CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
W/P
Ref.
Procedures
AUDIT OBJECTIVES
To determine whether:
A.
B.
C.
Cost of goods sold represents all expenditures
incurred for products shipped or services provided
during the year and is properly recorded.
Cost of sales is properly described and classified in
the financial statements and adequate disclosures with
respect to these amounts have been made.
Expenses incurred and the business conducted during
the year were in accordance with the objects of the
company, and were for the purpose of the company’s
business.
SUBSTANTIVE PROCEDURES
1. Overall Analytical Review
1.1
1.2
1.3
1.4
Compare the balances of cost of sales accounts with
the comparable balances for the preceding period and
with the budgeted amounts for the current period.
Investigate significant or unusual fluctuations.
Compare gross profit margins with comparable
margins for the preceding period with comparable
margins for industry and with budgeted margins for
the current period and investigate unusual
fluctuations.
Prepare and analyse gross profit analysis by taking
into account sales and cost components.
Using PBC, compare gross profit ratios by product
line, division or period to those of the prior year and
obtain
explanation
for
unusual
variations.
(Scope/Sample: __________.)
2. Cost of Goods Sold
2.1
2.2
V/AP
Perform a predictive test of cost of sales by product
line, division or other business segment by reference
to details of units shipped and average unit costs.
Investigate significant variances between the
predicted and recorded amounts.
Expand the vouching test of revenue transactions to
also test the related cost of sales transactions by
tracing the unit costs used to relieve inventory to cost
records tested in the audit of inventory.
Page: 1/13
By
Comments/Explanations
CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
W/P
Ref.
Procedures
2.3
2.4
2.5
Cross-reference the overhead and variance accounts to
the analytical reviews performed in conjunction with
the audit of standard inventory costs.
Cross-reference provisions for depreciation, depletion
and amortization included in cost of sales to the tests
performed in the audit of accumulated depreciation.
Test controls over conversion cycle (Refer conversion
cycle work program) in respect of material
requisition,
production
reporting,
inventory
management and inventory perpetual records.
3. Purchases
3.1
3.2
3.3
3.4
3.5
Select sample of purchases during the year and verify
through inspection of ordering, receiving and
disbursement documents.
Perform predictive tests based on the agreed/average
prices and received quantity.
Review significant purchase/supply agreements and
investigate any significant matter identified.
Test control over purchasing cycle in respect of
significant internal control functions. (Refer
compliance work program for purchases cycle).
Ensure purchase price in case of imports are translated
in accordance with IAS-21 and IAS-39 as applicable.
4. Purchase Cut-off
4.1
4.2
4.3
4.4
4.5
V/AP
Judgmentally
select
__________
receiving
transactions each before and after the physical
inventory date to test the client's inventory cutoff
procedures and controls. The items selected should be
selected from the transactions __________ days
before and after the physical inventory date.
Using PBC or cutoff documents, trace cutoff data
recorded before and after the physical inventory date
into the accounting records to determine if proper
cutoff was obtained. (Scope/Sample: __________.)
Scan the purchases / receipts journal for periods
before and after the physical inventory date for
unusual items. (Scope/Sample: __________ .)
Consider responses to accounts payable confirmations
that might indicate potential inventory cutoff
problems.
Conclude as to the propriety of the cutoff achieved.
Page: 2/13
By
Comments/Explanations
CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
W/P
Ref.
Procedures
5. Basis for allocating Overheads
5.1
5.2
5.3
For fixed overheads:
 In case of under utilization of normal
capacity, the unabsorbed overheads should be
charged as an expense for the period
 In case of abnormally high production, the
allocated overheads should not exceed the
actual amount as this may result in over
valuation of inventory.
For variable overheads allocation should be made on
actual production, the basis of which should be
consistent.
Ensure that the manufacturing and operating expenses
of shut down period are not deferred. As shut down
due to strike, lock-out or mechanical problems etc. are
part of operating cycle of an enterprise, these should
not be deferred as this will not only distort the current
picture of the profit or loss, it will also burden the
subsequent periods for no reason.
