Management and Operational Audit – CA Final Audit Question Bank

Management and Operational Audit – CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern.

Management and Operational Audit – CA Final Audit Question Bank

Management Audit

Question 1.
Management Audit and Operational Audit are complementary and supplementary to one another. Discuss. [Nov. 15 (4 Marks)]
Answer:
Management Audit and Operational Audit:
Management audit and Operational Audit are complementary and supplementary to one another. Management audit is concerned with the quality of managing, whereas operational audit is concerned with the quality of operations.

The basic difference between the two audits, is not in method, but in the level of appraisal. In management audit, the auditor evaluates decisions taken at the level of top management w.r.t. formulation of objectives, plans and policies whereas in operational audit auditor evaluates effectiveness, efficiency and economy of operations under management’s control along with recommendations for improvement.

In addition to what would normally be covered in an operational audit, management audit would also encompass the relevance and effectiveness of the aims, duties and decisions of management at various levels. Every aspect of the functions of Board of Directors should be in conformity with the objects set out in the constituting document.

Conclusion: From the above discussion which recognises management audit and operational audit as two identifiable exercises having a large area of overlapping jurisdiction, it may be convenient to consider them together to avoid duplication; and for this purpose, the expression “management and operational audit” may be acceptable as a management audit which includes within its scope all the elements of operational auditing.

“ICAI Examiner Comments”
Examinees failed to emphasize how the Operational audit and Management audit are complementary and supplementary to one another instead examinees merely wrote the meaning of Operational and Management audit.

Question 2.
K Ltd. requires you to organize a Management audit program. Briefly state a plan of action.
Answer:
Management Audit Program:
Management Audit Program may be based on the following plan of action:

1. Devising a statement of policy: in consultation with the top Management. The policy should ideally cover the scope, objective, the authority of the management audit function.
2. Location of audit function within the organization: The hierarchical status of management auditor and his team should be clearly defined.
3. Allocation of personnel: The management audit team should comprise of personnel who have adequate experience on various aspects of the organization.
4. Staff Training: In order to maintain qualitative standards, adequate and continuous training should be offered to the management audit team.
5. Time and other aspects: Adequate consideration should be given to time & cost involved in conducting the audit.
6. Frequency of audit: Should be determined on the basis of changes in industry and in consultation with the top management.

Question 3.
Write short note on: Management Audit Questionnaire. [Nov. 18 – Old Syllabus (4 Marks)]
Answer:
Management Audit Questionnaire:
A management audit questionnaire is an important tool for conducting the management audit. Through these questionnaires auditors make an inquiry into important facts by measuring current performance.

Objective of Management Audit Questionnaire:

• Comprehensive and Constructive examination of an organisation’s managementand its assigned tasks.
• Appraisal of management actions in accomplishing the organisation’s objectives.
• Highlight weaknesses and deficiencies of the organisation.
• Review of management functions of planning, organising, directing and controlling.
• Evaluation of effectiveness of decision making process in accomplishing the organisation objectives.

Working: There are three possible answers to the management audit questions – “Yes”, “No” and “N.A.”. “Yes” answer indicates that the specific area or function under study is functioning in an acceptable manner; no written explanation is needed in that case. “No” answer indicates unacceptable performance and requires explanation in writing. Those questions that are not applicable and should be ignored in the audit are checked in the “N.A.” column.

Importance: Management Audit Questionnaire not only serves as a management tool to analyse the current situation; but also, it enables the management auditors to identify the elements that are causing organisational difficulties and deficiencies.

Question 4.
Write a short note on – Management Audit Reports.
Answer:
Management Audit Reports:
Management Audit Reports are of following types:

1. Oral Reports: Oral reports are required in case of emergency. But they not considered reliable as no permanent record. Oral Reports helps in taking corrective steps timely.
2. Interim written report: These reports are issued in case of matters requiring early consideration so as to inform management before regular report.
3. Regular written reports: These are the formal report submitted after completion of work.
4. Summary written report: Summary reports are also known as “Flash” reports. These reports summarize various individual reports on integrated approach and facilitates management by exception.

