Biama 59697
Biama 59697
Biama 59697
Disclaimer:
The views expressed in the Technical Guide are those of the authors. The
Institute of Chartered Accountants of India may not necessarily subscribe to
the views of the authors.
E-mail : cia@icai.in
Website : www.icai.org
Price : ` 200/-
ISBN No : 978-81-8441-438-7
Preface…. .................................................................................................. v
Glossary .................................................................................................... xi
xii
Flag Ship Store The Flag Ship Store refers to a store located at
retailer’s primary location – A store in a prominent
location, a chain’s largest store, the store that holds
or sells the highest volume of merchandise, a
retailer’s most well-known location, a chain’s first
retail outlet, or the store location in a chain which
carries the most high- priced merchandise catering
to the most upscale customers.
Footfall The number of shoppers entering a store or
shopping mall.
High Street A place or locality in a major city or principal street
of a small town, which would be the main point of
purchase from well-known shops stocking high
quality, apparels, and non- apparels.
Horizontal Price An agreement between two or more parties,
Fixing generally considered to be competitors, to set,
maintain, and charge a specified price for a
particular product. This is considered to be a
collusion to artificially set prices at a certain level,
rather than allowing the free market to organically
drive price levels.
Internet Auction An internet service through which products can be
Platform sold and auctioned via internet.
Keystone Pricing A pricing method of marking merchandise for resell
to an amount that is double the wholesale price.
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M-Commerce (Mobile M-Commerce is the buying and selling of goods
Commerce) and services through wireless handheld devices
such as cellular telephone and personal digital
assistants (PDAs), known as next-generation e-
commerce. M-Commerce enables users to access
the Internet without needing to find a place to Plug-
in.
Mazur Plan Retail store management technique under which all
retail activities are divided into four functional
areas: merchandising, publicity, store management,
and accounting and control.
Merchandising In the broadest sense, merchandising is any
practice which contributes to the sale of products to
a retail consumer. At a retail in-store level,
merchandising refers to the variety of products
available for sale and the display of those products
in such a way that it stimulates interest and entices
customers to make a purchase.
Mystery Shopping A quality checks system employed by companies.
Dummy customers are sent into stores to check
upon quality of service, behaviour, and knowledge
of store employees, etc.
Never-out List Never-out List used when a retailer plans stock
levels for best-sellers. Items accounting for high
sales volume are stocked in a manner that ensures
they are always available.
Niche Retailing Niche Retailing enables retailers to identify
customer segments and deploy unique strategies to
address the desires of those segments.
Open-to-Buy The difference between planned purchases and the
purchase commitments already made by a buyer
for a given time period, often a month. It represents
the amount the buyer has left to spend for that
month and is reduced each time a purchase is
made.
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Order Lead Time The period from the date an order is placed by a
retailer to the date merchandise is ready for sale
(received, price-marked, and put on the selling
floor).
Parasite Store An outlet that does not create its own traffic and
that has no real trading area of its own.
Percentage Variation An inventory-level planning method where
Method beginning-of-month planned inventory level during
any month differs from planned average monthly
stock by only one-half of that month’s variation from
estimated average monthly sales. Beginning-of-
month planned inventory level (at retail) = Planned
average monthly stock at retail x ½ [1 + (Estimated
monthly sales/ Estimated average monthly sales)]
Perpetual- Inventory Keeps a running total of the number of units
Unit-Control System handled by a retailer by ongoing record-keeping
entries that adjust for sales, returns, transfers to
other departments or stores, receipt of shipments,
and other transactions. It can be done manually,
use tags processed by computers, or rely on point-
of-sale devices.
Planogram Visual description, diagram or drawing of a stores
layout to include placement of particular products
and product categories.
Point of Sale (POS) Point of Sale (POS) refers to the area of a store
where customers can pay for their purchases. The
term is normally used to describe systems that
record financial transactions. This could be an
electric cash register or an integrated computer
system which records the data that comprises a
business transaction for the sale of goods or
services.
Point-of- Purchase Point-of-purchase displays, or POP displays, are
(POP) Display marketing materials or advertising placed next to
the merchandise it is promoting. These items are
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generally located at the checkout
area or other location where the purchase decision
is made.
Power Centre A shopping site with (a) up to a half-dozen or so
category killer stores and a mix of smaller stores or
(b) several complementary stores specialising in a
product category.
Power Retailer The status reached by a company that is dominant
in some aspect of its strategy. Consumers view the
company as distinctive enough to become loyal to it
and go out of their way to shop there.
Precision Retailing Using data in information systems to make refined
merchandising decisions store by store.
Predatory Pricing Involves large retailers that seek to destroy
competition by selling goods and services at very
low prices, thus causing small retailers to go out of
business. The practice is restricted by federal and
state laws.
Pre-marking A system in which the manufacturer, rather than
the retailer, marks merchandise with the retail
price.
Prestige Pricing Assumes consumers will not buy goods and
services at prices deemed too low. It is based on
the price-quality association.
Price Comparison A specialised website comparing the prices of
Website products across various internet stores.
Price Guarantees Protect retailers against possible price declines. If a
retailer cannot sell an item at a given price, the
manufacturer pays it the difference between
planned retail and actual retail selling prices.
Price Lining A practice whereby retailers sell merchandise at a
limited range of price points, with each price point
representing a distinct level of quality.
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Primary Trading Area Encompasses 50 percent to 80 percent of a store’s
customers. It is the geographic area closest to the
store and possesses the highest density of
customers to population and the highest per-capita
sales.
Product/ Service Mix The number and kind of products and services a
general merchandise retailer will offer.
Product Breadth The product breadth is the variety of product lines
offered by a retailer. Product breadth is also known
as product assortment or merchandise breadth.
Product Depth Product depth is the number of each item or
particular style of a product on the shelves. Product
depth is also known as product assortment or
merchandise depth.
Pull Policy A promotional policy aimed at building strong
consumer demand for a product.
Push Policy A promotional policy aimed at markets with the
intention of getting retailers to stock a product in
order to build supply in the marketplace.
Regression Model A computer site-selection model that develops a
series of mathematical equations showing the
association between potential store sales
and various independent variables at each location
under consideration.
Retail Information Anticipates the information needs of retail
System managers; collects, organizes, and stores relevant
data on a continuous basis; and directs the flow of
information to the proper retail decision makers.
Sales Floor The sales floor is the location of a retail store
where goods are displayed, and sales transactions
take place.
Same-Store Sales A statistic used in Retail Industry analysis. It
compares sales of stores that have been open for a
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year or more. This statistic allows investors to
determine what portion of new sales has come from
sales growth and what portion from the opening of
new stores. Same store sales are usually released
by retail companies on a monthly basis. This is also
known as “comps”.
Sliding A loss prevention term referring to the act of a
cashier passing merchandise around the cash
register barcode scanner without actually scanning
the item.
Specialist Food Outlets selling a selected category of groceries.
Stores These include butchers’ shops, bakeries, cake
shops, off-licences and greengrocers.
Standardisation A strategy of directly applying a tried and tested
retail strategy to newer markets to ensure
customers get the same experience across all
stores of a chain.
Stock Keeping Unit The Stock Keeping Unit (SKU) is a unique number
(SKU) assigned to a product by a retail store to identify
the price, product options and manufacturer of the
merchandise.
Storefront The total physical exterior of a store. It includes the
marquee, entrances, windows, lighting, and
construction materials.
Target Market A segment of consumers that is most likely to
purchase the products and services offered by a
particular retailer.
Universal Product A categorisation where each item is given a ten-
Code (UPC) digit number, pre-marked on the package by the
producer in the form of a bar code over ten
corresponding numbers.
