The document discusses auditing the production cycle and inventories. It defines the production cycle as the time from when raw materials enter production to finished goods. It provides an example production cycle flow chart showing the procedures and documentation from requesting raw materials through issuing finished goods. It outlines objectives of inventory control, assertions that can be tested, and examples of tests of control and substantive procedures an auditor would perform related to inventory existence, rights and obligations, completeness, cut-off, accuracy, valuation and allocation, and classification and presentation.
The document discusses auditing the production cycle and inventories. It defines the production cycle as the time from when raw materials enter production to finished goods. It provides an example production cycle flow chart showing the procedures and documentation from requesting raw materials through issuing finished goods. It outlines objectives of inventory control, assertions that can be tested, and examples of tests of control and substantive procedures an auditor would perform related to inventory existence, rights and obligations, completeness, cut-off, accuracy, valuation and allocation, and classification and presentation.
The document discusses auditing the production cycle and inventories. It defines the production cycle as the time from when raw materials enter production to finished goods. It provides an example production cycle flow chart showing the procedures and documentation from requesting raw materials through issuing finished goods. It outlines objectives of inventory control, assertions that can be tested, and examples of tests of control and substantive procedures an auditor would perform related to inventory existence, rights and obligations, completeness, cut-off, accuracy, valuation and allocation, and classification and presentation.
The document discusses auditing the production cycle and inventories. It defines the production cycle as the time from when raw materials enter production to finished goods. It provides an example production cycle flow chart showing the procedures and documentation from requesting raw materials through issuing finished goods. It outlines objectives of inventory control, assertions that can be tested, and examples of tests of control and substantive procedures an auditor would perform related to inventory existence, rights and obligations, completeness, cut-off, accuracy, valuation and allocation, and classification and presentation.
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AUDITING THE PRODUCTION CYCLE( Inventories)
1. What is production cycle?
- The time during which stocks (raw materials, materials, semi-finished and finished parts) remain in the production process, from the start of processing to the finished product, is known as the production cycle. It consists of processing and pausing phases and represents a part of the production time. https://logistikknowhow.com/en/supply-chain-management-en/the- production-cycle/ - Physical flow of goods and the costs associated with these goods at different stages of processing a product, ie to the purchase requisitions for inventory and the subsequent payment of creditors who have supplied the inventory. Textbook pages 403 (15.1) 2. Example of production cycle - 2.1 Procedures flow in inventory cycle (a) Requisition and ordering of goods or raw materials (b) Receipts of goods or raw materials (c) Recording receipts and issues of goods or raw materials (d) Issuing of raw materials/finished goods from inventory (e) Storekeeping procedures of raw materials/finished goods
2.2 Functions and documentations in the inventory cycle
Documents Departments Functions Issue request for raw materials or Purchase requisition Storekeeping goods
Process purchase orders Purchase order Purchasing
Receive raw materials or goods Goods received report Storekeeping
Receive suppliers’ invoice Suppliers’ invoice Accounting (Purchasing in some cases for checking)
Record in accounting records Purchase journal Accounting
Store raw materials or goods and Raw materials/Goods Storekeeping recorded in inventory records perpetual records
Issue raw materials to production Raw materials requisition Storekeeping (Note 1)
Cost accounting records Cost accounting
OR OR
Goods delivery report Storekeeping
Despatch goods
Record the quantity of finished goods Finished goods perpetual Storekeeping dispatched in inventory record (note records 2)
Cost accounting records Cost accounting http://www.summaryplanet.com/industrial-economics/Inventory-and- Production-Cycle.html
3. Control of objective - Only goods required by the entiry are accepted and are accurately recorded. - Inventory is appropriately valued and damaged goods are not accepted. - The business is not interrupted due to out of stocks - Inventory are kept securely(not damaged or stolen)
4. Test of control Test of control Assertions 1. Existence Observe and evaluate proper segregation of duties and test procedures for transfer and issuing inventory. Review authorized production schedules and test procedures for establishing inventory levels and inventory control.
2. Rights and Check recorded inventory against suppliers invoices and goods received obligations notes.
3. Completeness Check sequential controls over purchase requisition, purchase order, receiving report and vouchers. Test the control procedures for the consignment goods.
4. Cut-off Check dates of receiving reports and delivery notes to dates to record the inventory movements in perpetual inventory records.
5. Accuracy Examine and test procedures for taking physical inventory, accumulating
costs, and developing standard cost.
6. Valuation and Discuss with management and test procedures for identifying obsolete and allocation slow-moving items.
7. Classification Check that the classification of inventory is in compliance with accounting
standard and company accounting policies.
8. Presentation Review inventory items are properly classified, disclosed and presented at fair and disclosure value in the financial statements.
1. Existence Check from the client’s inventory records to your
(Dec 09) test data to ensure that you record sufficient details of the location and the items to be able to trace them later. Select a sample of tag number and identify the tag with that number attached to the actual inventory. Observe whether movement of inventory takes place during the count.
2. Rights and Inquire as to consignment or customer inventory
obligations included on client’s premises. Be alert for inventory that is set aside or specially marked as indications of non-ownership.
3. Completeness Trace the items from your counts, into the client’s (Dec 09) inventory records and record sufficient details to enable you to do this. Observe whether movement of inventory takes place during the count. Inquire as to inventory in other locations. Account for all tags to make sure none are lost or intentionally omitted.
4. Cut-off Record in the working papers for subsequent
follow-up the last shipping document number used at year-end. Select a sample of goods received note from immediately prior to the year end and included in year- end payables, and ensure that the goods are included in year-end inventories. Select a sample of goods delivery notes from immediately prior to the year end and included in year- end receivables, and ensure that the goods are not included in year-end inventories and that the invoice was raised in the correct period. During the inventory counting, the auditor also considers cut-off procedures including details of the movement of inventory just prior to, during and after the count so that the accounting for such movements can be checked at a later date.
5. Accuracy Recount client’s count to make sure the recorded
counts are accurate on the tags. Compare physical counts with perpetual inventory records. Record client’s counts for subsequent testing.
6. Valuation and Trace some items of inventory in the inventory
allocation sheets back to original purchase invoices to agree the cost. Trace the same items of inventory to post-year-end sales to determine the NRV of inventory. For items that have not yet been sold trace to the provision for slow-moving inventory or discuss with management why these have not been provided for. Ensure that inventory is stated in the accounts at the lower of cost and NRV. Test for obsolete inventory by inquiry of factory employees and management, and alertness for items that are damaged, or located in inappropriate places.
7. Classification Examine inventory description on the
tags and compare with the actual inventory for raw material, WIP and finished goods. Evaluate whether the % of completion recorded on the tags for WIP is reasonable.
8. Presentation and Check that the figures disclosed in the financial disclosure statement agree to the audited figures and that inventories have been correctly analysed between finished goods, raw materials and WIP.
