Question

Discuss the differences between auditing a service company and a manufacturing company. What adjustments would your peers have to make to their audit planning if they were to audit a service company? 

Answer 1

Auditing is the reassurance of the financial statements on its correctness, accuracy and physical presence as on the particular date. Auditing involves an independent evaluation process.

The difference between service and manufactuing is the quality of output. Here are the differences

1. Service company output is intangible and manufacturing output is tangible in terms of output. Hence it is very critical to audit the service level agreement with customers for the quality of service output and income recognized. In case of manufacturing, the auditing of the physical manfacturing process and output products can be audited for physical stock take
2. Auditing of the physical location of the manufacturing process is possible however the audit of timesheets and confirmation of acceptance of service is required to be audited for service company
3. Inventory levels can be checked for the manufacturing company however there is no inventory in service company. This will purely have to be confirmation of customer acceptance of service
4. Service income recognisition can be audited with collectin from customer of confirmation of balances from customer however manufacturing company produce with regard to anticipation of demand and no customer related order possible for audit

With regard to audit planning of the service company, the following to be taken care:

1. Understanding the service business industry for which audit is solicited
2. Preparing of audit work paper with evaluation of industry risk, mitigation of risk factors, competition strategies, etc
3. Evaluation of the time sheets in case of information technology firms and acceptance of the timesheets by the clients and linking the same to the recognision of revenue
4. Proper study of the SLAs with the customers and whether client has made enough provision of the deferral of income for the last mile transaction
5. Whether client has provided for the escalation of the service obligation and also for the warranty claims obligations
6. Contingent liability provision for the improper service delivery provision, etc