From Manufacturing Accounting to Audit – Two Sides of the Same Story

It is widely understood that spontaneity is a luxury businesses can rarely afford. Profitability and operational efficiency are among the factors that make a business successful, while accounting is one of the key tools for monitoring and understanding both. But where does audit fit into this story, and what value can it bring?

Although accounting and audit have distinct roles and responsibilities, in practice they are closely connected. Yet audit can sometimes be met with a degree of reservation by accounting teams.

Rather than viewing audit merely as an additional layer of control, its role can be better understood through the value that independent assurance brings to users of financial information.

To illustrate this relationship, we will focus on one particularly complex area of business operations - manufacturing.

Accounting in a manufacturing company

Manufacturing, as the process through which a company's final product is created, is a fundamental part of its operations. Consequently, the timely and appropriate recording of transactions, valuation of inputs - including raw materials, supplies, packaging and tools - as well as labour costs, energy consumption and depreciation, product costing and finished goods inventory accounting are all important elements of managing the manufacturing process.

Accounting has long moved beyond simply recording and reporting production costs. Numbers create real business value when they are properly interpreted and analysed within the appropriate context.

Accurate transaction recording and appropriate valuation of production inputs and finished goods inventories contribute to better resource management, facilitate decision-making and provide greater insight into a company's operational and financial position. Ultimately, the quality of financial information can directly influence the quality of business decisions.

Inventories are particularly important for manufacturing companies. Appropriate inventory management and accounting are essential for maintaining continuity of operations. The accounting treatment of inventories is addressed by IAS 2 - Inventories. In practice, however, applying the standard requires professional judgement, particularly in determining costs, allocating production overheads and assessing net realisable value.

Accounting for the manufacturing process itself can also be challenging - from raw materials and other production inputs, including human labour, through to the finished product. Normal and abnormal losses, waste, quantities produced and the valuation of finished goods are only some of the issues manufacturing businesses encounter in their day-to-day operations.

Determining the cost of production can be a complex process requiring detailed analysis and calculations. Managing finished goods inventories, together with the resources required for their storage and safekeeping, creates further operational and accounting challenges.

Every industry has its own characteristics, and an accounting approach suitable for one company may not necessarily be appropriate for another, even within the same sector. Production models, technology, cost structures, organisational arrangements and accounting policies create a specific operating environment for each company.

In this context, accounting primarily serves the needs of the company while also generating information that forms the basis for external financial reporting. Its role is to provide relevant and reliable information about financial position and performance and to support informed business decisions.

So, what is the role of audit in the manufacturing story?

“Trust, but verify” perhaps captures the principle of independent verification in its simplest form.

The objective of an audit is neither to assume the role of accounting nor to guarantee the absolute accuracy of financial statements. An auditor obtains reasonable assurance and expresses an independent opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

It is precisely the auditor's independence and application of professional standards that help enhance the confidence of users of financial statements, including owners, investors, banks, creditors and other stakeholders.

This can be particularly relevant for manufacturing businesses. An audit is not simply a review of figures presented in financial statements. It involves understanding the company and its environment, assessing risks of material misstatement and considering relevant accounting policies and estimates.

In a manufacturing environment, areas such as inventories, production costs, allocation of overheads, product costing, impairment and valuation of finished goods may therefore require particular attention.

Another important aspect is internal control. Accounting processes are closely connected to a company's system of internal controls, while responsibility for designing, implementing and maintaining those controls rests with management.

As part of an audit, the auditor obtains an understanding of internal controls relevant to the audit in order to appropriately design and perform audit procedures. Where significant deficiencies in internal control are identified, these may be communicated to management and those charged with governance.

Audit can therefore provide an additional perspective on certain risks and weaknesses within processes, without assuming management's responsibility for running the business or establishing its internal controls.

Manufacturing accounting and audit - two sides of the same story

Accounting and audit perform different functions, but their value converges at one important point - the quality and reliability of financial information.

Accounting provides a systematic framework for recording, measuring and reporting a company's economic activities. Audit, on the other hand, provides an independent perspective and reasonable assurance over the financial statements.

They should therefore not be viewed as opposing sides, but as distinct functions that make complementary contributions to confidence in financial reporting.

In practice, auditors can sometimes be perceived as “outsiders” entering a system that the accounting team knows and manages every day. A quality audit, however, begins with understanding - understanding the business, its manufacturing processes, its specific risks and how those risks are reflected in the financial statements.

When such understanding exists, audit is more than a review of what has already happened. It contributes to greater confidence in the information on which owners, management and other stakeholders base their decisions.

And reliable information, combined with a better understanding of the business, provides a stronger foundation for better decision-making.

The published content, photographs, and videos are the property of RSM Macedonia and are protected in accordance with the Law on Copyright and Related Rights and the Law on Personal Data Protection. Any unauthorized downloading, reproduction, transmission, or misuse constitutes an infringement of rights and is subject to sanctions in accordance with the applicable laws.