Mafil Rbia Policy

Manappuram Finance Limited
Risk Based Internal Audit Policy
RISK BASED INTERNAL AUDIT

POLICY
MANAPPURAM FINANCE LIMITED
Page 1 of 29 Document Classification: Confidential

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TABLE OF CONTENTS
TABLE OF CONTENTS ............................................................................................................. 2
POLICY FORMULATION AND IMPLEMENTATION .................................................................. 3
INTRODUCTION .................................................................................................................... 4
POLICY GOVERNANCE ........................................................................................................ 6
ORGANISATIONAL STRUCTURE ......................................................................................... 8
INTERNAL AUDIT STRUCTURE ..........................................................................................11
OUTSOURCED INTERNAL AUDIT ARRANGEMENTS ........................................................12
ACCESS TO INFORMATION ................................................................................................13
DOCUMENTATION ...............................................................................................................13
CODE OF ETHICS ................................................................................................................13
AUDITEES RESPONSIBILITIES ...........................................................................................14
MANPOWER .........................................................................................................................14
POLICY DETAILS .....................................................................................................................15
RISK ASSESSMENT FRAMEWORK ....................................................................................16
INDEPENDENT RISK ASSESSMENT ..................................................................................16
RISK BASED AUDIT PLAN ...................................................................................................19
AUDIT EXECUTION ..............................................................................................................21
AUDIT REPORT AND REPORTING OBSERVATION ...........................................................21
CLOSURE OF OBSERVATIONS ..........................................................................................22
CONTINUOUS MONITORING ..............................................................................................22
COMMUNICATION ...............................................................................................................22
PERFORMANCE EVALUATION ...........................................................................................22
CODE OF ETHICS FOR INTERNAL AUDIT DEPARTMENT ................................................23
ANNEXURE 1 – INHERENT RISK RATING CRITERIA ........................................................24
ANNEXURE 2 – CONTROL RISK RATING CRITERIA .........................................................25
Annexure 3: Regulatory References ......................................................................................28

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POLICY FORMULATION AND IMPLEMENTATION

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INTRODUCTION
Objectives and Scope
1. The internal audit function broadly assesses and contributes to the overall improvement of the organization’s
governance, risk management, and control processes using a systematic and disciplined approach. The function
is an integral part of sound corporate governance and is considered as the third line of defence.
2. Risk based internal audit (RBIA) policy lays a framework for entity-level risk assessment and assures the Board of
Directors and the Senior Management on the quality and effectiveness of the organisation’s internal controls, risk
management and governance-related systems and processes.
3. Risk-based internal audit is expected to be an aid to the ongoing risk management by providing necessary checks
and balances in the system.
4. The internal audit team would undertake an independent risk assessment to formulate a risk-based audit plan
which considers the inherent business risks emanating from an activity/location and the effectiveness of the
control systems for monitoring such inherent risks.
5. The risk assessment of business and other functions of the organization shall at the minimum be conducted on
an annual basis. Every activity/location, including the risk management and compliance functions, shall be
subjected to risk assessment by the RBIA.
6. The scope of risk-based internal audit includes identifying potential inherent business risks and control risks,
suggesting various corrective measures. The audit mechanism should also ensure adequacy, effectiveness of laid
down procedures and ensure compliance with the same to control the risks to the optimum level.
7. The scope of the internal audit includes all the auditable entities/units within Manappuram Finance Limited
including technology-related aspects.
8. The internal audit report should be based on appropriate analysis and evaluation. It should bring out adequate,
reliable, relevant, and useful information to support the observations and conclusions. It should cover the
objectives, scope, and results of the audit assignment and make appropriate recommendations and/or action
plans.
9. All the pending high and medium risk observations and persisting irregularities should be reported to the
ACB/Board to highlight key areas in which risk mitigation has not been undertaken despite risk identification.
10. The internal audit function should have a system to monitor compliance with the observations made by the
internal audit. Status of compliance should be an integral part of reporting to the ACB/Board.
11. The information systems audit (IS Audit) should also be carried out using the risk-based approach.
12. Ensure compliance with regulatory guidelines specific to Internal Audit and related aspects.
13. The RBIA policy must be reviewed annually.

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Distribution of the Policy document
This is a confidential document and is meant for restricted distribution among MAFIL employees only. Any
unauthorised copying or distribution of this document is strictly prohibited. Individuals in the custody of this document
are responsible for ensuring the confidentiality of the document. It is the responsibility of the Internal Audit
Department to ensure that the document is updated with changes as and when required.