Question 5.
Write short note on: Summary Written Report.
Answer:
Summary Written Report:
Summary Reports are also known as Flash Reports. These reports summarize various individual reports on integrated approach and facilitates management by exception.

They are significant highlights for immediate attention of top management. Generally suspected defalcations are reported briefly to the appropriate management official on the ‘flash’ basis, often ending up in referral for criminal investigation and legal action.

It is common practice in number of companies of issuing a report quite frequently summarising the various individual reports issued and describing the range of their contents in a very brief and comprehensive manner where only important points are highlighted.

Such reports are primarily issued for audit committees and other Top-level managers who do not have sufficient time to go through the elaborate reports and matters which are required to be brought to their notice for immediate action.

Question 6.
Briefly describe the general guidelines that may be observed while drafting a management audit report.
Answer:
General guidelines while drafting a management audit report:
Management Audit Reports may be drafted considering following guidelines:

1. Title: Title of the management audit report needs to be short but descriptive so that its subject matter can be easily identified.
2. Objectives: Management audit report may describe the objectives of the audit assignment.
3. Scope: Management audit report may give a brief description of the activities audited.
4. Findings, conclusions and opinions: Findings should be discussed comprehensively. Conclusions and opinions should normally follow the findings.
5. Recommendations: Management audit report may include recommendations for potential improvements. Management Auditor should avoid providing detailed procedures in the capacity of an auditor.
6. Auditee’s views: Auditee’s views about audit conclusions or recommendations may also be included in the audit report in appropriate circumstances.
7. Summary: In case of long reports, a summary of conclusions and recommendations may be given at the end.

Question 7.
Explain in brief the behavioural aspects encountered in the management audit and state the ways to solve them.
Answer:
Behavioral aspects encountered in management Audit:
1. Staff/Line conflict: Management auditors are staff people while the members of other departments are line people. Management auditors has superiority complex and they may think their approach and solutions are the only answers. Staff do not consider the line before advising, as a result Line may not use advice of staff properly. Line does not co-operate with staff and do not provide sufficient information to staff.

2. Control: The management auditor is expected to evaluate the effectiveness of controls, there is an instinctive reaction from the auditee that the report of the auditor may affect them. There is a fear that the action taken based on the management audit report will affect the line people.

Solution to behavioral problems

1. Demonstrate that audit is part of an overall programme of review for protective and constructive benefit.
2. Demonstrate the objective of review is to provide maximum service in all feasible managerial dimensions.
3. Perform the review to ensure minimum interference with regular operation.
4. Involve responsible officers in the process of review of the findings and recommendations before the audit report is formally released.
5. Create an atmosphere of trust and friendliness.

Operational Audit

Question 8.
Write short note on: Meaning and Types of Operational Audit.
Or
What are the types of Operational Audits? [Nov. 17 (6 Marks)]
Answer:
Meaning and Types of Operational Audit:
Operational Audit is the review and appraisal of operations of an organization conducted by competent independent person. It analyse the regular operations like production, purchase, sales etc. to check whether they are in tune with company’s policies, objectives and goals or not. It focuses more on Qualitative aspects of operations rather than regular accounting aspects.

Types of Operational Audit:
1. Functional Audits: A functional audit deals with one or more functions in an organization, for example, the payroll function for a division or for the company as a whole. A functional audit has the advantage of permitting specialization by auditors. They can more efficiently spend all their time auditing in that area. A disadvantage of functional auditing is the failure to evaluate interrelated functions.

2. Organizational Audits: An operational audit deals with an entire organizational units, such as a department, branch, or subsidiary. It emphasizes how efficiently and effectively functions interact. The plan of organization and the methods to coordinate activities are especially important in this type of audit.

