1 Chapter 11 production and payroll cycle including audit of inventory valuation and capital assets

1

Chapter 11

production and payroll cycle including audit of inventory valuation and capital assets

•

2

production

3

1. Production cycle typical activities

(1)production planning(inventory planning).

(2)produce goods and services.

(3)cost accounting(cost accounting allocations, unit cost determinations, physical cost calculations).

(4)determine cost of goods sold.

• Authorization custody

• recordingkeeping periodic reconciliation

4

Productionplanning

Inventoryplanning

Receive goodsand services

Produce goodsand services

(physical quantity)

Costaccounting

Determine costof goods sold

Start here

Reconciliation(analysis)

Authorization

Cost of goods sold

Amortizationschedule

Sales forecast

Acquisition cycle

Purchase labour,

materials, and

overhead

Inventory

Payroll cycle

Pay wages

Orders

Deliveries

Revenue andcollection cycle

Deliver tocustomers

(valuation)

Periodicphysical count

Productioncost analysis

Qualitycontrol

test reports

Productionorders

Productionreports

Accounts/RecordsInventoryCost of goods soldAmortization

Inventory plan

Production plan

Salesforecast

custody

recordkeeping

5

(1)Authorization

Sales forecast

production planning(inventory planning to production orders)

Material, labour,timing

Production orders

Managers(s,p) Sign off the approval

6

Production report Quality control test report

Finished goods

Inventory record files

A

A

7

(2)custody

MOVING inventory

(materials into finished goods)

Supervisors and workers

Production order

Quality control test

Good cost accounting and analysisCompletion

of Production

8

(3)recordkeeping

Cost accounting department

Production order, record of material and labour used

Separation (inventory custodian, payroll department)

Overhead

Depreciation

amortization

Cost-per-unit

standard cost

variances

Cost of goods sold

9

(4)periodic reconciliation

• ACTUAL asset and liability TO RECORDED account

A. Physical count of inventory , perpetual inventory recordsB. vendors`s monthly statement, recorded accounts payable C.product Cost, prior experience or standard cost

• lower-of-cost-or-market

10

Productionplanning

Inventoryplanning

Receive goodsand services

Produce goodsand services

(physical quantity)

Costaccounting

Determine costof goods sold

Start here

Reconciliation(analysis)

Authorization

Cost of goods sold

Amortizationschedule

Sales forecast

Acquisition cycle

Purchase labour,

materials, and

overhead

Inventory

Payroll cycle

Pay wages

Orders

Deliveries

Revenue andcollection cycle

Deliver tocustomers

(valuation)

Periodicphysical count

Productioncost analysis

Qualitycontrol

test reports

Productionorders

Productionreports

Accounts/RecordsInventoryCost of goods soldAmortization

Inventory plan

Production plan

Salesforecast

custody

recordkeeping

11

2.audit evidence in management reports

Amortization schedule462

Sales forecast

Production plans and reports

12

3.control risk assessment

• Account balance

• (1)general control considerations

• (2)internal control questionnaire

• (3)production management--jit

• (4)detail test of controls audit procedures

• (5)direction of the test of controls procedures

• (6) summary:control risk assessment

13

Account balance

• Inventory:• raw materials• work in process• finished goods• cost of goods sold:• amortization:• amortization expense• accumulated amortization

14

(1)general control considerations

• A.Segregation of responsibility

• B.Detail control checking procedures

15


• Segregation of responsibility

• authorization

• (pro,inv planning)

• Custody cost accounting

• reconciliation

16

Segregation of responsibility

• A.authorization

(production and inventory planning).

• Custody, recording, reconciliation

• B. Custody of inventory (raw materials, work in process, finished goods)

• .authorize, purchase, cost accounting recordkeeping, prepare cost analyses (reconciliation)

17


• C.cost accounting (recording)• Authorization, Custody

• But prepare various analyses and Reconciliation

• combination of 2 or more

18

Detail control checking procedures

A.Production orders (a list of materials and the quantity, approved by planner)

B. materials requisitions( compared with the list, signed by production operator and storeskeeper)

19


• C.labour time record ON JOBS

(signed by production supervisor;

the cost accounting department should reconcile these cost amounts with the labour report from the payroll department)

20


• D.production report(signed by production supervisor and finished goods inventory custodian, to cost accounting)

computer (manual signatures and paper production orders, be imbedded in

computer-controlled systems)

21

(2)internal control questionnaire

• appendix 11A-1

22

(3)production management--jit

• Just-in-time manufacturing

• implemented in many companies

• appendix 11B

23

(4)detail test of controls audit procedures• Exhibit 10-2

• detail test of control procedure:

• A. 样本总体 (population)

• B. 取证方法（ action)

• action: vouching, tracing, observing, scanning, recalculating

• Exhibit 11-2

24

(5)direction of the test of controls procedures

• Exhibit 11-3• Exhibit 11-4• Exhibit 11-5

• why?

