•
Chapter 11
production and payroll cycle
including audit of inventory
valuation and capital assets
1
production
2
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
3
Start
here
Cost of
goods sold
Reconciliation
(analysis)
Determine cost
of goods sold
Production
planning
Acquisition cycle
Authorization
Amortization
schedule
Inventory
planning
recordkeeping
Cost
accounting
custody
Periodic
physical count
Sales forecast
Purchase labour,
materials, and
overhead
Receive goods
and services
Produce goods
and services
(physical quantity)
Payroll cycle
Pay wages
Revenue and
collection cycle
Inventory
Orders
Deliveries
Deliver to
customers
(valuation)
Accounts/Records
Inventory
Cost of goods sold
Amortization
Production
cost analysis
Production
reports
Quality
control
test reports
Production
orders
Inventory plan
Production plan
Sales
forecast
4
(1)Authorization
Sales forecast
production planning
(inventory planning to production orders)
Material, labour,timing
Production orders
Managers(s,p)
Sign off the approval
5
Production report
A
Quality control test report
Finished
goods
A
Inventory
record files
6
(2)custody
MOVING inventory
(materials into finished goods)
Production
order
Completion
of
Production
Good cost
accounting
and analysis
Quality
control test
Supervisors and workers
7
(3)recordkeeping
Production order, record of material and labour used
Separation (inventory custodian, payroll department)
Cost accounting department
Overhead
Depreciation
amortization
Cost-per-unit
standard cost
variances
Cost of
goods sold
8
(4)periodic reconciliation
• ACTUAL asset and liability TO RECORDED
account
A. Physical count of inventory ,
perpetual inventory records
B. vendors`s monthly statement,
recorded accounts payable
C.product Cost, prior experience or standard cost
• lower-of-cost-or-market
9
Start
here
Cost of
goods sold
Reconciliation
(analysis)
Determine cost
of goods sold
Production
planning
Acquisition cycle
Authorization
Amortization
schedule
Inventory
planning
recordkeeping
Cost
accounting
custody
Periodic
physical count
Sales forecast
Purchase labour,
materials, and
overhead
Receive goods
and services
Produce goods
and services
(physical quantity)
Payroll cycle
Pay wages
Revenue and
collection cycle
Inventory
Orders
Deliveries
Deliver to
customers
(valuation)
Accounts/Records
Inventory
Cost of goods sold
Amortization
Production
cost analysis
Production
reports
Quality
control
test reports
Production
orders
Inventory plan
Production plan
Sales
forecast
10
2.audit evidence in management
reports
Sales forecast
Production plans and reports
Amortization schedule
462
11
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
12
Account balance
•
•
•
•
•
•
•
•
Inventory:
raw materials
work in process
finished goods
cost of goods sold:
amortization:
amortization expense
accumulated amortization
13
(1)general control considerations
• A.Segregation of responsibility
• B.Detail control checking procedures
14
(1)general control considerations
• Segregation of responsibility
• authorization
• (pro,inv planning)
• Custody
cost accounting
• reconciliation
15
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)
16
Segregation of responsibility
• C.cost accounting (recording)
• Authorization, Custody
• But prepare various analyses and Reconciliation
• combination of 2 or more
17
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)
18
Detail control checking
procedures
• 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)
19
Detail control checking
procedures
• 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)
20
(2)internal control questionnaire
• appendix 11A-1
21
(3)production management--jit
• Just-in-time manufacturing
• implemented in many companies
• appendix 11B
22
(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
23
(5)direction of the test of controls
procedures
• Exhibit 11-3
• Exhibit 11-4
• Exhibit 11-5
• why?
24
Cost accounting
Production planning department
Production
orders
Issue slips
Bill of materials Material used report Labour reports
Manpower needs Production cost report Production cost report
5-b
Match
5-c
Trace
Sample
Trace
5-d
Authorized
5-a
25
Production
Materials
requisitions and
bills of materials
Cost accounting
Issue slips,
Materials used
reports
Production
cost reports
Overhead
analysis
Labour
reports
2-d
Sample
Vouch
labour
Vouch
materials
2-e
Compare
materials
General ledger
(inventory)
Same
sample
2-b
Compare
labour
2-c
Vouch
overhead
recalculate
2-e,f
2-a
26
(6) summary:control risk
assessment
• CONTROL RISK IS LOW
• CONTROL RISK IS high
27
3.audit cases: substantive audit
procedures
Casette 11.1
unbundled before its time
28
problem
• Production “sold” as finished goods before
actual unit completion.
