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Audit : Common Aspects
Info Analysis: Budget, Programmes and Schemes, Annual
Reports, Sanctions issued, Scrutiny of Govt Accounts received in
SAI office – especially the major payments , Internal Audit Reports,
Compliance with earlier Audits, Persistent Irregularities. Minutes of the
Project Progress/Review/ Evaluation/ Meetings
(incomplete/substantially time and cost over ran procurements,
arbitration cases, etc) , Quality Inspection Reports, Feed Backs
and Representations from Stack Holders, Media Reports, etc
Based on the initial study of the Schemes / Project Guidelines
select the Contracts and accordingly develop a strategy for
conducting contract audits.
Audit : Common Aspects
Why and what of Contract Audit
•Contract audits common in both public and private
sectors.
•There are many reasons for conducting contract audits,
•all related to risk management.
•Perform risk analysis of contracts to determine which
ones to audit.
•Contract risks include:
Time and cost overruns;
Audit : Common Aspects
frauds; duplicate billing or billing of unrelated costs; compliance with government regulatory agencies; Abondoned WorksIncomplete procurementsSubstandard qualityOver-projections of BenefitsArbitration, etc
and many more.
Audit : Common Aspects
Auditors should obtain:
contract files,
budgets,
project and/or engineering plans,
accounting records
any other documents they need to plan the specific audits.
documentation of direct costs and indirect costs charged
to the contract,
records documenting compliance with contract provisions,
regulatory matters
and contract deliverables.
auditors should review these documents and update
themselves on the contract and to develop the audit
procedures.
Audit : Common Aspects
They will verify billings from the contractor by examining the
contract costs incurred by the contractor.
Auditors will execute the audit procedures.
Auditors will select samples of direct and indirect costs and test
those costs to determine if they are allowable to the contract in
accordance with applicable criteria.
For government agencies, the criteria will include
government cost principles and the terms of the contract;
for companies the criteria will be the terms of the contract.
Audit of works Contracts
The aim of audit is to see that all works were executed within
the minimum possible cost and in accordance with the
procedure laid down for the purpose.
There are four main Stages connected with a project
clearance – which contain the contract management
problems which surface later:
1. Administrative Approval
2. Financial Sanction
3. Technical Sanction and
4. Appropriation or Re-appropriation of funds
Audit Points: contd..
Universal Audit Observations in India:
Time Over Run &
Cost Over Run Or
Efficiency : At the cost of Economy and Effectiveness
(CWG/anicuts)
Poor quality (Not yielding targeted results)
Incomplete/abandoned works; etc
Time Over Run :
Non Availability of the Project/Work Site
Change in Scope of Work – Inadequate surveys
Change in Design and Drawings – Inadequate
site/soil survey/technology-poor DPRs
Dispute with Contractor
Audit Points: contd..
Time Over Run continued :
Contractor has run away – Fin & Tech Bids /
inadequate capabilities.
For awarding work at Risk and Cost; formalities
are delayed or not completed.
Non/delayed availability of funds.
Progress monitoring mechanism not in place.
Delays in ATRs of quality monitors.
Works completed but final bill not setelled.
Cost Over Run: Adequate contractual capacity not available in the
States. Award at higher rates.
Adequate competition not generated:
e-procurement/tendering
Cost escalation due to time over run
Disputes with Contractor : Arbitration
Turn key Projects: Defective agreements/vague
terms and conditions.
LD charges are levied correctly and recoverd.
Some Interesting Examples
Administrative approval (A/A): Necessity for the
work by the administrative department for Air strip
A/A issued based on Guestimates (46/24 quarters At
Minimum possible cost) and necessary preliminary plans
(for land availability / basic amenities) not provided.
Boulders/ Earth exacavated : for Land levelling – cost
and cartage.
Transformers procured but remained unutilized due to
change in scope of work.
Quality control (Mckinzys comparison of observations of
SQC and NQC) and action taken on the quality related
observations - effect in payment.
Maintenance – DLP –post construction : Pb case
DPRs/ Design and Drawings: To be based on proper field
and site surveys, necessary soil/field investigations
(seldom found/normally noticed at the execution stage in
the form of large deviations/variations in scope of
work/quantities)
Road alignments based on transact walk (normally
dispute with forest department/land owners)
Proper soil surveys in works (building , dams, canals
which do not come up timely or never used or
breached or washed away)
DPRs: Main problem in India. Quality
depends on accuracy of the data and facts
including technology (DPR preparation is
outsourced to consultants).
