INTERNAL AUDIT REPORT OF ……………………………………..


Period


Place


Audit Team



Supervision



Audit Scope
: Transaction Vouching, Inventory System Controls, Internal Controls, Intra Unit Transactions,
Excise Records,
TDS, FBT and Service Tax

Audit Observations


1.
Custom Duty expenses Audit Observation

Custom Duty paid on import Rs.  …….. debited in Custom duty account and grouped with Direct Expenses.

System Weakness

Cost of import purchase will show at reduced cost and Cost of consumption will also be shown at reduced cost. Accordingly Valuation of W.I. P and Finished Goods will be affected.

Suggested Improvements

Duty paid on Import should be shown together with Import Purchase and amount should be tracked with respective purchased items.
It will enhance accuracy in Valuation of Closing Stock.

2.
Rubber Cess
Audit Observation

Rubber Cess of Rs. ….. paid on purchase of Rubber shown separately with Purchase Rubber.

System Weakness

Cost of purchase will show at reduced cost and Cost of consumption will also be shown at reduced cost. Accordingly Valuation of W.I. P and Finished Goods will be affected.


Suggested Improvements

Rubber Cess on purchase should be shown together with Rubber Purchase and amount should be tracked with respective purchased items.
It will enhance accuracy in Valuation of Closing Stock.

3.
Stock transfer
Audit Observation

Stock has been transferred from ONE Unit to OTHER Unit and freight incurred on transfer has been entered with Freight Inwards separately.

System Weakness

Practice will affect in correct valuation of Closing stock and Consumption.
Suggested Improvements

Freight should be shown together with respective transfer and amount should be tracked with respective purchased items.
4.
Freight on Purchase
Audit Observation

(A)
Freight paid on purchases is debited separately and grouped separately as freight Inwards and freight Exempted.

System Weakness

This practice reduces the cost of purchase and accordingly reduces the valuation and consumption of inventory.

Suggested Improvements

Freight paid on purchases should be shown together with respective purchase and amount should be tracked with respective purchased items.
It will ensure correct valuation of Closing Stock.

Audit Observation

(B)
Freight paid on purchase of Cement and building material has been treated as revenue items and debited in profit and loss account.
(Annexure A)
System Weakness

This practice will reduce the Cost of building being capitalized and charging capital expense in the profit and loss account will result in wrong determination of Profit and Loss and accordingly affect True and Fair presentation.


Suggested Improvements

Freight Expenses should be treated as capital expenses and should be debited in Building Account instead of revenue account.

Audit Observation

(C)
Freight on purchase of Air Conditioner and Fire Fighting Equipments has been treated as revenue expenses and debited in profit and loss account.
(Annexure A)
System Weakness

It will reduce Cost of Capital assets purchased and charging capital expense in the profit and loss account will result in wrong determination of Profit and Loss and accordingly affect True and Fair presentation.

Suggested Improvements

Freight Expenses should be treated as capital expenses and debited in Fixed Assets in Air Conditioner account and Fire Fighting Equipment account instead of revenue account, subject to materiality of amount i.e. > Rs.1,.000/-

Audit Observation
(D)
On analysis of purchases, we found that on several purchases no freight has been paid and management has to ensure whether these purchases are CIF or ex-factory if latter applies, the freight must have been debited in the books.

In the case of Raw Material purchase, a stamp should be affixed on purchase bill to indicate whether it is CIF or ex-factory where ever applicable.

(Annexure B)
5.
Loading and Unloading Expenses
Audit Observation

Expenses paid on loading and unloading of material cement and plant and machinery items has been treated as revenue expenses and debited in profit and loss account.
(Annexure C)
System Weakness

It will reduce Cost of Capital assets purchased and charging capital expense in the profit and loss account will result in wrong determination of Profit and Loss and accordingly affect True and Fair presentation.

Suggested Improvements

Loading and unloading expenses should be treated as capital expenses and debited in Building Account and respective Plant and machinery account instead of being debiting in revenue account.

6. Lab Equipment Audit Observation

Freight bill on purchase of Lab equipment from Germany not found.
System Weakness

Cost of Lab Equipment will not be correctly assessed.
Suggested Improvements

Bill should be in place and be entered in books of accounts.
7.
Office Equipment
Audit Observation

Freight bill on purchase of office equipment not found.
System Weakness

Cost of capitalization of office Equipment will not be determined correctly.

Suggested Improvements

Bill should be in place and be entered in books of accounts.
8.
Fixed Assets
Audit Observation

On verification of Fixed assets register, we found that freight charges and installation expenses was not entered in the books and not capitalized, also the fixed assets register was not complete.

9.
Building under construction
Audit Observation

On verification of building expenses, cost of labour has not been added in the capital cost of the building.

Whereas a system must ensure a certification by in house engg. / supervisor  to this effect that how much construction has been completed and there is not much difference in the capital cost of the completed portion and the pre estimated cost.