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Unit 13: Tax and Cost Audit

(i) Inventory Notes
(a) Is the size of the inventory adequate or excess compared with the production
programme?

(b) Is the provision most economical?
(c) Does it ensure optimum order size?
(d) Does it take into account the storage cost on the one hand, and carrying cost on the
other?
(e) Does it take note of lead time of the various items or groups of items?
(f) Does the receipt and issue system cause any bottle-neck in production?
(g) Does it involve too many forms and too much paper work?

(h) Is there any room for reduction of inventory cost consistent with production needs?
(i) Is the inventory as per the priced store ledger and as certified by the management
physically correct?

(j) Is the same amount of attention and care given to monies translated into material
things like raw materials, stores and supplies of all kinds as given to liquid cash?
(k) Does the issue of raw materials make the production in accordance with the standard
or schedule or otherwise, or covered by authorised schedule?
(l) Is the expenditure of consumable stores within the standard? If not, why not?
(ii) Opening and Closing Stocks: The cost auditor will see the following:

(a) that the opening stock is not unduly large compared with the volume of production
during the year;
(b) that the opening stock against various jobs really represents the actual physical
stock in the production shop and is not merely an accounting figure;
(c) that the responsibility of the shop foreman in-charge of the stock held in the
production shop is clear and properly documented; that he maintains proper record
of actual consumption vis-a-vis the actual withdrawal from the stock.
Valuation and correct indication of closing stock in the Trading and Profit and Loss Account
and in Balance Sheet is equally important. The Cost Auditor will examine and certify:
(a) that the physical verification is correctly carried out;
(b) that the valuation is correct with reference to the actual cost of production and
recognised policy for valuation;
(c) that volume of closing stock is commensurate with the volume of production and
that it does not reflect any failure or bottleneck in sales budget or production budget;
(d) that the volume of unmoved stores is not abnormal in comparison with the normal
rate of yearly consumption. The Cost Auditor will recommend disposal of such
unmoved stores with consequent release of capital unnecessarily locked up to the
advantage of the financial resources of the concern.

(iii) Store Issue Procedure in Stocks: The Cost Auditor will see:
(a) that withdrawal of materials or stores to production shop is scientific or covered by
authorised schedule and permits receipt to be located;

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