Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

You are the internal auditor of AB Manufacturing Co. Ltd. The Managing Director has asked you to enquire into the causes of abnormal wastage of raw materials during the month of Mangsir 2067. The wastage percentages are as follows:
Bhadra, 2067 1.2%
Ashwin, 2067 1.1%
Kartik, 2067 1.3%
Mangsir, 2067 3.6%
How will you proceed to carry out the Assignment?
Abnormal Wastage of Raw Material: The rate of wastage in Mangsir, 2067 has risen sharply as compared to previous months. Under the circumstances, before setting for detailed investigation, the internal auditor needs to understand the manufacturing environment right from the stage of purchase of materials, the movement of stock flow through the production process while its becomes finished goods. To locate the reasons for the abnormal wastage, the internal auditor should first of all assess the general requirements as under:

 Procure a list of raw materials, showing the names and detailed characteristics of each raw material.

 Obtain the standard consumption figures, and ascertain the basis according to which normal wastage figures have been worked out. Examine the breakup of a normal wastage into that in process, storage and handling stages. Also obtain control reports, if any, in respect of manufacturing costs with reference to predetermined standards.

 Examine the various records maintained for recording separately the various lots purchased and identification of each lot with actual material consumption and for ascertaining actual wastage figures therein.
 Obtain reports of Preventive Maintenance Programme of machinery to ensure that the quality of goods manufacture is not of sub-standard nature or leads to high scrap page work.
 Assess whether personnel employed are properly trained and working efficiently.

 See whether quality control techniques have been consistent or have undergone any change.

 Examine inventory plans and procedures in report of transportation storage efficiency, deterioration, pilferage and whether the same are audited regularly.

 Examine whether the basis adopted for calculating wastage for September is the same as was adopted for the other three months.

 Obtain a statement showing break up of wastage figures in storage, handling and process for the four months under reference and compare the results of the analysis for each of the four months.

Some specific reasons for abnormal wastage in process specific may be considered the auditor are as under:

 Examine laboratory reports and inspection reports to find out if raw materials purchased were of a poor quality or were of sub-standard quality. This will be most useful if it is possible to identify the wastage out of each lot that has been purchased.

 Machine breakdown, power failure, etc. may also result into loss of materials in process. Check the machine utilization statements.

 A high rate of rejections in the finished lots may also be responsible for abnormal wastage; therefore, examine the inspectors‟ reports in respect of inspection carried out on the completion of each stage of work or process.

 It is possible that the wastage may have occurred because the particular lot out of which issues were made in Mangsir, 2067 was lying in the store for a long time, leading to deterioration in quality or because of a change in the weather which may have led to the deterioration. Compare the wastage figures of Ashwin, 2066 with those of September, 2067.

 Abnormal wastage in storage and handling may arise due to the following reasons:
i) Write offs on account of reconciliation of physical and book stocks: In case of periodical physical stock taking, such write offs will be reflected only in the month such reconciliation takes place.
ii) Accidental, theft or fire losses in storage: The auditor should examine the possibility of these for the purpose.
iii) Examine whether any new production line was taken up during the month in respect of which standard input-output ratio is yet to be set-up.

(Visited 7 times, 1 visits today)
Share this on:

Leave a Reply

Your email address will not be published.