TOC and Substantive Test Cyle Production and Inventory Warehousing [PDF]

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FAITH COLLEGES AUDIPRA3 MLLAZO



TRANSACTION CYCLE TEST OF CONTROL AND SUBSTANTIVE TESTING AUDIT OF PRODUCTION AND WAREHOUSING CYLE (Compliance TOC and ST of Transactions) Audit Objectives and Procedures Assertion



Existence / Occurrence Completeness Valuation or Allocation Presentation and Disclosure



Audit Objectives To determine that recorded production transactions occurred To determine that all production transactions that occurred are recorded. To determine that production transactions are recorded for the proper amounts To determine that production transactions are recorded to result in presentation and disclosure In accordance with PAS,PFRS



Existing or Occurrence Recorded production transactions occurred. Controls A material requisition should be prepared by operating personnel and signed by a warehouse custodian when goods are transferred to production. Requiring materials to be completed by two persons — one who releases raw materials and another who accepts responsibility for merchandise provides evidence that a transaction exists. Properly completed materials requisitions should be on file in accounting, where an employee accounts for their sequence. Labor tickets bearing a signature indicating that work was actually performed should be the basis in recording labor.



Test of Controls To test this control, the auditor should observe separation of duties and examine approval signatures.



The auditor should examine labor tickets.



Completeness All production transactions that occurred are recorded. Controls Production Orders are prenumbered and accounted for to determine that all production is recorded. Materials requisitions are prenumbered and accounted for by an accounting clerk. Time charged on labor tickets is reconciled to



Test of Controls To test this control the auditors should observe the procedure and account for a numerical sequence Of production orders, The auditor should observe the procedure and account for numerical sequence of materials requisitions. The auditor could observe if a clerk reconciles the time Page 1 of 7



FAITH COLLEGES AUDIPRA3 MLLAZO



employee time cards.



charged on completed labor tickets to the total hours for which production workers are paid.



Valuation or Allocation Production transactions are recorded for the proper amount. Controls Value for transactions are based on a bill of materials, approved ticket and rates for labor, and predetermined overhead rates. Overapplied or underapplied overhead is reviewed periodically, and rates are adjusted as necessary.



Test of Controls To test this control the auditor should trace the amounts to the bill of materials time cards and overhead rates assigned costs may then be traced to authorized price lists and underlying schedules. The auditor should observe the signature indicating that the overhead rate has been reviewed.



Presentation and Disclosure Transactions are recorded to result in presentation and disclosure in accordance with PAS/PFRS. Controls The chart of accounts should adequately describe the accounts to be used; and account coding is independently checked.



Test of Controls The auditor should examine the chart of accounts and examine the signature of the employee performing the procedure.



Testing Controls: Production Transaction ABC Corporation Test of Controls: Production AUDIT PROCEDURES



WP REF



1. Select a sample of production orders. a. Determine if production order was authorized. b. Match to bill of materials and manpower needs. c. Trace bills of materials to material requisitions, material issue slips, materialsused reports, and into job cost sheets. d. Trace manpower needs to job time sheets, labor reports, and into job cost sheets. 2. Select a sample of issue slips from the raw materials stores file. a. Determine if a matching requisition is available for every issue slip. b. Trace to materials-used reports into job cost job cost time sheets. 3. Select a sample of clock timecards from the payroll file. Trace to job time tickets, labor reports, and into job cost time sheets. 4. Select a sample of open and closed job cost sheets. a. Recalculate all costs entered. b. Vouch labor costs to job tickets and labor reports c. Compare labor reports to summary of payroll. d. Vouch material costs to issue slips and materials-used reports. e. Compare materials-used reports to material requisitions and bill of materials. f. Vouch overhead charges to overhead analysis schedules. g. Trace selected overhead amounts from analysis schedules to cost allocations and to invoices of accounts payable vouchers. Page 2 of 7



Done By



Date



FAITH COLLEGES AUDIPRA3 MLLAZO



5. Reconcile the open job cost sheets to work-in process inventory control account. 6. Select a sample of transfers from work-in process and trace to a. Transfers to finished goods perpetual records comparing unit costs and quantities. b. Summary transfer entries in general ledger control accounts, 7. Select a sample of transfers from finished goods and trace to a. Shipping documents comparing quantities and unit costs, coordinating with tests of sales in the revenue/receipt cycle. b. Summary of cost of sales and sales entries.



The foregoing test of controls may reveal the following weaknesses and possible errors: Control Weakness Persons recording inventory cost flows, maintaining inventory records, determining overhead application rates, setting standard costs, or costing physical inventory not competent to do so. Inadequate documentation of inventory movements. Lack of rigorous cost accounting system), as evidenced by a. Absence of journal entries recording cost flows. b. Failure to incorporate standard costs and variance analysis into the accounting system. c. Failure to maintain detailed manufacturing overhead ledger. d. Failure to use standard journal entries in costing monthly production. Lack of periodic test counts and comparison of physical inventory with perpetual records. Failure to agree subsidiary inventory and overhead ledgers to controlling accounts on a regular basis.



Possible Errors 1. a. Errors in recording inventory cost flows. b. Errors in costing inventory and cost of sales. c. Errors in perpetual inventory records. 2. a. Unauthorized issuance of materials. b. Inaccurate inventory records. 3. a. Inventory recording errors. b. Errors in calculating and recording cost of sales. c. Failure to promptly locate and correct unfavorable variances.