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POLICY GOVERNANCE
Risk Based Internal Audit Policy Implementation
All employees of MAFIL (including branch employees) and management are responsible for ensuring that Risk based
Internal Audit policy is adhered to. The Internal Audit department is responsible for ensuring that staff are aware of,
and adhere to, this Policy and the standards thereunder.
Policy Compliance
The Internal Audit Department shall ensure that:

• All users including MAFIL employees and management adhere to the Policy standards.
• Continuous compliance monitoring and measurement processes shall be adopted.
• Reports about continuous compliance monitoring and measurement processes shall be shared with the
ACB/Board annually.
Review of Risk based Internal Audit Policy
The document shall be reviewed at least annually by the Head of Internal Audit. The risk based internal audit policy
and standard operating procedure documents shall be updated in line with any major or minor changes in the
operating environment. This Policy shall also be reviewed and updated in line with recommendations provided by
various stakeholders including risk management function, external auditors, and legal counsel.
Exceptions to the Policy
Notwithstanding any guidance by the regulator, the Internal Audit Department shall identify instances where
exceptions to the Policy requirement shall be allowed for process, procedure, systems, and specifications. Such
requests shall be approved by the Managing Director (MD) and reported to the Audit Committee. Exceptions allowed
shall be reviewed periodically by the Internal Audit Department.
Non- compliance/Violation of the Policy
Violation of standards defined in this document may include, but not limited to:
• Users do not comply with the Policy standards
• Violation of guidelines provided by the regulators

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Non-compliance of users to the Risk Based Internal Audit Policy would result in disciplinary actions including, but not
limited to:
• Suspension
• Termination
• Other disciplinary action
• Civil and/or criminal prosecution
Training and Awareness
1. All employees of MAFIL should be provided with an awareness of the Risk based Internal Audit policies and
procedures to enable them to ensure adherence and they operate in such a manner as to ensure its risk is
appropriately addressed.
2. MAFIL should arrange and coordinate periodic training and awareness programs through the training systems of
the organization to ensure that sufficient, competent, and capable human resources are available. These
programs should be targeted at all levels of employees including end-users in the organization, top management
personnel and personnel managing the Internal Audit of the organization.
3. The respective departments should monitor the work performance of their staff and should hold periodic
assessments to identify Internal Audit training needs and to discover any problem areas, particularly where staff
deal with sensitive information, or work on sensitive information.
4. All management and staff should be briefed on their role in ensuring the protection of the organization’s risk
areas and complying with the relevant policies and procedures.
5. All MAFIL employees should receive prompt notice of changes in MAFIL’s risk based internal audit policies and
procedures, including how these changes may affect them and how to obtain additional information.

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ORGANISATIONAL STRUCTURE
The objective of this Policy is to create a risk based internal audit mechanism that manages inherent business risk
emanating from an activity/location and the effectiveness of the control systems for monitoring such inherent risks.
To disseminate the policy, an organisational structure has been set. The detailed roles and responsibilities have been
spelt out to bring about clarity of roles of responsibilities of each stakeholder in the organisational structure.
Roles and Responsibilities
A. Board of Directors / Audit Committee of Board/IT Strategy Committee

1. The Board of Directors (the Board) / Audit Committee of Board (ACB) of MAFIL are primarily responsible for
establishing and overseeing the internal audit function in the organization.
2. The ACB/Board shall approve the RBIA policy and RBIA plan to determine the priorities of the internal audit
function based on the level and direction of risk, as consistent with the entity’s goals.
3. Developing an effective culture around the importance of internal audit
4. The ACB/Board will review the performance of RBIA annually.
5. The ACB/Board should formulate and maintain a quality assurance and improvement program that covers all
aspects of the internal audit function. The quality assurance program may include assessment of the internal
audit function at least once a year for adherence to the internal audit policy, objectives and expected outcomes.
6. The ACB/Board shall promote the use of new audit tools/ new technologies for reducing the extent of manual
monitoring/transaction testing/compliance monitoring, etc
7. The findings of the system and process audit including but not limited to IS Audit, shall be presented before the
IT Strategy Committee of the Board.
B. Senior Management
1. The senior management is responsible for ensuring adherence to the internal audit policy guidelines as approved
by the Board and development of an effective internal control function that identifies, measures, monitors and
reports all risks faced.
2. The senior management shall ensure that appropriate action is taken on the internal audit findings within given
timelines and status on the closure of audit reports is placed before the ACB/Board.
3. The senior management is responsible for establishing a comprehensive and independent internal audit function
that should promote accountability and transparency.
4. It shall ensure that the RBIA Function is adequately staffed with skilled personnel of right aptitude and attitude
who are periodically trained to update their knowledge, skill, and competencies.

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5. A consolidated position of major risks faced by the organization shall be presented at least annually to the
ACB/Board, based on inputs from all forms of audit.
C. Internal Audit Department

