Internal Audit Consulting Service in Automobile/ Automotive Industry

The AM's IT server and systems are connected with vendors. This enables efficient data transportation and online reliable data interchange. AM specifies delivery schedules which are captured by the vendors in their respective production units. The production units activate the production plan according to the need based procurement schedule.

AM receives online dispatch intimations, which facilitates production scheduling and data capture. AM's system directly validates delivery notes and invoices, avoiding duplicate entries. Sufficient controls are needed to validate data, prevent unauthorised access, and ensure data secrecy and integrity.

Masters involved in these processes are as follow:

• Material Master: The material master is a central repository of information on all materials used by a company. Auditors should ensure that the item master code creation is authorized and access is restricted.
• BOM Master: Auditor to verify BOM & Cost sheet updates, restricted BOM change access, and margin %. Highlight negative margins to the controlling team.
• WorkCentre Master: A work center is a group of machines used for production operations. It is used in routings and contains data for scheduling, capacity, costing, etc.
• Routing Master: Routing is a document that defines the sequence of operations, machine time, labor time, and other data for production costing.
• Product Planning: In component manufacturers, auditors need to ensure production planning and budgeting procedures, system controls, and manual controls for materials not covered by ERP.
• Production Order: Only authorized personnel should be responsible for creating, updating, and releasing production orders.
• MRP Run: The auditor is responsible for reviewing MRP usage for inventory items, reviewing the MRP run review process, and ensuring material requisitions and inventory controls.
• Production Rejection: The post-production quality control process identifies defects, records rejections in ERP, and the plant head decides on corrective action.

The primary responsibility of production management is to formulate and design various production policies.

The Internal auditor has to ensure existing written control procedures and practices of manufacturing and methods to control and monitor the smooth flow of all production processes, product cost savings, thereby improving button line, controlling wastage of resources and maintaining standard of quality throughout the production cycle.

The need of Internal Audit in the Automobile Industry is to ensure the adequate controls maintained for updation of necessary changes on regular review of production process.

Monitoring the progress and deviations from the plan is necessary to ensure plant efficiency and performance once production is set in motion.This involves identifying and fixing problems with routing and scheduling, misunderstanding orders and instructions, underloading or overloading work, and other factors such as late delivery of materials, machine breakdown, and errors in drawings.

Internal accounting controls provide the recording, classification and reporting of production costs such that inventories, cost of sales, and operating costs are properly reported in financial statements, and should provide for the safeguarding of company assets.Finance department should conduct periodic review to verify adequate controls for reporting, recording and tracking all production transactions under financial records.

• Recording of Production & Consumption: Auditors should verify production order closing, consumption recording, and cost accounting controls to ensure timely and accurate inventory and cost reporting.
• Utility Cost Analysis: Regular variance analysis of target and actual costs, including material, labor, overhead, and routing, to identify and address excess costs.
• Accounting of Scrap: Internal auditors are responsible for reconciling production scrap with stock records and investigating abnormal scrap by monitoring and taking necessary corrective action.
• Rework Cost of Products: The process of reworking materials should be automated in ERP and not controlled manually. Without this process, rework costs cannot be analyzed separately.

The health of the supply chain, financial performance, and operational efficiency are all affected by the critical function of inventory management. Inventory involves costs such as holding costs, ordering costs, investments, space management, etc. To prevent overstocking, stockouts, and other risks that can affect the bottom line, it is crucial to have a robust inventory management system.

In automotive industry, inventories are classified as follow:

1. Production Inventory: All materials and supplies used to produce finished goods are included in production inventories, but not for service and maintenance contracts. Examples of production inventories include raw materials, production materials, consumable supplies, and work in progress.
2. Finished Goods: The classification of finished goods as ready for sale can vary depending on the company's accounting policies. Until they are sold and revenue is recognized, they are counted as inventories.
3. Inventory (components) held for Service and Maintenance Contracts: To comply with regulations and maintain customer satisfaction, automakers must keep inventories of service parts for discontinued models. Internal auditors should ensure proper valuation.
4. Goods in Transit: Internal auditors in the automotive industry should ensure that goods-in-transit and goods on consignment are accurately reflected in inventory records.

Other than regular inventory, there are specific items of inventory which are important in relation to the automotive industry.

1. Moulds and Toolings: OEMs and component manufacturers often collaborate to produce toolings for automobile parts. The accounting treatment for toolings varies depending upon contractual agreements between the parties. To determine whether toolings should be capitalised by the OEM or the component manufacturer, internal auditors need to assess the economic substance of the arrangements.
2. Consumable Supplies

   These are divided into two major parts:

   • Production Supplies: Internal auditors must make sure that production supplies are properly accounted for and controlled, regardless of whether they are expensed or inventoried.
   • Other Supplies: The expense for other supplies used for product development, instructions, printed matter, and office supplies is immediately incurred upon acquisition.
3. Produced Vehicles

   Vehicles produced by the entity are divided into the given categories:

   • Production Supplies: Internal auditors must make sure that production supplies are properly accounted for and controlled, regardless of whether they are expensed or inventoried.
   • Other Supplies: The expense for other supplies used for product development, instructions, printed matter, and office supplies is immediately incurred upon acquisition.

Vendor monitoring and rating should be ongoing and periodic, assessing each batch against defined criteria based on risk assessment. This includes specifications, statistical QC data, delivery dates, certificates, and other documents. Each vendor should be evaluated annually for quality, full testing, complaints, audit reaction, response time, and regulatory changes.

Vendors should be rated objectively based on this evaluation, with categories such as completely satisfactory, partially satisfactory, and not satisfactory. Vendors may be reviewed, have their contracts reviewed, or be re-audited based on their ratings.

Preventive maintenance is essential for capital-intensive industries to ensure breakdown-free production. A schedule of preventive maintenance tasks should be reviewed by the plant head to ensure that it is sufficient. Deviations from the schedule can lead to a range of negative consequences, including reduced capacity utilisation, increased production costs, higher maintenance costs, reduced product quality, and increased safety risks.

In conclusion,Internal Auditing in the Automobile Industry plays a pivotal role by ensuring operational efficiency, regulatory compliance, and risk management. Continuous improvement, cost reduction, and customer satisfaction are all facilitated by it, which is crucial for sustained success and competitiveness in this dynamic and complex sector.