Case Study: IFC Testing and Statutory Audit for a Japanese Automotive Components Subsidiary
Bridging Indian statutory requirements with a Japanese parent company's global control and assurance framework
Executive Mandate Summary
Key Transaction & Governance Challenges
- •The control architecture was considered adequate when the business generated Rs 15 crore but had not evolved sufficiently as turnover expanded to Rs 62 crore.
- •A two-person finance team maintained accounting in Tally, with several processes dependent on manual controls and individual execution.
- •The subsidiary needed to satisfy Indian statutory requirements while also meeting a more demanding global assurance framework established by its Japanese parent.
- •Some controls were performed in practice but were not formally documented, while others existed in manuals without evidence of consistent operation.
Northrop Execution Architecture & Methodology
Executive Mandate Overview
A Japanese automotive components manufacturer operated an Indian subsidiary generating Rs 62 crore in annual turnover with 180 employees. While the financial statements had historically received clean statutory audit opinions, the parent company's internal audit identified 14 control observations requiring remediation.
The mandate was therefore broader than a conventional statutory audit. The subsidiary needed an IFC framework capable of satisfying both Indian statutory requirements and the Japanese parent's global assurance expectations.
Assessing the Control Environment
Northrop mapped the major financial and operational processes and assessed each control across four dimensions: existence, documentation, operation and operating effectiveness.
This distinction separated controls that existed only on paper from controls performed in practice and controls that genuinely operated as designed.
IFC Testing Across Critical Processes
Testing covered purchase-order approvals, three-way matching, vendor-master changes, inventory counts, revenue cut-off, intercompany transactions, journal entries, bank reconciliations, payroll and financial close.
Testing procedures included evidence inspection, re-performance, observation and inquiry, with samples determined according to control frequency.
Addressing the Segregation-of-Duties Gap
The procure-to-pay process presented a key control exposure because one individual could create vendors, approve purchase orders and process payments. The control was redesigned, documented and tested as part of the remediation programme.
Verifiable Institutional Outcomes & Value Realized
- The control observations identified across key financial and operational processes were addressed over a six-month remediation period.
- The vendor creation, purchase approval and payment process was redesigned and tested, with the key segregation issue addressed within 60 days.
- Physical inventory count accuracy improved from 94% to 98.5% within two inventory cycles.
- The year-end reconciliation cycle was reduced from 15 days to 3 days through monthly reconciliation.
Pratham Sharma
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