Internal Audit of Manufacturing Company in UAE | Procedure

A manufacturing audit is a thorough inspection of a manufacturing process, confirming it’s actually performing as recorded, financially and operationally. While the underlying audit approach is broadly similar across industries, manufacturing companies face specific additional procedures around inventory, cost testing, and reserve valuation that businesses in other sectors don’t need to worry about in the same way. Understanding inventory observation, price testing, and control testing in advance helps a manufacturing business genuinely prepare for its audit rather than scramble once it begins.

This guide covers how businesses manage accounting and finances in manufacturing, the internal audit procedure step by step, how inventory valuation connects to UAE Corporate Tax, and common findings auditors flag.

How Manufacturing Businesses Manage Accounting and Finances

• Tracking income and expenses tied to production
• Preparing statements of account for suppliers
• Assisting with salary processing and maintaining payroll files
• Reconciling and extracting monthly expense reports
• Making price-fixing recommendations based on actual incurred costs
• Using a perpetual inventory system to reduce overstock and production bottlenecks
• Implementing internal control procedures to prevent fraud and other errors

Also check: Internal Audit Services

Procedure for Internal Audit of a Manufacturing Company

1. Inventory Observation

Observing inventory counting procedures is a standard first-stage audit step, with independent checks conducted directly by the auditor to counter accounting fraud that can arise from falsified inventory records.

Auditors typically use two distinct testing directions, each addressing a different risk:

• Floor-to-sheet testing. Selecting physical items from the warehouse floor and verifying they’re properly included in the inventory records. This tests completeness, confirming nothing physically on hand is missing from the books.
• Sheet-to-floor testing. Selecting items from the inventory records and verifying they physically exist in the warehouse. This tests existence, confirming nothing recorded on the books is actually missing or fictitious.

Both directions matter and catch different risks, floor-to-sheet alone wouldn’t catch inventory recorded on the books that was never actually there, while sheet-to-floor alone wouldn’t catch physical stock that was never properly recorded.

2. Price Testing

Once inventory quantity is confirmed, auditors test inventory cost. Inventory is presented in financial statements at either market price or the lowest cost under applicable accounting standards, and the auditor verifies the cost of materials, overhead, and labor. Price testing typically involves selecting items from inventory and confirming costs are accurately recorded, reviewing original documentation such as time cards and invoices to support the figures.

Must check: Inventory Audit Services

3. Reserve Inventory Testing

Manufacturers often hold inventory at risk of becoming obsolete or perishable, food manufacturers with perishable stock are particularly exposed. Inventory reserve testing confirms the inventory’s market value isn’t overstated relative to the price tested. Auditors also evaluate obsolescence risk during internal controls testing, and any spoilage or unused stock spotted during inventory observation can prompt more aggressive reserve testing.

4. Analyzing the Results

After extensive quantity and price testing, the auditor analyzes the results to identify anomalies in the financial statements or losses the company may have suffered. Once analysis is complete, the auditor submits a report to management, including recommendations to improve the company’s financial management going forward.

How Inventory Valuation Affects UAE Corporate Tax

For manufacturing companies specifically, inventory valuation isn’t just a balance sheet matter. Since UAE Corporate Tax taxable income is derived from IFRS-based accounting profit, adjustments identified during price testing or reserve testing, a write-down for obsolete stock, or a correction to how overhead is allocated into inventory cost, directly affect the taxable profit reported for the period, not just the inventory figure itself. Manufacturers that undergo mandatory audit under Ministerial Decision No. 84 of 2025, as a Qualifying Free Zone Person, part of a Tax Group, or above AED 50,000,000 in revenue, should treat inventory audit findings as having direct Corporate Tax consequences, not purely an internal accounting exercise.

Common Audit Findings in Manufacturing Companies

• Overhead allocation applied inconsistently between periods. Changing how overhead is allocated into inventory cost without a documented reason distorts both valuation and reported profit.
• Reserve for obsolete or perishable inventory not reviewed regularly. A common finding where reserve assessments haven’t kept pace with actual spoilage or obsolescence risk.
• Price testing revealing cost recorded from outdated supplier invoices. Cost figures not refreshed against current supplier pricing can misstate inventory value.
• Weak segregation between inventory counting and inventory record-keeping. Where the same personnel handle both physical counts and the books, the risk of undetected discrepancies increases.

Simplifying the Audit Process for Manufacturing Companies

Large investment and operating costs make audits a consistent challenge in manufacturing. Inventory costs, perishability, and general operational complexity all add to the difficulty of the audit process, and this complexity only grows as the business scales. Companies need to address these factors head-on to stay compliant with applicable accounting standards, and engaging an experienced audit firm early, before problems compound, is consistently the more effective approach than treating audit preparation as a last-minute task.

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Farahat & Co., a trusted Auditors in UAE firm, provides internal and external audit services for manufacturing companies, including inventory testing, reserve assessment, and Corporate Tax-aligned reporting.

Contact Farahat & Co. today to discuss your manufacturing company audit requirements.