www.sbsandco.com
2
What is Scarp & Reasons for Generation of Scrap
Audit Objective
Documents required for verification
Audit Procedures
Understanding of Process
Preparing the Audit Programme
Test check of Internal controls relating to Scarp sales
Analytical Procedures
Verification of the Scrap Records
Vendor Contract verification
• Conclusion
Contents
Ashok Reddy P 8297584483 ashokp@sbsandco.com
www.sbsandco.com
3
Different types of scarp are generated due to damage or expiry of products and
scarp generation is also depending on the type of industry and the type of the
product also. But depending on the type of the scarp, it may be recycled back into
the production process or sold as revenue.
The main reasons for Scarp in a manufacturing industry,
Mistakes in the procurement
Wrong planning decision
Change in the design method and product
Goods produced with less quality
What is Scrap & Reasons
Ashok Reddy P 8297584483 ashokp@sbsandco.com
www.sbsandco.com
4
This procedures will help to organisation to prevent the irregularities
(Misstatements, Errors & Frauds) in the scrap sales from generation point to sales
and also the company will get the true financial profit arising from the scrap sales
Audit Objective
www.sbsandco.com
5
Documents required for verification,
Obtain written Policies and Procedures for Scarp sales
Scarp sales register
Production details(Normal wastage Vs Actual Wastage)
Obtain documented list of Authorised Personnel who sanction the Scarp
Invoices.
All contract copies along with copies of contract extension documents for scarp
sales, if any
Hard copies of documents(sample selected)
Documents required
Ashok Reddy P 8297584483 ashokp@sbsandco.com
www.sbsandco.com
6
Understanding of Process:
First we should understand the process to be followed for scarp sale (scarp
disposal) by way of discussing with client or read the written policies of the
company if any. At the time of capturing the process we should able to answer the
below six questions for better understanding the process flow are as follows,
i. What
ii. Why
iii. Where
iv. Who
v. When
vi. How
Audit Procedure - Verification of Scrap sales
Ashok Reddy P 8297584483 ashokp@sbsandco.com
www.sbsandco.com
7
Prepare the audit programme:
After developing the process notes we should prepare the Audit Programme, also
called audit plan. The prepared audit programme should contain the following
elements,
Audit programme should be aligned with the process note
Initial documents (as requested above) required for verification
Steps to be followed for verification. Ex. Control checks, Regulatory Compliances,
analytical procedures and other related issues relating to that area.
Working paper reference for each stage of verification
Remarks or comments if any both from audit and client perspective
Audit Procedure - Verification of Scrap sales
www.sbsandco.com
8
Internal Controls Check
Review the Segregation of Duties as regards to generation, storage and disposal
of scarp items.
Examine the financial power vested in the different persons and conditions
under which they exercise them.
Audit Procedure - Verification of Scrap sales
Ashok Reddy P 8297584483 ashokp@sbsandco.com
www.sbsandco.com
9
Analytical Procedures:
Analytical procedures are an important part of the audit procedures. The analytical
procedures include,
Review the production data and cost records for the determination of the extent
of scarp materials that may arise in a given period and compare the same with
the normal loss and last year figures.
Compare the income from the sale of scraps with the corresponding figures of
the preceding year for any abnormal changes. In case of any abnormal changes in
the scarp generation same should be taken to notice of the management.
Audit Procedure - Verification of Scrap sales
Ashok Reddy P 8297584483 ashokp@sbsandco.com
www.sbsandco.com
10
Verification Scrap sale records
Ensure that a separate space / scrap yard is earmarked for keeping the scrap
material. The scrap yard should have an enclosure and a gate with a lock and key.
Ensure that scarp records i.e. inward register and outward register at the scarp
yard should be updated daily with proper cross verification by the authorized
personnel.
Ensure that all scrap sold have been billed and same been accounted in the books
of accounts.
Sample should be selected based invoice value or based on the any abnormal
sales in a day or month
Audit Procedure - Verification of Scrap sales
Ashok Reddy P 8297584483 ashokp@sbsandco.com
www.sbsandco.com
11
Verify the all supporting documents relating to scrap sale sample selected as
follows,
o Invoice: In invoice we should concentrate on the date of transaction, Vendor name,
Amount as per contract if any, Taxes as applicable
o Waybills: Ascertain whether the way bill is properly prepared (Description of goods,
quantity etc.)
o Weighment slips: Ensure proper counting / weighment / measurement of scrap at the
scrap yard should be under proper authority
o Internal documents if any
Audit Procedure - Verification of Scrap sales
Ashok Reddy P 8297584483 ashokp@sbsandco.com
www.sbsandco.com
12
Vendor Contract verification:
The process of entering into contracts have to be documented and the approving
authorities for the entering of contracts have to be noted
Ensure that vendor selected for scarp sales should be based on proper evaluation and
should verify the supporting of the same i.e. comparative statements.
Check the rates at which different types of scraps have been sold and compare the same
with the rates that prevailed in the preceding year. In case any expiry of the contract,
copy of extension taken have to be examined.
Ensure that vendor should follow the terms and conditions specified in the contact i.e.
payment terms, security deposits, advances if any, clauses for termination etc.
Verify the vendor ledger account for cross checking of payment of advances as per
contact and record of all sales during the period against respective vendor.
Audit Procedure - Verification of Scrap sales
Ashok Reddy P 8297584483 ashokp@sbsandco.com
www.sbsandco.com
13
www.sbsandco.com/wiki
www.sbsandco.com/digest
Read our monthly e-Journals
SBS And Company LLP
Chartered Accountants
Our Presence in
Telangana: Hyderabad (HO)
Andhra Pradesh: Nellore, Kurnool, TADA (near Sri
City), Vizag
Karnataka: Bengaluru
+91-40-40183366 / +91-40-64584494 / +91-9246883366
Thank you!!!
P Ashok Reddy
PH: +91 8297584483
ashokp@sbsandco.com