3. Special Assignments: In operational auditing, special assignments arise at the request of management, for example, investigating the possibility of fraud in a division, making recommendations for reducing the cost of a manufactured product, etc.

“ICAI Examiner Comments”
Examinees have explained the functional audit but could not explain the other types of operational audits namely Organizational Audits and Special Assignments. Some examinees unnecessarily explained the objectives of operational audit and various types of audits viz., management audit, internal audit, cost audit, environmental audit, energy audit, compliance audit etc.

Question 9.
Briefly explain the objectives of Operational Audit. [May 11 (4 Marks)]
Answer:
Objectives of Operational Audit:
1. Appraisal of Controls: Operational auditing deals with the administrative controls and its purpbse is to determine whether the controls are adequate.

2. Evaluation of performance: In the task of performance evaluation, an operational auditor is heavily dependent upon availability of acceptable standards. The operational auditor cannot be expected to possess technical background in so many diverse technical fields obtaining even in one enterprise.

3. Appraisal of objectives and plans: In performance appraisal, the operational auditor is basically concerned not so much with how well technically the operations are going on, but with accumulating information and evidence to measure the effectiveness, efficiency and economy with which the operations are being carried on.

4. Appraisal of organisational structure: In evaluating organisational structure, the operational auditor should consider whether the structure is, in conformity with the management objectives and it is drawn up on the basis of matching of responsibility and authority.

Question 10.
In evaluating the organisational structure of a company, what aspects may be considered by the operational auditor to achieve his objectives? [May 18 – Old Syllabus (4 Marks)]
Answer:
Appraisal of Organisational Structure:
Organisational structure is an important area for appraisal by operational auditor as it provides the line of relationships and delegation of authority and tasks. In evaluating organisational structure, the operational auditor should consider the following:

1. Whether the organizational structure is in conformity with the management objectives
2. Whether it is drawn up on the basis of matching of responsibility and authority.
3. Whether the line of responsibility from the top to the bottom is clearly discernible from the structure?
4. Whether the delegation of responsibility and authority at each stage is clear and overlapping are avoided?

Question 11.
Mr. ‘P’ have been appointed as operational auditor of M/s Books & Magazine Ltd. And observed a totalling error in invoice of ₹ 1,000. He has not taken care of the same saying that this is out of scope of his work. Comment. [May 14 (3 Marks)]
Answer:
Scope of Operational Audit:
Operational Audit is the review and appraisal of operations of an organization conducted by competent independent person. It analyse the regular operations like production, purchase, sales etc. to check whether they are in tune with company’s policies, objectives and goals or not. It focuses more on Qualitative aspects of operations rather than regular accounting aspects.

In carrying out his work, operational auditor will have to exercise judgment to evaluate evidence in connection with the situations and issues; he will have to get the assistance of norms and standards in every operating field to be able to objectively judge a situation.

To a financial auditor, a loss of ₹ 1,000 caused by a wrong totalling of invoice is important, but for an auditor engaged in the review of operations, it does not assume so much importance. But simultaneously, it should not be assumed, that, an operational auditor is not concerned with the financial aspects of transaction and controls.

Conclusion: Contention of operational auditor that totalling error in invoice of ₹ 1,000 is out of scope is not correct as operational audit is being carried out to ensure that all the management functions like planning, organizing, staffing, directing and controlling are working effectively and efficiently. Such kind of error is very much in scope because such an existence of error indicates that control system (controlling function) is not sound.

Question 12.
Write short note on: Operational auditing arose from the need of mangers responsible for areas beyond their direct supervision. [May 15 (4 Marks)]
Or
Operational Auditing is a systematic process involving logical, structured and organized series of procedures. It concentrates on effectiveness, efficiency and economy of operations and therefore it is future oriented. In this perspective, state the Need of operational auditing.
Answer:
Need of Operational Audit:
Operational auditing arose from the need of managers responsible/or areas beyond their direct observation to be fully, objectively and currently informed about conditions in the units under control.

