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Unformatted text preview: Chapter 09 - Production Cycle CHAPTER 9 Production Cycle LEARNING OBJECTIVES Review Checkpoints Exercises, Problems, and Simulations 1. Describe the production cycle, including typical source documents and controls. 1, 2, 3, 4, 5 41 2. Give examples of tests of controls for auditing the controls over conversion of materials and labor in a production process. 6, 7, 8, 9 42, 43 3. Identify and describe considerations involved in the observation of physical inventory and tests of inventory pricing and compilation. 10, 11, 12, 13, 14, 15, 16, 17 44, 45, 46, 47, 48, 49, 50, 51, 52, 56, 57 4. Describe some common errors and frauds in the accounting for production costs, and related cost of goods sold, and design some audit and investigation procedures for detecting them. 18 ,19 53, 54, 55 9-1 Chapter 09 - Production Cycle SOLUTIONS FOR REVIEW CHECKPOINTS 9.1 Production planning Production Cost accounting 9.2 GAAP recognizes specific identification, weighted average, FIFO, and LIFO methods of accounting for inventory. 9.3 The auditor performs a walk through by talking to employees about their duties, observing performance, and examining documents produced and agreeing them to related documents. A walk-through of a production transaction will collect the following documents: Production order Bill of materials Materials requisitions Inventory record (raw materials issue) Journal entry (moving raw materials to work in process) Labor report (time records) Journal entry (charging labor to work in process) Production cost analysis Inventory record (finished goods addition) Journal entry (moving work in process to inventory) The requisitions should be in numerical sequence. They should be agreed to production orders, based on the bill of materials. The requisitions should also agree to the inventory record, which is agreed to the journal entry. The labor report would be agreed to time records and the journal entry. The journal entries would be summarized and agreed to the production cost. The finished goods addition would be agreed to the production cost and the journal entry. Controls: The auditor would look for the following Approval signatures on requisitions, and time records. Approvals of journal entries. Tests of accuracy of calculations. Separation of o Custody of the inventory o Record keeping o Authorization of use of materials and incurring time. o Reconciliation of inventory records to physical counts 9.4 Some work to obtain assurance about the reasonableness of the clients sales forecast needs to be performed. All the auditors need to accomplish is to learn about the assumptions built into the forecast for the purpose of ascertaining their reasonableness. In addition some work on the mechanical accuracy of the forecast should be performed to avoid embarrassing reliance on faulty calculations....
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