Chapter 9

Production Cycle

Accounting 408 1Chapter 9

Accounting 408 Chapter 9 2

1. Internal Control Production cycle

separate functions: authorization, issuing, production, stores, record keeping

documents and records: production reports, transfer documents, accounting cost distribution records, inventory records

Accounting 408 Chapter 9 3

1. Internal Control Inventory risks

important account dual effects subjective and complex accounting

Accounting 408 Chapter 9 4

2. Substantive Tests Inventory

Inventory observation (GAAPro) (next slide) Test pricing

goods in transit, consigned goods, returned goods Test inventory listing accuracy Confirmation Vouching transactions Cutoff tests - sales and purchases Analytical procedures

Accounting 408 Chapter 9 5

2. Substantive Tests Considerations in planning physical inventory

auditor’s responsibility substantive test or test of controls? date stop production or not total count or sample cycle counts obsolete and defective goods counting process ensure accuracy of measuring methods and units shipments between locations outside inventory-taking firms consider using specialists auditors not present for count use experienced auditors

Accounting 408 Chapter 9 6

2. Substantive Tests(continued)

Inventory Existence and Occurrence

observation, confirmation, cutoff tests Rights and Obligations

vouching, confirmation Completeness

analytical procedures, tracing, cut-off tests, confirmation, test listing accuracy

Accounting 408 Chapter 9 7

2. Substantive Tests(continued)

Inventory Valuation

vouching transactions, test pricing, inventory list accuracy, recompute inventory method calculations, recompute LCM

Presentation and Disclosure compare statement presentation to GAAP related party transactions, pledged inventory

for loan, inventory method

Accounting 408 Chapter 9 8

3. Frauds

Inventory fictitious inventory frauds

McKesson & Robbins inventory count frauds

MiniScribe, Phar-Mor often part of sales frauds

Chapter 1 9

Review Questions for Discussion Chapter

99.49.59.99.119.129.14

ACCT-4080

9.159.16