Expert verified India’s textile and garment sector is one of the largest in the world, contributing significantly to employment, exports, and GDP.
However, it also operates in a highly competitive and compliance-intensive environment. From raw material procurement to garment exports, the industry is exposed to operational risks, regulatory compliance, quality issues, and labour law obligations.
An internal audit in textile and garment companies plays a crucial role in ensuring operational efficiency, cost control, quality assurance, and legal compliance.
This guide outlines the internal audit methodology tailored to the unique characteristics of this sector.
Objectives of Internal Audit in Textile & Garment Industry
| Objective | Explanation |
| Cost Optimization | Evaluate material utilization, wastage, and overhead control |
| Process Efficiency | Review production planning, dyeing, finishing, and dispatch timelines |
| Compliance Monitoring | Labour law, pollution control, GST, and export regulations |
| Inventory and Procurement Control | Prevent pilferage and ensure accurate stock valuation |
| Quality and Customer Assurance | Track rework, returns, and inspection compliance |
Key Processes Audited in Textile & Garment Companies
a. Raw Material Procurement Audit
- Vendor registration and approval process
- Cost comparisons and tender procedures
- Quality inspection reports (e.g., cotton grade, GSM of fabric)
- Review of inward material register and stockroom records
b. Inventory Management Audit
- Stock verification of yarn, dyes, chemicals, and finished goods
- FIFO (First In, First Out) and expiry checks for dyes/chemicals
- Scrap and waste utilization tracking
- Reconciliation of physical stock with ERP records
c. Production Process Audit
- Audit of weaving, dyeing, printing, stitching, and finishing stages
- Machine efficiency, downtime analysis
- Labour productivity tracking
- Quality inspection and rejection analysis at each stage
d. Costing and Budget Audit
- Verification of product costing sheets
- Variance analysis: actual vs standard cost
- Analysis of overhead absorption (power, steam, water, etc.)
- Identification of cost leakages (e.g., excess rework, idle labour)
Labour Compliance & Payroll Audit
| Component | Audit Focus |
| Attendance & Leave Records | Check for accurate time recording and leave encashment |
| Minimum Wages Act Compliance | Ensure wages paid are as per law and industry benchmarks |
| Provident Fund & ESI Deductions | Verify statutory compliance and remittance |
| Bonus, Gratuity, Incentives | Audit accruals, eligibility, and documentation |
| Labour Contractor Verification | Review of agreements and payment tracking |
Environmental & Factory Compliance Audit
Textile and garment units often fall under the radar of pollution control boards and local authorities.
| Area of Audit | Requirement |
| Pollution Control Certification | Consent to Operate, Consent to Establish, and renewal tracking |
| Effluent Treatment Plants (ETP) | Logs for effluent discharge and treatment |
| Chemical Safety Compliance | MSDS (Material Safety Data Sheets), chemical storage, and labeling |
| Fire & Safety Audit | Fire exits, equipment servicing, employee training |
GST, Exports & Incentive Scheme Compliance
a. GST Audit
- Input Tax Credit reconciliation (GSTR-2B vs books)
- Job work documentation (ITC 04 compliance)
- Reverse charge mechanism applicability
- LUT filing and export without payment of IGST
b. Export Incentive Audit
- Duty Drawback, RoDTEP, EPCG scheme compliance
- Review of shipping bills, invoices, and BRCs (Bank Realization Certificates)
- Matching of export turnover with GST and financial statements
ERP and Digital Controls
Most mid-to-large textile companies use ERPs like SAP, Tally, or Textura for production and accounting.
| ERP Area | Internal Audit Utility |
| Production Planning Module | Compare planned vs actual batch outputs |
| Inventory Module | Stock movement tracking and valuation audits |
| Procurement Module | PO authorizations, GRN controls, and price consistency |
| Payroll Module | Verification of pay slips, deductions, and statutory filing |
| Compliance Alerts | Real-time alerts on due dates and deviations |
Case Study: Audit Findings in a Garment Export House
Company Profile: ₹120 crore turnover, exporting to Europe and Middle East
Audit Objectives: Operational efficiency and tax compliance
Findings:
- Delay of 7–10 days in stitching due to machine downtime
- ₹8 lakh excess electricity cost due to night shifts with low output
- LUT not renewed, leading to payment of IGST on exports
- PF deductions made but not deposited for 2 months
Recommendations:
- Introduce preventive maintenance schedule for stitching machines
- Monitor shift-wise output and optimize shift planning
- Automate LUT reminders in ERP system
- Immediate catch-up of PF liabilities with intimation to PF office
Risk Areas in Textile and Garment Audits
| Risk Category | Examples |
| Material Handling Risk | Pilferage of fabric rolls, poor bin tracking |
| Tax Compliance Risk | Missed filing of job-work returns, GST mismatch |
| Labour Law Risk | Underpayment or non-enrollment of workers in ESI |
| Quality Control Risk | High rate of returns due to weak in-process inspection |
| Production Delay Risk | Inadequate raw material planning or subcontractor dependency |
Best Practices for Internal Audits in Textile Sector
- Define a yearly audit calendar covering all functional areas
- Maintain cycle counts and surprise inventory checks
- Prepare and monitor cost per unit benchmarks
- Train internal teams on documentation and traceability
- Use data analytics to identify consumption anomalies
- Align audit practices with ISO 9001 and SA 8000 standards
Internal auditing in the Indian textile and garment industry is essential for managing tight margins, complex processes, and strict compliance requirements.
It ensures that companies maintain profitability, meet export standards, and avoid penalties or rejections.
A well-designed internal audit framework supports better decision-making, improves product quality, reduces losses, and builds long-term resilience in this competitive sector.
