The document outlines the auditing process for a composite textile mill, detailing critical areas an auditor should examine, including raw cotton purchases, production records, by-products, work-in-process inventory, and compliance with financial regulations. It emphasizes the importance of internal controls and proper documentation to prevent fraud and ensure accurate financial reporting. Additionally, it covers specific factors like sales tax, workers' profit participation, and adherence to relevant laws and standards in financial statements preparation.

1. Submitted To:
Miss Sundas Shah Nawaz
Submitted By:
Humayun Khalid Qurashi
Roll # 04/Regular
B.com(Hons) 4th Semester
Department Of Commerce
University of Sargodha

3. 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.

4. How to Audit a Textile Mill?
1. Purchase of Cotton
Purchase 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.

5. Production Records
The 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 date
of the report.
Flow of raw cotton
Deptt Deptt
.1 .2

6. By-Products & Wastes
Various 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.

7. Work in Process
Work-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.

8. 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.

9. 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.

10. Exchange Risk Fee
Foreign 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.

11. 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.

12. 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.

13. Financial Statements
Under 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.