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