6. Joint Product By Product Costing
6.1
6.2
6.3
Check the policy for allocation of cost to joint
products e.g. on the basis of selling price or quantities
produced after the point of separation.
Check the consistency of the above mentioned policy.
Check the treatment for any by-product e.g. if the byproduct is saleable then its NRV is deducted from the
total cost to be allocated to the joint products.
7. Excise Duty (ED)
7.1
7.2
7.3
7.4
V/AP
ED on the purchase of excisable goods should form
part of the cost of inventory.
Fixed ED or ED on production capacity should be
regarded as a period cost and should form part of the
cost of sales.
ED on excisable goods produced should be charged to
cost of sales, as such duty is collected at the time of
sale but adequate provision is required for excisable
goods in hand at the balance sheet date, which were
ready for sale.
Ensure that the cost of sales does not include any
indirect tax, which is subsequently adjustable against
liability for any other tax or duty e.g. sales tax.
Page: 3/13
By
Comments/Explanations
CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
W/P
Ref.
Procedures
8. Wastage
8.1
8.2
8.3
8.4
8.5
Check that the standard wastage percentage is
determined by an expert or specified in the machinery
manual. Also, this standard percentage does not
exceed the normal wastage prevailing in such
industry.
Check that the current wastage is in accordance with
the standard wastage.
Ensure that abnormal wastage is not charged to
production, as it is a separate line item of the profit
and loss account.
Consider bringing the matter of abnormal wastage to
the knowledge of the BOD through the covering
letter.
Ensure that the sale of wastage/scrap is:
 Disclosed as other income; or
 Disclosed separately as a part of sales; or
 Disclosed separately as a deduction from the
raw material consumed.
9. Payroll Expense
9.1
9.2
9.3
9.4
9.5
9.6
V/AP
Obtain a PBC which compares each significant
category of employee compensation (per the payroll
register) and significant payroll-related expenses (by
month between years). Include calculation of average
payroll per full-time equivalents of employees. Verify
the clerical accuracy of the analysis.
Trace selected amounts to the payroll register and to
prior year working papers otherwise those tested in
payroll cycle. (Scope/Sample: __________.)
Investigate significant fluctuations in amounts.
Consider whether they may be indicative of potential
cutoff problems.
Scan the payroll register for unusual balances or
amounts.
If the department-wise figure of an expense account is
not equal to the balance of the account, obtain an
explanation of the nature and approximate amounts of
the other categories of entries that have affected the
account balance.
Compute the ratios of material amounts of fringe
benefits to the total compensation earned by covered
employees or other data. Compare with the
comparable ratios for the preceding period and
investigate significant or unusual fluctuations.
Page: 4/13
By
Comments/Explanations
CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
W/P
Ref.
Procedures
9.7
9.8
9.9
9.10
9.11
9.12
9.13
9.14
9.15
If not performed in compliance phase, select a sample
of employees from the payroll register.
Inspect time cards or other records to support hours
worked/attendance record.
Inspect wage/salary authorisation or agreements to
support the rates paid.
Inspect authorisation forms to support amounts
withheld.
Inspect personal files for appropriate documentation
and evidence for the existence of employees.
Test the calculations of net pay and the clerical
accuracy of payroll register cumulative amounts.
Inspect board minutes for approval of slab increments,
and bonus awarded.
Check deduction of Withholding tax under section
50(1) and ensure its payment to treasury within
stipulated time period.
Ensure payment through cross cheques/bank transfers
as per the provision of the Income Tax Ordinance.
10. Travelling and Entertainment
10.1
10.2
10.3
10.4
10.5
V/AP
Have the client prepare a schedule of such expenses as
per Firm’s Standard Schedule and tie up the total of
such schedule with General Ledger
Compare current period total of such expenses with
the corresponding prior period amount and investigate
reasons for significant fluctuations.
Understand, document and evaluate the entity’s
internal control policies and procedures for
authorising, executing and recording such expenses
Based on the above assessment and considering the
risk factors from the planning phase, determine and
document the scope for selecting transactions for
verification.
