Audit services for manufacturing companies
Manufacturing businesses carry complex balance sheets. Work-in-progress valuations, raw material stock provisions, capital equipment depreciation, and the overhead absorption rates used to cost production output all create audit risks that need sector-specific knowledge to assess properly.
We audit manufacturing companies across a range of sub-sectors including precision engineering, food and drink production, textiles, plastics, metal fabrication, and industrial equipment manufacturing.
What is a manufacturing audit?
A manufacturing audit examines the financial statements with particular focus on inventory, cost accounting, and the manufacturing process controls that underpin the numbers:
- Raw materials, WIP, and finished goods valuation – Manufacturing inventory is typically the largest and most complex balance sheet item. The audit tests that raw materials are valued at cost, WIP includes appropriate labour and overhead absorption, and finished goods are held at the lower of cost and net realisable value.
- Overhead absorption rates – The method used to allocate production overheads to manufactured goods affects both stock values and the cost of sales. The auditor assesses whether the rates are reasonable, consistently applied, and updated when production volumes change significantly.
- Waste and scrap accounting – Manufacturing processes generate waste. The audit reviews whether waste rates are in line with expectations, whether scrap values are correctly accounted for, and whether unusual waste indicates quality control issues that could affect stock valuations.
- Capital equipment and depreciation – Manufacturing plant, machinery, and tooling represent substantial capital investment. The audit checks that depreciation rates reflect actual useful economic life, that impairment indicators are considered, and that capital allowances claims are correctly computed.
Financial audit vs manufacturing process audits
When people search for a manufacturing audit, they often mean manufacturing process audits – systematic reviews of production process efficiency, quality control procedures, and compliance with industry standards like ISO 9001 or IATF 16949. Process audits are a quality management tool. They examine whether the manufacturing process follows established procedures and whether the output meets the required standards.
A financial audit is different. We examine the financial statements to give an opinion on whether they present a true and fair view. But there is a connection: the results of process audits affect financial reporting. If a production process audit reveals high defect rates, that has financial consequences – higher scrap costs, warranty provisions, customer claims, and potential write-downs of defective stock. We review the findings from any process audits the company has carried out as part of our audit risk assessment.
Manufacturing process and quality controls
The auditor doesn’t conduct a formal manufacturing process audit in the ISO sense, but we do evaluate the quality control processes that affect financial reporting. If the company’s quality systems fail and produce defective output, the financial impact (scrap costs, rework, customer claims, warranty provisions) needs to be reflected in the accounts.
We review production records, yield analysis, and customer complaint data as part of the audit process. This helps us assess whether management’s provisions and accruals are adequate. Where a manufacturer operates to specific industry standards, non-compliance can trigger contractual penalties or loss of accreditation – both of which have financial statement implications that the audit needs to consider.
Cost accounting and costing systems
Getting cost accounting right is fundamental for manufacturing companies. The production process determines the cost structure, and the accounting treatment of that cost structure directly affects reported profits. We see common errors in how manufacturers account for:
- Labour costs allocated to production vs period costs charged to the P&L
- Machine time rates used in job costing or process costing systems
- The treatment of downtime, maintenance shutdowns, and idle capacity
- Sub-contracted manufacturing steps and the associated cut-off at year end
Standard costing systems in manufacturing are more complex than the accounting system can perfectly capture. They rely on assumptions about volumes, yields, and efficiency that may not hold across the year. The audit tests whether the variance between standard costs and actual costs is reasonable and correctly treated.
Compliance and regulatory obligations
Manufacturing companies face regulatory compliance obligations that can create material financial risks. Environmental costs, health and safety provisions, product liability insurance, and industry-specific regulations (food safety, pharmaceutical GMP, REACH chemicals) all have financial statement implications.
The audit considers whether provisions for known issues are adequate and whether contingent liabilities from potential regulatory action need disclosure. For manufacturers in regulated sectors, the cost of maintaining compliance can be substantial – and the financial consequences of losing accreditation or regulatory approval can be severe.
We also review compliance with Companies Act disclosure requirements specific to manufacturing businesses, including the treatment of government grants, apprenticeship levy costs, and environmental reporting obligations for larger companies.
Supply chain and procurement risks
Manufacturing companies are exposed to raw material price volatility, supplier concentration risk, and supply chain disruption. The audit considers:
- Whether forward purchase commitments for raw materials are properly disclosed
- The adequacy of provisions for onerous supply contracts
- Supplier rebate and volume discount accounting
- Import duty treatment on raw materials sourced internationally
Capital allowances and R&D
Manufacturing companies often invest heavily in plant and equipment. The audit checks that capital allowances claims (including the Annual Investment Allowance and full expensing) are correctly calculated and supported.
Many manufacturers also qualify for R&D tax credits on process innovation, new product development, or bespoke tooling design. We coordinate with the company’s tax advisers to make sure the audit work and the R&D claim are consistent.
The audit process for manufacturers
The audit process for a manufacturing company typically runs over three phases. Planning starts well before year end – we visit the site, understand the production process, identify the key audit risks, and agree the audit timetable with the finance team.
Interim audit work often includes attending stock counts at manufacturing sites, testing internal controls over production and inventory, and reviewing any significant transactions in the year to date. The final audit after year end focuses on the financial statements, audit report disclosures, and clearance of any issues identified during fieldwork.
We plan audit visits around production schedules to minimise disruption to factory operations. And we deliver a management letter summarising audit findings alongside the audit report, so the board gets practical feedback, not just a compliance exercise.
Group and multi-site manufacturing
Manufacturing groups with multiple production sites, shared services, and intercompany trading create additional audit complexity. Transfer pricing between group entities, elimination of intercompany profits in stock, and consolidated audit reporting all need careful attention.
We plan multi-site manufacturing audits to cover the key production locations while managing the disruption to factory operations.
Audit checklist for manufacturing companies
Before your audit, make sure your finance team has prepared:
- Detailed stock listings split by raw materials, WIP, and finished goods
- Overhead absorption rate calculations and supporting documentation
- Year-end stock count instructions and independent count records
- Capital expenditure schedules with supporting invoices
- Production yield reports and waste analysis
- Major customer and supplier contracts
- Any process audits or quality audit reports from the year
Our approach
We attend year-end stock counts at manufacturing sites, understand production costing methodologies, and review the audit results in the context of the company’s manufacturing operations, not just its accounting records.
We’re ICAEW-regulated and on the Register of Statutory Auditors. Audit fees are fixed. Call us on 0161 832 4451 or request a callback.
