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Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the
Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition
Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the
Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition
William C. BoyntonWilliam C. BoyntonCalifornia Polytechnic State California Polytechnic State
University at San Luis ObispoUniversity at San Luis Obispo
Raymond N. Raymond N. JohnsonJohnson
Portland State UniversityPortland State University
Chapter 16 – Auditing the Production and Personnel Services Cycles
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Chapter OverviewChapter OverviewChapter OverviewChapter Overview
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Interface of Production Cycle Interface of Production Cycle with Other Cycleswith Other Cycles
Interface of Production Cycle Interface of Production Cycle with Other Cycleswith Other Cycles
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Audit ObjectivesAudit ObjectivesAudit ObjectivesAudit Objectives
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Understanding the Entity and Understanding the Entity and EnvironmentEnvironment
Understanding the Entity and Understanding the Entity and EnvironmentEnvironment
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Analytical ProceduresAnalytical ProceduresAnalytical ProceduresAnalytical Procedures
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Inherent RiskInherent RiskInherent RiskInherent 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
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Consideration of Internal Consideration of Internal Controls – Common Documents Controls – Common Documents
and Recordsand Records
Consideration of Internal Consideration of Internal Controls – Common Documents Controls – Common Documents
and Recordsand Records• Production order
• Material requirements report
• Materials issue slip
• Time ticket
• Move ticket
• Daily production report
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Consideration of Internal Consideration of Internal Controls – Common Documents Controls – Common Documents
and Recordsand Records
Consideration of Internal Consideration of Internal Controls – Common Documents Controls – Common Documents
and Recordsand Records• Completed production report
• Standard cost master file
• Raw materials inventory master file
• Work-in-progress inventory master file
• Finished goods inventory master file
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Functions and Related Functions and Related ControlsControls
Functions and Related Functions and Related ControlsControls
• Initiating production– Planning and controlling production
• Production of Inventory– Issuing raw materials– Processing goods in production– Transferring completed work to
finished goods– Protecting inventories
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Functions and Related Functions and Related ControlsControls
Functions and Related Functions and Related ControlsControls
• Recording manufacturing and inventory transactions– Determining and recording
manufacturing costs– Maintaining correctness of
inventory balances
• Management Controls
• Additional Inventory Controls
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Systems Flowchart – Systems Flowchart – Manufacturing TransactionsManufacturing Transactions
Systems Flowchart – Systems Flowchart – Manufacturing TransactionsManufacturing Transactions
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Systems Flowchart – Systems Flowchart – Manufacturing TransactionsManufacturing Transactions
Systems Flowchart – Systems Flowchart – Manufacturing TransactionsManufacturing Transactions
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Inventory AuditsInventory AuditsInventory AuditsInventory Audits
• Preliminary Audit Strategies
• Substantive Tests of Inventory– Initial Procedures
– Analytical Procedures
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Substantive Tests of InventorySubstantive Tests of InventorySubstantive Tests of InventorySubstantive 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
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Substantive Tests of InventorySubstantive Tests of InventorySubstantive Tests of InventorySubstantive 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
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Substantive Tests of InventorySubstantive Tests of InventorySubstantive Tests of InventorySubstantive 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
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1. This analytical procedure commonly used in the audit of the production cycle is useful in measuring the effectiveness of the manufacturing process.
A. Inventory Turn DaysB. Inventory Growth to Cost of Sales GrowthC. Finished Goods Produced to Direct LaborD. Product Defects per Million
D. Product Defects per Million
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2. This document is a record of time worked by an employee on a specific job.
A. Production orderB. Time ticketC. Move ticketD. Standard cost master file
B. Time ticket
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3. All of the following are functions of the manufacturing process, except:
A. Initiating productionB. Initiating purchasesC. Production of inventoryD. Recording manufacturing and
inventory transactions
B. Initiating purchases
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The Personnel Services The Personnel Services CycleCycle
The Personnel Services The Personnel Services CycleCycle
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Audit ObjectivesAudit ObjectivesAudit ObjectivesAudit Objectives
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The Personnel Services The Personnel Services CycleCycle
The Personnel Services The Personnel Services CycleCycle
• Understanding the Entity and Environment
• Analytical Procedures
• Inherent Risk
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Analytical ProceduresAnalytical ProceduresAnalytical ProceduresAnalytical Procedures
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Consideration of Internal Consideration of Internal Controls – Common Documents Controls – Common Documents
and Recordsand Records
Consideration of Internal Consideration of Internal Controls – Common Documents Controls – Common Documents
and Recordsand Records• Personnel authorization
• Clock card
• Time ticket
• Payroll register
• Imprest payroll bank account
• Payroll check
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Consideration of Internal Consideration of Internal Controls – Common Documents Controls – Common Documents
and Recordsand Records
Consideration of Internal Consideration of Internal Controls – Common Documents Controls – Common Documents
and Recordsand Records• Labor cost distribution summary
• Payroll tax returns
• Employee personnel file
• Personnel data master file
• Employee earnings master file
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Functions and Related Functions and Related ControlsControls
Functions and Related Functions and Related ControlsControls
• Initiating payroll transactions– Hiring employees– Authorizing payroll changes
• Receipt of services– Preparing attendance and
timekeeping data
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Functions and Related Functions and Related ControlsControls
Functions and Related Functions and Related ControlsControls
• Recording and paying payroll transactions– Preparing the payroll– Recording the payroll
• Paying payroll– Paying the payroll – Protecting unclaimed wages– Filing payroll tax returns
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Systems Flowchart – Payroll Systems Flowchart – Payroll TransactionsTransactions
Systems Flowchart – Payroll Systems Flowchart – Payroll TransactionsTransactions
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Systems Flowchart – Payroll Systems Flowchart – Payroll TransactionsTransactions
Systems Flowchart – Payroll Systems Flowchart – Payroll TransactionsTransactions
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Personnel Services AuditsPersonnel Services AuditsPersonnel Services AuditsPersonnel Services Audits
• Preliminary Audit Strategies
• Substantive Tests of Personnel Services– Initial Procedures
– Analytical Procedures
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Substantive Tests of Personnel Substantive Tests of Personnel ServicesServices
Substantive Tests of Personnel Substantive Tests of Personnel ServicesServices
• 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
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4. This analytical procedure commonly used in the audit of the personnel services cycle may be a measure of productivity per employee.
A. Average payroll cost per employee classification
B. Revenue per employeeC. Total payroll as a percentage of
revenuesD. Payroll tax expense as a percentage of
gross payroll
B. Revenue per employee
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5. This record holds all pertinent employment data for each employee.
A. Payroll registerB. Payroll tax returnsC. Employee earnings master fileD. Employee personnel file
D. Employee personnel file
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6. This report shows each employee’s name, gross earnings, payroll deductions, and net pay for a period.
A. Clock CardB. Time TicketC. Payroll RegisterD. Payroll Check
C. Payroll Register