Name: Nilesh A. Mandlik

Roll No.: 61

Batch: MFM 13-16

Company: Godrej Aerospace Pvt. Ltd.

Assignment –

Critical areas in my Organization which need to be controlled /Audited?

Areas that can lead to losses? Preventive Measures taken towards it?

DEFINITION

Frequent or ongoing audit conducted by a firm's own or independent auditors appointed by the company to

Monitor operating results Verify Financial Records Evaluate Internal Controls Assist Management in increasing efficiency and effectiveness of business operations To detect Fraud

AUDITING THE PRODUCTION AND PERSONNEL SERVICES CYCLES

Planning the Audit of the Production Cycle Control Activities — Manufacturing Transactions Substantive Tests of Inventory Balances Value-Added Services in the Production Cycle

AUDITING THE PRODUCTION AND PERSONNEL SERVICES CYCLES

Planning the Audit of the Personnel Services Cycle Control Activities — Payroll Transactions Substantive Tests of Payroll Balances Value-Added Services in the Personnel Services Cycle

• Planning the Audit of the Production Cycle

The production cycle relates to the conversion of raw materials into finished goods. This cycle includes production planning and control of the types and quantities of goods to be manufactured, the inventory levels to be maintained, and the transactions and events pertaining to the manufacturing process. Transactions in this cycle begin at the point where raw materials are requisitioned for production, and end with the transfer of the manufactured product to finished goods. The transactions in this cycle are called manufacturing transactions.

The production cycle interfaces with the following 3 other cycles:

1. The expenditure cycle in purchasing raw materials and incurring various overhead costs.2. The personnel services cycle in incurring factory labor costs.3. The revenue cycle in selling finished goods.

Selected Specific Audit Objectives for the Production Cycle

Figure 1

Understanding the business and industry assists the auditor in designing an effective and efficient audit program. When auditing a manufacturing company, the auditor will usually want to understand the capital intensiveness of the manufacturing process, as well as the mix of raw materials and labor that are needed in the manufacturing process.Because of the importance of inventory to fair presentation for most manufacturers, wholesalers, and retailers, the auditor may use analytical procedures to identify problem areas.

Materiality

Summary of Selected Manufacturing Companies Statistics

Figure 2

Figure 2 illustrates the importance of inventory to manufacturers and retailers. For these entities, inventory is material and the audit of inventory is critical to reaching an opinion on the overall fair presentation in the financial statements.The primary consideration in evaluating the allocation of materiality is the determination of the magnitude of misstatement that will influence the decisions of a reasonable financial statement user. A secondary consideration is the relationship to the cost of detecting errors.

Inherent Risk

The inherent risk of misstatement in the financial statements arising from inventory transactions for the hotel chain or the school district is relatively low, as inventory is not a material part of the entity’s core process. With a manufacturer, wholesaler, or retailer, however, inventory may be assessed at or near the maximum for the following reasons:1. The volume of purchases, manufacturing, and sales transactions that affects these accounts is generally high, increasing the opportunities for misstatements to occur.2. There are often contentious issues surrounding the identification, measurement, and allocation of inventorial costs such as indirect materials, labor and manufacturing overhead, joint product costs, and the disposition of cost variances, accounting for scrap, and other cost accounting issues.3. The wide diversity of inventory items sometimes requires the use of special procedures to determine inventory quantities, such as geometric volume of stockpiles, aerial photography, and estimation of quantities by experts.4. Inventories are often stored at multiple sites, adding to the difficulties associated with maintaining physical controls over theft and damages and properly accounting for goods in transit between sites.5. The wide diversity of inventory items may present special problems in determining their quality and market value.6. Inventories are vulnerable to spoilage, obsolescence and other factors such as general economic conditions that may affect demand and salability and thus the proper valuation of the inventories. Inventory may be sold subject to right of return and repurchase agreements.Analytical Procedures

Analytical procedures are cost effective and they may alert the auditor to potential misstatements. If the financial presented for audit show a trend of increased profit margin combined with an increase in the number of inventory turn days, inventory may be overstated. This will alert the auditor to pay careful attention to the existence and valuation of inventory. The auditor might also be alert to cutoff problems that might have resulted in overstating invent inventory.

Analytical Procedures Commonly Used to Audit the Production Cycle

Figure 3

• Control Activities — Manufacturing Transactions

The control activities component of internal controls consists of 4 categories of activities:1. Segregation of duties, general controls and application controls.2. Information processing controls that include proper authorization.3. Physical controls4. Performance reviews and accountability.

