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Audit of a manufacturing unit

Ajay Singh Bhati (Manager (Accounts)) (215 Points)

17 April 2012

Dear experienced members,

I want to know that How and from where to start internal audit of a manufacturing unit? What are the things which we must be careful during internal audit?

Thanks in advance.

Regards

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6 Replies

piyush.a.k (-) (252 Points)
Replied 17 April 2012

Firstly start with normal data flow taking from a goods receipt note issue to a despatch order finalisation. This gives you the entire flow and the possible loop pole in the flow.

After which go through the regular monthly reutrns of excise, vat etc and the payment status alongwith working of the same.

For any manufacturing company audit the most sensitive asset is the companies stock. So do make keen interest in stock taking and the frauds associated with such stocks.

hope this few aspects can help you to think about how to start a internal audit.

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Joey Tribbiani (fdg) (2010 Points)
Replied 17 April 2012

In addition to abovesaid matter,I would like to add that please do check POs with corresponding GRNs. Sometimes there are differences which go unnoticed and since this is an internal audit you will like to account for the diferences in quotation recieved and the subsequent bills received,if any. In SAP,u can check clearing accounts for this purpose.

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Amit Gupta (Auditor MBA (Finance & HR) CA & CWA Final) (35 Points)
Replied 17 April 2012

Dear Ajay,

For the audit we have mainly 3 to 4 section.

First one is Finance & Accounts Section.

Secound one is Taxation ( Excise, Vat, Cst, Income Tax, Import Export )

Third One is Human Resource Audit ( Payroll, Legal laws, Grautity, Bonus, PF, ESI, Maternity, all labour laws)

Forth one is Physical Inventory of Manufacturing floor (Raw Material)

First start from the Operation store where the material have receipt. ( All suppoting with the Accounts againts material & Purcahse depatment should Place the PO to the supplier.)

Proper Gate entry & gate entry stamp against the material which have you been received in the store.

Consumption register on FIFO Base as per AS-2 (Prescribed by the ICAI, ASB).

Closing stock as per Physically verified ( If, Cost Accounting Mandotry than not a problem, Because allready CMA certified the Closing Stock Valuation), Due to IFRS.

Should be Physical inventory once in Month if turnover is around 40-50 Crore. If more thean quartly.

This one is give you a reveiw for the Raw-material audit in the Manufacturing industry.

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aman kumar (CA final intern) (47 Points)
Replied 17 April 2012

Dear Ajay,

Internal Audit of a manufacturing audit is entirely subject to agreed scope with the management. The broad areas covered are as follows:

1. Production Planning & Controlling i.e., Daily or fothnightly acheivement of produciton plans (plan vs. actual prod.), recording of the line wise/ shop wise production as differences in the same will lead to wrong MIS preparation. Monitoring of Line Stoppages/ Rejeciton & Reworks (if any) can also be covered.

2. Consumables/ Inventory Controls i.e., PO creation to Payment controls over revenue items, Receipts & Issue controls (GRN/ MRN preparation etc.), consumption monitoring including stock levels and standard consumption per unit of output, Quality certificates from vendors etc.

3. Offline & Online quality controls i.e., Compliance with Quality benchmarks as set by the Quality department for receiving of material or checking of items before consumption. This controls differs from company to company and require a discretionary assessment on the part of auditor.

4. Statutory compliances i.e., Application of factory's act, Exicse & Customs, labour laws, other statutory compliances (Vary from company to company)

5. Utilities i.e., consumption of electricity/ Water/ Air. Standard vs. actual consumption, Trending consumption over time.

6. Shop Maintenance i.e., adequacy of adherance to maintenance plans, fool proofing of production lines, reporting of breakdowns and production losses from the same.

7. Other areas i.e., Controls over shop level procurement (if it is purchases are not cenralized) etc.

Hope you find it useful.

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K GOPALAN (SOLE PROPRIETOR) (34 Points)
Replied 19 April 2012

Hi Ajay

The internal audit could be broadly divided into transaction audit and process/ system audit.

Transaction audit will cover checking of sample of all vouchers - purchase, sales, cash/ bank payments, debit/ credit notes, journal vouchers etc to satisfy yourself that the amounts are genuine and have approved by authorised officials. Checking some of the reconciliations will also be a part of this programme - bank reconciliation, sales vs ST returns, Modvat credit as per ledger vs excise records etc.

Process/ system audit will focus on the systems and processes - both IT enabled and otherwise - in the company and test their soundness in design and use. Key areas would be raw material purchase, material storage and issue, closing stock valuation, fixed assets accounting, debtors/ creditors reconciliation.

Hope you find this useful.

2 Like