The Internal Audit Department (IAD) will be responsible for undertaking risk based internal audits under the guidance
of the Audit Committee / Board. IAD must have sufficient authority, stature, independence, and resources thereby
enabling internal auditors to carry out their assignments properly. IAD shall be headed by a senior executive with
independent reporting to the Audit Committee.
The internal audit function shall not be outsourced. However, where required, experts including former employees
can be hired on a contractual basis subject to the ACB/Board being assured that such expertise does not exist within
the audit function. Any conflict of interest in such matters shall be recognised and effectively addressed. Ownership
of audit reports in all cases shall rest with regular functionaries of the internal audit function.
Head – Internal Audit
• Provide annual assessment on the effectiveness of the organization’s controls in managing key risks and control
activities.
• Evaluate the reliability and operation of the accounting and reporting system.
• Consider the scope of work of the external auditors and regulators to determine audit coverage.
• Evaluate the effectiveness of risk management processes
• Evaluate fraud risk management process
• Conduct or participate in internal investigations of suspected fraud, theft, or mismanagement, and provide advice
relating to internal fraud and security at the request of those charged with governance
• Maintain adequate professional audit staff with sufficient knowledge, skills, experience, and professional
certifications to meet the requirements of this policy
• The Head Internal Audit shall ensure that the department has the necessary resources, financial and otherwise,
available to carry out his or her duties commensurate with the annual audit plan, scope and budget approved by
the Audit Committee.
• Assess the effectiveness of the management in communicating risk and control information to appropriate areas
of the organization
• Coordinate and communicate information with the external auditors
• Report on potential improvements to the existing controls
• Assess and make appropriate recommendations for improving the governance process in promoting ethics and
values within the organization
• Provide periodic information on the status of the implementation of the annual audit programme and the
sufficiency of the Internal Audit Department resources

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• Issue periodic reports to those responsible for governance, and summarize results of the internal audits
• Present quarterly report/update to the Audit Committee, confirming on annual basis independence of the
Internal Audit Department and its audit staff, its performance during the period against key performance
indicators.
• Maintain properly documented files supporting conclusions, holding in safe custody any documents or property
or other material obtained for audit use or investigation.
• Ensure independence of Audit leads and staff.
The Head – Internal Audit will be supported by Internal Audit leads for various business units and support functions.
These audit leads will be responsible for audit planning and execution of their respective areas.
Key responsibilities of the Audit Leads include:
• Determine the scope, risk, and frequency of audit activities in identified areas of responsibility
• Monitor the implementation of the audit plan
• Review and approve audit procedures
• Deliberate on the issues raised with the IAD and management
• Finalize the audit report including action plans
• Discuss the audit report with the Head – Internal Audit
• Implement a tracking system to independently follow up on the open issues and escalate, if required; and
• Identify the need for follow-on audits to validate the remedial actions put in place.
• On-going engagement with their respective Branch Unit heads to understand business developments and identify
new risks emerging in their work area.

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INTERNAL AUDIT STRUCTURE

Authority, Stature, Independence, and Resources
The internal audit function must have sufficient authority, stature, independence, and resources thereby enabling
internal auditors to carry out their assignments properly. The Head of Internal Audit (HIA) and internal audit
functionaries shall have the authority to communicate with any staff member and get access to all records that are
necessary to carry out the entrusted responsibilities.
Competence
Requisite professional competence, knowledge and experience of each internal auditor are essential for the
effectiveness of the internal audit function. The staff possessing the requisite skills should be assigned the job of
undertaking risk-based internal audits. They should also be trained periodically to enable them to understand the
business activities, operating procedures, risk management and control systems, MIS, etc.
Rotation of Staff
The minimum period of service in the internal audit function shall be 6 months. The Board prescribes at least one stint
of service in the internal audit function for those staff possessing specialized knowledge useful for the audit function,
but who are posted in other areas, to have adequate skills for the staff in the internal audit function.
Reporting Line
The Head of Internal Audit shall directly report to MD & CEO with approval from the Board of Directors. Accordingly,
the ‘Reviewing authority’ shall be the ACB/Board and the ‘Accepting authority’ shall be the Board in matters of
performance appraisal of the Head of Internal Audit.
The ACB/Board shall meet the Head of Internal Audit at least once in a quarter, without the presence of the senior
management (including the MD & CEO/WTD). The Head of Internal Audit shall not have any reporting relationship
with the business verticals and shall not be given any business targets.
Remuneration
As such all auditors are full-time employees of the company. Auditors may also be appointed on a contract basis or
any method. In any arrangement as decided, the remuneration policies of auditors should be structured in a way to
avoid creating a conflict of interest and compromising the audit’s independence and objectivity .

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OUTSOURCED INTERNAL AUDIT ARRANGEMENTS

Internal audit functions shall not be outsourced as per the regulatory guidelines. Wherever required, experts including
former employees can be hired on a contractual basis subject to ACB / Board being assured that such expertise does
not exist within the internal audit function of the Company. However, ownership of all audit reports shall rest with
regular functionaries of the internal audit function.
The following aspects may, inter-alia, be kept in view to prevent any risk of a breakdown in internal controls on account
of outsourcing arrangements:
(a) Before entering an outsourcing arrangement for a risk-based internal audit, due diligence should be performed
to satisfy that the outsourcing vendor has the necessary expertise to undertake the contracted work.
(b) The contract, in writing, should at the minimum, specify the following:
 the scope and frequency of work to be performed by the vendor
 the manner and frequency of reporting to the entity the manner of determining the cost of damages arising
from errors, omissions, and negligence on the part of the vendor
 the arrangements for incorporation of changes in the terms of the contract, should the need arise
 the locations where the work papers will be stored
 the internal audit reports are the property of the Company and all work papers are to be provided to the
Company when required
 the authorised employees are to have reasonable and timely access to the work papers
 the supervisors are to be granted immediate and full access to related work papers
(c) The management should continue to satisfy itself that the outsourced activity is being competently managed.
(d) All work done by the vendor should be documented and reported to the top management through the internal
audit department.
(e) To avoid the significant operational risk that may arise on account of sudden termination of the outsourcing
arrangement, a contingency plan should be in place to mitigate any discontinuity in audit coverage.
(f) Periodic review of work performed by the outsourced vendor to be done by Head of Internal Audit for reliability,
accuracy, and objectivity.