Vertical Retailers Retailers that sell only their own branded
merchandise. These goods are not found anywhere
except in their own stores or catalogues (also
called lifestyle retailer).
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Chapter 1
Introduction
1.1 Retail refers to the sale of goods to end users, not for resale, but for
use and consumption by the purchaser. The retail transaction is at the end of
the supply chain. In India, the retail industry is the second largest employer
after agriculture, although it is highly fragmented and predominantly consists
of small independent, owner — managed shops. The Indian retail industry is
the fifth largest industry in the world.
1.2 Retail industry is one of the fastest growing industries in India. The
retail industry comprises of organised and unorganised industries.
Organised retailing refers to trading activities undertaken by licensed
retailers, i.e., those who are registered for GST, income tax, etc. These
include the corporate-backed hypermarkets and retail chains, and also the
privately owned large retail businesses.
Unorganised retailing refers to the traditional formats of low-cost retailing,
for example, the local Kirana shops, owner managed general stores, hand
cart and pavement vendors, etc.
The organised industry represents only 18% share of the retail industry as
per data from India Brand Equity Foundation (IBEF a Government Entity) for
the year 2021.
1.3 Post liberalisation the retail industry in India is heralded as one of the
sunrise industries. Today within the booming service industry, retail is the
single biggest contributor in terms of GDP to the national income. Retail has
played a major role world over in increasing productivity across a wide range
of consumer goods and services.
1.4 The term retailing is a very broad term which can be used to denote a
large range of products including durables and consumables. This industry
can be categorised into:
(i) Food & Beverage products
(ii) Soft goods — clothing, apparel, and other fabrics.
(iii) Hard goods (“hard line retailers”) - appliances, electronics, furniture,
sporting goods, etc.
Technical Guide on Internal Audit of Retail Industry
Further, the retail industry includes the sale/ distribution of the following
products:
Clothing, textiles and fashion accessories
Jewellery
Health and Beauty Care Services, Pharmaceuticals
Consumer Durables, Home Appliances/ Equipment
Mobile handsets, Accessories and Services
Food and Grocery
Books, Music and Gifts, etc.
2
Introduction
3
Chapter 2
Overview of Indian Retail Industry
2.1 Indian retail industry is one of the fastest growing industries in India,
especially, over the last few years. Though initially, retail industry in India
was mostly unorganised, and especially with the change of tastes and
preferences of the consumers, the industry is getting more significant and
organised as well. It is important for an internal auditor to have relevant
business knowledge and gain an understanding of the Indian retail industry,
its evolution, initiatives from the Government, special features of the industry
and the challenges faced by entities operating in this industry, in order to
understand the critical areas, nuances and knowledge of the business
thereby helping him to frame internal audit procedures to perform efficient
and effective internal audits.
Sector Share
E-commerce 7%
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Technical Guide on Internal Audit of Retail Industry
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Overview of Indian Retail Industry
small Kirana shop owners who form the basis of livelihood for millions of
people.
2.10 The Government has taken steps to help in growth of e-commerce
which eventually acts as the backbone for growth of e-retailing. Besides
developing the e-infrastructure in the country through effective telecom policy
measures, the Indian Government has created the necessary legal and
administrative framework through the enactment of the Information
Technology (IT) Act which combines e-commerce transactions and computer
misuse and frauds rolled into an Omnibus Act. The Controller of Certifying
Authorities (CCA) has been put in place for effective implementation of the IT
Act. The Act also enables e-governance applications for electronic delivery of
services to citizens.
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Overview of Indian Retail Industry
seller, rather creating a digital environment that enables both the buyer and
seller to transact digitally.
2.17 ONDC creates an open network enabling the flow of interactions /
command between various participant applications, implying that both the
buyer and the seller need not be using the same application for the
transaction to take place. Thereby the success of ONDC lies in onboarding
as many participants as possible, becoming the universal platform of
platforms / applications.
2.18 The following technological components play a vital role in enabling
this to happen:
1. Adaptor Interfaces: These are the APIs, which enable the exchange of
information and allows the participants of the network to interact with
each other.
2. Gateways: Gateway is an application that filters the results based on
the request received. Requests are filtered on the basis of location etc.
3. Open Registries: Open registries maintain the list of participants who
are joining ONDC.
4. Applications: Applications are of two types. Buyer side and seller side
applications. Both the applications carry features that enable the
respective functions of buying and selling.
2.19 ONDC will adopt a minimalistic approach of governance in complying
with the Information Technology Act, 2000. ONDC will also act as a
resolutory of disputes arising amongst the network participants.
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Technical Guide on Internal Audit of Retail Industry
sell contracts on behalf of the licensor. In return for the sale of goods or
services, the agent receives a commission specified in the licensing contract.
(ii) Dealership
Retailers may find the business model of a licensed dealership as a mix of
franchise and independent retailer. The licensee has the right (sometimes
this is exclusive) to sell a brand of products. Unlike a franchise, the dealer
can sell a variety of brands, and generally, no fees is paid to the licensor.
Dealerships may or may not be identified as an authorised seller or by the
company’s trademark.
(iii) Direct Distribution
Offering goods and services directly to consumers, through face-to-face
contact, usually at the client’s home, workplace or elsewhere outside of retail
sales points - form of retail distribution outside of a chain of shops.
(iv) E-store, Internet Store, On-line Store
A sales point involved in e-trading over the internet under a unique world
wide web (www) address, with an interactive form that allows the consumer
to place an order for a product or service using the information provided
(including price and mode of payment).
(v) Franchising System
It refers to the methods of practicing and using another person’s business
model. The parties signing a franchising agreement remain totally
independent of each other. Both the outlet and the goods (which are
frequently supplied by the franchisor) belong to the franchisee. The
franchisee purchases goods and services on its own behalf and the complete
sales revenue belongs to the franchisee, who pays periodic franchise fees to
the franchisor.
(vi) Integrator
It is a firm running a franchise or partnership-based retail chain. It may
operate on a commission basis or act as supplier if the integrator is a
wholesaler.
(vii) Independent Retailer
An independent retailer is one who builds his/ her business from the ground
up, i.e., from the business planning stage to opening of the retail store. He/
she may hire consultants, staff, and others to assist in the business.
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Overview of Indian Retail Industry
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Overview of Indian Retail Industry
(MIS). This would require periodic analysis of data on a store wise and
department wise basis.
(ii) The industry is labour intensive and requires trusted, young, attractive
salespersons to enable sufficient pushing of products to the customers
and stores. In the case of small grocery store, the owner directly
supervises the entire activity. In large stores, there are sophisticated
surveillance systems to supervise the activity to enable prevention and
detection of thefts and shoplifting by customers.
(iii) The success of a store is determined on the basis of correctness of
the demand forecasting in a location as against the actual number.
Hence, correct information is required by the decision makers as
regards the demand for a location.
(iv) The business processes and control systems are unique and should
be commensurate with size of retail store.
(v) The work timings of these stores would vary taking into consideration
the size, location, customers they cater, products and employee
availability.
(vi) Branding plays an important role in the Indian retail industry. Branded
products as well as branded retails are chosen by informed customers
and unbranded products still occupy a significant part of the retail
market, especially in the rural areas.
(vii) Corporate strategy might be required to be periodically changed in the
light of changing business scenario and trends across markets.
Further, there is need of standardisation of practices across locations
and stores. This would require quick adaptability by the entire
organisation to the dynamic changing environment.
(viii) Competition among products is extremely high with various
promotional offers and schemes. Bigger retailers virtually kill the
business of many small retailers in the vicinity through their intense
marketing strategies and offer to attract customers.
