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

Chapter OverviewChapter OverviewChapter OverviewChapter Overview

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

Audit ObjectivesAudit ObjectivesAudit ObjectivesAudit Objectives

Understanding the Entity and Understanding the Entity and EnvironmentEnvironment

Understanding the Entity and Understanding the Entity and EnvironmentEnvironment

Analytical ProceduresAnalytical ProceduresAnalytical ProceduresAnalytical Procedures

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

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

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

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

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

Systems Flowchart – Systems Flowchart – Manufacturing TransactionsManufacturing Transactions

Systems Flowchart – Systems Flowchart – Manufacturing TransactionsManufacturing Transactions

Systems Flowchart – Systems Flowchart – Manufacturing TransactionsManufacturing Transactions

Systems Flowchart – Systems Flowchart – Manufacturing TransactionsManufacturing Transactions

Inventory AuditsInventory AuditsInventory AuditsInventory Audits

• Preliminary Audit Strategies

• Substantive Tests of Inventory– Initial Procedures

– Analytical Procedures

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

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

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

The Personnel Services The Personnel Services CycleCycle

The Personnel Services The Personnel Services CycleCycle

Audit ObjectivesAudit ObjectivesAudit ObjectivesAudit Objectives

The Personnel Services The Personnel Services CycleCycle

The Personnel Services The Personnel Services CycleCycle

• Understanding the Entity and Environment

• Analytical Procedures

• Inherent Risk

Analytical ProceduresAnalytical ProceduresAnalytical ProceduresAnalytical Procedures

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

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

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

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

Systems Flowchart – Payroll Systems Flowchart – Payroll TransactionsTransactions

Systems Flowchart – Payroll Systems Flowchart – Payroll TransactionsTransactions

Systems Flowchart – Payroll Systems Flowchart – Payroll TransactionsTransactions

Systems Flowchart – Payroll Systems Flowchart – Payroll TransactionsTransactions

Personnel Services AuditsPersonnel Services AuditsPersonnel Services AuditsPersonnel Services Audits

• Preliminary Audit Strategies

• Substantive Tests of Personnel Services– Initial Procedures

– Analytical Procedures

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