Common Documents and Records

Following are some of the common documents, records, and computer files used in processing manufacturing transactions:

1. Production order - Form indicating the quantity and kind of goods to be manufactured. An order may pertain to a job order or a continuous process.2. Material requirements report - Listing of raw materials and parts needed to fill a production order.3. Materials issue slip - Written authorization from a production department for stores to release materials of use on an approved production order.4. Time ticket - Record of time worked by an employee on a specific job.5. Move ticket - Notice authorizing the physical movement of work in process between production departments, and between work in process and finished goods.6. Daily production activity report - Report showing raw materials and labor used during the day.7. Completed production report - Report showing that work has been completed on a production order.8. Inventory subsidiary ledgers or master files (perpetual inventory records) - Records maintained separately for raw materials, work in process and finished goods. Contain information on units and costs added to and deducted from the respective inventory accounts and units on hand and associated costs comprising the inventory balances at a point in time.9. Standard cost master file - A computer file containing standard costs.10. Raw materials master file - A computer file with the quantities of raw materials inventory on hand.11. Work-in-process inventory master file - A computer file containing the sum of actual work-in-process costs. The file is used to prepare the daily production report.12. Finished goods inventory master file - A computer file that contains the sum total of production costs. It may be used as a perpetual inventory for finished goods.

Functions and Related Controls

Executing and recording manufacturing transactions and safeguarding inventories involve the following manufacturing functions:

1. Initiating production:a. Planning and controlling production.b. Issuing raw materials.

2. Movement of goods:a. Processing goods in production.b. Transferring completed work to finished goods.c. Protecting inventories.

3. Recording manufacturing and inventory transactions:a. Determining and recording manufacturing costs.b. Maintaining correctness of inventory balances.

Obtaining an Understanding and Assessing Control Risk

In obtaining and documenting an understanding of portions of internal control components relevant to manufacturing transactions, the auditor uses the same procedures as for other

transaction classes. This includes reviewing any prior experience with the client, making inquiries of management and other production personnel, inspecting production documents and records, and observing production activities and conditions. It may also include the use of internal control questionnaires, flowcharts, and narrative memoranda.

• Substantive Tests OF Inventory Balances

Determining Detection Risk for Tests of Details

In keeping with the audit risk model described and applied in previous chapters, the auditor’s specification of acceptable levels of detection risk for tests of details for inventory assertions will reflect an inverse relationship with relevant inherent risk, control risk, and analytical procedures risk assessments pertaining to those assertions.Relevant control risk assessments vary based on the transaction classes that affect the particular inventory account as shown in the following tabulation:

Figure 4Designing Substantive Tests

Possible substantive tests of inventory balance assertions and the specific account balance audit objectives to which relate are shown in Figure 4. Evidence from some of the tests applicable to merchandise inventory and to manufacture finished goods inventories also relates to objectives for the corresponding cost of goods sold accounts due to the reciprocal relationship of these accounts.

Initial Procedures

An essential initial procedure involves obtaining an understanding of the entity’s business and industry to set the context for the evaluation of analytical procedures and tests of details.In tracing beginning inventory balances to prior year working papers, the auditor should make certain that any audit adjustments agreed upon in the prior year did, in fact, get recorded.

Analytical Procedures

A review of industry experience and trends may be essential in developing expectations to be used in evaluating analytical data for the client. A review of relationships of inventory balances to recent purchasing, production, and sales activities should also aid the auditor in understanding changes in inventory levels.Because of the reciprocal relationship between inventories and cost of goods sold, these procedures may provide evidence useful in determining the fairness of management’s assertions pertaining to both accounts.

Test of Details of Transactions

These tests involve the procedures of vouching and tracing to obtain evidence about the processing of individual transactions that affect inventory balances. Special consideration is given to determining the propriety of the cutoff of inventory transactions at the end of the accounting period.

Test of Details of Balances

The observation of inventories has been a generally accepted auditing procedure for more than 50 years. This procedure is required whenever inventories are material to a company’s financial statements and it is practicable and reasonable.In performing this auditing procedure, the client has responsibility for the taking of the inventory. Receivables and Inventories, states that from this substantive test, the auditor obtains direct knowledge of the effectiveness of the client’s inventory taking and the measure of reliance that may be placed on management’s assertions as to the quantities and physical condition of the inventories.

Timing and Extent of the Test

The timing of an inventory observation depends on the client’s inventory system and the effectiveness of internal controls. In a periodic inventory system, quantities are determined by a physical count, and all counts are made as of a specific date. The date should be at or near the balance sheet date.In a perpetual inventory system with effective internal controls, physical counts may be taken and compared with inventory records at interim dates.

