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Chapter 9

Chapter 9. Production Cycle. 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. 1. Internal Control.

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Chapter 9

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  1. Chapter 9 Production Cycle 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 Chapter 9

  3. 1. Internal Control • Inventory risks • important account • dual effects • subjective and complex accounting 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 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 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 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 Chapter 9

  8. 3. Frauds • Inventory • fictitious inventory frauds • McKesson & Robbins • inventory count frauds • MiniScribe, Phar-Mor • often part of sales frauds 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 Chapter 1

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