For transactions selected as above, ensure that these
were:
 Authorised by the appropriate level of authority;
 In accordance with the entity’s policies, rules
and limits;
 For the purpose of business;
 Properly supported by bills of travel agents,
boarding passes, ticket jackets and expense
summaries / reports;
 Based on reasonable/comparable rates; and
 Verified by the entity’s internal audit
department, where applicable.
Page: 5/13
By
Comments/Explanations
CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
W/P
Ref.
Procedures
11. Rent, Rates and Taxes
11.1
11.2
11.3
11.4
11.5
11.6
11.7
Have the client prepare a schedule of such expenses as
per Firm’s Standard Schedule and tie up the total of
such expenses with General Ledger.
Compare current period total of such expenses with
the corresponding prior period amount and investigate
reasons for significant fluctuations.
Review all significant rent agreements and note:
 The respective expiry/ maturity dates;
 The provisions for renewal of agreement;
 Amount of deposit;
 Amount of rent and the period of payment;
 Rent escalation clauses; and
 Any other significant restrictions or obligations
of the entity.
Understand, document and evaluate the entity’s
internal control policies and procedures for
authorising, executing and recording rent, rates and
taxes.
Based on the above assessment and considering the
risk factors from the planning phase, determine and
document the scope for selecting payments for
verification.
For payments selected as above, ensure that these
were:
 Authorised by the appropriate level of authority;
 In accordance with the rent agreement; and
 Verified by the entity’s internal audit
department, where applicable.
Ensure that proper accrual / adjustment for such
expenses have been made at period end.
12. Communication and Utilities
12.1
12.2
12.3
12.4
V/AP
Have the client prepare a month-wise analysis of such
expenses and tie up the total of such analysis with
General ledger.
Compare current period total of such expenses with
the corresponding prior period amount and investigate
reasons for significant fluctuations.
Understand, document and evaluate the entity’s
internal control policies and procedures for
authorising, executing and recording such expenses.
Use Firm’s Standard Schedule for performing
predictive test for such expenses.
Page: 6/13
By
Comments/Explanations
CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
W/P
Ref.
Procedures
12.5
12.6
12.7
12.8
Based on the above assessments and considering the
risk factors from the planning phase, determine and
document the scope for selecting transactions for
detailed verification.
For transactions selected as above, ensure that these
were:
 Authorised by the appropriate level of
authority;
 Properly supported by bills / invoices and other
relevant documents;
 For business purposes; and
 Verified by the entity’s internal audit
department, where applicable.
Obtain list of telecommunication, electricity and gas
connections and ensure that all bills relating thereto
have been duly accounted for.
Ensure that proper accrual for such expenses have
been made at period end.
13. Legal and Professional Expenses
Ensure whether legal and professional expenses
relates to the product cost, if so, then consider
application of work program steps defined in
administration and selling expenses.
14. Repairs and Maintenance
14.1
14.2
14.3
14.4
V/AP
Have the client prepare a schedule of such expenses as
per Firm’s Standard Schedule and tie up the total of
such expenses with General Ledger.
Compare current period total of such expenses with
the corresponding prior period amount and investigate
reasons for significant fluctuations.
Understand, document and evaluate the entity’s
internal control policies and procedures for
authorising, executing and recording such expenses.
Based on the above assessments and considering the
risk factors from the planning phase, determine and
document the scope for selecting transactions for
detailed verification.
Page: 7/13
By
Comments/Explanations
CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
W/P
Ref.
Procedures
14.5
14.6
14.7
14.8
For transactions selected as above, ensure that these
were:
 Authorised by the appropriate level of
authority;
 Properly supported by bills / invoices and
other relevant documents;
 For business purposes; and
 Verified by the entity’s internal audit
department, where applicable.
Review all significant service and maintenance
contracts and note:
 The respective expiry/ maturity dates;
 The provisions for renewal of contract;
 Amount of service charges and the period of
payment;
 Escalation clauses; and
 Any other significant terms.
Ensure that repairs and maintenance of capital nature
is appropriately accounted for.
Ensure that proper accrual for such expenses have
been made at period end.
15. Fuel and Power
15.1
15.2
15.3
15.4
15.5
V/AP
Have the client prepare a quantitative schedule of
fuel/gas consumption during the period and cross refer
it from the inventory portion, if applicable.
