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Modern Auditing: Modern Auditing

The chapter discusses auditing the production and personnel services cycles. It covers understanding inherent risks, common documents and records, key functions and controls, systems flowcharts, and substantive audit tests for inventory and payroll transactions and account balances. Analytical procedures and tests of details are important audit procedures for these cycles.

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Permata Keristiya
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140 views35 pages

Modern Auditing: Modern Auditing

The chapter discusses auditing the production and personnel services cycles. It covers understanding inherent risks, common documents and records, key functions and controls, systems flowcharts, and substantive audit tests for inventory and payroll transactions and account balances. Analytical procedures and tests of details are important audit procedures for these cycles.

Uploaded by

Permata Keristiya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Modern

Modern Auditing:
Auditing:
Assurance
Assurance Services
Services and
and the
the Integrity
Integrity
of
of Financial Reporting, 8th Edition
Financial Reporting, 8 th
Edition

William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University

Chapter 16 – Auditing the Production and Personnel


Services Cycles
Chapter
Chapter Overview
Overview
Interface
Interface of
of Production
Production Cycle
Cycle
with
with Other
Other Cycles
Cycles
Audit
Audit Objectives
Objectives
Understanding
Understanding the
the Entity
Entity and
and
Environment
Environment
Analytical
Analytical Procedures
Procedures
Inherent
Inherent Risk
Risk
• Volume of transactions

• Cost issues

• Diversity of inventory items

• Storage at multiple locations

• Determination of quality and value

• Vulnerability of inventory

• Right of return and repurchase agreements


Consideration
Consideration of
of Internal
Internal Controls
Controls ––
Common
Common Documents
Documents andand Records
Records
• Production order

• Material requirements report

• Materials issue slip

• Time ticket

• Move ticket

• Daily production report


Consideration
Consideration of
of Internal
Internal Controls
Controls ––
Common
Common Documents
Documents andand Records
Records
• Completed production report

• Standard cost master file

• Raw materials inventory master file

• Work-in-progress inventory master file

• Finished goods inventory master file


Functions
Functions and
and Related
Related Controls
Controls

• Initiating production
– Planning and controlling production

• Production of Inventory
– Issuing raw materials
– Processing goods in production
– Transferring completed work to
finished goods
– Protecting inventories
Functions
Functions and
and Related
Related Controls
Controls

• Recording manufacturing and


inventory transactions
– Determining and recording
manufacturing costs
– Maintaining correctness of inventory
balances

• Management Controls

• Additional Inventory Controls


Systems
Systems Flowchart
Flowchart ––
Manufacturing
Manufacturing Transactions
Transactions
Systems
Systems Flowchart
Flowchart ––
Manufacturing
Manufacturing Transactions
Transactions
Inventory
Inventory Audits
Audits
• Preliminary Audit Strategies

• Substantive Tests of Inventory


– Initial Procedures

– Analytical Procedures
Substantive
Substantive Tests
Tests of
of Inventory
Inventory
• Tests of Details of Transactions
– Test Entries to Inventory Accounts
– Test Cutoff of Purchases, Manufacturing, and
Sales Transactions

• Tests of Details of Balances


– Observation of the Client’s Physical
Inventory Count
– Timing and Extent of the Test
– Inventory-Taking Plans
– Performing the Test
Substantive
Substantive Tests
Tests of
of Inventory
Inventory
• Tests of Details of Balances
– Inventories Determined by Statistical
Sampling

– Observation of Beginning Inventories

– Test Clerical Accuracy of Inventory Listings

– Test Inventory Pricing

– Test Cost of Manufactured Inventories


Substantive
Substantive Tests
Tests of
of Inventory
Inventory

• Confirm Inventories at Locations


Outside the Entity
– Examine Consignment Agreements and
Contracts

• Tests of Details of Accounting


Estimates

• Comparison of Statement
Presentation with GAAP
Study
Study Break
Break
1. This analytical procedure commonly
used in the audit of the production
cycle is useful in measuring the
effectiveness of the manufacturing
process.
A. Inventory Turn Days
B. Inventory Growth to Cost of Sales Growth
C. Finished Goods Produced to Direct Labor
D. Product Defects per Million

D. Product Defects per Million


Study
Study Break
Break
2. This document is a record of time
worked by an employee on a
specific job.
A. Production order
B. Time ticket
C. Move ticket
D. Standard cost master file

B. Time ticket
Study
Study Break
Break
3. All of the following are functions
of the manufacturing process,
except:
A. Initiating production
B. Initiating purchases
C. Production of inventory
D. Recording manufacturing and
inventory transactions

B. Initiating purchases
The
The Personnel
Personnel Services
Services Cycle
Cycle
Audit
Audit Objectives
Objectives
The
The Personnel
Personnel Services
Services Cycle
Cycle
• Understanding the Entity and
Environment

• Analytical Procedures

• Inherent Risk
Analytical
Analytical Procedures
Procedures
Consideration
Consideration of
of Internal
Internal Controls
Controls ––
Common
Common Documents
Documents andand Records
Records
• Personnel authorization

• Clock card

• Time ticket

• Payroll register

• Imprest payroll bank account

• Payroll check
Consideration
Consideration of
of Internal
Internal Controls
Controls ––
Common
Common Documents
Documents andand Records
Records
• Labor cost distribution summary

• Payroll tax returns

• Employee personnel file

• Personnel data master file

• Employee earnings master file


Functions
Functions and
and Related
Related Controls
Controls

• Initiating payroll transactions


– Hiring employees
– Authorizing payroll changes

• Receipt of services
– Preparing attendance and timekeeping
data
Functions
Functions and
and Related
Related Controls
Controls

• Recording and paying payroll


transactions
– Preparing the payroll
– Recording the payroll

• Paying payroll
– Paying the payroll
– Protecting unclaimed wages
– Filing payroll tax returns
Systems
Systems Flowchart
Flowchart –– Payroll
Payroll
Transactions
Transactions
Systems
Systems Flowchart
Flowchart –– Payroll
Payroll
Transactions
Transactions
Personnel
Personnel Services
Services Audits
Audits
• Preliminary Audit Strategies

• Substantive Tests of Personnel


Services
– Initial Procedures

– Analytical Procedures
Substantive
Substantive Tests
Tests of
of Personnel
Personnel
Services
Services
• Tests of Details of Transactions
– Test Entries to Inventory Accounts
– Test Cutoff of Personnel Services
Transactions

• Tests of Details of Balances and


Disclosures
– Recalculate Accrued Payroll Liabilities
– Auditing Employee Benefits and Pension
Plans
– Auditing Stock Options and Stock
Appreciation Rights
Study
Study Break
Break
4. This analytical procedure commonly
used in the audit of the personnel
services cycle may be a measure of
productivity per employee.
A. Average payroll cost per employee
classification
B. Revenue per employee
C. Total payroll as a percentage of revenues
D. Payroll tax expense as a percentage of gross
payroll

B. Revenue per employee


Study
Study Break
Break
5. This record holds all pertinent
employment data for each
employee.
A. Payroll register
B. Payroll tax returns
C. Employee earnings master file
D. Employee personnel file

D. Employee personnel file


Study
Study Break
Break
6. This report shows each employee’s
name, gross earnings, payroll
deductions, and net pay for a
period.
A. Clock Card
B. Time Ticket
C. Payroll Register
D. Payroll Check

C. Payroll Register

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