification (blue for surface water, red for foul)
7 If interceptors are fitted when were they last cleaned out?
8 Is the integrity of the bunding arrangements regularly checked?
9 Are there spillage kits in close proximity to where hazardous
substances are stored?
10 Are instructions for dealing with spillages readily available?
4.0 Dangerous Substances and Incidents
1 Are any potentially hazardous materials stored or used (e.g. fuel,
pesticides, drugs, chemicals, flammable and toxic substances)?
2 Are there adequate safeguards to prevent their escape into the

environment? (e.g. containment measures such as bunding,
interceptors etc)
4 Are there spillage kits in close proximity to where hazardous
substances are stored?
5 Are instructions for dealing with spillages readily available?
6 Are there contingency plans in place for dealing with
emergencies?
7 Are contingency plans tested?
5.0 Noise and Nuisance
1 Have there been any complaints about the site from neighbours or
the general public?
2 Have there been any problems with the local authority, Environment
Agency or any other regulatory authority?
3 What records are kept of complaints?
2915
4 Who deals with complaints and what procedures are followed?

6.0 Planning (incl Site, Land, Buildings Issues)
1 Are there any Tree Preservation Orders - TPO’s on the site and how
are they managed?
2 Are there any Listed Buildings on the site and how are they
managed?
3 Does the site have any environmental sensitivities, such as
proximity to rivers, lakes, forests, townships, rare habitats etc?
4 Have Building Regulations approval been granted for building /

development works?
5 Have there been any complaints about the site from neighbours or
the general public?
6 Have there been any problems with the local authority, Environment
Agency or any other regulatory authority?
7 What records are kept of complaints?
8 Who deals with complaints and what procedures are followed?
9 Is there an up-to-date site plan showing site boundaries, site
orientation, plant layout, drainage systems, etc?
10 Are all utilities clearly identified?
11 Are there regular site inspections by management?
12 Are there plans for new developments and how are they
progressing?
13 Have the environmental effects of these plans been adequately
assessed? [e.g. formal Environmental Impact Assessments
14 Is there scope for improving the site by landscaping, tree planting,
putting in lawns, lakes and amenity areas?
15 Where are the main storage areas for materials, especially
hazardous substances and fuels?
16 What procedures are in place for coping with fires, spillages and
other emergencies?
17 Have there been any previous pollution incidents on the site and, if
so, how were they handled?
18 Has there been any damage to the local environment which can be
traced directly to the site activities?
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7.0 Resource Consumption (incl. Use of Energy)

1 Does the Procurement/ Purchasing process incorporate
environmental clauses in the contract / supplier documentation?
2 Is the environmental performance of suppliers monitored?
3 Are any of these associated with particular environmental problems
during their life cycle? (e.g. tropical hardwoods, CFC, paper etc.)
4 Are more environmentally preferable alternatives available?
5 Could these be used?
6 Is there any scope for reducing levels of consumption?
7 Are consumption levels adequately monitored at present?
8 Does the Department currently purchase recycled paper for
photocopying or personal computer printers?
9 Does the Department currently purchase other recycled office
stationery?
ENERGY
10 What are the main forms of energy used?
11 Is energy consumption adequately monitored? (ideally, monitored
separately for different buildings, departments or functions)
12 Has any significant effort been put into energy conservation?

13 What specific steps have been taken to reduce its energy
consumption and to ensure that use of energy is as efficient as
possible?
14 Have any energy utilisation surveys been undertaken or detailed
advice provided on how to reduce energy consumption recently?
(i.e. within the last 3 years)
15 Who is responsible for reporting problems of energy use and
supply to the Estate Maintenance Help Desk?
16 Is energy efficiency positively promoted via a Good Housekeeping
Scheme?
17 Are there up to date ‘switch it off’ stickers and posters for lighting
and electrical equipment?
18 Has investment been made in energy efficient schemes recently?
2917
19 Are individual staff encouraged to be responsible for their own

energy use?
20 Are employees positive concerning energy reduction and aware of
their role and responsibility?
21 Are environmental issues considered when purchasing fuels? (
i.e. gas cleaner than oil etc.)
22 Does the monitoring regime in place highlight notable exceptions to
normal performance?
23 Are the necessary management arrangements in place to support
the delivery of effective energy management?
24 Is there scope for further initiatives?
WATER
25 What are the main uses for water?
26 Is the consumption adequately monitored?
27 Is there potential for reducing water consumption?
28 What specific steps have been taken to reduce its water
consumption and to ensure that use of water is as efficient as
possible [Examples include push taps, low flush toilets, urinal
controls Are
29 there adequate safeguards to prevent pollution of the mains supply
(e.g. by siphoning back)?
30 Has any significant effort been put into water conservation?
31 Is water efficiency positively promoted via a Good Housekeeping
Scheme? (Posters, stickers, training etc)
32 Who is responsible for reporting problems of water use and
supply to the Estate Maintenance Help Desk?
33 Have any water utilisation surveys been undertaken recently? (i.e.
within the last 3 years)
34 Has investment been made in water efficient schemes recently?
35 Does the monitoring regime in place highlight notable exceptions to
normal performance?
36 Are employees positive concerning water reduction and aware of
their role and responsibility?
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37 Are the necessary management arrangements in place to support

the delivery of effective water management?
38 Is there scope for further initiatives?
8.0 Risk
1 Where are the main storage and collection areas for materials,
especially hazardous substances and fuels?
3 What procedures are in place for coping with fires, spillages and
other emergencies?
4 Have there been any previous pollution incidents on the site and, if
so, how were they handled?
5 Where are the main storage and collection areas for materials,
especially hazardous substances and fuels?
6 Are there suitable spillage kits readily available to contain
potential spillages?
7 Have staff undergone training in the proper use of spillage kits?
8 Is there an adequate monitoring and maintenance regime in place to
manage the risks posed by Legionella?
9 Is the monitoring and maintenance regime independently audited by
a specialist consultant?
10 Is there an Asbestos Register identifying all known ACMs in
premises?
9.0 Transport
1 Does the site own or operate any vehicles?
2 Are these managed in such a way as to maximise fuel economy?
3 Is there any potential to reduce the number of miles driven (e.g.
better route planning, avoiding unnecessary journeys etc.)?
4 Is there potential to convert existing vehicles to greener fuels (e.g.

LPG, CNG, ULSD etc.)?
5 Does the site have a published Sustainable Transport Plan?
6 Is there a Transport Manager whose role is to co-ordinate all
transport activities?
2919
7 Has a travel to work survey been undertaken amongst staff to

establish attitudes and transport patterns for the site?
8 Is secure cycling storage provided, together with lockers and
showering facilities for staff?
9 How is the site served with public transport facilities? (e.g. bus
services and stops, railway stations, taxi ranks etc.)
10 Is there a fee levied for on-site parking?
11 Is there up to date information and timetables provided for all
public transport providers readily available for staff and visitors?
10.0 Waste
1 What wastes are produced?
2 How are they disposed of?
3 Is there a formal waste policy and strategy for the site?
4 Is the Organisation’s Waste Management Policy and Operational
Procedures available to staff carrying out waste disposal?
5 Have waste audits been carried out to identify and monitor all
waste arisings on the site?
6 Are staff aware of the requirements for waste management under
the respective acts
7 Is the disposal service for toxic and flammable waste chemicals
provided by Procurement via the Toxic and Flammable Waste Store
used?
8 Are records of waste consignments available and up to date?
(Records for 3 years must be retained)
9 Are there suitable procedures and facilities for segregating and
handling clinical waste and other potentially harmful wastes (e.g.
solvents, toxic, special waste etc.)?
10 Are there up to date waste management posters and procedures
available in prominent locations e.g. waste rooms, staff rooms etc.?
11 Does the site comply with the requirements of the Various Acts
relating to waste management?
12 Are suppliers of goods and services encouraged to reduce
packaging or to take empty packaging back for re-use?
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13 Are there opportunities for reducing the quantity of waste

produced?
14 Is the Organisation’s systems for advertising or acquiring redundant
equipment made use of?
15 Is there a waste manager whose role is to co-ordinate all waste
management activities?
16 Are appropriate waste records e.g. Authorisations, Carriers
Certificates of Registration, Hazardous Waste Regulations
Consignment Notes, Annual Transfer Notes, Waste Transfer
Notes, ‘Duty of Care’ documentation and audit, Permits, Licences
- waste management, Method Statements etc. available and in
order
17 Are there opportunities for recycling of the wastes produced?
• Paper?
• Cardboard?
• Aluminium / Steel cans?
• Glass?
• Printer toner cartridges?
• Plastics?
• Furniture?
• Wood?
• Other? (specify)
Auditor’s Signature Date
2921
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Reference
http://envfor.nic.in
http://www.recycletradeindia.com
http://www.vermigold.com
http://en.wikipedia.org/wiki/Waste_management
http://moef.nic.in
http://www.stat.fi
http://en.wikipedia.org/wiki/Waste
2922
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I-21
TECHNICAL GUIDE ON
INTERNAL AUDIT OF
BEVERAGES INDUSTRY
2923
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Glossary
AP Accounts Payable
AR Accounts Receivable
CAGR Compounded Annual Growth Rate
COA Chart of Authority
CWIP Capital Work-in-Progress
ER-M Expense Requisition- Marketing
ESI Employees State Insurance
FAR Fixed Assets Register
GR Goods Receipt
GRN/SRN Good Receipt Note/ Service Receipt Note
GR/IR Good Receipt/ Invoice Receipt
HR Human Resource
IR Installation Report
KL Kilo Litre
LR Load-out Requisition
MODVAT Modified Value Added Tax
MRN Material Requisition Note
MSR Marketing Spend Requisition
OIF Outlet Identification Form
PF Provident Fund
PJV Purchase Voucher
PO Purchase Order
PRiA Process Risk Assessment
PR Purchase Requisition
QA Quality Assurance
2928
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Technical Guide on Internal Audit of Beverages Industry
QSL Quantitative Stock Ledger

RC Registration Certificate
RFQ Reference for Quote
SKU Stock Keeping Unit
SOD Segregation of Duties
VC Visi Cooler
VMF Vendor Master File
2929
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Contents
Glossary ........................................................................................................ 2928
Chapter 1: Introduction ............................................................................... 2931
Chapter 2: Overview of Beverages Industry ............................................... 2932
Chapter 3: Methodology for Internal Audit .................................................. 2937
Chapter 4: Business Process Overview and Risk Assessment .................... 2947
Chapter 5: Internal Audit Checklist ............................................................. 3004
Appendix: Format of Environmental Statement (Form V) .......................... 3116
2930
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Chapter 1
Introduction
1.1 This Technical Guide is intended to assist internal auditors in carrying
out internal audit of entities operating in the beverages industry. The
Technical Guide deals with operational areas of entities operating in this
industry with emphasis on financial controls and compliance mandated as
per various regulations applicable to the specific industry.
Today, the scope of internal audit has increased from mere verification of
financial transactions to reviewing of proper, efficient and economical usage
of resources by the entity. Therefore, it is imperative that an internal auditor
familiarizes with various operational and technical aspects of the beverages
industry for performing internal audit in a more efficient and effective manner.
1.2 This Technical Guide covers the following aspects:
(i) Glossary of terms peculiar to beverages industry;
(ii) Scenario in the beverages industry, special features and challenges
faced by entities operating in this industry;
(iii) Discussion on Business Process Review and Risk Assessment in
Bottling Operations;
(iv) Major areas of internal audit significance and risks faced by an entity
operating in this industry, procedures that an internal auditor can
perform (including Regulatory Compliance);
(v) Appendix.
This Technical Guide does not cover the following aspects:
(i) Special audits
(ii) Investigations.
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Chapter 2
Overview of Beverages Industry
2.1 The beverages industry consists of two major categories and eight sub-
groups. The non-alcoholic category is comprised of soft drink syrup manufacture;
soft drink and water bottling and canning; fruit juices bottling, canning and
boxing; the coffee industry and the tea industry. Alcoholic beverages categories
include distilled spirits, wine and brewing.
The beverages products industry, viewed as an aggregate group, is highly
fragmented. This is evident by the number of manufacturers, methods of
packaging, production processes and final products. The soft drink industry is the
exception to the rule, as it is quite concentrated.
2.2 In most established markets around the world, soft drinks now rank first
among manufactured beverages, surpassing even milk and coffee in terms of per
capita consumption. Including ready-to-drink, packaged products and bulk mixes
for fountain dispensing, soft drinks are available in almost every conceivable size
and flavor and in virtually every channel of retail distribution.
Soft drinks are gradually overtaking hot drinks as the biggest beverages sector in
the world, with consumption rising by around 5 percent a year according to a
recent report from Zenith International. But while the US remains the biggest
market for now, Asia is likely to be the main driver of sales growth in the future.
2.3 Growth drivers of the beverages industry in developed countries are
different from those in the developing countries. While growing population,
favorable demographics and rising income levels are expected to be key drivers
in developing countries, rising health consciousness and increasing need for
convenience foods are expected to drive growth in developed countries.
As early as the 1960s, most bottlers were producing beverages through
machinery that ran at 150 bottles per minute. As product demand has continued
to skyrocket, soft drink manufacturers have shifted to faster machinery. Due to
advances in production technology, filling lines now are able to run in excess of
1,200 containers per minute, with minimal downtime except for product or flavor
changes.
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Market Trends and Industry Challenges

2.2 Market trends for the soft drink industry can be summarized by six
fundamental themes:
 Changing consumer beverages preferences, featuring a shift toward
health-oriented wellness drinks;
 Growing friction between bottlers and manufacturers in the distribution
system;
 Continually increasing retailer strength;
 Fierce competition;
 Complex distribution system composed of multiple sales channels;
 Beverages safety concerns and more-stringent regulations.
While previously dominated by carbonated soft drinks, the industry is now more
evenly balanced between carbonates, and product categories with a healthier
image, such as bottled water, energy drinks and juice.

Whitepaper on Soft Drinks Industry- Deloitte and SAP
2933
2.5 While carbonates are still the largest soft drink segment, bottled water is
catching up fast, with an average of 58 liters consumed annually per capita.
Among individual countries, Italy ranks number one in bottled water
consumption, with the average Italian drinking 177 liters per year. Overall, bottled
water represents the fastest growing soft drink segment, expanding at 9 percent
annually. This growth is being partially driven by increasing awareness of the
health benefits of proper hydration. The industry has responded to consumers’
desire for healthier beverages by creating new categories, such as energy
drinks, and by diversifying within existing ones. For example, the leading
carbonated soft drink companies have recently introduced products with 50%
less sugar that fall mid-way between regular and diet classifications. Similarly, a
South African juice company has recently released a fruit-based drink that
contains a full complement of vitamins and nutrients.
Relationship of Beverages Companies and Bottlers

2.6 Globally, the soft drink market works on the relationship of beverages
companies and the bottlers where the key ingredient (which is concentrate) are
supplied to the bottlers by the beverages companies for packaging and
distributing the products in market. This structure often causes conflicts of
interest between beverages companies and bottlers. Many factors are
contributing to the friction between bottlers and beverages companies:
(i) Beverages companies often profit from increased concentrate sales at the
expense of bottlers’ margins.
 Beverages companies have historically had higher returns and
lower capital requirements
 Bottlers have historically had lower returns and higher capital
requirements for building and maintaining production and
distribution networks.
(ii) Bottlers continue to consolidate in an attempt to offset margin pressure
through cost reduction. Specifically, size helps them to:
 Spread fixed costs over greater volume
 Make larger investments in automated production lines
 Contain the costs of acquiring new customers
 Increase customer loyalty.
(iii) Declining prices have further reduced bottlers’ margins.
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(iv) Soft drink manufacturers continue to develop new products and

packaging, which increases operational complexity and, therefore,
expenses for bottlers.
 More new soft drinks have been introduced in the last two years by
the top beverages companies than were introduced in the entire
decade of the 1990s. Examples include: Coke with Lemon, Vanilla
Coke, Dr. Pepper Red Fusion, Pepsi Blue, DnL, Fanta Berry,
SoBe,Mr.Green, Sierra Mist, and Mountain Dew, Code Red.
 While manufacturers view these new products as a way to build a
portfolio of options to hedge against product successes or failures,
bottlers see them as a burden since they often require additional
capital expenditures
Beverages Industry - Specific Processes

2.7
(i) Planned deliveries – Effective solutions feature powerful tools that
businesses can use to efficiently load, dispatch, and track any number of
deliveries. Emphasis is placed on eliminating redundant trips and matching the
appropriate vehicles and drivers to customers for each delivery. By extending
route management into the order management system, companies reap cost
savings of 25% to 50%.
(ii) Monitor route business – Beverages companies must be able to
account for every item delivered, and take quick action to resolve item
discrepancies. Best-in-class solutions provide powerful check-in and check-out
functions that record all deliveries and returned goods. They also provide tools to
monitor quickly and accurately the entire transportation operation, or that of a
transportation supplier, from loading and delivery to accounting and settlement of
returned goods. The system as a whole ensures complete loads, on-time
deliveries, solid inventory control, and seamless invoicing.
(iii) Keep track of empties – Best-of-breed beverages industry solutions
paint a detailed picture of the entire empties situation, showing the location and
status of crates and pallets, and helping optimize return logistics. It also permits
quick access of each customer’s empties account as well as print delivery notes
or invoices recording the empties involved in a delivery.
(iv) Manage rebates and bonus agreements – Rebate and bonus
agreements are critical to enhancing relationships among beverages
manufacturers, wholesalers and customers. Yet, the task of managing rebate
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programs is becoming increasingly difficult as current rebate arrangements often

involve numerous parties, including many that are not directly involved in the
initial transactions. Effective beverages solutions provide companies with the
tools needed to manage easily and accurately large, complex partner
constellations with any number of bonuses or rebate arrangements. They also
provide coupon management. These functions apply both to direct and indirect
customers.
(v) Manage commissions – In the beverages industry, complex commission
structures are needed to motivate the sales force and to encourage them to push
certain brands and to develop specific markets. Best-in-class solutions allow
companies to complete commission based transactions, make payments both to
internal and external sales forces, and track the payment of these commissions
over time.
Soft Drinks Industry in India

2.8 The beverage market has witnessed rapid growth over the past few years
in India. Increasing middle class population, rapid urbanization and rising
disposable income are some of the major factors fuelling this growth. The
carbonated drinks market is close to ` 6,000 crores and is growing by 10-12 per
cent annually.
The fruit-based beverages market stands at ` 5,000 crores and is growing at 35-
40 per cent annually. The fruit-based beverages market is divided into three
segments — fruit drinks, nectar and 100 per cent juice — and are currently
dominated by Dabur, Parle Agro, PepsiCo and HUL.
The Functional drinks segment is dominated by energy drinks. The current
market size of energy drinks in India is around `500 crores and it is expected to
grow at a CAGR of 25 per cent.
2.9 Within the hot beverages category, India is the largest producer of tea
with a total turnover of around `8,500 crores, growing at a rate of 1-2 per cent
annually. India is the world’s fifth largest producer of coffee, accounting for 4 per
cent of the world’s production.
Fruit/ vegetable juice segment is expected to grow at a CAGR of 30 per cent in
value terms, followed by the energy drinks segment at a CAGR of around 25 per
cent in value terms.
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Chapter 3
Methodology for Internal Audit
Standards on Internal Audit
3.1 The Institute of Chartered Accountants of India has, till date, issued
eighteen Standards on Internal Audit (SIAs), which aim to codify the best
practices in the area of internal audit and also serve to provide a benchmark
of the performance of the internal audit services. While formulating SIAs, the
Internal Audit Standards Board of ICAI takes into consideration the
applicable laws, customs, usages, business environment and generally
accepted internal auditing practices in India. The list of Standards on Internal
Audit (SIAs) is given below:
SIA 3 Documentation
SIA 4 Reporting
SIA 5 Sampling
The Framework for Standards on Internal Audit comprises four components
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viz., the Code of Conduct, the Competence Framework, the Body of

Standards and the Technical Guidance.
3.2 Internal audit is conducted in variant economic, legal, cultural and
business environments. The organisations in which internal audit is
performed differ widely in size, structure, nature of business, scale, purpose,
objectives and geographical spread. Further, the internal audit activity may
be performed by an entity’s employees or by some external agency. Thus,
the Framework for Standards on Internal Audit applies to all the persons
performing internal audit activity, irrespective of whether the function is
performed in-house or by an external agency.
Purpose of Standards on Internal Audit (SIAs)

3.3 The purpose of Standards on Internal Audit (SIAs) is:
 To provide standards for quality of services during an internal audit.

 To codify the best practices in internal audit services.
Some important aspects on internal audit have been discussed in the
following paragraphs.
Terms of Internal Audit Engagement

3.4 The client is expected to formally communicate the appointment to the
internal auditor. Upon receiving the communication, the internal auditor
should send an engagement letter, preferably before the commencement of
engagement so as to avoid any misunderstandings. The internal auditor and
the client/ auditee should record the terms of engagement in the letter or
other suitable form of contract and it shall also confirm objective and scope
of internal audit with the client.
The engagement letter should, generally, include reference to the following
aspects:
 Objective of the internal audit
 Management’s responsibilities
 Scope of internal audit (including reference to the applicable
legislation, regulation and various pronouncement of ICAI).
with the internal audit
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 Expectation to receive management’s written confirmation in respect

to representation made in connection with the audit.
 Basis on which fees shall be computed and the billing Arrangements
thereof.
Any changes in the terms of the appointment should be communicated in
written form. Moreover, the internal audit may be on a continuous basis,
monthly, quarterly or even annual. It is important for the internal auditor to
ensure that the periodicity of the internal audit is sufficient in the light of
overall business condition.
Knowledge of the Entity and its Environment

3.5 Prior to accepting an engagement, the internal auditor should obtain a
preliminary knowledge of the Beverages industry and of the nature of
ownership, management, regulatory environment and operations of the entity
subjected to internal audit, and should consider whether a level of knowledge
of the beverages business adequate to perform the internal audit can be
obtained.
Following the acceptance of the engagement, further and more detailed
information should be obtained. To the extent practicable, the internal auditor
should obtain the required knowledge at the commencement of the
engagement. As the internal audit progresses, that information should be
assessed, enhanced, updated, refined and validated as the internal auditor
and the engagement team obtain more knowledge about the beverages
business.
3.6 In case of continuing engagements, internal auditor should update and
re–evaluate information gathered previously, including information in the
prior year’s working papers. The internal auditor should also perform
procedures designed to identify significant changes that have taken place in
the operations, control environment, technology and strategic processes
since the last internal audit.
An understanding of business risks facing the entity increases the likelihood
of identifying risks of material misstatement in the information subject to
internal audit.
3.7 Knowledge of the beverages business is a frame of reference within
which the internal auditor exercises professional judgment in reviewing the
processes, controls and risk management procedures of the entity
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It should be ensured that the internal audit engagement team assigned to an

internal audit engagement obtains sufficient knowledge of the business to
enable them to carry out internal audit work delegated to them. The internal
auditor should also ensure that the audit team appreciates and understands
the need to be alert for additional information and the need to share that
information with the internal auditor and other members of internal audit
team.
In order to make effective use of knowledge about the business, internal
auditor should consider how this knowledge acquired, affects his review of
internal controls and systems taken as a whole and whether his overall
entity–wide assessment of systems, procedures, controls and risk
management principles are consistent with his knowledge of the entity’s
business
The information and knowledge obtained by the internal auditor on the entity
and its environment should be adequately documented in the engagement
working papers
Audit Planning, Materiality and Sampling

3.8 After acquiring the knowledge of business and various laws and
regulation applicable to the beverages industry, the internal auditor should
plan out the internal audit activity. Planning helps in achieving the objectives
of internal audit function.
Adequate planning ensures that:
 Appropriate attention is devoted to significant areas of audit.
 Potential problems are identified.
 Skills and time of the staff are appropriately utilised
 Work is carried out in accordance with the applicable pronouncements
of ICAI.
 Work is carried out in conformity with the applicable laws and
regulation.
In preparing an internal audit program, the internal auditor should obtain an
understanding of the accounting and internal control system prevalent within
the entity, exercise preliminary judgment regarding the critical areas to be
considered during the internal audit. It also helps the internal auditor in
determining the audit materiality, nature and extent of audit procedures to be
adopted. While designing an audit sample the internal auditor should
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consider the specific audit objectives, materiality, population from which the
internal auditor wishes to select the sample, area of audit significance and
the sample size.
Internal Control
3.9 Internal controls are a system consisting of specific policies and
procedures designed to provide management with reasonable assurance that
the goals and objectives it believes important to the entity will be met.
and error, the accuracy and completeness of the accounting records, and the
timely preparation of reliable financial information. The internal audit function
constitutes a separate component of internal control with the objective of
determining whether other internal controls are well designed and properly
operated.
3.10 Internal control system consists of following inter-related components:
 Control (Or Operating) Environment
 Risk Assessment
 Control Objectivity Setting
 Event Identification
 Control Activities
 Information and Communication
 Monitoring
 Risk Response.
The system of internal control must be under continuous supervision by
management to determine that it is functioning as prescribed and is modified,
as appropriate, for changes in environment. The internal control system
extends beyond those matters which relate directly to the functions of the
accounting system. The internal auditor should obtain an understanding of
the significant processes and internal control systems sufficient to plan the
internal audit engagement and develop an effective internal audit approach.
The internal auditor should use professional judgment to assess and
2941
evaluate the maturity of the entity’s internal control. The auditor should
obtain an understanding of the control environment sufficient to assess
management's attitudes, awareness and actions regarding internal controls
and their importance in the entity. The internal auditor should examine the
continued effectiveness of the internal control system through evaluation and
make recommendations, if any, for improving that effectiveness.
The importance of internal controls in a beverages entity need not be over-
emphasized. Internal audit plays a major role in determining the
effectiveness of internal controls and highlights areas for improvement. The
Internal auditor may also refer to Standard on Internal Audit (SIA) 12,
“Internal Control Evaluation” for a detailed discussion on internal control.
Internal Audit in an Information Technology

Environment
3.11 Computer Information System (CIS) environment exists when one or
more computer(s) of any type or size is (are) involved in the processing of
financial information, including quantitative data and the significance in
relation to the audit, whether those computers are operated by the entity or
third party.
The overall objective and scope of internal audit does not change in a CIS
environment. However, the use of computer changes the processing,
storage, retrieval and communication of financial information and may affect
the accounting and internal control systems employed by the entity.
Moreover, the risks involved in an internal audit may too undergo a change.
The internal auditor should have sufficient knowledge of the CIS environment
to plan, direct, supervise, control and review the work performed.
3.12 The data in an entity operating in CIS environment is, generally,
voluminous. The CIS automatically generates material transaction or entries
and exchanges transaction automatically with other organisation as in
electronic data interface (EDI) systems. Source documents, computer files
and other evidential matter exist only for short period and in machine
readable form. The use of the Computer Assisted Audit Technique (CAAT)
shall increase the efficiency in the performance and enable the internal
auditor to economically apply certain procedures to the entire population or
accounts transaction.
The internal auditor should understand the CIS Environment in designing
audit procedures to reduce the audit risk to an acceptable low level. The
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internal auditor should also document the audit plan, the nature, the timing
and the extent of audit procedures performed and the conclusions drawn
from the evidence obtained which may be in the electronic form. The internal
auditor should ensure that such electronic evidence is adequately and safely
stored and is retrievable in its entirety, as and when required.
The internal auditor may refer to Standard on Internal Audit (SIA) 14,
“Internal Audit in an Information Technology Environment” for guidance on
procedures to be followed when an audit is conducted in a computer
information systems (CIS) environment.
Internal Audit Documentation

3.12 Internal audit documentation should be designed and properly
organized to meet the requirements and circumstances of each audit. It
should be sufficiently complete and detailed for an internal auditor to obtain
an overall understanding of the audit. All significant matters which require
exercise of judgment, together with internal auditor’s conclusion thereon
should be included in the internal audit documentation. Documentation
prepared by internal auditor should enable reviewer to understand:
 The nature, timing and extent of audit procedures performed to comply
with SIAs and applicable legal and regulatory requirements;
 The results of audit procedures and audit evidence obtained;
 Significant matters arising during the audit and conclusions reached
thereon; and
 Terms and conditions of an internal audit engagement/ requirements
of internal audit charter, scope of work, reporting requirements, any
other special conditions, affecting the internal audit.
3.13 It should cover all the important aspects of an engagement viz.,
engagement acceptance, engagement planning, risk assessment and
assessment of internal controls, evidence obtained and examination/
evaluation carried out, review of the findings, communication and reporting
and follow up.
3.14 Compliance means ensuring conformity and adherence to regulatory
acts, rules, procedures, laws, regulation, directives and circulars. Standard
on Internal Audit (SIA) 17 issued by the ICAI relating to “Consideration of
Laws and Regulations in an Internal Audit“ states that when planning and
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performing audit procedures and in evaluating and reporting the results

thereof, the internal auditor should recognize that non-compliance by the
entity with laws and regulation that may materially affect the financial
statements. However, an audit cannot be expected to detect non-compliance
with all laws and regulations. Detection of non-compliance, regardless of
materiality, requires consideration of the implications for the integrity of
management or employees and the possible effect on the other aspect of the
audit.
Non-compliance with laws and regulations could result in financial
consequences for the entity such as, fines, litigation, etc. Internal auditor
cannot be expected to detect noncompliance with all laws and regulations;
however this argument shall not apply to engagements where the internal
auditor is specifically engaged to test and report separately on compliance
with specific law and regulations.
3.15 `The management is responsible to ensure that the entity’s operations
are conducted in accordance with laws and regulations. The responsibility for
prevention and detection of non-compliance shall be that of the management;
however the internal auditor should plan and perform the internal audit
recognising that the internal audit may reveal conditions or events that would
lead to questioning whether an entity is complying with laws and regulations.
The term “Non-compliance “refers to acts of omission or commission by the
entity being audited, either intentional or unintentional, which are contrary to
the prevailing laws and regulations. Such acts include transactions entered
into by, or in name of the entity or on its behalf by the management or
employees. However, non-compliance does not include personal misconduct
(unrelated to the business activity of the entity) by the entity’s management
or employees.
Understanding of Laws and Regulations

3.16 Laws and regulation vary considerably in their relation to the financial
statements. Some laws or regulations determine the form or content of an
entity’s financial statement or the amounts to be recorded or disclosures to
be made in financial statements. Other laws or regulation are to be complied
with by management or prescribed by the provisions under which the entity is
allowed to conduct its business. Non-compliance with laws and regulation
could result in financial consequences for the entity such as, fines, litigation,
etc. It also has a potential effect on going concern as an entity.
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The internal auditor should plan and perform the audit recognizing that the
audit may reveal conditions or events that would lead to questioning whether
an entity is complying with laws and regulations. In order to plan the internal
audit, the internal auditor should obtain understanding of the legal and
regulatory framework applicable to the entity and how the entity is complying
with that framework.
3.17 To obtain this understanding, the internal auditor would particularly
recognize that non-compliance of some laws and regulations may have a
fundamental effect on the operations of the entity and may even cause the
entity to cease operation, or call into question the entity’s continuance as
going concern. To obtain the understanding of laws and regulations, the
internal auditor would ordinarily:
 Use the existing knowledge of the entity’s industry and business.
 Inquire with management as to the laws or regulations that may be
expected to have a fundamental effect on the operations of the entity.
 Inquire with management concerning the entity’s policies and
procedures regarding compliance with laws and regulations.
 Discuss with management the policies or procedures adopted for
identifying, evaluating and accounting for litigation claims and
assessments.
After obtaining the understanding, the internal auditor should perform
procedures to identify instances of non-compliance with those laws and
regulations where non-compliance should be considered while preparing
financial statements, specifically:
authorities.
Significance of Compliance
The significance of compliance is:
(a) The benefits to the Industry are:
 Helps in compliance with legal terms and covenants and thereby
reduces penalties and charges
 Increased Internal Control
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 Reduction of internal frauds and losses

 More time available for other core activities
 Increases efficiency in operations
 Customer satisfaction.
(b) The benefits to the stakeholder are:
 Better investor confidence
 Uniform practices
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Chapter 4
Business Process Overview and
Risk Assessment
4.1 Process Risk Assessment (PRiA) is used to perform a risk assessment
for each Business Process. There should be one form created for every
process that could potentially be audited. This risk assessment form should
be updated year after year for any new risk assessment information. The
risk evaluation helps to determine the risk level for each process. Risk levels
can be high, medium or low depending on each evaluation. The risk level
will determine what detail of testing should be performed on the processes.
Procurement Process
4.2 The purpose of the procurement procedures is to ensure that
purchases are made judiciously, and that goods of acceptable quality are
purchased from reputable vendors, at competitive terms and in a timely
manner. Further, to ensure that timely disbursements are made.
These procedures cover goods and services, but exclude purchases from
inter-unit locations and capital purchases for projects, etc.
The various types of goods and services purchased are:
(i) Raw and packaging materials (excluding concentrate)
(ii) Concentrate
(iii) Beverages cooler and sales assets which are generating sales
volume.
(iv) Capital goods
(v) Stores and spares
(vi) Professional and other services
(vii) Utilities e.g., electricity, telephone, etc.
(viii) Marketing materials, e.g., premier items, etc.
4.3 Requesting or User department is required to:
(i) Check availability of material on hand with stores;
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(ii) Prepare PRs in a timely manner;

(iii) Obtain appropriate (budgetary and other) approval on PR;
(iv) Allocate applicable department, location and budget codes.
4.4 Purchase function is required to:
(i) Review PR for completeness, approval, etc.;
(ii) Plan purchases of regular raw and packing material and consumables;
(iii) Obtain and evaluate quotations from vendors;
(iv) Document new vendor evaluation and selection on vendor master form
(VMF);
(v) Negotiate price and other terms of purchase;
(vi) Prepare purchase order and obtain approvals per COA;
(vii) Circulate copies of PO;
(viii) Co-ordinate with vendors for logistics, including for return of rejected
goods;
(ix) Monitor items dispatched on returnable basis;
(x) Monitor vendor performance over time.
4.5 Finance department is required to:
(i) Approve POs and update budget commitment;
(ii) Verify vendor invoice and check for arithmetical accuracy etc.;
(iii) Perform three-way match, matching invoice, GRN and PO;
(iv) Update excise records on receipt of vendor’s excise invoice (also
rejections);
(v) Record the payable to vendor and withhold taxes, as applicable;
(vi) Disburse to vendors on a timely basis and deposit taxes withheld;
(vii) Reconcile with the vendors’ statement of account periodically;
(viii) Undertake cut-off procedures periodically.
4.6 Stores department is required to:
(i) Receive goods and prepare GRN, on the basis of supplier’s delivery
challan/ packing list and physical verification;
(ii) Provide excise invoice, where applicable, to the excise duty section;
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(iii) Update stock ledger, after quality approval of goods;

(iv) Separately store rejected goods in a marked area and co-ordinate
their return;
(v) Prepare list of obsolete or unusable items, periodically.
4.7 Quality assurance department is required to:
(i) Check quality and approve or reject material for acceptance;
(ii) Approve GRNs for goods accepted, and rejection reports for others.
4.8 The requesting or user department is to initiate purchases of goods or
services on a Purchase Requisition (PRs). These PRs are to be authorized
by the department head as per COA, after verifying the availability of budget
and the validity of the need to purchase.
For more regularly consumed raw and other materials (e.g., concentrate,
sugar, crowns, CO2, HSD, LDO, activated carbon, filters, etc.), a PR need
not be prepared. Procurement for these items is to be monitored by the
Supply Chain department, based on the store’s inventory status on the Daily
Stock Movement Report. The procurement decision is to take into account
the production plan (including maintenance schedule), delivery lead-time and
contingencies. For certain utility related expenses e.g., telephone, electricity,
courier charges, etc., a PR is not necessary.
4.9 All purchases are to be made from approved vendors only. Where
expenses are incurred by third parties, and reimbursed by the Company, a
prior vendor approval is recommended.
Based on approved VMF received, the working capital section in Finance
department is to update the vendor master file. This is to be arranged
alphabetically, and include details of vendor name, code, address, telephone
number, bank account and the date of activation, and is to be circulated to
purchase section and finance. Changes to the vendor master file should be
made on the basis of approved VMFs. Requests for changes in basic vendor
information (e.g., address, bank account and payee name) should be made
by the vendor in writing. The alphabetic list of vendors is to be reviewed
before a new vendor is added to check that multiple vendor numbers are not
issued to the same vendor.
4.10 When goods are received, the gate security should guide the vehicle
to the designated receiving area, preferably separated from the stores. The
storekeeper is to carry out a preliminary visual inspection of goods, and
compare the items received and quantities, to the vendor’s packing
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list/delivery note and PO. The storekeeper is to prepare a Goods Receipt

Note on the receipt of goods. In case of services, the user department is
responsible for confirming the receipt of services, and is to evidence it on the
invoice at the point of its approval. The receipt of smaller transactions (say
below INR 1,000) may be assumed, as the cost of verification etc., may
exceed the exposure.
Where an order is delivered in part, the stores department is to record the
partial receipt on the reverse of the PO, to ensure receipts do not exceed the
ordered quantity.
4.11 For sugar (and some other items purchased in bulk quantities), weight
of the entire load is to be taken on a weighbridge at the time of receipt,
where possible. Further, each bag of sugar is to be weighed by production
before it is poured into the hopper, and recorded on a Sugar Weight
Register. This identifies the shortages by supplier. The differences, if
substantial, are to be recovered from the supplier, and recorded on a
Materials Returned to Stores Note and provided to stores who in turn are to
take it up with the Supply Chain Department.
The AP section is to maintain a GRN Register to track the receipt of invoices,
excise copy of invoice, lorry receipt, and to control freight payments. This
also facilitates making month-end accruals. For freight payments, the
receiver is to record the GRN reference on the reverse of the (transporter’s)
Lorry Receipt (LR), to be submitted to AP with the freight invoice. The AP
section is to link the LR, GRN and the PO, verify the claim and to update the
GRN register for freight payment. Emergency freight payments may be made
at the time of the receipt of goods from the petty cash. In such cases, the AP
section is to update the GRN register next day to prevent duplicate freight
payments.
4.12 The Quality Assurance department (QA) is to inspect goods received,
and document the quantity approved on the GRN. QA is to track the rejection
record of vendors, and take-up potential quality issues with the purchase
function. The purchase function is to monitor overall vendor performance,
including timeliness, quality, etc. The storekeeper is to update the stock
ledger on the basis of the quality approved GRN. The accrual for the payable
is to also correspond to this quantity. Thus, rejected quantities are not taken
as receipts in the system.
For rejections, QA is to prepare a Quality Control Rejection Report and is to
be routed through excise function to enable reversing of the Modvat credit,
and the copy for accounting purposes. Where replacement for goods rejected
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and returned is received, a fresh GRN is to be prepared and the GRN labeled
as “replacements”, to facilitate the AP function to perform the three-way
match. The AP section is to ensure that invoices against which materials
have been rejected are not recorded. Where this has happened, a debit note
is to be promptly made. Similarly, for partial rejections, the vendor’s invoice
is to be recorded at full, and a debit note raised for the value of the rejection.
The AP section is to perform a three-way match between PO, GRN and the
invoice. The AP section is not to alter the invoice (e.g., invoice number, date,
quantity, amount etc.). A separate debit note is to be issued where
deductions are to be made from the invoice. After three-way-match, a pre-
numbered Purchase Journal Voucher is to be prepared.
4.13 At month-end, open GRNs are to be accrued for at standard cost
(where units use standard costing), based on the vendor’s excise invoice or
at the PO rate. Accrual is to be reversed at the beginning of the next month.
The AP section is to ensure timely payments to suppliers, and to process
invoices by their due date. The disbursement team is to consider early
payment discounts and manage cash flows optimally. Access to unused
checks is to be restricted to authorized personnel only. Further, a record of
checkbooks obtained from the bank, and those issued for use, is to be made
on a checkbooks Issue Control Log. All checkbooks are to be stamped
“Account Payee only” on receipt from the bank, except one checkbooks,
which is to be used for petty cash withdrawals.
4.14 Periodically, a statement of account or confirmation of balance is to be
obtained from vendors, to reconcile the payable balance as per books with
the records of the vendors. This is especially important for vendors with
running accounts. The AP staff involved in preparing (or approving) PJVs or
disbursement staff involved in checks preparation should not carry out the
reconciliation.
Certain items are classified as central purchase items and it is mandatory for
all locations to ‘pool purchase’ those items. These include all ingredient and
packing materials, and certain chemicals, stores and spares and capital
goods. The detailed list of central purchase items is available with the Region
Offices. The benefit of central/ pool purchasing is better leverage on prices
and terms, based on the combined volume for all locations.
4.15 Central purchases are to be similar to regular purchases, except for:
 Corporate office to receive procurement plans for the central purchase
items from each Unit;
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 Based on the combined volumes planned, corporate office to negotiate

prices with central vendors;
 Corporate office to raise POs on the central vendor, with a copy to the
Unit;
 Units to indicate the dispatch instructions to the central vendor;
 Unit to receive goods, perform three-way match and process payment
to vendor under intimation to Corporate office;
Process Risk Assessment (PRiA)

4.16 The following table gives in detail Process Risk Assessment (PRiA):
Risk Sub- Risk Question Remarks
Q No. Process
1 Vendor Have there been any Higher the number of
Master File significant vendor addition to the vendor
additions during the master, higher the risk rating
period at this location? to this sub-process.
2 Vendor Have there been any Significant changes in the
Master File changes to the VMF vendor master file leads to
during the period (i.e., higher risk rating to this sub-
vendor deleted, process.
vendor information
changed, etc.)?
3 Vendor How frequently is the Periodic review of VMF or
Master File VMF reviewed and audit trail helps in ensuring
maintained at this that no unauthorised change
location? has been made. Higher the
frequency, lower the risk.
4 Vendor How many issues Higher the number of issues
Master File were noted in last identified in a sub-process,
audit in this sub- higher the weightage or risk
process? ranking of the sub-process.
5 Vendor Have there been any Higher the number of
Selection significant vendor addition to the vendor
additions during the master, higher the risk rating
period at this location? to this sub-process.
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Q No. Process
6 Vendor How many issues Higher the number of issues
Selection were noted in last identified in a sub-process,
7 Purchase Were there any Higher the number of
Orders purchase orders manual purchase orders,
issued outside of the higher is the weightage or
ERP System at this risk ranking of the sub-
location during the process.
period? What was the
value of purchase
orders issued outside
of ERP during the
period?
8 Purchase Have there been any Significant changes in the
Orders changes in the COA leads to higher risk
location's COA during rating to this sub-process.
the period?
9 Purchase Are purchase price If tolerance limits are not
Orders and quantity defined then 3-way match in
tolerances defined in procurement process cannot
the system? be ensured. Absence of
tolerance indicates higher
risk rating to this sub-
process.
10 Purchase How many issues Higher the number of issues
Orders were noted in last identified in a sub-process,
audit in this sub- higher is the weightage or
process? risk ranking of the sub-
process.
11 Goods & Does this location Higher the number of open
Services have a significant purchase orders/ 3-way
Receipts amount of open PO's exceptions, higher is the
or aged 3-way match weightage or risk ranking of
exceptions? the sub-process.
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Q No. Process
12 Goods & What is the value of Higher the value of open
Services goods received but not GRIR, higher is the
Receipts invoiced at this weightage or risk ranking of
location? the sub-process.
13 Goods & Has there been any Higher the number of fraud
Services fraud noted at this cases, higher the weightage
Receipts location in regards to or risk ranking of this sub-
procurement process? process.
Specify the number of
cases?
14 Goods & How many issues Higher the number of issues
Services were noted in last identified in a sub-process,
Receipts audit in this sub- higher is the weightage or
process.
15 Verification Have there been any Significant changes in the
& Approval changes in the COA leads to higher risk
location's COA during rating to this sub-process.
the period?
16 Verification Have any new Significant recurring
& Approval significant recurring payments lead to higher risk
payments been set up rating to this sub-process.
at this location during
the period?
17 Verification How many issues Higher the number of issues
& Approval were noted in last identified in a sub-process,
process.
18 Debit Was there a significant Higher the number of debit/
Notes amount of debit/credit credit memos, higher is the
memos issued at this risk rating to this sub-
location? process.
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Q No. Process
19 Debit How many issues Higher the number of issues
Notes were noted in last identified in a sub-process,
process.
20 Freight Is there significant Significant increase in the
Expense increase in the freight freight expense leads to
expense? higher risk rating to this sub-
process.
21 Freight How many issues Higher the number of issues
Expense were noted in last identified in a sub-process,
process.
22 SOD Has there been any Frequent/ Major Change in
turnover in personnel function for Procurement
that perform key AP role may lead to higher risk
duties that could result rating for this sub-process.
in an employee
performing
incompatible tasks?
23 SOD Has there been any Higher the number of fraud
fraud noted at this cases, higher the weightage
location in regard to or risk ranking of this sub-
AP during the past 3 process.
years?
24 SOD How many issues Higher the number of issues
were noted in last identified in a sub-process,
process.
Production Process
4.17 The procedures cover the requisition and receiving of raw, packing
and other materials, including empties for production, as per plan. This
2955
includes returning any excess quantities of material to the stores and the
transferring of completed production to the warehouse.
(i) Production Department
(a) Prepare planned and a firm next day’s production plan.
(b) Requisition for raw, packing and other materials for production.
(c) Prepare production report for each shift and line.
(d) Record breakage during production.
(e) Transfer product to shipping.
(f) Return excess raw and packing material to stores and empties
to shipping.
(g) Secure material, if any, on the production floor.
(ii) Sales Department
Provide detailed sales forecast.
(iii) Stores Department
(a) Issue raw, packing and other materials.
(b) Receive any returns from the production department.
(iv) Procurement Department
Ensures availability of materials as per the production plan.
(v) Warehousing Department
(a) Prepare status of empties and fills to facilitate production
planning.
(b) Provide empties for production and receive fills from production.
(c) Secure the fills and the empties storage area.
(d) Update excise records, as applicable.
(vi) Quality Department
(a) Perform on-line quality checks during production.
(b) Compute raw material yields
(vii) Finance Department
(a) Record accounting entries for production and consumption of
materials.
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(b) Determine and account for other manufacturing costs.

