Manufacturers, from the shop floor to the financial statements.
Inventory sits in three states at any moment, and work in progress is the hardest of them to value. The stage of completion, the overheads absorbed and the treatment of idle capacity all affect the figure, and all of them are matters of judgement.
Revenue recognition is usually straightforward, but returns, rebates, warranty obligations and discount schemes frequently are not, and they tend to be settled after the period has closed.
Accounting and reporting
- Inventory valuation across raw materials, work in progress and finished goods
- Absorption of production overheads, and exclusion of abnormal loss and idle capacity
- Capitalisation, depreciation and the treatment of major overhauls
- Revenue recognition, including returns, rebates, discounts and warranty provisions
- Reconciliation of supplier and customer balances
Regulatory
- GST on outward supplies, input tax credit, and e-invoicing and e-way bills where the notified conditions are met
- Cost records and cost audit for companies in specified industries
- Reporting required by the Companies (Auditor's Report) Order, where it applies, including on inventory verification and fixed asset records
Internal controls
- Production and stores records reconciled to the financial records
- Goods receipt matching and purchase authorisation
- Fixed asset register with periodic physical verification
- Segregation of duties across billing, collection and payment
Questions that arise
- Are physical counts reconciled to the records, and are differences explained rather than written off?
- Is work in progress valued on a consistent and supportable basis?
- Are assets in the register traceable to assets on the floor?
- Are the differences between book and tax depreciation tracked and reconciled?