FORENSIC AUDIT REPORT - 1

FORENSIC AUDIT REPORT

OF

PMC PHARMA PVT. LTD.

- Submitted by:
CA. Syx

Forensic Audit Report _PMC Pharma Pvt. Ltd. (Private & Confidential)
 FORENSIC AUDIT REPORT - 1

TABLE OF CONTENTS

Forensic Audit Report _PMC Pharma Pvt. Ltd. (Private & Confidential)
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BACKGROUND AND OBJECTIVE

ABOUT PMC PHARMA PVT. LTD.:

PMC Pharma Pvt. Ltd. (The Company) is a reputed pharmaceutical company engaged in manufacture
of medicines and other Pharma products. The company is in the same business line since last eighteen
years. The company has demonstrated history of delivering quality products to the industry and has
always been known for ice breaker break through practices in the pharmaceutical industry.

The company has two segments as mentioned below:

S. SEGMENT DESCRIPTION
NO.

1. Pharmaceutical Engaged in manufacture and research and development of

Segment pharmaceutical products like drugs and medicines.

2. Other Pharma Engaged in manufacture of other wellness and Pharma products like
Products heating pads, pillows etc.

KEY FEATURES OF THE COMPANY:

1. Company engages capital intensive techniques to manufacture the products.

2. There are as many as 450 employees and workers in the organization divided in various
departments.
3. The company works in three shifts for production.
4. Raw material is indigenously procured.
5. The sales are also indigenously made.
6. Company strictly believes in Kaizen and endeavors to strive for continuous improvements.
7. The company is being managed by qualified professionals and management personnel.
8. Company do not have any special recognition for revenue assessment and tax purposes.
9. The company maintains books of accounts on mercantile basis.
10. The company works on an efficient ERP system for all its operations.

Forensic Audit Report _PMC Pharma Pvt. Ltd. (Private & Confidential)
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OBJECTIVE OF FORENSIC EXAMINATION:

During the current financial year i.e. 2017-18, the company is observing a steep plunge in the sales of
pharmaceutical and other Pharma products. But, simultaneously there is no fall or very minimal fall in
the inputs and purchases of raw material consumed. Along with this there is also no measurable hike in
the value and quantity of stocks created.

In other words, sales are falling but there is no corresponding fall in purchases of raw material. Also in
this situation stocks would have piled up but currently the stocks are also not very high.

The company wants to get a forensic examination done so that the exact reasons for the downfall in
sales can be detected and corrective measures can be taken.

For this purpose, the data from April 01, 2014 shall be taken into consideration for the examination
assignment and relevant conclusions shall be drawn on this basis.

Forensic Audit Report _PMC Pharma Pvt. Ltd. (Private & Confidential)
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OUR APPROACH

UNDERSTANDING THE BUSINESS MODEL:

For this purpose, key points to be kept in consideration are:

1. Drawing the organizational chart for flow of duties, authority and responsibility.
2. Drawing a blue print of the entire process flow for manufacturing of various products.
3. Mapping the above two and getting a detailed idea for who is responsible for what action in the
organization.
4. Discussions with key people in the organization and interviewing the personnel.

DRAFTING RISK PROFILE:

For this purpose, key points to be kept in consideration are:

1. Obtaining risk registers if maintained by the entity. If not, assisting the organization to make
risk register.
2. Checking the movement of raw material and other inputs received in the company from their
entry into the premises till their exit.
3. Drafting responsibility and authority chart of the employees of the company.

DATA ANALYTICS AND FORENSIC EXAMINATION:

For this purpose, key points to be kept in consideration are:

1. Study the trends from data by running the data in various audit tools and MS Excel as well.
2. Keeping a check on
a. Exceptional transactions
b. Significant variations
c. Irregular transactions
3. Analyzing the data and highlighting key observations and red flags.

IDENTIFY THE FRAUD AREAS AND DRAFTING THE REPORT:

For this purpose, key points to be kept in consideration are:

1. Based on the above study, giving a bird eye view of the company and reporting the fraud prone
areas and other opinions and suggestions.

Forensic Audit Report _PMC Pharma Pvt. Ltd. (Private & Confidential)
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EXECUTIVE SUMMARY

THE COMPANY:

The company has efficiently installed management information system (MIS) along with a well-
managed ERP system for proper functioning of all operations of the organization. The complete process
takes place through ERP system and flows through the various levels of authority.

The company engages a reputed firm of Chartered Accountants for the task of monthly internal audit of
the business along with the statutory audits which are performed by some other well-established firm.

The internal auditors are responsible to get implemented all controls and security related checks along
with the audit of books of accounts. The periodic physical verification of stocks is being done in the
presence of internal auditors.

The company believes that the security and control measures implemented by them are sufficient and
adequate to detect any frauds or misdoings being done in the organization.

The company is known for providing quality products and there is a zero-tolerance policy in the
company against an employee who is engaged in malpractices and deteriorates the standards and quality
of the products. The company believes that it is the leader in industry and has demonstrated history of
breakthrough practices in the industry.