Select a sample of fuel purchases during the period
and ensure that:
 These are supported by properly authorised
purchase orders, goods receiving report, quality
inspection report and other internal documents;
 The invoices / bills are in accordance with the
agreement with vendor, if any; and
 The purchases are accounted for upon receipt of
goods and in the relevant period.
Compare current period consumption and expenses
with the corresponding prior period figures and
investigate reasons for significant fluctuations.
Analyse the relationship between fuel consumption
and production and consider performing appropriate
predictive tests.
Consider the implications of sales tax in case of self
generation of power / electricity.
Page: 8/13
By
Comments/Explanations
CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
W/P
Ref.
Procedures
16. Insurance
16.1
16.2
16.3
16.4
16.5
16.6
16.7
16.8
Have the client prepare a schedule of such expenses as
per Firm’s Standard Schedule and tie up the total of
such expenses with General Ledger.
Compare current period total of such expenses with
the corresponding prior period amount and investigate
reasons for significant fluctuations.
Review all significant insurance policies and note:
 Nature of policy and sum insured;
 Amount of premium and the period of
payment;
 The respective expiry/ maturity dates;
 The provisions for renewal of policy; and
 Any other significant restrictions or
obligations of the entity.
Understand, document and evaluate the entity’s
internal control policies and procedures for
authorising, executing and recording insurance
expense.
Based on the above assessment and considering the
risk factors from the planning phase, determine and
document the scope for selecting payments for
verification.
For payments selected as above, ensure that these
were:
 Authorised by the appropriate level of
authority;
 In accordance with the policy; and
 Verified by the entity’s internal audit
department, where applicable.
Ensure that proper accrual / adjustments for such
expenses have been made at period end, particularly
the workings relating to prepaid portion of such
expenses are adequate.
Cross match the assets insured as per policy with the
assets appearing in the books of the company.
Perform test of insurance to ensure adequacy of
insurance coverage and determine the amount of
over/under insurance.
17. Fee and Subscription
17.1
V/AP
Have the client prepare a schedule of such expenses as
per Firm’s Standard Schedule and tie up the total of
such expenses with General Ledger.
Page: 9/13
By
Comments/Explanations
CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
W/P
Ref.
Procedures
17.2
17.3
17.4
V/AP
Compare current period total of such expenses with
the corresponding prior period amount and investigate
reasons for significant fluctuations.
Select a sample of such payments and ensure that
these were:
 Properly authorized;
 For business purposes; and
 Supported by invoices / bills and other
relevant documents.
Ensure that proper accrual / adjustment for such
expenses have been made at period end and
prepayments, if any, are properly classified.
18. Operating Leases
18.1
Obtain copies of new or revised operating lease
agreements and update the PERMANENT FILE
accordingly.
18.1.1 Examine the lease documents and determine whether
they are properly executed. Ensure that lease
transactions were properly authorized by reference to
the minutes.
18.1.2 Review the terms of new or revised operating lease
agreements and determine whether IAS-17 requires
capitalization of the lease.
18.2 Have the client prepare a summary schedule of
operating leases, including the following information
for each significant lease (leases with other related
parties should be set forth separately):
 Description of the leased property and
significant terms of the lease agreement;
 Rentals and sublease rentals included in the
income statements for the current and
preceding periods;
 Accrued and/or prepaid rent as of the beginning
and end of the current period; and
 Required future minimum rental payments by
year for each of the succeeding five years and
in total for subsequent periods.
18.3 Verify the clerical accuracy of the schedule and trace
amounts for the preceding period to the prior period’s
working papers.
18.4 Predict rent expense and compare predicted amounts
with recorded amounts. Investigate differences in
excess of tolerable error.
18.5 Compare rent expense to prior period end and
budgeted or projected balances. Investigate
differences in excess of tolerable error.
Page: 10/13
By
Comments/Explanations
CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
W/P
Ref.
Procedures
18.6
18.7
Review lease expense for unusual items, new or
modified leases, etc.
Recalculate accrual for rent expense as straight line
rent expense less rental payments made and crossreference expense to the income statement and
accrual/prepayment to the balance sheet.
