General

Royalty audits are designed to check the fairness of the implementation of royalty agreements made between a company and its customers or suppliers. Verification of royalty payments is a complex issue which includes, among other things, performance of sensitivity testing at customer locations, performance of cross-organizational examinations (e.g., development bodies, operations, financial, legal), and it requires expertise in a number of different disciplines, such as auditing, organizational control processes, and technological and legal know-how.

There are two types of royalty audits:

Customer audits – An audit, the goal of which is to assess the fairness of the royalties paid by the customers to the organization.

Supplier audits – An audit, the goal of which is to assess the fairness and integrity of the processes used to compute the royalties of the organization itself.

Our firm has extensive experience in the area of royalty audits. As part of some of those audits, we were sent to verify the correctness of the royalty calculations of huge companies abroad which pay royalties to our clients in Israel.

In conducting our audits, we integrate our experience in the fields of internal auditing, SOX, and information systems auditing. We also make use of advanced auditing techniques, including simulations of royalty calculations.

The audit process

Risk assessment

A risk assessment is primarily conducted in organizations that receive royalties from their customers. The goal of the assessment is to map the parties paying the royalties and evaluate the level of risk of each factor from the standpoint of the payer of the royalties. The risk level of each factor is determined on the basis of a risk evaluation model which takes into consideration the type of customer, types of royalties, volume of royalties, the length of time the Company has been working with the specific customer, etc. The result of the assessment is a multi-year work plan, from which the annual audit plan is derived in connection with royalties. The assessment is updated periodically.

Performing the current audit

A royalty audit consists of the following major phases:

·           Preparation for the audit (organization) – Learning the framework of the engagement of the customer, obtaining documents and royalty data for the period being audited.

·           Preparation for the audit (customer) – Meeting the relevant parties at the customer, an initial understanding of the work processes and obtaining additional material for purposes of the audit.

·           Planning the audit – Identifying the major risks on which the audit will focus and preparing a detailed audit plan, including prioritization of issues.

·           Field work – Conducting the audit in accordance with the audit plan. The field work is carried out partially at the offices of the customer. The work includes also use of computerized audit tools which allow for an efficient examination of large quantities of data.

·           Preparation of a draft audit report – Formulating the findings, verifying them with the audited parties and preparing an audit report on the basis of the audited process.

·           Presentation to management and preparation of a final report – The draft is sent to management. The auditor presents the audit that was conducted and discussions are held on the findings and recommendations. Management comments are incorporated into the report, following which a final report is issued.