(ix) The demand factors for consumables and durables are significantly
different and business intelligence plays an extremely important role
for the success of the entity.
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Technical Guide on Internal Audit of Retail Industry
(x) The risks for a retail industry are different from any other industry. The
areas of risk can vary from business risk to business continuity risk.
(b) Supply Chain Management and Billing
Unlike many other industries, the contract and billing process are unique.
There is wide range of practices taking into consideration the depth of
penetration of this industry. Some important aspects are as follows:
(i) The dynamics of the Supply Chain Management (SCM) plays the most
critical part of the retail industry and involves the efficient management
of the distribution processes and delivery processes to achieve
success in its operations. This is taking into consideration the
complexity of the procurement process from suppliers across
geographical locations at varied terms and conditions.
Big entities have warehouses which act as depot for their stores and
replenish them on a periodic basis. Further, such replenishments
might be from local purchases or from a centralised location.
(ii) Significant economies of scale exist when an entity would buy large
number of products by negotiating lower price per unit than its
competitors. It gives better competitive advantage over smaller
entities.
(iii) Payment might be made in the form of cash, cheque or debit/ credit
card, discount coupons/ vouchers, etc. Considering the volume of
transactions, the entities might face challenges in ensuring an error
free billing of its products.
(iv) Billing process is typically related to format of the store. It is system
driven in the case of large stores and fairly simple and unorganised in
the case of small stores. Billing needs to be done on a real time basis
and there cannot be any delays on this front.
(c) Material Storage and Handling
The success of the store depends on efficiency of management of products
and materials, considering the perishable nature of products. Some special
features are as follows:
(i) Considering the size and volume of materials, entities find it relatively
challenging to maintain sufficient control on the inventory and to
perform routine inventory verification. Further, there must be a unique
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Overview of Indian Retail Industry
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Overview of Indian Retail Industry
2.25 Retailers purchase a product, mark up its cost, and advertise it for
sale. The mark-up process is the key to the retailer’s business because if the
product is marked up too high, consumers will not buy it and if it is marked up
too low, there will be no profit and the supply may be quickly get exhausted.
In any case, the product value cannot exceed the Maximum Retail Price fixed
by the manufacturer.
2.26 India is witnessing change in lifestyles of large section of the
population. The need to understand the emerging markets and consumers
has become a big challenge for the corporates, especially, in creating and
managing a powerful brand. By developing a powerful brand, entities can
establish ‘brand equity’ and the equity assists firms to manage competition
and to maintain market share. Branding is one of the most effective
competitive tools and it is a challenging task for the marketer to nurture a
brand into a strong profitable brand.
2.27 Some new age brands are adopting D2C model of distribution, where
they tie-up with a logistics partner and remove the intermediary from the
distribution network. Such models are reliant on the internet completely. As
soon as a customer orders products from the brand’s website or via any
other available means, the manufacturer/owner of the brand sends it directly
to the customer without depending on an intermediary.
2.28 Indian e-commerce is following primarily two business models:
Market place model
Inventory model
Market place model is basically using digital medium as a showcase for the
products by various sellers, meanwhile the platform not maintaining any
inventory of the same. Platform acts as an intermediary and arranges for
payment, logistics and delivery between the merchant and the buyer.
Whereas in inventory models, the platform itself buys the goods from the
manufacturers or sellers and stores it in its warehouses and takes care of
end delivery.
2.29 Today’s brands are more visible than those in the past. They are
everywhere-on the TV, hoardings, posters and print media. Brands while
proclaiming their positive qualities pull down those of their rivals. Intangible
assets such as brands, patents and know-now have become increasingly
dominant elements of entity’s value.
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Overview of Indian Retail Industry
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Technical Guide on Internal Audit of Retail Industry
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Overview of Indian Retail Industry
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Technical Guide on Internal Audit of Retail Industry
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Chapter 3
Risk Management
Risk
3.1 Risk can be defined as the probability of a threat exploiting
vulnerability of business assets or processes or controls by occurrence of an
event causing significant impact to the business operations and continuity
and which could prevent the organization from achieving its goals and
objectives. Areas which can be impacted by risk are broadly classified into
strategic, reputation, operational, financial, legal, environmental, etc.
3.2 The ICAI has issued a Standard on Internal Audit (SIA) 130, Risk
management. The Internal auditor may refer this Standard in detail to
understand the important terms, various responsibilities of Management and
Internal auditor and how this standard to be used in the context of mitigating
and managing the risk.
Business Risk
Business risk comprises the following:
(i) A change in the product range based on customers changing
preference needs.
(ii) A change in the legal environment that imposes new conditions, costs
or restrictions upon the manner of providing the services, the means
by which the services are delivered to the customer.
(iii) A change in the volume of transactions, either to:
(a) Increase (requiring additional hiring and perhaps a change in
business process) or
(b) Decrease (resulting in sub-optimization of dedicated resources
or re-allocation of resources).
(iv) Risks due to international operations.
(v) Unprecedented increase in the cost of real estate leading to increased
cost of operations and strain on the profitability.
(vi) Increase in workers’ compensation cost and retention of key
employees.
(vii) Change in consumer confidence leading to significant locations in
consumption of certain category products.
(viii) Risks on account of non-compliance with statutes.
(ix) Changing importance for locations might have a significant impact
taking into consideration the initial investment required to be made at
every location and higher rentals that might be paid for them in
comparison to the others in the vicinity.
(x) Credit risks related to commercial business consumers.
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Risk Management
Political Risk
Political risk represents the degree to which social and governmental
environments may change in the future. This risk may manifest itself in
events over which a government has no control, such as, riots or new
elections. Other events may be caused by a government, such as, an
embargo on imports or exports, increases in tariffs, new prohibitions on
transactions with specific countries.
In international outsourcing transactions, political risks need special attention
due to the long-term nature of the relationship. There are a number of
techniques that can mitigate, but not eliminate, such risks.
Further, the country makes policy for Foreign Direct Investment (FDIs) by a
foreign entity in retail industry in India. This is subject to political risks and
the policy viable to change which might have a significant impact on the
operations and the business established in India. There might also be
instances where additional duty is charged on certain products imported in
India e.g., antidumping duty. In such cases, the entity might not be able to
reap the benefit of cheaper products for its customers. Moreover, the entity is
affected by retail policies of the country from which the entity procures
products e.g., if there is any quota for exports, it might have an impact on the
prices of goods.
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Technical Guide on Internal Audit of Retail Industry
Environment Risks
Environmental risks associated with the retail industry, generally, fall into one
of two categories:
(i) Site Acquisition, Development, and Construction
Considering that retailers buy and develop retail property, the retailers should
develop an effective due diligence process, and manage environmenta l risk.
The significant cost would be on account of following:
Clean-up Cost Cap for “capping” the cost of cleaning up known
pollution conditions.
Pollution Legal Liability for transferring the risk of cleaning up
unknown pre-existing pollution conditions, third party claims, and other
related exposures.
Loss of income due to delay in opening/ scheduled completion of the
project.
(ii) Store Operations
Environmental risks arising from retail store operations, generally, fall into
one of two categories:
a. Nature of products/ services sold— Retail operations that store and
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Risk Management
Systemic Risk
Regulators and governments focus on the risks to the systems that support
local and global economies. A systemic risk affects all participants in an
economic sector or industry.
When planning any solution to the sourcing dilemma, executives and
managers need to understand the nature of systemic risk and adopt
appropriate risk planning strategies.
