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Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th 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.

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slide1

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

inherent risk
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
consideration of internal controls common documents and records
Consideration of Internal Controls – Common Documents and Records
  • Production order
  • Material requirements report
  • Materials issue slip
  • Time ticket
  • Move ticket
  • Daily production report
consideration of internal controls common documents and records1
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
functions and related controls
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
functions and related controls1
Functions and Related Controls
  • Recording manufacturing and inventory transactions
    • Determining and recording manufacturing costs
    • Maintaining correctness of inventory balances
  • Management Controls
  • Additional Inventory Controls
inventory audits
Inventory Audits
  • Preliminary Audit Strategies
  • Substantive Tests of Inventory
    • Initial Procedures
    • Analytical Procedures
substantive tests of inventory
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
substantive tests of inventory1
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
substantive tests of inventory2
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
study break
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

study break1
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

study break2
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

the personnel services cycle1
The Personnel Services Cycle
  • Understanding the Entity and Environment
  • Analytical Procedures
  • Inherent Risk
consideration of internal controls common documents and records2
Consideration of Internal Controls – Common Documents and Records
  • Personnel authorization
  • Clock card
  • Time ticket
  • Payroll register
  • Imprest payroll bank account
  • Payroll check
consideration of internal controls common documents and records3
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
functions and related controls2
Functions and Related Controls
  • Initiating payroll transactions
    • Hiring employees
    • Authorizing payroll changes
  • Receipt of services
    • Preparing attendance and timekeeping data
functions and related controls3
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
personnel services audits
Personnel Services Audits
  • Preliminary Audit Strategies
  • Substantive Tests of Personnel Services
    • Initial Procedures
    • Analytical Procedures
substantive tests of personnel services
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
study break3
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

study break4
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

study break5
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