2. Session 9.1-P-11 RISK BASED AUDIT AND STATISTICAL SAMPLING APPLICATIONS IN CENTRAL EXCISE RECEIPT AUDIT

3. Session 9.1-P-12 RISK BASED AUDIT  Risk based audit is an approach to audit whereby the limited audit resources are efficiently focused only on those areas where the risk of audit is high instead of focusing equally on all areas & thereby spreading resources thinly.  Risk based audit avoids:  under auditing in high risk situations, &  over auditing in low risk situations  thereby ensure cost-effective audit

4. Session 9.1-P-13 THE RISK MODEL  OAR = IR*CR*DR where, OAR: overall audit risk IR: inherent risk CR: Control risk DR: Detection risk  Given the OAR and an assessment of IR and CR, it is possible to assess DR

5. Session 9.1-P-14 THE RISK MODEL Overall audit risk: Maximum risk acceptable to the auditor Inherent Risk:Risk that a material error will occur in the first place Control Risk: Risk that internal controls will fail to detect the error Detection Risk: Risk that audit procedures will fail to detect the error

6. Session 9.1-P-15 RISK ASSESSMENT STRATIFIES POPULATION Based on risk perception, the population would have the following kinds of items: –Key Items which require high assurance from audit and are highly significant which could be checked 100% –High value items are generally checked 100% as a prudent audit practice –High risk, highly significant items would be subject to higher level of substantive test –Low risk, less significant items would be tested through lesser substantive tests

7. Session 9.1-P-16 THE SAMPLING PROCESS The Sampling process entails the following steps: Determine the assurance levels of audit Assess the inherent risk and control risk for the entity and at the transaction level Design audit procedures for each strata of the population Contd…

8. Session 9.1-P-17 Contd… Use sampling techniques for drawing samples from each strata Substantive audit tests on the sample Evaluation of the results Projection of the sample results on the population

9. Session 9.1-P-18 Statistical Sampling and Risk analysis in CERA to be applied in 2 areas Risk assessment and selection of unit for audit Drawing a sample of transactions after assessment of inherent risk and control risk

10. Session 9.1-P-19 Factors having a bearing on the risk perception of a unit Revenue (Through PLA) Chapter Single Product, Multi Product Assesee prone to evasion Audit output MODVAT

11. Session 9.1-P-110 Statistical Sampling in Central Excise Audit Presently, one month and one week from each quarter with highest revenue are selected for test check of transactions in a financial year In new system, the risk model is an analytical tool for selection of the sample size and samples.

12. Session 9.1-P-111 Selection of Unit Two units viz. M/s Max India ltd., and M/s Swaraj Engines ltd. were selected for carrying out this study.The reasons for selection of these units were:- Computerized system of accounting and invoicing The number of inputs/outputs was small so as to make the study easily manageable Contd…

13. Session 9.1-P-112 Contd… As the category of transaction being not large, it was easier to segregate the transactions in various categories and select the sample Units are public limited companies having professional staff

14. Session 9.1-P-113 In the first unit:- Items in each category were allocated consecutive numbers and then the required sample size was selected by using Random Selection tables Sample size selected was irrespective of the value It was feared where the transactions in the population vary in value, the sample might concentrate on low value transactions.

15. Session 9.1-P-114 In the second unit:- Modified technique of selecting samples on monetary basis was adopted All items in each category above a certain limit were segregated for 100% checking For the rest of the population, monetary unit sampling was adopted to select the sample size & sample with the help of computer using software IDEA 2001

16. Session 9.1-P-115 Control Risk Assessment Assess the adequacy of the policies and procedures in the auditee organization for detecting material error Evaluation of both the control environment and control systems existing in the company on the following parameters: Contd…

17. Session 9.1-P-116 Contd… Management philosophy and working style Functioning of Audit Committee Organizational set up Internal Audit system Control of Central Excise department Segregation of incompatible functions. Control over accounting system. Restricted access to assets. Control of computer operations

18. Session 9.1-P-117 Identification of Areas for Sampling The following two areas were identified where statistical sampling can be applied Availment of CENVAT credit on inputs as well as on capital goods Sale invoices