Inventory-Taking Plans

The taking of a physical inventory by a client is normally done according to a plan or a list of instructions. The client’s instructions should include such matters as the:1. Names of employees responsible for supervising the inventory taking2. Date of the counts3. Locations to be counted

4. Detailed instructions on how the counts are to be made5. Use and control of pre-numbered inventory tags and summary sheets6. Provisions for handling the receipt, shipment and movement of goods during the counts if such activity is unavoidable7. Segregation or identification of goods not owned

Performing the Test

In observing inventories, the auditor should:1. Scrutinize the care with which client employees are following the inventory plan2. See that all merchandise is tagged and no items are double tagged3. Determine that pre-numbered inventory tags and compilation sheets are properly controlled4. Make some test counts and trace quantities to compilation sheets5. be alert for empty containers and hollow squares (empty spaces) that may exist when goods are stacked in solid formations6. Watch for damaged and obsolete inventory items7. Appraise the general condition of the inventory8. Identify the last receiving and shipping documents used and determine that goods received during the count are properly segregated9. Inquire about the existence of slow-moving inventory items.

When inventories are material and the auditor does not observe the inventory at or near the year-end. Do following things:1. Tests of the accounting records alone will not be sufficient as to quantities.2. It will always be necessary for the auditor to make, or observe, some physical counts of the inventory and to apply appropriate tests of intervening transactions.

Inventories Determined by Statistical Sampling

When statistical sampling methods are used by the client, the auditor must ascertain that:1. The sampling plan has statistical validity,2. It has been properly applied, and3. The results in terms of precision and reliability are reasonable in the circumstances.

Applicability to Assertions

Like the confirmation of accounts receivable, the observation of the client’s inventory taking applies to many assertions. This test is the primary source of evidence that the inventory exists. In the addition, this test relates to the following assertions:

Figure 5

Confirm Inventories at Locations Outside Entity

When client inventories are stored in public warehouses or with other outside custodians, the auditor should obtain evidence as to the existence of the inventory by direct communication with the custodian. This type of evidence is deemed sufficient except when the amounts involved represent a significant proportion of current or total assets.

When this is the case, the auditor should apply one or more of the following procedures:1. Test the owner’s procedures for investigating the warehouseman and evaluating the warehouseman’s performance.2. Obtain and independent accountant’s report on the warehouseman’s control procedures relevant to custody of goods and, if applicable, pledging of receipts, or apply alternative procedures at the warehouse to gain reasonable assurance that information received from the warehouseman is reliable.3. Observe physical counts of the goods, if practicable and reasonable.4. If warehouse receipts have been pledged as collateral, confirm with lenders pertinent details of the pledged receipts (on a test basis, if appropriate).

Test of Details of Balances:

Accounting EstimatesWhen auditing inventory, the auditor must determine whether it is appropriate to write down the value of inventory below cost because the inventory is obsolete or slow-moving, and whether conditions would cause the client to sell inventory at such a price that it would experience a loss on its sale.The auditor’s responsibility for quality is limited to that of a reasonably informed observer. The auditor obtains evidence of general condition of obsolescence by:1. Observing the client’s inventory taking2. Scanning perpetual inventory records for slow-moving items3. Reviewing quality control production reports

In addition, the auditor will use hindsight to the extent possible and review the sale of inventory after year-end to determine the reasonableness of costs compared to subsequent sales prices. For example, the auditor will usually:1. Compare the cost of inventory items with the entity’s current sales catalog and sales reports2. Review inventory turnover after year-end

3. Consider whether a change in replacement costs is an indicator of changing market conditions4. Make inquiries of the client about slow-moving and obsolete inventory and the realizable value of inventory through sales

• Value-Added Services in the Production Cycle

When the auditor evaluates issues such as the net realizable value of inventory, he or she should consider the client’s business risks, and the risk of substitute products or competitors taking market share, and should share this knowledge and understanding with the client.Further, the auditor’s analytical procedures will address the effectiveness of the inventory management process. The auditor will normally evaluate an entity’s inventory turnover.

Planning the Audit of the Personnel Services CycleAn entity’s personnel services cycle involves the events and activities that pertain to executive and employee compensation. The types of compensation include salaries, hourly and incentive (piecework) wages, commissions, bonuses, stock options, and employee benefits. The major class of transactions in this cycle is payroll transactions.