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Risk Management
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Technical Guide on Internal Audit of Retail Industry
Risk Assessment
3.6 A risk-based planning exercise shall form the basis of the overall
internal audit plan. The Internal Auditor shall undertake an independent risk
assessment exercise to prioritise and focus the audit work on high risk areas,
with due attention to matters of importance, complexity and sensitivity.
3.7 The internal auditor shall undertake an independent risk assessment
of all the Auditable Units identified in the Audit Universe and align this with
the risk assessment conducted by the management and the statutory auditor.
This is required to prioritise and focus audit work on high-risk areas, with due
attention to matters of importance, complexity and sensitivity.
3.8 This exercise may involve site visits and preliminary surveys of the
Auditable Unit. Based on this exercise, key risk mitigations (or internal
controls) are identified for testing the effectiveness of operation. Absence of
any risk mitigations (or missing controls) could point towards process design
gaps which shall also be validated and reported.
3.9 The internal auditor may also plan to undertake a dedicated audit of
the company’s Risk Management Framework and processes, as a separate
review or assignment.
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Risk Management
Internal Control
3.11 Standard on Internal Audit (SIA) 120, “Internal Controls” as issued by
the ICAI states that Internal Controls are systemic and procedural steps
adopted by an organization to mitigate risks, primarily in the areas of
financial accounting and reporting, operational processing and compliance
with laws and regulations.
3.12 Internal Controls (ICs) are essentially risk mitigation steps taken to
strengthen the organization’s systems and processes, as well as help to
prevent and detect errors and irregularities.
3.13 The actual steps of mitigation (e.g., review, approval, physical count,
segregation of duty, etc.) are referred to as “Control Activities”. When ICs
mitigate the risk of financial exposure, they are also referred to as Internal
Financial Controls (IFCs) and when they mitigate operational risks, they are
also referred to as Operational Controls (OCs). ICs generally operate with
human intervention (Manual Controls), but in an automated environment,
computer controls are deployed to secure the systems and called IT General
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Chapter 4
Fraud Management
4.1 Frauds significantly affect the revenue of the entity operating in retail
industry. On an average around 3% of revenue is lost on account of frauds.
Shrinkage or Fraud in retail is a key issue. Shrinkage means “loss in
inventory on account of combination of employee theft, shoplifting, vendor
fraud and administrative error,”
4.2 Various categories of fraud constitute a major component of the
shrinkage. Among the factors responsible for shrinkage losses, employees
and vendors are critical factors that need to be managed by retailers.
Employees may resort to direct theft, under invoicing in collusion with
customers, stealing cash, etc., whereas vendors can under-deliver in terms
of number, size or quality of items as against the bill invoice.
4.3 The growing motivation among employees to lead a luxurious life, high
reliance on skilled resources, thereby leading to weaker internal controls,
and over dependence on existing systems and processes give rise to
increased risk of fraud in retail industry.
4.4 Most potentially costly fraud schemes operating in the retail industry
happen far from the selling floor, the security cameras and the cash register.
This happen when employees behind the scenes circumvent processes and
take advantage of insufficient oversight. Retailers face some unique risks
that can have a potentially devastating impact on the company’s bottom line
and reputation. Retail companies should be proactive in identifying fraud
risks and implementing anti-fraud programs and controls to minimize the risk
of fraud.
Categories of Fraud
4.5 The common categories of fraud that affect the retail industry are as
follows:
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Fraud Management
(d) Backdating
It is another way of fraudsters misstating revenue in which sales documents
make a transaction appear to have occurred in a prior period. Again, failure
to institute or enforce policies about negotiating and executing sales
agreements can be a risk factor here.
Certain frauds can be identified by the internal auditor through performance
of analytical procedures as described earlier. A few indications of potential
fraud might be in the nature of following:
Decreasing Gross Margins
Increasing sales are increasing could signal a side agreement for a
special discount.
Unusually High Returns
It could be caused by a channel stuffing arrangement or other side
agreement permitting reseller returns of unsold goods.
Unexplained Differences in Physical Inventory
It indicates a bill-and-hold fraud is taking place.
Build-up of Aged Accounts Receivable Balances
It might be caused by backdating, side agreements, or channel stuffing
arrangements.
An Unusual Spike in Sales
An unusual spike in sales just before the end of the reporting period
could indicate any of these schemes.
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segregate sales, cash receipts and accounting functions is an easy target for
cash skimming.
(b) Theft of Inventory
It can be as simple as removal of inventory from the warehouse or along the
supply chain. It can include adjustment of books and records to hide the
theft. This is more likely to happen in companies with multiple inventory
locations or complex supply chains. Failure to properly segregate inventory
and record keeping duties makes this kind of theft easy to accomplish.
(c) Marketing Fraud
It is another way of fraudsters misappropriating assets. The entity’s
personnel collude with customers to share rebates, discounts, or promotional
items. Where salespeople maintain long-term client relationships and have
significant latitude with terms, this type of fraud can occur.
The fraud indicators include the following:
Growing accounts receivable balances without sales increases.
Lower than expected gross margins.
Higher than expected promotional allowances.
Unusual number of credit adjustments, customer account write-offs, or
customer returns.
Unexplained variances in inventory¡ larger than expected shrink
percentages.
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4.7 With rising challenges in the industry, the key to success is staying
competitive without compromising on the quality of services. Cost
effectiveness is necessary to achieve this, and an effective fraud risk
management will help companies to identify potential leakage points and
opportunities to save.
Fraud Management System
4.8 Fraud management System is an integral part of business with the
raise of frauds in the industry. Fraud management system ensures revenue
assurance and risk management by monitoring, controlling and managing
large quantity of transactional data. It enables retail entities to identify
potential fraud and block suspicious activities and protect it from frauds.
The fraud management system may have the following important features:
(a) Business rules engine to allow the setup and maintenance of custom
business rules.
(b) Transaction processing Application Programming Interface (APls)
which allow multiple parameters as input, the ability to evaluate these
parameters against the defined business rules and as a result provide
as output the decision to accept, review or reject the order transaction.
(c) The ability to setup and maintain fraud negative lists.
(d) A risk prediction model or algorithm to provide a risk score based on
historical data. It is possible that single software may not be able to
provide these capabilities. In such scenarios, real time interfaces to an
online risk prediction service (third party ASP model) may be required
to determine the risk score which could then be used as an input to the
business rules engine.
(e) A workflow engine to model the fraud business process. Another
alternative is to build the workflow within the Order Management
System (OMS).
(f) Fraud review screens for the order information and the rules tripped.
As explained above, the alternative approach could be to build these
on the OMS.
(g) The ability to record and store authorisation and settlement data for
credit cards. This ability can be used to reconcile chargebacks from
the payment providers against the original order transaction.
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(f) In case the Order Management System (OMS) manages the customer
related communications (SMS, emails, etc.,), hence it should also be
able to manage the communication associated with payment and fraud
related problems.
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Chapter 5
E-commerce Retailing and Data
Analytics
E-commerce Outlook
5.1 Though a late entrant to the world of E-Commerce, India is catching up
to the global trend of E-commerce pretty rapidly. Lowered smartphone prices
plus pan Indian network coverage with affordable internet prices have
resulted in the sudden spurt of E-commerce in India.
5.2 E-commerce market in India currently stands at approximately $75
billion a year and is expected to reach $ 350 billion by the year 2030. Indian
E-commerce is expected to grow at a CAGR of 27% in between 2019-24, a
rate much higher than the traditional retail growth rate. Fashion brands,
apparel, electronic goods and groceries are seen as the drivers of the Indian
E-commerce growth. As an indicator of growing e-commerce, the demand for
warehouse space in top eight Indian cities is expected to reach 76.2 million
sq. ft. by 2026 from 31.7 million sq. ft. in 2021.
