1. Chapter 9
Production Cycle
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
AU-C 501
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
multiple locations and shipments between locations
outside inventory-taking firms
consider using specialists
auditors not present for count
use experienced auditors
Accounting 408
Chapter 9

6. 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. 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 inventory count frauds
McKesson & Robbins
inventory count frauds
MiniScribe, Phar-Mor
often part of sales frauds
Accounting 408
Chapter 9

9. Review Questions for Discussion
Chapter 9
9.4
9.5
9.8
9.9
9.13
9.16
9.17
9.19
ACCT-4080
Chapter 1