4.18 he sales department prepares sales forecast by brand and pack,
broadly in line with the annual business plan, latest sales estimate, specific
promotions and the expected market requirements.
Other key factors relevant for this plan are:
 product already available at the plant and distribution warehouses;
 availability of raw and packaging material;
 availability of empties (including new glass);
 production capacity;
 length of time for changing/ cleaning the equipment;
 size of available warehouse space;
 beverages product shelf life; and
 outsource options or requests from other locations.
Based on the Daily Production Plan, the production and QA departments are
to requisition and obtain raw, packing, and other material from the stores on
a Material Requisition-cum-Issue Note. Upon receipt, the material issue note
is to be signed to acknowledge receipt.
The shipping copy of the Daily Production Plan serves as a requisition for
empties. The stack from which empties are to be issued for production is to
be identified and counted. The empties received from shipping are to be
acknowledged by production on an Empties Transfer to Production Form. In
case empties are received more than once in the same shift, this form is to
be prepared for each such issue by shipping and acknowledged by
production.
After each shift, excess inventory on the shop floor is to be returned to stores
on a pre-printed and pre-numbered Material Return Note. This is to be
prepared in duplicate: the original for stores and the book copy for
production. Less preferably, where a secure shop floor store exists and
where the quantities are small (and likely to be consumed in the next day or
so), the production department may hold unutilized material. This is to be
recorded on a Shop Floor Stock Register along with the consumption.
Unused bottles and cases, along with the dirty, scuffed, foreign, other brand
or chip neck bottles are to be returned to shipping, on the Empties Transfer
To/ From Production.
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4.19 High or low fills, cases of incorrect packing or those otherwise identified
as unfit by production must be uncorked immediately, to prevent mix-up with
good product. These bottles are to be excluded from the day’s production
count and drained with the empties being handed over to shipping.
Similarly, samples collected by QA are to be excluded from production.
Upon completion of quality tests, the empties are to be returned to shipping
on the Empties Transfer to/ from Production Form.
Product put-on-hold or otherwise rejected by QA is to be separately identified
on the Empties Transfer to/ from Production Form. Further, “Reject” stickers
are to be pasted by QA on each case, and stacked separately by shipping to
prevent distribution. Further, draining is to be carried out by shipping, upon
receipt of Operation’s Head approval.
A line-wise count of the finished product is to be recorded by production on a
Production Count Sheet. This is prepared in original only and where
automated counters exist, these are to be cross verified with the counters.
Where automated counters are used, they should be zeroed before the start
of the shift. Further, adjustments are to be made to the counter reading for
any empty bottles which pass the counter. Based on counts, the production
department is to prepare a Daily Shift and Line-Wise Production Report.
Production department is to prepare a Glass Reconciliation for each shift,
taking into account any dirty, scuffed, chip neck, foreign or unsorted bottles
returned to shipping, determining the breakage during the production
process. Bins are to be placed at specific areas around the line to collect
broken bottles. These are to be weighed at the end of the shift to determine
(and possibly corroborate) the breakage arrived in Glass Reconciliation, by
location.
Daily raw material usage is to be recorded by QA/ production, to determine
‘yields’. For this purpose, based on the finished production transferred to
shipping, the raw and other materials theoretical consumption is computed.
This compared with the actual consumption provides the yield. Similarly,
these are to be prepared on a monthly and year-to-date basis. Line utilization
levels are also to be calculated, representing the percentage of finished
product produced, in comparison to the rated speed for the line.
Production is to transfer fulls to shipping on the Fulls Transfer Form.
Shipping is to count the fulls received and match with the production reported
on this form, and sign to acknowledge the receipt. Any difference is to be
investigated and resolved promptly.
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Fulls identified as ‘on-hold’ by QA is to be recorded in the remarks column of

the Fulls Transfer Form, and excluded for updating the excise records. Once
approved these are to be corrected on the excise and shipping records. The
rejected stock is to be corrected in the shipping records and drained.
Typically, finished products may be moved to the shipping area while
production continues. Accordingly, these are to be stored in a separate area
within shipping and counted at the end of the shift to determine the
production and the quantity transferred. Less preferably, in certain cases
product may also have to be dispatched from the day’s production. In such
cases, production is to be determined taking into account dispatches from
current production.
At month end, the finance and the production departments are to record the
work-in-progress, if any. Typically, this may be in the form of unused raw or
final syrup. The syrup levels in mixing tanks are to be recorded along with
the breakdown of equivalent raw materials (at standard conversion factor) on
a Month-end Report.
The finance department is to carry out the following activities and periodically
process accounting entries as follows:
(i) Daily:
(a) Ensure excise record is updated for production reported.
[Note: Excise duty is also payable for captive consumption and
breakage of fulls in the shipping area. However, no duty is
payable on rejected goods, identified prior to their moving into
the bonded warehouse, and samples picked up by QA.]
(b) Further, that the quantities dispatched per shipping records,
agree with the excise records (therefore the finished stock in the
shipping area agrees with the excise records).
(c) In the accounting system (ERP), record the quantity of finished
goods produced by brand and pack to trigger the automated
entries for cost of goods sold, etc.
(ii) Monthly:
(a) Perform physical verification of WIP. Based on Month End WIP
Report, value equivalent raw material components and record
entry.
2959
(b) Record the month’s production entry based on the month’s

glass reconciliation record breakage.
Sales and Accounts Receivables

4.21 The process pertaining to sales and accounts receivables are explained
as per following paragraph.:
Check-in Check-out Process

4.22 The purpose of Stock-out and Stock-in procedures is to establish
controls over inventory in the direct route selling process. These procedures
describe the manner in which the hand over or takeover of Company
products is to occur between functions and to establish the responsibility (for
custody).
Typically, a direct route sale is undertaken from a distribution warehouse/
depot, or in certain cases, the plant warehouse. All vehicles on which product
is loaded, must be subject to Stock-out and Stock-in procedures, including
non-company owned vehicles.
Stock-out and Stock-in duties are performed by checkers. They are required
to:
 Check physical stock of fulls, empties and cases given/ received to/
from salesmen;
 Check and report empties for damages and chip necks at Stock-In;
 Prepare Load-out summary.
Salesman is required to:
 Count quantity loaded/ unloaded and sign-off on load sheet;
 Secure vehicle and promptly leave location upon signing of load sheet;
 Sort empties by brand and pack before Stock-In.
Warehouse supervisor is required to:
 Oversee the entire Stock-out and Stock-in process;
 Ensure stocks are loaded on a first-in-first-out (FIFO) basis;
 Ensure physical security controls over Stock-Out and Stock-In area;
 Organize periodic spot checks of vehicles, just outside the warehouse;
 Ensure timely updating of warehouse stock records.
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Each salesman on his return from a route is to provide the quantity and
product-mix (including premia and other items) for the next day’s route. This
is to be recorded centrally, either on an assigned board or on a preprinted
Direct Load-out Requisition (LR), prepared in original. Telephonic requests
received directly at the warehouse are also to be recorded on the LR.
Considering factors like reasonableness, availability of product and sales
target planned, the sales supervisor is to appropriately amend and authorize
the LR for various routes. The approved LR is to be handed over to the
shipping in-charge, to organize the loading of vehicles.
For second or subsequent loads, quantities may be provided to salesmen,
based on their requests. In some cases, it may be logistically more
convenient to operate feeder vehicles to deliver the product to the route
salesman, for subsequent loads.
The loaders are to load vehicles with product in accordance with the LR.
Quantities loaded on route vehicles are to be recorded on a preprinted and
pre-numbered Load Sheet. Where more than one load is dispatched on the
same day, a separate load sheet is to be prepared for the second or
subsequent loads, after completing Stock-In procedures for the earlier load.
Also a reference is to be given of the earlier load sheet, so as to facilitate
settlement. Quantities loaded on feeder vehicles are to be recorded on a pre-
printed and pre-numbered Feeder Load Sheet.
The checkers are to supervise the loading, including for non-company
vehicles, ensuring no product is concealed in the route truck cabin or other
areas. At the time of handing over stock, the salesman is to perform an
independent and blind count of stocks on the vehicle assigned to him, and
call out his count to the checker. Upon agreeing the count, the salesman and
the checker are to both sign the load sheet.
From the point of signing the load sheet, the accountability for the stock
passes on to the salesmen, who are to promptly leave the facility. Using the
salesman’s load sheet, the gate security is to check the paperwork and
inspect the vehicle for any concealed stocks, and then allow the vehicle to
exit.
When route (or feeder) vehicles return to the warehouse, products are to be
unloaded in the presence of both the checker and the salesman. The checker
should take a count independent of the salesman, of the unsold fulls and
empties, i.e., bottles, canisters and crates collected.
When the salesman and the checker agree on the count, it is to be recorded
on the load sheet (the last load sheet, if more than one has been issued).
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The original load sheet (after check in) is to go to the settlement clerk, and
the second copy is to remain as book copy and used for updating stock
records.
The warehouse supervisor is to update the stock register on the basis of the
net load on load sheets, and prepare a Net Load Summary. Further, the
warehouse supervisor is to prepare a Route Breakage Report for the bursts
(liquid and bottle lost), leakage (only liquid lost) and breakage (only bottle
lost) and obtain approval of the sales supervisor.
Direct Sales On-Route Procedures

4.23 On-route, a salesman is to visit each outlet on the route map. The
salesman is to complete the cash or credit invoice for the sale of product,
less return of empties, collect cash and obtain the signatures of the
customer.
The on-route procedures describe the controls applicable to salesmen, in
recording sales, monitoring the inventory of fulls and empties, and handling
the cash and checks collected.
Route salesmen are responsible for all items loaded on their vehicles, as well
as for cash, checks and credit memos collected, along with the paperwork
associated with the daily sales.
Salesmen are required to:
 Secure the product and cash on-route;
 Make credit sale only to approved credit parties;
 Ensure billings are at correct rates;
 Extend discounts per approved schemes only;
 Account for pre numbered documents;
 Complete paperwork prescribed on-route.
On-route sales are to be recorded by salesmen on a preprinted and pre-
numbered Cash Sales Invoice or Credit Sales Invoice, depending on whether
sales are for cash or credit. Further, the receivable or payable on account of
bottles and cases is to be recorded on a pre-printed pre-numbered Deposit
Slip.
All invoices are to be signed by the salesman. Further, each credit sale
invoice and where a trade scheme is in force, each cash invoice is to be
signed by the customer or his representative also. For a credit invoice this
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acknowledges the liability to pay. In other cases, the signature confirms the
receipt of free goods or scheme. Where sales is partly on credit and partly on
cash, a credit sales invoice is to be used, with the cash collected being
recorded through a Collection Receipt.
For all the fulls sold, equal empties are to be collected. Where a difference
arises, the deposit for the differential is to be collected/ refunded recording it
on the deposit slip. Salesman should bring back empties sorted by brand,
and check for any chip necks, breakage/ damage, which is recoverable from
the customer.
On-route, salesmen are to also collect debtor dues for credit sales made
earlier. For this, salesmen are to issue a pre-printed and pre-numbered
Collection Receipt.
All cases given on loan have to be pre-approved by the Sales department.
Further, the total value of cases given on credit should not exceed the credit
policy limits, unless appropriately approved.
Direct Route Cash Collection Procedures

The purpose of the route cash collection procedures is to establish controls
over cash and check collections for cash sales made on routes by salesmen
and collections from debtors. The procedures describe the manner in which
cash collections are to be reported by salesmen and handed over to
cashiers. Further, how cash collections are to be consolidated and banked.
At each stage when cash is accessed or transferred, accountability and
responsibility is to be fixed, building in adequate segregation in processes.
 Secure cash on-route and in-depot (before deposit with cashier);
 Report cash and check collections from customers;
 Deposit day’s cash and check collections before leaving the location;
 Reconcile promptly any discrepancies in cash collection and deposit.
Cashiers are required to:
 Count cash and check receipts in the presence of the salesman;
 Perform a preliminary review of the validity of checks accepted;
 Verify the cash detail form prepared by the salesman;
 Ensure safety of cash, and hand over for deposit with bank;
2963
 Ensure timely deposit of cash in the bank;

Head Cashier is required to:
 Summarize cash and check collection by cashiers and prepare bank
pay-in-slip;
 Reconcile cash collections with that deposited;
Depot Accountant is required to:
 Perform a physical cash count;
 Maintain details of post-dated checks in order of due date;
 Update the bounced check register;
 Prepare a list of parties with check facility withdrawn.
Direct Sales Route Settlement Procedures

4.25 The settlement procedure considers the net load taken out and cash,
check and credit memos brought back by a salesman. Each salesman is
responsible to account for the value of product taken out by him, and account
for it with credit invoices for credit sales, and check and cash for cash sales.
Typically, this process must be completed before a salesman leaves with the
next day’s load.
The purpose of settlement is to safeguard company assets, as also to protect
staff involved, by defining clear areas of responsibility and accountability,
while ensuring a good control environment. These procedures cover
reporting of the net load based on load reports, sales invoices, cash and
checks collected and credit sale invoices.
A salesman is to obtain authorization for any free products provided on route
(does not include scheme frees). Also the bursts, leakage and breakage
identified on the load sheet are to be authorized by the sales department.
Until approved, these are to be charged to the salesman.
The settlement clerk is to check that the relevant supports are received, the
rates used are current and no unauthorized changes have been made on
invoices. Further that frees and discounts are in line with the applicable and
approved schemes, and credit provided is authorized. Also that bursts,
leakage and breakage are authorized.
In certain cases, to reduce the settlement time, only a quick settlement may
be carried out immediately on the return of the salesmen, and the final
settlement may follow on to the next morning. In quick settlement, the net
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load would be accounted for on the same day. However, the individual sale
invoices that make-up the net load would be accounted for subsequently
(before the salesman departs with the next day’s load), as part of the final
settlement process. Accordingly, in a quick settlement, only the credit sale
invoices are to be recorded (and the cash sale invoices recorded
subsequently). At this stage any unauthorized credit is to be identified and
recorded as a salesman shortage. However, where a final settlement takes
place immediately, the cash sale invoices would also be recorded.
Based on the above, the system is to compute the settlement, identifying any
salesman shortage, and printing the entire information on a Settlement
Sheet. The signatures of the salesman are to be obtained. When all sale
invoices are recorded, a load variance may arise where the net load reduced
by bursts, leakage and breakage does not add up to the quantities per the
individual cash and credit invoices. Such difference is to be investigated and
recorded as sales made to the salesman. These are to be tracked in an
exception report and minimized.
Upon completion of all settlements for the day, the settlement clerk is to
summarize these on a Summary Settlement Sheet. The total net load for all
settlements should be reconciled with the warehouse inventory records.
Further, the net load should be reconciled to the sales recorded and frees
and breakages etc. charged-off. The credit sales are to be separately
compared with the accounts receivable balance updated and cash sales to
the collections.
Indirect Sales
4.26 Indirect sales comprise sales to distributors for onwards sale to
outlets. These procedures define the recommended controls over indirect
sales, specifically pertaining to:
 The handing over of product to distributors and the collection of
empties;
 Receivables collection and credit control; and
 Other aspects like, compliance with agreements.
Indirect sales could be made both from the plant and distribution
warehouses. Typically, dispatches are made against an order received from
a distributor after credit approval by finance.
Sales to distributors are recorded as (end-customer) sale. However, it is
useful to have further details of the distributor’s customer base, network, etc.
2965
Also, the company may often support the indirect distribution process by
monitoring (and supervising) important distributor routes, and assist in
various marketing and other programs in the distributor’s market.
Distribution department is required to:
 Appoint distributors and establish a distributor network;
 Process approved sale orders and prepare invoices;
 Arrange logistics and ship product;
 Co-ordinate with distributors for collections;
 Monitor distributor stocks and their set-up.
Finance department is required to:
 Check credit limits and approve sale orders in compliance with credit
policy;
 Record collections from distributors;
 Periodically reconcile outstanding balances from distributors;
 Identify and follow-up on outstanding balances.
Shipping or warehouse supervisor is required to:
 Dispatch goods as per approved order form;
 Ensure stocks are dispatched on a first-in-first-out (FIFO) basis;
 Ensure physical security controls over load-out area;
 Update warehouse stock records in a timely manner.
To undertake indirect sales, distributors are appointed by the distribution/
sales department. For this purpose, the Distribution/ Sales Manager is to
identify potential parties and carry out various evaluation procedures to
determine their financial stability, warehouse space, distribution background,
etc. Where selected, a Distributor Master Form is to be completed and a
standard agreement may be entered into defining the commercial terms,
including accounting for breakage, freight costs, reimbursement of expenses,
etc. In case where credit is to be extended, a credit evaluation is to be
carried out.
The distribution department is to identify and enter into contracts with
transport companies for dispatches. Agreements should cover transit
insurance, breakage, and the procedure for the recovery of breakage in
excess of the established norms.
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Distributors are to provide their product requirements in an Order Form or a

designated person of the distributor may be authorized to place orders by
phone or fax, for more urgent requirements. Where such an order is
received over phone, the distribution department is to note the requirement
of the distributor on the order form. The finance department is to evaluate
each order on the Order Form to check that credit limits established for
individual distributors are not exceeded, unless written approval for the
additional credit is obtained. Upon finance approval, orders are to be
processed by shipping.
Dispatch vehicles are to be loaded with product in accordance with approved
sales orders only. Quantity dispatched is to be recorded on the Fulls
Dispatch Note and signed by the checkers supervising the loading. Where
goods are to be dispatched from the plant warehouse, the distribution
department is to prepare the Excise/ Tax Invoice. The gate security is to
check the physical load with the load sheet, and inspect the vehicle for any
concealed stocks, and then allow the vehicle to exit.
The warehouse department is to update the warehouse fulls stock ledger
based on the book. The distribution department is to keep a track of the
stock of fulls and empties with each distributor. A weekly report is to be
obtained from the distributors of stocks with them, to monitor the movement
of empties and fulls.
For product received, distributors are to return empties, in the return trip of
vehicles. In certain cases, empties may also be provided in advance.
Loaders are to unload empties under the supervision of a checker. Checkers
are to record the count of empties and breakage.
Account receivables section should maintain a separate account for sale of
liquids and glass on credit for each distributor. Receivables are to be
recorded for liquid based on the sales invoice and the entry for the glass on
credit is to be recorded periodically from the Party Ledger. The distribution
department is responsible for the timely realization of receivables. Further, to
monitor compliance with the credit policy, the finance department is to
prepare a weekly listing of distributor wise outstanding with ageing analysis.
Accounts Receivables and Collections

4.27 The procedures for Accounting of Sales, Receivables and Collections
are aimed at ensuring that sales, receivables and collections are correctly
recorded and that adequate controls can be exercised over trade
receivables. Further, that credit to customers is extended per policy and with
2967
authorization, to enable management to monitor and control receivables and

promptly identify and follow-up on sticky debts, and if necessary, provide for
doubtful ones.
Accounts Receivable clerk is required to:
 Record cash and credit sales in sales journal;
 Maintain invoice-wise customer ledger;
 Ensure prompt deposit of collections;
 Reconcile sub-ledger balances with general ledger;
 Prepare debtors ageing report/ overdue debtors listing.
 Effect sales and collect dues from customers;
 Submit collections to cashier and clear shortages;
 Inform sales supervisor of customer disputes.
Sales Manager is required to:
 Follow-up on overdue balances;
 Collect outstanding;
 Review compliance with individual customer credit limits;
 Obtain appropriate credit approval for increase in limits.
Finance Manager is required to:
 Review necessity for provision for doubtful debts;
 Review debtors ageing report and overdue listing on a weekly basis;
 Obtain approval as per certain approvals for write-off of balances;
 Review dispatches to credit customers against established limits.
All sales are to be recorded on a Sales Journal - Liquid or Cases on Credit
Journal. This is to be consolidated for all salesmen and a single entry is to be
processed for all cash and credit sales on the credit side, with the
consolidated cash and individual party receivables being recorded on the
debit side. Further, collections are to be recorded after matching with the
invoice settled. For on account collections, the A/R clerk is to ascertain the
invoices settled from the customer.
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Based on the debtors’ ageing report, salesmen are to collect the receivable
amounts from customers. The route salesmen are to carry their invoice copy
to support and provide reference of the amounts collected. Any short
collections on-route is to be backed up by an explanation. For collections
against bounced checks, in the case of dispute, the bank communication
may be provided to the customer to indicate the reasons for the dishonor.
Bank charges on dishonored checks are to be recovered from the customer.
Further, if the customer disputes any invoice, the route salesman is to record
the reasons for the dispute on the invoice copy and forwarded it to the
accounts receivable supervisor for investigation and resolution. The specific
invoices against which monies have been collected are to be recorded on the
Collection Receipt. Partial payments of invoices are to be recorded on the
invoice copy (salesman book) and signed by both the customer and the
salesman. Any adjustments to the invoice amount are to be approved by both
the Sales and Finance Managers. The salesman is to communicate such
changes to the customer on the next visit and collect any amounts due.
The A/R section of the finance department is to prepare an Overdue Debtors
Listing on periodic basis, indicating customer-wise overdue invoices. A
Debtor’s Ageing Report is to be similarly prepared and distributed on periodic
basis. All invoices are to be aged based on invoice date.
Where warranted, an allowance for doubtful debts is to be created for
suspected unrecoverable trade receivables. These allowances are to be
reviewed by the Finance Manager to identify bad debts. All write-offs are to
be approved with an approval, to be approved in accordance with the certain
approvals. However, sales and finance departments are to continue to follow-
up for amounts, which have been written off.

4.28 The following table gives in detail Process Risk Assessment (PRiA) for
Sales and Accounts Receivable:
Q No. Process
1 Sales What was the value Higher the value or
Ordering of credit sales at this proportion of credit sales,
location? higher is the risk at the
location in terms of
collectability and liquidity.
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Q No. Process
2 Sales How many issues Higher the number of issues
Ordering were noted in last identified in a sub-process,
3 Shipping of What was the value Higher the value or change
goods of total sales at this in percentage of sales from
location? What is previous year, higher the
the increase of weightage or risk ranking of
percentage to last the sub-process.
year?
4 Shipping of Has there been any Shipping is one of the
goods turnover in the important functions in Sales
preparer or reviewer process. If there is any
of shipping significant change in this
information in this function, it increases the risk
location? around this sub-process and
needs more attention in the
year of transition.
5 Shipping of How many issues Higher the number of issues
goods were noted in last identified in a sub-process,
6 Revenue What was the value In case high value contracts
Recognition of new contracts at have been entered into, it
this location? needs auditor’s attention to
ensure that compliance with
company policies has been
ensured and due diligence
has been performed.
7 Revenue Were there any Volatile and non-standard
Recognition adjustments to prices leads to higher
existing weightage of risk to this sub-
arrangements where process.
prices are not fixed
in functional or local
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Q No. Process
currency at this
location?
8 Pricing of Were there any Higher the number of
SKU changes to the Price changes in price master,
Master File at this higher is the weightage of
location? the risk to this sub-process.
9 Pricing of Has there been any Pricing is critical function in
SKU turnover in the the sales process. If there is
personnel any significant change in
responsible for the this function, it increases the
Price Master File at risk around this sub-process
this location? and needs more attention in
the year of transition.
10 Pricing of How many issues Higher the number of issues
SKU were noted in last identified in a sub-process,
11 Invoicing What was the value Higher the value or change
of total sales at this in percentage of sales from
location during the previous year, higher the
audit period? weightage or risk ranking of
that sub-process.
12 Invoicing How many issues Higher the number of issues
were noted in last identified in a sub-process,
13 Daily Sales What is the Higher the percentage of
Settlement percentage of Direct Direct Sales, higher the
Sales in this weightage or risk ranking of
location? this sub-process.
14 Daily Sales Has there been any Higher the number of fraud
Settlement fraud related to the cases, higher the weightage
daily sales or risk ranking of this sub-
settlement process? process.
If yes, please
2971

Q No. Process
specify the number
of fraud cases
identified.
15 Daily Sales How many issues Higher the number of issues
Settlement were noted in last identified in a sub-process,
16 Sales Were any goods Higher sales return indicates
Return returned during the higher risk in the sub-
year at this location? process.
What was the value
of goods returned
during the year at
this location?
17 Sales Has there been any Approval for sales return is
Return turnover in the significant process to ensure
returns department the quality compliance. If
at this location? there is any significant
change in this function, it
increases the risk around
this sub-process and needs
more attention in the year of
transition.
Return were noted in last identified in a sub-process,
19 Accounts Was there any Monitoring of Accounts
Receivable turnover in the Receivable is critical to
Monitoring revenue accounting control the bad-debts. If
personnel at this there is any significant
location? change in this function, it
increases the risk around
this sub-process and needs
more attention in the year of
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Q No. Process
transition.
20 Accounts How many issues Higher the number of issues
Receivable were noted in last identified in a sub-process,
Monitoring audit in this sub- higher the weightage or risk
21 Volume What is the value of Higher the value or change
Reporting unit case sales at in percentage of sales from
this location? What previous year, higher the
is the percentage of weightage or risk ranking of
change compared to that sub-process.
previous period.
22 Volume How many issues Higher the number of issues
Reporting were noted in last identified in a sub-process,
23 Master Data Have there been any Higher the number of
Maintenanc risk significant changes in price master,
e customer master file higher is the weightage of
changes at this the risk to this sub-process.
location?
24 Master Data How many issues Higher the number of issues
Maintenanc were noted in last identified in a sub-process,
e audit in this sub- higher the weightage or risk
25 Sales Was there any Frequent/Major Change in
Analysis turnover in the function for sales analysis
revenue accounting role may lead to higher risk
personnel at this rating for this sub-process.
location?
Analysis were noted in last identified in a sub-process,
27 Allowance Were there any Significant change in
2973

Q No. Process
for Doubtful changes to the doubtful debts calculation
and Bad methodology for methodology can affect the
Debts calculating bottom line. This leads to
allowance for the higher weightage of risk
doubtful accounts? rating for this sub-process.
28 Allowance What is the value of Higher value of old
for Doubtful accounts over 30 outstanding increases the
and Bad days? risk of recoverability and
Debts hence is assigned higher
weightage of risk rating for
this sub-process.
29 Allowance Was there any Frequent/ Major Change in
for Doubtful turnover in the function for Working Capital
and Bad personnel who Management role may lead
Debts calculate or review to higher risk rating for this
the Allowance for sub-process.
Doubtful Accounts
calculation at this
location?
30 Allowance How many issues Higher the number of issues
for Doubtful were noted in last identified in a sub-process,
and Bad audit in this sub- higher the weightage or risk
Debts process? ranking of the sub-process.
31 Segregation Has there been any Frequent/ Major Change in
of Duties turnover in function for Sales and AR
personnel that Role may lead to higher risk
perform key Sales rating for this sub-process.
and AR duties that
could result in an
employee
performing
incompatible tasks?
32 Segregation Has there been any Higher the number of fraud
of Duties fraud noted at this cases, higher the weightage
location in regards or risk ranking of this sub-
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Q No. Process
to Sales and AR process.
during the past 3
years?
33 Segregation How many issues Higher the number of issues
of Duties were noted in last identified in a sub-process,
Direct Marketing Expenses

4.28 The objective of marketing expense control procedures is to monitor
marketing related commitments and the corresponding actual spend against
budgets. The procedure covers the preparation of annual budget by
marketing spend category; the recording of commitments; the subsequent
recording of actual expenditure for approved schemes and programs, by
brand, marketing spend category; and the reporting of marketing expenditure
on the sales curve basis. The procedures also describe the process of
recording and evaluating the actual results achieved and those expected at
the start of the activity.
The marketing and finance departments are to jointly prepare the annual
marketing budget and obtain appropriate approvals. Typically, this is based
on the expected annual sales.
The broad marketing spends categories are:
(i) Visi Cooler
This comprises of the cost of Visi Cooler that are written-off upon purchase,
the depreciation of those that are capitalized, and the placement and repairs
& maintenance costs.
(ii) Outdoor & Merchandising Budget
This comprises of signage costs e.g., wall painting, pole advertisement,
banners, painting of truck, dealer boards, hoarding, point of purchase, etc.
This also includes other promotion costs e.g., consumer promotions (viz.
premier items, local sponsorships, etc.), retail promotions (viz. coupon
schemes, etc.) and special account costs (viz. up-front payments, specific
promotion with outlets, etc.). This does not include product discounting.
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(iii) Trade Discounts

This comprises of trade discounts e.g. special account discount, free bottle
schemes, sampling, specific brand promotions, etc.
(iv) Divisional or Corporate Consumer Marketing
This comprises of centrally administered and supported consumer
promotions. Typically, these are nationwide promotions.
(v) Corporate Retail Marketing
This comprises of centrally administered channel development and support
costs, e.g., for transportation, eateries, institutional sales, etc.
(vi) National Brand Promotion
This comprises of brand development and equity creation costs through
national media, administered by Corporate e.g., commercials on television,
newspapers, etc.
(vii) Salesmen Incentive
This comprises of incentives to sales employees for achieving volume
targets, etc.
Where possible, the budget is to be broken down into specific activities under
each of the broad categories by the Unit for better monitoring of the
marketing spends. Upon approval, the detailed marketing budget is to be
recorded on the Annual Budget Plan.
For carrying out market promotions or related activities, the marketing
department is to prepare a Expense Requisition- Marketing (ER-M) and
obtain approval. Expenditure related to trade schemes, event sponsorships,
outdoor signage, etc. is to be recorded in the respective expense.
Typically, purchases are to be carried out by the Supply Chain department or
a designated marketing person, in accordance with the Purchase
Procedures. An approved expense is to serve as the purchase requisition for
materials or services (e.g., glow signs, banners, hoarding rentals, wall
paintings, event management contracts, etc.).
Purchase orders (POs) are to record the expenses reference and are placed
on approved vendors after comparing quotations. Alternatively, POs may be
placed on centrally approved vendor at pre-determined prices.
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Receipt of materials is to be recorded on the goods receipt note, including

direct receipt of materials in the field (e.g., dealer boards at the outlet), etc.
Prior to approval, the Accounts Payable section should additionally verify:
(i) For outdoor activities, sponsorship and merchandising
o Authorization for free products (where agreed).
o Receipts for up-front advances, if any.
o Completion of activity, as certified by the Area Sales person/
executive.
o Photographs/ proof of the outdoor activities.
(ii) Signage:
o Installation report with outlet and Area Sales Executive
signatures.
o Photographs/ Proof.
(iii) Trade schemes & sampling:
o Free product authorization.
o Summary settlement sheet for direct sales.
o Distributor’s Debit Note & settlement sheet for sales.
(iv) Key account discounts:
o Key Account Agreement (to be maintained by finance).
o Copy of the invoices raised on the key account.
(v) Sales incentives:
o Approval of the incentive scheme per COA.
o Quantum of sales achieved per finance records for incentive
calculation.
The actual payments made along with month-end accruals and debit/credit
notes relating to marketing spend are to be recorded by the finance
department against the original commitment (i.e., expenses and the
corresponding PO).
Where the actual spend exceeds the commitment per expenses, the finance
department is to immediately inform the marketing department and preferably
hold the disbursement or issue of Credit Note to the vendor, or to the
distributors and key accounts. A supplementary expense is to be prepared
and upon approval the actual spend should not exceed the Expense amount.
2977
Distributor claims are to be received promptly and periodically. The date of

receipt is to be recorded and delays are to be followed-up for by finance, by
tabulating the period-wise receipt of claims from each distributor. For
schemes, the amount claimed is to be supported by the distributor’s invoices.
Each claim is to be verified and approved by the Sales department.
Subsequently, finance is to independently verify the claim, determining it is
raised for the correct period, is adequately supported, approved and in
accordance with policy.
Premier items are to be charged to the respective marketing expense code,
upon purchase. A detailed quantitative record is to be maintained of the
receipts and issues and the physical count periodically compared with the
inventory records. Collections from the sale of premier items are also to be
recorded in the marketing expense account code under the credit sub-
account. Premier items may also be provided to redemption centers, which
are to be tracked as temporary issues. On the subsequent final accounting
with the redemption center, the final issue is to be recorded in the inventory
records.
Deductions from Revenue

4.29 This process is designed to monitor marketing related commitments
and the corresponding actual spend against budgets with control procedures.
Further, it broadly evaluates the effectiveness of the marketing related
spend.
The procedures cover the preparation of annual budget by marketing spend
category and month; the recording of commitments; the subsequent
on the sales curve basis. The procedure also describes the process of
The marketing and finance departments jointly prepare the annual marketing
budget and obtain approval as per COA. Typically, this is based on the
expected annual sales volume and often stated as cost per case of sales.
This budget is to be further detailed by month and marketing spend category.
The broad marketing spends categories are:
(i) Visi Coolers, etc.
This comprises of the cost VCs that are written-off upon purchase, the
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depreciation of those that are capitalized, and the placement and

repairs and maintenance costs.
Note: Ice-chests push carts and other non-electric BRs are to be
expensed in the month of purchase.
(ii) Outdoor and Retail Merchandising Budget
This comprises signage costs (e.g., wall painting, pole advertisement,
banners, painting of truck back, dealer boards, hoarding, point of
purchase - POP material etc.). This also includes other promotion
costs e.g., consumer promotions (e.g., premia items, local
sponsorships etc.), retail promotions (e.g., premia items, coupon
schemes etc.) and key account costs (e.g., up-front payments, specific
promotion with outlets, etc.). This does not include product
discounting.
(iii) Trade Discounts
This comprises trade discounts (e.g., key account discount, free
schemes, sampling, brand promotions, etc.).
(iv) Divisional Consumer Marketing
This comprises of centrally administered and supported consumer
promotions. Typically these are nation-wide promotions (e.g., Cricket,
Hockey, Football, Bottle opener, various schemes and promotions,
etc.).
(v) Division Retail Marketing
This comprises of centrally administered channel development and
support costs (e.g., for transportation, eateries, institutional sales, etc.).
(vi) National Brand Promotion
This comprises of brand development and equity creation costs
through national media, administered by corporate (e.g., commercials
on television, newspapers, etc.).
(vii) Salesmen Incentive
This comprises incentives to sales employees (for achieving volume
targets, etc.).
Where possible, the budget is to be broken down into specific activities under
each of the broad categories by the Unit for better monitoring of the
marketing spends.
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For carrying out market promotions or related activities, the marketing

department prepares a Marketing Spend Requisition (MSR) and obtains
appropriate approvals. This is to be pre-printed and prepared in triplicate:
the original and the first copy are for the finance and the marketing
departments, the second copy being the book copy.
Typically, purchases are to be carried out by the Supply chain management
or a designated marketing person, in accordance with the Purchase
Procedures. An approved MS is to serve as the purchase requisition for
materials or services (e.g., glow signs, banners, hoarding rentals, wall
paintings, event management contracts, etc.).
Receipt of materials is to be recorded on the goods receipt note (GRN –
separate series for marketing), including for direct receipts in the field (e.g.,
dealer boards at the outlet) etc., which are based on information provided by
the receiver. Dispatches are to be on a Material Requisition cum Issue Note.
4.30 The Purchase Voucher (PJV) should contain the MS reference. Also,
prior to approval, the Account Payable section should additionally verify:
(i) For outdoor activities, sponsorship and merchandising
o Authorization for free products (where agreed).
o Receipts for up-front advances, if any.
o Completion of activity, as certified by the Area Sales Manager.
o Photographs of the outdoor activities.
(ii) Signage
o Installation report with outlet & Area Sales Manager signatures.
o Photographs.
(iii) Trade schemes and sampling
o Free product authorization.
o Summary settlement sheet for direct sales.
o Distributor’s debit note and settlement sheet for indirect sales.
(iv) Key account discounts
o Key Account Agreement (to be maintained by finance)
o Copy of the invoices raised on the key account.
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(v) Sales incentives

o Approval of the incentive scheme per COA
o Quantum of sales achieved per finance records for incentive
calculation.
The finance department is to record expenditure on the PJV and disburse (or
issue Credit Note) to the vendors (or distributors) as per agreed terms.
Further, the period within which claims are to be submitted should be
specified and periodically, the claims not received identified.
The actual payments made along with month-end accruals and debit/credit
notes relating to marketing spend are to be recorded by the finance
department against the original commitment (i.e. MSR and the corresponding
PO). The accruals are to be reversed at the beginning of the next month.
Where the actual spend exceeds the commitment per MS, the finance
department is to immediately inform the marketing department and preferably
hold the disbursement or issue Credit Note to the vendor, or to the
distributors. A supplementary MS is to be prepared and approved. Typically,
the actual spend should not exceed the MS amount.
Distributor claims are to be received promptly every month. The date of
receipt is to be recorded and delays are to be followed-up for by finance, by
tabulating the month-wise receipt of claims from each distributor. For
secondary schemes, the amount claimed is to be supported by the
distributor’s invoices. Each claim is to be verified and approved by the Area
Sales Manager. Subsequently, finance is to independently verify the claim,
determining if it has been raised for the correct period, is adequately
supported, approved and is in accordance with the policy. Where possible,
claims are paid for in the form of free product.
Process Risk Assessment (PRiA):

