AUDIT OF SUGAR INDUSTRY

Definition

Sugar is produced from harvested sugar cane or sugar beets and processed by a sugar mill.
The milling process extracts juice from the beets and cane with grinding pressure. Extracted sugar
proceeds through a purification process that removes impurities. Sugar is further refined to
different granule grades and bleached with limestone as appropriate. Beet pulp can be sold for a
filler in cattle feed and cane pulp can be burned as a biomass fuel.

Audit Procedures

General Audit Procedures

Audits of sugar mills test for quality standards, accuracy and regulatory compliance:
 Verify that farm sources of sugar cane are supplying the contracted amounts of sugar cane.
Confirm accounting invoices that reflect that the mill is paying the contracted rate for the
sugar cane.
 Check equipment functioning capacity. Validate equipment maintenance records. Ensure
that cold digesters, boilers, distillers and other equipment meet local ordinances and state
regulations for what is acceptable and what is required in manufacturing sugar.
 Interview a sample of random employees to verify that employees are similarly trained in
company quality control measures. Ask about any safety incidents that have occurred over
the previous year. Verify whether these incidents have been documented on an Occupational
Safety and Health Administration (OSHA) accident incident report.
 Confirm the types of sugar that the mill produces. Brown sugar, turbinado, "raw" sugar and
white table sugar are prepared by different methods. Evaluate the methods for producing the
different sugar products manufactured by the mill. Compare these methods to industry
standards. Brown sugar, for example, is made by leaving some amount of molasses in the sugar
when it goes through the centrifuge. Turbinado is steamed rather than boiled to reduce
impurities. So called "raw" sugar is sugar that has not been bleached or refined to a fine grain.
 Estimate whether the quality of the products produced meets the company's documented
quality standards for the number of impurities that pass through the final quality inspection.
 Identify the packaging for each type of sugar. Measure the labeling on consumer retail
packaging against the Federal Drug Administration requirements for labeling and nutrition.

Specific Audit Procedures

 Verify cost of sugarcane procured

 Verify receipts and issues of process materials such as lime, Sulphur, super – phosphate,
caustic soda, filter cloth and other chemicals.
 Compare wastage, spoilage, rejections of quantity and cost of sugarcane and other raw materials
with previous year and inquire into unusual fluctuations.
 Verify production and sales of byproduct.
 Specific Audit Procedures – Verifying Specified Components

 Cost of Mixed Juice with supporting  Cost of Production of Massecuite

documents (a) Raw materials
(a) Raw material/process materials – Cost of clarified juice as above
Sugar cane – Process material
Gur (b) Direct salaries
Water (c) Consumables
(b) Direct salaries, wages and benefits (d) Repairs and maintenance
(c) Consumable stores (e) Utilities
(d) Repairs and maintenance (f) Steam
(e) Insurance (g) Insurance
(f) Steam (h) Depreciation
(g) Depreciation (i) Other factory overheads
(h) Other factory overheads • Add work in process opening
Less realizable value of baggage • Less work in process closing
Total cost of mixed juice produced • Total cost of Massecuite transferred

