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
entitys 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 controls
4. 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 workin-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 auditors
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.

Rele
vant control risk assessments vary based on the transaction classes that affect the particular
inventory account as shown in the following tabulation:

Figure 4
Designing 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 entitys 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 managements 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 companys 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 clients inventory taking and the measure of reliance that
may be placed on managements 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 clients 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 clients instructions should include such matters as the:
1. Names of employees responsible for supervising the inventory taking
2. Date of the counts

3. Locations to be counted
4. Detailed instructions on how the counts are to be made
5. Use and control of pre-numbered inventory tags and summary sheets
6. Provisions for handling the receipt, shipment and movement of goods during the counts if such
activity is unavoidable
7. 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 plan
2. See that all merchandise is tagged and no items are double tagged
3. Determine that pre-numbered inventory tags and compilation sheets are properly controlled
4. Make some test counts and trace quantities to compilation sheets
5. be alert for empty containers and hollow squares (empty spaces) that may exist when goods are
stacked in solid formations
6. Watch for damaged and obsolete inventory items
7. Appraise the general condition of the inventory
8. Identify the last receiving and shipping documents used and determine that goods received
during the count are properly segregated
9. 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 yearend. 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, and
3. 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 clients 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 owners procedures for investigating the warehouseman and evaluating the
warehousemans performance.
2. Obtain and independent accountants report on the warehousemans 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 Estimates
When 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 auditors 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 clients inventory taking
2. Scanning perpetual inventory records for slow-moving items
3. 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 entitys current sales catalog and sales reports
2. Review inventory turnover after year-end
3. Consider whether a change in replacement costs is an indicator of changing market conditions
4. 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 clients 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 auditors analytical procedures will address the effectiveness of the inventory
management process. The auditor will normally evaluate an entitys inventory turnover.
Planning the Audit of the Personnel Services Cycle
An entitys 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 Strategy
Personnel 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 auditors 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 employees 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 employees 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 employers 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 employees 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 employees
2. Payments to actual employees for hours not worked
3. 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 and
2. 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 payroll
2. Each employee receives only one check
3. Each employee is identified by a badge or employee ID card
4. 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 accruals
2. Auditing employee benefits and pension plans
3. Auditing stock options and stock appreciation rights
4. 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 by
2. Identifying steps that a client may take to improve employee productivity.

1.
2.
3.
4.
5.
6.
7.
8.
9.

Other Important Areas for Auditing of Manufacturing Companies.

Purchases
Sales
Creditors
Debtors
Sub-Contracting
Inventory Scrap
Export Incentives
Price Escalation
Cash Management

10. Payroll
11. Labor Contractors
12. 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.