Traditional sources of information remain inadequate for an effective management of the company where the management is at a distance from actual operations due to layers of delegation of responsibility, separating it from actualities in the organisation.

Operational audit as a specialised management information tool fill the void that conventional information sources fail to fill. Conventional sources of management information are departmental managers, routine performance report, internal audit reports, and periodic special investigation and survey. These conventional sources fail to provide information for the best direction of the departments all of whose activities do not come under direct observation of managers.

Operational auditing has filled a very significant vacuum; it has come to provide the management with inexpensive, continuous and objective appraisal of activities, operations and controls to inform the management about achievement of standards and, if otherwise, to inform the management about what has gone wrong and how it has gone wrong. Also, it enlightens the management about possible dangers, constraints and opportunities that may be of immense value to the management.

“ICAI Examiner Comments”
The need for operational auditing are not properly highlighted. Instead candidates explained operational Auditing.

Question 13.
Perfect Steel Ltd. has reported a higher turnover of? 560 crores in the year 2020-21 as compared ‘ to earlier years but its sales return has also increased to 10% from only 4% upto the last year. The management is concerned about the high sales returns and feels a need to get the operational audit done for sales and production department of the company. The company is also having an internal audit system in the company. Elaborate the possible reason/s, why management is getting operational audit done when internal audit has already been done for both the departments by stating the shortcomings of conventional information sources. [RTP-Nov. 19]
Answer:
Need of Operational Audit:
The need for operational auditing has arisen due to the inadequacy of traditional sources of information for an effective management of the company where the management is at a distance \ from actual operations due to layers of delegation of responsibility, separating it from actualities in the organisation.

Operational audit as a specialised management information tool fill the void that conventional information sources fail to fill. Conventional sources of management information are departmental managers, routine performance report, internal audit reports, and periodic special investigation and survey. These conventional sources fail to provide information for the best direction of the departments all of whose activities do not come under direct observation of managers.

The shortcomings of these sources can be stated as under:
(i) Executives and managers are too preoccupied with implementation of plans and achieving of targets. They are left with very little time to collect information and locate problems. They may come across problems that have come to surface but they are hardly aware of problems that are brewing and potential.

(ii) Managers or their aides are generally relied upon for transmitting information than for booking for information or for analysing situations.

(iii) The information that is transmitted by managers is not necessarily objective – often it may be biased for various reasons.

(iv) Conventional internal audit reports are often routine and mechanical in character and have a definite leaning towards accounting and financial information. They are also historical in nature.

(v) Other performance reports contained in the annual audited accounts and the routine reports prepared by the operating departments have their own limitations. The annual audited accounts are good as far as an overall evaluation is concerned in monetary terms.

(vi) Operations of controls in a satisfactory manner cannot be relied upon to bring to light the environmental conditions. Controls are specific and their satisfactory operation is related to the specific situation under control. Also monitoring of the breakdown or non-operation of controls is a periodic phenomenon.

(vii) Surveys and special investigations, no doubt, are very useful but these are at the best occasional in character. Also, they are costly, time consuming and keep the departmental key personnel busy during the period they are on. These are basically an attempt to carry out a post-mortem rather than to enlighten the management about the ways on improvement or for better “ performance or to give a signal for dangers and disasters to come.

Question 14.
“Operational Auditing is not different from Internal Auditing” Discuss.
Answer:
Operational Audit vs. Internal Auditing:

Operational Auditing	Internal Auditing
It is concerned with the review and appraisal of operations of an organization carried on by a competent independent person	It is concerned with determining whether other internal controls are well designed and in place
It is not a part of internal control	It is a part of internal control system
It is an constructive function i.e. to provide sug­gestions for improvement	It is an protective function i.e to safeguard the assets of the enterprise.
It analyses all aspects of operations whether they are in tune with management policies, objectives and Goals	It is primarily concerned with financial account­ing and internal control
It mainly deals with qualitative aspects	It focuses more on quantitative aspects

NOTE: Over a period of time, scope of internal auditing has been widened so as to cover all operations besides accounting and financial operations. So in the present time, there is no difference in internal auditing and operational auditing.