 Where a company cultivates sugarcane on

 Cost of White-Bagged Sugar Produced
its own farm, verify profit / loss on own
(a) Raw materials
production of sugarcane. Obtain
– Cost of Massecuite
documentary evidence for
– Process materials
(a) Seeds, fertilizers, herbicides
(b) Direct salaries and wages
(b) Insecticides
(c) Consumables
(c) Abiana / Water charges
(d) Repairs and maintenance
(d) Land preparation
(e) Utilities
(e) Plantation
(f) Steam
(f) Operation of tractors
(g) Insurance
(g) Harvesting
(h) Depreciation
(h) Utilities
(i) Other factory overheads
(i) Insurance
Total cost
(j) Depreciation
Less realizable value of molasses
(k) Rent of equipment
Total cost of white sugar
(1) Other cost
Add work in process opening
Total cost of own production
Less work in process closing
Sales value at controlled price
Cost of white sugar
Profit / Loss on own production
Add packing materials
Total cost of White Bagged Sugar
Ensure that company has maintained
Excise duty on quantity produced
proper books and records as required by
Less excise duty paid
Sugar Industry (Cost accounting records)
Excise duty payable on finished goods
Order, 1995
 Cost of Production of Clarified Juice  Cost of Sugarcane Crushed
(a) Raw materials (a) Total sugarcane purchased at
Cost of mixed juice as above Government fixed price
– Lime (b) Sugarcane produced from own farms
– Filter (c) Commission
(b) Direct Salaries (d) Quality premium
(c) Consumables (e) Loading/unloading charges
(d) Repairs and maintenance (f) Cane development expenses
(e) Utilities (g) Can cess / purchase tax
(f) Steam (h) Road cess
(g) Insurance (i) Octroi
(h) Depreciation (j) Transport charges
(i) Other factory overheads (k) Salaries and wages
Total cost (1) Repairs and maintenance 
Less realizable value of press mud (2) Others
Total cost of clarified juice produced Total cost of sugarcane

Key Process Audits – Risks and Implications

Cane Survey Process

Risk Implication
Incomplete Cane Survey. Certain fields need to be
Grower dissatisfaction/cane not
captured during the cane survey. Surveyor might not be
procured.
capturing some of the fields
Incorrect information captured in survey Grower dissatisfaction
Unauthorized changes in the survey data: Once survey Statutory Non- compliance/Favorable
is done; it is signed off by surveyor and government who treatment given to representative some
is part of the survey. Hence, any changes to the survey to growers may needs upset other
be duly authorized. growers
Non-adherence to timelines Fine by state government
Data entry errors: Survey data is fed into software and Grower dissatisfaction/cane not
there are chances of manual errors in feeding the data. procured.
Unauthorized addition/ deletion of growers from the Favorable treatment given to some
records growers may upset other growers.
Non-recovery of loans/Incorrect
Duplicate grower codes existing in the data
planning for procurement
Unauthorized/Incorrect bonding being done with
growers: Bonding for supply of cane is done with each
farmer as directed by cooperative / cane societies. To Statutory Non- compliance
favor a grower there is risk of changing the data in
software without proper authorization.
 Cane Procurement
Risk Implication
Cane being purchased from unauthorized/fictitious
Statutory Non- compliance
growers
Incorrect recording of purchase. Incorrect payments
Lower variety being purchased as higher variety Excess payments
Excess loss being shown as driage while transporting Reduction in recovery/Excess
cane from out- centers to mill payments
Grower dissatisfaction/Fine by state
Biased distribution of supply tickets
government
Clerks at out-centers doing incorrect weighment Statutory Non- compliance
Supply on fictitious supply tickets Fraud/Incorrect payments
Payment done to growers without adjusting for loans Financial Loss
Delays in transfer of cane from out- centers to mill Reduction in recovery due to excess
due to lack of logistics planning driage

Improper planning in distribution of supply ticket Loss in recovery/ increased cost of

leading to excess/shortage of cane on various days. production

Sales Processes
Risk Implication
Sales expenses incurred are in excess of budget Budget overrun
Financial loss if payments are
Unauthorized orders/transactions are executed
not received
Units are unaware of the orders they are required to deliver Delays in dispatch
Loss due to non-payment by customers/ bad debt Financial loss
Delay in processing of orders - late delivery penalty Financial loss
Duplication of processing of orders – lack of controlling on
Financial loss
processing dispatch
Delay in processing of invoice incompleteness of recording Bad debts/delay in payments.
Transactions are not recorded in an appropriate period Statutory Non- compliance
Incorrect processing of discount transactions Loss of discount
Incomplete/incorrect processing of accounts Financial Loss
Incorrect bank accounts disclosure Statutory Non- compliance
Incorrect provisioning of doubtful debts Statutory Non- compliance
Incorrect/ unauthorized write off of accounts Financial loss
Customer complaints feedback/ resolution not present Customer dissatisfaction
Internal Controls
 Cane Survey or Pre-procurement Process

 Whether a detailed listing has been prepared for all the villages to be surveyed
 Is all relevant information being captured in the survey?
 Are all changes in the survey register duly authorized?
 What are the controls to deal with data entry errors? A sample checking should be done for
effectiveness of these controls
 Whether audit log is being maintained for all the changes in data fed into IT System
 Are all the timelines specified by the government being adhered to?
 Whether proper verification process exists, before adding/deleting any grower code to database.
 Whether relevant documents are being obtained from grower before addition?
 Whether any check is being done to identify duplicate grower codes in the data?
 Has the bonding been done as per the directions from the government?