Comparison of work items and quantities
executed with those prescribed in the DPRs
(STAs view points, WBM v/s WMM, CD
works, CC works, etc.)
• Analysis of ALR and AHR in the financial bids,
justification/ markets trends (when prepared?)
• Bank guarantees genuine,
• Manintenace of contractor ledger, Inspection Book, Site
Register
• Comparison of items and quantities: between DPR & G
schedule and G schedule and MB (Normally financial
implications are checked)
• Final Bill pendency
When contractor leaves the work:
See his profile (works in hand)/financial standing
Technical evaluation
Recoveries
Invocation of BG and
Formalities for risk and cost award.
• Funds remain idle/Unspent Funds :Investment
Appropriateness of the action taken on the
observations of quality monitors
Comparison of observations of different quality
monitors
Thank you
3. Important points to be seen in audit of
tenders and high value contracts
An interaction on
Important points to be seen in audit of tenders and
high value contracts
sharing the experiences
Some Basic Concepts
Govt is the biggest buyer of goods and services.
What we buy/sell? (Goods, Services, etc. to meet our needs)
Satisfaction (In terms of quality, quantity, rates and
convenience)
NIT/RFP Contents should clearly spell out our
requirement/ needs What is required exactly should be
clear to both buyer and seller? (Requirement/expectations
are often vague in new type of procurements ? Will get
better response (go to him he knows the job?)
Expectations of both the sides should be crystal clear :
DMS (Computerisation case- SRS), IGNOU (ERP), DDA
(Bakkarwala) (Requirements formulation)
Some Basic Concepts Contd..
Clarity will help better competition, bid evaluation process
and contract execution.
(To understand above clearly by both the sides :Pre bid
conference)
The two sides have conflicting
interests/expectations but a Win- Win situation
when satisfaction is there on both the sides.
How balancing of Interests/Expectations carried
out : by following rules & procedures
(Bidding/tendering Process).
,
Basics
Important Points to be seen in Audit
Source of Technical specifications: Not adopted /
not some company specific/generic only.(IGNOU:TCS; DMS :CMC)
Technical Evaluation and adequacy of weightage
to technical aspects (60:40 or 80:20);more
weigtage to favour some one?
Clauses related to technical competency and
capacity, requisite skills and numbers ensured?
Some Basic Concepts…Contd.
NIT should contain Agreement format/No
term or condition was interpreted to the
disadvantage of Govt.
Timely procurement: Procurement when required
(IGNOU: Transformers : Never used – Warranty over –
genuine?) Not much in advance (ready for putting in use)
nor delayed (Other work suffering/assets lying
unutilised). Quantity not in excess of requirement nor
splitting of tenders to avoid sanction of higher
authorities.
Procurement procedure followed was as prescribed by
the rules in force. Clauses related to technical
competency and capacity, requisite skills and numbers
ensured ?
Important Points to be seen in Audit NIT: No term or condition formulated or interpreted to the
advantage or disadvantage of any bidder/Govt. interests
protected (IMO : System suppliers, Two bid system they follow).
Adequacy of competition : Through proper procedure
ensuring transparency.
Reasonability of rates: How established ? When new procurement ?
(TCS).
Cartel formation? Adequacy of the steps taken to prevent it . (IGNOU
paper procurement, Nexus, Test Lab was managed).
Delivery : Wrt the approved specification/technical
parameters, adequacy of the tests conducted to check
quality parameters.
Important Points to be seen in Audit
e- procurement : if in vogue, how robust is the system ?
Price variation clause, if provided, in accordance with rules? Rates
revision especially when Petrol rates were being increased frequently. Rent,
rates, taxes, subsequent addition/deletion or revision by Govt.
Qualified staff deployed as per the contract.
Scope of work (IGNOU: Over prescription boulders, NRRDA :DPR Vs
Actual execution - culverts, quality superior than requisite, etc.)
Quality of work (NRRDA :Independent study – NQM Vs SQM, STA views –
not only financial but quality & quantity should also be seen by STAs in
respect of the works executed by the engineers)
Funds and other pre-requisites (encumbrance free site/approvals
from authorities concerned) were available ?