Risk Sub-Process Risk Question Remarks
Q No.
1 Rebates What is the value of Higher the value of
rebates redeemed rebate, higher is the risk
by customers for rating to this sub-process.
this operation?
2 Rebates Whether any Higher the instances of
fraudulent fraudulent cases, higher is
instances noted in the rating to this sub-
2981

Q No.
the location related process.
to rebate
management
3 Rebates Has the operation Significant adjustments
had a history of related to customer
material, out of rebates leads to higher
period adjustments risk rating to the sub-
relating to customer process.
rebates?
4 Rebates How many issues Higher the number of
were noted in last issues identified in a sub-
audit in this sub- process, higher is the
process? weightage or risk ranking
of the sub-process.
5 Calculation, Does the operation Off-invoice rebates
Pricing, and require contracts for without much contractual
Approval off- invoice agreement leads to the
rebates? higher risk rating to the
sub-process.
6 Calculation, What is the value of Higher the value of
Pricing, and rebates redeemed rebate, higher is the risk
Approval by customers for rating to this sub-process.
this operation?
7 Calculation, What percentage of Larger number of manual
Pricing, and rebates granted are rebate processing leads to
Approval manual over-rides? the higher risk rating to
the sub-process.
8 Calculation, How many issues Higher the number of
Pricing, and were noted in last issues identified in a sub-
Approval audit in this sub- process, higher is the
of the sub-process.
9 SOD How many issues Higher the number of
audit in this sub- process, higher is the
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Q No.
of the sub-process.
10 Balance What is the value of Higher the value of
Sheet the rebate/ rebate, higher is the risk
Reconciliation allowance accounts rating to the sub-process.
at this location?
11 Balance Were there any Significant adjustments
Sheet material related to rebate/
Reconciliation adjustments to the allowances leads to the
rebate/ allowance higher risk rating to the
accounts for this sub-process.
entity/ location?
12 Balance Has there been any Rebate reconciliation is
Sheet turnover in the one of the important
Reconciliation preparer or functions in Deduction/
reviewer of the Rebate Management
rebate/ allowance process. If there is any
reconciliations for significant change in this
the location? function, it increases the
risk around this sub-
process and needs more
attention in the year of
transition.
13 Balance How many issues Higher the number of
Sheet were noted in last issues identified in a sub-
Reconciliation audit in this sub- process, higher is the
of the sub-process.
Fixed Assets
Visi Cooler Distribution and Maintenance
4.31 Visi Cooler (VC) is a refrigerator with glass door from which you can
view items placed inside without opening the glass door. Generally, it is
placed by beverages companies at the outlets and malls where public can
see and select the drink they want.
2983
The purpose of the Visi Cooler (VC) procedures is to establish the controls
surrounding VCs, which are an important asset of the company and typically
located with third parties and spread over geography. Broadly, the
procedures cover the identification of outlets for placement of VCs, their
installation, the asset code tagging and tracking, handling of withdrawal and
re-installations, and the evaluation of the incremental sales arising from each
installed VC.
All concerned departments jointly prepare Visi Cooler requirement plan for
entire year along with yearly budget plan. The plan is to consider the
purchase cost, which is to be approved as capital expenditure and the write-
off or depreciation charge. Additionally, this is to take into account the
existing uninstalled VCs on hand, as per inventory records. Ice-chests, push
carts and other non-electric VCs are normally expensed in the month of
purchase, and are to be accordingly budgeted.
Upon approval of the yearly budget plan, the supply chain department raises
purchase order, specifying Visi Cooler-wise quantities approved, along with
the delivery schedule indicating the time and location of delivery. The sales
department identifies the outlets for installation of Visi Cooler, based on
considerations like, expected growth in volume, exclusivity, visibility, effective
distribution or other strategic reasons.
Once the Outlet Identification Form (OIF) is approved, sales department
prepares installation requests, on a pre-printed and pre-numbered
Installation Report (IR), completing Part I (installation request) thereof. This
is to be prepared in triplicate: the original and the first copy for the supplier/
service provider the installation team (service center) and the second copy
being retained as book copy. The service center completes Part II (the
installation report section) with installation details including machine serial
number, company’s asset tag number etc. and obtain the signatures of the
outlet representative on both the IR and on the Visi Cooler Placement
Agreement. The Agreement is to be prepared in duplicate: the original for the
sales department and a copy for the outlet. The service center obtains the
signatures of the Sales Manager on the IR, as acknowledgement of the
successful completion of the installation and provides the completed IR
(original) and the agreement to the sales department. The sales department
then prints the list of VCs installed and provide to finance for release of
payment to supplier or service provider.
In case a VC needs to be removed from an outlet for maintenance, a form is
prepared in triplicate, the original for the outlet, the first copy for the sales
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department and the second copy being retained with the service center.
Upon completion of the repair and maintenance, and the reinstallation of the
VC, Part II of the above form, i.e., the ‘Reinstallation of Equipment’ section is
completed and signatures of the outlet obtained on the form and provided to
the sales department. The service center logs the maintenance of each VC,
which is reviewed periodically by the cold drinks function periodically to
ensure that the repairs are genuine and reasonable, particularly, where the
Company pays for the spares.
Periodically, the sales department analyzes and document productivity of
VCs placed based on incremental sales and profitability. Based on such
evaluation, certain outlets may qualify for a different VC and some could
even fail to meet the expected productivity. In certain cases, where VCs are
placed for strategic reasons including visibility, exclusivity, etc., the
productivity evaluation may be less relevant. However, an evaluation of the
increased visibility, the existence of exclusivity at the outlet, and the
incremental sales achieved should still be made and documented.
In case a VC needs to be withdrawn from an outlet, a pre-printed and pre-
numbered withdrawal form is prepared in triplicate. The original and first
copy for the service center (along with the original Agreement) and the book
copy for the sales department. The service center pulls-out the VC from the
outlet and hand over the original of the Withdrawal Form to the outlet after
obtaining signatures for the cancellation of the Agreement on the first copy.
The said copy is then submitted to the sales department along with the
cancelled Agreement.
Withdrawn assets are maintained in the custody of the Company, and
physically segregated form the new VCs. Periodically, the sales department
is to review the VCs approved for pull-out but remaining placed with the
outlet. Further, that the VCs pulled-out reconcile with the physical stock on
hand.
The cold drinks department organizes periodic verification and reconciliation
of the VCs at the outlets with the VC Tracking Register. The verification is to
be carried on throughout the year, covering each VC at least once per
annum. This may be carried out as part of the maintenance arrangement or
separately undertaken through the sales force.
Additionally, an external agency may be hired for carrying out physical
verification of VCs on a sample basis (say covering 5 per cent of assets).
The results of such verification may then be extrapolated for drawing a
conclusion on the population and determining the need to supplement the VC
2985
procedures. Where an asset is missing, the same is to be reported promptly

to all concerns for further investigation and action.
Accounting Entries
4.32 Record the following entry based on GRNs for new VC received by
Company:
Debit: Inventory – vendors, coolers and dispensers (new)
Credit: Accounts payable - Trade
To capitalize VCs installed based on IRs received from service provider:
Debit: VCs
Credit: Inventory – vendors, coolers and dispensers (new)
It should be noted that no accounting entry is to be recorded for VCs pulled-
out and remaining uninstalled.
Expense of Ice chests, push carts etc. in the month of purchase:
Debit: POS material – outside production
Credit: Accounts payable – Trade
Depreciate VCs (including that pulled-out and pending reinstallation):
Debit: Depreciation – VCs
Credit: Accumulated depreciation – vendors, coolers and dispensers
Returnable Containers
4.33 Returnable Containers in non-alcoholic beverages industry includes -
Glass Bottles, Plastic Crates and Bulk Jars which are meant to be returned to
the factory for refill/ reuse. Therefore, these returnable containers cannot be
treated as consumables, and hence, not charged to P&L at the time of their
purchases but treated as assets in the financials. In general, returnable
containers are spread over the following locations:
(i) Factory Premises
(ii) Sales centre/ depots.
(iii) Market with the distributor/ retailers
(iv) Lying with consumers
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Accounting Treatment will be as follows:

(a) For purchasing container stock
Container stock account Dr
Bank/ creditor account Cr.
(b) For recording deposit from customers
Bank Account Dr.
Container Deposit Liability Cr.
(c) At the time of return of containers from customer
Container Deposit Liability Dr.
Bank Account Cr.
In terms of charging losses on account of breakages of glasses, the
accounting treatment may differ from company to company as determining
actual breakages is a challenge for any entity since these glasses are spread
over various locations and only 15%-25% of the returnable containers
remains in factory at any point in time. In case, an entity follows to account
for breakages, the accounting entry can be:
(d) Breakages on container asset
Profit and loss account Dr. (Breakages)
Container stock account Cr
Since, it is difficult to ascertain the actual breakages because of the physical
location of returnable containers, an organization may adopt depreciation
method which is more practical and feasible considering significant volume of
glasses at entity level to estimate the losses on account of breakages and
monitor the actual movement of glasses separately to account for glass on
deposit. The accounting entry can be:
(e) Depreciation on container asset
Profit and loss account Dr. (Depreciation)
Container stock account Cr.
Other Fixed Assets

4.34 The purpose of the fixed assets and depreciation procedures is to
ensure that the fixed assets are correctly and consistently accounted for, and
that adequate controls are exercised and accountability established for this
2987
significant investment of the company. Broadly, this section covers the

accounting for fixed assets and depreciation, including their transfers and
disposals. Further, it also covers the procedures for physical control over
fixed assets.
Following assets are capitalized:
 Items with a life exceeding one year;
 Purchased software packages, exceeding a specified amount and with
a life of more than a year;
 Software development costs
 A substantial refurbishment is to be capitalized. Repair to existing
assets, unless substantial and linked to enhance the productivity, are
charged to expenditure.
New assets are recorded as construction work-in-progress, until installed and
placed in service. The construction work -in-progress account is analyzed
periodically and the status of old items is reviewed. Upon completion, new
projects are capitalized at cost. Project related preoperative expenses are
captured as ‘construction work-in-progress’.
Spares, including machinery spares received with original equipment, are not
to be capitalized but accounted for as inventory and kept in the stores.
All assets are tagged, preferably with metal tags, and coded in accordance
with a standard coding pattern. Tags are affixed in a manner that they are
clearly visible.
The finance/ Accounting department prepares and maintains Fixed Asset
Register, with the following details:
 Account number
 Asset code
 Description of asset (sufficient to identify)
 Date of receipt
 Date placed in service
 Depreciable life
 Depreciation method
 Cost
 Supporting documentation (e.g., Invoices, Registration, Approvals,
POs, etc.)
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 Equipment number/ serial number

 Location of asset (as detailed as practical)
 Department responsible for asset
Fully depreciated assets are not removed from Fixed Asset Register until
disposed-off or transferred out. When transferred out, the receiving location
assigns a new asset number and tags the asset. Besides, change in location
of assets is updated on the fixed asset register. This ensures that the
depreciation or other associated costs are charged to the correct cost center
and the responsibility for custody remains correctly defined.
Fixed assets are physically verified at regular intervals. Physical verification
is carried out independent of the person recording the asset and documented
on pre-numbered count sheets. As convenient, verification may be conducted
on a continuing or cyclical basis, with off-premise assets being confirmed by
correspondence. Discrepancies identified on physical verification are
reported to the appropriate authority and promptly investigated. Any
unrecorded assets identified during physical verification are included after
determining the reason for the initial omission.
The company’s assets are secured and guarded against theft and
destruction. The premises are enclosed by a high fence designed to
discourage scaling. Further, security at the premises needs to be adequate
and all unmonitored entrances locked and chained. Besides, the safety
equipment (e.g., fire extinguishers, etc.) should be adequate, in good
working condition and placed strategically to be clearly visible. Assets of the
Company should be adequately insured at all times.
All assets, other than freehold land, are depreciated in periodically as defined
in company’s policy keeping IGAAP and other regulations in consideration.

4.35 The following Process Risk Assessment (PRiA) of Fixed Assets:
Q No.
1 Asset Did the entity have Significant increase in
Capitalization- fixed asset fixed assets amounts to
-Accounting additions during higher risk rating to the
and the audit period? process.
Recording
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Q No.
2 Asset Did the entity have Significant amount of
Capitalization- fixed asset fixed assets transfers
Accounting transfers during the amounts to higher risk
and audit period? rating to the process.
Recording
3 Asset What is the value Significant addition/
Capitalization- of total asset transfer to the asset
Accounting additions, including amounts to higher risk to
and transfers and the sub-process.
Recording CWIP?
4 Asset Have there been Significant change in this
Capitalization- any changes in function amounts to
Accounting operation that higher risk to the sub-
and affect this sub- process.
Recording process (i.e., M&A
activity resulting in
large amounts of
additions,
applications used,
etc.)?
5 Asset How many issues Higher the number of
Capitalization- were noted in last issues identified in a sub-
Accounting audit in this sub- process, higher the
and process? weightage or risk ranking
Recording of the sub-process.
6 Asset Did the entity have Significant amount of
Capitalization- any capital projects capital project initiated
CIP and begin this year? amounts to higher risk
Projects rating to the sub-process.
7 Asset Is interest System driven interest
Capitalization- capitalized capitalisation leads to
CIP and automatically or is higher risk for the
Projects it computed using a application controls
manual process? whereas manual process
leads to higher risk to the
sub-process.
2990
E- 9279

Q No.
8 Asset Were there any Significant shift of budget
Capitalization- material budget amounts to higher risk of
CIP and shifts or increases the sub-process
Projects between capital
projects?
9 Asset How many issues Higher the number of
Capitalization- were noted in last issues identified in a sub-
CIP and audit in this sub- process, higher the
Projects process? weightage or risk ranking
of the sub-process.
10 Balance Were there any Higher the number of
Sheet Recs material adjustments in PPE
adjustments to the account leads to higher
PPE accounts for risk ratng to the sub-
this entity/location? process.
11 Balance Has there been Significant change in this
Sheet Recs any turnover in the function amounts to
preparer or higher risk to the sub-
reviewer of PPE process.
account
reconciliations for
the location?
12 Balance How many issues Higher the number of
Sheet Recs were noted in last issues identified in a sub-
audit in this sub- process, higher the
of the sub-process.
13 Disposals Did the entity have Higher the value of
any fixed asset disposals, higher is the
disposal or transfer risk rating to the sub-
requests during the process.
year? What is the
value of disposals
14 Disposals How many issues Higher the number of
2991

Q No.
of the sub-process.
15 Fixed Asset Were there any Significant movement
Register asset movements amounts to higher risk
(additions, rating to the sub-process.
transfers or
disposals) during
the year?
16 Fixed Asset Does the location Non availability of
Register have a formalized standard procedures and
fixed asset process tagging amounts to
including tagging higher risk rating to the
and tracking process.
assets?
17 Fixed Asset How many issues Higher the number of
Register were noted in last issues identified in a sub-
of the sub-process.
18 Impairment Have there been Significant amount of
any impairments impairment amounts to
recorded this year? higher risk rating to the
If applicable, what sub-process.
was the value of
impairments
recorded during the
year?
19 Impairment What types of Higher proportion of
assets make up the intangible assets or Fixed
fixed asset Assets amount to higher
balance? risk rating to the sub-
process.
20 Impairment How many issues Higher the number of
2992
E- 9281

Q No.
of the sub-process.
21 Maintenance Have there been Significant change in the
any changes to policies and guidelines
fixed asset policies amount to higher risk to
(i.e., useful lives to the sub-process.
asset categories,
depreciation
conventions)
during the audit
period?
22 Maintenance How many issues Higher the number of
of the sub-process.
23 Physical Have there been Instances noted for theft
Controls any instances of and missing assets
material known recommends higher risk
theft or rating to the sub-process.
misappropriation of
fixed assets at this
location?
24 Physical Were there any Significant adjustments
Controls material to PPE balances
adjustments to indicates gap in physical
PPE balances as a and book assets and
result of PPE amounts to higher risk
inventories (i.e., rating to the process.
PP&E was not fully
counted, etc.)?
25 Physical How many issues Higher the number of
Controls were noted in last issues identified in a sub-
of the sub-process.
2993
Inventory
4.36 The objective of Inventory Procedures is to establish controls
surrounding the issue, holding and reporting of inventory items including raw
materials, consumables and stores and spares. Further, to determine the
consumption of inventory items for the production of finished goods, obsolete
items and shortages, if any. The inventory procedures include the receipt,
the issue, storage and count of raw, packing and other inventory items.
Stores department receives materials purchased, along with a quality
approved copy of the Goods Receipt Note. The items include raw materials &
consumables bottles and cases, stores and spares and miscellaneous items.
Based on the GRN and physical quantities received, the Quantitative Stock
Ledger (QSL) is updated for each transaction.
Based on the Daily Production Plan, the production and QA departments
requisition materials on a Material Requisition Note (MRN). MRN booklets
are provided to user departments for requisitioning materials. On receipt of
completed and approved MRNs, the stores department assigns a sequential
number, based on the MRN Log. Items on which MODVAT credit is availed
are recorded separately on the MRN Log. For items not in stock, the stores
department makes a noting on the MRN, for the user to prepare a Purchase
Requisition. Where the issue of materials is based on flow meter readings
(e.g., CO2, HSD, LDO, treated water, etc.), the stores department records
the meter reading on the MRN at the end of each shift along with the
production supervisor. The difference between the current and previous
reading represents the consumption.
After each shift, excess inventory on the shop floor is returned to stores
department on a Material Return Note. Any loose quantities received from
production is first issued out. Less preferably, for smaller quantities and
where a secure shop floor store exists, excess inventory may be retained for
consumption over the next day or so.
Inventory items are stored in a secure place and protected from the weather.
As appropriate, these are stacked to facilitate issue on a FIFO basis, with the
date of manufacture displayed. Certain smaller and similar items may be
kept in bins. Material which are sensitive to temperature are kept in secured
location and under temperature control, as prescribed, with access to
authorized personnel only.
Obsolete and rejected materials are segregated in the warehouse, and
clearly identified to avoid introduction into the production process.
2994
E- 9283
The stores department is to carry out a daily physical count of raw and
packing material at a fixed time. Stores and spares are classified as A, B, or
C category on the basis of the value of consumption. Category ‘A’ items are
verified more frequently, followed by category ‘B’ and ‘C’.
All significant book-to-physical differences (shortages/overages) are to be
investigated and reported to appropriate authority for approval for adjustment
in books.
Obsolete material identified are to be destroyed promptly. An approval is
required for such write off, and is to be approved as per the approval
process. Physical destruction of obsolete stocks is to be carried out in
presence of the finance and the quality assurance department under a
Certificate of Destruction.

4.37 The following is Process Risk Assessment of Inventory:
Q No. Process
1 Receiving Does this location Higher the percentage of
have inventory? change or inventory value,
What is the higher weightage of risk
percentage of rating to this sub-process.
change over
previous period?
2 Receiving What was the value Significant amount of
of inventory purchase of inventory
purchased during indicates higher risk rating
the period at this to this sub-process.
location?
3 Receiving How many issues Higher the number of
of the sub-process.
4 Costing How much is the Significant change of
production volume in percentage of production
terms of units/ cases volume over previous
period leads to the higher
2995

Q No. Process
risk rating to this sub-
process.
5 Costing How many issues Higher the number of
of the sub-process.
6 Counts What is the value of Higher inventory value
inventory at this leads to higher risk rating
location? to this sub-process.
7 Counts Were there any Significant adjustment
material adjustments entries in Inventory
made to the accounting indicates
inventory accounts higher risk weightage to
based on inventory this sub-process.
counts during the
period?
8 Counts Are there any Non-Standard use of Unit
inventory items at of Measurement and
these locations that different methodology
use a different unit- leads to the higher risk
of-measure for count rating to this sub-process.
and recording
purposes?
9 Counts Does this location Inventory located at
have inventory held multiple warehouse owned
by third party? by third party amounts to
higher risk rating to this
sub-process.
10 Counts What is the value of Higher inventory value
inventory held by held by 3rd party leads to
others? higher risk rating to this
sub-process.
11 Counts How many issues Higher the number of
2996
E- 9285

Q No. Process
of the sub-process.
12 Book to Has a physical If physical verification was
physical inventory count been not performed, rate this
adjustments performed at this sub-process as high risk.
location during the
period?
13 Book to Were any material Significant differences
physical differences in during physical verification
adjustments inventory noted at indicates higher risk rating
this location during for this sub-process.
the counts?
14 Book to How many issues Higher the number of
physical were noted in last issues identified in a sub-
adjustments audit in this sub- process, higher the
of the sub-process.
15 Accounting Were there any Significant adjustment
for Bottles material breakage entries in bottles and
and Cases adjustments to the cases indicate higher risk
Inventory accounts weightage to this sub-
for this process.
entity/location?
16 Accounting Does this location In case pre-paid expense
for Bottles have material is material, rate this sub-
and Cases prepaid container process as high risk.
expense recorded
on their books?
17 Accounting How many issues Higher the number of
for Bottles were noted in last issues identified in a sub-
and Cases audit in this sub- process, higher the
of the sub-process.
18 Obsolete and Has the inventory Lower inventory turnover
2997

Q No. Process
slow moving turnover ratio means idle inventory and
inventory decreased at this leads to higher risk
location during the weightage for this sub-
period? process.
19 Obsolete and Does this location In case inventory is not
slow moving maintain a separate bifurcated for good and
inventory area for materials obsolete stock, the risk
and goods which are rating is high for the sub-
obsolete or expired? process.
20 Obsolete and Does this location In the absence of reserve
slow moving maintain a reserve for obsolete inventory, rate
inventory for obsolete this sub-process as high
inventory? risk.
21 Obsolete and Has this location Significant write offs leads
slow moving materially adjusted to higher risk weightage to
inventory inventory (write-offs) this sub-process.
during the period?
22 Obsolete and How many issues Higher the number of
slow moving were noted in last issues identified in a sub-
inventory audit in this sub- process, higher the
of the sub-process.
23 Impairment Have economic or Any indication of such
market events event leads to higher risk
occurred which weightage to this sub-
would result in the process.
net realizable value
of inventory
decreasing at this
location during the
period?
24 Impairment Have container Significant change in the
deposit prices/ rates price for the location leads
changed at this to higher risk rating to the
location during the sub-process.
period?
2998
E- 9287

Q No. Process
25 Impairment Does this location In the absence of
estimate bottles and estimation for breakages
cases breakage/ and losses of inventory,
loss? the sub-process needs to
be rated as high.
26 Impairment How many issues Higher the number of
of the sub-process.
27 SOD Has there been any Frequent/ major Change in
turnover in function for Inventory Role
personnel that may lead to higher risk
perform key rating for this sub-process.
Inventory duties that
could result in an
employee performing
incompatible tasks?
28 SOD Has there been any Higher the number of
fraud noted at this fraud cases, higher the
location in regards to weightage or risk ranking
Inventory during the of this sub- process.
past 3 years?
29 SOD Please indicate how Higher the number of
many issues were issues identified in a sub-
noted during last process, higher the
assessment. weightage or risk ranking
of the sub-process.
General Ledger and Reporting

4.38 The purpose of general accounting and closing procedure is to ensure
that all financial transactions are posted to the general ledger in the proper
accounting period to enable the operation to prepare periodic trial balance
and submit the financial statements.
2999
The start of the process is with passing of journal vouchers, cash vouchers,
booking of bills and ends with preparing of financial statements and the
closing files. This process affects all Profit and Loss accounts and Balance
Sheet accounts.
The accounting system is to be set up to restrict the access right of individual
users to their areas of responsibility. For each individual user a separate user
ID has to be created to ensure segregation of duties.
Accounting systems provides the option to close the particular period. Every
month post-closing activities, Finance department closes the past period and
opens the period for current month activities.
Generally, following type of vouchers are passed- Journal Voucher, Purchase
Journal Vouchers, Reversible Voucher, System Generated Voucher, etc.
These vouchers are parked in the Accounting System by an Accounts
executives and needs to be reviewed for supporting, correctness of
accounting codes by Accounts Manager.
After the PJVs are posted, the same are available for payment based on the
credit terms. AP executives can select the vouchers for payment. Normally
only due payments are selected for payments. In case of exceptions the AP
executive mentions the reason for out of due selections on the printout of
Payment selection register.
After the month ends, the period is blocked by Accounting or Finance
Manager, and hence, no entries can be passed in the prior periods.
The Accounting Manager is responsible for posting all entries parked in
Accounting System into the General Ledger. Before posting, he reviews the
supporting documents and checks whether they are reviewed and approved.
To make sure all journal entries are posted to General Ledger at the time of
month-end, the Accounting system needs to give an error message to
indicate whether there is any un-posted journals in the system.

4.39 The following is Process Risk Assessment of General Ledger and
Reporting:
Q No. Process
1 GL Is this a Non- In case of non ERP
Maintenance Enterprise ERP location, the risk is higher.
Location?
3000
E- 9289

Q No. Process
2 GL Have there been any Higher the number of
Maintenance changes to the changes in the master
master data of any data, higher the risk rating
system for this for the sub-process.
location?
3 GL Have there been any In case direct posting is
Maintenance direct postings to the not prevented through
general ledger at configuration, the risk of
this location? the sub-process amounts
to higher.
4 GL How many issues Higher the number of
Maintenance were noted in last issues noted, higher is the
audit in this sub- risk of the sub-process.
process?
5 Record Have there been any Higher the number of
Transactions new interfaces interfaces, higher is the
and Post to attached to the risk rating to the sub-
Ledger general ledger at process.
this location?
6 Record How many issues Higher the number of
Transactions were noted in last issues noted, higher is the
and Post to audit in this sub- risk of the sub-process.
Ledger process?
7 System Is responsibility for Formally assigned
Access monitoring and responsibility to monitor
testing interfaces the interfaces amounts
formally assigned? low risk to the sub-
process and vice versa.
8 System How many issues Higher the number of
Access were noted in last issues noted, higher is the
process?
9 SOD Has the operation Adequate documentation
identified possible and approval tool for
SOD issues based possible SOD violation
3001

Q No. Process
on the Approval amounts lower risk to the
tool? process and vice versa.
10 SOD Do employees with Access to period open
the ability to open and posting Journal
and close Entries to same person
accounting periods amounts to higher risk to
also have the ability the sub-process.
to post journals
entries?
11 SOD How many issues Higher the number of
were noted in last issues noted, higher is the
process?
12 Adjusting Does this location Higher the number of
Entries/JV's post journal entries? journal entries, higher is
the risk to the sub-
process.
13 Adjusting Does this location In case system is
Entries/JV's have parked configured to have park
documents? and post of Journal entry
by different person, the
risk to the sub-process is
lower and vice versa.
14 Adjusting How many issues Higher the number of
Entries/JV's were noted in last issues noted, higher is the
process?
15 Reconciliatio Were there any Higher the number of
n & Review material adjustments adjustments, higher is the
to the general ledger risk to the sub-process.
for this entity/
location?
16 Reconciliation How many issues Higher the number of
& Review were noted in last issues noted, higher is the
process?
3002
E- 9291

Q No. Process
17 Field Sub- Has there been any Frequent/major change in
Consolidation turnover in the function for GL role may
preparer or reviewer lead to higher risk rating
of consolidated for this sub-process.
investees step up
entry calculations for
the location?
18 Intercompany Does this location Higher the number of
have intercompany inter-company
transactions? transactions amounts to
higher risk rating to the
sub-process.
19 Intercompany How many issues Higher the number of
were noted in last issues noted, higher is the
process?
3003
E- 9292
Chapter 5
Internal Audit Checklist
Procurement Process
5.1 The purpose of the Procurement procedures is to ensure that
purchases are made judiciously, and that goods of acceptable quality are
purchased from reputable vendors, at competitive terms and in a timely
manner. Further, to also ensure that timely disbursements are made. These
procedures cover goods and services, but exclude purchases from inter-unit
locations and capital purchases for projects etc.
S. Sub- Control Control Classification Test
No. Process Title Description (Preventive / Procedures
Detective)
1 Vendor Vendor Vendor Preventive 1. Ensure
Master addition/ addition/change additions/
change requests, changes to
requests including the Vendor
approved vendor Master are
and verification, are formally
vendors independently authorized in
verified approved line with the
before being approved
added to the policies/ local
Vendor Master. COA prior to
being
updated in
the Vendor
Master.
2. Ensure
there are
adequate
supporting
documents to
verify the
validity and
legitimacy of
3004
E- 9293

Detective)
each addition
or change.
3. Ensure the
additions/
changes
approver is
an associate
different from
the requestor
and is also
independent
from the
Vendor
Master
Custodian.
2 Vendor Vendor An audit trail Detective 1. Ensure
Master Master with all risk audit trails
audit trail significant were
reviewed vendor master periodically
additions/ reviewed for
changes, all risk
including significant
vendor name vendor
and address, master
bank account additions and
numbers, and changes.
other data that 2. Ensure
may be reviews were
significant to performed by
the local an individual
operation is independent
reviewed by an from the
independent Vendor
associate Master
periodically. custodian.
3 Vendor Vendor Periodically, Detective 1. Ensure the
Master the entire Operation
3005

Detective)
Master Data Vendor Master performs a
Review is reviewed review for
(e.g., duplicate inactive and/
vendors, etc.) or duplicate
and maintained vendors at
(e.g., Vendor periodic level.
Master updated 2. Ensure all
to block inactive and/
duplicate or duplicate
vendor vendors
account, etc.). identified
during the
review have
been blocked
or deleted,
respectively.
4 Vendor Bidding Competitive bid Preventive 1. Ensure the
Selection Process procedures Operation
should be maintains
established, appropriate
documented, competitive
and enforced in bid
accordance procedures in
with the local accordance
purchasing with the
policy and purchasing
approved policy.
guidelines. 2. Ensure
competitive
bids are
comparable
(i.e., issued in
the same
period,
addressed to
the operation,
underlying
3006
E- 9295

Detective)
goods and
services are
comparable),
documentatio
n is properly
maintained.
There is a
rationale if no
bids were
obtained,
consideration
was given to
the best
source of
supply and
bids were
submitted
within a
reasonable
period from
the purchase
date.
5 Release Approved Purchase Preventive Check
of Purchase orders whether the
Purchase Orders approved in the release
Order system based strategy
on the release configured in
strategy the system is
configured in in accordance
the system with the
approved
COA.
6 Release Approved Manual Preventive For the

of Purchase Purchase selected
Purchase Orders orders should samples,
Order be approved ensure that
3007

Detective)
based on the purchase
COA orders are
approved
based on the
chart of
authority.
7 Release Purchase Purchase price Preventive Check
of price and and quantity whether
Purchase quantity tolerances, as purchase
Order tolerances approved by price and
defined local quantity
management, tolerances
are defined defined in the
within the system are in
application. accordance
with the limits
approved by
local
management.
8 Goods/ Goods/ Warehouse Preventive 1 For the

Service Services Manager/ selected
Received are Service samples,
recorded receiver makes ensure that
based on Goods Receipt Goods
the valid Note based on Receipt Note
GRN the valid has been
document delivery note/ prepared
Service based on the
completion delivery or
documents. Invoice.
2. Goods
Receipt Note
should be
supported
with approved
Purchase
3008
E- 9297

Detective)
Order.
3. Any
variance in
PO quantity
and Invoice
quantity
should be
approved by
the
appropriate
personnel.
9 Goods/ Exception Open PO's, Detective Open PO and
Service reports aged PO Violation
Received reviewed exceptions to 3- Reports
way match, Testing:
unmatched 1. Ensure
receiving, and Open PO
unmatched/ reviews were
blocked invoice performed by
reports are the Operation
reviewed and and ensure
old/unusual they were
items are performed
investigated timely and
and resolved. aged items
are
explained/
cleared
2. Ensure
violation
reports were
adequately
and timely
reviewed by
the
Operation.
3009

Detective)
10 Goods/S Monthly Operation Detective 1. For the
ervice manual maintains selected
Received purchasing procedures to months,
accruals solicit/ obtain a ensure that
recorded complete listing entity has
of goods and performed
services manual
received but accrual
not invoiced process. 2.
(i.e., no goods Examine
receipt or whether
invoice entry accrual
has been process has
entered in captured all
ERP) to be goods or
included in services
manual received but
accruals. not invoiced.
3. Verify that
working of
accruals is
supported
with
confirmation
from
respective
departments
for the goods
or services
received.
11 Invoicing Invoice System invoice Preventive Check
workflows workflow whether
control authorizations workflow for
approvals control the invoice
and invoice approval
aligned approval routing is
with the routing and are aligned with
3010
E- 9299

Detective)
Local aligned with the the Local
COA. Local COA. COA.
12 Invoicing Invoice Accounts Preventive 1. For the
processing Executive selected
with process invoice samples,
support after verifying ensure that
documenta the details of invoice is
tion invoice to supported
ensure that with approved
invoice carrying Purchase
correct PO Order.
Number, 2. Verify
Description, whether
Qty and Vendor details of
Name. invoice
matches with
Purchase
order in terms
of quantity,
PO Number,
Vendor name
and
description of
goods.
3. In case of
any miss-
match,
required
approval has
been
supported.
13 Payments Recurring New recurring Preventive 1. Ensure
payments payment setups new recurring
approved are properly payments
supported and (those set up
independently since the last
approved and a audit) have
3011

Detective)
review of been
existing reviewed/
recurring approved with
payments is proper
performed at supporting
least annually documentatio
to confirm the n prior to set
need for up in ERP.
continuation of 2. Ensure an
payment. annual review
(at least) of
existing
recurring
payments
(those set up
prior to the
current year)
to confirm
need for
continuation
of payment
has been
performed/
approved.
14 Payments Approved The bank Preventive 1. For the

Payments authorized selected
signatories samples,
must approve verify and
the payments confirm
within system persons
for payment approving
advice to be payment
released to the advices in
bank. system are
Approval is authorized as
given after per COA.
3012
E- 9301

Detective)
comparing the 2. Verify the
totals on the signatures on
Hash report hash report/
and payment payment
summary with advice to
the figures on ensure
system in case payment are
of Automated duly
payment run authorized.
and after 3. Ensure
checking the amounts
supporting in payable as
case of the per payment
manual advice are in
payments. The match with
reports and the payment
supporting proposals.
signed as an
evidence of the
review.
15 Debit/ Invoice All Preventive Ensure all
Credit modificatio modifications to debit memos
Notes ns an approved are properly
approved invoice via a supported
debit/ credit and
memo are independently
properly approved per
approved. the LCOA
16 Balance BS Balance sheet Detective 1. Select a

Sheet Reconciliat reconciliations sample of
Reconcili ions for all Accounts reconciliation
ations prepared Payable s for various
and Accounts, periods/mont
approved including GR/ hs and
IR accounts, accounts
3013

Detective)
are prepared to throughout
ensure the year.
balances are 2. Review
supported, the
analyzed, and reconciliation
reconciling s and ensure
items are that they are
cleared in performed
timely manner. and reviewed
Balance sheet by the
reconciliations appropriate
are personnel.
independently 3. Ensure
reviewed/ that the
approved. reconciliation
s are
performed in
a timely
manner and
ensure that
reconciling
items are
researched
and
addressed in
a timely
manner.
4. Review
the Balance
Sheet by
account to
identify
unusual items
(e.g., credit
balances in
asset
accounts,
debit
3014
E- 9303

Detective)
balances in
liability
accounts,
etc.)
17 SOD Functional Functional Preventive 1. Observe

duties duties such as, key functions
segregated custody, of the
review, process.
approval, and 2. Evaluate if
recording are there is
properly appropriate
segregated. segregation
of duties for
all main
processes.
Production Process
5.2 The procedures cover the requisition and receiving of raw, packing
and other materials, including empties for production, as per plan. This
includes returning any excess quantities of materials to the stores and the
transferring of completed production to the warehouse.
S. Sub- Control Title Control Classification Test
No. Process Description (Preventive / Procedures
Detective)
1 Material Material Material Preventive 1. Ensure

Master Master Master additions/
addition/chang addition/ changes to
e requests change the Material
approved. requests, Master are
including Bill formally
of Material for authorized
Finished in line with
Goods are the
independently approved
3015

Detective)
approved policies/
before being local COA
added to the prior to
Master Data. being
updated in
the Master.
2. Ensure
there are
adequate
supporting
documents
to verify the
validity and
legitimacy
of each
addition or
change.
3. Ensure
the
additions/
changes
approver is
an
associate
different
from the
requestor
and is also
independen
t from the
Material
Master
Custodian.
2 Material Material An audit trail Detective 1. Ensure
Master Master audit with all risk audit trails
trail reviewed significant were
3016
E- 9305

Detective)
Material periodically
master reviewed
additions/ for all risk
changes, significant
including Bill content to
of Material is the Material
reviewed by Masters
an additions
independent and
associate changes.
periodically. 2. Ensure
reviews
were
performed
by an
individual
independen
t from the
Material
Master
custodian.
3 Material Material Periodically, Detective 1. Ensure
Master Master Data the entire the
Review Material Operation
Master is performs a
reviewed review for
(e.g., inactive
duplicate and/or
codes, BOM, duplicate
etc.) and Material
maintained. codes at
periodic
level.
2. Ensure
all inactive
and/ or
3017

Detective)
duplicate
Material
codes
identified
during the
review have
been
blocked or
deleted,
respectively
4 Issue Validation of Plant Preventive 1. For the
Consumpti Process Order Accountant selected
on and verifies the Process
Output correctness Order,
recording and ensure that
completeness output has
of process been
order ensuring recorded
correct based on
recording of the
output and production
validates the document
consumption signed off
booking based by the Plant
on defined Manager
BOM for each
production
run.
2. Verify
whether
consumptio
n against
output has
been
booked as
per defined
3018
E- 9307

Detective)
BOM.
3. Any
variance in
defined
BOM and
actual
consumptio
n is
followed up
for
corrective
action
5 Issue Variance Plant Finance Detective 1. For the
Consumpti Analysis Manager selected
on and periodically period,
Output performs the ensure that
recording variance variance
analysis analysis
report for has been
standard performed
consumption by the Plant
and Actual Finance
consumption. Manager.
Significant 2. Examine
variances are the
discussed with significant
Production Variances
Team for noted
corrective during
action review.
3. Ensure
that follow-
up actions
were taken
for
corrective
measure.
3019