5.3 Special events like festivals and dedicated mega discount sales days
by e-commerce players are witnessing huge participation from the buyers
and recording billions of worth of trade in such short span.
5.4 Tier 2 & 3 cities of India are recording the highest ever growth for
Indian e-commerce and their phase of growth is outmatching the growth in
tier 1 cities. Electronic goods and apparels account for 80% of the total
goods sold through e-commerce in India. Drive for fashion and brand loyalty
are the key factors resulting in massive rush for apparels and electronic
goods in India. Online retail was 5% of the total retail in 2019, which is
expected to jump to 11% by 2024.
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Smartphones Growth
Smartphone adoption in India has been growing rapidly and India is expected
to have 1 billion smartphone users by 2026. The growth in rural India is much
higher than in Urban India.
Low-cost Data
The low-cost data in India has enabled the massive growth of smartphones,
backed by the internet penetration. The trio of smartphones penetration –
internet penetration and the low-cost data are instrumental in driving the e-
commerce in India. Incidentally, India is considered to be the place where the
mobile internet is the cheapest in the world. One GB of mobile internet data
costs around INR 7 in India, which is considerably low.
Brand Loyalty
The strong affiliation towards brands is also making e-commerce dearer to
the people. There is a practical limitation to what retail can offer to people
under one roof and even if such brick-and-mortar store is available,
nationwide expansion of such stores is not economically feasible. The only
feasible way of buying a product of particular brand from anywhere in India is
to buy them online.
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Difference in Price
Indian customer is recognizing the fact that there exists a significant
difference between the price of some products sold in online vs offline mode.
One-time purchases like smart phones, electronic gadgets and home
appliances are likely to give a good bargaining power to the buyer, and thus
gives e-commerce an edge over the brick-and-mortar stores.
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umbrella under which they can enjoy many services, the tendency to get the
maximum out of internet is high and is resulting in the growth of e-commerce.
Young Population
The population of India is young, India is home to world’s largest young
population and is expected to retain the title for the next few decades to
come. Young generation being tech-savvy is more attracted towards the idea
of e-commerce than their comparative elder ones.
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Data Analytics
5.5 Data analytics is the science and process of examining the raw data to
draw conclusions about that information. It helps the business to analyse
patterns by examining its present and past data which could be structured or
unstructured. The retail companies track data at all the stages of buying.
5.6 Some of types of Data analytics in retail industry are as follows:
Descriptive analytics: This is an analysis of past data to understand what
has happened and whether there is a progress in the month as compared to
past or not.
Diagnostic analytics: This is another type of analysis where the reason of a
particular event of trend can be analysed. Basic questions of such as sales
are good in a month. Why sales have come down. What is the impact of
advertising on the sales, etc. can be answered.
Predictive analytics: This type of analysis helps us to understand the trend
and know what could happen in the near future and how much sales can be
achieved in this quarter based on the previous quarter trend.
Prescriptive analytics: This type of analysis gives us suggestions on future
course of action based on other analysis and trend established in the past
and with predictive analysis. This is a structured way of taking informed
decision which is data driven.
Data analytics in retail industry is a disruptive technology. By using the Big
data, the entity can take decisions on its pricing, supply chain movement and
also help to retain the customers. Big data means usage of huge volume of
data to help understand the patterns, trends and behavioural trends.
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Chapter 6
Technological Trends in Retail
Industry
6.1 The recent phase of growth of Indian retail industry should be credited
to the technological advancements. Technology has helped and shaped
today’s Indian retail industry and has lots of promises in store as well.
Emerging Technologies
6.2 Some of the emerging technology applications which can be seen in
the Indian retail industry are as follows:
Use of Robotics
Robotics are becoming integral part of complex, large warehouse
management. Robots are replacing human beings with their efficiency and
error free execution.
warehouse lying empty behind. Such smart software’s give an alert when
goods reach a minimum level and enable the store to initiate re-ordering of
the same.
Payment Gateways
Payment gateways are driving the cash led retail towards the cashless path.
Debit and Credit cards paved the path for the cashless era, which was
cemented and boosted by net banking and UPI, respectively.
Emergence of FinTech
FinTech is also promoting the Indian retail in their own way. From offering
financial assistance to the buyers in the form of credit facilities and offering
credit facilities to the merchants, they are making money a lesser constraint
in shopping. Such assistance may be in the form of dedicated credit cards for
shopping, additional incentives for shopping, etc.
Use of QR Codes
QR codes are of very large use in retail industry. They help in solving the
complex issue of batching, labelling, and billing. They are also used in
payment systems like UPI to facilitate seamless, secure transfer of money.
Introduction of Drones
Drone technology is evolving day by day with its civilian applications along
with the military ones. Introduction of drones in large scale is in discussions,
which would radically change the on-door delivery landscape.
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Predominant Softwares
6.3 Some examples of the predominant softwares being deployed in the
retail industry are listed below:
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Major Innovations
Over the past few years, there have been many major innovations which
include the following:
(a) Radio Frequency Identification (RFID): This involves identifying
customers by issuing them smart cards embedded with smart chips.
These cards would be Radio-frequency Identification (RFID) enabled
and would give information regarding the customer like his
preferences, shopping behaviour, etc.
(b) E-Catalogue based Selling: Limited range of merchandise is
available in-store, while the range of a hyper format is made available
through self-browse kiosks.
(c) Mobile Point of Sale (POS): This would enable the purchase of goods
while putting them in a shopping cart. The customer would be spared
from the hassle of standing in long queues.
(d) Buy Online Pick Up In-store (BOPIS): In this model the customers
can select the products and buy them online. Unlike other models
where the product gets delivered to the location, here the product will
be kept at designated pickup In store and the customer can visit the
pickup store and take delivery of goods.
(e) Digital Signage: Static signboards have not proved to be beneficial in
terms of helping a customer to track a product. Digital signboards
integrated with an automated tracking system can make this easier.
(f) Intelligent Database: A detailed database of the customer is made
available online and helps the retailer to understand a particular
customer’s buying characteristics.
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Chapter 7
Governing Bodies
7.1 This Chapter provides an overview of the various Government Bodies
(ministries, departments, etc.) which set the overall legal and regulatory
framework applicable to the Retail Industry. A summary of various statutory
provisions applicable to the Retail Industry are covered in detail in this
Guide.
6. Economic Division
7. Administration & General Service Division
8. Finance Division
9. Supply Division
10. Logistics Division
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(b) Minimize wastage at all stages in the food processing chain by the
development of infrastructure for storage, transportation and
processing of Agro-food produce
(c) Introduce modern technology into the food processing industries from
both domestic and external sources
(d) Encourage R&D in food processing for product and process
development and improved packaging
(e) Provide policy support, and support for creation of Infrastructure,
capacity expansion/ upgradation and other supportive measures form
the growth of this Industries
(f) Promote export of processed food products.
In the era of economic liberalization, where the private, public and co-
operative Industries are to play their rightful role in development of food
processing industry, the Ministry acts as a catalyst for attracting greater
investment into this industry, guiding and helping the industry in a proper
direction, encouraging exports and creating a conducive environment for the
healthy growth of the food processing industry.
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Governing Bodies
7.10 Apart from the abovementioned laws, the internal auditor may be
aware of the local legislations under which the entity/ undertaking operates
e.g., Karnataka Shops and Commercial Establishments Act, 1961, prescribes
the daily and weekly working hours, extra wages for overtime work, holidays
for all entities established in the State of Karnataka.