Sanctions at prescribed levels available ?
Compensation/ Mile stones.
Important Points to be seen in Audit Arbitration when dispute arises
Explain DMS (SRS/Trg/ Execution) /TCS(Training)
/IMO Experience : People do not know the ERP
concept/ info is power so don’t want to share, change
management ineffective,Trg in effective, contract
infrastructure space, communication network, AC
facility, Power Back up, etc not provided.
Rent, rates, taxes, subsequent addition/deletion or
revision by Govt.
sharing the experiences
An interaction
on audit points to be seen
in works procurement and execution
sharing the experiences
Audit objectives:
The aim of audit is to see that all works were executed
within the minimum possible cost and in accordance
with the procedure laid down for the purpose.
Time and cost over run are the universal observations
in India .
There are four main Stages connected with a project
clearance – which contain the contract management
problems surfaced later:
1. Administrative Approval
2. Financial Sanction
3. Technical Sanction and
4. Appropriation or Re-appropriation of funds
Audit objectives: contd..
Universal Observations :
Time Over Run &
Cost Over Run Or
Efficiency : At the cost of Economy and Effectiveness
Time Over Run : Non availability of the Project/Work Site
Non availability of approvals to drawings/designs/plans
Non availability of permissions/clearances from authorities
Change in Scope of Work – Inadequate surveys
Change in Drawing and Design – Inadequate site/soil
survey/technology
Disputes with Contractor
Contractor has run away/Risk and cost formalities not fulfilled
Cost Over Run:
Adequate contractual Capacity not available in
the State
Adequate competition not generated :e-
procurement/tendering
Time Over Run
Disputes with Contractor : Arbitration
Turn key Projects :Defective agreements
Minimum possible cost:
Administrative approval (A/A): Necessity for the
work by the administrative department (Air strip)
. An approximate estimate and necessary
preliminary plans (land availability), Technical
estimate for the work to be prepared in advance.
Design and Drawing: To be based on proper field and site
surveys, necessary investigations (seldom found/normally
noticed at the execution stage in the form of large
deviations/variations in scope of work/quantities)
Road alignments based on transact walk (normally
dispute with forest department/land owners)
Proper soil survey in works (building , dams, canals
which do not come up timely or never used or
breached or washed away)
DPRs: Main problem in India. Quality
depends on accuracy of the data and facts
including technology (DPR preparation is
outsourced to consultants).
Comparison of work items and quantities
executed with those prescribed in the DPRs
(STA’s view points, WBM v/s WMM, CD
works, CC works, etc.
Execution of works/Contract Management:
Potential Audit Areas
• Analysis of ALR and AHR in the financial bids,
justification/ market rates and trend (when prepared? To
justify the rates received?)
• Bank guarantees genuine,
• Maintenance of contractor ledger, Inspection Book, Site
Register
• LD charge are levied correctly and recovered.
• Comparison of items and quantities: between DPR & G
schedule and G schedule and MB (Normally financial
implications are checked)
• final fill pendency
When contractor leaves the work:
See his profile (works in hand)/financial standing
Technical evaluation
Recoveries
Invocation of BG and
Formalities for risk and cost award.
Appropriateness of the action taken on the
observations of quality monitors
Comparison of observations of different quality
monitors
PMGSY experience(second and third tier monitoring
and
Effect in payment (rectification of the sample or the
entire work
Maintenance contract
PPP New ways of Financing:
Huge infrasture being created
their subsequent Maintenance and
Renewal
PPP contd….
Requirement of huge funds:
Tools for meeting funds requirement - Diferrent Models:
PPP - JVs and
Others:
BOLT (Built, Operate,Lease and Transfer/MCA-
TCS)
BOOT (Built, Operate,Own and Transfer)
BOT (Built, Operate and Transfer/TCS-
IGNOU)
SPVs (opens a company for the purpose)
PPP contd…
Financing:
Toll (Estimation of Receipts & Payments/
Cost Benefit Analysis)
Cess on users who can afford (Mining and
other commercial users)
Annuity (Where Toll/Cess not possible):
Bunching to ivite financially and
technically sound big players.
Thank you
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