Sugarcane Procurement Process

 Has the sugarcane been purchased from growers not listed in growers list?
 Have some large payments been made to certain growers or family members of same growers?
 Do multiple growers have same bank account details?
 Check for records of calibration of weighing bridges.
 Check for serial numbering of purchase receipt at the out-centers.
 Check for the cancellation process of any wrong receipt, or if any receipt has been left blank.
 Check whether the tickets on which supply has been made have been issued by mill or society.
 Check if cane has been purchased in excess quantity than that mentioned on supply ticket, beyond
tolerable limit.
 Check for the process of verification of cane variety on receipt of the same at mill gate or out-
center.
 Reconcile purchase records of the out-center with receipt at the mill gate. Check if proper root
causing has been done for any major variations.
 Check for time lag between purchases of cane at out-centers and receipts at mill-gate to see it is
not too high.
 Check if root causing has been done for failure rate in supply tickets if it is beyond certain
threshold.
 Reconcile payments made with supplies.
 Check if payments had been made to growers without adjusting for loans.
 Check for any large payments made in cash and analyze the reasons for the same. •
 Verify transporter contracts and payments.

Manufacturing Process

 Actual to budgeted comparison for various efficient norms set by the management. Some key
parameters to look at are:
 Power/steam consumption per quintal of cane crushed.
 Recovery ratio.
 Sugar losses in bagasse and molasses.
 Fuel consumption per unit of electricity generated (Power Plant).
 Steam generated per quintal of fuel consumed (Power Plant).
 Percentage of make-up water (Power Plant).
 Steam/power consumption in Distillery
 Statutory compliances with respect to operation of machineries like, boiler, vacuum pans, etc. and
other clearances from the government.
 Environment, Health and Safety standards are adhered to in day-to-day functioning, running of
ETP plant, disposal of boiler ash, flue gas and spent wash.
 Log books are being filled properly and are also capturing deviations
 Recording of overtime by the workers.
 Recording of finished goods is as per excise rules.
 Control over gunny bags movement.
 Segregation of duties between production and quality
 Root cause analysis for any break downs.
 Trend analysis with previous year results.
 Planning with regards to off-season and season maintenance schedule
 Cost/budget of maintenance (year to year comparison).
 Whether annual maintenance contracts have been entered for key machineries
 In case of power plant and distillery are separate entities, whether bagasse, sugar and molasses
have been transferred at arm's length principle?
 Whether overheads have been allocated properly while accounting for cost of manufacturing?

Sales and Marketing Process

 Check for budgeting the expenses for sales.