The internal auditor is expected to include in the scope of his work the
compliance of respective state legislations as part of his internal audit
procedures. The internal auditor is also expected to be aware of various
circulars issued by the RBI related to foreign currency transactions.
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Chapter 8
Statutory Laws Applicable to Retail
Industry
8.1 This chapter provides a broad overview of various laws and
compliances applicable to entities operating in this industry. The internal
auditor may refer to these laws and regulations and study the applicable
cases and judgements by competent authorities.
Considering that these laws and regulations undergo frequent amendments/
change, the internal auditor may update himself with the amendments,
pronouncements, new regulations from time to time to ensure effective
performance of internal audit.
Registrations
8.4 Every supplier of goods is required to obtain registration in the
State/UT from where he makes the taxable supply if his aggregate turnover
Statutory Laws Applicable to Retail Industry
exceeds the threshold limit during a FY. Different threshold limits for supply
of goods have been prescribed for various States and Union Territories. The
threshold limit prescribed for various States/UTs are as follows:
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f. Legal Division
g. International Cooperation Division
h. Capacity Building Division
i. Corporate Services Division
Some of salient features of the Competition Act applicable to the Retail
Industry are discussed below:
The Secretariat
8.10 The Secretariat is the Division within the Commission responsible for
handling administrative matters and carrying out the day-to-day affairs of the
Commission. The responsibility of communicating with parties in proceedings
before the Commission or corresponding with other regulatory bodies, inter
alia, is discharged by the Secretariat.
Antitrust Division
8.11 The Antitrust Division (ATD) assists the Commission in the discharge
of its enforcement mandates relating to the prohibition of anti-competitive
agreements and abuse of dominant position.
(a) Anti-Competitive Agreement
An arrangement, understanding or concerted action entered into
between parties which can be anti-competitive Horizontal Agreement
or Anti-competitive Vertical Agreement.
(b) Horizontal Agreements are those agreements where enterprises are
engaged in identical or similar trade of goods or services. When
enterprises collude amongst each other to distort competition in the
markets, such agreement is presumed to have an appreciable adverse
effect on competition and thus, shall be void. The following falls under
the category:
• agreement to fix price.
• agreement to limit production and/or supply.
• agreement to allocate markets.
• bid rigging or collusive bidding.
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Statutory Laws Applicable to Retail Industry
Combination Division
8.12 The Combination Division facilitates the Commission in its role as an
ex-ante regulator of acquisitions, mergers and amalgamations.
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Advocacy Division
8.13 Advocacy division is entrusted with the following functions:
Creating awareness: Creating awareness about the Commission’s
activities through publication and dissemination of advocacy material.
Training Programs: Conducting training programs on competition Law.
Academic Events: Sponsoring Moot court events/seminars/lectures on
competition law at premier academic Institutions.
Conferences: Regularly scheduling roadshows and conferences to
engage with stakeholders.
The other divisions also help the Commission to smoothly regulate the
provisions of the Competition Act.
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Chapter 9
Internal Audit
9.1 Considering the nature of Retail Industry and the pace at which the
industry has grown over the past decade, need for ensuring proper controls
need not be over emphasized. With increasing number of frauds in the
software field and considering the vulnerability of the industry to modification
of data, internal audit becomes significant. Internal audit also helps in
verifying the controls in place within the entity with regard to sufficiency and
effectiveness in the light of overall business. Internal audit also helps in
assessing the risks faced by the entity and provide a method for
management of the same. Internal controls and risk management are
extremely important activities in an entity operating in the Retail Industry.
9.2 Internal Audit provides an effective tool to ease out all complexities,
ensures that systems and processes are adequate to support the growth and
are adapted to the changes in various regulations, thereby ensuring
sustained growth and development.
As defined in Framework Governing Internal Audits, "Internal Audit provides
independent assurance on the effectiveness of internal controls and risk
management processes to enhance governance and achieve organizational
objectives."
Brief explanation of the key terms used above is as follows:
i) Independence: Internal audit shall be an independent function,
achieved through the position, organization structure and reporting of
the internal auditor.
At times, in addition to providing assurance, the internal auditor may
adopt an advisory role to help an organization achieve its objectives,
provided this does not compromise the independence of the internal
auditor.
ii) Internal controls and risk management are integral parts of
management function and business operations. An internal auditor is
expected to evaluate the design and operating effectiveness of internal
controls and risk management processes (including reporting
processes) as designed and implemented by the management.
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Internal Audit
Key Concepts
9.5 As per the Framework Governing the Internal Audit as issued by ICAI,
there are certain concepts which form an integral part of Internal Audit
activity and therefore apply to most internal audit. Key Concepts are in the
nature of:
Internal Controls
Risk Management
Governance Processes
Compliance with Laws and regulations
Nature of Assurance
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Internal Audit
(c) Ensure linkage between what is expected of the Internal Auditor and
how those expectation can be met within the Framework governing
Internal Audits; and
(d) Promote better understanding on key operational areas, such as,
accountability and authority, roles and responsibility, and such other
functional matters.
Once the objectives of internal audit are defined, they help to establish the
operating parameters within the overall internal audit agenda. These
objectives and operating parameters are formally recorded in one of these
two documents:
(a) An Internal Audit Charter, primarily designed for the in-house team of
internal auditors and its stakeholders; and
(b) An Engagement Letter is a formal agreement signed with the out-
sourced internal audit service provider.
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Internal Control
9.13 SIA 120 “Internal Controls” states that Internal Controls are systemic
and procedural steps adopted by an organization to mitigate risks, primarily
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Overview of Compliance
9.19 Compliance means ensuring conformity and adherence to Acts, Rules,
Regulations, Directives and Circulars.
9.20 Standard on Internal Audit (SIA) 150 “Compliance with Laws and
Regulations” issued by Institute of Chartered Accounts of India requires that
internal auditor to provide independent assurance to management and to
those charged with governance on the compliance framework. The nature
and extent of internal audit procedures to be applied is dependent on the
framework in place and maturity of the processes.
9.21 In case the management has implemented the formal compliance
framework, the internal auditor shall plan and perform internal audit
procedures to evaluate the design, implementation and operating
effectiveness of such framework.
9.22 In case there is no formal compliance framework, the internal auditor
shall design and conduct the audit procedures with a view to highlight any
exposures arising from weak or absent compliance activities and processes,
internal auditor shall make recommendations to implement and strengthen
those processes and thereby, improve compliance.
9.23 Where the independent assurance requires the issuance of an audit
opinion over the design, implementation and operating effectiveness over
compliance, this shall be undertaken in line with the requirements of SIA 110,
Nature of Assurance.
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Overview of Governance
9.24 Governance is an important aspect of internal audit. The definition of
Internal audit elaborates on the term Governance by clarifying how this is a
critical operation. Governance is a key concept and integral part of internal
audit. The definition of ‘Internal audit’ elaborates on the term Governance by
clarifying how this is a critical operation of the company and fulfilling
expectations of its various stakeholders.
9.25 Standard on Internal Audit (SIA) 140, Governance as issued by
Institute of Chartered Accountants of India with the objective to:
(a) Provide a common terminology on governance to prevent ambiguity or
confusion on the subject matter.
(b) Explain the responsibilities of the Board of Directors and Management,
Audit Committee with regard to governance, as mandated by law and
regulations; and
(c) Specify responsibilities of the Internal Auditor, especially, when
providing independent assurance on the governance framework.
9.26 SIA 140 defines Governance as a set of relationships between the
company and its various stakeholders (both internal and external) and
provides the structure through which the company’s objectives are achieved.
