1. Modern Auditing:
Assurance Services and the Integrity of Financial Reporting, 8th Edition
William C. Boynton
California Polytechnic State University at San Luis Obispo
Raymond N. Johnson
Portland State University
Chapter 16 – Auditing the Production and Personnel Services Cycles

2. Chapter Overview

3. Interface of Production Cycle with Other Cycles

4. Audit Objectives

5. Understanding the Entity and Environment

6. Analytical Procedures

7. Inherent Risk Volume of transactions Cost issues
Diversity of inventory items
Storage at multiple locations
Determination of quality and value
Vulnerability of inventory
Right of return and repurchase agreements

8. Consideration of Internal Controls – Common Documents and Records
Production order
Material requirements report
Materials issue slip
Time ticket
Move ticket
Daily production report

9. Consideration of Internal Controls – Common Documents and Records
Completed production report
Standard cost master file
Raw materials inventory master file
Work-in-progress inventory master file
Finished goods inventory master file

10. Functions and Related Controls
Initiating production
Planning and controlling production
Production of Inventory
Issuing raw materials
Processing goods in production
Transferring completed work to finished goods
Protecting inventories

11. Functions and Related Controls
Recording manufacturing and inventory transactions
Determining and recording manufacturing costs
Maintaining correctness of inventory balances
Management Controls
Additional Inventory Controls

12. Systems Flowchart – Manufacturing Transactions

13. Systems Flowchart – Manufacturing Transactions

14. Inventory Audits Preliminary Audit Strategies
Substantive Tests of Inventory
Initial Procedures
Analytical Procedures

15. Substantive Tests of Inventory
Tests of Details of Transactions
Test Entries to Inventory Accounts
Test Cutoff of Purchases, Manufacturing, and Sales Transactions
Tests of Details of Balances
Observation of the Client’s Physical Inventory Count
Timing and Extent of the Test
Inventory-Taking Plans
Performing the Test

16. Substantive Tests of Inventory
Tests of Details of Balances
Inventories Determined by Statistical Sampling
Observation of Beginning Inventories
Test Clerical Accuracy of Inventory Listings
Test Inventory Pricing
Test Cost of Manufactured Inventories

17. Substantive Tests of Inventory
Confirm Inventories at Locations Outside the Entity
Examine Consignment Agreements and Contracts
Tests of Details of Accounting Estimates
Comparison of Statement Presentation with GAAP

18. Study Break
This analytical procedure commonly used in the audit of the production cycle is useful in measuring the effectiveness of the manufacturing process.
Inventory Turn Days
Inventory Growth to Cost of Sales Growth
Finished Goods Produced to Direct Labor
Product Defects per Million
D. Product Defects per Million

19. Study Break
This document is a record of time worked by an employee on a specific job.
Production order
Time ticket
Move ticket
Standard cost master file
B. Time ticket

20. Study Break
All of the following are functions of the manufacturing process, except:
Initiating production
Initiating purchases
Production of inventory
Recording manufacturing and inventory transactions
B. Initiating purchases

21. The Personnel Services Cycle

22. Audit Objectives

23. The Personnel Services Cycle
Understanding the Entity and Environment
Analytical Procedures
Inherent Risk

24. Analytical Procedures

25. Consideration of Internal Controls – Common Documents and Records
Personnel authorization
Clock card
Time ticket
Payroll register
Imprest payroll bank account
Payroll check

26. Consideration of Internal Controls – Common Documents and Records
Labor cost distribution summary
Payroll tax returns
Employee personnel file
Personnel data master file
Employee earnings master file

27. Functions and Related Controls
Initiating payroll transactions
Hiring employees
Authorizing payroll changes
Receipt of services
Preparing attendance and timekeeping data

28. Functions and Related Controls
Recording and paying payroll transactions
Preparing the payroll
Recording the payroll
Paying payroll
Paying the payroll
Protecting unclaimed wages
Filing payroll tax returns

29. Systems Flowchart – Payroll Transactions

30. Systems Flowchart – Payroll Transactions

31. Personnel Services Audits
Preliminary Audit Strategies
Substantive Tests of Personnel Services
Initial Procedures
Analytical Procedures

32. Substantive Tests of Personnel Services
Tests of Details of Transactions
Test Entries to Inventory Accounts
Test Cutoff of Personnel Services Transactions
Tests of Details of Balances and Disclosures
Recalculate Accrued Payroll Liabilities
Auditing Employee Benefits and Pension Plans
Auditing Stock Options and Stock Appreciation Rights

33. Study Break
This analytical procedure commonly used in the audit of the personnel services cycle may be a measure of productivity per employee.
Average payroll cost per employee classification
Revenue per employee
Total payroll as a percentage of revenues
Payroll tax expense as a percentage of gross payroll
B. Revenue per employee

34. Study Break
This record holds all pertinent employment data for each employee.
Payroll register
Payroll tax returns
Employee earnings master file
Employee personnel file
D. Employee personnel file

35. Study Break
This report shows each employee’s name, gross earnings, payroll deductions, and net pay for a period.
Clock Card
Time Ticket
Payroll Register
Payroll Check
C. Payroll Register