Using the Understanding of the Business and Industry to Develop Audit StrategyPersonnel services may vary in importance to various manufacturers, wholesalers, and retailers. Some industries may vary widely on the labor intensiveness of the manufacturing process.

• Planning the Audit of the Personnel Services Cycle

Before proceeding with the audit of personnel services, it is important for the auditor to understand:1. The importance of personnel services to the overall entity.2. The nature of compensation, as hourly compensation requires a different control system than salaried compensation.3. The importance of various compensation packages such as bonuses, stock options and stock appreciation rights, and pension agreements.

Materiality

For software companies and service firms such as banks, insurance companies, and professional firms, personnel services is a major expense. The growth of the service sector in the U.S.

economy and the importance of human capital to the value of many technology and software companies make the personnel services cycle a material audit area for many companies.

Inherent Risk

The auditor is rarely concerned about the completeness assertion in the payroll cycle as most employees quickly follow up with their employers if they are not paid. However, payroll fraud (existence or occurrence) is a major concern for the auditor. Fraud may occur at 2 levels. Employees involved in preparing and paying the payroll may process data for fictitious employees and then divert the paychecks to their own use.Alternatively, management may overtly misclassify or “pad” labor cost in government contract work to defraud the agency.Inherent risk may be high for the existence or occurrence, valuation or allocation, and presentation and disclosure assertions.

Analytical Procedures

The auditor will normally perform analytical procedures early in the audit of the personnel services cycle because they are cost effective. Examples of analytical procedures that the auditor might use are presented in Figure 16-11. Analytical procedures may be useful in identifying potential fraud such as when gross payroll per employee exceeds the auditor’s expectations.

• Control Activities — Payroll Transactions

Common Documents and Records

The following documents and records are important in executing and recording payroll transactions:1. Personnel authorization. Memo issued by personnel department indicating the hiring of an employee and each subsequent change in the employee’s status for payroll purposes.

2. Clock card. Form used by each employee to record hours worked daily during a pay period. It is used with time clocks that record the time on the card. This and the following form may be replaced in modern systems with an employee badge that is inserted into a terminal to cause an electronic record of the time to be made.

3. Time ticket. Form used to record time worked by an employee on specific jobs. Time worked is often machine imprinted.

4. Payroll Register. Report shows each employee’s name, gross earnings, payroll deductions, and net pay for a pay period. It provides the basis for paying employees and recording the payroll.

5. Imprest payroll bank account. Account to which a deposit is equal to the total net payroll is made each pay period, and on which checks for salaries and wages for employees are drawn.

6. Payroll check. An order draws on a bank to pay an employee. It is accomplished by a detachable memo indicating gross earnings and payroll deductions.

7. Labor cost distribution summary. Report show these account classifications for gross factory earnings for each pay period.

8. Payroll tax returns. Forms prescribed by tax authorities for filing with payments of taxes withheld from employees and employer’s payroll taxes for social security and federal and state unemployment.

9. Employee personnel file. Holds pertinent employment data for each employee and contains all personnel authorizations issued for the employee, job evaluations, and disciplinary actions, if any.

10. Personnel data master file. Computer file containing current data on employees needed for calculating payroll such as job classification, wage rate, and deductions.

11. Employee earnings master file. Computer files containing each employee’s gross earnings, payroll deductions, and net pay for the year to date by pay periods.

Functions and Related Controls

The processing of payroll transactions involves the following payroll functions:1. Initiating payroll transactions, including:

o Hiring employees.o Authorizing payroll changes.

2. Receipt of services, including:o Preparing attendance and timekeeping data.

3. Recording payroll transactions, including:o Preparing and recording the payroll.

4. Paying payroll, including:o Paying the payroll and protecting unclaimed wages.o Filing payroll tax returns.

Obtaining an Understanding and Assessing Control Risk

The procedures used to obtain and document the understanding of the internal control components for payroll transactions are the same as for the other major classes of transactions. The process of assessing control risk for payroll transactions begins with identifying potential misstatements and necessary controls.

In assessing control risk, the auditor realizes that misstatements in payroll may result from unintentional errors or fraud. Of particular concern is the risk of overstatement of payroll through the following:1. Payments to fictitious employees2. Payments to actual employees for hours not worked3. Payments to actual employees at higher than authorized rates

2 tests of controls pertaining to control risk for the existence or occurrence assertion are:1. The test for terminated employees and2. Witnessing a payroll distribution.