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ACCESS TO INFORMATION
For the risk assessment to be accurate, it will be necessary to have proper MIS and data integrity arrangements. The
internal audit function should be kept informed of all developments such as the introduction of new products, changes
in reporting lines, changes in accounting practices/policies, etc. The risk assessment should invariably be undertaken
yearly. The assessment should also be periodically updated to consider changes in the business environment,
activities, and work processes, etc.
DOCUMENTATION
For the risk assessment to be accurate, clearly understandable, be unambiguous and verifiable at a later stage,
documentation of each process is of utmost importance.
Documentation of the process would involve but not be limited to.
1. Maintaining of a register with columns to showcase the audit area, sub-area, process, risk rating, observation,
methodology of assessment, details of data collected, curated observations
2. As far as possible all documentation will be in digital format and filed in a logical way for easy access
3. Data transferred on each finalized observation and updated thereon will be stored in a version-controlled
method.
4. All past data about published audit reports should be in read-only format.
5. All data will be stored in compliance with as per IT policy.
6. Sensitive data to be stored and shared must be password protected.
CODE OF ETHICS
All employees including the employees in the internal audit team are governed by the general code of ethics as per
the HR policy of MAFIL.

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AUDITEES RESPONSIBILITIES
Internal audit should not be a fault-finding mission. It is done to find out errors in the systems and working, lag from
approved timelines, adequacy of controls and their effectiveness in managing inherent risk and to generate process
improvement opportunities to improve overall efficiency in the area being audited.
To attain these objectives, there must be support from the auditee. His / her responsibilities are as follows.
1. Providing required data to auditors – The auditee must provide accurate data/additional data with all fields
as requested by the auditor. If the data request contains sensitive information, the auditee can take suitable
guidance/approval from the appropriate authority before sharing such data.
2. The audit is conducted as per the approved audit calendar and with time constraints. During the audit, the
auditee must attend and discuss the issues or queries raised by the auditors on time.
3. The auditee is responsible to oversee the activity in the department. He should work towards improvements
in all aspects of his area/domain.
4. The auditee must be positive and commit to the timely closure of observations. In all cases where he agrees
with the observation for improvements but is not empowered to decide on cost and other factors, he may
take up the matter with suitable authority and get necessary approvals on time.
5. In cases where the observations are as per best industry practices but not feasible with current MAFIL
practices, the auditee must ensure the observation is marked as PIO (Process Improvement Opportunity)
6. Closure of observations within the approved timeline is the responsibility of the auditee. He must close the
audit observations of the period when he was not in the department also.
7. The auditee is responsible for rectification of observations immediately. He must not wait for the final audit
report to start the rectification process. The management gains comfort when the observations in the audit
report are rectified before presentation to management.
MANPOWER
The senior management is responsible for establishing a comprehensive and independent internal audit function that
should promote accountability and transparency. It shall ensure that the RBIA Function is adequately staffed with
skilled personnel of the right aptitude and attitude who are periodically trained to update their knowledge, skill, and
competencies.

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POLICY DETAILS

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RISK ASSESSMENT FRAMEWORK

Risk assessment is an important part of any internal audit process that is used to understand the impact of risk and
the probability for the risk to be realized. The results of a risk assessment must be used to prioritize efforts to
counteract the risks.
The process of risk assessment is not a one-time activity but an ongoing project, which is dynamic and responds to
changes in the internal and external environment facing an organization at a point in time. Therefore, while risk
assessment may be classified as a point in time exercise, an organizations’ ability to assess and manage its risk
continuously (in response to an ever-changing environment) is a key challenge.
INDEPENDENT RISK ASSESSMENT

To prepare a risk based internal audit plan, the internal audit team must understand the existing and known risks in
the system. It should be noted that the risk based internal audit plan would cover, based on criticality/ risk, all risks in
the system. As and when a new risk is discovered, the risk based internal audit plan may be relooked and if the need
arises, the plan may be updated.
Risk Assessment Methodology