Detective)
6 Machine Validation of Standard Preventive 1. Ensure

Capacity capacity Capacity the capacity
Utilizations utilization utilization utilization
norms norms are norms are
validated by supported
the Plant with
Head by way engineer’s
of sign off of certificate
the report and
considering all technical
technical inputs.
inputs and 2. Examine
engineer the
certification. utilsation
On the basis norms are
of norms the validated by
overhead Plant Head
allocation is by way of
configured sign off.
into master 3. Verify
recipe to the
determine the overhead
cost of allocation
production. has been
appropriatel
y
configured
into Master
recipe.
7 Machine Periodic Plant Head Detective 1. Ensure
Capacity Review of Performs that
Utilizations Capacity periodic periodic
Utilization. review of review has
capacity been
utilization performed
norms and by Plant
3020
E- 9309

Detective)
any variance Head.

in actual and 2. Examine
installed
the
capacity is variance
investigated noted
for corrective
during
action. review.
3. Verify
whether
such
variances
investigated
and
corrective
actions
were taken
for revised
allocation
of
overheads.
Sales and Accounts Receivables

5.3 The purpose of Stock-out and Stock-in procedures is to establish
controls over inventory in the direct route selling process. These procedures
describe the manner in which the hand over or takeover of company products
is to occur between functions, to establish the responsibility (for custody).
Typically, a direct route sale is undertaken from a distribution warehouse/
Depot, or in certain cases, the plant warehouse. All vehicles on which
product is loaded, must be subject to Stock-out and Stock-in procedures,
including non-Company owned vehicles.
Indirect sales comprise sales to distributors for onwards sale to outlets.
These procedures define the recommended controls over indirect sales,
specifically pertaining to:
 The handing over of product to distributors and the collection of
empties;
3021
 Receivables collection and credit control; and

 Other aspects like, compliance with agreements.
Indirect sales could be made both from the plant and distribution
warehouses. Typically, dispatches are made against an order received from
a distributor after credit approval by finance.
Sales to distributors are recorded as (end-customer) sale. However, it is
useful to have further details of the distributor’s customer base, network, etc.
Also, the company may often support the indirect distribution process by
monitoring (and supervising) important distributor routes, and assist in
various marketing and other programs in the distributor’s market.
No. Process Title Description (Preventive/ Procedures
Detective)
1 Master Customer Master Data Preventive 1. Review
File Master Executive whether
Verificatio checks Customer
n from whether the Master/ Price
Source request for Master/
Data. updating Discount
Customer Master/ Credit
Master/ Price limit is updated
Master/ based on valid
Discount request.
Master/ Credit 2. Ensure that
Limit is Master data is
complete and updated based
authorized as on valid
per DOA. supporting
documents.
2 Master Review of Master Data Detective 1. Review
File correctne Manager whether audit
ss and verifies the trail report has
complete correctness been signed off
ness of and by the Master
the completeness Data Manager.
updated of updation of 2. Examine
data Customer/ whether any
Price/ discrepancies
3022
E- 9311

Detective)
Discount/ noted during
Credit master sign off has
and signs off been followed
the audit log up for
as an corrective
evidence of action.
review.
3 Master Periodic Finance Detective 1. Verify that
File review of Manager periodic review
Master performs of Master Data
Data periodic has been
review of performed by
customer the Manager
master/ Finance.
Discount 2. Examine
Master/ Price whether any
Master/ Credit discrepancies
Limit to noted during
ensure the review has
correctness been followed
and up for
completeness corrective
of data. action.
4 Sales Release Sales orders Preventive 1. Review that
Order of Sales are released a credit limit
Order into system has been
only on the established for
basis of valid the credit sales
customer customers.
order and 2. Ensure all
available approvals are
credit limit. in accordance
with the
effective credit
policy and the
COA. If there
is any
3023

Detective)
deviation with
regards to the
credit limit,
ensure
adequate
approval
before invoice
was submitted.
3. Ensure
sales orders
are released
based on the
valid customer
order.
5 Pricing Data ERP Preventive Check the
validation automatically system
by system calculates configuration to
pricing based ensure that
on the system
customer price automatically
masters at the calculates
time of pricing based
creation of on the
sales order. customer price
The sales masters at the
order time of creation
information is of sales order.
copied to
delivery and
billing in terms
of Material
code, order
quantity and
Pricing which
ensures
correct
movement of
3024
E- 9313

Detective)
inventory at
the time of
delivery and
correct billing
at the time of
invoicing.
6 Shipment Invoice Security Preventive 1 .For the
verificatio personnel selected
n at Exit perform samples, verify
Gate independent whether
check of the security
invoice personnel has
quantity and signed off the
shipped count of
quantity. Any vehicles.
variance noted 2. Examine
is investigated whether
and resolved. quantity
mentioned as
per invoice
tallies with the
security count.
3. Ensure the
corrective
action has
been taken for
any
discrepancies
for invoice
quantity and
security count.
7 Shipment Periodic Reconciliation Detective 1. For the
Reconcili between sales selected
ation of order quantity samples,
order and ensure that
quantity dispatched reconciliation
and goods quantity has been
3025

Detective)
dispatche is performed performed for
d quantity by Warehouse sales order
personnel. quantity and
Deviation if dispatched
any, is goods.
followed up 2. Verify that
and rectified corrective
by Debit Note/ actions have
Credit Note been taken for
any
differences.
8 Shipmen Proof of Invoices or Preventive 1. Select a
t receipt other proof of sample of
are receipt, signed shipments and
obtained by credit ensure the
as a customers respective
Proof of upon receipt invoice has
Delivery of product, are been signed by
obtained as a the customer
Proof of or another form
Delivery. of proof of
receipt has
been received.
2. Compare the
shipment dates
recorded in the
system and the
actual dates
goods were
shipped. Any
discrepancies
should be
followed up on
by operations
in a timely
manner.
3. Ensure that
3026
E- 9315

Detective)
revenue has
been correctly
recognized for
month end
sales.
9 Invoicin Review of On a monthly Detective 1. Verify for the
g Monthly basis, sales selected
Sales analysis is months
performed by whether sales
category analysis has
(sales data been
extracted from performed by
system). the appropriate
The person.
comparison is (Finance
made against Controller)
latest forecast. 2. Examine the
Significant variance noted
variances are during the
required to be review are
noted and documented.
explained. Any 3. Ensure
resulting corrective
actions from action has
the review are been taken for
documented. the variances
The analysis noted during
prepared is review.
reviewed by
Financial
Controller.
10 Invoicin Balance Debtor Detective 1. Obtain the
g Confirmat balances as guidelines for
ion per books are the periodic
circulated to balance
customers for confirmation.
balance 2. Review the
3027

Detective)
confirmation. balance
Variations, if confirmation
any, found out documents for
are addressed the selected
appropriately. period.
3. Ensure that
necessary
adjustment
entries were
passed in case
of variance in
balance.
11 Revenue Review of Operation Preventive 1. Obtain
Recognit Sales reviews Revenue
ion during shipments Recognition
cut-off close to Policy of the
period period-end Company.
and provides 2. Obtain Sales
necessary in Transit
adjustment for Reports/
shipments Revenue
where title has Reversal
not transferred Reports/ List of
as of Goods Shipped
established But Not
period cut-off. Invoiced.
3. Ensure that
any shipments
which require
an adjustment
due to period
end cut-off
have been
made properly
and in a timely
manner.
4. Select
3028
E- 9317

Detective)
samples of
shipments near
cut off periods
(end of month
and beginning
of next month)
and ensure
that the
revenue has
been captured
at the right
period.
12 Collectio Debtors On a monthly Detective 1. Obtain the

n Ageing basis, overdue debtors policy
Manage and (aging) and guidelines
ment corrective debtors’ for provisions.
action balances and 2 Ensure for
related the selected
provisions/ months
incentives are whether ageing
reviewed. analysis has
been
Amounts "past performed by
due" more the appropriate
than specified personnel.
days or 3. Examine
overdue whether
amount in provision for
case of doubtful debts
prompt have been
“payment calculated as
scheme” are per approved
followed up policy.
and action is 4. Ensure that
decided and corrective
taken, action have
3029

Detective)
including been taken for
raising debit default
notes, customers e.g.,
blocking blocking of
delivery to credit limit or
customer and invoicing, etc.
creating
provision(s)
for bad debt.
As part of the
review, credit
limits/
incentive
schemes of
customer is
reviewed and
amended or
applied.
13 Collection Approved Write off Preventive 1. For the
Managem write offs proposal is selected
ent for raised samples, verify
overdue containing the whether write
balances reasons for off has been
such write off. approved as
The proposal per DOA.
for write off is 2. Ensure that
verified along write off is
with all the adequately
supporting supported by
and approved the working
as per DOA. based on the
approved
policy.
14 Accruals Adjustme Accounting Preventive 1. For the
nt entries Manager/ selected
for Assistant samples, verify
provision Accounting whether
3030
E- 9319

Detective)
s and Manager Journal
accruals reviews all voucher for
journal entries provision/
(including accruals etc
accruals, has been
provisions and approved as
pre-payment) per DOA.
along with 2. Ensure that
supporting journal voucher
sheets for is adequately
correctness supported by
and validity the working
before based on the
approving into approved
system policy.
15 Collectio Incoming Incoming Preventive 1. For the
ns payment payment from selected
processin customer are samples, verify
g on the matched with whether
basis of invoice by collections are
invoice. Finance Team recorded after
and AR verifying the
balance is invoice
cleared on amount.
timely basis. 2. Check
whether
discount/
interest/ fees
as applicable
for timing of
payments are
adequately
calculated and
supported
before deriving
final amount of
payment.
3031

Detective)
3. Ensure
whether AR
Balances are
cleared on
timely basis.
16 Collectio Reconcili Reconciliation Detective 1. Check
ns ation between Sub whether
between Ledger and reconciliation is
General General prepared
Ledger Ledger is between
and Sub done and General
Ledger reviewed by Ledger (GL)
Accounting per Sub-ledger
Manager. Any (SL).
differences 2. Review the
are analysed reconciliations
and resolved. for accuracy
and their
correctness.
3. Ensure that
all adjustment
entries to
support the
reconciliation
are approved
and backed-up
with working.
4. Investigate
the reason for
aged item in
reconciliation.
17 Sales Sales Sales returns Preventive 1. For the
Return return are recorded selected
recorded on timely samples,
on the basis by the ensure that
basis of Order Taking sales returns
3032
E- 9321

Detective)
approval Centre Team are recorded
on the basis of only on the
supporting basis of
documents adequate
and required approval.
approval 2. Examine
whether sales
returns are
recorded on
timely basis.
3. Verify
whether reason
for sales
returns are
adequately
documented.
18 Sales Sales On a quarterly Detective 1. For the
Return Return basis, selected
Reconcili Distribution quarter, obtain
ation team the document
physically of physical
counts the verification
returned documents.
goods from 2. Verify
randomly whether
selected physical
returned verification has
invoice and been
reconciles conducted
with ERP to based on the
ensure that approved
returns have guidelines.
been recorded 3. Examine
correctly and whether any
completely. discrepancies
The noted during
reconciliation physical
3033

Detective)
statement is verification has
reviewed by been followed
Financial up for
Controller. corrective
action.
19 Route For direct In case of Preventive 1.Verify the
Settleme sales to Direct Sales to following
nt Direct outlets, outlets, documents:
Sales settlemen settlement - Fulls check in
t associate slip
associate ensures - Empties
ensures driver's check in
driver's settlement confirmation
settlemen sheets are with the PV
t sheets prepared and
- System
are supported by
generated
prepared the properly
settlement
and signed
sheet
supported documents
2. Ensure
by the (e.g., cashier
these
properly signed
documents are
signed receipts,
signed by
document checker
appropriate
s signed load
authority.
documents).
20 Route Settlemen In case of Preventive 1. Obtain
Settleme t sheets Direct Sales to settlement
nt Direct and outlets, sheets for the
Sales supportin settlement period under
g sheets and audit.
document supporting 2. Check
s are documents whether
audited are audited settlement
on a daily (e.g., by sheets are
basis comparing reviewed by an
driver's load independent
document person.
3034
E- 9323

Detective)
used in route
settlement
against
checker's
copy and by
reviewing
invoices to
ensure they
are issued at
the approved
price) on a
daily basis.
21 SOD Functiona The functional Preventive 1. Observe
l SOD duties related key functions
to this process of the process.
(such as 2. Evaluate if
custody, there is
review, appropriate
approval, and segregation of
recording) are duties for all
properly main
segregated. processes.
Direct Marketing Expenses

5.4 The objective of marketing expense control procedures is to monitor
marketing related commitments and the corresponding actual spend against
budgets. The procedure covers the preparation of annual budget by
marketing spend category; the recording of commitments; the subsequent
on the sales curve basis. The procedures also describe the process of
The marketing and finance departments are to jointly prepare the annual
marketing budget and obtain appropriate approvals. Typically, this is based
on the expected annual sales.
3035

Detective)
1 Pre-Paid Investm Amount paid Preventive 1. Check
Marketing ent in to bottler for whether
and Media coolers investment in amount paid to
Buying is coolers are Bottler for
adequat appropriately investment in
ely supported coolers are
supporte with required supported with
d. approval and valid
have valid agreement.
agreement. 2. Ensure the
payment is
supported with
required
approval.
3. Verify
whether the
payment has
been
appropriately
recorded in
the correct GL
Code.
2 Pre-Paid Amount Amount Preventive 1. Check
Marketing spent on spent on whether
and Media celebrity celebrity fees amount paid to
Buying fees and and media Celebrity and
media space is Media Agency
space is appropriately for media
appropri supported space are
ately with required supported with
supporte approval and valid
d. have valid agreement.
agreement 2. Ensure the
payment is
supported with
3036
E- 9325

Detective)
required
approval.
3. Verify
whether the
payment has
been
appropriately
recorded in
the correct GL
Code.
3 Media Marketin Marketing Detective 1. Obtain the
Buying g finance marketing
Perform executes performance
ance quarterly audits for key
Audit audits of bottlers.
marketing 2. Verify that
performance. the report has
(billed as been reviewed
contracted or timely.
agreed) 3. Verify that
any
adjustment/
follow up
action noted
during review
has been
performed.
4 Media Media Local media Detective 1. Understand
Buying Perform airing/ the media
ance performance airing/
Audit are audited performance
and reviewed process.
on a timely 2. Obtain the
basis. post-audit
report for
3037

Detective)
review.
3. Ensure that
follow up
action has
been
performed.
5 Prepaid Review Marketing Detective 1. Examine

Marketing on assets/ agreements,
and Media Prepaid programs entries,
Buying Marketin amortization amortization
g Assets calculation schedules, etc
and/ or other for new pre-
accounting paids and
treatments determine
are properly whether
supported, amounts were
recorded and properly
independentl recorded and
y reviewed reviewed/
and approved.
approved 2. Examine
amortization
for
reasonablenes
s and
accuracy
3. Verify that
amortization is
reviewed by
authorised
person.
6 Marketing Procedu Operation Detective 1. Review the
Accruals res to has month end
3038
E- 9327

Detective)
solicit established marketing
goods/s procedures accrual and
ervices to solicit/ ensure the
received obtain a basis for
but not complete preparing the
invoiced listing of marketing
for the goods and accrual is
manual services reasonable,
accruals (including including
marketing estimate for
assets) marketing
received but claims
not invoiced received from
to be bottlers in
included in preparing the
manual accrual.
accruals. All 2. Obtain the
accrual JV to record
accounts the accrual
need to be and ensure
reviewed in whether the
the next support
period to calculation
ensure the had evidence
proper fall of review and
out approval.
recording. 3. Note
whether the
resulting
adjustments
were
appropriately
booked.
7 Impairment Impairm Quarterly, Detective 1. Obtain the
ent Operation quarterly
3039

Detective)
Survey reviews the confirmation
marketing submitted to
asset Corporate
balances for Finance.
possible 2. Verify if
impairment any
indicators impairment
and supports indicators
conclusions have been
prior to identified.
submission 3. Review the
to the process to
Corporate. identify
Ensure the impairment
impairment indicators to
testing cover ensure the
the confirmation
marketing sent to
side (i.e., Corporate
long term Finance is
marketing prepared in
assets, accordance
investment in with the
coolers). approved
guidelines.
4. If
accounting
adjustments
were required
and recorded,
verify that they
were
discussed with
and approved
by Corporate
Finance.
3040
E- 9329

Detective)
8 Balance Balance Balance Detective 1. Verify that
Sheet Sheet sheet there is
Reconciliat Reconcil reconciliation adequate
ion iations s for all supporting
marketing documentation
related and they are
accounts independently
(including reviewed and
prepaid approved.
media spent, 2. Verify that
Coolers and reconciling
accruals) are items if any
prepared to are cleared
ensure timely.
balances are 3. Review the
supported, Balance Sheet
analyzed, by account to
and identify
reconciling unusual items
items are (e.g., debit
cleared in balances in
timely liability
manner. accounts, etc.)
Balance
sheet
reconciliation
s are
independentl
y reviewed/
approved.
9 SOD Function The Preventive 1. Observe

al SOD functional key functions
duties related of the process.
to this 2. Evaluate if
3041

Detective)
process there is
(such as appropriate
custody, segregation of
review, duties for all
approval, main
and processes.
recording)
are properly
segregated.
Deductions from Revenue

5.5 This process is designed to monitor marketing related commitments
and the corresponding actual spend against budgets with control procedures.
Further, it broadly evaluates the effectiveness of the marketing related
spend.
The procedures cover the preparation of annual budget by marketing spend
category and month; the recording of commitments; the subsequent
on the sales curve basis. The procedure also describes the process of
The marketing and finance departments jointly prepare the annual marketing
budget and obtain approval as per COA. Typically, this is based on the
expected annual sales volume and often stated as cost per case of sales.
This budget is to be further detailed by month and marketing spend category.
No. Process Description (Preventive/ Procedures
Detective)
1 Calculati Off-invoice Off-invoice Preventive 1. Verify
on, rebate/ rebate/allowa whether
Pricing, allowance nce calculations
and calculations calculations are
3042
E- 9331

Detective)
Approval properly are supported reviewed
supported and by the by an
independently properly independen
reviewed and signed t person
approved contract with and are
bottler/ properly
customer, approved.
independentl 2. Verify
y reviewed whether
and calculations
approved. are
supported
by a
properly
signed
contract
with the
bottler/
customer or
duly
approved
program.
3. Verify
that the
rebate is
recorded to
the
appropriate
GL
account.
4.
Determine
whether
credit
memos,
claims, or
3043

Detective)
invoices
paid/
deducted
was in line
with the
supporting
documentat
ion,
agreements
or
contracts.
5. If
payment
requires,
acknowledg
ment
ensure to
obtain
evidence
that
customer
receives
the
payment or
products or
customer is
aware of
the
deductions
in their
accounts.
2 Calculati New/ changes New/ Preventive 1. Ensure
on, to Rebate changes to that
Pricing, prices are rebate prices changes
and properly are properly are made
approved in for the
3044
E- 9333

Detective)
Approval approved accordance selected
with the COA/ samples of
rebate policy new prices
prior to and
update in amendment
Rebate/ Price s to the
Master File. rebate
master file
as per
appropriate
level of
approval as
defined in
the local
chart of
authority.
2. Verify if
adjustment
s are timely
encoded in
SAP and
after
approval.
3. Review
a list of all
adjustment
s and
identify
adjustment
s are
approved
and
supported.
3 Calculati Manual Any manual Preventive 1. Obtain a
on, override of override of listing of
3045

Detective)
Pricing, rebate prices rebate prices price
and are properly are properly overrides
Approval approved reviewed and (exception
approved in reports,
accordance etc.).
with COA or 2. Verify
applicable that the
policy. manual
overrides
are
properly
supported
and
reviewed
approved in
accordance
with COA.
3. Verify
the
operation is
routinely
reviewing
price
overrides.
4 Calculati Independent An audit trail Preventive 1. Obtain
on, Rebate/Price of changes to the
Pricing, Master File Rebate/ Price operation's
and Audit Trail Master File is review of
Approval Review reviewed by the rebate
an master file
independent audit trail.
associate 2. Verify
periodically. that all risk
significant
changes
3046
E- 9335

Detective)
were
reviewed
and
approved.
3. Verify
that the
person
performing
the review
is
independen
t of the
rebate
update
process.
5 Source Independent Independent Detective 1. For the
Data associate associate selected
Validatio ensures credit ensures sample
n memo/ invoice credit memo/ review
from invoice from invoice with
customer/ customer/ signed
check request check contracts or
for off-invoice request for agreements
rebates/ off-invoice , payment
allowances/ rebates/ approvals
fees is allowances/ and
properly fees is supporting
supported by properly documentat
approved supported by ion.
calculation approved 2. Ensure
prior to calculation that the
payment prior to supporting
payment. documentat
ion in line
with
3047

Detective)
agreements
or contracts
and
payment/
credit is
calculated
based on
above.
3.
Investigate
any
significant
differences.
6 Accrual Operation has Operation Preventive 1. For the
Recordi established has selected
ng and procedures to established months,
Reconcil identify all procedures to obtain the
iation rebates identify all rebates
earned by rebates accrual
customer but earned by analysis
not paid that customer but and ensure:
need to be not paid that (a)
included in need to be Accruals
manual included in are
accrual. manual reasonable
accrual. based on
Accruals are rebate
reviewed for type.
reasonablene (b) Accrual
ss and s are
approved by reviewed
appropriate by an
management. independen
t person
and are
3048
E- 9337

Detective)
properly
approved.
2. Compare
month-to-
month
accruals
and
investigate
and
conclude
on any
unusual
variances.
7 Balance Balance Balance Detective 1. For the
Sheet Sheet sheet selected
Reconcil Reconciliation reconciliation months
iation s s for all review the
rebate/ reconciliati
allowance ons and
related ensure that
accounts are they are
prepared to performed
ensure and
balances are reviewed
supported, by the
analyzed, appropriate
and personnel.
reconciling 2. Ensure
items are that the
cleared in reconciliati
timely ons are
manner. performed
Balance in a timely
sheet manner
reconciliation and ensure
s are that
3049

Detective)
independentl reconciling
y reviewed/ items are
approved. researched
and
addressed
in a timely
manner.
3. Verify
that the
amortizatio
n
methodolog
y is in-line
with the
related
Customer
Master
Agreement.
8 SOD Functional The Preventive 1. Observe
SOD functional key
duties related functions of
to this the process
process 2.
(such as Evaluate if
custody, there is
review, appropriate
approval, and segregation
recording) of duties for
are properly all main
segregated. processes.
Fixed Assets
5.6 The purpose of the fixed assets and depreciation procedures is to
ensure that the fixed assets are correctly and consistently accounted for, and
that adequate controls are exercised and accountability established for this
3050
E- 9339
significant investment of the company. Broadly, this section covers the

accounting for fixed assets and depreciation, including their transfers and
disposals. Further, it also covers the procedures for physical control over
fixed assets.
Detective)
1 Civil Granting Civil Preventive 1. Ensure that
Constru Civil construction an
ction Constructi work is independen
work- on work is evaluated, t evaluation
awardin adequately approved and of the
g controlled. verified before structural
awarding the drawings
work and (layouts)
making has been
payments. performed
by an
external
consultant
to
determine
the
quantum of
work and
cost to be
incurred.
Specific
focus to be
placed on
the process
documente
d for
awarding of
such
contracts.
2. Check that
based on
above, the
(RFQ) has
3051

Detective)
been
prepared to
obtain bids/
quotes
from civil
works
contractors
and
contracts
has been
awarded
based on
established
parameters
3. Verify that
the
quotations
invited are
comparable
with
respect to
the
specificatio
ns of
materials
etc.
4. Check
whether
the final bill
of the
vendor for
constructio
n /
renovation
has been
reviewed
by
3052
E- 9341

Detective)
independen
t civil
consultant
before
payment.
2 Asset Asset Assets-Under Preventive 1. Select
Capitaliz Additions Construction sample for
ation- properly are reviewed assets
Accounti capitalized periodically for additions
ng and prior to capitalization from FAR.
Recordi updating and for asset (Sample
ng fixed asset additions. selection
register criteria
e.g. - High
value
machinery,
Civil Work,
Items dealt/
purchased
by local
operations)
2. Analyze
FAR and
check if
asset life
and
depreciatio
n method
have been
defined in
accordance
with the
company
policy.
3. Verify bids
(sufficient
number of
3053

Detective)
quotes) for
assets
purchases.
Lesser
number of
bids should
be
supported
by
approved
business
justification
/
reasoning.
4. Check for
the correct
capitalizati
on in the
system
(asset
category,
asset life,
asset
value,
tagging,
Installation
Date, Put
to use
date, etc.)
5. Check
account
balance in
the asset-
under-
constructio
n account
and
3054
E- 9343

Detective)
compare it
with
detailed
project
specific
report
(where
project cost
is
recorded).
6. Discuss
with the
unit
manageme
nt about
the process
of
reviewing
asset-
under-
constructio
n (CWIP)
account to
ensure the
timely
capitalizati
on of
projects.
7. Review the
asset-
under-
constructio
n (CWIP)
transfer
entries in
FAR for
accuracy
3055

Detective)
and
timeliness.
8. Perform a
physical
examinatio
n of Asset
lying under
CWIP
account for
checking if
asset is
actually
under
constructio
n stage.
9. Verify if
depreciatio
n is
calculated
on account
balances
(transferred
from CWIP
account)
from the
date the
project is
finished
and it is
recorded in
FAR.
3 Intangibl Intangible Finance Preventive Examine
e Asset Asset Manager - whether
Capitaliz Additions capitalizes the Finance
ation- adequately intangible asset Manager
Accounti capitalized on the basis of capitalize the
ng and . approved intangible
3056
E- 9345

Detective)
Recordi agreement and assets based
ng details as on the
approved by approved
the authorised agreement and
person in terms relevant
of financial support
viability of the documents.
intangible
assets like
patent/
copyright/
marketing
rights, etc.
4 Review Independe Accounts Detective Verify whether
of nt review Executive review of
Intangibl of forwards asset intangible
e Assets Intangible schedule at the assets have
assets end of every been
quarter to performed to
Manager–Cell ensure the
for review. correctness of
Asset schedule amortization
captures the and net value
accumulated of intangible
amortization assets.
and net value
of the
intangible asset
as on date.
5 Fixed Independe Periodic asset Detective 1. Verify
Asset nt review movements whether all
Register of periodic (i.e., new, the assets
assets disposed, movements
movement transferred) (Additions/
in FAR recorded in Transfers/
FAR are Disposals/
independently Write-offs)
3057

Detective)
reviewed for as
accuracy. recorded in
the monthly
/ quarterly
financial
reporting
are
matching
with FAR.
2. Perform a
walkthroug
h of the
process
followed by
Operations
for
reviewing
assets
movement.
3. Pick a
random
sample of 2
months /
quarters for
testing.
6 Physical Fixed Fixed assets Preventive 1. For a
Controls Asset are sample of
Tagging appropriately fixed
and uniquely assets,
identified in verify
FAR which assets
includes unique have been
asset numbers tagged with
to link the a unique
physical assets asset tag
to the asset number.
records. Select from
3058
E- 9347

Detective)
floor to
sheet and
sheet to
floor.
2. Using ACL
(other data
analytics
tools),
identify
instances
where
assets tag
number is
missing
and
instances
of duplicate
asset tag
numbers in
FAR.
7 Physical Periodic Assets are Detective 1. Check if
Controls Fixed periodically assets are
Asset verified via physically
Verification physical verified on
and observation periodic
reconciliati and reconciled basis.
on to FAR to FAR. Any 2. Off-
differences premises
identified assets
during asset (Vehicles
verification are given to
properly distributors,
recounted, Machinery
investigated, to co-
and supported. packers,
Upon etc.) should
completion of also be
3059

Detective)
investigation verified as
provision or per this
adjustments periodicity.
are made for 3. Verify if
missing assets. latest
physical
verification
report is
reconciled
with FAR.
4. If assets
are found
for which
there is not
record in
FAR,
reason for
their
omission
should be
documente
d and
approved
as
appropriate
5. Check if
recount
was
performed
for
variances
in the FAR
quantity
and
physically
available
quantity
3060
E- 9349

Detective)
6. Ensure that
provision or
adjustment
entries are
passed for
the
adjustment
s identified.
7. Verify if
appropriate
approvals
were
obtained
before
assets are
adjusted in
FAR.
8 Segrega Functional The functional Preventive 1. Observe
tion of Segregatio duties related key
Duties n of Duties to this process functions in
(such as the
physical process.
custody, 2. Review
recording and Access
approval) are Controls
properly List from
segregated. ERP and
evaluate if
appropriate
segregatio
n of duties
for all main
processes
have been
defined.
9 Mainten Changes Changes to the Preventive Check if all the
in Master Master Data changes in
3061

Detective)
ance Data file File (e.g., FAR and
useful lives to depreciation
asset adjustment
categories, report are
depreciation supported.
conventions)
are supported,
reviewed and
approved.
10 Disposal Asset For asset Preventive 1. Obtain a
s disposal disposal and list of all
and transfers, disposals
transfers finance made to
are department date from
properly ensures proper ERP.
supported authorization 2. Check
and and support whether
reviewed prior to these
updating the disposals
FAR. have been
adequatel
y
approved
and
supported
.
3. Verify bids
(sufficient
number of
quotes)
for assets
purchases
. Lesser
number of
bids
should be
supported
3062
E- 9351

Detective)
by
approved
business
justificatio
n/
reasoning.
4. Verify
gate out
pass,
shipping
document,
invoices
and match
details in
bids and
invoices.
5. Match the
invoice
with the
sales
proceeds.
6. Recalculat
e
gain/loss
on
disposal
and trace
to the
general
ledger.
7. Ensure
the
disposal
of the
assets
was
correctly
3063

Detective)
and
properly
booked.
11 Disposal Accrual for For asset Preventive 1. Discuss
s assets disposals not with the
ready for processed in operations
disposal the period of about the
are impairment assets
properly identification / identified
prepared, discontinuation for
reviewed of asset use, an disposal.
and accrual is 2. Ensure
approved. prepared, that
reviewed, and appropriat
properly e accruals
approved at the have been
time of made and
identification in approved
order to for these
recognize any assets.
associated loss
on disposal in
the appropriate
accounting
period.
Inventory Process
5.7 The objective of Inventory Procedures is to establish controls
surrounding the issue, holding and reporting of inventory items including raw
materials, consumables and stores and spares. Further, to determine the
consumption of inventory items for the production of finished goods, obsolete
items and shortages, if any. The inventory procedures include the receipt,
the issue, storage and count of raw, packing and other inventory items.
Stores department receives materials purchased, along with a quality
approved copy of the Goods Receipt Note. The items include raw materials
and consumables bottles and cases, stores and spares and miscellaneous
3064
E- 9353
items. Based on the GRN and physical quantities received, the Quantitative
Stock Ledger (QSL) is updated for each transaction.
Detective)
1 Receivin Physical At the time of Preventive 1. Verify
g count of the GR, the whether
goods is packing slip, the
compared delivery packing
with the notice, or bill slip,
packing slip, of lading is delivery
delivery compared to notice or
notice, or bill a physical bill of
of lading count of the lading is
before goods before compared
acceptance. acceptance to a
and is used physical
as evidence count of
to document the goods
and record before
the goods acceptanc
receipt. e.
2. Verify
whether
the
Operation
records
the GR at
the point
of legal
transfer of
title.
Review
actual
receiving
document
ation and
shipping
document
ation to
3065

Detective)
ensure
SAP GR
date is
accurate
and
appropriat
e.
2 Costing Standard Standard Detective 1. Discuss
costs are costs are the
periodically periodically process of
reviewed and reviewed and deciding
revised as revised as standard
needed. needed (for costs for
instance, various
before being items.
input into the 2. Check if
system). standard
cost is
establishe
d during
the annual
budgeting
process.
3. Check
that
standard
cost are
establishe
d for new
products
introduced
during the
year.
4. Check
whether
AFM or
FM has
3066
E- 9355

Detective)
reviewed/
approved
the
standard
before
uploading
it in ERP.
3 Costing Purchase/ Purchase/ Preventive 1. Obtain
production production monthly
variances are variances analysis
periodically are report and
analyzed. periodically review
analyzed and analysis
allocated to of
appropriate variances.
accounts and 2. Verify
accounting whether
periods. the
variances
are
allocated
to
appropriat
e
accounts
and
accountin
g periods.
Review
the
Deferred
Inventory
Account
to ensure
accuracy.
3. Verify
whether
3067

Detective)
the labor
and
overhead
applied
costs are
being
reconciled
to actual
costs on a
timely
basis.
4. Verify
whether
the
significant
variances
are
highlighte
d in
managem
ent
reports for
review
and
approval
or are
monitored
by the
finance
departme
nt
independe
ntly of
production
.
5. Review
variance
3068
E- 9357

Detective)
accounts
in the
general
ledger
and
investigat
e and
explain
unusual
entries.
4 Counts Periodic Periodic Detective 1. Discuss
Physical Physical with the
Counts counts for Unit
Full goods Managem
and Raw ent about
materials are process
performed in for
accordance physical
with the verificatio
proper count n of all
plan to verify Inventory
purchases items.
on hand. A 2. Check if
proper count physical
plan should verificatio
include n is
frequency, performed
cut off by an
procedure, independe
inventory nt person.
held at third 3. Participat
party, etc. e in the
physical
count
(falling
within
audit
3069

Detective)
period)
and count
few
inventory
items
(high and
low value
both).
4. Check if
count
difference
s are
investigat
ed and
recounted
for
resolution/
confirmati
on.
5. Verify if
reconciliat
ion
between
book
quantity
and
physical
quantity is
performed
and it is
done by a
person
independe
nt of
custodian/
person
performin
3070
E- 9359

Detective)
g count.
6. Take
physical
verificatio
n report of
any other
month
and verify
approvals
for
adjusting
book
stock.
7. Check if
all items
are
covered
during the
physical
verificatio
n at the
month-
end.
8. Ensure
inventory
lying at
third party
locations
are
covered
during the
month-
end
counts.
(Third
Party
Locations
3071

Detective)
may
interalia
include
SGAs
lying with
external
vendors,
Jobwork
material
like
resins,
etc.)
9. Sight the
confirmati
on
received
from third
party for
inventory
lying at
their
locations
10. At the
time of
participati
ng month-
end count,
check
whether
the
physical
movement
of
inventory
including
RM/ PM/
FG is
3072
E- 9361

Detective)
stopped at
the time of
physical
verificatio
n.
11. Check
whether
goods
received
but not
inventorie
s are not
included
for count.
5 Inventor Inventory 1. Invent Preventive 1. Check
y Counts counts are ory that the
adequately counts inventory
controlled. sheets / count
tags are sheets are
used used
and during the
controlle physical
d. counts.
2. Invent 2. Count
ory sheets
count must
sheets include all
are not the
pre- inventory
populate items.
d with 3. At the
inventor time of
y participati
balance on in
s as per physical
books. count,
3. Items check if
3073

Detective)
using count
different sheets are
unit-of - prepopula
measure ted with
for count on-hand
and inventory
recordin quantities.
g are 4. In the
identifie previous
d and months
these count
conversi sheets,
ons are check if
reviewe quantity
d and appears
approve to be pre-
d. populated
or
computer
printed.
5. Discuss
with the
managem
ent if
items
using
different
unit-of -
measure
are
identified
and their
conversio
n criteria
is
approved.
6. Check the
3074
E- 9363

Detective)
month-
end
physical
quantity
for such
items in
the books
and
calculate
book
quantity
as per
approved
conversio
n criteria.
7. Verify in
the book
versus
physical
reconciliat
ion
whether
proper
conversio
ns are
made and
reviewed
by Plant
Manager.
6 Inventor Inventory Third-party Detective 1. Review a
y Counts Counts at total sample of
third party inventory third-party
balances are inventory
monitored for custodian
reasonablen contracts
ess to to ensure
ensure material
3075

Detective)
inventory loss limits
losses are and
recorded. penalty
fees are
clearly
document
ed.
2. Verify
whether
the
operation
has a
process in
place to
monitor
third-party
losses.
3. Review a
sample of
material
losses
beyond
acceptabl
e limits
and
ensure
they have
been or
will be
recuperat
ed/ re-
covered.
7 Obsolet Obsolete or 1. Obsolete Preventive 1. Identify
e and expired or expired expired
slow materials and materials finished
moving goods are and goods
inventor appropriately goods are from the
3076
E- 9365

Detective)
y segregated appropriat closing
and ely inventory
monitored for segregate records.
obsolescence d and 2. Discuss
. restricted with the
from Unit
being Managem
consumed ent if
, shipped expired
to finished
customer goods and
s. other
2. Slow Inventory
moving items are
and lying in
excess the plant/
inventory depot
(including premises.
bottles 3. Verify if
and expired
cases) is inventory
monitored is properly
for segregate
obsolesce d and
nce and marked as
appropriat "Expired -
e Not to be
reserves consumed
are /
establishe shipped".
d, 4. Discuss
reviewed, with the
approved unit
and managem
properly ent about
recorded. the
3. Adjustme process
3077

Detective)
nts for for
inventory identifying
write-offs slow
(e.g. moving/
expired excess
goods inventory.
write-off, 5. Check
and whether
broken enough
bottles provision/
and reserves
cases) were
are created
booked in for such
the proper stock.
accountin 6. Check if
g period write-off is
and are performed
properly for
authorize provided
d. items
identified
as slow
moving/
non-
moving/
obsolete.
7. Verify that
the
inventory
write offs
are
appropriat
ely
approved.
8 Check-in 1. The 1. The Preventive 1. Select a
/ check- warehou warehous sample of
3078
E- 9367

Detective)
out se e load
personne personnel document
l signs signs the s
the load load evidencin
documen document g the
t. to release of
2. Check- evidence goods and
out/ in is release of receipt of
performe goods returns.
d away and 2. Check
from receipt of whether
warehou returns. load
se 2. Check- document
storage out/ in is and return
areas. performed receipts
3. Independ away are
ent from appropriat
Check- warehous ely signed
Out e storage by the
Count areas shipping
and blind where departme
count. product nt.
could be 3. Check
placed on whether
the goods
vehicles were
without physically
detection. counted
3. Independ by
ent security
Check- prior to
Out Count release/
and blind return.
count is 4. Check
performed whether
. check-out/
in is
3079

Detective)
performed
away from
warehous
e storage
areas
where
product
could be
placed on
the
vehicles
without
detection.
5. Observe
whether at
check-out,
an
independe
nt
(checker)
and blind
count
(other
than
shipping)
is
performed
for the
product
loaded on
vehicles.
9 Segrega SOD A person Preventive 1. Review

tion of between independent User
Duties custody and of the Access
(SOD) book entry. inventory List to
3080
E- 9369

Detective)
custodian check who
participates all have
in the entry access to
of final enter
inventory inventory
count into count in
the system. the
system.
2. Ensure
that the
custodian
of
inventory
is
independe
nt of
person
entering
the count
in the
system.
General Accounting and Closing

5.8 The purpose of General Accounting and closing procedure is to ensure
that all financial transactions are posted to the general ledger in the proper
accounting period to enable the operation to prepare periodic trial balance
and submit the financial statements.
The start of the process is with passing of Journal Vouchers, Cash Vouchers,
booking of bills and ends with preparing of financial statements and the
closing files. This process affects all P&L accounts and Balance Sheet
accounts.
The accounting system is to be set up to restrict the access right of individual
users to their areas of responsibility. For each individual user a separate user
ID has to be created to ensure segregation of duties.
3081
Accounting Systems provides the option to close the particular period. Every
month post-closing activities, Finance department closes the past period and
opens the period for current month activities.
S. Sub- Control Control Classification Test Procedures
No. Process Title Description (Preventive /
Detective)
1 GL Changes Changes Preventive 1. Obtain
Mainten to master to master understanding
ance data data are of process to
properly add/ change
reviewed GL accounts.
and 2. Obtain random
independe samples and
ntly perform the
approved following:
prior to (a) Verify if the
their accounts were
update in properly
the included in the
system. COA (Chart of
Accounts) by
comparing the
additions or
changes to the
company’s
chart of
accounts.
(b) Verify if
additions/chan
ges are
properly and
timely
approved.
2 GL Direct Direct Preventive 1. Determine
Mainten posting to posting to whether
ance GL G/L certain GL
accounts accounts accounts are
is blocked for
restricted direct posting.
3082
E- 9371

Detective)
by the 2. Obtain
system. evidence
(screenshots,
etc.) that direct
posting is
blocked.
3 GL GL to System is Preventive 1. Understand
Mainten Financial designed the structure of
ance Statement to map the financial
s mapping General statement
Ledger system.
accounts 2. Obtain
to proper samples from
Financial the Balance
Statement Sheet and
lines. Profit & Loss
Accounts and
reconcile that
the mapped
accounts were
properly
classified and
included in the
proper
financial
statement
lines.
4 GL Update of Currency Preventive 1. Verify that
Mainten currency table is exchange
ance table updated on rates were
timely updated timely
basis. in the system.
2. Ensure that
update was
reviewed and
approved
3083

Detective)
independently.
5 Segrega System The Preventive 1. Review of
tion of based system- access control
Duties duties are based list vis-à-vis
adequatel duties for SOD matrix with
y all financial respect to
segregate processes critical
d. are transactions
properly and reports in
segregated all financially
and relevant
violation, if business
any, are process.
monitored 2. Discuss any
and exceptions with
mitigated the Unit
in management
accordanc and check
e with the approvals given
company by appropriate
policy. authority for
granting the
conflicting
access.
6 Adjustin Manual Journal Preventive 1. Check whether
g and Vouchers vouchers are
Entries Recurring (Manual or properly
and Journal Recurring) supported,
Journal Vouchers are reviewed and
Voucher properly appropriately
s supported, approved.
and 2. Check whether
independe vouchers
ntly provide
reviewed sufficient
and explanation,
approved. acceptable
3084
E- 9373

Detective)
documentation
and evidence
of independent
review/approva
l.
3. Check if
entries were
posted timely.
7 System Critical Access to Preventive 1. Obtain a listing
Access Spreadsh critical of shared
eets and spreadshe drives and the
financial ets and employees
system areas who have
access where access to
critical, these folders.
confidentia 2. Review the
l, and listing for
financial reasonablenes
data is s based on
stored (like folder manager
shared job title and
drives, ensures that
databases, no terminated
SharePoint employee has
sites, etc.) access to any
is properly of these
restricted. shared folders.
3. Select a
random
sample of
employees and
test their
access,
according to
the access
listing, by
observing
3085

Detective)
them attempt
to access and
modify folders
to which they
were not
granted access
as well as
folders to
which they
were given
read-only
access.
8 GL Closure of Operation Preventive Download GL
Mainten calendar closes the Calendar Report
ance month accounting from financial
period in system and ensure
the system that the accounting
as per periods were
defined closed as per
timelines company’s
approved calendar month.
by the
manageme
nt.
9 Financia Sign off of Finance Detective Verify whether
l Financial Controller book closure check
Closure Closure signs off list has been
Process Check-list the signed off by the
financial authorised person.
closure Ensure that book
checklist closure checklist
covering has comments on
balance all the items as
sheet/ defined in SOP.
profit and
loss
account
3086
E- 9375

Detective)
elements
as defined
in SOP to
ensure the
completen
ess and
correctnes
s of book
closing.
10 Financia Review of Finance Detective Verify the variance
l Variance Controller analysis has been
Closure Analysis reviews performed for the
Process the Balance Sheet and
Balance Profit and Loss
Sheet and Account on
Profit and quarterly basis.
Loss Ensure that all
statement. variance over
Any threshold limit has
variance been adequately
over the explained and
threshold auctioned.
limit
defined in
SOP is
explained
and
auctioned
on
quarterly
basis.
Legal and Regulatory Compliance

5.9 Even though the overall approach of any internal audit assignment
depends on the need and perception of the entity’s management, of late
certain legal requirements and regulatory prescriptions relating to corporate
3087
governance have assumed importance in this regard.

