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Unformatted text preview: C HAPTER 16 A UDIT THE P RODUCTION AND P ERSONNEL S ERVICES C YCLE Learning Check 16-1. a. The production cycle relates to the conversion of raw materials into finished goods, and includes production planning and control of the types and quantities of goods to be manufactured, the inventory levels to be maintained, and the transactions and events pertaining to the manufacturing process. b. The major transaction class within this cycle is manufacturing transactions. c. The production cycle interfaces with (1) the expenditure cycle through the purchase of raw materials and incurrence of various overhead costs, (2) the personnel services cycle through the incurrence of factory labor costs, and (3) the revenue cycle through the sale of finished goods. 16-2. a.The transaction class audit objectives for the production cycle are: Occurrence. Recorded manufacturing transactions represent material, labor, and overhead transferred to production and the movement to completed production to finished goods during the current period ( EO1 ). Recorded cost of sales represent the sale of inventory during the year ( EO2 ). Completeness. All manufacturing transactions ( C1 ) and cost of sales ( C2 ) that occurred during the period were recorded. Accuracy. Manufacturing transactions ( VA1 ) and cost of sales ( VA2 ) are accurately valued using GAAP and correctly journalized, summarized and posted. Cutoff. All manufacturing transactions (EO1 and C1) and cost of sales (EO2 and C2) have been recorded in the correct accounting period. Classification. All manufacturing transactions (PD1) and cost of sales (PD2) have been recorded in the proper accounts. b. Several account balance audit objectives for the production cycle are: Existence. Inventories included in the balance sheet physically exist ( EO3 ). Completeness. Inventories include all materials, products and supplies on hand at the balance sheet date ( C3 ). Rights and Obligations. The reporting entity has legal title to recorded inventories at the balance sheet date ( RO1 ). Valuation and Allocation. Inventories costing assumptions have been properly applied (VA3) and inventories are properly stated at the lower of cost or market (VA4). 16-3. a.In a manufacturing company, inventories and cost of goods sold are usually significant to the company's financial position and results of operations. Further, due to the cost of observing inventory the auditor will normally allocate a significant amount of overall materiality o the audit of inventory, without exceeding an amount that the auditor believes will affect the analysis of a financial statement user. b. Several factors that affect inherent risk for assertions related to the production cycle are: The volume of purchases, manufacturing, and sales transactions that affects these accounts is generally high, increasing the opportunities for misstatements to occur....
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- Fall '09