The company endeavours to move ahead and establish more refined practices for the processes of the
organization.

Forensic Audit Report _PMC Pharma Pvt. Ltd. (Private & Confidential)
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OUR OBSERVATIONS

OBSERVATIONS AND SUGGESTIONS:

During the course of our forensic audit we came across loopholes and other aspects which are being
listed below. Wherever applicable we have provided our suggestions/ inputs.

S. NO. OBSERVATION & IMPACT SUGGESTIONS ACTION TAKEN

REPORT

1. Excessive Centralisation of
Decision making:

Observation:
It was observed that there was We suggest that there should The company
excessive centralisation of decision- be proper decentralisation of realised this flaw and
making powers. There are handful the responsibilities and have immediately
directed their HR to
people in the organization who are authorities. The person who
make suitable
responsible for awarding the is responsible to procure raw appointments at the
purchase contracts. material should not be the desired posts to
We observed that the contracts are same who is responsible to avoid this type of
repeatedly awarded to same suppliers deal with the clients. discrepancies.
even when the inspection department
have raised serious apprehensions If this happens, there comes Also the company
incorporates a policy
regarding the quality of the raw an opportunity for this
to strictly adhere to
material supplied by them. The person to manipulate the the reports of
queries were written on a document things. inspection
attached with the bills but no specific department so that
actions/ measures were taken by non genuine raw
people responsible to award material is not
contracts. purchased.
It was also discovered that few
suppliers have bribed the employees
of the company to secure contracts
but no admissible evidence could be
collected against them.

Impact:
We observed that few of the clients
have stopped giving us contracts for
medicines due to failed samples in
their labs. But this information was
not communicated to the responsible
persons of the company. We

Forensic Audit Report _PMC Pharma Pvt. Ltd. (Private & Confidential)
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personally made calls to such clients

to know about the issue and the
findings were shocking as described
above.

2. Loopholes in the process chart:

Observation:
We observed that there are loopholes We suggest that stores The company has
and chances of leakages in the personnel should check the implemented the said
process flow of the company. The quantities punched at the suggestions and have
company is extensively relying on gate from the quantity directed the stores
the computer aided controls and this actually received. Too much personnel to act
gives a wonderful opportunity to the reliance on computer aided accordingly.
employees to commit a fraud. measures is not correct at all
We observed that the material which the times.
is purchased was being siphoned out
of the factory with the help of We also suggest that few
workers and other people. more CCTV cameras be
installed at strategic location
Impact: near parking yard of trucks
The purchases were not reduced as so that this kind of theft can
compared to the quantum of sales be controlled.
and the material was being stolen and
taken out of the business premises.
Persons responsible to take the
material from factory gates to the
stores used to commit this fraud. The
loophole was that during the
movement from gates to store the
employees used to transfer some raw
material to the trucks used to take
scrap material out of the factory.
Also, there was no provision to
verify stocks in the stores as the
store’s personnel depended on the
stocks punched by gate keepers.
Hence comparatively the sales were
falling but purchases were not
declining accordingly.

COMMENTS:

These were the two prime reasons for the fall in sales and correspondingly there was no
measurable fall in purchases and neither stocks were being created.

Forensic Audit Report _PMC Pharma Pvt. Ltd. (Private & Confidential)
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SCOPE AND APPROACH

SCOPE AND APPROACH:

We were asked to analyse the data for the period commencing from April 01, 2015. We have drawn
following observations in our audit:

1. The sales show a similar pattern for all the years except the current year in consideration.
2. During all the years under consideration, there was a steep rise in sales during the rainy
season because the environment becomes more infectious and people catching more
diseases.
3. It was also observed that sales during winters declined as this was considered as a slump
season in the pharmaceutical industry.
4. During the year 2017 – 18, the sales have declined since the commencement of the year.
5. During the course of our audit we did not find any slump in the industry hence the fall in
the sales of PMC Pharma Pvt. Ltd. was suspicious.
6. There was rather a marginal rise in the sales according to the industry standards.
7. The detailed study of data also revealed that company was paying overtime premiums to
the workers even when the sales were continuously falling.
8. We took interviews of the people responsible for various tasks and came at the above
findings which have been given in the preceding section.
9. During the interviews few employees revealed that the persons responsible to award
contract for procurement of raw material used to take bribes to award contracts to
specified suppliers. But we could not find any conclusive evidence against such
employees.
10. Interviews also revealed the fraudsters and culprits as when asked about the same
process, their answers differed.
11. We also observed that as the saying ‘man is behind machine’ holds true. Many data entry
manipulations have been done before feeding the data to MIS. and ERP. There was no
check on these manipulations.
12. The scope of work of internal auditors was required to be magnified so that these cases of
frauds should be detected at an early stage.

COMMENTS:

There are serious discrepancies at certain points which are suitably highlighted in this report.
The company is advised to look into the appropriate matters and implement the suggested
views.

Forensic Audit Report _PMC Pharma Pvt. Ltd. (Private & Confidential)