In witnessing the distribution of payroll checks, the auditor observes that:

1. Segregation of duties exists between the preparation and payment of the payroll2. Each employee receives only one check3. Each employee is identified by a badge or employee ID card4. There is proper control and disposition of unclaimed checks

• Substantive Tests of Payroll Balances

Determining Detection Risk

Factors contributing to high inherent risk for existence or occurrence and valuation or allocation assertions related to payroll transactions have been noted earlier. However, evidence of effective controls over these risks in many cases permits low assessments of control risk, resulting in moderate or high acceptable levels of detection risk for most or all payroll assertions. Consequently, substantive tests of payroll balances are often limited to applying analytical procedures to the expense accounts and related accruals, and limited tests of details. If the analytical procedures reveal unexpected fluctuations, more extensive tests of details will be required.

Designing Substantive Tests

Audit program considerations for accrued payroll liability balances are similar to those identified in Figure 15-10 for accounts payable. However, the auditor does not confirm payroll liabilities. When no unexpected fluctuations are revealed by analytical procedures, the auditor has obtained evidence in support of audit objectives related to the existence or occurrence, completeness, and valuation or allocations assertions.

Text explanations of specific substantive tests for payroll balances are limited to the following procedures:1. Recalculating accruals2. Auditing employee benefits and pension plans3. Auditing stock options and stock appreciation rights4. Verifying officers’ compensation

• Value-Added Services in the Personnel Services Cycle

Personnel management is a core process for many companies. The primary issue is how the auditor uses the knowledge obtained during the audit to provide value-added services to his or her client. When performing the audit, many CPAs monitor revenue per employee and evaluate performance relative to others in the industry. CPAs who understand the industry can often help clients identify opportunities that may exist in growing revenue per employee.

When auditing expenses and profitability, a CPA will often evaluate employee productivity statistics. CPAs are often skilled at developing means to hold responsibility centers accountable for their use of resources — in this case, the payroll resource.

CPAs may assist clients by:

1. Suggesting appropriate measures of employee productivity or by2. Identifying steps that a client may take to improve employee productivity.

• Other Important Areas for Auditing of Manufacturing Companies.

1. Purchases2. Sales 3. Creditors4. Debtors5. Sub-Contracting6. Inventory – Scrap7. Export Incentives8. Price Escalation9. Cash Management10. Payroll11. Labor Contractors12. Review of MIS and Internal Controls

1. Purchases

• To check whether quotations are received from various suppliers.

• To check whether Comparative Statements are prepared for each Purchase Order.

• Match the Purchase Orders with the Purchase Requisitions in respect of quantities.

• Receipt of materials is recorded through Material Receipt Note (MRN) against all Purchase Orders.

• To check whether bills are passed after adequate inspection.

• Quantity and Rates match with the PO

• Check of bills are properly accounted in the books

2. Sales

• Scrutiny of contract with the client and ensure that design, supply and erection phases are properly billed.

• Provision of Guarantees/advances

• Review Project Status

• Check the Billing Break Up as per Contract & Ensure the same is followed

• Collection/ Receivables/ Retention

• Taxes & Duties reimbursement from the client

• Taxes & Duties in case of Direct Dispatches

• All Materials dispatched is billed

• Sales Returns

• Compare budgeted profit with actual profit.

3. Creditors Review

• Scrutinize debit balances in creditor's ledger, to determine the following:

• Excess payment

• Bill not booked

• Advance made but material not received

• Whether new advance given to the same party from which earlier supplies are pending since a long time.

4. Debtors Review

• Check age wise listing of the debtors

• Filter out debtors aging more than the credit period

• Investigate into the reasons of delay in payments

• Ensure the adequacy of the debt recovery measures and recommend ways to eliminate the inefficiency

• Reconcile the debtors as per the branch/site and as per the Head Office.

• Accentuate on frequent visits by HO officials/auditors to site/branch in order to sort out the differences in the amount of debtors and keep a track on the debt recovery controls.

5. Sub-Contracting

• Matching bills to Work Order and receipt of material.

• Check whether Excise/CENVAT implications

• Quotations are invited for new jobs / new contracts.

• Material Accounting Report / PO wise Material Accounting Report is checked with issue and receipt details for reasonableness.

• Perform material reconciliation to ensure whether correct credit has been given for expensive material for e.g. Stainless Steel.

• Perform material reconciliation to ensure that input/output ratio's exist and are reasonable.

6. Inventory - Scrap

• Procedure for selection of party e.g. alternative quotations, tenders etc.

• Whether advance earnest money deposit is given before clearance of material.