The organization will undertake a yearly Risk Assessment to formulate the risk-based audit plan. The risk assessment
would be performed as an independent activity to cover risks at various levels (corporate and branch; the portfolio
and individual transactions, etc.) and the processes in place to identify, measure, monitor and control the risks.
Further, the assessment will be updated periodically to account for changes in the business environment, activities,
and work processes.
The risk assessment process will cover the following activities:
• Identification of inherent business risks in various activities undertaken by the organization.
• Evaluation of the effectiveness of the control systems for monitoring the inherent risks of the business activities
(`Control risk’).
• Drawing up a risk-matrix for considering both the factors viz., inherent business and control risks
The risk assessment process shall involve but not be limited to processing the following information:
 Previous internal audit reports and compliance
 Proposed changes in business lines or changes in focus
 A significant change in management / key personnel
 Results of the latest regulatory examination report

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 Reports of external auditors

 Industry trends and other environmental factors
 Time elapsed since the last audit
 The volume of business and complexity of activities
 Substantial performance variations from the budget
 Business strategy of the entity vis-à-vis the risk appetite and adequacy of control.
The following phased approach shall be adopted for performing the independent risk assessment:
a. Preparation: To undertake a risk assessment, an understanding of the scope and functions of the various functions
that support the business processes shall be obtained. This involves, but is not limited to:
i. Identifying business functions and processes: Business functions critical to business delivery shall be
identified and focused upon. Interviews with concerned stakeholders shall be scheduled to understand the
business functions and priorities of the organization.
ii. Understanding existing risk management framework: Applicable risk standards relevant to the MAFIL
environment shall be evaluated and assessed.
iii. Assess overall control environment: Obtain information regarding the overall control environment by
reviewing the existing risk registers, audit reports, organisation structure, major changes within the function,
business performance.
b. Preliminary risk assessment: The risks related to the various MAFIL processes shall be identified. This involves,
but is not limited to:
i. Interviews with key stakeholders: Interviews shall be conducted with the key stakeholder to understand the
processes and identify possible gaps in the definition of processes.
ii. Performing high-level process walkthroughs: Process walkthroughs shall be performed to understand the
operation of business processes and to identify possible issues in the working of such processes.
iii. Verifying evidence of control design and implementation: Evidence of control design and implementation
shall be verified to validate the efficacy of the control in mitigating risks.
c. Inherent risk and control risk rating/categorisation: The risk assessment is done at the inherent risk and control
risk level. Inherent business risks indicate the intrinsic risk in a particular area/activity of the organization and will
be grouped into low, medium, and high categories depending on the severity of the risk. Inherent risk rating will
be done based on the impact and likelihood of a particular risk rating. The methodology for grouping the risks
into High, Medium, and low categories depends on the severity of the risk which is enumerated in ANNEXURE 1.
Control risks arise out of inadequate control systems, deficiencies/gaps and/or likely failures in the existing
control processes. The control risks will be classified into low, medium, and high categories and the methodology
is enumerated in ANNEXURE 2.

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The Extremely High-Risk Areas would require immediate audit attention, maximum allocation of audit resources
besides ongoing monitoring by the organization’s top management. The inherent business risks and control risks
will also be analysed to assess whether these are showing a stable, increasing or decreasing trend.
The risk matrix will be prepared for each business activity/location.
Risk Matrix
High A – High Risk B – Very High Risk C – Extremely High

Risk
Medium D – Medium Risk E – High Risk F - Very High Risk
Low G – Low Risk H – Medium Risk I – High Risk

Inherent Business
Low Medium High
Control Risk
Risk
A – High Risk- Although the control risk is low, this is a High-Risk area due to high inherent business risks.
B – Very High Risk- The high inherent business risk coupled with medium control risk makes this a Very High-Risk area
C – Extremely High Risk – Both the inherent business risk and control risk are high which makes this an Extremely
High-Risk area. This area would require immediate audit attention, maximum allocation of audit resources besides
ongoing monitoring by the top management.
D – Medium Risk – Although the control risk is low this is a Medium Risk area due to medium inherent business risks.
E – High Risk – Although the inherent business risk is medium this is a High-Risk area because of control risk also being
medium.
F – Very High Risk – Although the inherent business risk is medium, this is a Very High-Risk area due to high control
risk.
G – Low Risk – Both the inherent business risk and control risk is low.
H – Medium Risk - The inherent business risk is low, and the control risk is medium.
I – High Risk – Although the inherent business risk is low, due to high control risk this becomes a High-Risk area.

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The outcome of the risk assessment or final rating of an auditable unit will be a key factor to decide on the frequency
of audit, the extent of audit to be undertaken and the type of audits to be performed. E.g., Extremely high-risk areas
will be subjected to audits at a higher frequency or concurrent audits and higher scrutiny.
We must also analyse the inherent business risks and control risks to assess whether these are showing a stable,
increasing or decreasing trend. Illustratively, if an area falls within cell ‘B’ or ‘F’ of the Risk Matrix and the risks are
showing an increasing trend, these areas will also require immediate audit attention, maximum allocation of audit
resources besides ongoing monitoring by the top management (as applicable for cell ‘C’).
Trend of Risk
Risk-based internal audit is expected to be an aid to the ongoing risk management by providing necessary checks and
balances in the system.
The risk assessment needs to be done regularly and the finding must be compared with the findings of the earlier
period to identify trends of shifting/reducing/increasing risks. This process will also help us identify among others,
new areas of risk, areas of risk which have become redundant due to change in systems, operations, processes,
automation etc. The trend will also be generated from the level of risk accepted in each domain. The actual risk
generated will be compared with the benchmark risk (threshold risk) and the risk level as per previous periods to
generate a trend.
RISK BASED AUDIT PLAN