Increasingly internal auditors are being asked to constantly review processes
of compliance with these requirements and evaluate their efficacy. Not only
does this provide assurance to the management and also to those charged
with governance (e.g., Board of directors) but it also helps in improving
corporate governance practices.
The purpose of internal audit in the area of legal and regulatory compliance
is to ensure that all applicable commercial, environmental, statutory
requirements are being regularly monitored for effective compliance by the
organization.
No. Process Description (Preventive Procedures
/Detective )
1 Pollution Obtain Has consent Preventive 1. Check
Control consent/ been obtained whether
permission by the condition
under manufacturing s on
various Acts unit from the which
and Rules. State Pollution consent
Control Board was
under Air Act, given are
Water Act and fulfilled?
Hazardous 2. Is the
Waste consent
Management valid for
Rules of the the audit
Environment period?
Protection Act. 3. Check for
the actual
effluent
discharge
details
and their
requirem
ent as
per
consent
letter and
3088
E- 9377

/Detective )
the
company’
s quality
policy.
2 Pollution Submit Has the unit Preventive 1. Check if
Control Environment submitted the statement
al environmental for the
statements statement for last
each financial financial
year to the year has
State Pollution been
Control sent.
Board? 2. Check if it
was sent
within
prescribe
d time
period.
3. Check for
the
accuracy
of data
mentione
d in the
environm
ental
statement
.
(Refer to
Appendix A
– Format of
Environmen
tal
Statement)
3 Water Draw water Is the unit Detective 1. Enquire
3089

/Detective )
supply as per the drawing water from the
agreemen agreement. as per an factory
t approved manager
scheme of the or quality
central ground manager
water if plant
authority/ falls in
State the
government? critical/
semi-
critical
(unsafe)
zone with
respect to
ground
water
availabilit
y.
(Approval
is not
required
from
CGWA if
Unit falls
in the
safe
zone)
2. Check for
complian
ce with
the
approved
scheme.
4 Water Payment of Has the unit Detective Check
supply periodic paid the whether the
3090
E- 9379

/Detective )
agreemen water bills. necessary Unit is paying
t monthly the cess on
charges/ cess water usage
for use of on timely
water? basis.
5 Food License Has the unit Preventive 1. See if
Safety under FSS obtained license is
And Act 2006 license under valid for
Standards the Food the audit
Act, 2006 Safety And period.
Standards Act, 2. License
2006? covers all
the
products
manufact
ured/
stored by
unit.
3. Check
complian
ce with
condition
s
mentione
d in the
License".
6 Food FSS license Do all the Preventive 4. See if
Safety with distributors of license is
And distributors. the unit have valid.
Standards license under 5. Check if
Act, 2006 Food Safety the
And license
Standards Act, covers all
2006? the
products
3091

/Detective )
manufact
ured or
stored by
unit.
7 Factories License Has the unit Preventive Check
Act under obtained whether
Factories Act license under factory
the Factories license is
Act? valid for the
audit period.
8 Factories Overtime Is overtime Preventive 1. Analyze
Act exceeding incurred by the
50 hours per workmen overtime
quarter exceeding 50 tracking
hours in a record
quarter? maintaine
d by the
unit to
check
whether
overtime
by each
worker is
within
permissib
le limit.
2. Inquire
about the
reasons
of non-
complian
ces with
HR
Manager.
3092
E- 9381

/Detective )
9 Factories Overtime Is the Preventive 1. Verify the
Act wage rate overtime paid calculatio
at double of n of
ordinary wage wages
rate (Basic + (as
allowance)? mentione
d in the
factories
act)
2. Verify if
unit has
been
paying
overtime
at double
the wage
rate.
10 The Payment of Are the Preventive Verify from
Minimum minimum minimum the salary
Wages wages wages paid by sheet if unit
Act the unit as per is paying at
specified by least
the state minimum
government wages
labor laws? specified by
government
from time to
time.
11 The Filing of Has annual Preventive Verify return
minimum annual return been has been
wages Act return. filed (Form filed with
III)? prescribed
authority on
timely basis.
12 The Health Has a health Preventive 1. See if
3093

/Detective )
workmen Insurance insurance policy is
compensa Policy policy taken valid.
tion Act by the unit 2. Check if
(For those covering all the
units workers their policy
where ESI spouse and covers
act is not kids? all the
applicable employe
) es of the
unit.
13 Contract Registration If the unit Preventive Check if
Labor Act for engaging engages license is
contract contract labor, valid.
labor. has it obtained
certificate of
registration for
employing
contract
labor?
14 Contract Use of Do the labor Preventive Verify if all
Labor Act Certified contractors the
contractors. have a contractors
certificate in have
Form V for obtained the
working as said
contractors? certificate
and is valid.
15 Contract Payment of Is the unit Detective Check if PF
Labor Act PF and ESI ensuring that and ESIC are
by the PF and ESIC paid by all
contractors. are paid by the
the contractors
contractor? on timely
basis.
3094
E- 9383

/Detective )
16 Storage of Storage of 1. Has the Preventive 1. Check if
Liquefied Liquefied unit the said
gas Rules gas obtained license
of the license has
Explosive from the been
Act Chief obtained
Controller and is
of valid.
Explosives 2. Analyze
under the daily
Storage of record
liquefied of LPG
gas Rules and
of the check if
Explosive the
Act if it is consum
storing ption or
more than storage
100 Kgs of exceeds
LPG. the
2. Has the licensed
unit stored quantity
LPG in at any
excess of point in
the time.
licensed
quantity
any time
during the
period?
17 Storage of License for 1. For Preventive 1. Check if

petroleum storage of storage of the said
products petroleum petroleum license
3095

/Detective )
products. items like has
Petrol/ been
Diesel, obtained
Furnace and is
oil, etc., valid.
has the 2. Analyze
unit daily
obtained record
license of
under the petrol,
petroleum diesel
rules? and
2. Has the furnace
unit stored oil and
Petrol or check if
Diesel or the
Furnace oil consum
in excess ption or
of the storage
licensed exceeds
quantity at the
any time licensed
during the quantity
period? at any
point in
time.
18 Storage of License If the Preventive Check if the
petroleum under the consumption license is
products Solvent, of furnace oil valid during
Raffinite and exceeds 50 the audit
slop order KL in a month period.
and its
storage
exceeds 20
KL at any
point of time,
3096
E- 9385

/Detective )
the unit is
required to
take a license
under the
Solvent,
Raffinite and
slop order
from the
District supply
officer for
consumption
of Furnace oil
or any other
solvent.
19 Static and Storage of 1. Has the Preventive 1. Check if
Mobile CO2 unit the
Pressure obtained license is
Vessel the valid
Rules license during
for the audit
storage period.
of CO2 2. Analyze
under daily
static record of
and CO2 and
mobile check if
pressure the
vessel consumpt
rules? ion or
2. Has the storage
unit exceeds
stored the
CO2 in licensed
excess of quantity
the at any
licensed point in
3097

/Detective )
quantity time.
at any
time
during
the
period?
20 Indian License to Has the unit Preventive Check if
Boiler Act, operate the taken license licenses are
1923 boilers. to operate the available for
boilers under all boilers
the Indian and they are
Boiler Act, valid during
1923? the audit
period.
21 Indian Annual Has the unit Detective Verify that for
Boiler Act, inspection of ensured the last year
1923 boiler. annual every boiler
inspection and was verified.
testing of the
boiler by
factory
inspector?
22 State Permission Has Preventive 1. Compare
Electricity for power permission maximu
Board and DG sets been obtained m
from State granted
electricity and
board for actual
authorized usage of
maximum power.
power for the 2. If the in-
unit? house
power
generati
on is
3098
E- 9387

/Detective )
more
than
500KWA
then
ensure
that
required
permissi
ons are
availabl
e with
the
location.
23 State Annual fees Has the unit Preventive Verify if said
Electricity for deposited the fee has been
Board inspection. annual fees paid timely.
for inspection
by the
electrical
inspector?
24 Motor Registrations Are all the Preventive 1. Obtain
Vehicles and vehicles the list of
Act, 1988 insurance of owned by the all
vehicles. unit registered vehicles
in its name? available
Has a with the
comprehensiv Unit from
e insurance the Fixed
(including third Asset
party liability) Register.
been taken? 2. See
Has fitness physical
certificate documen
been obtained ts if all
for all the the
3099

/Detective )
company vehicles
owned entered
vehicles? in FAR
Do company are in the
drivers and name of
fork lift unit.
operators 3. Discuss
have with the
adequate Unit
licenses? Manage
ment if
certain
vehicles
are given
to
distributo
rs and
check
RC book
for those
vehicles.
4. Check
whether
insuranc
e policy
for all the
vehicles
is in
place
and is
valid.
5. Check
whether
fitness
certificat
e has
3100
E- 9389

/Detective )
been
obtained
for all the
company
owned
vehicles.
6. Check
whether
the
company
drivers
and fork
lift
operators
have
requisite
licenses.
25 Fire NOC from Has a No Preventive Check if the
Safety Fire agency. Objection said NOC is
Certificate in place and
been obtained valid.
from the local
fire service
agency
26 Weights Certification Is annual Preventive Verify
and of weighing stamping and certification
measure scales certification of has been
act all weighing done for all
scales weights and
conducted by measures
Inspector of available with
weights and the Unit.
measure?
3101
IT General Controls
5.9 IT General Controls, ITGC for short, are the IT controls in place to
ensure the proper development and implementation of applications, as well
as the integrity of programs, data files and computer operations. ITGC audits
are usually done in support of a financial statements audit, where the
purpose of the ITGC audit is to review the controls in place for the IT
systems that have a direct impact on the financial statements.
There are typically seven main control elements/ sub-processes, namely:
(a) Access to Programs and Data
(b) Computer Operations
(c) Program Changes
(d) Software Development/ Acquisition
(e) Install and Test Software and Infrastructure
(f) Configuration Management
(g) SLA Management
S. Sub- Control Classification Test Procedures
No. process (Preventive/
Detective )
1 Software The Preventive Check whether each
Developm organization’s development project
ent/ system (custom development
Acquisitio development and/ or the acquisition of
n lifecycle vendor applications)
methodology adheres to the structured
(SDLC) System Development
includes Life Cycle (SDLC)
security, methodology of the
integrity and company.
availability
requirements
for the
development
and acquisition
of new systems
and major
3102
E- 9391

Detective )
changes to
existing
information
systems.
2 Software The SDLC Preventive Check whether adequate
Developm methodology application controls have
ent/ ensures that been applied to all new
Acquisitio information information systems
n systems are development and
designed to changes to existing
include information systems.
application
controls that
support
complete,
accurate, valid
and authorized
transaction
processing.
3 Software The Preventive  Check whether
Developm organization Annual Budgeting and
ent/ has an Planning Process
Acquisitio acquisition and have been
n planning established.
process that  Check whether
aligns with its rankings are assigned
overall to the projects to set
strategic the priority.
direction.
4 Software IT Preventive Review the evidences

Developm management available to demonstrate
ent/ ensures that that
Acquisitio users are users of information
n appropriately system (represented by
involved in the Business Lead etc.)
3103

Detective )
design of have been adequately
applications, involved in the following
selection of off- phases of application
the-shelf design or selection of
software and software:
the testing 1. Initiating and
thereof. Planning
Post- 2. Requirements
implementation Analysis
reviews are 3. Design
performed to
4. Build and Test
verify controls
Check whether post-
are operating
implementation review
effectively.
have been performed to
validate that the
company’s IT Internal
Controls are operating
effectively.
5 Software The Preventive Check whether
Developm organization acquisition of system
ent/ acquires or software has been made
Acquisitio develops in accordance with the
n systems acquisition and planning
software in process. Also check if in-
accordance house development of
with its system software was in
acquisition, compliance with the
development System Development
and planning Lifecycle Methodology
policies and (SDLC).
procedures.
6 Install and A testing Preventive Check whether adequate
Test strategy is testing has been
Software developed and performed for all
and followed for all significant changes to
3104
E- 9393

Detective )
Infrastruct significant ensure that all the
ure changes in requirements of an
applications application have been
and met and no
infrastructure unauthorized/
technology, unintended change has
which been made
addresses unit,
system,
integration and
user
acceptance
testing to
ensure that the
proposed
systems
operate as
intended.
7 Install and Load and Preventive Check whether plans for
Test stress testing application development
Software is performed and support include
and according to a Load testing and System
Infrastruct test plan. Stress testing.
ure Check whether interface
Interfaces with testing is a part of all test
other systems plans for application
are tested to development and
confirm that support.
data
transmissions
are complete,
accurate and
valid.
8 Install and The conversion Preventive Check whether
Test of data is effectiveness of data
3105

Detective )
Software tested between conversion has been
and its origin and reviewed and approved
Infrastruct its destination by business owners.
ure to confirm that
it is complete,
accurate, valid
and has
restricted
access.
9 Program IT change Preventive Check whether all
Changes requests are change requests are
standardized, standardized,
documented documented and
and subject to approved by appropriate
formal Program authority. (for example
Changes by Requester’s manager,
procedures. IT Operation Manager
and the Business
Emergency Owner.)
change Check whether
requests are emergency change
documented request are
and subject to standardized,
formal Program documented and
Changes approved/ ratified with-in
procedures. reasonable time.
10 Program Controls are in Preventive  Check if controls are

Changes place to restrict in place to restrict the
transport of migration of programs
programs to to the production
production only environment only by
by authorized authorized
individuals. individuals.
 Check if controls are
in place to ensure that
3106
E- 9395

Detective )
compiler or other
system development
tools cannot be
installed on
production machines.
All code shall be
precompiled before
moving into a
production
environment where
applicable. If a
compiler is necessary
on a production
machine, the access
and execution rights
are strictly controlled.
 Check whether
access to production
environment has been
restricted to
authorized release
managers only. Also
check if application
developers have
display access only
when necessary for a
business function.
11 Program IT Preventive Check whether setup
Changes management and configuration of
ensures that system software (like
the setup and Windows 2003 Servers,
implementation Windows XP, AS400,
of system Domain Controllers,
software do not Firewalls, etc.) is in
jeopardize the accordance with
security of the Technical Security
3107

Detective )
data and Standards laid out by the
programs organization.
being stored on
the system.
12 Access to Systems are Preventive Check whether all users
Programs configured to of the Systems are
and Data authenticate all supplied with a unique
users to the user ID that is valid
system to throughout the user’s
support the employment. Also check
validity of if controls are in place to
transactions ensure that user IDs are
and to enforce not reused for other
periodic individuals even after
password termination of the
changes in original employee.
accordance
with defined
procedures.
13 Access to Procedures Preventive  Check if documented
Programs exist and are procedures have
and Data followed to been put in place for
ensure timely granting access to
action relating new users; changing
to requesting, access of existing
documenting, users and removing
approving, access of separated
establishing, or transferred users.
suspending  Check whether
and closing management shall
user accounts. ensure that all
company information
Controls assets issued to
relating to employees and third
appropriate parties such as,
3108
E- 9397

Detective )
segregation of laptops, badges,
duties over keys, ID cards,
requesting and secure-ID tokens,
granting software, data,
access to documentation, and
systems and manuals are collected
data exist and and turned in upon
are followed. the termination or
suspension of an
employee.
 Check whether the
request for a user’s
access to company
information is
approved by his
Reporting Manager
and by information
owner before access
is actually granted to
the user.
14 Access to A process Detective Check whether user
Programs exists and is access rights to
and Data followed to company’s Information
periodically Systems are reviewed
review and and documented by
confirm access business owner or
rights. delegatee periodically.
Also ensure that the
review encompasses all
employees and third
parties with access to
company information.
15 Access to Firewalls, Preventive Check whether firewalls,
Programs intrusion intrusion detection
and Data detection and system, etc. have been
3109

Detective )
vulnerability appropriately configured,
assessments, Vulnerability
exist and are assessments exist and
used to prevent used to prevent
unauthorized unauthorized access.
access to the
company’s
network.
16 Access to IT Detective Check whether security
Programs administration logs are reviewed and
and Data monitors and monitored regularly for
logs security any probable security
activity, and violation, like, any
identified unauthorized activity or
security attempted intrusion.
violations are
reported to
senior
management.
17 Access to Physical Preventive 1. Check whether
Programs access is controls are in place
and Data restricted to to ensure that
authorized unknown or
personnel and unauthorized
requires individuals are not
appropriate allowed into
identification restricted areas
and without escort.
authentication. 2. Check whether a
process is in place to
document the
request for data
center access to a
user.
3. Check whether a
3110
E- 9399

Detective )
process is in place to
immediately remove
a user’s access to
data center as soon
as he has left the
organization or when
his role has
changed.
4. Also check if the
room containing
wiring or
communications
equipment (wiring
closets, PBX rooms,
etc.) is locked at all
times with access
restricted to
authorized personnel
only.
18 Configurat Information Preventive 1. Review the controls
ion systems are implemented by the
Managem configured to organization to
ent ensure that ensure that users
administration are not allowed to
privileges are load, download or
required for install software from
software the Internet on their
installation. All machines without
installed appropriate
applications approval.
and software 2. Check whether
must be periodic review of
authorized by software installed on
Head of IT. user machines is
performed by the
3111

Detective )
organization to
ensure that all
system resources
are in compliance
with licensing
agreements.
19 Configurat IT Preventive Check whether :
ion management 1. All company
Managem has information systems
ent established use current
procedures Company approved
across the anti-virus software.
organization to 2. Definitions of anti-
protect virus software are
information updated periodically.
systems and
3. Complete hard drive
technology
of user machines is
from computer
scanned periodically.
viruses.
4. A system is
disconnected from
the network
immediately if virus
is suspected on that
machine.
20 SLA A framework is Preventive Check whether a
Managem defined and network services
ent managed to agreement identify and
establish key includes:
performance 1. Security
indicators to requirements
manage including Non-
service level Disclosure
agreements, Agreement,
both internally 2. Service levels-
and externally. response time,
3112
E- 9401

Detective )
resolution time, etc.
3. Monitoring including
penalty clause for
failure to comply with
agreed Service
Levels,
4. Management
requirements and
5. Right to Audit.
21 SLA A regular Detective Check whether SLA
Managem review of review is performed
ent security, covering areas like:
availability and 1. Critical Service Level
processing Trends.
integrity is 2. Call Volumes.
performed for
3. Service Desk
service level
Response Time
agreements
Reports.
and related
4. Service Desk
contracts with
Resolution Time
third-party
Reports.
service
providers. 5. Backup Reports.
6. Disk Capacity
Reports.
22 Access to Management Preventive Check whether :
Programs protects 1. Smoking, drinking
and Data information, and eating in system
logically and processing rooms is
physically, in prohibited.
storage and 2. Smoke detectors
during and humidity
transmission monitors are
against installed in the data
unauthorized center. Besides, the
3113

Detective )
access or same are tested on
modification. periodic basis to
ensure that they are
working as intended.
3. On-site and off-site
storage of back-up
media is in fire-proof
vaults.
4. Backup media, as
well as a
comprehensive set
of operating and
application
documentation, is
stored off-site in a
different seismic
zone.
23 Access to Management Check whether :
Programs has 1. System and
and Data implemented a application software
strategy for back-up is
backup of data performed before
and programs. regularly scheduled
system upgrades
and/ or maintenance
occurs.
2. Multiple tape back-
ups of all critical
applications are
created regularly.
One set is stored
onsite at a Company
data center and the
other set is sent off-
site to a remote
3114
E- 9403

Detective )
location.
3. Tapes are sent
offsite daily for
critical applications
and periodically, as
defined by back-up
schedule, for other
applications.
24 Access to Procedures Detective 1. Check whether
Programs exist and are periodic testing of
and Data followed to backups and backup
periodically media is performed
test the to get reasonable
effectiveness assurance that
of the backup process is
restoration effective. All
process and business critical data
the quality of has been adequately
backup media. backed up and is
restorable, when
needed.
2. Check the
worthiness and
reusability of backup
media
3115
E- 9404
Appendix
Format of Environmental Statement
(Form V)
A – Format of Environmental Statement (Form V)
(See rule 14)
Environmental Statement for the financial year ending the 31st
March………………
PART – A
(i) Name and address of the owner/occupier of the industry operation or
process.
(ii) Industry category Primary ----(STC code) Secondary.-----(SIC Code)
(iii) Production capacity.----Units----
(iv) Year of establishment
(v) Date of the last environmental statement submitted
PART – B
Water and River Material Consumption
(1) Water consumption m3/d:
Process
Cooling
Domestic
S. Name of Products Process water consumption per unit of
No. product output.
During the previous During the Current
financial Year financial Year
1
2
3
4
3116
E- 9405
1. Substituted by Rule 2 (b) of the Environment (Protection) Amendment

Rules, 1993 notified vide G.S.R 3’6 (E) dated 22.04.1993.
(ii) Raw Material Consumption
S. * Name of Name of Consumption of raw material per
No. Raw Material Products Unit of Output
During the During the
previous Current
financial Year financial Year
1
2
3
4
*Industry may use codes if disclosing details of raw material would violate
contractual obligations, otherwise all industries have to name the raw
materials used.
PART - C
Pollution discharged to environment/unit of output
(Parameter as specified in the consent issued)
Pollutants Quantity of Concentrations of Percentage
pollutants pollutants in of variation
discharged discharges from
(mass/day) (mass/volume) prescribed
standards
with reasons
a) Water
b) Air
3117
PART – D
Hazardous Wastes
(as specified under Hazardous Waste Management and Handling Rules,
1989)
S. Hazardous Waster Total Quantity (Kg.)
No.
During the During the
previous Financial current Financial
Year Year
1 From process
2 From pollution control
facilities.
PART – E
Solid Wastes
S. Waste Total Quantity
No. During the During the
previous Financial current Financial
Year Year
1 From process
2 From pollution control
facilities.
3 a. Quantity recycled
or re-utilized within
the unit
b. Sold
c. Disposed
PART – F
Please specify the characterizations (in terms of composition of quantum) of
hazardous as well as solid wastes and indicate disposal practice adopted for
both these categories of wastes.
3118
E- 9407
PART – G
Impact of the pollution abatement measures taken on conservation of natural
resources and on the cost of production.
PART – H
Additional measures/investment proposal for environmental protection
including abatement of pollution, prevention of pollution.
PART – I
Any other particulars for improving the quality of the environment.
3119
E- 9408
I-22
TECHNICAL GUIDE ON
INTERNAL AUDIT OF
IT SOFTWARE INDUSTRY
3121
E- 9409
Abbreviations
AMC Annual Maintenance Contract
CAGR Compounded Annual Growth Rate
CCTV Closed Circuit Television
CMM Capability Maturity Model
DGFT Directorate General of Foreign Trade
DTA Domestic Tariff Area
DTAA Double Taxation Avoidance Agreement
ESI Employees State Insurance
FCNR Foreign Currency Non-Repatriable
FEMA Foreign Exchange Management Act
FIRC Foreign Inward Remittance Certificate
HRD Human Resources Department
IPR Intellectual Property Rights
ISO International Standards Organisation
ISP Internet Service Provider
ITeS Information Technology Enabled Services
MSA Master Service Agreements
NASSCOM National Association of Software and Services Companies
NSDL National Securities Depository Limited
NSR National Skills Registry
3126
E- 9410
Internal Audit of IT Software Industry
PF Provident Fund
RBI Reserve Bank of India
RFP Request for Proposal
RFQ Request for Quote
SBU Strategic Business Units
SEZ Special Economic Zone
SIA Standards on Internal Audit
SME Small and Medium Enterprises
SMS Short Messaging Service
STPI Software Technology Parks of India
T&M Time & Material Billing
TDS Tax Deducted at Source
TRPS Trade Related Aspects of Intellectual Property Rights
VAR Value Added Resellers
WCT WIPO Copyrights Treaty
WPPT WIPO Performances and Phonograms Treaty
WTO World Trade Organisation
3127
E- 9411
Glossary
Annual Maintenance Contracts It is the legal agreement entered
(AMC) between two companies wherein the
latter agrees to render the maintenance
service annually to the former at an
exchange of a fixed amount.
Closed Circuit Television It is the use of video cameras to transmit

(CCTV) signal to a specific place, on a limited set
of monitors.
Cloud Computing Cloud computing is a expression used to

describe a variety of different computing
concepts that involve a large number of
computers that are connected through a
real-time communication network
(typically, the Internet).
Cloud Storage Cloud storage is a model of networked

enterprise storage where data is stored
not only in the user's computer, but in
virtualized pools of storage which are
generally hosted by third parties.
Directorate General of Foreign It is the agency of the Ministry of

Trade (DGFT) Commerce and Industry of the
Government of India responsible for
administering laws regarding foreign
trade and foreign investment in India.
Domestic Tariff Area (DTA) It means an area within India that is

outside the Special Economic Zone and
other specified areas.
Double Taxation Avoidance It is a tax treaty formally concluded and

Agreement (DTAA) ratified agreement between two
independent nations ( bilateral treaty) or
more than two nations (multi lateral
treaty) on matters concerning taxation,
normally, in written form.
3128
E- 9412
Employees State Insurance (ESI) It s a self-financing social security and

health insurance scheme for Indian
workers
Foreign Currency Non-Repatriable FCNR deposits stands for Foreign

Account Deposits (FCNR) Currency Non-Repatriable Account
Deposits. This is a Fixed Deposit Foreign
Currency account and not a savings
account. Deposits in this account can be
made in any of the major currencies like,
US Dollar, UK Pound, Canadian Dollar,
Deutsche Mark, Japanese Yen and Euro.
Foreign Exchange Management It consolidates and amends the law

Act (FEMA) relating to foreign exchange with the
objective of facilitating external trade and
payments and for promoting the orderly
development and maintenance of foreign
exchange market in India.
Foreign Inward Remittance It is a document that provides proof of

Certificate (FIRC) inward remittance to India.
Firewall It is software or hardware-based network

security system that controls the
incoming and outgoing network traffic by
analyzing the data packets and
determining whether they should be
allowed through or not, based on a rule
set.
Global Delivery Model It is a methodology used by IT

companies by using a model of executing
technology project using a team that is
distributed globally.
Intellectual Property Rights It is a legal concept which refers to

(IPR) creations of the mind for which exclusive
rights are recognized.
Information Technology (IT) Companies dealing in information

technology are referred to as IT
Companies.
3129
Information Technology Enabled It is that sector of IT Industry which aims

Services ( ITeS) at providing various services through the
use of IT.
National Association of Software It is the premier organisation that

and Services Companies represents and sets the tone for public
(NASSCOM) policy for the Indian software industry.
Offshoring Relocation by a company of a business

process from one country to another.
Employee Provident Fund Employee Provident Fund Organisation

Organization is a statutory body of the Government of
India under the Ministry of Labor and
Employment. It administers a compulsory
contributory Provident Fund Scheme,
Pension Scheme and an Insurance
Scheme.
Reserve Bank of India (RBI) It is the apex bank of India. The RBI uses
monetary policy to create financial
stability in India and is charged with
regulating the country's currency and
credit systems.
Special Economic Zone (SEZ) It is a geographical region that is

designed to export goods and provide
employment.
Small and Medium Enterprises They are enterprises where the

(SME) investment does not exceed specified
limits.
Software Ecosystem A Software ecosystem consists of sets of

software solutions that enable, support
and automate the activities in a social or
business ecosystem.
Statement of Work(SOW) It is a formal document that captures and

defines the work activities, deliverables,
and timeline a vendor must execute in
performance of specified work for a
client.
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Software Technology Parks of It is an export oriented scheme for the

India (STPI) development and export of computer
software, including export of professional
services.
Tax Deducted at Source (TDS) It is a means of collecting income tax in

India, governed under the Indian Income
Tax Act of 1961.
Value Added Resellers (VAR) It is a business process that adds

features or services to existing product
and later resells it.
Y2K YEAR 2000 was a problem for both

digital and non-digital documentation and
data storage solutions that resulted in
from the practice of abbreviating 4-digit
year to 2-digit.
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Contents
Abbreviations ........................................................................................ 3126

Glossary ................................................................................................ 3128
Chapter 1: Introduction ....................................................................... 3133
Chapter 2: About IT Software Companies ........................................... 3135
Chapter 3: Special Feature of Software Industry ................................. 3160
Chapter 4: Legal Framework ............................................................... 3164
Chapter 5: Need for Internal Audit ...................................................... 3176
Chapter 6: Major Areas of Internal Audit Significance ......................... 3191
Annexure
Annexure I: Compliances ..................................................................... 3223
References .......................................................................................... 3236
mmmcxxxii
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Chapter 1
Introduction
1.1 This Technical Guide is intended to assist Internal Auditors in carrying
out Internal Audit of entities operating in the Software (Information
Technology) Industry. The management in concurrence with the internal
auditor, in accordance with the various pronouncements of ICAI and other
regulatory requirements, assessments of control environment and business
domain knowledge primarily decides the scope of the internal audit. The
technical guide deals with operational areas of entities operating in this
Industry with emphasis on compliance as mandated as per various
regulations as applicable to the specific entity.
Indian IT industry is growing steadily despite the global meltdown from the
year 2008. Inspite of global gloom across industries, Indian IT industry still
managed to register a growth of 5.5%. The Domestic Market is also slotted to
witness 12% growth, this year. Potential size of India’s offshoring industry is
estimated at US $ 120 to 180 billion by 2015. The Industry currently employs
around 1 million people and provides indirect employment to around 2.5
million people. It is expected to add another 150,000 jobs in another fiscal
according to NASSCOM.
1.2 Indian IT/ ITeS sector is growing substantially with its:
 Expansion into varied verticals
 Well differentiated service offerings
 Increasing geographic penetration
The phenomenal success of Indian IT- ITeS industry can be attributed to
availability of strong qualified human resources, favourable government
policies, burgeoning demand conditions, healthy growth of related industries
and competitive environment prevalent in the industry and the focus on
innovation by the IT Industry. The interplay of these forces has led to putting
the industry on the global map.
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1.3 The Software industry is a giant industry embracing large range of

segments. To elaborate further, this sector can be categorised into:
(a) Software solutions
(b) IT Services
Scope
1.4 The Technical Guide does not covers following:
(a) IT enabled Services (ITeS) – In this Guide on Internal Audit of
Software Industry, the services relating to Information Technology enabled
services (ITeS) have been excluded.
(b) Knowledge Process Outsourcing (KPO) and Business Process
Outsourcing (BPO) – Internal audit processes relating to KPO and BPO
have also been excluded. There is a separate drafted Guide by ICAI for BPO
areas. The ‘Technical Guide on Internal Audit of BPO Industry’ covers
following:
 Evolution and history of BPO industry in India
 Reasons for outsourcing and initiatives taken by the government
 Special features of the BPO Industry
 Types of services provided by the BPO industry
 Major Challenges faced by the BPO industry
 Legal framework and a Gist of all the applicable regulations to BPO
industry
 Statutory laws applicable to Indian BPO industry
 Need for internal audit and factors contributing to the evolution of
internal audit.
 Standards on Internal Audit
 Major areas of internal audit significance like, invoicing, SLA
adherence, Payroll, Operating Costs, Fixed Assets, Related party
transactions, Data security.
 Risks faced by the BPO industry.
 Maintenance of books of accounts and documents.
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Chapter 2
About IT Software Companies
Eco-System
2.1 The software industry is one of the most promising industries in India.
Software companies make widespread use of partner business models like,
resell. Some software companies create and manage partner ecosystems
around them. Each software ecosystem is created for a purpose and often
one finds network effects in a software ecosystem.
Today, there are only a few sources in the literature on the form of
cooperation between software companies and on the objectives, structure
and forms of cooperation in so-called software ecosystems (e.g., referral).
For software companies, this is a crucial problem, since the decision to join
or to create a software ecosystem or to partner is not easy. All issues around
business models, software ecosystem leverage and software partnerships
are roughly summarized in the term "Software Economics".
A software vendor sells software to its customers. The companies in the
ecosystem interact with the software vendor or its customers or partners in
the following ways:
 They sell products or services to the software vendor´s customers.
These products or services might be related to or integrated with the
software vendor´s products or services;
 They sell the software vendor´s products, e.g. as Value Added
Resellers (VAR);
 They sell services to the software vendor, to the customers or to the
software vendor´s partners;
 They purchase or license the software vendor´s products;
 They sell or license software to the software vendor (suppliers);
 They align on standards with the software vendor to create bigger
markets based on standardized products or services; and
 Last but not the least, companies are potential candidates for
acquisition by the software vendor.
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Evolution of IT Industry
2.3 The evolution of IT industry can be studied in 5 phases which have
been discussed in the paragraphs given below:
Phase I: Prior to 1980
2.4 The Software industry was literally non-existent in India until 1960.
Software used in the computers till that time, were in-built with the systems.
Government protected the hardware industry through high tariff barriers and
licensing. However, in the west, the need for software development was
gradually being felt as the software in-built in the system was not sufficient to
perform all the operations. The government of India therefore, realised the
potential for earning foreign exchange.
In 1972, the government formulated the Software Export Scheme. This
scheme made the provision of hardware imports in exchange of software
exports. Tata Consultancy Services Limited (TCS) became the first firm to
agree to this condition. The year 1974 marked the beginning of software
exports from India.
Phase II: 1980-1990
2.5 Despite the government initiatives, the software exports were not
picking up because of two reasons mainly:
 The exports of software, was heavily dependent on the imports of
hardware, which was costly as well as the procedure for obtaining the
same was very cumbersome.
 Secondly, there was a lack of infrastructural facilities for software
development.
To counter these, the government formulated a new computer policy in 1984,
which simplified import procedure and also reduced the import duty on
hardware for software developers. In an attempt to make software industry
independent of hardware industry, the government in 1986 formulated
Software policy which further liberalised the IT industry. According to this
policy, the hardware imports were de-licensed and were also made duty free
for the exporters. This along with the world wide crash in the hardware prices
reduced the entry barriers substantially.
In 1990, government established Software Technology Park of India. This
scheme was formulated to increase the export of software and services.
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Phase III: 1990-2000

2.6 This decade made several significant changes in the economy,
including trade liberalisation, opening up of Indian economy to foreign
investment, devaluation of rupee, and relaxation of entry barriers. These
changes attracted many foreign entities to our nation. These MNC’s in India,
introduced ‘Offshore Model’ for software services, according to which the
companies used to service their clients from India itself. This model further
graduated itself to ‘Global Delivery Model’, It is the combination of Onsite and
Offshore Model. In this Model Offshore Development Centre is located in
various locations across the globe.
During this period due to the entry of many players in Indian market, the
competition got intensified. Therefore the players started investing in
research and development to distinguish their services from others.
Phase IV: 2000 - 2007
2.7 The Global problems like, Y2K, the dotcom crash and recession in the
US economy, proved to be a boon to Indian IT Industry. The Y2K problem
demanded the existing software to be compatible to the year 2000. Due to
the shortage of US based programmers during this period, many mid – sized
firms were forced to utilise the services of Indian Firms. This had placed the
Indian IT industry on the global Map.
Post 2002-03, the industry had registered a robust growth rate because of
increase in the number of clients, large sized contracts and a strong global
delivery model.
Phase V: Post 2007
2.8 Economies faced a downward trend during the 2007-10 due to
recession in the United States of America and the snowball effect to the
European and the Asian countries. This situation got even more aggravated
with the uncertainties in the global political and economic environment. This
affected economy at large with rising unemployment rates, political
instabilities, general uncertainty and large scale cost reduction initiatives by
both private and public sector organizations. This has resulted in huge
budget cuts on IT investment by large corporations. It leads to stiffer
competition for software companies to grab their market share to sustain
their growth rates.
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Since 2010, the recession impact smoothened and there have been signs of
recovery. However, the markets and the corporates are cautious in their
approach especially on any long-term strategic investment decisions. This
stage evolved into a lot of phenomenal changes in the industry. The key
changes post 2010 phase are:
 Early capital budgeting was performed by the companies in order to
avoid last minute funds shortage.
 The software industry approach changed towards outcomes based
solutions for their clients. The prime motive of the big-players of the
industry was to blend their services and products specific to customer
requirements and serve their needs efficiently in an Operating
Expenditure (Opex) based model rather than the traditional Capital
Expenditure (Capex) based model.
 Companies came out with different strategies to adopt with client and
to gain customer base. Some of these are gain sharing, investment
sharing, etc.
 The most prominent change that emerged after the phase of 2010 was
Cloud Computing. Mass storage of data on cloud has not been very
commonly used pre-2010. This trend saw a huge change. 90% of
today’s data of an enterprise or individual users are stored on cloud,
with or without our knowledge.
 Mobile had just been a device for calling, SMS and some
entertainment like music, videos. Nowadays, the industry is not the
same though. Usage of mobiles has come to such a large extent that
the same is used for enterprise mobility, decision-making, social
media, banking, analytics, etc.
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Growth Trajectory
Phase V
Phase IV Customer
satisfaction
Indian Firms
Phase III establish their Capital
Offshore credibility budgeting
Phase II provisioning Execution of Cloud
of services higher end Computing
Lower
Import Formation of services Mobility
Phase I Duties ODCs by ITe BPO
MNCs Analytics
High Import Formation of sector steadily
Duty STPs maturing Social Media
Execution of Growth in
Lower end Exports
services
Presence of few
players
Modest
beginning in
software
exports
Initiatives Taken by the Government

