Presentation Submitted To:

Miss Sundas Shah NawazSubmitted By:

Humayun Khalid QurashiRoll # 04/RegularB.com(Hons) 4th SemesterDepartment Of CommerceUniversity of Sargodha

Principles of Auditing

Textile Mill

Textile Industry comprises of several distinct industrial units that perform distinct processes, e.g. ginning, spinning, weaving, dyeing & printing etc. to convert raw cotton into fabrics. For the sake of discussion I am assuming a composite textile mill (Gul Ahmad) that purchases raw cotton from farmers & performs all processes till the production of finished fabrics. In the Audit of such a Textile mill the special points that are acquire attention of the Auditor are as follows.

How to Audit a Textile Mill?

1.Purchase of CottonPurchase of raw cotton is a

technical and specialized job and absence of an effective system it is easy for purchasing staff to fraud. In order to ensure that purchase bills are paid for the same quantity and quality as are supplied by the farmers. So the Auditor should ensure an effective internal control over purchase of raw cotton. During the season of purchase the Audit staff should be present at the place of buying to ensure the compliance of internal control procedures.

Production RecordsThe Auditor must be aware of all process of production, currently production level, and units produced.The Auditor should ensure proper documentation of flow of material from one department to another department, incurrence of production costs and the out put level.Usually the production reports are prepared on daily basis; the reports also contain cumulative totals up to the dateof the report.

Deptt.1

Deptt.2

Flow of raw cotton

By-Products & WastesVarious products are produced in making processes by Textile Mills in the form of by-products and wastes with a significant total sales. Textile Mills sold that by-products and waste to different sub-industries and markets and earns revenue.So and auditor should ensure effective internal control over collection and sales of by-products and wastes, and vouch the related accounting records.

By-Products of Textile Mills Cut-pieces; Low level cloths; Different types of dyes; Scrap of cotton etc.

Work in ProcessWork-in-Process inventory represents an item of significant value in textile mill. On the last day of accounting year, the audit staff must be physically present in production department.

By physical presence of audit staff the auditor should ensure proper stock taking. For valuation of work-in-process inventory the auditor may rely on certificates obtained from responsible officers.

Cotton Cess Act 1923

The Cotton Cess Act (1923) requires textile mills to pay a certain amount of cess (tax) according to numbers of bales of cotton used in production. The auditor should ensure that the mill has paid proper amount as cotton cess into government treasury.

Supplier’s Credit.

Textile Mills imports machinery on the basis of deferred payments or installments payables to foreign currency. These loans are termed as “Supplier’s Credit”. The auditor should study the contracts for acquisition of machinery under Supplier’s Credit. He should vouch for accuracy of division of each installment into principal and interest.

Exchange Risk FeeForeign currency loans involves exchange rate risk. Any depreciation in the value of Rupee increases debt burden of imports of machinery under the contract of supplier’s credit. The State Bank of Pakistan in exchange of a fee termed as Exchange Risk Fee provides coverage against the exchange risk. On payment of Exchange Risk Fee the importer of machinery is required to pay the installments at a stated exchange rate irrespective of market value of rupee.The exchange Risk fee should not be capitalized in value of imported machinery, but the fee should be recorded as revenue expense, chargeable to Profit and Loss Account. The Auditor should qualify his opinion for any noncompliance thereof.

Sales Tax

Sales of Textile mills are subject to sales Tax. So every Textile Mill should be registered under Sales tax Act. The Auditor should ensure that proper records of sales tax as required by the Sales Tax Act are maintained by the company and sales tax returns are submitted in time.

Workers’ Profit Participation Fund

The Companies Profit (Worker’s Participation) Act 1968 requires that a company engaged in an Industrial undertaking shall contribute a portion of its profit towards a fund called Worker’s Profit Participation Fund. This Fund is used to pay bonus to the workers. The auditor should ensure compliance thereof.

Financial StatementsUnder the provisions of the Income Tax Ordinance 2001, tax year of Cotton Textile Mills is a period from 1st October to 30th September. Therefore, the auditor should see that financial statement of the Mill are prepared for the same period. The auditor should also ensure that financial statement of the textile mill are drawn up in conformity with the provision of the companies Ordinance 1984, International Accounting Standards and other relevant Laws.