4. Undetected inventory shrinkage or recording errors. 5. Undetected errors in recording or posting overhead accounts.



On the basis of the preliminary evaluation and the results of compliance testing, the auditor makes a final evaluation of the controls over production transactions. The auditor then determines the nature, timing and extent of substantive tests to be done on account balances affected by the production



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FAITH COLLEGES AUDIPRA3 MLLAZO



Substantive Test of Transaction: Production Transactions Assertions Existence or Occurrence



Audit Objectives A. To determine that recorded production transactions occurred.



Completeness



To determine that all production transactions that occurred are recorded.



Valuation and Allocation



To determine that production are recorded for the proper amounts



Presentation and Disclosures



To determine that production transactions are recorded to result in presentation and disclosure in accordance with PAS,PFRS



Audit Procedures For selected transactions, examine signed materials requisitions, approved labor tickets, and allocation of overhead. Account for a sequence of production reports. Account for a sequence of materials requisitions. Reconcile time cards and labor tickets. Test cost records by tracing to underlying documents such as bill of materials, labor tickets, authorized labor rates. and standard overhead rates. Review variances.



Check accuracy of account coding by reference to chart of accounts.



Testing Controls: Inventory Warehousing Entities store supplies, replacement parts, raw materials, and finished goods. Although the stored goods may differ, the basic controls and the tests of controls that an auditor performs are similar. Hence, we discuss here only one example, the storage of raw materials. Auditors perform one or more audit procedures to test the following assertions related to inventory warehousing: General Existence or occurrence



Specific Recorded inventory warehousing transactions occurred.



Completeness



All inventory warehousing transactions that occurred are recorded. Inventory warehousing transactions are for goods that belong to the entity. Inventory warehousing transactions are recorded for the proper amounts. Inventory warehousing transactions are recorded to result in presentation and disclosure in accordance with PAS/PFRS.



Rights and obligations Valuation or allocation Presentation and disclosure



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FAITH COLLEGES AUDIPRA3 MLLAZO



Existence or Occurrence: Recorded inventory warehousing transactions Control A copy of a receiving report signed by a receiving clerk is used by inventory accounting to record receipt of goods. A materials requisition is prepared and signed by appropriate operating personnel.



Tests of Controls Observe separation of duties and examine approval signature on receiving report. Observe separation of duties and examine approval signature on materials requisition.



Completeness: All inventory warehousing transactions that occurred are recorded. Control Receiving reports and materials requisitions are prenumbered and accounted for by a clerk in inventory accounting.



Tests of Controls Observe procedure and account for a numerical sequence of receiving reports to determine that all have been recorded.



An inventory clerk signs a copy of the receiving report after counting goods transferred to his or her area. Access to inventory is limited to personnel responsible for its custody.



Observe procedure. Examine signature on receiving reports.



Observe procedures.



Rights and Obligations: Inventory warehousing transactions are for goods that belong to the entity. Control Goods received on consignment are labeled and separated from goods the entity owns.



Tests of Controls Inquire about and observe the procedure



Valuation or Allocation: Inventory warehousing transactions are recorded Control Costs assigned to work in process and finished goods are set by procedures that are reviewed and periodically evaluated. Mathematical accuracy is tested.



Tests of Controls Inquire about and observe evidence of standards setting, review of standards, and testing of standards.



Presentation and Disclosure: Inventory warehousing transactions are recorded to result in presentation and disclosure in accordance with PAS/PFRS. Control Chart of accounts adequately describes accounts to be used, and account coding is assigned by one person and checked by another.



Tests of Controls Examine chart of accounts. Examine signature of employee performing check.



Substantive Test of Transaction: Warehousing Transaction Page 5 of 7



FAITH COLLEGES AUDIPRA3 MLLAZO



Assertions Existence or Occurrence



Audit Objectives To determine that recorded inventory warehousing transactions occurred.



Audit Procedures For selected transactions recorded in the inventory control account, examine signed receiving report.



Completeness



To determine that all inventory warehousing transactions that occurred are recorded.



Account for a sequence of receiving reports and requisitions. Perform records—to—floor and floor— to-records tests.



Rights and Obligations



To determine that inventory warehousing transactions are for goods that belong to the entity



Examine invoice for goods received.



Valuation and Allocation



To determine that allocations are recorded for the proper amounts.



Trace allocated costs back to supporting documents. Verify mathematical accuracy and trace postings.



Presentation and Disclosures



To determine that inventory warehousing transactions are recorded to result in presentation and disclosure in accordance with PAS/PFRs.



Check accuracy of accounts on invoices by referring to chart of accounts.



Exercises Each of the following tests of controls could be performed during the audit of-the controls in the production cycle. Required: For each procedure, identify (a) the internal Control activity (strength) being tested and (b) the assertion(s) being addressed. 1. Balance and reconcile detailed production cost sheets to the work-In-process inventory control account. 2. Scan closed production cost sheets for missing numbers in the sequence. 3. Vouch a sample of open and closed production cost sheet entries to (l) labor reports and (2) issue forms and materials used reports. Page 6 of 7



FAITH COLLEGES AUDIPRA3 MLLAZO



4. Locate the material issue forms and determine whether they are (l) prenumbered, (2) kept in a secure location and (3) available to unauthorized persons. 5. Select several summary journal entries in the work-in-process inventory and (l) vouch them to weekly labor and material reports and to, production cost sheets and (2) trace them to the control account. 6. Select a sample of the material issue forms in the production department file, Examine them for a. Issue date and materials used report date. b. Production order number. c. Floor supervisor's signature or initials. d. Name and number of material. e. Raw material stores clerk's signature or initials. f. Material requisition in raw material stores file, noting the date of requisition. 7.Determine by inquiry and inspection whether cost clerks review dates on reports of units completed for accounting in the prior period.



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