The relationship and structure help to guide the behaviour of individuals and
groups in the right direction. The following are well accepted underpinnings
of good governance:
(a) Integrity and Accountability
(b) Trust and Equity
(c) Transparency and Justice
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Internal Audit
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Chapter 10
Major Areas of Internal Audit
Significance
10.1 Internal audit procedures that apply to any industry also apply to an
entity operating in the retail industry. In this Technical Guide, internal
auditing procedures pertaining to Retail Industry have been specified. These
audit procedures are illustrative in nature which can be performed in addition
to the regular internal audit procedures performed by an internal auditor.
Invoicing
10.2 The invoicing process varies significantly and is directly based on the
size of the retail store. To elaborate, it varies from a systematic billing
process and checking process in the case of large stores to non-systematic
cash-based billing in the smaller stores. The billing and invoicing proces s in
the retail industry needs to be simple, systematic, fast, secure and error-free
to ensure avoiding unnecessary waiting time for billing and plays a major role
in the success of the organization.
10.3 It might be pertinent to note that potential for omitted/ manipulating
income is greater in e-retailing, due to the borderless and paperless feature
of the organization. With online retail, the reconciliation of shipment costs
with both cost of goods sold, and income is another quality audit technique.
10.4 In general, cheques are received from customers whom the
management is familiar with or from customers who procure large quantities
of products. The management might also offer “on account” payment from
such customers.
10.5 A few common types of billing include:
(i) Cash Pay Outs: As discussed above, the accounting for cash is a
primary focus for the internal auditor. Considering that cash is paid for
a significant part of the billing by the entity, maintenance of proper
records is a critical part of the overall organization management. It is
equally important to ensure that there is sufficient and appropriate
fixing of responsibility in the case of management of cash.
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(ii) Z Tapes: Most simple cash registers contain a “Z” key which can only
be operated by the manager, owner, or a key employee. The Z key
totals the entire history of activity on the cash register for a period,
providing a summary total for (sales) taxable sales, non (sales) taxable
sales, credit card sales, credit card tips, cash sales, lottery sales,
coupons and discounts, etc. Each day’s Z tape is used to record the
daily sales in the sale journal. These tapes must be retained by the
owner and made available for the examination.
(iii) Point of Sale (POS): This is a computerized accounting system that
records sales along with related items, such as employee’s time and
tips received, or reductions to inventory and calculations of profit on
each sale. These machines can produce financial statements, periodic
statements of profit and loss, profits per item, payroll checks, etc.
10.6 Transfer of property of products can be through the following methods:
(i) Counter service—Where goods are out of reach of buyers and must
be obtained from the seller. This type of retail is common for small
expensive items (like jewellery) and controlled items like medicine and
liquor.
(ii) Delivery (Commerce)—Where goods are shipped directly to
consumer’s homes or workplaces. Ordering on telephone is now
common, either from a catalogue, newspaper, television advertisement
or a local restaurant menu, providing for immediate service.
(iii) Door-to-Door Sales—Where the salesperson sometimes travels with
the goods for sale.
(iv) Self-service—Where goods may be handled and examined prior to
purchase.
10.7 Retailers use different methods to collect and account for cash. In
some stores, only the owner collects cash from customers. In larger stores,
key employees collect and account for cash. In more sophisticated systems,
a Point of Sale (POS) cash register may record sales and decrease inventory
at the same time.
10.8 Considering the nature of the industry, frequent job rotation would
enable the entity to prevent errors and de-motivate the employee to do any
fraudulent activity.
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Objective
The objective of cash management systems is to eliminate potential security
loopholes by implementing a closed cash cycle.
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10.22 Some common types of system driven vendor fraud indicators include
the following:
• An employee’s home address matches with vendor’s address.
• An employee’s initials match with vendor’s name.
• Cheques are written to “cash”.
• A vendor’s address contains a P.O. box.
• Vendor data missing or found to be illogical.
10.23 The following procedures may be performed by the internal auditor:
(i) Sell-through Rate
The sell-through rate is a calculation, commonly represented as a
percentage, comparing the amount of inventory a retailer receives from a
manufacturer or supplier against what is actually sold to the consumer. This
enables the internal auditor to understand the movement of goods.
(ii) Open to Buy
The goal of good inventory management is to maintain an appropriate level
of inventory for the amount of sales. This enables the internal auditor to
evaluate the utilization of working capital in the entity.
(iii) Fill Rate
The ratio refers to the percentage of consumer orders satisfied from stock at
hand. It is a measure of inventory’s ability to meet demand. This enables the
internal auditor to estimate whether the entity has been placing order
sufficient enough to meet the demand of products from customers and to
ensure that there is no loss of sales and customer loyalty.
(iv) Suppliers for a Key Product
It may be better for the entity to have multiple suppliers for a critical product
to ensure the availability of products on a timely basis, risk reduction,
avoiding over reliance on a particular supplier and ensuring better bargaining
power. The internal auditor might provide the management an analysis for
such products.
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Payroll
10.32 In the retail industry, the cost of payroll in relation to the turnover of
the entity might not be very significant. But, the success of the retailer
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10.37 The internal auditor may also perform additional analytical procedures
over a period of time and compare them for ascertaining the following
inconsistencies:
(i) No. of Bills Raised/ No. of Hours
This ratio is determined by the number of bills an employee process to
the total time taken by him over a period of time. By analysing this
ratio, the internal auditor can understand the skill level of employees,
steps taken by the management towards maintaining efficiency,
importance of training and ability of the management in identifying the
right person for the job. This ratio gains significance, especially,
because by processing quickly, customer’s, satisfaction can be
ensured to enable development of brand and loyalty.
(ii) Average Employee Cost per Store
Average cost incurred for an employee (cost includes incentives, gifts,
entertainment costs incurred for a store) can be computed by dividing
the total cost on employees in a store incurred for a period to average
number of employees during the period. The internal auditor may
compare this information between different periods or with different
stores and ensure that there is no significant unexplainable difference
in the average employee cost per store.
(iii) Total Revenue per Store to Number of Employees/ Employee Cost
This ratio can be computed based on the total revenue of the store in
a particular period to the number of employees/ employee cost in the
same month. This would enable the internal auditor to understand the
importance of a firm in terms of its significance.
(iv) Employee Turnover Ratio
Employee turnover ratio helps the internal auditor to verify the attrition
rate and assess the entity’s effectiveness and steps taken towards
prevention of attrition and retention of key employees. In case of
employee turnover ratio being higher than the industry, the internal
auditor may obtain explanations for such high turnover ratio.
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Fixed Assets
10.38 In general, an entity operating in the retail industry would have the
following types of fixed assets:
Freehold land and leasehold land
Buildings, warehouses, and leasehold improvements
Plant and machinery
Office equipment
Computer and software
Furniture and fixtures
Electrical installations
Vehicles
10.39 In the event of a comprehensive distribution system being operated by
the entity, large investments are required in warehouses and storage
locations apart from transportation vehicles. The entity is required to have
sufficient control over such assets to ensure that these are being used
properly and therefore, periodic physical verification would be of importance.
10.40 The entity might lease certain assets for installation at the stores. The
internal auditor may verify whether there is proper control over such leased
assets. Further, the internal auditor may ensure that there are sufficient
controls within the entity to differentiate between own assets and those
assets provided by the vendors/ manufacturers to promote their product. The
internal auditor may also perform additional analytical procedures over a
period of time and compared them for ascertaining any inconsistency such as
following:
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Data Security
10.41 Data security is a major risk in the retail industry. Security in a retail
industry can be bifurcated into two significant components:
(i) Information Technology Security
The various sources of danger to data can be in the form of following:
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Operating Costs
10.43 Significant operating costs for any entity operating in a retail industry
include the following:
(i) Lease Expenses
Lease expenses could be of the nature of leasing of office building for
workspace or leasing of assets for official purpose or accommodation
provided to the employees. This would be a significant part of the expenses
considering that the entity needs to own the location or lease the location for
its display. The success of the entity is based on location of store and,
incidentally, to have a store at the right location would mean incurring higher
cost.
