AUDIT OF SPECIALIZED INDUSTRIES Auditing Help

Procedures discussed in this chapter are in addition to the normal
verification procedures of assets and liabilities.

BRIEF DESCRIPTION OF CERTAIN TERMS USED IN TEXTILE INDUSTRY

Textile fabrics are built out of fibers. The quality of fibers influences the quality of the fabric Cotton is called dead fiber because it has little luster and elasticity. Wool is warm wrinkle-resistant, and fairly strong and elastic a live fiber. Rayon is a beautiful fiber normally lustrous, but it can be made dull. It is weaker than cotton and stretches easily. Nylon is extremely strong and elastic. It is about twice as expensive as rayon. It very much resembles with silk. Nylon keeps its shape even after washing but melts touched by a very hot iron. Glass fibers are usually in filament form and are extremely strong but should not be bent too sharply or they may break. Glass fibers do not absorb water and they cannot burn. The fabrics are mainly used for curtains and other decorative purposes. Dacron is mostly made in staple form. It is quite strong and extremely wrinkle-resistant. They retain their shape after careful washing. However they accumulate’ static electricity and a hot iron will melt them.

The price is little above nylon.

Dyeing involves adding colours to the textile materials Bleaching is conducted either to produce a pure absorbent material or to produce good white. Drying of fabrics forms an important part of the process of bleaching, dyeing and finishing. The removal of water is first performed by mechanical means and then application of heat.

Block printing involves” printing of fabrics with hand blocks, very similar to the use of a rubber stamp and an inkpad. The blocks are generally made of wood which is cut so that the design is raised in relief. The thickness is generally 3 to 4 inches and sizes vary up to 18 inches square

NORMAL PROCESS IN A TEXTILE INDUSTRY

Cotton to yarn

Cotton grown on agricultural fields is transported to a gin. The gin separates the lint and the seed. The cotton comes out as thick sheet of cotton batting or picker lap. The pricker lap is put on a cotton card. The machine which consists of numerous little wire points. This machine separates the fiber and spreads them into webs. The web is condensed into a thick strand of loose fibers called a card silver. The silver from the card is drawn out on drawing frames. After drafting the silver is put on a fly frame that converts it into roving and winds it on bobbins. These are then “taken to a spinning frame where it is drafted further. This changes the roving into yam. The ring frame winds theyam on bobbins. The raw material is thus converted to yam.

Weaving

A loom is capable of weaving vario us fabrics: bulky, coarse, fine or
sheer. Weaving involves two sets of yams; warp and filling, interlacing at right angles with each other in a flat plane on the loom. The number of ends and picks per inch, or thread count is important in woven fabrics.

Knit goods

Knit goods are often described in terms of gauges. High gauge is used to produce fine or sheer fabrics, while a low gauge is used to knit course or bulky fabrics. Knitting can be performed more rapidly than weaving and is usually cheaper because in knitting a number of yams may be fed into the machine simultaneously.

AUDIT PROCEDURES

1. Obtain overview of the company.
• Total annual production of yarn converted into 20’s count.
• Total annual production of cloth converted to 50 picks
• Value of exports of yam and cloth
• No of spindles installed

• No of looms installed
• Number of employees
• Key ratios
• Trends
• Distribution channels, e.g., sale organization, independent sales
agents, jobbers, brokers, or converters.

2. Obtain understanding of client’s cost accounting and internal control systems for spinning and weaving units.
The auditor should obtain sufficient knowledge of the design of the cost accounting and internal control systems for spinning and weaving units. He should also ensure that such systems are actually being operated. The nature and extent of the procedures performed by the auditor to obtain understanding of cost accounting and internal control systems will depend upon the size and complexity of the business, nature of entity’s cost accounting records and documentation of costing procedures.

Generally the auditor should review following records:

• Cost accounting records.
• Method of recording cost of cotton / yarn procured.
• System of accumulation and distribution of payroll costs to spinning, weaving. and finishing departments.
• System of accumulation of overheads. e Budgetary controls
• Year – end valuation policies of cotton, yarn and cloth.

3. Verify unit costs’
(a) Determine unit cost and total cost of cotton / yarn used.
(b) Ensure that basis of allocation of cost materials used has been consistently applied.
(c) Trace cost oflabour from payroll distribution summary.
(d) Test hours worked on the specific jobs from time cards.
(e) Ensure that the hourly rates have been properly determined.
(f) Obtain a summary of applied overheads, test computations and check allocation of the jobs.
(g) Review overhead. allocation for reasonableness and consistent application bases.

4. Check valuation of work in process:
(a) Select last month of the accounting period and carry out following tests:
i) Check materials placed in process through material requisitions for the jobs.
ii) Check labour in process with time tickets
iii) Check factory over head with reference to relevant overhead application rate.
iv) Agree the totals of (i), (ii) and (iii) above with amount charged to factory costs for the month per fmancial statements.
v) Trace yarn / cloth produced to finished goods records.
(b) In order to determine that the work in process has not been stated beyond its net realizable value, test value of yarn / clothe with
recent sales invoices or with latest customer orders.
(c) Determine reasons for jobs not transferred to finished goods for a prolonged period. Consider provision required for obsolete, slow moving or defective inventories.

5. Carry out analytical procedures:
a) Compare percentages of following cost components to total cost, and investigate causes for unusual variations from budget:

Cotton / yarn used Direct labour

Factory overhead

Selling and administrative overheads

b) Tabulate percentage of profit earned on spinning, weaving and other units, compare with budgeted margins and inquire into reasons for unusual variances.
c) Determine reasons for unusually high over or under applied overheads.
6. Ascertain production capacity of plant:

Spinning units:

Production at normal capacity converted into 20 count based on 3 shifts per day (kgs) Weaving units:”
Production at normal” capacity converted to 50 picks based on three shifts per day (sq. meters)

7. Verify actual utilization of the capacity and the reasons for differences between actual and installed capacity.

8. Verify salaries and benefits of directors and chief executive.

9. Compare total man – days of direct labour available and actually worked during the year.

10. Verify statement of cost of goods sold for:
i) Direct labour costs on production;
ii) Indirect employees”cost on production;
iii) Employees’ cost on administration;
iv) Employees’ cost on selling and distribution;
v) Bonus to workers and employees;
vi) Other employees’ cost, if any (including taxes and levies);
vii) Total employees’ cost [total of items (i) to (iv) above]
11. Verify direct labour cost per unit of yam / cloth
12. Inspect the incentive schemes, if any, with particular reference to its contributions towards increasing productivity and its effect on cost of production.
13. Determine the proportion of closing inventory of stores representing items which have not moved since long.
14. As regards depreciation, verify:
a) The method of depreciation adopted by the company, e.g., straight line or diminishing balance, etc.
b) The basis of allocation of depreciation on common assets to the different departments.
c) The basis of charging depreciation to the cost of products 15. If there are any special expenses which have been directly allocated to products under reference, ensure that the total amount as also the incidence per unit of product is disclosed.
16. Review cost per unit of spinning and weaving departments with comparative figures for the previous year and comments on the
reasons of difference.
17. Verify the sales in quantities and net sales realization of yarn / cloth and the average sales realization per unit.
18. If yam / cloth is exported, verify quantity exported, net realizations per unit, countries to which exported indicating the profit or loss incurred in export.
19. Review the profit per unit eamed on yam and cloth

Posted on November 3, 2015 in Audit of Specialized Industries

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