Pharma Manufacturing Audit: Batch Costing, Stock and GMP Checks

A pharma manufacturing audit checks that product cost is built correctly batch by batch, that stock reflects what is saleable and not expired, that returns and trade schemes are recorded in the right year, and that licences and quality systems are in place. A single quality failure can stop a plant, so compliance sits next to the numbers.

Last reviewed: 17 October 2026. Facts checked. We ran a web search on revised Schedule M. It returned news and trade pages, one of which looked like a third-party tracker. These said the revised Good Manufacturing Practice norms were notified in January 2024 and that the extended deadline for smaller manufacturers ended on 31 December 2025. We read the search summaries and did not open the Gazette, the Drugs Rules or any CDSCO page. Treat the dates as indicative and confirm them with the current rules and your state drug controller. We did not check any pricing control order or other product-specific rules, and we give no price caps.

What is distinctive about pharma manufacturing

• Production is by batch. Each batch has raw materials, packing materials, yield and a batch record.
• Materials have shelf life. Expired and near-expiry stock is a constant issue.
• Quality control and quality assurance hold or release batches. Rejections and reprocessing change cost.
• Sales go through stockists and distributors with schemes, free goods and returns.
• Some contract manufacturing is done for others, or the company outsources some of its own.
• Plants run under licences from the state and central drug authorities, and may be inspected.
• Prices of some products may be controlled. Check current orders for the products concerned.

Key risks

1. Costing errors. Wrong yields, standard costs not updated, or overheads loaded to the wrong batch.
2. Stock existence and condition. Expired, quarantined, rejected or damaged stock carried at full cost.
3. Returns and expiry claims. Returns not provided for until credit notes are issued after year end.
4. Trade schemes. Free goods, discounts and incentives recorded late or not at all.
5. Licence and GMP lapses. Operating outside licence terms, with potential closure.
6. Data integrity. Altered batch records or test results.
7. Cut-off at year end. Dispatches to stockists recorded before the goods left or before control passed.

Audit programme in steps

Step 1: Understand products, plants and licences

List each plant, its licence, the product categories it makes and validity dates. Note own manufacturing, loan licensing and contract work. Obtain the latest inspection reports and any observations or notices.

Step 2: Test the bill of materials and standard costs

For a sample of products, compare the standard bill of materials to the approved formula. Check material rates against recent purchase invoices. Look at when standards were last updated.

Step 3: Test batch costing

Choose a sample of batches across products. For each, compare issued quantities of raw and packing material to the batch record, check output and yield against the standard, and recompute cost per unit. Large yield losses, unexplained rework or repeated rejection of the same product deserve separate review. Check conversion cost allocation and capacity assumptions.

Step 4: Observe stock and test expiry

Attend the count and use the stock count procedures. In addition:

• Segregate quarantine, released, rejected and expired stock and confirm each is shown at the right value.
• Compare the expiry report to the stock ledger. Items past expiry should be written off or provided for.
• Test slow-moving items, especially short-shelf-life products near the end of their life.
• Check stock held with third parties or depots through confirmations.

See the inventory audit checklist for general tests.

Step 5: Test sales, schemes and returns

Trace dispatches to invoices and to proof of delivery. Test the cut-off for the last week of the year. Compare scheme terms to credit notes and free goods issued. Read credit notes issued after year end for returns related to the year under audit. The order-to-cash checklist gives the revenue tests. Review stockist receivables ageing and disputes.

Step 6: Test purchase and supplier controls

Check that active pharmaceutical ingredients and critical materials come from approved suppliers with quality documents. Test price approvals, goods received notes and payables. See the procure-to-pay checklist and the MSME payables guide, since many suppliers are small units.

Step 7: Review quality, GMP and data integrity

You are not a quality inspector, but you can test whether the system records exist. Check that batch release has an authorised signature, deviations and out-of-specification results have a closure trail, and stability studies are current. Confirm that the plant is upgraded or in a documented plan to meet the revised GMP norms that apply to it. Look for edited records, missing audit trails on lab systems and backdated entries.

Step 8: Review fixed assets and validation

Check that new equipment, cleanrooms and utilities are capitalised and depreciated, and that validation and qualification costs are treated correctly. Use the fixed assets checklist.

Step 9: Review regulatory and tax compliance

Check licence renewals, pollution consent, factory licence and drug-related filings. Review GST on sales and input credit on purchases, and customs for imported materials. Confirm current rates from notifications because we did not.

Step 10: Review provisions and contingencies

Look at product complaints, recalls and notices from authorities. Estimate any provision for returns and expiry. Check disclosures about notices that could stop production.

Common findings

• Standard costs stale for a year or more.
• Expired or rejected stock still at cost.
• Year-end dispatches recorded before the goods left.
• Returns provision missing or based on a guess.
• Scheme credits booked after year end with no accrual.
• Licences expired or products made outside the licence category.
• Batch record changes without a proper audit trail.

Which Indian laws to check

Name only. Verify current text:

• The Drugs and Cosmetics Act, 1940 and the Drugs Rules, including the Good Manufacturing Practice schedule as revised.
• The Drugs (Prices Control) Order, where the product is under price control.
• The Companies Act, 2013, CARO and the cost records rules if applicable to the company.
• GST law and the Income-tax Act.
• The Factories Act and pollution control laws for the plant.
• The Legal Metrology and labelling rules that apply to packaged goods.

FAQs

Does the auditor review GMP compliance?

Not as an inspector. The auditor considers whether non-compliance affects the financial statements, through provisions, stock value or going concern.

Why is the expiry report so important?

Stock past expiry has no sale value and may need disposal.

What is a common cut-off trap?

Invoices raised to stockists before the dispatch is complete.

Related Articles

• Stock count procedures: step-by-step guide
• Order-to-cash internal audit checklist
• Inventory internal audit checklist
• MSME payables audit

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