Question 15.
State the key differences between financial and operational audit. [May 12 (4 Marks)]
Or
The main objective of operational auditing is to verify the fulfilment of plans, and sound business requirements. While in financial auditing, the concentration is more in the financial and accounting areas to ensure that possibilities of loss, wastage and fraud are minimized or removed.
In the light of above, state the major differences between Financial and Operational Auditing.
Or
Write short note on: Financial vs. Operational Audit. [Nov. 17 (4 Marks)]
Answer:
Financial Auditing vs. Operational Auditing:

	Financial Auditing	Operational Auditing
Purpose	11 concerned with the opinion that wheth­er the historical information recorded is correct or not	It emphasizes on effectiveness and efficiency of operations for future per­formance.
Area	It is restricted to the matters directly affecting the appropriateness of the pre­sented financial statements	It covers all the activities that are related to efficiency and effectiveness of business operations.
Reporting	Financial audit report is sent to all stock holders, bankers and other persons hav­ing interest in the organization.	Operational audit report is primarily for the management
End Task	Financial audit reports the findings to the persons as its end objectives.	Operational audit is not limited to the reporting only, but includes suggestions for improvements also.

Question 16.
Many modern enterprises have become huge and sophisticated. This has resulted in decentralisation of their activities and different type of audits. You are required to explain the difference to the management:
(i) Internal & Operational Audit.
(ii) Management Audit & Operational Audit.
(iii) Financial Audit & Operational Audit. [RTP-Nov. 18]

Question 17.
The Operational audit is carried out effectively when the operational auditor responds with positive traits in a scenario which is blended with behavioural issues. Explain few positive traits that help to conclude an Operational Audit, a success. [May 18 – New Syllabus (4 Marks)]
Answer:
Positive traits of an Operational Auditor:
1. Operational auditor should be more inquisitive’as, his knowledge ordinarily would be scanty in areas beyond accounting and finance.

2. Operational auditor is required to visualise whether simpler alternative means are available to do a particular work. He should ask the who, why, how of everything.

3. Operational Auditor should possess an attitude of skepticism. He should try to see everything as to whether particular operational aspects properly fit in the business frame and organisational policy.

4. He should imbibe a constructive approach rather than a fault-finding approach and should give a feeling that his efforts are to help attaining an improved operation and not merely fault finding. If the auditor succeeds in giving a feeling of help and assistance through constructive criticism, he will be able to obtain co-operation of the persons who are involved in the operations.

5. He should try to develop a team comprised of people of different backgrounds.

Question 18.
Employees of GIG Ltd. have to travel frequently for business purposes, so the company entered into a contract with a Simony Travels Ltd. for managing booking, cancellation and other services required by their employees. As per contract terms, Simony travels has to raise its monthly bills for the tickets booked or cancelled during the period and the same are paid by GIG Ltd. within 15 days of the bill date. The bills raised by Simony travels were of huge amount, so the management of GIG Ltd. decided to get an audit conducted of the process followed for booking/cancellation of tickets and verify the accuracy of bills raised by the travel agency. Which audit do you feel the management should opt for? Also briefly discuss the qualities the auditor should possess for such audit. [RTP-May 19]
Answer:
Audit Requirement for verification of bill raised by travel agency:
In the case mentioned in the question, management should opt for operational audit. Operational auditor will ensure verification of effectiveness, efficiency and economy of operations done by the Simony travels for the organisation.

Qualities an operational auditor should possess:
The operational auditor should possess some very essential personal attributes to be effective in his work. Such personal attributes comprise of:

1. Operational auditor should be more inquisitive as, his knowledge ordinarily would be scanty in areas beyond accounting and finance.