• The Internal Audit Department will prepare Internal Audit Plan based on the Risk Assessment.
• The frequency of audits/prioritisation of areas will be determined based on the Risk Assessment process.
• The areas identified as high, very high, extremely high risk (based on the matrix) will be audited at shorter intervals
as compared to medium and low-risk areas.

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• The frequency of audit will be decided based on the following matrix
Risk Audit Matrix
High Once in 12 – 15 Once in 6 – 12 months Once in 6 months

months (Very High Risk) (Extremely High
(High Risk) Risk)
Medium Once in 15 – 18 Once in 12 – 15 Once in 6 – 12

months months months
Inherent Business
(Medium Risk) (High Risk) (Very High Risk)

Risk
Low Once in 18 – 24 Once in 15 – 18 Once in 12 – 15

months months months
(Low Risk) (Medium Risk) (High Risk)
Low Medium High
Control Risk
The Audit Plan will prioritize audit work to give greater attention to the areas of:
(i) High Magnitude and high frequency
(ii) High Magnitude and medium frequency
(iii) Medium magnitude and high frequency
(iv) High magnitude and low frequency
(v) Medium Magnitude and medium frequency.
All the units/businesses/locations (Even Low Risk) of Manappuram Finance should get audited at least once in two
years.
The risk based internal audit plan prepared by the audit team should be reviewed by the management and presented
to the Audit Committee for approval. The audit plan should be revisited periodically based on changes and dynamic
risk assessments undertaken.

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AUDIT EXECUTION
The internal audit execution will be undertaken by a combination of process audits, concurrent audits, systems audits,
file audits by way of offsite/remote auditing methods as well as physical verification and visits. IAD will perform the
following types of audits to provide comprehensive assurance to the management and the Audit Committee:
• Process audit based on risk assessment
• Branch/field audit based on risk assessment
• Concurrent audit
• Thematic audit
• Information systems audit
• Offsite monitoring and risk analytics
Based on the Internal Audit Plan, Head – Internal Audit in coordination with the IA team will ensure timely audit
execution. The organization will strive to undertake audits through in-house audit resources. However, audits that
require specialized skill sets and are not available within IAD may be performed with the help of experienced
external auditors. The contract with the external auditor should specify the scope of work to be performed and
critical terms.
Internal Audits shall be performed using Audit Programs defined for the specific type of audit/area being audited.
Head – Internal Audit shall ensure appropriate working paper documentation for all the audits and activities
performed for record and future reference.
AUDIT REPORT AND REPORTING OBSERVATION

• Audit Reports will be prepared in the standard format and issued following the conclusion of each engagement
and will be distributed as appropriate.
• The observations will be graded, classified in line with the agreed observation grading matrix.
• IAD will be responsible for appropriate follow-up activity on results from audit reports. The status of observations
will be tracked until resolution and reported as part of the regular audit pack to the Audit Committee, including
those observations that have not (yet) been addressed within an appropriate / agreed timeframe.
• The summary of the status of the audit plan, key observations, open audit points will be presented to the Audit
Committee quarterly.
• IAD will also assist in providing necessary information to RBI for Risk based Supervision and any other
requirements.

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CLOSURE OF OBSERVATIONS
All observations need to be closed within the timelines as agreed at the time of closure of the published internal audit
report. These timelines are key to ensuring the systems are upgraded and improved to cover the identified risk areas.
There can be changes in the operational activities, systems, and controls during the period from publishing the internal
audit report to the committed date of closure.
If due to any unforeseen circumstances, the auditee is unable to fix the issue and ensure closure of the observation,
and/or if there are repeated observations, the auditee must get approval from management for extension of timelines
or closure of the observation without fixing the issue as the risks have been mitigated with other controls/system
upgrades.
CONTINUOUS MONITORING
A risk assessment is an important part of any internal audit process that is used to understand the impact of risk and
the probability for the risk to be realized. The results of a risk assessment must be used to prioritize efforts to
counteract the risks.
The process of risk assessment is not a one-time activity but an on-going project, which is dynamic in nature and
responds to changes in the internal and external environment facing an organization at a point in time. Therefore,
while risk assessment may be classified as a point in time exercise, an organizations’ ability to assess and manage its
risk continuously (in response to an ever-changing environment) is a key challenge.
COMMUNICATION
The communication channels between the risk-based internal audit staff and management should encourage
reporting of negative and sensitive findings. All serious deficiencies should be reported to the appropriate level of
management as soon as they are identified. Significant issues posing a threat to the business should be promptly
brought to the notice of the Board of Directors, Audit Committee, or top management, as appropriate.
PERFORMANCE EVALUATION
Periodic Review
The Internal Audit Department should conduct periodical reviews, annually or more frequently, of the risk-based
internal audit undertaken by it vis-à-vis the approved audit plan.
1. The performance review should also include an evaluation of the effectiveness of risk-based internal audits in
mitigating identified risks.

