TAILIEUCHUNG - Lecture Auditing & assurance services (5th) - Chapter 9: Production cycle

After reading the material in this chapter, you should be able to: Describe 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. | McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 09 Production Cycle Learning Objectives Describe 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- Importance of Inventory Major component of current assets on the balance sheet. Errors effect both the balance sheets and net income. Valuation is usually very subjective. Potential obsolescence Goods have not been sold, so marketability may be uncertain. 9- Inherent Risks in Production Cycle Complexity (. dollar value LIFO) Susceptibility to theft Movement of inventory Lower-of-Cost-or-Market valuation Effects on gross profits 9- Typical Activities Planning Production plan Production Bill of materials Requisitions Cost Accounting Standard costs Overhead allocation 9- Production Cycle: Control Considerations Production runs are authorized. Raw Materials should be counted, and inspected As production is undertaken, materials and labor quantities should be summarized. All inventory items should be accounted for Used in production Scrap Returned to inventory Use of TRANSFER tickets Count/inspect the items and compare quantities The cost accounting department reviews Quantity of raw materials to materials requisition Quantity of direct labor to time sheets and labor distribution report Cost accounting applies overhead costs to production using OVERHEAD TICKETS Cost summary 9- Production Cycle: Control Procedures Physical Controls .

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