2.9 Although the story of the Indian software industry is a story of private
initiative, the government played a supporting role with public funding of a
large, well trained pool of engineers and management personnel who could
forge the Indian IT industry into a world class treasure in a short time. Early
government support came from a few visionary civil servants who
championed the cause and helped the industry find its way through a
labyrinth of regulations, making exemptions wherever possible. Later,
3139
policies that encouraged local firms and direct foreign investments were
introduced.
2.10 Government targeted software exports once the market identified the
industry’s potential and created the necessary institutions. As early as 1972,
the Department of Electronics introduced a policy to permit duty-free imports
of computer systems, if importers would promise to export software and
services worth twice the value of the imported computers within a specified
time. This policy helped a number of leading companies in their inception
stage. In the 1980s the Department gave software developers a further boost
by initiating software export friendly policies. It formed a software export
promotion council and liberalized import rules for materials needed for the
industry. Software was explicitly targeted as a key sector for export
promotion. In the late 1990s, the government created four major taskforces
comprising chief executives of leading software companies to study the
sector and recommend actions, and then acted on most of the
recommendations. At that time the Department of Electronics became the
Ministry of Communication and Information Technology. This was followed by
the IT Act to address a large number of issues. In addition to these federal
interventions, many states promoted local software industry by improving
infrastructure, IT education, and provision of more facilitating environments.
With the beginning of economic reforms in the early 1990s, efforts were
made to attract foreign as well as domestic investment. Foreign companies
were permitted to establish fully owned subsidiaries in the electronics export
processing zones. Within the Ministry of Finance there was greater
recognition of India’s comparative advantage in the sector, as it abolished
entry barriers for foreign companies, made available fast, low-cost data
connection facilities, and reduced and rationalized duties, taxes, and tariffs.
2.11 The Reserve Bank of India adopted several measures to support the
IT industry. These included: simplification of the filing of Software Export
Declaration Form (SOFTEX); acquisition of overseas parent company shares
by employees of the Indian company; companies whose software sales were
over 80 percent could grant stock options to non-resident and permanent
resident employees; foreign exchange could be freely remitted for buying
services; and companies which executed contracts in “computer software”
abroad could use income up to 70 percent of contract value to meet contract-
related expenses abroad.
Tax holidays were given on company profits, although the government is
progressively phasing out these deductions. Tax breaks from corporate
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income and tax on profits was available to units in any free trade zone, any
software technology park, or any special economic zone to the extent of 100
percent of the profits derived from the business. These deductions were not
available from Financial Year 2009–2010 onwards.
Indian direct investment in joint venture (JV)/wholly owned subsidiaries
(WOS) abroad was simplified and a fast track window is available for large
investments. IT software and services companies in India can acquire
companies overseas through American Depositary Receipt/ Global
Depository Receipt stock swaps without prior approval for up to $100 million
or ten times the export earnings of the previous year.
2.12 While the government has enacted significant reforms in the area of
intellectual property rights (IPRs), and has joined the World Trade
Organization and Trade-Related Aspects of IPRs, the reforms have so far not
led to a surge in patents in the Indian software industry, nor have IPRs been
perceived as effective in protecting innovations in the Indian software
industry.
Several policy reforms in the telecom sector helped accelerate the domestic
and export industry. In 1998, a national telecom policy was announced to
clarify the role of the regulator, transition from license fee to a revenue
sharing model and open domestic long distance to private operators. The ISP
gateway monopoly ended in 2000 and permitted private companies to set up
international gateways. In 2002, international long distance was liberalized
two years ahead of WTO commitments and competition increased in cellular
markets. As a result, India’s teledensity, the number of phones per 100
people, increased to five and cellular penetration overtook the land line
penetration.
2.13 Recognizing the growing need for manpower in the software industry,
the Ministry of Human Resources Development took the following actions:
 Helped create and expand computer science departments in existing
engineering colleges.
 Eased policies in order to enable private sectors to open educational
institutions without public funding. A large number of engineering
colleges were opened in the private sector.
 Introduced quality control systems for engineering colleges and other
IT training institutions, such as the All India Council for Technical
Education and an accreditation system run by professional bodies
3141
such as the Computer Society of India to monitor private training

institutions.
 Encouraged the private sector to open training institutions. At its peak
nearly one million Indians were being trained in a year with the IT
training industry earning over nearly 10 billion rupees in 1998 with no
government subsidy.
Software Technology Parks

2.14 Creation of NASSCOM in 1988 and later establishment of STPs in
1990 represented a fundamental approach to policy making for the software
industry. An important institutional intervention was the establishment of
STPs to provide infrastructure for private companies to export software.
Established in 39 locations, including most major towns, they provided ready-
to-plug IT and telecom infrastructure. STPs also allowed single-window
clearance for all regulatory matters. The benefits and approvals for STPs are
similar to those of Export Oriented Units. Incentives provided in the Export–
Import Policy are also applicable to STP members.
The companies registered with these parks account for about 68 percent of
software exporters. Many of these companies have not benefited from the
actual STP infrastructure in any significant way. Perhaps, the major
contribution of these STPs was to enable new enterprises to launch, and
small and medium enterprises to grow. Already established companies
merely registered with these parks but did not use the infrastructure that was
created.
The performance of STPs has been variable. Where the environment was
right the STPs enabled small and medium enterprises (SMEs) to set up and
grow. On the other hand in Gujarat, total sales from 60–70 SMEs was Indian
Rs. 1,000 million (US$22 million), miniscule in comparison with industry
norms. The Gandhinagar STP had a membership of 300 companies, many of
which may have been attracted because of the incentives. However, only 60–
70 are active. Out of the 5 Mbps (megabits per second) bandwidth available
for use, hardly 2 Mbps was being utilized.
One of the STPs’ key contributions is providing high-speed data
communication services to the industry. The Software Technology Parks of
India (STPI) had international gateways at 39 locations (2003). For the last
mile users can connect through point-to-point and point-to-multipoint
microwave links, and terrestrial fibre/copper cables were used (where
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feasible). The up time of STPI connections is 99.9 percent. STPI works with
major international telecom operators such as AT&T, Sprint, MCI, Intelsat
and British Telecom. STPI offers two main services: softpoint service, secure
and exclusive digital circuits for data and voice transmission; and SoftLink,
Internet access on a shared basis.
Competition and Differentiators
Talent Pyramidal Foreign

Outsouricng Labour arbitrage
availability structure Investment
2.15 Indian software industry thrives significantly based on the clients from
the US market. Although there are a number of clients across other
continents, viz., Europe, Middle-East, Asia, Australia, US still has the lion
share of market for the Indian software industry.
The key areas which would differentiate Indian Software industry from others
are as under:
 The Indian comparative advantage is based on cost and availability of
software talent: the ability to offer the services of a large number of
software professionals at costs substantially lower than those in the
U.S. U.S. firms do not outsource requirement analysis, specification,
and high-level design, nor do they outsource larger scale system
integration types of activities to India. However, the leading Indian
software firms do have the ability to provide these high-end services.
 The option of outsourcing has been of great value to U.S. firms.
Virtually, all the U.S. managers noted that outsourcing to Indian firms
allowed them to use in-house staff for more valuable and creative
activities, such as the development of new business applications with
a greater potential for influencing the firm. They greatly value the
flexibility inherent in outsourcing – the firm does not take on a long-
term obligation when it is uncertain about the future, both about the
evolution of information technology and about its own specific uses of
the technology.
3143
 Indian software firms do not pose serious competitive challenge to

U.S. software firms. Indeed, for the most part, they complement the
U.S. industry, with the possible exception of those U.S. firms that
provide staff augmentation and software services.
 Pyramidal Structure: The Indian software industry has a pyramidal
structure with large corporates ruling the sector. The top players in the
industry have more than $1 billion in annual sales.
 Multinational Companies (MNCs) are setting up their branches in India
to conduct sophisticated software development activities and as a
captive source of R&D, utilising India’s abundant man-power.
Majo
or Challeng
n es Faced by the Industry
2.16 The Indian software services industry has been spectacularly
successful, growing at over 50% annually for several years. However, the
nature of markets and technology is changing. Other changes include rising
salaries in India, fast growing higher end markets, talent shortage worldwide,
and need for faster implementation of projects. However, for Indian
companies a key change could be the growth of market segments that are
not so price sensitive, and price based competition from China, Mexico,
Philippines and other countries. Challenges arising from sustained high
growth, operating as a low cost service provider, challenge of overseas
development, managing multiple agencies in a single project, cultural
challenges of operating in overseas markets and entry barriers to higher end
value added work.
Challenges
faced by Less expensive Labour
industry
Poor infrastructure
Small domestic market
High competition
Brain Drain
Defusing industry environment
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2.17 The major challenges faced by the IT Industry in India are as under:
 Though initially India provided less expensive and highly skilled
manpower; currently it has ran out of that “skilled” manpower and
whatever manpower is available is either not “skilled enough” or very
expensive.
 Indian education system is not able to deliver substantial skilled
manpower in terms of skill level in the numbers required. The quality is
sore point when comes to the education. There are only a few Indian
universities and institutions which can be regarded of international
quality. The better educational institutions are highly subsidized by the
government and hence the development of the same has not been as
good as it could have been. There are some good institutions in the
private sector as well but they are as expensive as any in the
developed nations.
 Infrastructure in India has not been able to keep pace with the
sustained development needs in the software industry. e.g., the rental
in the housing markets have increased nearly 4 fold in last 5 years,
however the incomes for these software professionals have not
increased in the same proportion. Further added is the traffic levels in
the software dominated cities is another example of the bottlenecks in
the infrastructure.
 Due to the high Dollar inflows into the county due to its lucrative stock
market return the Indian Rupee has become very strong compared to
the Dollar. The government is also not keen to improve the situation
due to the high prices of crude petroleum in the international markets
since the petroleum products are highly subsidized in India and any
weakening of Indian Rupee will add to the subsidy burden. The high
volatility in the foreign currency rates have further worsened the
challenge for IT Industry.
 The Eastern European countries provide as much cost benefit as
Indians do and they currently are as competitive as Indians are in cost.
Similarly, other Asian countries are exhibiting better cost benefit
advantage compared to Indian Software Industry.
 The advantage for the Indian software industry has been its early
beginning, and a large English Speaking population – the highest in
the world. But due to the globalization of economy that advantage is
not significant anymore. We have Indian software professionals
3145
working in non-English speaking countries. Similarly, now manpower

from less expensive non-English speaking countries is trying to
compete for the big bucks of Software Services Industry.
2.18 Some of the other challenges faced by the Indian Software Industry
are that the Indian software industry specializes in the export of low-end
software development services, competing primarily on cost and availability
of software talent.
 The industry is diffusing geographically. Although Bangalore is still
home to many of the leading firms, the industry is not confined to
Bangalore and is diffusing to regions other than Bangalore and
Mumbai, with a substantial presence in Hyderabad, Chennai, and
Delhi, and a growing presence in Calcutta and Pune.
 The domestic market is still small. Although PCs are diffusing more
rapidly, communication bandwidth is still limited. The bandwidth
problem is compounded because of the intransigent attitude of the
department of telecommunications as it tries to retain control over
telecommunications in India. The result is that Internet access in India
is still slow and expensive. In addition, various infrastructure
constraints have combined to slow the adoption of IT for business and
government operations.
 Project management expertise is scarce, because the industry is still
young in India and large-scale projects where project managers are
trained are still relatively rare. This problem is exacerbated by a large
number of experienced professionals who emigrate to the U.S.
 Management capability is weak. It is likely that many of the existing
firms will fail the challenge of moving beyond low-end services.
However, this should not be a major problem for the industry as a
whole because some Indian firms are already looking outside of their
boundaries and even outside India to get the managers they need.
Factors Contributing to Industry Growth

2.19 Software Industry registered a massive expansion in the last 10 years.
This industry signifies India's position as the knowledge based economy with
a Compounded Annual Growth Rate (CAGR) of 42.3%. In the year 2008, the
industry grew by 7% as compared to 0.59% in 1994-95.
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India has emerged as a major global exporter of software services in the

international economy. Despite predictions that the industry would fail in the
midst of global financial crisis, growth of software industry in India continues.
Professionals and private consumers are increasingly reliant on computing
for smooth day-to-day living. Companies seek to optimize profit through
efficient software use, while private consumers use software for many
reasons including work, organization and entertainment.
Other market segments, such as professional service automation, cloud
computing and content management software are increasingly popular with
businesses seeking to optimize their activities. The global software market is
expected to continue recording strong growth across all major segments.
Quality Accreditations
2.20 Quality accreditations are most important for a company serving under
the software industry. Client satisfaction and quality assured products and
services would be guaranteed using the quality accreditations. Quality
accreditations will ensure that the process flow in the company does not
have a hindrance, even if such drawback exist, the accreditation systems will
ensure that the process is put back to place.
The accreditation process also ensures that their certification practises are
acceptable and behave ethically and employ suitable quality assurance.
One of the good accreditation systems around the world is ISO 9001. The
ISO 9001 standard is related to quality management systems and designed
to help organisations ensure that they meet the needs of customer and other
stakeholders, while meeting the statutory and regulatory requirements
related to product or service.
2.21 A quality accreditation service is not a one-time award or certificate. It
has to be renewed by conducting quality assurance audit at regular intervals
as recommended by certifying body. The most common interval would be
once in three years. Apart from ISO 9001, there are ISO 27001, ISO 14001
are popular quality accreditations used by companies in the software
industry.
Other popular quality certifications used by the industry include SEI CMM
which stands for Capability Maturity Model issued by the Software
Engineering Institute. Under this certification Level 5 is the highest grade of
certification where the uppermost 5th Level is a state where processes would
3147
be systematically managed by a combination of optimum process utilisation

as well as process improvement.
Operating Model
2.22 The IT industry has unique operating model due to the macro
economic factors influencing the industry. The global environment and the
various industries in which the customers are operating play an important
role in the way the IT companies are structured to provide meaningful
services. In the Indian market context, these IT companies are focused on
providing the services to the global companies at a lower cost with most
innovative solutions in a global delivery model. While the origin of the
business model began with providing service at a lower cost, it has gradually
evolved in to providing more value to the clients through the intellectual
capital accumulated over the past several decades. Let us understand the
various elements of their operating model.
Business Model
2.23 Global customers especially look for support from India IT players in
terms of providing high quality people who could help in their technological
requirements. This could be around maintaining their existing technologies,
creating new technologies to support their business processes, new
platforms, global infrastructure, helpdesk and so on. The primary resources
for IT industry are the human resources and technology. These two drive a
significant influence on providing value to the customers. Hence, the IT
companies operate around where the human resources are available and the
environment where new technologies can be generated.
Strength and competitiveness of the IT companies lays in their ability to
attract high quality talent who can develop state-of-the-art technologies. This
requires high standards of recruitment process, talent development, HR
policies, research and development capabilities of the service provider. A
professional sales force required at the customer locations that should be
building solutions to their requirements. This would also require a number of
onsite employees with delivery experience to demonstrate the delivery
capabilities.
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Internal Audit of IT Software Indus ry
Recruitment
process
Technology Talent
adaptation Development
Software
development
enablers
R&D HR
Capabilities Policies
2.24 Depending on the customer requirements, they usually invite service

provider by sending out Request for Proposal (RFP) or Request for Quotation
(RFQ). This RFP will have all the necessary requirements of the customer
that they expect from the service provider. The service provider will have to
respond to the RFP by filling in the necessary details and the proposed
solution including the pricing. Depending on the solution and the other
parameters, the customer evaluates the entire service provider and then
finally selects the service provider to award the contract.
The type of contract varies from one-time projects with limited timeframe to
long-term Master Service Agreements (MSAs) which covers a suite of
services offered by the service provider. This depends on the strategy of the
customer and their confidence in working with the service provider as a
strategic partner. The contract contains a number of legal requirements
which will be binding on both the parties obligated to a number of
commitments.
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Service Offerings
2.25 The services offerings of IT companies include the below 4 categories
with specific areas:
Service Offerings
Products,
Consulting Technology Outsourcing Platforms and
Solutions
(i) Consulting
(a) Business Consulting
(b) Technology Consulting
(c) Process Consulting
(ii) Technology
(a) Business Application services, across SAP, Oracle, IBM,
TIBCO, Microsoft Dynamics, Salesfore.com, etc.
(b) Business IT Services
(i) Application Outsourcing Services
(ii) Application Services
(iii) Independent Validation and Testing Services
(iv) Infrastructure Management Services
(v) Infrastructure Outsourcing Services
(c) Engineering services
(iii) Outsourcing
(a) Business Process Outsourcing (BPO)
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(iv) Products, Platforms and Solutions

(a) Cloud
(b) Mobility
(c) Sustainability
(d) Platform solutions
(e) Products
Consulting Technology Outsourcing Products,

Platforms &
Solutions
Business Business
Business
Application Process
Consulting
Services Outsourcing
Cloud
Technology Busines IT
Consulting Services
Mobility
Process Engineering
Consulting Services
Platform
solutions
Products
Customer Industry Orientation

2.26 While there are number of service offerings offered by the IT
companies, the significant value-add is provided by tailoring these services
based on the industry in which their customer’s operate. This is to make their
services relevant to their customer and also to ensure that their workforce is
groomed to build expertise that matches their customer business
environment. This is one of the most important leverage for the customer to
approach IT service providers as they get access to multi-varied experienced
talent which otherwise would not be possible in-house. Therefore, the
Industry segmentation organized by the IT companies is in the following
Industry verticals as discussed below:
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Industry Segmentation
2.27 Industry segmentation refers to the major industries in which Software
Industry plays a vital role. The software companies in the industry render
services and products to the following industries that fall as part of majority of
revenue:
Banking, Finance & Insurance
Construction
Energy & Utlities
Government
Industry segmentation
Healthcare
Life sciences
Manufacturing
Media & Telecom
Retail & Consumer products
Travel, transportation & hospitality
Typical Organization Structure

2.28 The typical organization structure of Software Company is depicted
below. This is illustrative to visualize the organization structure normally
followed explaining the inter-connectivity of variety of functions within the
organization.
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Chief Executive Officer (CEO)
Strategic Business Units (SBU)
Business Enabling services (Finance, M&A, HR, Admin, and Marketing)
Field Management Planning Products & Services
Sales Project Management
Implementation Delivery Practice
Support Business Quality
CUSTOMERS
Human Resources Development

2.29 Human Resources Development (HRD) plays a backbone for an IT
company, as the dependence on people is significantly high. Therefore,
every IT company takes a number of efforts to ensure world class HR
practices in their businesses. The broad activities / departments within HRD
include:
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Talent
Acquistion
Performance Talent
Management Development
Compensation Education &

& benefits Research
Leadership Payroll &

skills related
Learning &
competency
development
All these functions work in tandem to ensure they hire, retain, and groom
best of the breed people within the organization. There are a number of
accreditations and certifications provided by organizations for the best in the
industry. Such accreditations demonstrate the organization practices around
people as this becomes the basis on which customers rely on the services
provided by the IT companies. There is a huge competition among the IT
companies to differentiate themselves based on the HR practices in order to
attract talent as well as to provide confidence to their customers for
sustainable service offering.
Revenue Model
2.30 Revenues generated by IT companies vary depending on the nature of
service and the arrangement with the customer. The typical billing models
are:
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Billing Models
Time & Annual

Material Milestone License- Maintenanc Outcome Transaction
based - based based e Contracts based based
(T&M) - (AMC)
(i) Time & Material (T&M) billing involves billing which could be on
hourly rates, daily rates, weekly rates, fortnightly rates, monthly
rates or bimonthly rates or quarterly rates, etc. In T&M, billing is
done on the basis of the time spent by the people involved in the
project. This is being tracked by the time sheets maintained by the
employees and approved by the project managers. It is also known
as Full Time Equivalent (FTE) method of billing.
(ii) Milestone billings is charged on the basis of achievement of a

Milestone which could be Feasibility Study/ Business Analysis/
Development/ Implementation/ Go Live. The completion of the phase
has to be signed by both the parties. Milestone contracts are also
called Fixed Price Contracts.
(iii) Product License sales could be for examples like, SAP, JDE, Tally
MS office, etc. wherein the customer is charged for the number of
users using the product of the service provider. This model is usually
adopted wherein the product is developed by a service provider and
it is installed at the customer location. Typically, this product will
require use by multitude of people and, therefore, the customer pays
based on the number of users. A typical example would be a
banking software, airline software, operating system, etc.
(iv) Annual Maintenance Contracts (AMC’s) could be installation of
Patches and Upgrades. AMCs may also involve change
management of the software.
(v) Outcome based pricing, wherein the service provider charges
based on the outcomes realized by the customer. This is typically
used in Products, Platforms and Solutions service offerings. This is
becoming more popular model as the customers want to pay for
outcomes than the efforts of the software company.
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(vi) Transaction/ volume based pricing, wherein the customer pays

based on the volumes or transactions delivered by the service
provider, irrespective of the number of people or effort put in by
them.
Projeect Lifecycle
2.31 The project spans in an IT industry typically spans anywhere from
months to several years depending upon the nature of projects. The lifecycle
of project would typically follow six sigma DMAIC steps of:
1. Define
2. Measure
3. Analyse
4. Improve
5. Control
Project Management plays a very significant role in the IT companies as this

becomes key enabler to fulfil the customer requirements. Therefore, a
number of training and coaching programs are conducted for the people to
be fully equipped in managing projects. This is especially essential in a
milestone based billing projects. This also helps in projects where there will
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be multiple stakeholders involved across both service provider and the

customer organizations.
Service Delivery Commitment and Compliance

2.32 The service provider typically commits a minimum service level when it
comes to the services offered. This is to provide assurance for the customer
as well as to ensure continuity of business operations of the customer. There
are many measurement criteria’s being used to measure the minimum
service levels which are converted into service commitment and built into the
contract. The service provider is expected to fulfil this service commitment,
failing which, they will be liable to penalties or even consequences of
termination of contract. Therefore, in a typical IT project, the delivery
commitment paramount becomes guiding factor to be ensured by the service
provider. All the key people in the project are expected to be fully familiar
with such commitments and ensure that they provide the necessary
contribution to ensure it is met.
Governance Model
2.33 As there are number of stakeholders involved across both customer
and the service provider across multiple locations, it is indeed essential to
have a proper governance model which ensures the communication across
levels happens as per agreed frequency. There will be multi-layered
governance structure established with specific focus on various topics
involved in the engagement between customer and the service provider.
Governing Agenda Members of Members of Frequency

body Customer Service
Provider
1 Strategic: 1.Engagement Key Business Quarterly

Steering plan stakeholders Unit Head,
committee viz. CIO, Engagement
2. Contractual
relationship manager
3.Performance manager
4 Future plans
2 Operational: 1. Portfolio Project Engagemen Monthly

Project review Management t manager,
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portfolio 2. Milestone officer, Delivery

review updates Business Leaders
committee stakeholders
3. Key issues /
challenges
4. New
opportunities /
improvements
3. Tactical: 1. Individual Project Engagemen Weekly

Project project review leader t leader
review board
2. Issues / Project team Project
challenges members Leader
3. Agreements Project
on performance team
4 Contract 1. Contract Legal Engagemen Monthly

board review representativ t Manager,
e,
2. MSA review Legal
Relationship representati
3. Legal
manager ve
4. Performance
compliance
Sustainability
2.34 As the IT service company is high-dense with people and
infrastructure requirements, there is a significant need to ensure they follow
sustainable practices which takes care of environment and society at large.
There are number of stakeholders involved when it comes to the operational
functions of the IT company. It is the responsibility of the IT company to
ensure that their needs are addressed and met on a sustainable manner.
Some of the key stakeholders are:
1. Investors
2. Customers
3. Vendors / Suppliers
4. Employees
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5. Society
6. Regulators
7. Environment, Health and Safety
8. Governments / local legislators
The IT Company is accountable to ensure that all such stakeholders’
interests are addressed in the operations of the organization. This is typically
reported as part of the Sustainability Report, popularly known as Business
Responsibility Report
The previous trend of losing or backward sustained development in the
industry has been replaced. Currently, we can see a number of top corporate
bodies serving under the Software industry contributed a lot towards
Corporate Social Responsibility (CSR) and society as a whole.
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Chapter 3
Special Features of Software
Industry
3.1 There are certain special features which are applicable to IT Industry;
it might not be applicable to other industries. Some of those features are
discussed below in the following paragraphs:
Working from Home

3.2 It is an option increasingly being offered by companies to their
employees to better manage their work-life balance by providing them
flexibility to work from home. Work from Home (WFH) is now an accepted
norm in many companies, especially in the IT sector. As the IT companies
work for their clients across the globe in different time zones, their
employees are expected to interact with their clients and associates in
different locations. A critical point taken into account by a number of
companies is that most working people complain of not having enough time
to spend with their families. The WFH option offers them the opportunity to
gain that much-needed work-life balance, and motivates them to put in their
best effort at work in return. While employees are happy, employers feel that
in these times of high attrition rates, such an option helps in retention. Along
with a good pay package and growth opportunity, employees these days are
increasingly looking at work culture of a place before deciding on a job.
Time Sheet Management for Work from Home

3.3 The work from home option is not feasible for all sectors. Only those in
which there is minimum personal interaction required, like in some
departments of the IT sector, does it work. And in even those, one has to
work closely with a supervisor, on a set of deliverables. In such a situation it
becomes very important to maintain a time sheet.
The method used to maintain the time sheet should monitor and generate
timesheets for each employee which includes a start and end time for each
task. A detailed breakdown of tasks as well as the cost incurred for each task
should be available. They should report to a supervisor who will monitor the
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work done by the employees and will approve the time sheet for further
processing.
Geographic Spread of Software Industry

3.4 Recent years have seen the increasing geographic distribution of
software development. The software industry now tends to relocate its
production units in decentralized zones in which a skilled workforce is more
readily available, thus taking advantage of political and economic factors.
The main objective of this is to optimize resources in order to develop higher
quality products at a lower cost. The distance between the different teams
can vary from a few meters (when the teams work in adjacent buildings) to
different continents. The situation in which the teams are distributed beyond
the limits of a nation is called Global Software Development (GSD). This kind
of scenario is interesting for several reasons, mainly because it enables
organizations to abstract themselves from geographical distance, whilst
having qualified human resources and minimizing cost, thus increasing the
market area by producing software for remote clients and obtaining a longer
workday by taking advantage of time differences. In this context, “offshoring’’
refers to the transfer of an organizational function to another country, usually
one in which human resources are cheaper. “Nearshoring’’ is when jobs are
transferred to geographically closer countries, thus, avoiding cultural and
time differences between members and saving travel and communication
costs.
Cloud Computing and Central Servers

3.5 Cloud computing is a colloquial expression used to describe a variety
of different computing concepts that involve a large number of computers
that are connected through a real-time communication network (typically the
Internet). In science, cloud computing is a synonym for distributed computing
over a network and means the ability to run a program on many connected
computers at the same time. Some of the benefits of cloud computing and
central servers are:
 Increase in volume output or productivity with fewer people. Cost per
unit, project or product plummets.
 Reduced spending on technology infrastructure.
 People worldwide can access the cloud, provided they have an
Internet connection.
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 The process will be streamlined.

 It will reduce capital costs as there is no need to spend on hardware,
software and licenses.
 It will improve accessibility.
 Projects can be monitored more effectively.
 It will improve flexibility.
Accounting of Software Tools

3.6 A software company will be utilizing a lot of softwares to run its own
business. Few of the softwares might be purchased and the rest developed
by the company itself. Such softwares will be of high cost and it has to be
verified that such expenses are capitalised. The provisions relating to
intangibles as per Accounting Standard (AS) 26 have to be followed. If the
software is purchased then it has to be entirely capitalised but if the same is
internally generated then it has to be verified if the treatment of the expenses
in the research stage and the development stage are in accordance with AS
26.
Project wise Costing

3.7 The software companies will be serving many clients and usually
maintain accounts in such a way as to ascertain the project wise costing of
all the projects in hand. If the books of accounts are maintained for the
company on an overall basis and not bifurcating the projects the
management should be in a position to identify the costs to be allocated and
be in a position to determine the profitability of the individual projects.
Legal Software
3.8 Software piracy is copying and use of software without proper license
from the developer. Similarly, simultaneous use of single user license
software by multiple users or loading of single user license software at
multiple sites also amounts to software piracy. Using trial version software for
commercial gains is also piracy. Piracy is punishable offence. By using legal
licensed software, it is ensured that critical updates are available when
needed, the products are fully supported, reliable and above all it is legal.
Any person or company who indulges in unauthorized copying, sale,
downloading or loading of software is punishable by imprisonment or by fine.
Hence, the software companies should use legal versions of the softwares.
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Confidentiality of Source Code

3.9 IT companies should have a secure network complete with firewall,
anti-spyware and ant-virus mechanisms to guard itself against threats from
outside. But often the threat is more from inside than from outside and this is
what companies often ignore. Perpetrators of information theft often resort to
social engineering methods than hacking to gain access to confidential
information. Software companies should opt for employee surveillance
measures like monitoring of e-mails and IMs to be informed of any possible
information theft. Cyber criminals often target smaller companies which
handle confidential information. In order to protect such confidential
information and source codes the company has to restrict the access of
source codes. It also has to enter into a non-disclosure agreement with the
employees to safeguard its source code.
Software Used for Internal Use

3.10 Due to the advent of technology most of the software companies use
softwares for internal use like, leave management, payroll management, HR
records, Performance appraisal, and intranet for communication of policies.
Due to such softwares there might not be any manual record maintained for
such purposes. Hence, the internal auditor has to verify the data maintained
in the softwares and satisfy himself that it is appropriate for the size of the
company. He has to run some test checks in such softwares and check if
there are any discrepancies. If there are any, he has to verify with the
management how such discrepancies have been dealt with and suggest
methods to avoid and control such discrepancies.
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Chapter 4
Legal Framework
Governing Regulations
4.1 In recent times, software development and technical competence,
domain knowledge, information technology enabled services experience and
expertise for offering quality IT (ITES) including business process
outsourcing services and their exposure to working on BPO knowledge
process outsourcing various platforms and systems services industry in India
has emerged as one of the most dynamic and vibrant sectors in India’s
economy.
The Government of India has announced promotion of IT as one of the top
priorities of the country. India has embarked on a policy agenda which aims
to restructure its economy with enhanced global participation, The FDI to
supplement domestic investment in for achieving a quantum jump in growth
rate is now an integral part of government of India policy initiative impairing
the greater transparency to business procedure and integration with the
global market place are seen as the hallmark of new industrial, trade and
fiscal policies.
National Association of Software and Services
Companies (NASSCOM)
4.2 The National Association of Software and Services Companies
(NASSCOM) is a trade association of Indian Information Technology (IT) and
Business Process Outsourcing (BPO) industry. Established in 1988,
NASSCOM is a non-profit organization.
NASSCOM is a global trade body with over 1200 members, of which over
250 are global companies from the US, UK, EU, Japan and China.
NASSCOM's member companies are in the business of software
development, software services, software products, IT-enabled/BPO services
and e-commerce. NASSCOM has been a proponent of global free trade in
India.
NASSCOM was set up in 1988 to facilitate business and trade in software
and services and to encourage advancement of research in software
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technology. It is a not-for-profit organization, registered under the Indian

Societies Act, 1860.
Currently, NASSCOM is headquartered in New Delhi, India with regional
offices in the cities of Mumbai, Chennai, Hyderabad, Bangalore, Pune and
Kolkata.
NASSCOM Initiatives
Global Trade Development
The focus of the Global Trade Initiative at NASSCOM is to engage with a
wide variety of domestic and international stakeholders, such as
Governments, customers and associations, to collaborate on issues related
to international policy, visa/ work permits and business partnerships. Since
the regulatory environments continuously change the world over and
compliance issues are becoming important across the globe, NASSCOM is
helping the Indian IT-BPO industry remain abreast of these developments,
and participate in these markets while conforming to their new laws and
modified policies. Indian companies are beginning to expand across the
world, with the largest organisations becoming significant players in the
global marketplace and the countries where they are present. India has in
many ways ceased to be a competitor and has become an enabler for
industry growth in these nations.
NASSCOM is advising member companies to build stronger and deeper
relationships with overseas clients and other stakeholders by maintaining
absolute transparency, exhibiting corporate ethics and establishing
themselves, as well as India, as “trusted, secure sourcing” destinations.
Besides continuing to nurture existing markets,
NASSCOM has also stepped up its focus on developing opportunities in
newer areas—geographies, verticals and customer segments. Several high
growth and under-penetrated regions such as, Continental Europe, Latin
America, Africa, the Middle East and Japan are looking promising for the IT-
BPO business.
These regions are increasingly beginning to embrace Indian IT in order to
optimise costs, improve operational efficiency and productivity and gain
access to specialised talent.
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National Skills Registry for IT/ITES Professional

(NSR-ITP)
4.4 Human resources are the key assets for IT-BPO industry in India and
the industry has focused on developing and implementing best practices in
human capital management, safety and security that span across employees,
clients and other stakeholders. NASSCOM in partnership with the industry
has developed a unique initiative – National Skills Registry –a national
database of registered and verified knowledge workers in the industry. This
database is managed and run by NDML - a fully owned subsidiary of National
Securities Depository Limited (NSDL).National Skills Registry (NSR) aims to
build a robust and credible information repository on the knowledge
professionals in the sector. The data fields include permanent fact sheet of
information on the professional along-with photograph & appropriate
background checks (where undertaken), thus providing identity security for
the organisation and its clients. Biometrics is also included in this repository
to ensure unique identification. The benefits of NSR flow across to clients,
service providers and employees. The data is owned by the employee who
can authorise prospective employers to validate details and avoid duplication
of background checks. The industry benefits by having credible data on
current and prospective employees eliminate issues of potential frauds and
avoid repetitive background checks. Clients who deal with sensitive data are
assured of proper verification checks of employees who are dealing with this
data. NSR has enhanced the value proposition of Indian IT-BPO industry, as
one that has raised the bars on security standards in pursuit of excellence
and client satisfaction.
Sector Skills Council

4.5 Sector Skills Councils are tasked with developing an enabling
environment for skills development, including support for (i) clarification of
sector-specific competencies/skills (ii) capacity development for skills
development institutions/ such as curriculum and standards, faculty
development, and so forth; (iii) trainee placement mechanisms, and
(iv) monitoring and evaluation, supporting systematic collection and analysis
of data about skills development, including employer feedback regarding the
quality of trainees (v) quality assurance of independent third-party providers,
etc.
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Diversity and Inclusivity

Recognizing the need for shared Child Care facilities that are vital for the
professional growth and retention of employees, NASSCOM, as part of its
Diversity and Inclusion Initiative, had entered into an understanding with
ESPERANZA, to provide quality 24 hours child care facility for our members
at a concise fee, in the year 2009.
Membership
4.6 NASSCOM’s members are primarily companies run by Indian nationals
in the business of software development, software services, and IT-enabled/
BPO services. The consortium was set up to facilitate Indian business and
trade in software and services and to encourage advancement of research in
software technology by Indians. It is a non-profit organization, funded entirely
by its members. NASSCOM has played a role in ensuring quality of service,
and the enforcement of Intellectual Property Rights in the Indian Software
and BPO industry. As on June 2007, more than 1,110 information technology
companies in India were members of NASSCOM. Membership includes
domestic software/ ITES companies as well as multinationals operating in
India. The wide range of member companies gives NASSCOM the ability to
represent the interests of the Indian software industry with authority.
NASSCOM also has a Mentorship Programme for the midsized companies.
This is a six month engagement, which will help the organization to develop a
better assessment of their strengths and weaknesses.
(a) NASSCOM Membership provides a unique opportunity for an
organisation and its professionals to engage and drive thought
leadership in activities, forums and industry groups. NASSCOM
members address current challenges, build strategies for the future
and share best practices, with the overall objective of building a
growth-led competitive and sustainable industry.
(b) Insights on Industry Trends
 Access to NASSCOM research and intelligence that tracks
industry trends, growth opportunities and best practices
 Access to a repository of industry presentations, blogs,
discussions and articles
 An opportunity to engage with the NASSCOM research team and
share case studies or transformational stories.
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(c) Opportunities to enhance visibility

 Visibility through features and interviews on the NASSCOM
website, as well as the monthly newsletter, NASSCOM News line
 Speak, sponsor or participant opportunities at NASSCOM events
 Chance to contribute to blogs and newsletters as thought leaders
 Brand building through NASSCOM awards and recognitions
o Innovation
o Emerge 50
o Healthcare IT
o Social Innovation
o Excellence in IT Security
o Gender Diversity
o DSCI Security and Privacy
o Talent Innovation
o Nominate your customer in India for the IT User Awards
(d) Opportunity to network, build and share best practices
 Chance to leverage the Member database on NASSCOM’s
website to post a trade lead, or participate in one
 Chance to share or learn best practices through city level
networking sessions on human capital development, data
security, contract management, quality, diversity and more.
(e) Global Trade Development
 Members can participate in opportunities for global networking
and build business at NASSCOM's global events, and through
delegations and road shows
 Network with companies in other countries through their
delegations to India
 Receive information regularly about policy updates in different
countries.
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 Understand issues related to visas, immigration through

NASSCOM’s mobility best practices sessions
 Learn about trends and opportunities in different markets through
country reports
Software Technology Parks of India (STPI)