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2. The Board of Directors/Audit Committee of Board should periodically assess the performance of the risk-based
internal audit for reliability, accuracy, and objectivity.
3. Variations, if any, in the risk profile as revealed by the risk-based internal audit vis-à-vis the risk profile as
documented in the audit plan should also be investigated to evaluate the reasonableness of the risk assessment
methodology of the Internal Audit Department.
CODE OF ETHICS FOR INTERNAL AUDIT DEPARTMENT

There are certain moral principles that the Internal Auditors should follow. These are illustrative and not exhaustive;
these provide the basic guidelines to the Internal Auditors about the moral hazards and conflicts which they may face
while carrying out Internal Audit assignments.
Integrity, Objectivity & Independence of Internal Auditor

• Internal auditors shall have an obligation to exercise honesty, objectivity, and diligence in the performance of
their duties and responsibilities.
• Internal Auditors holding the trust of the organization, shall exhibit loyalty in all matters about the affairs of the
organization.
• Internal Auditors shall refrain from entering any activity which may conflict with the interest of the organization.
• Internal Auditors shall not accept a fee or a gift from an employee, a contractor, or a supplier.
• Internal Auditor must be fair and must not allow prejudice or bias to override his objectivity. She/he should
maintain an impartial attitude. The internal auditor should not, therefore, to the extent possible, undertake
activities, which are or might appear to be incompatible with her/his independence and objectivity. For example,
to avoid any conflict of interest, the internal auditor should not review an activity for which she/he was previously
responsible.
• Internal Auditor should immediately bring any actual or apparent conflict of interest to the attention of the
appropriate level of management so that necessary corrective action may be taken.
Confidentiality
• Internal auditors shall be prudent in the use of information acquired in the course of their duties. She/he shall
not use confidential information for any personal reason or in a manner that would be detrimental to the interest
of the organization.
• Internal Auditor should not disclose any such information to a third party, including employees of the entity,
without specific authority of management/ client or unless there is a legal or professional responsibility to do so.

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ANNEXURE 1 – INHERENT RISK RATING CRITERIA
Risk Impact Category Low Medium High

(1) (2) (3)
Financial Reporting The impact between INR

Impact below INR Impact of more than INR
___ Crores and INR ____
___Crores. i.e., Less than ____ Crores, i.e., 5% of the
Crores. i.e., 1% to 5% of
1% of PAT PAT
PAT
Financial Impact Financial transactions

Financial transactions Financial transactions
between INR 1 Lac to INR 5
below INR 1 Lac above INR 5 Lacs
Lacs
Reputational No reputational damage as Reputational damage due

Widespread reputational
news is not available to to information with the
damage due to public
anyone other than key Clients, Vendors, and
news and media coverage.
stakeholders. Investors
Regulatory Non-compliances that Financial Penalty, Show-

Non-compliances that may
could result in inspection cause notice from the
not result in any regulatory
comments or remarks regulator and Potential
implications.
from the regulator Cancellation of License
Operational Operational errors / lapses Operational errors/lapses

Operational errors / lapses
between 1% to 5% of the beyond 5% of the
below 1%
transactions. transactions.
Legal Legal cases could result in

Legal suits of medium financial penalties and
Limited / No legal impact impact/with the possibility regulatory fines for the
of out of court settlements Company, KMPs and
Directors.

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ANNEXURE 2 – CONTROL RISK RATING CRITERIA
SI No Control Rating Category Audit Report Rating and Compliance Control Control Weig
Status Risk Score Risk Rating ht
1 Previous Internal Audit Satisfactory with no major pending 3 Low 15%

Report and Compliance open risks/gaps
Status
Needs Improvement with no or some 2 Medium
pending open risks/gaps
Unsatisfactory with major pending 1 High

open risks/gaps
SI No Control Rating Category Changes in Control Control Weig

Business/Processes/Product Risk Score Risk Rating ht
2 Proposed changes in business Minor or no changes 3 Low 10%

lines or changes in business proposed/implemented since the
focus or change in previous audit
product/processes
Partial changes 2 Medium
proposed/implemented since the
previous audit
Major changes 1 High

proposed/implemented since the
previous audit
SI No Control Rating Category Changes in Management / Key Control Control Weig

Personnel Risk Score Risk Rating ht
3 A significant change in No Changes in the Management / Key 3 Low 15%

Management / Key Personnel Personnel
Few changes in the Management / 2 Medium

Key Personnel

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Significant changes in the 1 High

