Audit Planning Memorandum

1. Introduction: This memorandum sets out our proposed strategy for auditing the
Karnataka State Khadi and Village Industries Board (KVIB) for the year ended 31
March 2006.
2. Background of the entity: KVIB is a Statutory Board established by an Act of the State
Legislature. It was established in 1957. The Board was established by the State Government
with the objective to organize, develop and regulate Khadi and Village industries in the state.
The main objective of the Board is to give priority for Khadi and Village Industries in rural
areas and to develop, provide assistance, generate employment opportunities in rural areas
and improve the economic status of the rural artisans.
3. Respective Responsibilities: The CEO is ultimately responsible for maintaining proper
accounting records; preparing annual Accounts that give a true and fair view of the state of
affairs of the Board; and ensuring that these Accounts have been properly prepared in such
manner as prescribed under the Karnataka State Village Industries Act, 1956. He is also
responsible for ensuring that the expenditure and income presented in the annual Accounts
has been applied to the purposes intended by the State Legislature and the funding agencies
and that the financial transactions conform to the authorities which govern them. The audit
of the Board is entrusted to the CAG under the provisions of Section 19(3) of the CAGs
DPC Act. There may be certain matters on which C&AG may decide to communicate to
Legislature in a separate report. Such matters may include comments on the internal controls
and accounting records and may be intended to provide additional information alongside any
matters referred to in the audit certificate.
4. Objectives of audit: Our work is constructed around producing, for the C&AGs
consideration, an audit certificate that he will then address to the Legislature through the
Government. The audit certificate follows a standard form (based on auditing standards) in
which the C&AG provides Legislature with an opinion on two matters. First, the C&AG
will state whether, in his opinion, the Accounts give a true and fair view of the state of affairs
of the Board and of its income and expenditure, total recognised gains and losses for the
relevant year. This part of the opinion will also indicate whether the Accounts have been
properly prepared in such manner as prescribed under the Karnataka State Village Industries
Act, 1956 and/or Karnataka Finance Code (KFC).
Second, the C&AG will also indicate whether, in his opinion, the expenditure and income
presented in the Accounts have, in all material respects, been applied to the purposes
intended by the Legislature and funding agencies and whether the financial transactions
conform to the authorities which govern them.
In arriving at this two part opinion, we will consider the following matters:
whether the Department has kept proper accounting records and whether
proper returns adequate for the audit have been received from any third
parties;
whether effective systems of internal control are in place;
whether the Accounts are in agreement with the accounting records and
returns; and
whether we have obtained all the information and explanations which we
consider necessary for the purposes of our audit.
Where we are not satisfied with any of the above matters, then we will consider how our
audit conclusion might impact upon the C&AG's audit certificate. In deciding the impact on
his opinion, the C&AG may decide to refer to such matters in his audit certificate and/or in a
separate Report to Legislature.

4. Risk Assessment: Based on the assessment of external and control environment of the
Board, the overall inherent risk assessment of the account areas is made as high, medium or
low and significant audit areas identified are as follows
a. Non-plan expenditure - salary: There is a specific risk that the expenditure incurred
during the year may exceed the budget and thus there may be the risk that salary
component of non-plan expenditure is met out of plan grants, ie expenditure without
specific approval of government as Board cannot reappropriate from plan heads.
b. Debtors: The main activities of the Board are to extend financial loans to the rural
sector. Hence debtors is identified as a major risk area. Recoveries have to be
affected on the Khadi and Village Industries Commission (KVIC) loans advanced
under various schemes. The risk is that debt will become bad as the loan recovery
period is over in the PBS/CBC which are closed schemes. Further the risk also lies
in the possibility that there could be delays in remittance of loan amount to the
KVIC, as a result leading to a difference in the demand by the KVIC and remittance
by the Board. Whether regular reconciliation between the Board and the KVIC is
being done will also be a risk area.
c. Provisions for depreciation, bad and doubtful debts: There may be the risk of the
Board not providing for depreciation, as a result leading to misstatement of assets.
Further if the Board provides, whether it provides sufficiently for bad and doubtful
debts is another area to be examined.
d. Recovery of interest on loans: Repayment of interest may not be as per the
guidelines. In addition to this, there may be delay in repayment of interest amount to
the KVIC.
e. Exhibition account: Non adherence to the conditions imposed by the KVIC may
cause them to reduce the grant and thus may impose additional financial burden on
the Board. Further whether the resource sharing is as per the guidelines prescribed
by KVIC may be another area of risk.
f. Pension: Whether the Board is providing enough to meet its pension liability.
Inability to do so may impact on the discharge of its pension liability. Further
whether the Board is remitting the pension contribution to government is another
risk area.
g. Plan grant: The risk is that the grants may not have been discharged as per the terms
and conditions and may not have been utilized for the purpose and within the period
for which they were sanctioned and that they may have been lapsed.

5. Materiality: Since the main business of the Board is disbursal of loans received
from the State government and the KVIC and other funding agencies and these
loans are not routed through the state budget, the level of Legislature interest is
low. Further, public interest is also low. Hence the accounts of the Board can be
considered as not sensitive account.
Therefore 2% of GROSS EXPENDITURE is set as materiality for the Board.

The term ASSURANCE FACTOR refers to the level of assurance required from
sampling .The assurance Factors for different levels of substantive testing are:Level of Testing
Focused
Standard
Minimum

Assurance Factor
3.0
2.0
0.7

As a general rule, the risk factor is proposed to be taken as 0.7, which may be
subject to revision for specific account areas based on the results of substantive
testing. This may also depend on the time available.
The formula for calculating sample size :Sample size = (Account area population / Precision) X Assurance Factor.

The sample sizes is calculated as follows:

Gross Expenditure
Materiality Base
Materiality (2% of Materiality Base)
Less Most likely Error (10% of Materiality)
Precision is 90%
Sample size =(account area population X 0.7)/ 0.0162x

x
0.02x
0.002x
0.018x
0.0162x

6. Audit Approach for each account area: Our audit approach is a risk based one, informed by
our understanding of the Boards business and the accounting and the internal control
systems as well as our assessment of the risks associated with the financial statements. As a
part of our audit, we will determine the extent to which we can rely on detailed control
procedures and managements monitoring activities to prevent or detect specific material
misstatements and address all potential errors by conducting walk through tests of all the
identified significant audit areas. Where it is found that the accounting systems and controls
are sound, we will seek to take audit assurance from them. In respect of those significant
audit areas where either the controls dont exist or are weak, further substantive procedures
are designed.
7. Resources and timing: The audit is to be completed in a period of 4 weeks. The audit team
will comprise the following members
Shri. Gopinathan, AG Team leader
Shri. Ravindra Pattar, Sr. DAG
Shri. L.Hangsing, Sr. DAG
Ms. Chanda Pandit, Sr. DAG
Shri. Sr. A.O
Ms. Elizabeth, AAO,
Shri. Vijay Kumar, SO,
Shri. 2 Auditors.
11. Key contacts at the entity: The key contacts include Shri. R.Rameshappa, Chief Executive
Officer and Shri. Shariff, the FA & CEO.