2. Operational auditor is required to visualise whether simpler alternative means are available to do a particular work. He should ask the who, why, how of everything.

3. Operational Auditor should possess an attitude of skepticism. He should try to see everything as to whether particular operational aspects properly fit in the business frame and organisational policy.

4. He should imbibe a constructive approach rather than a fault-finding approach and should give a feeling that his efforts are to help attaining an improved operation and not merely fault finding. If the auditor succeeds in giving a feeling of help and assistance through constructive criticism, he will be able to obtain co-operation of the persons who are involved in the operations.

5. He should try to develop a team comprised of people of different backgrounds.

Miscellaneous Questions

Question 19.
In an operational audit performance evaluation, what factors can cause unsatisfactory production performance?
Answer:
Factors causing unsatisfactory production:

1. Inadequate or unskilled personnel
2. Non-availability of raw materials
3. Lack of proper supervision
4. Lack of proper machine maintenance
5. Strikes and/or lock out
6. Problems of power supply
7. Non-availability of essential machine spares
8. Lack of proper quality control
9. Poor quality of raw materials
10. Other causes like fire, earthquake etc.

Question 20.
You have been appointed to carry out Management-cum-OperationalAuditofa Public Ltd. company. State whether the use of quantitative ratios is more effective than the use of financial ratios to gain real insight into the financial statements.
Answer:
Use of Quantitative Ratio:
The objective of management-cum-operational audit is not only to verify compliance with the control but to suggest measures to improve operational environment & increase overall productivity.

Financial ratios keep changing with the variations in the price level. In a dynamic economy, price levels seldom remain constant and hence comparison of financial ratios over the years becomes vitiated. Quantitative ratios and reconciliations remain unaffected by changes in price. They reflect certain basic relationships and change only if there is a change in the method of operation, technology, degree of automation, product mix, etc.

A comparison of quantitative ratio over the years can reveal pertinent and leading indications of the real state of affairs.

The various quantitative ratios which maybe calculated are input-output ratio for a manufacturing concern, occupancy ratio for hotels, etc.

The nature of quantitative ratios and reconciliations that an auditor can work out in a particular audit would depend upon the actual circumstances of the case. However, the auditor must keep a few general considerations in mind while using quantitative data.

Firstly, he should analyse and use such data mainly as an evidence to support the figures in the statements under audit.

Secondly, the auditor should try to correlate vital relationships between physical quantities. In this regard the auditor should establish the cause and effect relationship between activities.

Thirdly, the auditor may attempt to link a physical quantity with its corresponding monetary figure through an estimated average rate.

Conclusion: Though working out quantitative ratios involves greater strain on the auditor, but it is more rewarding.

Question 21.
You have been appointed Management Auditor of a large manufacturing company suffering from working capital crunch. Enlist and discuss the related areas which you would probe into to overcome the company’s problem.
Answer:
Action Plan for management audit of a company facing financial crunch
(a) Working Capital Estimation: Prepare a statement of the projected working capital requirements. It should be based on the functional budgets in sales, production, expenses, capital expenditure and the master budget consisting of projected profit and loss and the balance sheet.

(b) Cash Flow Statement/Cash Budget: Month-wise cash budgets showing inflows and outflows of cash heading-wise should be prepared to analyse the major inflows and outflows affecting the entity.

(c) Inventory/Stock Management: Raw materials and inventories should be classified properly to determine the level of stock of materials. The system of inventory management needs to be looked at so as to check the avoidable wastes/scraps generated during storage and handling.

(d) Credit Management: The company should lay down a proper policy for evaluating customers, determining the credit period and offering discounts for early payment. An age-wise analysis of debtors should also be prepared so as to avoid credit to defaulters. The sale department needs to be geared up so that realisation can be made in time.

(e) Funds Flow Analysis: The company should prepare a funds flow analysis, distinguishing between long-term and short-term sources and applications.