 Check if all the expenses are duly processed, accounted and approved as per DOA
 Check if all expenses including the ones which are in excess of budget, are duly approved as per
DOA.
 Check for sample of transactions that proper DOA has been followed in the sales contract.
 Check for the debit on agents for bad debts.
 Check for management's approval process for processing non- standard terms and
conditions/orders.
 Check that data is processed with supporting documents.
 Review of process of intimating orders details to units on time
 Review of process application controls related to order processing. Review list of order processed
on a sample basis with the approval document for authorization and compare the same with credit
limit terms of customers.
 Check process of transfer of order entry data details for shipping/material dispatching department
and to the invoicing department Compare all the information for completeness and correctness
and do 3-way match.
 Check appropriate approvals for all order modifications.
 Review the segregation of duties to avoid chances of overriding activities/controls
 Review the process of dispatch orders and the process of controlling by issuing dispatch order
numbers, etc.
 Review the process of material dispatched and the scheduled time to process invoice for the same
 Review the cash/bank receipts transactions for recording in appropriate period. Check for delay in
recording the transaction
 Review the process of recording cash/bank collection in books and the control of review to avoid
any recording or processing error.
 Ensure that the collections are accounted for in the correct customer account.
 Review the process of cheque collection and timely processing the same for collection
 Review the process of discount to customers. Review on a sample basis the discount given along
with details of approval and correctness for the same.
 Ensure that the discounts are accounted in the correct customer accounts
 Check that the credit notes are issued for appropriate reasons.
 Check the process of reviewing the accounts receivable details. Review aging of accounts
receivable and the action taken for collection of the same
 Review the process of reconciling Subsidiary Ledger. General Ledger (SL.GL) reconciliation on a
periodic basis. Compare the same with standard policy. Check on a sample basis reconciliation
for the same.
 Review bank accounts reconciliations. Ask for bank account as per books of accounts and the
bank statement. Verify the bank balances from banks and check for pending unresolved/ unclear
transactions
 Review the standard policy of provisioning of doubtful debts and the actual provision made.
Compare the same with standard policy. Also check the authorization approval for the same.
 Review the standard policy of account's write-off. Compare the actual write off details with the
standard policy and also check the authorization approval for the same as per DOA.
 Check for existence of process for resolution of customer's complaints
 Questions

1. In a sugar industry, large amount of data is involved. Typically, a factory might be dealing with close
to 50,000 to 1 lakh growers, and so it becomes essential to deploy what resources to facilitate the
process?
a. IT Resources
b. Processing Resources
c. Internal Control Resources
d. Database Resources

Most sugar industries have multiple units thus, the use of IT resources such as ERP manages
the processes across various unit. The overall objective and scope of an internal audit does not
change in an IT environment however, the use of computer changes the processing, storage,
retrieval, and communication of information and interplay of processes, systems, and control
procedures that would affect the internal control employed by the entity.

2. All of the following are the periods in which specific process is to be covered and planned in the
engagement letter, except?
a. Cane Development
b. Cane Procurement
c. Merchandising
d. Off Season maintenance

Sugar Industry is seasonal in nature with calendar of activities spread throughout the year
therefore, engagement letter should clearly state the scope that will be covered, along with quarters/
period when audit is to be conducted specifically, the period in which specific process is to be
covered and must be accordingly be planned. Suitable period for covering key areas is Cane
development, cane procurement, manufacturing during the crushing season, off season maintenance
just after the crushing season, and sales throughout the year.

3. Fine by state government will be mandated in what key risk in the cane survey process?
a. Duplicate grower codes existing in the data
b. Incorrect bonding being done with growers
c. Unauthorized changes in the survey data
d. Non- adherence to timelines

Duplicate grower codes existing in the data implies incorrect planning for procurement while
incorrect bonding being done with growers and unauthorized changes in the survey data implies
Statutory Non- Compliance/ favorable treatment given to some growers. Only non-adherence to
timeliness is fined by the state government in the cane survey process.
4. What risk constitutes to fraud or incorrect payments?
a. Clerk at out centers doing incorrect weighment
b. Biased distribution of supply tickets
c. Supply of fictitious supply tickets
d. Payments being done without adjusting for loans

Supply of fictitious supply tickets is a risk that constitutes to fraud or incorrect payments. On
the other hand, clerk at out centers doing incorrect weighment may result to statutory no-
compliance, biased distribution of supply tickets may imply fine by state government and payments
being done without adjusting for loans may lead to incurrence of financial loss.

5. Internal auditor needs to ensure that the following controls are operating effectively in cane
procurement process, except?
a. Verify transporter contracts and payments
b. Check for records of calibration of weighing bridges
c. Checking whether audit log is being maintained for all the changes in data fed into the IT
System
d. Reconcile payments made with supplies

Verifying transporter contracts and payments, checking for records of calibration of weighing
bridges, and reconciling payments made with supplies are all controls to be audited by the internal
auditor to ensure effective operations in cane procurement process. Checking whether audit log is
being maintained for all the changes in data fed into the IT System is included in the cane survey/
pre-procurement process.
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