4.7 Software Technology Parks of India' (STPI) is a government agency in
India, established in 1991 under the Ministry of Communications and
Information Technology, that manages the Software Technology Park
scheme. It is an export oriented scheme for the development and export of
computer software, including export of professional services. The STP
Scheme provides various benefits to the registered units, which includes
100% foreign equity, tax incentives, duty free import, duty free indigenous
procurement, CST reimbursement, DTA entitlement, deemed export etc.
STPI has played a seminal role in India having earned a reputation as an
information technology superpower. STP units exported software and
information technology worth Rs. 2,15,264 crore in FY 2010-11. The state
with the largest export contribution was Karnataka (see Bangalore) followed
by Maharashtra, Tamil Nadu and Andhra Pradesh. STPI has a presence in
many of the major cities of India including the cities of Bangalore, Mysore,
Trivandrum, Bhilai, Bhubaneswar, Chennai, Coimbatore, Hyderabad,
Gurgaon, Pune, Guwahati, Noida, Mumbai, Kolkata, Kanpur, Lucknow,
Dehradun, Patna, Rourkela, Ranchi, Gandhinagar, Imphal, Shillong, Nashik,
etc.
Besides, regulating the STP scheme, STPI centres also provide variety of
services, which includes High Speed Data Communication, Incubation
facility, Consultancy, Network Monitoring, Data Centre, Data Hosting, etc.
STPI provides physical hosting for the National Internet Exchange of India.
The tax benefits under the Income Tax Act Section 10A applicable to STP
units has expired since March, 2011. While the Government has chosen not
to extend the Sec 10A benefits against the demand by the IT units, most of
the STP registered SME units shall be affected, who now will have to pay
Income Tax on profits earned from exports.
A new incentive scheme for IT & ITES companies is under discussion. It will
help dispersal of IT industry in smaller cities and also support STPI-
registered units which have not come under SEZs as well as other units
which are not covered under any incentive scheme. This incentive scheme is
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seen as an alternate scheme to compensate the STPI units, but the same
would be restricted to those units located in tier II and III cities. However,
proposal is still under consideration and no announcement has been made.
Functions of STPI
4.8 The following are functions of STPI:
(i) To establish Software Technology Parks/ Centres at various
locations in the country
(a) to perform all functions in the capacity of the successor to the
erstwhile Software Technology Park Complex which were taken over
by the STPI
(b) to establish and manage the infrastructural resources such as
integrated infrastructure including International communication / Data
centre/ Incubating facilities, etc. for 100% export oriented units and to
render similar services to the users other than exporters.
(c) to undertake other export promotional activities such as, technology
assessments, market analysis, market segmentation as also to
organize workshops/exhibitions/seminars/ conferences etc.
(d) to facilitate specialized training in the niche areas to meet the above
objectives.
(e) to work closely with respective State Government and act as an
interface between Industry and Government.
(f) to promote secondary and tertiary locations by establishing STPI
presence to promote STP/ EHTP Scheme, and promotional schemes
announced by Government.
(g) to promote entrepreneurship through incubation programmes / seed
funds / IP development and other awareness programmes.
(h) to assist State Governments in formulating IT policies and liaison for
promoting the IT industries in respective states to achieve an
exponential growth of exports.
(i) to promote quality and security standards in the IT industries.
(j) to work jointly with venture capitalists for providing financial assistance
to the IT industries.
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(k) to provide Project Management and Consultancy services both at

national and international level in the areas of expertise of STPI.
(ii) To perform financial management functions which comprise inter
alia the following activities
(a) to obtain or accept grants, subscription, donations, gifts, bequests
from Government, Corporations, Trusts, Organizations or any person
for fulfilling the objectives of the STPI.
(b) to maintain a fund to which shall be credited :
 all money provided by the Central Government, State
Governments, Corporations, Universities, etc.,
 all fees and other charges received by the STPI,
 all money received by the STPI by way of grants, gifts, donations,
benefactions, bequests or transfers; and
 all money received by the STPI in any other manner or from any
other source.
(c) to deposit all money credited to the Fund in Scheduled Banks/
Nationalized Banks or to invest in such a manner for the benefit of the
STPI as may be prescribed. At least 60% of the funds shall be placed
with the Public Sector Banks or in such a manner as may be
prescribed by the Government from time to time.
(d) to draw, make, accept, endorse and discount cheques, notes or other
negotiable instruments and for this purpose, to sign, execute and
deliver such assurance and deeds as may be necessary for the
purposes of the STPI.
(e) to pay out of the funds maintained by STPI or part thereof, the
expenses incurred by the STPI from time to time including all
expenses incidental to the formation and reorganization of the STPI
and management and administration of any of the foregoing activities
including all rents, rates, taxes, outgoings and the salaries of the
employees.
(f) to acquire, hold and dispose of the property in any manner whatsoever
for the purposes of the STPI, with the prior approval of Governing
Council as per the procedure laid down by Government.
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(iii) To do all such acts and things as may be required in order to

fulfil the objectives of the STPI
(a) Strive for the up gradation of the technology to meet customer
requirements in ever changing market
(b) Up gradation of the technical knowledge of STPI personnel through
seminars/ conferences/ trainings
(c) State-of-Art data communication services as per acceptable
international standards
(d) Comprehensive service including project approvals, import attestation,
software export certification etc., in a time bound manner
(e) Achieving customer satisfaction through the combined efforts of
planning and execution of the projects through dedicated workforce.
Ministry of Communications and Information

Technology, Government of India
4.9 The Ministry of Communication and Information Technology is an
Indian government ministry. It contains three departments:
 Department of Telecommunications
 Department of Electronics and Information Technology
 Department of Posts
The following cadre controlling authority of the Civil Services (including
Indian Telecommunication Service, Indian Postal Service, Telegraph Traffic
Service and Indian Posts and Telegraphs Accounts and Finance Service) are
under the administration and supervision of the Ministry of Communications
and Information Technology.
The objective of the Ministry with respect to the Information Technology is as
under:
 Promotion of Information Technology education and Information
Technology-based education
 Matters relating to Cyber Laws, administration of the Information
Technology Act, 2000 (21 of 2000) and other IT-related laws
 Matters relating to promotion and manufacturing of semiconductor
devices in the country excluding all matters relating to Semiconductor
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Complex Limited Mohali; the Semiconductor Integrated Circuits Layout

Design Act, 2000 (37 of 2000)
 Interaction in IT-related matters with international agencies and
bodies, e. g., Internet for Business Limited, Institute for Education in
Information Society and International Code Council-on line
 Initiative on bridging the Digital Divide: matters relating to Media Lab
Asia
 Promotion of standardization, testing and quality in IT and
standardization of procedures for IT applications and tasks
 Electronics Export and Computer Software Promotion Council
 National Informatics Centre
 Initiatives for development of hardware and software industries
including knowledge-based enterprises, measures for promoting IT
exports and competitiveness of the industry
 Efforts for increasing the acceptance of FOSS at a national level
(NRCFOSS)
 Centre for Development of Advanced Computing (C-DAC)
Key Functions of the Ministry are as under:
 Policy matters relating to Information Technology; Electronics; and
Internet (all matters other than licensing of Internet Service Provider).
 Promotion of Internet, IT and IT enabled services.
 Assistance to other departments in the promotion of e–Governance.
 Promotion of Information Technology education and Information
Technology–based education.
 Matters relating to Cyber Laws, administration of the Information
Technology Act, 2000 (21 of 2000) and other IT related laws.
 Matters relating to promotion and manufacturing of Semiconductor
Devices in the country excluding all matters relating to Semiconductor
Complex Limited (SCL),Mohali; The Semiconductor Integrated Circuits
layout Design Act,2000 (37 of 2000).
 Interaction in IT related matters with international agencies and bodies
e.g., Internet for Business Limited (IFB), Institute for Education in
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Information Society (IBI) and International Code Council – on line

(ICC).
 Initiative on bridging the Digital Divide: Matters relating to Media Lab
Asia.
 Promotion of Standardization, Testing and Quality in IT and
standardization of procedure for IT application and Tasks.
 Electronics Export and Computer Software Promotion Council (ESC).
 National Informatics Centre (NIC).
 Initiatives for development of Hardware/ Software industry including
knowledge–based enterprises, measures for promoting IT exports and
competitiveness of the industry.
 All matters relating to personnel under the control of the Department.
Indian Copyright Act, 1957
4.10 The Copyright Act, 1957 (Act No. 14 of 1957) governs the laws &
applicable rules related to the subject of copyrights in India. Copyright Law in
the country was governed by the Copyright Act of 1914, was essentially the
extension of the British Copyright Act, 1911 to India, and borrowed
extensively from the new Copyright Act of the United Kingdom of 1956. All
copyright related laws are governed by the Copyright Act, 1957.
The Copyright Act today is compliant with most international conventions and
treaties in the field of copyrights. India is a member of the Berne Convention
of 1886 (as modified at Paris in 1971), the Universal Copyright Convention of
1951 and the Agreement on Trade Related Aspects of Intellectual Property
Rights (TRIPS) Agreement of 1995.
Though India is not a member of the Rome Convention of 1961, WIPO
Copyrights Treaty (WCT) and the WIPO Performances and Phonograms
Treaty (WPPT), the Copyright Act is compliant with it.
Copyright Board
4.11 The Copyright Board, a quasi-judicial body, was constituted in
September 1958. The jurisdiction of the Copyright Board extends to the
whole of India. The Board is entrusted with the task of adjudication of
disputes pertaining to copyright registration, assignment of copyright, grant of
licences in respect of works withheld from public, unpublished Indian works,
production and publication of translations and works for certain specified
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purposes. It also hears cases in other miscellaneous matters instituted

before it under the Copyright Act, 1957. The meetings of the Board are held
in five different zones of the country. This facilitates administration of justice
to authors, creators and owners of intellectual property including IP
attorney’s near their place of location or occupation.
A Gist of Important Regulations that may be

Applicable to Software Industry
4.12 The important regulations that may be applicable to Software Industry
are as follows:
 The Companies Act, 2013
 Partnership Act, 1932 / Limited Liability Partnership Act, 2008
 Shops and Establishments Act of respective states.
 The Sale of Goods Act, 1930
 The Negotiable Instruments Act, 1881
 The Income tax Act, 1961
 Service Tax under the Finance Act, 1994
 The Indian Contract Act, 1872
 Sales tax Act of respective states
 Foreign Exchange Management Act 1999
 Information Technology Act 2000
 State Specific Shops and Establishment enactments.
 Central Excise and Customs Act
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Chapter 5
Need for Internal Audit
5.1 Effective Internal Audit provides a tool to ease out all complexities,
ensures that systems and processes are adequate to support the growth and
are adapted to the changes in various regulations, thereby ensuring
sustained growth and development.
Preface to the Standards on Internal Audit, issued by the Institute of
Chartered Accountants of India defines the term Internal Audit as:
“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 strategic risk
management and internal control system.”
The Definition highlights the following facets of an Internal Audit:
 Internal auditor should be independent of the activities they audit. The
internal audit function is in general considered independent when it
can carry out its work freely and objectively. Independence permits
internal auditors to render impartial and unbiased judgment essential
to the proper conduct of audits.
 Internal audit is a management function, thus, it has the high-level
objective of serving management's needs through constructive
recommendations in areas such as, internal control, risk, utilization of
resources, compliance with laws, management information system,
etc.
 Internal audit's role should be a dynamic one, continually changing to
meet the needs of the organization. There is often a need to change
audit plans as circumstances warrant. These changes may include
coverage of new areas, assistance to management in solving
problems, and the development of new internal audit techniques.
 An effective internal audit function plays a key role in assisting the
board to discharge its governance responsibilities. Thus, it contributes
in accomplishment of objectives and goals of the organization through
ethical and effective governance.
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 Risk management enables management to effectively deal with risk,

associated uncertainty and enhancing the capacity to build value to
the entity or enterprise and its stakeholders. Internal auditor plays an
important role in providing assurance to management on the
effectiveness of risk management.
 Internal audit function constitutes a separate component of internal
control with the objective of determining whether other internal
controls are well designed and properly operated. Thus, the
examination and appraisal of controls are normally components, either
directly or indirectly, of every type of internal auditing assignment.
Factors Contributing To Evolution Of Internal

Audit
Evolution of Internal Audit

• Size & Complexity of
business
• Compliance requirements
• Risk Management
• Tab on internal controls
• Investor protection
guidelines
• Unconventional Business
models
• Competition rivalry
5.2 General Guidelines on Internal Audit issued by the Institute of

Chartered Accountants of India describes the factors contributing to the
evolution of Internal Audit in India. A few such factors are:-
(i) Increased size and complexity of businesses
Increased size and business spread dilutes direct management oversight on
various functions, necessitating the need for a full time, independent and
dedicated team to review and appraise operations. Complexity of operations
results in requirement of specialists in the field to guide the management.
(ii) Enhanced compliance requirements
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Increase in the geographical spread of the businesses has also led to

crossing of political frontiers by businesses in a bid to tap global capital for
improving the technology. This has thrown up compliance with the laws of
the home country as well as the laws of that land as a critical factor for
existence of businesses abroad.
(iii) Focus on risk management and internal controls to manage them
Internal auditors can carry out their job in a more focused manner by
directing their efforts in the areas where there is a greater risk, thereby
enhancing the overall efficiency of the process and adding greater value with
the same set of resources.
(iv) Stringent norms mandated by regulators to protect investors
The regulators are coming up in a big way to protect the interests of the
investors. The focus of the latest regulations being ethical conduct of
business enhanced corporate governance and reporting requirements to
various boards and committees.
(v) Unconventional business models
Businesses today use unconventional models and practices, for example,
outsourcing of non-core areas, such as collection of waste generated to
another organization rather than dealing with on its own.
(vi) An increasingly competitive environment
Whereas deregulation and globalization have melted the political as well as
other barriers to entry in the markets for goods and services, free flow of
capital, technology and know-how among the countries as well as strong
infrastructure has helped in better access to the existing best practices
globally, and technology and equipment has helped to carry on the business
smoothly. This in turn, has lured more and more players in the existing
markets, thereby, stiffening the competition.
Standards on Internal Audit

5.3 The Institute of Chartered Accountants of India (ICAI) has, till date,
issued eighteen Standards on Internal Audit (SIAs) and the same are as
follows:
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SIA 3 Documentation
SIA 4 Reporting
SIA 5 Sampling
These Standards are recommendatory in nature and codify the best practices
in the field of internal audit. “Framework for Standards on Internal Audit”
promotes professionalism in the internal audit activity and comprises of four
components, viz., the Code of Conduct, the Competence Framework, the
Body of Standards and the Technical Guide.
Standards on Internal Audit (SIAs) are important for carrying out internal
audit of Software Industry. The internal auditor and the audit team are
expected to be updated on the latest pronouncements issued by the Institute
in order to conduct an effective internal audit.
5.4 As multinational enterprises have recognized an increasing array of
risks facing the organization, it is no surprise that the demand for risk
management professionals has risen dramatically. Any disciplined approach
to growth and value creation assumes that the organization is managing all
manner of significant and likely risks effectively. Risk can be considered both
at the macro or portfolio level (enterprise-wide risk management) as well as
the micro or departmental level. Risk management is frequently an area in
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which internal audit can contribute greatly by furnishing analyses and

providing wise counsel to top management and the board of directors.
The internal audit function also performs micro level risk assessment for its
own purposes to identify those areas which demand the greatest efforts on
the part of the internal audit function and for achieving appropriate audit
coverage of the audit universe over defined periods of time. Internal auditors
can play a significant “partnering” role with management in establishing and
monitoring business processes for the assessment, measurement, and
reporting of risks in general and in implementing enterprise risk management
initiatives.
Modern approaches to risk-based internal auditing allow for the assessment
of risks and linking them to business objectives systematically. Indeed, the
internal audit function can facilitate the processes by which business units
“can develop high quality risk assessments,” and this can in turn be very
useful to the internal audit function in planning its own work, primarily by
enhancing the quality of decision-relevant information and minimizing
duplication of effort.
Importance of Internal Audit
5.5 The following parts highlight importance of internal audit:
 Understanding and assessing the risks and evaluate the adequacies of
the prevalent internal controls.
 Identifying areas for systems improvement (manual and by automation
support) and strengthening controls.
 Ensuring optimum utilization of the resources of the entity, for
example, human resources, physical resources, etc.
 Ensuring proper and timely identification of liabilities, including
contingent liabilities of the entity and taking a merit based view on
contingent liabilities.
 Ensuring compliance with internal and external guidelines and policies
of the entity as well as the applicable statutory and regulatory
requirements.
 Safeguarding the assets of the entity and adequacy of title to the
assets.
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 Reviewing and ensuring adequacy of information systems security and

control.
 Reviewing and ensuring adequacy, relevance, reliability and timeliness
of management information system flowing from common data base.
Importance of Audit Documentation

5.6 “Internal audit documentation” means the record of audit procedures
performed, including audit planning as discussed in the Standard on Internal
Audit (SIA) 1, Planning an Internal Audit, relevant audit evidence obtained,
and conclusions the auditor reached (terms such as “working papers” or
“work papers” are also sometimes used). Thus, documentation refers to the
working papers prepared or obtained by the internal auditor and retained by
him in connection with the performance of his internal audit.
All the significant matters which require exercise of judgment, together with
the internal auditor’s conclusion thereon should be included in the internal
audit documentation. However, the documentation prepared by the internal
auditor should be such that enables an experienced internal auditor (or a
reviewer), having no previous connection with the internal audit to
understand:
(a) the nature, timing and extent of the audit procedures performed to
comply with SIAs and applicable legal and regulatory requirements;
(b) the results of the audit procedures and the audit evidence obtained;
(c) significant matters arising during the audit and the conclusions
reached thereon; and
(d) terms and conditions of an internal audit engagement/ requirements of
the internal audit charter, scope of work, reporting requirements, any
other special conditions, affecting the internal audit.
Use of Analytical Procedures
5.7 Analytical procedures” means the analysis of significant ratios and
trends, including the resulting investigation of fluctuations and relationships
in both financial and non-financial data that are inconsistent with other
relevant information or which deviate significantly from predicted amounts.
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Analytical procedures are used for the following purposes:

 to assist the internal auditor as risk assessment procedures to obtain
initial understanding of the entity and its environment and thereafter in
planning the nature, timing and extent of other internal audit
procedures;
 as substantive procedures when their use can be more effective or
efficient than tests of details in reducing detection risk for specific
financial statement assertions;
 as an overall review of the systems and processes in the final review
stage of the internal audit; and
 to evaluate the efficiency of various business/ management systems.
When analytical procedures identify significant fluctuations or relationships
that are inconsistent with other relevant information or that deviate from
predicted amounts, the internal auditor should investigate and obtain
adequate explanations and appropriate corroborative evidence. The
examination and evaluation should include inquiries of management and the
application of other auditing procedures until the internal auditor is satisfied
that the results or relationships are sufficiently explained.
Unexplained results or relationships may be indicative of a significant
condition such as a potential error, irregularity, or illegal act. Results or
relationships that are not sufficiently explained should be communicated to
the appropriate levels of management. The internal auditor may recommend
appropriate courses of action, depending on the circumstances.
Terms of Internal Audit Engagement

5.8 The auditee is expected to formally communicate the appointment to
the internal auditor. Upon receiving the communication, the internal auditor
should send an engagement letter, preferable before the commencement of
engagement so as to avoid any misunderstanding. The internal auditor and
the auditee should agree on the terms of engagement before
commencement. Standard on Internal Audit (SIA) 8, “Terms of Internal Audit
Engagement” establishes standards and provides guidance in respect of
terms of engagement of the internal audit activity whether carried out in
house or by an external agency.
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The terms of the engagement should contain a statement in respect of the

scope of the internal audit engagement. It should clearly delineate the broad
areas of function of internal audit like evaluating internal controls, review of
business process cycle controls, risk management and governance.
The engagement letter should, generally, include reference to the following:
 Objective of internal audit;
 Management’s responsibilities;
 Scope of internal audit (including reference to the applicable
legislation, regulation and various pronouncement of ICAI);
with the internal audit;
 Expectation to receive management’s written confirmation in respect to
representation made in connection with the audit;
 Basis on which fees shall be computed and the billing arrangements
thereof;
 Industry specific area;
 References received from the parent company, if any; and
 Undertakings and locations to be covered.
Internal auditor have a specific responsibility arising out of a law or a
regulation or a professional standard applicable to the internal auditor, to
communicate directly, the above mentioned issues to an appropriate
authority or someone within the entity or a regulator, the terms of the
engagement should contain a clear mention of such responsibility.
Internal Audit Evidence
5.9 Paragraph 14 of the SIA 2, “Basic Principles Governing Internal Audit”,
states:
"The internal auditor should, based on his professional judgment, obtain
sufficient appropriate evidence to enable him to draw reasonable conclusions
there from on which to base his opinion or findings. Factors affecting the
professional judgment include the activity under audit, possible errors and
their materiality and the risk of occurrence of such errors.”
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The internal auditor obtains evidence by performing one or more of the

following procedures:
 Inspection: Inspection consists of examining records, documents, or
tangible assets. Inspection of records and documents provides
evidence of varying degrees of reliability, depending on their nature
and source and the effectiveness of internal controls over their
processing.
 Observation: Observation consists of witnessing a process or
procedure being performed by others. For example, the internal
auditor may observe the counting of inventories by client personnel.
Enquiry
Analytic
Inspectio Observatio & Computa
al
n n confirma tion
Review
tion
 Inquiry and Confirmation: Inquiry consists of seeking appropriate

information from knowledgeable persons inside or outside the entity.
Inquiries may range from formal written inquiries addressed to third
parties to informal oral inquiries addressed to persons inside the
entity. Responses to inquiries may provide the internal auditor with
information which he did not previously possess or may provide him
with corroborative evidence.
 Computation: Computation consists of checking the arithmetical
accuracy of source documents and accounting records or performing
independent calculations.
 Analytical Review: Analytical review consists of studying significant
ratios and trends and investigating unusual fluctuations and items.
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Internal Control Evaluation

5.10 Standard on Internal Audit (SIA) 12, “Internal Control Evaluation”
states that “Internal controls are a system consisting of specific policies and
procedures designed to provide management with reasonable assurance that
the goals and objectives it believes important to the entity will be met”.
and error, the accuracy and completeness of the accounting records, and the
timely preparation of reliable financial information. The internal audit function
constitutes a separate component of internal control with the objective of
determining whether other internal controls are well designed and properly
operated.
The broad areas of review by the internal auditor in evaluating the internal
control system include:
 Mission, vision, ethical and organizational value-system of the entity
 Personnel allocation, appraisal system, and development policies
 Accounting and financial reporting policies and compliance with
applicable legal and regulatory standards
 Objective of measurement and key performance indicators
 Documentation standards
 Risk management structure
 Operational framework
 Processes and procedures followed
 Degree of management supervision
 Information systems, communication channels
 Business Continuity and Disaster Recovery Procedures
The internal auditor should obtain an understanding of the significant
processes and internal control systems sufficient to plan the internal audit
engagement and develop an effective audit approach. The internal auditor
should use professional judgment to assess and evaluate the maturity of the
entity’s internal control.
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The auditor should obtain an understanding of the control environment

sufficient to assess management's attitudes, awareness and actions
regarding internal controls and their importance in the entity. The internal
auditor should examine the continued effectiveness of the internal control
system through evaluation and make recommendations, if any, for improving
that effectiveness.
Internal Audit in an Information Technology Environment
5.11 The overall objective and scope of internal audit does not change in a
CIS environment. However, the use of computer changes the processing,
storage, retrieval and communication of financial information and may affect
the accounting and internal control systems employed by the entity.
Moreover, the risks involved in an audit may too undergo a change. The
internal auditor should have sufficient knowledge of the CIS environment to
plan, direct, supervise, control and review the work performed.
The internal auditor should consider the effect of an IT Environment on the
internal audit engagement inter alia:
(i) Consider the extent to which the IT environment is used to record,
compile, process and analyse information, and
(ii) The system of internal control in existence in the entity with regard to:
 The flow of authorised, correct and complete data to the
processing centre;
 The processing, analysis and reporting tasks undertaken in the
installation;
 The impact of computer-based accounting system on the audit
trail that could otherwise be expected to exist in an entirely
manual system.
5.12 The internal auditor should review the robustness of the IT
environment and consider any weakness or deficiency in the design and
operation of any IT control within the entity, by reviewing:
 System Audit reports of the entity conducted by independent
Information System auditors;
 Reports of system breaches, unsuccessful login attempts, passwords
compromised and other exception reports;
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 Reports of network failures, virus attacks and threats to perimeter

security, if any;
 General controls like segregation of duties, physical access records,
logical access controls;
 Application controls like input, output, processing and run-to-run
controls;
 Excerpts from the IT policy of the entity relating to business continuity
planning, crisis management and disaster recovery procedures.
Knowledge of Business
5.13 Prior to accepting an engagement, the internal auditor should obtain a
preliminary knowledge of the industry and of the nature of ownership,
management, regulatory environment and operations of the entity subjected
to internal audit, and should consider whether a level of knowledge of the
entity’s business adequate to perform the internal audit can be obtained.
In case of continuing engagements, the internal auditor should update and
re-evaluate information gathered previously, including information in the prior
year's working papers. The internal auditor should also perform procedures
designed to identify significant changes that have taken place in the
operations, control environment, technology and strategic processes since
the last internal audit.
Internal auditor should obtain sufficient, appropriate information about the
entity, specifically the following aspects:
(i) Relevant industry, regulatory, and other external factors including the
applicable financial reporting framework.
(ii) The nature of the entity to enable the internal auditor to understand the
classes of transactions, account balances, and disclosures to be
expected in the financial statements.
(iii) Business operations.
(iv) Investments and investment activities
(v) Financing and financing activities.
(vi) Financial reporting.
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(vii) The entity’s selection and application of accounting policies, including

the reasons for changes thereto.
(viii) The entity’s objectives and strategies, and those related business risks
that may result in risks of material misstatement.
(ix) Business risk may arise from change or complexity. A failure to
recognise the need for change may also give rise to business risk.
Business risk may arise, for example, from:
(a) The development of new products or services that may fail;
(b) A market which, even if successfully developed, is inadequate
to support a product or service; or
(c) Flaws in a product or service that may result in liabilities and
reputational risk.
(x) An understanding of the business risks facing the entity increases the
likelihood of identifying risk of material misstatement in the information
subject to internal audit.
5.14 Compliance means ensuring conformity and adherence to Acts, Rules,
Laws, Regulation, Directives and Circulars.
Standard on Internal Audit (SIA) 17 “Consideration of Laws and Regulations
in an Internal Audit’’ issued by the Institute of Chartered Accountants of India
requires that when planning and performing audit procedures and in
evaluating and reporting the results thereof, the internal auditor should
recognize that non compliance by the entity with laws and regulation may
materially affect the financial statements. The requirements in this SIA are
designed to assist the internal auditor in identifying the significant impact of
non-compliance with laws and regulations on the functioning of the entity.
However, in view of the inherent limitations on the role of the internal auditor,
he is not responsible for preventing non-compliance and cannot be expected
to detect non-compliance with all laws and regulations.
Non-compliance refers to Acts of omission or commission by the entity, either
intentional or unintentional, which are contrary to the prevailing laws or
regulations. Such acts include transactions entered into by or in the name of
the entity, or on its behalf, by those charged with governance, management
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or employees. Compliance does not include personal misconduct (unrelated

to the business activities of the entity) by those charged with governance,
management or employees of the entity.
Non-compliance with laws and regulations may result in fines, litigation or
other consequences for the entity that may have a material effect on not only
the reporting framework of the financial statements but also on the
functioning of the entity and which in extreme cases may impair their ability
to continue as a going concern itself.
Compliance with laws and regulations is an inherent part of the functioning of
an entity. Since the role of an internal auditor is to carry out a continuous and
critical appraisal of the functioning of an entity and suggest improvements
thereto, the identification of non-compliance with laws and regulations is also
an inherent part of his responsibilities. It will be pertinent to adhere that the
scope of an internal audit as described in paragraph 9 of the Standard on
Internal Audit (SIA) 1, “Planning an Internal Audit”, is also affected by the
statutory or regulatory framework in which the entity operates.
The internal auditor should perform procedures to identify instances of non-
compliance with those laws and regulations where non-compliance should be
considered while preparing financial statements, specifically:


authorities.
 The internal auditor should also perform substantive tests of details of

classes of transactions, account, balances or disclosures.
The significance of compliance is as follows:

(i) Benefits to the Industry are:
 Helps in compliance with legal terms and covenants and thereby
reduces penalties and charges.
 Increased internal control.
 Reduction of internal frauds and losses.
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 More time available for other core activities.

 Increases efficiency in operations.
 Customer satisfaction.
(ii) Benefits to the stakeholder are:
 Better investor confidence
 Uniform practices
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Chapter 6
Major Areas of Internal Audit
Significance
Business Areas
Business Vision and Strategy
6.1 Most of the IT companies will have a vision and a strategy for their
business. A description of what an organization would like to achieve or
accomplish in the mid-term or long-term future is known as a vision
statement of a company. It is intended to serve as a clear guide for choosing
current and future courses of action
Strategy can be defined as a combination of the ends (goals) for which the
company is striving and the means by which it is seeking to get there. The
most important part of implementing the strategy is ensuring the company is
going in the right direction which is towards its vision.
A written declaration of an organization's core purpose and focus that
normally remains unchanged over time is called as a mission statement. It
serves as filters to separate what is important from what is not and clearly
state which markets will be served and how, and communicate a sense of
intended direction to the entire organization.
Mission Defines what they have to do, Vision defines what they want to do.
The Internal auditor has to first read the vision and mission statement and
strategy drafted to achieve the same, in order to get a fair idea of the
business of the company.
Market Differentiators of the Company
6.2 Market differentiators or differentiation is the process of distinguishing
a product or service from others, to make it more attractive to a particular
target market. This involves differentiating it from competitors' products as
well as a firm's own products. This is done in order to demonstrate the
unique aspects of a firm's product and create a sense of value. The objective
of differentiation is to develop a position that potential customers see as
unique.
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Market capitalization
6.3 Market capitalization (Market Cap) represents the aggregate value of a
company or stock. Market capitalization is calculated by multiplying a
company's shares outstanding by the current market price of one share. The
investment community uses this figure to determine, a company's size, as
opposed to sales or total asset figures. For example if a company has 10
Lakh shares outstanding, each with a market value of Rs.100, the company's
market capitalization is Rs. 1000 Lakhs (10,00,000 x Rs.100 per share). This
can be done in case of listed companies. Observing trends of Market Cap
helps to understand the perceived value of the company both in terms of
financial as well business fundamentals.
Industry Vs. Company growth
6.4 The growth of a company means the rate at which the company is
growing. Industry growth rate means the rate at which the industry as a
whole is growing. The growth rate of both the company and the industry need
not be the same. If the industry growth rate is abnormally higher than that of
the company growth rate, the auditor has to ascertain as to why the growth
rate of the company is low in spite of having a high industry growth rate.
Financial Planning, Budgeting and Forecasting
Robustness
6.5 A financial plan is an estimate of the total capital requirements of the
company. It selects the most economical sources of finance. It also tells us
how to use this finance profitably. Financial plan gives a total picture of the
future financial activities of the company.
Financial budgeting is used to project future income and expenses. It is done
to estimate whether the person/ company can continue to operate with its
projected income and expenses.
Financial forecast is a prediction concerning future business conditions that
are likely to affect a company. It is important to understand the rigor of
financial planning, budgeting and forecasting practices of the company. This
demonstrates the organization’s ability to predict and influence their business
levers to achieve the desired results.
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Business Risks
Strategic
Risks
Technolog Economic
y Risks risks
Brand Operationa
Risks l Risks
Business
Risks
Human
Complianc
Capital
e Risk
Risks
Political Disaster
Risks Risks
6.6 Business risks can be uncertainty in profits or danger of loss and the
events that could pose a risk due to some unforeseen events in future.
Business risks may take place in different forms depending upon the nature
and size of the business. Business risks can be categorized as, internal risks
which arise from the events taking place within the organization and external
risks which arise from the events taking place outside the organization.
Business risks can be further classified into following
(i) Strategic Risk
These are risks associated with the operations of that particular industry. It
can be caused by changes in supply and demand, competitive structures,
and introduction of new technologies, mergers and acquisitions. Strategic
risks are also determined by board decisions about the objectives and
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direction of the organisation. Sometimes strategic risks are often risks that
organisations may have to take in order to expand, and even to continue in
the long term. An organisation may accept other strategic risks in the short
term, but take action to reduce or eliminate those risks over a longer
timeframe.
(ii) Economic/ Financial Risk
These are risks associated with the financial structure and transactions of the
particular industry. Also the possibility that shareholders will lose money
when they invest in a company that has debt, if the company's cash flow
proves inadequate to meet its financial obligations. When a company uses
debt financing, its creditors will be repaid before its shareholders if the
company becomes insolvent.
(iii) Operational Risk
These are risks associated with the operational and administrative
procedures of the particular industry. Few of the examples of such risks are,
misappropriation of assets, theft of information, fictitious employees,
misrepresentation of cash balances, third-party theft and forgery, data entry
errors, accounting errors, failed mandatory reporting, negligent loss of client
assets, etc.
(iv) Compliance Risk (Legal Risk)
These risks are associated with the need to comply with the rules and
regulations of the government. There are various Acts which are applicable
to the software companies. The company has to comply with a variety of
compliances as per various Acts. Even if the company does not comply with
any one of the statutory compliances the respective government department
will issue notices and also might levy fine and penalty. Hence the company
has to employ well trained staff to follow all the compliance requirements.
(v) Disaster Risk
There would be different risks like, natural disaster (floods) and others
depend upon the nature and scale of the industry. It has been dealt with in
the Business continuity plan mentioned below.
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(vi) Political Risk

It refers to the complications businesses may face as a result of what are
commonly referred to as political decisions that alters the expected outcome
and value of a given economic action. For example, political decisions by
governmental leaders about taxes, currency valuation, trade tariffs or
barriers, investment, wage levels, labour laws, environmental regulations and
development priorities, can affect the business conditions and profitability.
Similarly, non-economic factors like, political disruptions such as, terrorism,
riots, coups, civil wars, international wars, and even political elections that
may change the ruling government, can dramatically affect businesses’
ability to operate. Political risk is extremely difficult to quantify yet the
companies and investors must examine and understand the potential for
political risks. Companies should have a comprehensive framework for
identifying and assessing all the risks they face, and assessing the impact of
risk. Such a framework enables development of mitigation strategies that
support company operations through crisis and change. The formal process
of gathering and assessing data on political developments should be
overseen by a risk manager and disseminated at the corporate, operating
unit, and regional level. Companies must monitor political risk on an ongoing
basis and use this information proactively to inform investment and operating
decisions. At the same time companies have to capitalize on opportunities
resulting from political change.
(vii) Human Capital Risk
It refers to the gap between the goals of the organization and the skills of the
workforce. Indian IT sector has become an HR manager’s nightmare. Their
biggest challenge is marinating good people in organisation and keeping the
attrition rate in control. The demand for good resources is more than the
present supply and they are paid premium salaries. The rising cost of people
is reducing the profit margins of the companies though the profit has been
increasing by leaps and bounds. With many global companies opening up
captives in India to reduce their cost of operations the salaries have shot
northward and this has augmented the trouble of Indian IT players. The
supply and demand of quality engineers who are capable of working in the IT
field is having a huge gap. Companies have started looking for additional
options of hiring science graduates and providing them adequate training to
enable them to work in IT sector, but still the quality of talent is declining
which in turn means lack of quality in work. Companies are struggling to hire
new resources and salary war is becoming worse every day.
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(viii) Brand/ Reputation Risk

Every company, every organization develops a reputation and, while it may
take many years to form and is usually quite durable, a company’s reputation
can be undone in fairly short period. Reputation is more than just a
company’s good name, it’s a composite of those factors affecting how others,
particularly those outside of the organization, view the company.
Safeguarding a company’s reputation has become a key factor in every
company’s long-term strategic planning. To safeguard the reputation of a
company regular investment in the structures, activities, staff, is essential.
The company must take steps to measure its reputation in the market by
opting for brand valuation. The checklist for brand valuation is given in the
relevant section below.
(ix) Technology Risk
The technology risk faced by the companies would be due to loss of value
due to the ever changing technology and the lack of ability of the company to
cope up with such change. The company has to be constantly updating itself
to the latest technology else it will be wiped out by the competition.
6.7 In order to mitigate the above mentioned risks it is necessary for the
company to have a proper control of the operations of the business. This can
be achieved by having an effective internal audit. The following are the
checklists for few of the major areas of internal audit which are illustrative in
nature.
Contracts
6.8 Contracts play a vital role in the IT industry. The Revenue model shall
be based on the Contracts entered into and the adherence to the contract is
the basic requirement of the business. Written contracts provide businesses
with a legal document stating the expectations of both parties and how
negative situations will be resolved. Contracts also are legally enforceable in
a court of law. Contracts often represent a tool that companies use to
safeguard their resources. The model checklist is as follows:
Sl.No Particulars Remarks

(i) Review terms and conditions of contract
(ii) Income Recognition and the Compensation Clause
needs to be clearly examined
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(iii) Analyse the impact on the entity on non compliance

of terms mentioned there in
(iv) Verify non competence agreement, if any in
favour/against the company and its compliance.
(v) Verify the termination clause, warranties or
representations due on company and dispute
resolution terms involved.
(vi) Verify how contract compliance is monitored and
reviewed periodically.
(vii) Verify if the terms of the contract are prejudicial to
the interests of the company.
(viii) Verify if the company has accepted any contracts
the business objectives of which are not in the MOA
& AOA of the company.
Statement of Work(SOW)
(i) Verify that the SOW has defined the scope of work
and the deliverables.
(ii) Verify if the SOW has defined the place where the
service has to be provided.
(iii) Verify if the payments to be received are up front or
phased.
(iv) If the project requires any special hardware or
software or specialized workforce requirements
verify as to who will provide the same i.e. the
company or the client.
(v) Verify if there are any limitations on the number of
hours that can be billed per week or month.
(vi) Verify if there are any criteria for the buyer or
receiver of goods to determine if the product or
service is acceptable.
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Fixed Assets
6.9 The entity requires having sufficient control in such cases to ensure
that the assets put into proper usage and periodic physical verification might
be of paramount importance. There could be instances wherein the entity
might lease. The internal auditor might be required to verify whether there is
proper control over such leased assets.
If the internal auditor is required to perform fixed asset verification
procedures too as part of the scope of his work, the auditor can refer to
‘Guidance Note on Audit of Fixed Assets’ issued by the ICAI.
The model checklist for verification of fixed assets is as follows:
Sl.No Particulars Remarks
(i) Proper authorisation for acquisition/ disposal/

restoration of Fixed Assets.
(ii) Physical verification of assets/ update of fixed

assets registers at regular intervals.
(iii) Compliance with Accounting Standard 10"

Accounting for Fixed Assets" and Compliance with
Accounting Standard 19 " Leases" in relation to
leased assets, issued by the ICAI.
(iv) Revaluation of assets value and useful life at

regular intervals by independent professional
valuers.
(v) Insurance coverage for assets of the entity.
(vi) Proper recording/ authorisation for inter/ intra entity

transfer of fixed assets.
(vii) Segregation of responsibilities among employees

handling custodian and verification activities.
(viii) Verify calculation of depreciation, amortisation, and

capitalisation of expenditure incurred.
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Government Grants
6.10 Government grants are assistance given by government in cash or
kind to an enterprise for past or future compliance with certain conditions.
They may be either accounted under the ‘capital approach’, under which a
grant is treated as part of shareholders’ funds, or the ‘income approach’,
under which a grant is taken as income over one or more periods. The
treatment depends upon the type and reason for the grant.
The model checklist for verification of government grants is as follows:
Sl no Particulars Remarks
(i) Verify the grant letter issued by the government

and study the conditions specified therein.
(ii) Verify whether the grant is in monetary or non-

monetary.
(iii) If the grant is monetary verify the accounting

method followed to record the grant.
(iv) Verify if the entity utilising the monetary grant for

the purpose stated is by the government.
(v) If non-monetary assets are granted verify it is

recorded at acquisition cost or nominal cost.
(vi) If the grant is relating to a specific asset verify if

the grant has been deducted from the gross value
of the asset.
(vii) Verify if the grant is refundable and if it is, then

verify if it is accounted as an extraordinary item
(viii) If grants are received as compensation for

expenses or losses incurred in a previous
accounting period, verify if it has been accounted
as per AS 5.
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Loans and Borrowings

6.11 In an industry such as, the IT industry there tends to be borrowing of
some sort. It may be short term or long term; it may be taken from banks or
financial institutions, from members or directors, etc.
An important feature of such liabilities which has a significant effect on the
related audit procedures is that these are represented only by documentary
evidence which originates mostly from third parties in their dealings with the
entity.
An illustrative list of procedures that an internal auditor might perform would
include:
(i) Verify the credit/ borrowing limits of the board

of directors.
(ii) Verify if the terms of the borrowing is

prejudiced against the interest of the entity.
(iii) Verify whether the long term loans are being

applied for long term purposes and not for
working capital purposes.
(iv) Verify if all the statutory compliances have

been met by the entity w.r.t borrowings.
(v) Verify if interest is paid regularly or a provision

for the same has been created.
(vi) Verify if the repayment is as per the repayment

schedule or is there any variations.
(vii) Verify the closing balance with the confirmation

letter given by the entity who has provided the
loan.
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Foreign Currency Transactions

6.12 The IT Industry has gone beyond the geographical boundaries. As a
result of globalisation, a lot of foreign companies have set up their branches
all over India. Hence, there will be inflow of foreign currency by way of
capital, repatriation, export receivables, etc. The model checklist on foreign
currency transactions is as follows:
(i) Check FCNR and other non resident accounts
(ii) Check whether the inward/ outward remittances

have been duly accounted
(iii) Ensure compliance with RBI/ FEMA compliance

in relation to cross border transactions
(iv) Review minutes of board meetings pertaining to

foreign investments, if any
(v) Compliance with Accounting Standard 11

"Effects of Changes in Foreign Exchange
Rates".
(vi) Compliance with Income tax/ Service tax

regulations on payments made to non-residents
(vii) Compliance with DTAA/ foreign tax reliefs on

taxation of foreign income earned by resident
production houses.
(viii) Tax issues on Satellite/ Optic fibre