(f) Investment Management: The idle funds of the company, if any, should be invested in shortterm securities to augment the income

(g) WIP Analysis: W1P should be monitored and for the purpose it is necessary to ensure that no bottlenecks develop at any stage during the production process.

Question 22.
XYZ, a manufacturing unit does not accept the recommendations for improvements made by the Operational Auditor. Suggest an alternative way to tackle the hostile management. [Nov. 10 (5 Marks), MTP-Oct. 20]
Answer:
Way to tackle the Hostile Management:

• To tackle the hostile management, auditor is advised to follow participative approach. In this approach the auditor discuss the ideas for improvements with those managers that have to implement them and make them feel that they have participated in the recommendations made for improvements.
• This approach encourages the auditee to develop a friendly attitude towards the auditors and
  look forward to their guidance in a more receptive fashion. ‘
• The proposed recommendations are discussed with the auditee and modifications as may be agreed upon are incorporated in the operational audit report.
• With this attitude of the auditor it becomes absolutely easy to implement the proposed suggestions as the auditee themselves take initiative for implementing and the auditor do not have to force any change on the auditee.

Question 23.
You have been appointed as an internal auditor of a company RSM Ltd. The Managing Director of X Ltd. is concerned about high employee attrition rate in his company. As the internal auditor of the company he requests you to analyze the cause for the same. What factors would you consider in such analysis? [May 13 (4 Marks), MTP-May 20]
Answer:
The factors responsible for high employee attrition rate are as under:

1. Job Stress & work life imbalance
2. Wrong policies of the Management
3. Unbearable behaviour of Senior Staff
4. Safety factors
5. Limited opportunities for promotion
6. Low monetary benefits
7. Lack of labour welfare schemes
8. Whether the organization has properly qualified and experienced personnel for the various levels of works?
9. Is the number of people employed at various work centres excessive or inadequate?
10. Does the organization provide facilities for staff training so that employees and workers keep themselves abreast of current techniques and practices?

Question 24.
The Board of Directors of XYZ Ltd. is concerned with decreasing operating efficiency in material consumption. As an Auditor entrusted with investigating the causes for this poor state, what may be the areas of your focus in this respect. [Nov. 18 – New Syllabus (5 Marks)]
Answer:
Focus Area while investigating the causes of decreasing operating efficiency in material consumption:
To determine the reasons for decreasing efficiency in material consumption, the auditor is required to understand the manufacturing operations from the initial stage of purchase of materials, issue of material, consumption of material and conversions into finished goods. For this purpose, auditor may focus on following aspects:

1. Obtain a list of raw materials used in the production process mentioning therein the names and detailed characteristics of each raw material.

2. Ascertain the basis of computation of normal wastage figures and its consistency as compared to previous months.

3. Obtain internal control reports, in respect of manufacturing costs incurred with reference to predetermined standards or budgets.

4. Examine the stock records so as to determine the raw material purchased, material issued to production.

5. Examine the production records so as’to determine the material received from the stores and actual material consumed in the production and waste produced in the production process.

6. Study the Maintenance Programme of machinery to ensure that the machinery does not consume more raw material and quality of goods manufacture. is wot of sub-standard nature.

7. As certain whether employees engaged in production are properly trained and working efficiently.

8. Determine the existence and effectiveness of quality control techniques employed in the entity.

9. Examine inventory controls in respect of storage, pilferage, issues etc.

10. Obtain a statement showing break up of wastage figures in storage, handling and production for the period under reference and compare the results of the analysis for each of the month.

11. Consider the existence of following situations that may also cause the abnormal wastage:
(a) Purchase of poor quality of raw materials.
(b) Machinery breakdown or power failure.
(c) High rate of rejections of finished goods
(d) Deterioration of raw material lying in godowns
(e) Abnormal wastages in storage and handling.
(f) Commencing new production line.