Modern

Modern Auditing:
Auditing:

Assurance
Assurance Services
Services and
and the
the Integrity
Integrity
th
of
Financial
Reporting,
8
of Financial Reporting, 8th Edition
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

Chapter
Chapter Overview
Overview

Interface
Interface of
of Production
Production Cycle
Cycle
with
with Other
Other Cycles
Cycles

Audit
Audit Objectives
Objectives

Understanding
Understanding the
the Entity
Entity and
and
Environment
Environment

Analytical
Analytical Procedures
Procedures

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

Consideration
Consideration of
of Internal
Internal Controls
Controls
Common
Common Documents
Documents and
and Records
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
Functions and
and Related
Related Controls
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
Functions and
and Related
Related Controls
Controls
Recording manufacturing and
inventory transactions

Determining and recording

manufacturing costs
Maintaining correctness of inventory
balances

Management Controls
Additional Inventory Controls

Systems
Systems Flowchart
Flowchart
Manufacturing
Manufacturing Transactions
Transactions

Systems
Systems Flowchart
Flowchart
Manufacturing
Manufacturing Transactions
Transactions

Inventory
Inventory Audits
Audits
Preliminary Audit Strategies

Substantive Tests of Inventory

Initial Procedures

Analytical Procedures

Substantive
Substantive Tests
Tests of
of Inventory
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 Clients Physical

Inventory Count
Timing and Extent of the Test
Inventory-Taking Plans
Performing the Test

Substantive
Substantive Tests
Tests of
of Inventory
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
Substantive Tests
Tests of
of Inventory
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
Study Break
Break
1. This analytical procedure commonly
used in the audit of the production
cycle is useful in measuring the
effectiveness of the manufacturing
process.
A.
B.
C.
D.

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
Study Break
Break
2. This document is a record of time
worked by an employee on a
specific job.
A.
B.
C.
D.

Production order
Time ticket
Move ticket
Standard cost master file

B. Time ticket

Study
Study Break
Break
3. All of the following are functions
of the manufacturing process,
except:
A.
B.
C.
D.

Initiating production
Initiating purchases
Production of inventory
Recording manufacturing and
inventory transactions

B. Initiating purchases

The
The Personnel
Personnel Services
Services Cycle
Cycle

Audit
Audit Objectives
Objectives

The
The Personnel
Personnel Services
Services Cycle
Cycle
Understanding the Entity and
Environment

Analytical Procedures

Inherent Risk

Analytical
Analytical Procedures
Procedures

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

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

Functions
Functions and
and Related
Related Controls
Controls
Initiating payroll transactions
Hiring employees
Authorizing payroll changes

Receipt of services

Preparing attendance and timekeeping

data

Functions
Functions and
and Related
Related Controls
Controls
Recording and paying payroll
transactions
Preparing the payroll
Recording the payroll

Paying payroll

Paying the payroll

Protecting unclaimed wages
Filing payroll tax returns

Systems
Systems Flowchart
Flowchart Payroll
Payroll
Transactions
Transactions

Systems
Systems Flowchart
Flowchart Payroll
Payroll
Transactions
Transactions

Personnel
Personnel Services
Services Audits
Audits
Preliminary Audit Strategies

Substantive Tests of Personnel

Services
Initial Procedures

Analytical Procedures

Substantive
Substantive Tests
Tests of
of Personnel
Personnel
Services
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
Study Break
Break
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 employee
C. Total payroll as a percentage of revenues
D. Payroll tax expense as a percentage of gross
payroll
B. Revenue per employee

Study
Study Break
Break
5. This record holds all pertinent
employment data for each
employee.
A.
B.
C.
D.

Payroll register
Payroll tax returns
Employee earnings master file
Employee personnel file

D. Employee personnel file

Study
Study Break
Break
6. This report shows each employees
name, gross earnings, payroll
deductions, and net pay for a
period.
A.
B.
C.
D.

Clock Card
Time Ticket
Payroll Register
Payroll Check

C. Payroll Register