Kế toán, kiểm toán - Chapter 09: Production cycle

Auditing & Assurance Services, 6eChapter 09Production Cycle“There is one rule for industrialists and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.”—Henry Ford9-*Learning ObjectivesDescribe the production cycle, including typical source documents and controls.Give examples of tests of controls for auditing the controls over conversion of materials and labor in a production process.Identify and describe considerations involved in the observation of physical inventory and tests of inventory pricing and compilation.Describe some common errors and frauds in the accounting for production costs and related cost of goods sold, and design some audit and design some audit and investigation procedures for detecting these errors and frauds.9-*Inherent Risks in Production CycleComplexity (e.g. dollar value LIFO)Susceptibility to theftMovement of inventoryLower-of-Cost-or-Market valuationEffects on gross profits9-*Typical ActivitiesPlanningProduction planProductionBill of materialsRequisitionsCost AccountingStandard costsOverhead allocation9-*Production Cycle: Control ConsiderationsProduction runs are authorized.Raw Materials should be counted, and inspectedAs production is undertaken, materials and labor quantities should be summarized.All inventory items should be accounted forUsed in productionScrapReturned to inventory9-*Production Cycle: Control ConsiderationsUse of TRANSFER ticketsCount/inspect the items and compare quantitiesThe cost accounting department reviewsQuantity of raw materials to materials requisitionQuantity of direct labor to time sheets and labor distribution reportCost accounting applies overhead costs to production using OVERHEAD TICKETSCost summary9-*Production Cycle: Control ProceduresPhysical ControlsProduction Order and Materials Requisition.Physical inventories reconciled to perpetual inventory records.Restrict access to inventoriesTransfer TicketsSeparation of DutiesAuthorizationRecordingCustodyReconciliationPerformance ReviewsScrap reportsVariance analysis9-*Management ReportsSales ForecastsInventory reportsItems on handOpen purchase ordersProduction plans and reports9-*Test of ControlsObserve separation of dutiesVouch costs to labor and material reportsTime ticketsReceiving reportsTransfer ticketsCheck proper authorizationsExamine review of cost reports9-*Substantive ProceduresObservation of inventory countTests of pricing and compilationAnalytical proceduresExcessive inventorySlow moving inventory9-*Physical Inventory ObservationAuditors are required to make, or observe, some physical counts of the inventory and apply appropriate tests of intervening transactions.Usually make test counts at a time other than year-end. test roll-forward or roll-back9-*Physical Inventory ObservationReview client instructionsStop flow of goodsMake TEST COUNTSFrom INVENTORY LISTINGFrom WAREHOUSE FLOORRecord some counts in working papers9-*Client Count InstructionsNames or team number and datesInstructions for descriptions and countsNoting obsolete or damaged itemsTag control—compilation of countsShutting down productionControlling inventory movement including shipping and receivingSupervisory approvalMaking changes and corrections9-*Physical Inventory ObservationListen to instructions provided to count teamsUnderstand the use of control tags, count sheets, scanners, or RFID Be wary of "hollow squares" and "empty boxes”Tour shipping and receiving areasWatch for OBSOLETE and SLOW-MOVING inventory CONFIRM inventory on CONSIGNMENT and at other locationsConsider the use of SPECIALISTSConfirm inventory in transit.9-*Pricing and Compilation TestsValuation (Price Tests) VENDOR INVOICESCOST FLOW ASSUMPTION (FIFO, LIFO, average, specific identification)LOWER OF COST OR MARKET for inventory Check Extensions and Footings. Agree to G/L9-*Purchase CutoffsVerify CUT-OFFs for purchases and salesExamine Receiving Reports and Vendor Sales Invoices occurring around year-end.Examine bills of lading and sales invoicesAgree to inclusion/exclusion from inventory9-*Analytic ProceduresVerify REASONABLENESS of COGSGross Profit MarginCompare to prior year, competitors, or industry averagesVerify REASONABLENESS of ending inventoryDays Sales in Inventory Inventory Turnover9-*Fraud Red FlagsUncontrolled access to inventoryMany high-dollar items with market value (i.e. salable on eBay?)Unexspected counts during inventoryLarge differences between counts and inventory records.Inventory shows signs of damage, obsolescence or excess quantities.Unusual interplant transfers during physical inventory or at year-end.Reluctance of client to move merchandise to allow inspection of additional items located behind.9-*