25

Production planning department Cost accounting

Productionorders

Bill of materialsManpower needs

Issue slipsMaterial used reportProduction cost report

Labour reportsProduction cost reports

Sample

Authorized

5-a

5-b

5-c5-dTrace

Trace

Match

26

Production Cost accounting

Materialsrequisitions and bills of materials

Issue slips,Materials usedreports

Productioncost reports

Labourreports

Overheadanalysis

General ledger(inventory)

Same sample

Sample

recalculate

2-a

2-c2-e

2-e,f

2-b

2-d

Vouchmaterials

Comparematerials

Vouch overhead

Comparelabour

Vouchlabour

27

(6) summary:control risk assessment

• CONTROL RISK IS LOW

• CONTROL RISK IS high

28

3.audit cases: substantive audit procedures

Casette 11.1 unbundled before its time

29

problem

• Production “sold” as finished goods before actual unit completion.

• Understated inventory

• overstated cost of goods sold

• overstated revenue

• overstated income

30

Method

• Western corporation

• assembled and sold computer system

Asystem

Productionorder

Hardware

equipment

software

contract

After finished installation

pay the price

for the entire package

31

Unbundled

•

hardwareUnbilled contractrevenue

Sales revenue

cost of goods sold

software Accounts receivableA billing statement

Other Revenue, cost

Work-in-process inventory account

32

Paper trail

• Customer

orders

contracts

Hardware and softwareproduction orders

Production cost accumulationwork-in-process inventory recordproduction reportproduction cost report

33

Amount

• Overstatement • 3 years

• 12%,15%,19%

• of

• Income before taxes

34

Audit approach

• Objective

• occurrence of cost

• completeness of recorded inventory

35

control

1.production planning department approval of orders as a total unit.

2.cross-referenced ,

• Can see them as same order unit

36

Test of controls

• 200-250 production orders

• vouched to the underlying customer orders and contracts, validity, proper period.

• Enquiry the standard procedures for the time of revenue and cost of goods sold recognition.

•

37

Audit of balance

• A.dual purpose test

• B.points: the dollar amounts accounts accumulated as cost of contracts and proper cutoff for recording the cost.

• C.red flag:unbilled contract revenue.

38

Discovery summary

• audit firm

• Purchasing complete software packages from other developers.

39

Break:5 minutes

•

40

4.Part 2:payroll cycle

• Activities

Personnel hiring/firing

Payroll accounting

Compensationdetermination

Supervisionattendanceand work

Cash distribution

Payrolldistribution

41

Acquisition and payment cycle

Cash disbursement(reconciliation)

Cashdisbursemtent

Starthere ere Personnel

hiring/firing

Compensationdetermination

Authorization

CustodyPayrolldistribution

RecordkeepingPayrollaccounting

Supervisionl,affendance,and work

Payrollcheques

Production cycle

Cost accounting

Labour costanalyses

Payrollregister

Year-to-dateEarningsrecords

Timekeepingrecords

Governmenttax reports

Personnelfiles

Employees’T-4 forms

Employmentapplication

Terminationnotice

Union contractOther approval

DeductionauthorizationsEmployeebenefits

Accounts/Records

Wages expense and accrualPayroll tax expense and liabilityPension expense and liabilityAccrued employee benefitsExpensea and LiabilityCash disbursements

42

(1)Separate people or department

• Personnel and labour relation---hiring/firing

• supervision--approval of work time

• timekeeping and cost accounting

• payroll accounting

• payroll distribution

43

(2)authorization

Personnel or labour department• Add new employees to payroll• delete terminated employee• obtain authorization for deduction• transmit authority for pay rate changes to payr

oll department.SUPERVISOR Approve all pay base data (hours, job number, absence, time off allowed).

44

(3)custody

• Paycheques ,cash, electronic transfer codes

• payroll distribution function:

control the delivery of pay to employees,

not be returned to persons involved in other-fun.

• timekeeping function:

• supervisors access to time cards or time sheets.

• the timekeeping devices, the employee.

45

(4)recordkeeping

Prepare individual paycheques, pay envelopes.

• Year-to-date earnings records

• tax reports

• payroll tax returns

• federal T-4 summary.