Management / Key Personnel
SI No Control Rating Category Audit comments in regulatory or other Control Control Weig
examinations Risk Score Risk Rating ht
4 Results of Regulatory No negative comments or negligible 3 Low 20%

examination report or any comments
other audit
Few negative comments/issues 2 Medium
highlighted
Severe negative comments 1 High

highlighted
SI No Control Rating Category Industry Trends / Environmental Control Control Weig

Factors Risk Score Risk Rating ht
5 Industry Trends / Growing industry trends/environment 3 Low 5%

Environmental Factors factors
Status quo in industry trends / 2 Medium

environmental factors
Adverse industry trends/concerns in 1 High

the environmental factors
SI No Control Rating Category Time Lapsed Control Control Weig

Risk Score Risk Rating ht
6 Time elapsed since last audit < 6 Months 3 Low 10%
>6 Months x < 12 months 2 Medium
> 12 Months 1 High

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SI No Control Rating Category Volume and Complexity Control Control Weig

7 The volume of Business and Low Volumes or Less Complexity of 3 Low 10%
Complexity of Activities Activities
Medium level Volumes or Complexity 2 Medium

of Activities
High Volumes or Complexity of 1 High

Activities
SI No Control Rating Category Variations against Targets Control Control Weig

8 Substantial performance A variance of up to 10% between 3 Low 5%

variations from targets business targets and actual
(business performance (underachievement or
volumes/performance overachievement)
numbers)
A variance of greater than 10% but 2 Medium
less than 20% between business
targets and actual performance
(underachievement or
overachievement)
A variance of greater than 20% 1 High

between business targets and actual
performance (underachievement or
overachievement)
SI No Control Rating Category Business Strategy Control Control Weig

9 Business Strategy factors overall risk 3 Low 5%

appetite of the Company

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Business Strategy of Company Business strategy is aligned with the 2 Medium

vis a vis Risk Appetite and risk appetite of the Company and
Adequacy of Controls control environment
Business strategy is not aligned with 1 High

the risk appetite of the Company and
Control environment
SI No Control Rating Category Systems Environment Control Control Weig

10 Systems environment and A highly automated environment with 3 Low 5%

system-based controls minimal manual controls (i.e., if 75%
of the total controls are automated)
Moderately automated environment 2 Medium

with combination of manual &
automated controls (30% - 75%
automated controls)
High reliability on manual controls 1 High

(less than 30% automated controls)
Annexure 3: Regulatory References
SI Regula Obligation Set Name Regulation Regulation Code Obligation Summary

No. tor Date
1 RBI Risk-Based Internal Audit Feb 02, 2021 RBI/2020-21/88 Guidelines for Risk based
(RBIA) Ref.No.DoS.CO.PPG./ Internal Audit
SEC.05/11.01.005/2020-
21
2 RBI Directions on Managing 09 Nov, RBI/2017-18/87 Guidance on Outsourcing
Risks and Code of 2017 DNBR.PD.CC.No.090/ of Financial Services
Conduct in Outsourcing of 03.10.001/2017-18
Financial Services by
NBFCs

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3 RBI Master Direction - 08 Jun, 2017 RBI/DNBS/2016- Guidelines on Information

Information Technology 17/53 Technology Framework
Framework for the NBFC Master Direction
Sector DNBS.PPD.No.04/66.
15.001/2016-17
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Manappuram Finance Limited

Risk Based Internal Audit Policy

RISK BASED INTERNAL AUDIT

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POLICY FORMULATION AND IMPLEMENTATION

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Distribution of the Policy document

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The Internal Audit Department shall ensure that:

Review of Risk based Internal Audit Policy

Exceptions to the Policy

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Training and Awareness

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Roles and Responsibilities

A. Board of Directors / Audit Committee of Board/IT Strategy Committee

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C. Internal Audit Department

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INTERNAL AUDIT STRUCTURE

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OUTSOURCED INTERNAL AUDIT ARRANGEMENTS

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RISK ASSESSMENT FRAMEWORK

INDEPENDENT RISK ASSESSMENT

Risk Assessment Methodology

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 Reports of external auditors

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The risk matrix will be prepared for each business activity/location.

High A – High Risk B – Very High Risk C – Extremely High

Medium D – Medium Risk E – High Risk F - Very High Risk

Low G – Low Risk H – Medium Risk I – High Risk

Low Medium High

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RISK BASED AUDIT PLAN

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• The frequency of audit will be decided based on the following matrix

Risk Audit Matrix

High Once in 12 – 15 Once in 6 – 12 months Once in 6 months

Medium Once in 15 – 18 Once in 12 – 15 Once in 6 – 12

(Medium Risk) (High Risk) (Very High Risk)

Low Once in 18 – 24 Once in 15 – 18 Once in 12 – 15

Low Medium High

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AUDIT REPORT AND REPORTING OBSERVATION

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CODE OF ETHICS FOR INTERNAL AUDIT DEPARTMENT

Integrity, Objectivity & Independence of Internal Auditor

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ANNEXURE 1 – INHERENT RISK RATING CRITERIA

Risk Impact Category Low Medium High