• Understated inventory
• overstated cost of goods sold
• overstated revenue
• overstated income
29
Method
• Western corporation
• assembled and sold computer system
A
system
Production
order
After finished
installation
Hardware
equipment
software
contract
pay the price
for the entire
package
30
Unbundled
•
Work-in-process inventory
account
hardware
Sales revenue
cost of goods sold
software
Other Revenue, cost
A billing statement
Unbilled
contract
revenue
Accounts
receivable
31
Paper trail
•
Customer
orders
contracts
Hardware and software
production orders
Production cost accumulation
work-in-process inventory record
production report
production cost report
32
Amount
• Overstatement
• 3 years
• 12%,15%,19%
• of
• Income before taxes
33
Audit approach
• Objective
• occurrence of cost
• completeness of recorded inventory
34
control
1.production planning department
approval of orders as a total unit.
2.cross-referenced ,
• Can see them as same order unit
35
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.
•
36
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.
37
Discovery summary
• audit firm
• Purchasing complete software
packages from other developers.
38
Break:5 minutes
•
39
4.Part 2:payroll cycle
• Activities
Personnel
hiring/firing
Compensation
determination
Supervision
attendance
and work
Payroll
accounting
Payroll
distribution
Cash
distribution
40
Acquisition
payment cycle
Start
here
and
Cash
disbursemte
nt
Cash disbursement
(reconciliation)
Payroll
cheques
Production cycle
Payroll
distributio
n
Authorization
Custody
Payroll
accounting
Personnel
hiring/firing
Compensation
determination
Recordkeepin
g
Payroll
register
Yearto-date
Earning
s
records
Timekeepin
g
records
Government
tax reports
Termination
notice
Union contract
Other approval
Deduction
authorizations
Employee
benefits
Supervisionl,
affendance,
and work
Cost accounting
Labour cost
analyses
ere
Employment
application
Personnel
files
Employees’
T-4 forms
Accounts/Records
Wages expense and accrual
Payroll tax expense and liability
Pension expense and liability
Accrued employee benefits
Expensea and Liability
Cash disbursements
41
(1)Separate people or department
•
•
•
•
•
Personnel and labour relation---hiring/firing
supervision--approval of work time
timekeeping and cost accounting
payroll accounting
payroll distribution
42
(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
payroll department.
SUPERVISOR Approve all pay base data
(hours, job number, absence, time off allowed).
43
(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.
44
(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
45
(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.
46
(6)Employees on fixed salary
• The system is simplified
• even nonexistent.
47
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.
48
6.control risk assessment
• THE MAJOR RISKS
• PAYING fictitious “employees”
• overpaying for time or production
• incorrect accounting for costs and expenses.
49
6.control risk assessment
•
•
•
•
•
•
•
(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
50
(1)general control considerations
• Segregation of responsibility
• authorization
• Custody
cost accounting
• reconciliation
51
Segregation of responsibility
• A.authorization//payroll preparation,
paycheque distribution, reconciliation.
• B. payroll preparation// authorization,
payroll cheques
• C.recordkeeping// // authorization,distribute
pay.
52
Detail control checking
procedures
• (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
53
Detail control checking
procedures
• (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 .
54
(2)computer-based payroll
• Various paper records and approval signatures
may not exist.
• they may all be
imbedded in computerized.
• 嵌入
• chapter 19
55
(3)internal control questionnaire
• Appendix 11A-2
56
(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
57
(5)direction of the test of controls
procedures
• 2 directions:completeness, validity
• understand
• why?
• E11-9
E11-8
58
Personnel files
Payroll department
Authorization files Payroll registers
Trace rates,
deductions
Sample
A-1-c
Review, trace
to authorization
A-1-a
A-1-b
B-1-a
or
B-1-a Vouch rates, Sample
deductions
59
(6)computerized payroll
processing
• Reference files
• dynamic files
• the test of controls procedures
60
(7)summary:control risk
assessment
• Control risk is low or high
61
Casstte 11.3
time card forgeries
Nurse
jane
Time card
shift supervisor
work
paid
Leasing
agency
bills
M
hospital
62
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.
63
Paper trail
• (1)ward shift logs.
• (2)personnel records( the own nurses,
supervisors, and other employees).
64
amount
• 24 e.h × $22/h=$528
• 15 weeks,
$7900
• friends,
$24000
65
Audit approach
• Objective
• valid employees
• actual time worked
• authorized pay rate
66
control
• Authorization: contract for nursing
time,rate
• ward shift log
• supervisors approve time card.
• Agency billings( contract, time card)
• prepare paycheques.
67
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.
68
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.
69
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.
70
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
71