Internal Audit of Manufacturing concern: Key areas to be checked

Manufacturing Audit:

A comprehensive evaluation and inspection of the manufacturing processes in a company and it works and is handled is done under the manufacturing audit. This type of audit is limited to a particular unit but each and every area related to the manufacturing are thoroughly reviewed by the auditor. Manufacturing audit helps and forms the basis of internal audit services in a company.

Reasons for Manufacturing Audit:

There are many reasons for why internal auditing is conducted for manufacturing audit. These reasons are-

  • It helps in uncovering any inaccuracies so they can be quickly fixed.
  • It also encourages the ongoing corrective actions.
  • It helps in demonstrating a proactive approach towards the improvement of process.
  • It helps in revealing the process consistency either from person to person or day to day level.
  • It also provides assurance about the actual practices reflected by the procedures used.

Requirements in Manufacturing Audit:

Just like any other auditing process a good manufacturing audit also has certain requirements. These are-

  • A manufacturing audit is to be announced in advance or beforehand. This is to be done in order to seek the whole process of manufacturing and what people are doing at the unit.
  • A scheme of rating must be discovered in order to classify the existing problems. This scheme is very helpful in prioritizing the actions taken for correcting or removing such problems.
  • An action is required after discovering the problem while conducting the manufacturing audit. The employees must help in assisting the auditor in the resolution of the problems in the unit.
  • Requirement of trained and knowledgeable auditors is also important. While providing the auditor services, any auditor must be familiar with the auditing techniques and the areas they have to observe.
  • A clear procedure and planning the same is required. A manufacturing audit is conducted to access the whole unit of manufacturing work area and not just to find problems. Merely, walking in the unit without proper planning is of no use in the auditing process. Therefore, an auditor must be very clear on which procedure to be used after properly planning the audit.

Key areas of Manufacturing Audit:

The key areas that an auditor must look for while conducting a manufacturing audit are as follows-

  • Sales- The invoices for sales must be vouched in order to ensure that revenue recognition is done properly in line as per the accounting standards applicable on it.
  • Purchase- The authorized purchase order as per the matrix approval of the company, for every purchase made by the unit must also be checked by the auditor during the manufacturing audit.
  • Inventory- A separate and proper plan for audit is required for this particular area as it is large. This is done to get a proper knowledge of what is happening in the unit and how the work is moving forward. The listed companies are required to have verification of the inventory as there is a potential for them to window dress the inventories accounting figures. The following areas are to be covered under the inventory:
  • Inventory’s physical verification
  • WIP Valuation
  • RM Valuation
  • Valuation of Inventory
  • Provisions related to obsolete stock
  • Stocks confirmation with the third parties
  • Slow moving inventory
  • Non-moving inventory
  • Payroll- A review of the biometric database is important as the manufacturing industries are liable to tend huge labor turnover and to ensure that there are no ghost employees.
  • Factories Act compliance- Auditor must check the unit’s compliance with the act and its norms.
  • Issue of production material- It is to be checked whether there is a defined system for issuing the material of production.
  • Cost Sheet- It is to be ensured during the manufacturing audit that the cost sheets are prepared for each and every type of product manufactured.
Author: Anil Agrawal
EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or