• Whether scrap cleared is correct type & weighed before clearance.

• Whether scrap is sold by the subcontractor & proceeds/debit notes received by the company.

• Whether scrap retained by subcontractor is forwarded to company.

• Whether excise duty has been correctly paid.

• Scrap invoices raised are in accordance with contract rates.

7. Export Incentives

• Correct selection between advance license, duty drawback and DEPB.

• All duty free eligible imports under advance license have been fully made.

• Whether all exports made against a particular advance license are properly allocated thereto.

• All advance licenses are properly redeemed after completion of export

• Review of penalties for not completing export obligation

• Whether AIR (All Industry Rate) for exported item has been claimed as drawback

• Where drawback is claimed on a brand application basis,

• Whether all imported items have been properly considered.

• Whether combination of claims i.e part advance license, part duty drawback have taken place.

• Whether all eligible DEPB claims have been lodged.

• Review of Exim Policy & Procedures together with SION and products eligible for DEPB.

• Whether all export / trading House benefits have been claimed

• Whether export claims deemed have been properly lodged.

• Whether any product exported has any input which is deemed to be imported and hence eligible for duty drawback whether incentives for services have been claimed.

8. Price Escalation

• Objective: - To ensure that price escalations are claimed in all eligible sales components and are claimed correctly.

• Read all contract provisions in general and in particular for price escalation, to determine the plan of action.

• Check ceiling on price escalation claimable, in respect of various project price components and total claims made during the review period.

• Examine the formula provided in the contract, has been applied correctly.

• Check whether the base and current indices for various types of raw material have been derived from the sources specified in contract and used in the formula correctly.

• Examine various dates i.e. scheduled date and execution date of work done, used are correct.

• Check currency conversion factors, in case project price is expressed in foreign currency.

• Check arithmetical accuracy of calculation of value billed, adjusted price payable by customer and net adjustment amount (escalation amount).

• Check whether escalation claims are made in respect of billing done, upto the date of claim/s.

• Review status of claims lodged with the customer with respect to acceptance and payment of the same.

9. Cash Management

• Identify all the Bank CC Accounts, Current accounts & EEFC Accounts of the company

• Analyze the Daily Bank Balances at the end of the day to find out the monthly unutilized balance

• Prepare a frequency Distribution Table of daily balances

• Check whether the balances at banks are lying idle over a period of time.

• Find out if there are any loans taken by the company

• Analyze the need for taking loans, if surplus bank balances are in existence.

• Check other investments of the company e.g Fixed deposits. Term Deposits and analyze the cost benefit of Interest paid on loans vis a vis interest received on FDs

10. Payroll

• Ensure that gross pay paid is in accordance with contract of employment.

• Payments are made for time spent in the office/factory.

• Payroll calculations are correct.

• Statutory deductions and other deductions are properly made and paid over to the concerned authorities.

• Payments to contractors are verified in respect of actual attendance in company premises.

11. Labor Contractors

• Read all the provisions of the contract agreement in respect of maximum number of laborers required, payment terms etc.

• Check attendance record maintained by the contractor with that of time office.

• Check whether requisition slips for casual labor (i.e extra labor) are authorized.

• Surprise Check the physical attendance of laborers in the company with that of attendance record at time office.

• Check whether wages/overtime wages/other allowances are paid as per agreement

• Check whether any other deductions like canteen, leave etc. are made as per the provisions of the contract

• Check whether statutory deductions like PF,ESI etc are properly made and paid by the contractor & the Company

• Check whether other reimbursements like Service tax/PF/ESI are paid after producing sufficient documentary evidence.

• Check whether billings for regular and casual laborers are done properly and as per the agreement.

12. Review of MIS & Internal Controls

• Study the internal control manual of the company

• Check if these controls are followed by all department

• If not then identify the reasons

• Find out loopholes and risks in the system

• Recommend ways to eliminate the loopholes and mitigate the risks

• Draw Flow Charts of the Business process flow

• Draw a flow chart of the inter department document flow

• Study the flow and recommend improvements

• Specifically look for delays in the document flow in any particular department and find ways to pace up the flow.

• Identify bottlenecks in the business process flow and categorize in the order of importance and recommend ways to eliminate them to result in optimum utilization of resources and increased production capacity

Conclusion

• These are few of the important areas of audit in any manufacturing company. There can be many other areas of audit such as Risk Management, Indirect Taxes, and Direct Taxes etc. which I shall upload very soon.

• There can be no standard audit programme for all the manufacturing companies but I have tried to put most common areas to be scrutinized.