Authorization and custody //prepare the payroll

46

(5)Periodic reconciliation

• Payroll bank account ,bank statement

• Comparing “real payroll” to recorded wages.

• Sent supervisor a copy of the payroll register, showing the employees paid under the authority and responsibility.

Reapprove the payroll after it is completed.

Notice whether any persons not approved.

• Payroll report, the labour records used.

47

(6)Employees on fixed salary

• The system is simplified

• even nonexistent.

48

5.audit evidence in management reports and file

• Personnel files

• timekeeping records

• payroll register

• labour cost analysis

• governmental and tax reports

• year-to-date earnings records

• employee T-4 reports.

49


• THE MAJOR RISKS

• PAYING fictitious “employees”

• overpaying for time or production

• incorrect accounting for costs and expenses.

50


• (1)general control considerations

• (2)computer-based payroll

• (3)internal control questionnaire

• (4)detail test of control audit procedures

• (5)direction of the test of controls procedures

• (6)computerized payroll processing

• (7)summary:control risk assessment

51


• Segregation of responsibility

• authorization

• Custody cost accounting

• reconciliation

52


• A.authorization//payroll preparation, paycheque distribution, reconciliation.

• B. payroll preparation// authorization, payroll cheques

• C.recordkeeping// // authorization,distribute pay.

53


• (1)periodic comparison of the payroll register to the personnel department files to check hiring and terminated employees not deleted.

• (2)periodic rechecking of wage rate and deduction authorizations

54


• (3) reconciliation of time and production paid to cost accounting calculations

• (4) reconciliation of YTD earning records with tax returns

• (5)payroll bank account reconciliation .

55

(2)computer-based payroll

• Various paper records and approval signatures may not exist.

• they may all be imbedded in computerized.

• 嵌入• chapter 19

56

(3)internal control questionnaire

• Appendix 11A-2

57

(4)detail test of control audit procedures

• A. 样本总体 (population)

• B. 取证方法（ action)

• action: vouching, tracing, observing, scanning, recalculating

• Exhibit 11-7

58

(5)direction of the test of controls procedures

• 2 directions:completeness, validity

• understand

• why?• E11-9

E11-8

59

Personnel files Payroll department

Authorization files Payroll registers

Sample

Review, traceto authorization

A-1-aA-1-b

A-1-c

B-1-a B-1-a SampleVouch rates,

deductions

or

Trace rates, deductions

60

(6)computerized payroll processing

• Reference files

• dynamic files

• the test of controls procedures

61

(7)summary:control risk assessment

• Control risk is low or high

62

Casstte 11.3time card forgeries

Mhospital

Nursejane

Leasingagency

Time card

shift supervisor

bills

paidwork

63

method

• Agency time card showed approval signatures of a county nursing shift supervisor.

• The shift supervisor had been terminated.

• 1-2 days, 40-hour work week.

• Claim payroll hours on the false time card.

64

Paper trail

• (1)ward shift logs.

• (2)personnel records( the own nurses, supervisors, and other employees).

65

amount

• 24 e.h × $22/h=$528

• 15 weeks, $7900

• friends, $24000

66

Audit approach

• Objective

• valid employees

• actual time worked

• authorized pay rate

67

control

• Authorization: contract for nursing time,rate

• ward shift log

• supervisors approve time card.

• Agency billings( contract, time card)

• prepare paycheques.

68

Test of control

• weakness

• Nobody compared the card shift logs to time card.

• Nobody examined the supervisory signatures for their validity.

• Auditor

• Enquiry about error-checking procedures, follow.

69

Audit of balance• (1)Vouch rates billed to the contract.

• (2)vouch time claimed to the ward shift logs

• (3)compare handwriting example to the approval signatures on the time cards.

• (4)using personnel records to determine the supervisors were actually employed.

• (5)using the work attendance records to determine the supervisors were on duty.

70

discovery

• (1)Had not signed in on the ward shift logs.

• (2) supervisors were not employed at the time.

• (3) signatures were not written by the supervisors.

• $32,900 WAS REFUNDED.

71

Auditing assignments(13)

• 1. prepare chapter 12.

• 2. 下列各题，每人自我练习，不交。• 11.3, 11.4, 11.10, 11.17,11.21,11.22,11.36

• 3. 下列各题，每人均做，书面完成 , 提交。 11.40--11.50,

• 11.61,11.63, 11.64,11.69

• 4. 小组完成案例 :11.2, 11.4

Documents

1 Chapter 11 production and payroll cycle including audit of inventory valuation and capital assets