19. General and Other Expenses
19.1
19.2
19.3
19.4
19.5
19.6
19.7
19.8
19.9
V/AP
Select a sample of cash disbursements made during
the year from the cash disbursements journal.
Scope:
 Disbursements over Rs. __________ to
provide __________% coverage and/or
 Representative sample of
__________
disbursements.
If statistical sampling is used, indicate:
 Statistical method: __________
 Compliance level __________ %
 Tolerable error __________
Review supporting documents (e.g., invoices,
receiving reports, cheques) to determine proper
account classification.
Judgmentally select __________ month(s) and trace
the payments to the account distribution report and
then to posting in the general ledger. Review the
general ledger for other entries to the account.
For judgmental/mathematical or statistical sampling
application, project sample results to entire
population. Calculate likely error and post adjustment
to PAJE (Proposed Adjusting Journal Entries) sheet if
appropriate.
Ensure that all the purchases/services acquired in
foreign currencies are translated using exchange rate
prevailing at the date of transaction (a rate that
approximates the actual rate for example, weekly /
monthly average is also acceptable).
Select a sample of source documents (e.g. receiving
reports, vendors invoices etc.) relating to other
operating expenses incurred during the period.
Determine whether these transactions were properly
recorded during the period.
Cross reference depreciation, depletion and
amortisation expense to the tests performed in the
audit of fixed assets/assets subject to finance lease.
Cross reference warranty expense to the analysis of
accrual for warranty costs in the audit of accrued
liabilities.
Page: 11/13
By
Comments/Explanations
CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
W/P
Ref.
Procedures
19.10
For each significant other expense account not tested
in other areas of the working papers, have the client
prepare an analysis of the cumulative balance. Verify
the clerical accuracy of the analysis and examine
critical forms and documents.
20. Tax Compliance
20.1
20.2
In each area of expenses, while verifying
disbursements, also ensure deduction of tax at source
under Section 149 to 156 of the Income Tax
Ordinance, 2001.
Further ensure that all the disbursements are made
through cross-cheques/banking channels unless
otherwise allowed by Tax Laws. Even then consider
its materiality in internal control perspective.
21. Capacity utilization
21.1
21.2
21.3
21.4
V/AP
Obtain a schedule duly signed by the client
management
personnel
(preferably
Director
Production or Engineer) containing details of
production capacity of the manufacturing units, the
actual production achieved during the period and the
reason for shortfall, if any.
Cross refer actual production figure from the
quantitative schedule of inventories verified during
the year.
Enquire reasons for any shortfall in production and
check reasonableness thereof.
Assess the implication of paragraph 11 of IAS – 2
regarding allocation of fixed production overheads.
21. Objects of the Company
Ensure that the business conducted by the Company
has been in accordance with the objects of the
Company, as defined in the object clause of the
Memorandum of Association and all the expenses are
for the purposes of the business.
Other tests as deemed necessary
Management Letter
Page: 12/13
By
Comments/Explanations
CLIENT:
AUDIT PROGRAM
__________________________________________________
PERIOD:
__________________________________________________
SUBJECT:
COST OF GOODS SOLD
Est.
Hrs.
Phase/
Level
V/AP
W/P
Ref.
Procedures
By
Comments/Explanations
Prepare management letter points including:
 Internal control weaknesses;
 Business improvement opportunities;
 Legal non-compliance;
 Accounting system deficiencies; and
 Errors and irregularities not material at the
financial statements level.
Disclosure
Ensure appropriate disclosure have been made in
accordance with the reporting framework and fill
relevant portion of Financial Statement Disclosure
Checklist (FSDCL).
Supervision, review and conclusion
1.
2.
3.
4.
Perform Senior review and supervision.
Resolve Senior review points.
Resolve Partner and Manager review points.
Conclude response to the audit objectives.
Audit conclusion
Based on the substantive test procedures, I/we performed as outlined above, it is my/our opinion that the audit objectives set forth at
the beginning of this audit program have been achieved, except as follows:
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
Date:____________
______________
Signature
___________
Job Incharge
Page: 13/13
________
Manager
_______
Partner