(ii) Advertisement and Marketing Expenses
Advertisement expenses are incurred predominantly for the purpose of
creation and development of a strong brand name. Branding is one of the
most important aspects of any business, large or small, retail or Business to
Business (B2B). An effective brand strategy gives major edge in increasingly
competitive markets. A brand is something that tells the customers (existing
and prospective) what they can expect from the entity’s products, and also
differentiates offering from competitors.
The various strategies that the entity might use for marketing are as follows:
(a) Loyalty Program
A retail establishment or a retail group may issue a loyalty card to a
consumer who can use it as a form of identification when dealing with that
retailer. By presenting the card, the purchaser is typically entitled to either a
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can estimate the operating cost (i.e., cost including labour, communication,
lease and all other variable expense to the particular undertaking) to the
revenue generated by it. This would provide a basis for evaluating the cost
effectiveness of operating in each of the undertakings.
(iii) Variable Cost per Man Hour per Undertaking
Variable cost per man hour can be computed by dividing the total cost
incurred in an undertaking divided by man hours for the same period. This
can be compared with different periods to verify whether there has been a
significant increase/ decrease in the expense and identify reasons for the
same.
(iv) Interest Cost to Loans
Interest cost to loans provides a basis for the estimation of the average cost
of borrowed funds in the entity. The internal auditor can estimate the average
cost of borrowing and compare them with the existing rate to verify whether
the interest paid is significantly high.
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Surprise Verification
10.50 If physical verification or examination is done without prior information
to the management, it is called as Surprise Check. An element of surprise is
experienced by management or the employee in such cases. Surprise check
is used in physical verification of cash, security items, inventory, etc.
The internal auditor may use surprise checks as an effective tool for finding
effectiveness and continuity of internal controls.
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Theft by employees.
Frauds in the case of products exchanged by customers.
Fraudulent practice in handling home deliveries.
(e) Customer Shop Lifting
This is another common problem causing shrinkages. Generally, specific
products including beauty products, skin care products, razors, etc. are more
prone to such shop lifting by customers. It is also extremely difficult in
controlling the customer theft though some measures are being taken by a
few retailers based on their experience and learning.
10.51 Corrective steps taken at the right point of time would certainly help
the retailers mitigate the risk to a greater extent and reduce the losses on
account of shrinkage. The following could be some areas where best
practices need to be deployed:
a. Having clear SOPs for operations at stores.
b. Ensure adherence to the SOPs.
c. Avoid or minimize manual intervention at the POS.
d. Ensure proper training to the staff.
e. Educate the staff on the importance of reduction of shrinkages.
f. Proper physical verification of stocks.
g. Deployment and monitoring of CCTV at the stores.
h. Employees frisking.
i. Background check on staff.
10.52 The following measures would certainly help in reducing the
shrinkages:
Setting up a dedicated internal/ external team to handle stock checks
at each of the stores periodically. Initially each store is covered at
least once a month.
Creation of stock check squad that would visit each store every day
and verify a few SKUs on a random basis.
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Mystery Audit
10.56 Mystery shopping is an objective view of a business through the eyes
of a customer. A mystery shopper visits a business anonymously, posing as
a regular customer, to experience and evaluate the level of customer service
provided by the business. Mystery shopping provides management with a
detailed assessment of employee performance and the variables that affect a
customer’s experience and satisfaction with the business.
It is a tool used by mystery shopping providers and market research
companies to measure quality of retail service or gather specific information
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Appendix 1
Model Processes in Retail Industry
Appendix 1
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Appendix 2
Model Internal Audit Checklists
Sl. PARTICULARS Yes No N/A
No.
I Verification of Billing Mechanism
1.1 Whether there is a proper billing system
commensurate with the size of business.
1.2 Whether the controls have been verified to
ensure fixing of appropriate responsibility to
the person. Whether there are sufficient
systems to ensure periodic job rotation
preventing mis- appropriation of funds.
1.3 Whether there is any log maintained by the
entity as regarding errors and mistakes in
billing.
1.4 Whether correct GST rate is charged for the
sales made.
1.5 Whether there is any variation between sale
price and approved sales price.
1.6 Whether proper approvals are taken for giving
credit period to the customers.
1.7 Whether proper approvals are received for
giving discount to customers.
1.8 Whether valid reasons were captured on the
handbills raised.
1.9 Whether hand bills were found not updated in
the accounting ERP.
1.10 Whether there is a routine checking of
collections (cash, coupons, vouchers, credit
card receivables, etc.) made at the time of
change in billing personnel.
Appendix 2
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Appendix 2
vendor.
2.8 On selection of the supplier, whether an
approved Purchase Order (PO) has been
placed with the supplier within reasonable
time.
2.9 Whether the Actual PO quantity are ERP PO
quantity are matching.
2.10 Whether there are any contracts entered by
the entity with suppliers for critical materials to
ensure adequate supply at a reasonable price.
2.11 Whether there are sufficient procedures to
inspect materials as regards to specification
and quantity, received by the entity at the site
before unloading and signing of the delivery
note.
2.12 Whether there are sufficient documentary
controls such as Gate Pass for entry of goods.
2.13 Whether purchases are supported by
transportation evidence and expenses, like E-
Way Bill, consignment note from transporter,
etc.
2.14 Whether a sample check for compliance of
procedures has performed.
2.15 Whether the receipt of material is properly
accounted.
2.16 Whether the material receiving department is
maintaining sufficient records of receipt and
inspection of material.
2.17 Whether the delivery note has been approved
by the appropriate level of authority before
making the entry.
2.18 In cases where materials are supplied by
customer, whether appropriate accounting of
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Distribution Strategy
3.21 Whether the entity have a strategy for efficient
handling and managing inventory movement.
3.22 Whether the strategy clearly cover all areas of
decision making.
3.23 Whether the strategy is renewed at a frequent
basis.
3.24 Whether there are instances wherein the entity
has procured goods/ transported goods at a
price which is more than its alternative.
3.25 In such cases, whether there are sufficient
approvals obtained to incur higher costs for
the procurement of goods.
3.26 Whether there are sufficient control systems
installed to enable capture of exceptions and
appropriately highlight such variances.
3.27 Whether the entity has estimated the cost of
various strategies and its benefits accepting
the final strategy.
Trade-offs in Logistical Activities
3.28 Whether the entity has made an evaluation of
the cost of alternatives possible.
3.29 Whether the entity have a scientific basis of
evaluation the overall cost of transportation.
3.30 Whether the method of evaluation of cost of
transport between options has been made in a
comprehensive manner.
3.31 Whether a comprehensive agreement has
been made between them to ensure that the
Logistics Company would bear the risks
related to transportation of goods.
3.32 If the entity has an in-house logistics division,
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Additional checks
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related cost.
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Appendix 3
List of Organizations, Online
Resources and Other Sources
1 ONDC | Open Network for https://ondc.org/
Digital Commerce
2 National Retail Federation http://www.nrf.com/
3 Retail Industry Leaders https://www.rila.org/
Association
4 National Association of http://www.nacds.org
Chain Drug Stores
5 Association for convenience and https://www.convenience.org
petrol retailing
6 National Grocers http://www.nationalgrocers.org
Association