19. Session 9.1-P-118 Stratification of Audit Population ( MAX INDIA Ltd.) On perusal of Sales/CENVAT records, the transactions of both types were segregated into following homogenous categories CENVATSALES (I) Imported MaterialDomestic Sale a) General Buyers b) Sister concern c) Captive consumption (II) Indigenous Material (a) Major Suppliers (b) Sundry Suppliers Export (III) Capital GoodsJob Workers

20. Session 9.1-P-119 Stratification of Audit Population (Swaraj Engines Ltd.) CENVATSALE Imported MaterialHigh Value Indigenous MaterialSister Concern a) High Value Miscellaneous b) Others Job Work Capital GoodsWithout duty a) High Value Export b) Others Captive Consumption

21. Session 9.1-P-120 Inherent Risk Assessment Sr.NoCategoryInherent Risk evaluation 1 Imported materialHigh 2 Major suppliersMedium 3 Sundry supplierHigh 4 Capital goodsLow 5 General buyersMedium 6 Sister concernHigh 7 Captive consumptionHigh 8 ExportHigh 9 Job WorkerHigh MAX INDIA LIMITED

22. Session 9.1-P-121 Inherent Risk Assessment Sr. NoCategoryInherent risk evaluation 1 High valueCent percent items were checked. 2 Sister ConcernHigh 3 MiscellaneousMedium 4 Job WorkHigh 5 Without DutyHigh 6 Export N.A as the goods are entirely sold to PTL, Mohali 7 Captive Consumption High 8 Imported MaterialMedium 9 Indigenous material Medium 10 Capital GoodsLow SWARAJ ENGINES LIMITED

23. Session 9.1-P-122 Determination of Required Audit Assurance and Sample After working out the control risk and inherent risk for each category of transactions, required audit assurance level and Sample size for each category has been worked out on the basis of Standard Statistical tables( Max India ltd.) and IDEA 2001( Swaraj Engines)

24. Session 9.1-P-123 COMPARATIVE ANALYSIS

25. Session 9.1-P-124 Sr No CategorySample for Pilot StudyOld System No.% w r t population Amount (Rs in lakh) No.% w r t population Amount (Rs in lakh) 1.General Buyers 1942.71297.31124417.382097.29 2.Sister Concern 58100.0022.35712.062.56 3.Export11479.721212.853020.98371.43 4.Job work57100.00110.121322.8121.99 5.Captive use 11436.664514.47 Total5376.951642.63133917.332493.27 Max India Ltd. Details of Sale Invoices

26. Session 9.1-P-125 Sr. No. CategorySample for Pilot StudyOld System No.% w r t population Amount (in lakh) No.% w r t population Amount ( in lakh) 1.Imported Material 11493.44145.052218.0323.13 2.Indigenous material (a) Major Suppliers 11428.93117.398321.0788.00 (b) Sundry Suppliers 1147.4119.3228318.4047.80 3.Capital goods 11457.8722.242512.690.87 TOTAL45620.26304.0041318.35159.80 Max India Ltd. Details of CENVAT Invoices

27. Session 9.1-P-126 Swaraj Engines Ltd. Details of Sale Invoices Sr No CategorySample for Pilot StudyOld System % w.r.t. Population % w.r.t. Value % w.r.t. Population % w.r.t. Value 1.High Value100.00 20.2720.30 2.Sister Concern 16.3722.8919.4821.07 3.Misc.16.2863.0419.1817.63 4.Job Work30.5037.80*19.3119.38* 5.Without Duty 53.7487.38*14.9733.12* Total21.6633.45 44.39* 19.2320.91 21.21*

28. Session 9.1-P-127 Swaraj Engines Ltd. Details of CENVAT Invoices Sr No CategorySample for Pilot StudyOld System % w.r.t. Population % w.r.t. value % w.r.t. Population % w.r.t. Value AInputs a) Imported b) High Value c) Others 100.00 100.00 5.71 100.00 100.00 15.43 -- 23.44 20.76 -- 22.20 22.08 Total (A)7.1329.3220.7821.97 BCapital Goods a) High Value b) Others 100.00 16.09 100.00 49.48 -- 20.07 -- 19.38 Total (B)16.6790.6319.933.59 Total (A+B)8.2031.9020.6821.20

29. Session 9.1-P-128 Thank You