Here is an endeavour to put forward my internal audit experience in manufacturing companies like ThyssenKrupp and Forbes Marshall

1. Internal Audit How to perform Internal Audit of Manufacturing companies Prepared by VikasKalyanshetty CA, B.Com

2. Index Definition Internal Audit: A Statutory requirement Auditing Standard Areas of Audit Each area explained Conclusion

5. Average Annual Turnover – Rs 5 Crores

7. Areas of Audit of Manufacturing Companies. Purchases Sales Creditors Debtors Sub Contracting Inventory – Scrap Export Incentives Price Escalation Cash Management Payroll Labour Contractors Review of MIS and Internal Controls

8. 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

9. 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.

10. 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.

11. 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.

12. 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.

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

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

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

17. Whether scrap retained by subcontractor is forwarded to company.

18. Whether excise duty has been correctly paid.

20. All dutyfree eligible imports under advance license have been fully made.

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

22. All advance licenses are properly redeemed after completion of export

23. Review of penalties for not completing export obligation

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

25. Where drawback is claimed on a brand application basis,

26. whether all imported items have been properly considered.

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

28. Whether all eligible DEPB claims have been lodged.

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

30. Whether all export / trading House benefits have been claimed

31. Whether deemed export claims have been properly lodged.

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

35. Prepare a frequency Distribution Table of daily balances

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

37. Find out if there are any loans taken by the company

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

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

41. Payroll calculations are correct.

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

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

45. Check whether requisition slips for casual labour (i.e extra labour) are authorised.

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

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

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

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

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

52. Check if these controls are followed by all department

53. If not then identify the reasons

54. Find out loopholes and risks in the system

55. Recommend ways to eliminate the loopholes and mitigate the risks

56. Draw Flow Charts of the Business process flow

57. Draw a flow chart of the inter department document flow

58. Study the flow and recommend improvements

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

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

62. Hope this would be useful for all the readers concerned with the internal audit