Case Study: SOX-Aligned Internal Audit for a Japanese Chemical Company’s India Operations
Building documented, testable controls for a Japanese parent company's J-SOX assurance programme
Executive Mandate Summary
Key Transaction & Governance Challenges
- •The subsidiary performed key controls, but approvals, reconciliations and inventory counts were not consistently documented in a form that could be independently tested.
- •The Tokyo-listed parent required evidence that material subsidiaries had controls that were both designed effectively and operating effectively.
- •Procurement documents had been matched, but there was no dated or signed evidence establishing who performed the control and when.
- •Monthly bank reconciliations existed, but outstanding items older than 30 days were not consistently investigated and documented.
Northrop Execution Architecture & Methodology
Executive Mandate Overview
A Japanese specialty chemicals company with Indian operations generating Rs 88 crore in annual turnover required J-SOX-aligned control documentation and testing. The subsidiary had controls in place, but insufficient evidence existed to demonstrate that those controls operated effectively.
The engagement therefore focused on converting informal control activity into documented, testable and repeatable control evidence.
Risk-Based Control Scoping
Northrop began by identifying the financial statement areas carrying significant risk, including Rs 88 crore of revenue, Rs 18 crore of inventory, Rs 32 crore of fixed assets, Rs 12 crore of trade payables and Rs 22 crore of intercompany receivables.
The processes feeding these accounts were mapped and key controls identified for testing.
Building the Risk and Control Matrix
Each control was documented in the parent's RCM format. Documentation covered the control objective, process owner, frequency, system used, evidence generated and the methodology by which an auditor could test operating effectiveness.
Japanese translations of control descriptions were also provided for the parent's internal audit team.
Quarterly Controls Testing
Unlike a one-time annual review, the programme tested controls quarterly. Procurement, bank reconciliation, inventory and other financial reporting controls were tested through inspection, re-performance and observation.
The first cycle identified gaps between control performance and control evidence, including undocumented three-way matching and incomplete follow-up of aged bank reconciliation items.
Verifiable Institutional Outcomes & Value Realized
- Four quarterly testing cycles created a complete year of documented, tested and evidenced control operation for the parent company's J-SOX programme.
- The three-way matching process was redesigned with a stamped and dated matching record, allowing performance of the control to be independently verified.
- An outstanding-item ageing and follow-up log was introduced to strengthen investigation and documentation of long-outstanding bank reconciliation items.
- The inventory weighing process was upgraded using calibrated equipment, improving accuracy from 96.2% to 97.4%.
Pratham Sharma
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