Transmission companies/ Foreign companies.
Related Party Transactions

6.13 As per Accounting Standard (AS) 18, “Related Party Disclosures”
issued by the Institute of Chartered Accountants of India, related parties are
considered to be related if at any time during the reporting period one party
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has the ability to control the other party or exercise significant influence over
the other party in making financial and/ or operating decisions.
As Section 2(17) of Companies Act, 2013 “relative”, with reference to any
person, means any one who is related to another, if
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be
prescribed.
Section 2(41) of Income Tax Act, 1961, lays down that ‘Relative’ in relation to
an individual, means the husband, wife, brother or sister or any lineal
descendant or descendant of that individual. Further, a person shall be
deemed to have a substantial interest in a business or profession if:
(i) In case of company, the person, at any time during the year, carries
not less than 20% of the voting power.
(ii) In any other case, the person, at any time during the year, is
beneficially entitled to not less than 20% of the profits of such
business or profession.
6.14 Given the increased linkages between the Indian companies with their
counterparts across the globe (coupled with the impressive growth achieved
and targeted for the sector), the transactions between Indian players and
their related parties overseas have increased manifold. Such related party
transactions come under the purview of Transfer Pricing (‘TP’) regulations
and require the same to be carried out at an arms-length price.
(i) Obtain sufficient audit evidence on related party
transactions.
(ii) Review the procedure followed by the entity to
identify a related party.
(iii) Obtain information on key management personnel
and their substantial interest held by them in
companies if any.
(iv) Understand the pricing norms followed by the
company in relation to transactions with related
parties.
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(v) Review the methodology followed by the entity in

relation to apportionment of cost between related
parties.
(vi) Review compliance with Transfer pricing
regulations.
(vii) Review bank transactions and reconcile
receivables/ payables if any from/to related parties.
(viii) Review minutes of board meetings and register
maintained under Companies Act, 2013 to
understand the transactions entered by the
directors.
(ix) Obtain explanation for abnormal transactions, if
any, among related parties
Legal and Statutory Compliance

6.15 The internal auditor shall perform the following audit procedures to
help identify instances of non-compliance with other laws and regulations
that may have a significant impact on the entity’s functioning:
(a) Inquiring of management and, where appropriate, those charged with

governance, as to whether the entity is in compliance with such laws
and regulations; and
(b) Inspecting correspondence, if any, with the relevant licensing or

regulatory authorities.
The internal auditor is not responsible for preventing non-compliance and

cannot be expected to detect non-compliance with all laws and regulations in
case of inherent limitations in scope of audit, if any.
(i) Obtain understanding on legal and regulatory

framework applicable to the entity.
(ii) Verify compliance with the following regulations:

FEMA regulations
Information Technology Act
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Compliance with IPR/ copyrights/ patents

STPI
Ministry of Information Technology.
(iii) Obtain sufficient appropriate audit evidence

regarding compliance with the provisions of
applicable laws and regulations
(iv) Perform specified audit procedures to help identify

instances of non- compliance with other laws and
regulations .
(v) Communication appropriately to non-compliance

or suspected non-compliance with laws and
regulations identified during the internal audit.
(vi) If appropriate obtain written representations from

management stating that all known non
compliances/ suspected non-compliances have
been disclosed to internal auditor.
(vii) If the company has a policy of working for 24

hours in shifts, verify if all the labour laws have
been complied with.
(viii) Verify and obtain sufficient audit evidence that the

company has registered with all the statutory
authorities like, PF, ESI, Service Tax, Sales Tax
etc (if applicable).
(ix) Verify if any notices are issued by any of the

department and the company has replied the
same else has appointed any professional to do
the same.
(x) Verify that the company is adhering to all statutory

compliances like, deduction and remittance of
TDS, filing of monthly/quarterly returns, etc
Information Security and Privacy of Data

6.16 Data security is an important aspect in the IT industry. Any loss or
misuse of data will result in huge loss to the entity. At the same time data
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security is also a major problem in the industry. The following various types
of the ways of threat to data security:
(a) Natural Calamity

Fire, flood, earthquake, etc., can cause damage to hardware including
server, computers and other physical storage devices.
(b) Theft of Data

Data theft is a growing problem primarily perpetrated by workers with access
to technology such as, desktop computers and hand-held devices capable of
storing digital information such as, flash drives, iPods and even digital
cameras. Since employees often spend a considerable amount of time
developing contacts and confidential and copyrighted information for the
company they work for, they often feel they have some right to the
information and are inclined to copy and/or delete part of it when they leave
the company, or misuse it while they are still in employment. A common
scenario is where a sales person makes a copy of the contact database for
use in their next job.
(c) Hacking
There are chances that the system might be hacked if the security of the
systems is not strong enough. Hackers might gain access the data stored in
the entity’s systems and publish it online or even sell it to the competitors.
The following is the checklist for data security:
(i) Is there a sound computer/ laptop usage policy

formed by the entity?
(ii) Does the usage policy covers all possible

areas?
(iii) Are there sufficient firewalls installed in the

server to ensure proper security and is it
frequently updated?
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(iv) Is there a frequent systems audit done to ensure

in time detection of all irregularities?
(v) Does the entity take all possible steps to

prevent, detect and punish fraud?
(vi) Verify if the company takes back up of the data

regularly and stores them at a secure location.
(vii) Verify the record of lapses tracked by the

company and the nature of action steps taken to
pervert recurrence.
Books of Accounts
6.17 The internal auditor is required to verify the sufficiency of controls
related to maintenance of books of accounts by the entity. The internal
auditor is also required to verify the controls for allocation of costs between
different departments in every location and whether it is adequate and
reliable in the light of overall business operations. Model Checklist is as
follows:
(i) Does the entity have proper accounting system

commensurate with the regulatory
requirements?
(ii) Are the control Systems in place in estimating

the revenue generated location-wise sufficient
to ensure that proper books are maintained for
the location?
(iii) Does the entity have location wise employee

details to ensure proper allocation of payroll
cost to the location?
(iv) What is the frequency of closing the books of

accounts i.e. monthly, quarterly etc?
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(v) Are the controls for operating the books proper

to ensure that prevention of manipulation?
(vi) Are the books maintained in a manner to

provide Information to the management for
decision making?
Operating Costs
6.18 They are costs administered by a business on a day to day basis.
They may be fixed or variable costs. Model checklist for few of the important
operating costs is given below:
Travelling Cost
(i) Evaluate the overall internal control

environment resulting from the current
processes.
(ii) Obtain a copy of travel policy of the company, if

any.
(iii) Verify the travel voucher and the supporting

documents.
(iv) If amounts are paid in advance and the

expenses incurred are less than the advance,
verify that the balance amount is received back
from the employees.
(v) Verify if there are any limits for incurring such

expenses.
(vi) Verify that the expenses incurred during the

year are for official purpose only.
(vii) If there is any personal expenses, verify if it is

approved by the authorised person.
(viii) Recalculate the total reimbursable amount to

test accuracy.
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Communication Expenses
(i) Verify if the company has any contract with any
of the telecom service provider.
(ii) If there is a contract, verify whether the rates
agreed upon is not prejudicial to the interests of
the company.
(iii) Verify if there are necessary steps to prevent
misuse of the telephone and internet service.
(iv) Verify if the password of the internet and wi-fi is
confidential.
(v) If there are no contract with any telecom
provider verify the monthly bills.
(vi) Verify if there are any huge deviances in the
bills.
(vii) If there are such deviances verify if the
management has take steps to investigate the
cause for such deviances.
Software Development Cost and R&D Costs

(i) Verify that the costs incurred on the
development stage is capitalized.
(ii) If there are any interest costs relatable to
software development verify if it is capitalised
as per AS 16.
(iii) Verify that cost of upgrades and enhancements
are capitalized only if the upgrades or
enhancements provide additional functionality.
(iv) If existing software is retired from use, any
unamortized costs of the old software shall be
expensed.
(v) Verify that expenditures on research should be
recognised as an expense immediately and
expenditure under development phase should
be recognised as an intangible asset, if the
recognition criteria given in AS 26 are satisfied.
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Business Continuity Plans

6.19 Business continuity plans are processes that help organizations
prepare for disruptive events, the event might be a fire, storm or simply a
power outage caused by short circuit. Management's involvement in this
process can range from overseeing the plan, to providing input and support,
to putting the plan into action during an emergency.
Disasters can be classified in two broad categories. The first is natural
disasters such as, floods, storm or earthquakes. While preventing a natural
disaster is very difficult, measures such as, good planning which includes
mitigation measures can help reduce or avoid losses.
The second category is manmade disasters. These include hazardous
material spills, infrastructure failure, or terrorism. In these instances
surveillance and mitigation planning are invaluable towards avoiding or
lessening losses from these events.
In an industry such as the IT industry where data plays a very crucial part, it
has to be safeguarded in the event of any such disasters occurring.
Following is a model checklist for preventing and dealing with disasters
enabling the entity to continue its business:
(i) Verify if the company has a business continuity
plan in place or has outsourced the same to a
third party.
(ii) If outsourced, verify if the backup is taken in
disks or stored through cloud storage.
(iii) If stored in cloud storage, verify that only
authorised persons have access to such data.
(iv) Verify if regular back up of the data is taken from
on-site and automatically copied to off-site disk,
or back up made directly to off-site disk
(v) Verify that only authorised persons have access
to the backup data.
(vi) Verify if the plan encompasses on how the
employees will evacuate and communicate
during such events.
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(vii) Verify if sufficient steps are taken to prevent fire

in the premises by installing stabilizers and
surge protectors.
(viii) Verify if fire prevention systems such as, alarms
and fire extinguishers are existing in the
company.
(ix) Verify if CCTV’s are installed to prevent any sort
of theft.
(x) Verify that anti-virus, firewalls and other security
measures are taken to safeguard the data
(xi) Verify if uninterruptible power supply (UPS) and/
or backup generators are maintained in the
company to keep systems going in the event of a
power failure.
(xii) Verify the steps taken by the company to provide
key operations even in case of exigencies.
(xiii) Verify if the company has identified certain staff
to provide services in case of contingencies.
Analysis, Reporting and Financial Control

6.20 Financial analysis means assessment of the effectiveness with which
funds (investment and debt) are employed in a firm and the efficiency and
profitability of its operations. Financial control is management control
exercised in planning, performance evaluation, and coordination of financial
activities aimed at achieving desired return on investment. Financial
reporting is consolidating the analysis and to determine the effectiveness of
control in the form of a report. Funds management, project accounting,
Profitability analysis, Management reporting form part of the analysis and
reporting. Following is a model checklist for the same.
Funds Management
(i) Verify if the funds are applied in the assets as
approved by the management.
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(ii) Verify that the disbursement of large amounts

is vested only with the top management.
Project Accounting
(i) Verify that the books are maintained in such a
way as to know the financial position of every
individual project.
(ii) Verify that the common costs are apportioned
to every individual projects in a proportionate
manner.
Profitability Analysis
(i) Verify that if the company is handling multiple
projects whether it is maintaining a profitability
analysis for each of the projects.
(ii) If any of the projects is not profitable, verify if
the reasons for the same has been disclosed.
(iii) If there are continuous losses in any of the
projects verify the steps taken to correct the
same.
Management Reporting
(i) Verify if the company has a policy of preparing
and sending a MIS for the management
monthly.
(ii) Verify the frequency and accuracy of the MIS.
(iii) Verify if the management has taken any action

based on the MIS reports.
Patents and Copyright

6.21 Copyright is the right given by law to the creators of literary, dramatic,
musical, creation of computer software's and databases and their distribution
and a variety of other works of mind. It ordinarily means the creator alone
has the right to make copies of his or her works or alternatively, prevents all
others from making such copies. The basic idea behind such protection is the
premise that innovations require incentives. Copyright recognises this need
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and gives it a legal sanction. Moreover, commercial exploitation of copyright

yields income to the creators and, thus, making pecuniary rewards to
individuals creativity.
A patent can be defined as a grant of exclusive rights to an inventor over his
invention for a limited period of time. The exclusive rights conferred include
the right to make, use, exercise, sell or distribute the invention. Patents are
granted only after the satisfaction of certain requirements, which include the
patentable subject-matter, utility, novelty, obviousness and specification. A
patent can be obtained only if an invention is industrially applicable. An
invention is said to be industrially applicable, if it can be made and used in
an industry.
Infringement of a patent is the violation of the exclusive rights of the patent
holder. If any person exercises the exclusive rights of the patent holder
without the patent owner's authorization then that person is liable for patent
infringement.
Copyright piracy is a phenomenon prevalent worldwide. Piracy means
unauthorised reproduction, importing or distribution either of the whole or of a
substantial part of works protected by copyright. The author of a copyrighted
work, being the owner, enjoys certain exclusive rights with respect to his or
her works. These include right to reproduce, to publish, to adopt, to translate
and to perform in public. The owner can also sell, assign, license or
bequeath the copyright to another party, if he wishes so. If any person other
than the copyright owner or his authorised party undertakes any of the above
mentioned activities with respect to a copyrighted product, it amounts to
infringement of the copyright. The model checklist is as follows:
(i) Verify the registrations under the Copyrights and
Patents Act
(ii) Obtain documentary evidence on
registration/renewal of copyrights at regular
intervals.
(iii) Advice the entity on regulatory compliances in
case of infringement of copyrights/patents by
third party against the company.
(iv) Compute contingent liability, if any, on
infringement of copyrights of third party by the
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entity there by to provide realistic picture of

financial statements.
(v) Advice the company on sharing of copyrights
with domestic or foreign residents and legal
issues involved.
(vi) Verify if the company is taking serious legal
action against those who have infringed their
patents/ copyrights.
Internal Controls
6.22 As many of the software companies in India are subsidiaries of
companies of USA or of any other country, it would need to follow the
Sarbanes-Oxley (SOX) Act requirements as per the rules prevailing in its
parent company’s country. As a best practice, a number of Indian IT
companies as well started following SOX requirements. The Act requires all
financial reports to include an internal control report. This is designed to
show that not only are the company's financial data accurate, but the
company has confidence in them because adequate controls are in place to
safeguard financial data. Year-end financial reports must contain an
assessment of the effectiveness of the internal controls. The issuer's auditing
firm is required to attest to that assessment. The auditing firm does this after
reviewing controls, policies, and procedures during a Section 404 audit,
conducted along with a traditional financial audit. It is designed to review
audit requirements to protect investors by improving the accuracy and
reliability of corporate disclosures. These standards require management to:
 Assess both the design and operating effectiveness of selected
internal controls related to significant accounts and relevant
assertions, in the context of material misstatement risks;
 Understand the flow of transactions, including IT aspects, in sufficient
detail to identify points at which a misstatement could arise;
 Evaluate company-level (entity-level) controls, which correspond to the
components of the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) framework;
 Perform a fraud risk assessment;
3213
 Evaluate controls designed to prevent or detect fraud, including

management override of controls;
 Evaluate controls over the period-end financial reporting process;
 Scale the assessment based on the size and complexity of the
company;
 Rely on management's work based on factors such as competency,
objectivity, and risk;
 Conclude on the adequacy of internal control over financial reporting.
The model checklist for internal controls is as follows:
(i) Verify if the requirements as per SOX are
maintained by the company.
(ii) Select a set of controls and test it repeatedly
(iii) Verify if the company has a sound password

policy like instructing the employees not to have
usual passwords like their name, date of birth,
etc., as passwords.
(iv) Verify that the database has a strong
authorisation program and does not have any
loopholes.
(v) Verify the external auditor’s report of the previous
year and check if any loopholes pointed out by
them are complied with by the company.
Computer Assisted Audit Techniques (CAATs)

6.23 It is the practice of using computers to enhance the effectiveness and
efficiency of audit procedures. They are computer programs and data that
the auditor uses as part of the audit procedures to process data of audit
significance, contained in an entity’s information systems. The internal
auditor should select a suitable CAAT keeping in mind the size and nature of
business.
3214
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Following are few of the audit tools which the auditor can use in his internal
audit.
(i) Microsoft Excel

It is a spreadsheet application used for calculation, graphing tools, pivot
tables etc. It allows sectioning of data to view its dependencies on various
factors for different perspectives.
(ii) Microsoft Access
It is a database management system with a graphical user interface and
software-development tools. It stores data in its own format and can also
import or link directly to data stored in other applications and databases.
(iii) ERP’s like SAP, etc.
It provides easier global integration and real time information. It reduces the
possibility of redundancy errors. It maintains a centralized library of
electronic work papers, and automates work paper review and approval.
(iv) SaaS
It is a software delivery model in which software and associated data are
centrally hosted on the cloud. Access to cloud-based ERP systems allows
internal auditors to gather audit information on their own, resulting in less
internal time committed to the audit. Audit procedures can be performed
throughout the year in real time. One of the major advantages is that all
transactions create an ‘audit trail’ that cannot be manipulated by the
company.
(v) Crystal Reports
It is a business intelligence application used to design and generate reports
from a wide range of data sources. It allows users to graphically design data
connection and report layout.
Business Enabling Functions

6.24 There are various departments which enable a software company
business to function smoothly. Few of the important departments are HR,
Finance, IT, Facilities, Administration, Quality, Risk management.
3215
The model checklist for the same is as follows.
Human Resources(HR)
(i) Verify if the recruitments made are according to
the talent acquisition policy of the company.
(ii) Verify that an attendance sheet is maintained in
case of trainings provided for the employees.
(iii) Verify if non-disclosure agreement has been
entered into with the employees.
(iv) In case of employee leaving the company verify
if the company has entered into a Non
Competence Agreement with the employees.
(v) Verify the appraisal mechanisms in the
company and check if the same has been
followed or not.
(vi) Verify the attrition rate of the employees.
(vii) If the employee turnover is higher than that of

the industry obtain the reasons for the same
and report the same to the top management.
(viii) Verify if there are any group or medical
insurance policies on the employees taken by
the company.
(ix) Verify if there is any policy of human resource
valuation in the company.
(x) If it is in existence verify the method used to
value the same and how it is accounted.
(xi) Verify if the value of human resource has been
quantified.
(xii) If the value of such an asset is very low verify
the reasons for the same.
(xiii) Verify if the method selected to value the
human resource is appropriate to the company.
3216
E- 9500
(xiv) Verify if the pay scale of the employees is on

par with the industry or there is a very huge
deviation.
(xv) Verify if the entity maintains a checklist of
statutory remittances to be made on account of
PF, ESI, Labour Welfare Fund.
(xvi) Verify if there are sufficient records maintained
by the entity with regard to their recruitment,
offer letter, and all other correspondences with
the employee.
(xvii) Verify if entity maintains separately all
complaints and grievances received from the
employees.
(xviii) Verify In cases of flexible timings and work from
home option provided to an employee, has
appropriate approval been obtained.
(xix) Verify if cheques prepared and signed by two
different employees.
(xx) If the entity opts for bank transfer then is there
sufficient level of authority to issue bank
transfer instruction to the bank.
Finance
(i) Verify the various sources of finance of the
company.
(ii) Verify the debt equity ratio of the company to
find out the leverage of the company.
(iii) If the company has taken a loan verify that the
same is utilised for the specific purpose only.
(iv) Verify the collection period of the debtors.
(v) Verify the payment period of creditors.
(vi) Verify if the operations team is sufficiently
supported by the Finance department by
providing variety of reports, analysis and
insights for appropriate decision making
3217
Information Technology
(i) Verify the usage of IT policy of the company
and whether the employees adhere to it.
(ii) Verify if the company is utilising the software it
develops for its internal purpose.
(iii) Verify if the IT department circulates the
relevant hardware and software usage policy to
the employees.
(iv) Verify there is a rigorous IT helpdesk in place to
ensure the IT requirements of the business are
addressed on a timely basis.
Administration
(i) Verify if the company has a separate
administration department to adhere to the
needs of the company.
(ii) Verify that the accounts department and
administration department are not related.
(iii) Verify the requests received by the
administration department and the action taken
by them to address the issue.
(iv) Verify if the administration department is in
charge of all the statutory registrations of the
company.
Quality
(i) Verify if the company has a defined set of
principles to maintain quality of the products.
(ii) Verify if there is a quality control team in the
company.
(iii) Verify that the employees related to production
are not related to the quality control team.
(iv) Verify if the quality control team conducts tests
on all the products and services and reports the
same to the management.
3218
E- 9502
(v) In case the quality requirements are not met

with verify the procedure to be followed for
further processing.
(vi) Verify if the company obtains feedback from its
customers regarding the products and service
of the company.
(vii) In case of customer complaints verify if their
grievances has been addressed to.
(viii) Verify if a record of all the complaints and their
details are maintained by the company.
(ix) In case the product/ service has to be reworked
verify if the cost is borne by the company or it is
recovered from the customer.
(x) After addressing the grievances of the customer
verify if the company has taken the feedback
from the customer again.
(xi) Verify if there are any steps/plans taken to
improve the quality.
Revenue Earned by the Company

6.25 The revenue earned by IT companies would be by sale of products or
by providing services. There are various means of revenue which an IT
company can earn and the following is a model checklist for the same.
(i) Identify if the company in involved only in exports
or even in domestic sales.
(ii) If it is into exports verify if the service is provided
by the company on site by deputing its employees
abroad or from India.
(iii) Identify the billing mechanism of the company.
(iv) Verify if proper time sheets are maintained by the
company if it follows billing on Time and Material basis.
(v) Verify if the company is billing under the
milestone method, time sheet method or cost plus
method.
3219
(vi) Verify if there is an escalation clause if the billing

is done on progressive basis.
(vii) Verify if the company provides warranty and post
warranty services.
(viii) Verify if the amount charged by the company for
post warranty services is different from normal
charges.
(ix) Verify if the company has entered into an Annual
Maintenance Contract (AMC) with its customers
(x) Verify the number of services provide under AMC
and the prices charged to them.
(xi) Verify if there is any price difference in the service
provided under AMC and as a standalone basis.
(xii) Verify if the company charges for any services not
covered under the AMC.
(xiii) Verify if the company also provides on demand
services to its customers apart from post warranty
services and is there any price difference for the
same.
(xiv) Verify if there are any revenue leakage
possibilities due to improper maintenance of time
sheets.
(xv) If there are any such revenue leakages what are
the steps taken by the company to overcome it.
(xvi Verify if the revenue recognition adopted by the
company is as per AS 9.
Value of Brand
6.26 Strong brands are necessary in IT industry because technology has
increased the number of content providers and made it possible for many
more competitors to seek the attention and loyalty of audiences and
advertisers. Brands are crucial in separating IT companies and their products
from those of competitors, in creating continuity of quality and service across
extended product lines, and in helping develop strong bonds with consumers.
3220
E- 9504
The Model checklist is as follows:
(i) Understand the valuation methodology followed
and verify if the method selected is appropriated.
(ii) Verify the factors considered in valuing the brand
like, growth rate, expected life, weights assigned
to various factors, competition, and discount rate
adopted.
(iii) Obtain brand valuation documents from
independent valuers, if any,
(iv) Reconcile the value of brand with financial
statements.
(v) Verify amortization/ impairment provided every
year.
(vi) Advice the client on importance of brand value
and the need to get them registered if they are
not registered.
Accounting for Recharges to the Clients

6.27 Accounting for recharges refers to reimbursement of expenses by the
client to the company. Model checklist is as follows:
(i) Verify the SOW entered into by the company and
the client and determine if there is a clause for
reimbursement of expenses.
(ii) If there is reimbursement clause, verify if there are
any limits specified for the same.
(iii) Check that such a reimbursement is not recorded
as income in the books of the company.
(iv) Verify that such reimbursements are received by
cheques.
(v) Verify that there is adequate supporting documents
are maintained for such reimbursement claims.
3221
Hedging
6.28 Hedging means reducing or controlling risk. This is done by taking a
position in the futures market that is opposite to the one in the physical
market with the objective of reducing or limiting risks associated with
currency price changes. As majority of the income derived by software
companies are by way of foreign exchange they have to hedge in order to
safeguard themselves against the fluctuating foreign exchange.
Alternatively, the entity can also maintain an Exchange Earner’s Foreign
Currency (EEFC) account with any of the authorised Dealers. It is a facility
provided to the foreign exchange earners, including exporters, to credit 100
per cent of their foreign exchange earnings to the account, so that the
account holders do not have to convert foreign exchange into Rupees and
vice versa, thereby minimizing the transaction costs. Such accounts are
offered without any minimum balance requirements. The EEFC account
balances can be hedged. A unit located in a Special Economic Zone can
open a Foreign Currency Account with an authorised dealer in India subject
to certain conditions as prescribed by the RBI.
The Model checklist is as follows:
(i) Verify if the company has safeguarded itself
against foreign exchange fluctuations by
entering into forward contracts, options etc.
(ii) Verify that such hedging is duly authorised by
the Board of Directors.
(iii) Verify if the profits or losses from such forward
contracts or options as recognised as per the
AS 11.
(iv) If necessary, advice the management of the
company on the disclosure requirements as per
AS 32.
(v) Verify that only the authorised persons are
operating the EEFC account.
(vi) If the company is located in SEZ, verify if the
conditions mentioned by the RBI are followed to
open the account.
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E- 9506
Annexure I
Checklist for Compliances
Sl Applicable Requirement Remarks
No Statute
1 STPI Approval for The following grants are obtained:
establishing Grant of industrial approval
the unit- STP
Approval of the foreign technology
Import Export agreement
Licence
Approval for import of capital goods
Application
for
2 STPI Bonding & Bonding is done through a prescribed
Debonding document which is an agreement of
the STPI unit with the Development
Commissioner of the STPI.
This document binds the unit for
importing duty free procurement
against export. Debonding of a unit is
to relieve itself from this liability and
pay applicable duty (if required).
3 STPI Custom Duty Necessary license for import of
Exemption goods.
The importer must carry out the
development of software and export
either all the software so developed or
such other percentage.
The importer must execute a bond, in
the prescribed form. The bond should
be for a sum to be prescribed by the
customs authority.
The goods sought to be imported
must be
Capital Goods
3223
Raw Material
Components
Spares for production machinery
Consumables required for
manufacture of goods
Drawings, blue prints, technical maps
and charts, relating to manufacturing
activity
Office equipment, spares and
consumables thereof.
4 STPI Periodic Monthly Progress Reports (MPR) &
Statutory Quarterly Progress Reports (QPR):
Reports All units are required to submit
Monthly Progress Reports & Quarterly
Progress Reports by 7th of a month
on completion of previous month and
by 10th of a month on completion of
previous quarter respectively in the
prescribed format. It is a mandatory
requirement and units which are
irregular in submitting MPRs & QPRs
can be denied services of STPI.
Annual Performance Reports (APR):
Yearly performance report should be
submitted as per the prescribed
format.
5 STPI Books of Distinct Identity: If an industrial
Accounts enterprise is operating both as a
domestic unit as well as an
EHTP/STP unit, it shall have two
distinct identities with separate
accounts, including separate bank
accounts. It is, however, not
necessary for it to be a separate legal
entity, but it should be possible to
distinguish the imports and exports or
supplies affected by the EHTP/STP
3224
E- 9508
units from those made by the other

units of the enterprise.
Maintain the accounts as under:
Maintenance of Sales Invoices.
Maintenances of Fixed Asset
Registers.
Maintenance of Foreign Inward
Remittance Certificate file (FIRC) &
Bank Realization Certificate (BRC) file
where the original of the FIRCs and
BRCs are kept.
Maintenance of contract file, where
copies of contracts received from
buyers are maintained.
6 STPI Export After completion of the project, the
Obligation STP units will get the exports attested
from STPI in prescribed following
forms
Reporting Requirement
When export of software is made
through data communication, it will be
declared on SOFTEX form (which is
available for sale to exporters through
regional offices of Reserve Bank and
STPI centres). The form has to be
submitted to the concerned STPI
within the stipulated time as per the
guidelines of RBI.
7 RBI On receipt of Intimation to RBI:
Foreign If your bank receives the money in
Investment foreign currency (say it receives US
$) then your bank is supposed to give
you a call and tell you that it has
received money in so and so currency
and ask you when to do the
conversion to INR , after this you
need to file an intimation with the RBI
3225
telling them that you received FDI into

your company through your bank
within 30 days of receiving the funds.
While remitting funds ensure the
following:
(a) Funds have to flow only from
the investors’ bank accounts
(b) The purpose of remittance
should be stated as
“Towards Investment in Share
Capital”
(c) Know Your Customer
information to be transmitted
along with remittance.
8 RBI Issue of Once this intimation is sent, your next
Shares step is to actually issue the shares to
the foreign investor within 180 days of
receiving the funds, failing which you
are bound by law to transfer the
money back to your investor.
Reporting on Issue of Shares:
FC-GPR (Annexure 8)
FIRC Copies
A Certificate from the Company
secretary for FEMA compliance
A Certificate from CA indicating the
manner of arriving at the price of
shares issued to the persons resident
outside India A letter stating the
reason for delay in submission of FC-
GPR (in case of delay)
Debit authority letter
9 RBI Annual Submit Annual Return of Foreign
Reporting Liabilities & Assets, in Part B of Form
FC-GPR, with the Reserve Bank of
India, External Liabilities and Assets
3226
E- 9510
Statistics Division, Mumbai, before

15th
July of every year, also enclose
audited financials of the company.
10 RBI External (i) Eligible borrowers (as per RBI
Commercial master circular issued on 02/07/2012.
Borrowings It will be updated every year)
Automatic (a) Corporates (registered under
Route the Companies Act except
financial intermediaries (such
as banks, financial institutions
(FIs), housing finance
companies and NBFCs) are
eligible to raise ECB.
Individuals, Trusts and Non-
Profit making Organisations are
not eligible to raise ECB.
(b) Units in Special Economic
Zones (SEZ) are allowed to
raise ECB for their own
requirement. However, they
cannot transfer or on-lend ECB
funds to sister concerns or any
unit in the Domestic Tariff Area.
(ii) Recognised lenders
Borrowers can raise ECB from
internationally recognised sources
such as (i) international banks, (ii)
international capital markets, (iii)
multilateral financial institutions (such
as IFC, ADB, CDC, etc.,), (iv) export
credit agencies, (v) suppliers of
equipment,(vi) foreign collaborators
and (vii) foreign equity holders (other
than erstwhile OCBs). A “foreign
equity holder’ to be eligible as
“recognized lender’ under the
3227
automatic route would require

minimum holding of equity in the
borrower company as set out below:
(i) For ECB up to USD 5 million –
minimum equity of 25 per cent
held directly by the lender.
(ii) For ECB more than USD 5
million – minimum equity of 25
per cent held directly by the
lender and debt-equity ratio not
exceeding 4:1 (i.e., the
proposed ECB not exceeding
four times the direct foreign
equity holding).
(iii) Amount and Maturity
(a) The maximum amount of
ECB which can be raised
by a corporate is USD 500
million or equivalent during
a financial year.
(b) ECB up to USD 20 million
or equivalent in a financial
year with minimum average
maturity of three years.
(c) ECB above USD 20 million
and upto USD 500 million
or equivalent with a
minimum average maturity
average maturity of five
years.
(d) ECB upto USD 20 million
can have call / put option
provided the minimum
average maturity of three
years is complied with
before exercising call / put
option.
3228
E- 9512
End-use
(a) Investment e.g., import of
capital goods (as classified by
DGFT in the Foreign Trade
Policy), by new or existing
production units, in real sector-
industrial sector including small
and medium enterprises (SME)
and infrastructure sector – in
India. Infrastructure sector is
defined as (i) power, (ii)
telecommunication, (iii)
railways, (iv) road including
bridges, (v) sea port and
airport, (vi) industrial parks, and
(vii) urban infrastructure (water
supply, sanitation and sewage
projects);
(b) Overseas direct investment in
Joint Ventures (JV) / Wholly
Owned Subsidiaries (WOS)
subject to the existing
guidelines on Indian Direct
Investment in JV/WOS abroad.
Ends-users not permitted
(a) Utilisation of ECB proceeds is
not permitted for on-lending or
investment in capital market or
acquiring a company (or a part
thereof) in India by a corporate.
(b) Utilisation of ECB proceeds is
not permitted in real estate.
(c) Utilisation of ECB proceeds is
not permitted for working
capital, general corporate
purpose and repayment of
existing Rupee loans.
3229
Procedures
Borrowers may enter into loan
agreement complying with ECB
guidelines with recognised lender for
raising ECB under Automatic Route
without prior approval of RBI. The
borrower must obtain a Loan
Registration Number (LRN) from the
Reserve Bank of India before drawing
down the ECB
11 RBI External (a) With a view to simplify the
Commercial procedure, submission of copy
Borrowings- of loan agreement is dispensed
reporting with.
Requirement (b) For allotment of loan
registration number, borrowers
are required to submit Form 83,
in duplicate, certified by the
Company Secretary (CS) or
Chartered Accountant (CA) to
the designated AD bank. One
copy is to be forwarded by the
designated AD bank to the
Director, Balance of Payments
Statistics Division, Department
of Statistics and Information
System (DSIM), Reserve Bank
of India, Bandra-Kurla Complex,
Mumbai – 400 051
(c) The borrower can draw-down
the loan only after obtaining the
loan registration number from
DSIM, Reserve Bank of India.
(d) Borrowers are required to
submit ECB-2 Return certified
by the designated AD bank on
monthly basis so as to reach
DSIM, RBI within seven working
3230
E- 9514
days from the close of month to

which it relates.
12 RBI Conversion of Conversion of ECB into equity is
ECB permitted subject to the following
conditions:
(a) The activity of the company is
covered under the Automatic
Route for Foreign Direct
investment or Government
approval for foreign equity
participation has been obtained
by the company,
(b) The foreign equity holding after
such conversion of debt into
equity is within the sectoral cap,
if any,
(c) Pricing of shares is as per SEBI
and erstwhile CCI guidelines /
regulations in the case listed /
unlisted companies as the case
may be.
Conversion of ECB may be reported
to the Reserve Bank as follows:
(a) Borrowers are required to report
full conversion of outstanding
ECB into equity in the form FC-
GPR to the concerned Regional
Office of the Reserve Bank as
well as in form ECB-2 submitted
to the DSIM, RBI within seven
working days from the close of
month to which it relates. The
words “ECB wholly converted to
equity” should be clearly
indicated on top of the ECB-2
form. Once reported, filing of
ECB-2 in the subsequent
months is not necessary.
3231
(b) In case of partial conversion of

outstanding ECB into equity,
borrowers are required to report
the converted portion in form
FC-GPR to the concerned
Regional Office as well as in
form ECB-2 clearly
differentiating the converted
portion from the unconverted
portion. The words “ECB
partially converted to equity”
should be indicated on top of
the ECB-2 form. In subsequent
months, the outstanding portion
of ECB should be reported in
ECB-2 form to DSIM.
13 Income Tax Sec 10 B- Special Incentive is been given to the
100% Export newly established 100% EOU. Under
Oriented Unit this section the profits and gains
derived from the 100% EOU shall not
be included in the total income of the
tax payers. This benefit is available
for the income earned during a period
of five consecutive assessment years
falling within a period of eight years
from the commencement of
production. This exemption is
available to all the tax payers
including the foreign companies and
the Non Resident tax payers.
14 Employee’s Reporting Preparation of monthly PF remittance
Provident Requirements statement.
Fund and Preparation of PF challan prescribed
Miscellaneous formats and specified copies
Provisions
Preparation and filing of necessary
Act, 1952
forms and returns
Obtaining Form No.2 from new
entrants joined during the month.
3232
E- 9516
Maintenance of a database of all

employees giving the details of their
names, PF number, transfer/
withdrawal, etc., for future reference
and also to follow up with RPFC for
transfer /withdrawal till process is
complete.
15 The Reporting Preparation of monthly ESI remittance
Employee’s Requirements statement.
State Preparation of ESI challan in
Insurance Quadruplicate.
Act, 1948
Preparation of ESI challan prescribed
formats and specified copies.
16 Special Eligibility It is not formed by the splitting up, or
Economy Criteria the reconstruction, of a business
Zone already in existence.
It is not formed by the transfer to a
new business, of machinery or plant
previously used for any purpose.
Proposal does not involve use of
capital goods already used.
Other procedural requirements are
fulfilled.
17 Special Reporting SEZ units are required to maintain a
Economy Requirements Positive Net Foreign Exchange
Zone earning cumulatively for a period of 5
years from the commencement of
operation.
Intimate date of commencement.
The Unit shall execute a Bond-cum-
Legal Undertaking.
To submit annual performance report
duly certified by CA within specified
time from the close of Financial Year,
to development commissioner.
To undertake not to change name,
3233
style and location except with

approval of development
commissioner.
To intimate change in Board of
directors, etc.
Required to maintain proper books of
accounts financial year wise which
include records in respect of
import/export/ procurements/inter unit
transfer/ DTA sale/sub-contracting/
destruction, etc.
The goods admitted into a Special
Economic Zone shall be used by the
Unit or the Developer only for carrying
out the authorized operations but if the
goods admitted are utilized for
purposes other than for the authorized
operations or if the Unit or Developer
fails to account for the goods as
provided under these rules, duty shall
be chargeable on such goods as if
these goods have been cleared for
home consumption.
18 Special Benefits 100% Income Tax exemption on
Economy Available export income for SEZ units under
Zone Section 10AA of the Income Tax Act
for first 5 years, 50% for next 5 years
thereafter and 50% of the ploughed
back export profit for next 5 years.
Exempt from paying Service Tax
where services are consumed within
SEZ. Even otherwise, refund is
granted. Service tax is exempted in
case of exports also.
However, services provided by unit in
SEZ to DTA are liable to Service Tax.
Exempted from payment of State
Sales tax and other levies as
3234
E- 9518
extended by the respective State

Governments.
Exemption from Central Sales Tax.
If any unit in SEZ or STPI purchases
any goods from DTA, then the excise
duty paid can be claimed as refund.
In case of any goods manufactured or
produced by unit in SEZ,such goods
are exempt from payment of excise
duty subject to conditions/ limitations.
Exempt from Customs duty if
purchased for authorised operations.
R&D Cess on import of technology is
exempt.
If any unit in SEZ procures any goods
from outside India there is no customs
duty payable by the units.
Exempt from Excise duty if purchased
for authorised operations.
Single window clearance for Central
and State level approvals.
There is no limit for DTA sales.
External commercial borrowing by
SEZ units upto US $ 500 million in a
year without any maturity restriction
through recognized banking channels.
Exempt from Dividend distribution tax.
3235
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References
http://www.nasscom.in/
http://www.stpi.in/
http://www.sezindia.nic.in/
http://www.rbi.org.in/
http://www.incometaxindia.gov.in/
http://www.esic.nic.in/
http://www.epfindia.gov.in/
http://www.nic.in/
http://www.assocham.org/
Source- Internal Audit Standards Board
3236

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E- 6389

1. Industry Specific

Foreword ..................................................................................... iii

I-1 Technical Guide on Internal Audit in

I-2 Technical Guide on Internal Audit in Upstream

I-3 Technical Guide on Internal Audit in

I-4 Technical Guide on Internal Audit

I-5 Technical Guide on Internal Audit of

I-6 Technical Guide on Internal Audit of

I-7 Technical Guide on Internal Audit of BPO

I-8 Technical Guide on Internal Audit of

I-9 Technical Guide on Internal Audit

I-10 Technical Guide on Internal Audit of

I-11 Technical Guide on Internal Audit

I-12 Technical Guide on Stock and

I-13 Technical Guide on Internal Audit of Mining

I-14 Technical Guide on Internal Audit of

I-15 Technical guide on Business Control,

I-16 Technical Guide on Internal Audit of

I-17 Technical Guide on Internal Audit of

I-18 Technical Guide on Internal Audit of

I-19 Internal Audit in Oil & Gas Refining &

I-20 Technical Guide on Auditing Waste

I-21 Technical Guide on Internal Audit of

I-22 Technical Guide on Internal Audit of

Note : Detailed contents of each of these Guides is given at

APM Administrated Pricing Mechanism

ASTM American Society for Testing and Materials

ATF Aviation Turbine Fuel

ATU Amine Treatment Unit.

BBU Bitumen Blowing Unit

BIS Bureau of Indian Standards

BPCL Bharat Petroleum Corporation Limited

BRPL Bongaigon Refineries & Petrochemicals

CIF Cost, Insurance and Freight

CPCL Chennai Petroleum Corporation Limited

CST Central Sales Tax

CVD Countervailing Duties

DCS Digital Control System

DGH Directorate General of Hydrocarbons

E&P Exploration and Production

EIL Engineers India Limited

FDZ Free Delivery Zone

FOB Free On Board

GAIL Gas Authority Of India Limited

GDP Gross Domestic Product

GNP Gross National Product

GOHDS Gas Oil Hydro De-sulphurisation Unit.

GOI Government of India

HPCL Hindustan Petroleum Corporation Limited

HRD Human Resources Development

HSD High Speed Diesel Oil

IBP IBP Co. Limited

IIP Indian Institute of Petroleum

ILP Industry Logistic Plan

IOCL Indian Oil Corporation Limited

IQCM Industry Quality Control Manual

JVC Joint Venture Company

KRL Kochi Refineries Limited

1. Industry Specific