AUDIT OF

PRODUCTION
CYCLE
 INTRODUCTION
The production cycle involves the conversion
of raw materials into finished goods. It includes
production planning and control of the types
and quantities of products to be manufactures,
the inventory levels to be maintained, and the
activities pertaining to the manufacturing
processes.
DOCUMENTS
USED
 Prenumbered form used to instruct a quantity of
PRODUCTION a particular product.
ORDER Records approval for production personnel to
produce products

A list of raw material components required to

BILL OF produce a product.
MATERIALS Indicates components to be used in producing a
product

A prenumbered form used to request and

MATERIALS approve the issuance of materials from
REQUISITION inventory.
Records approval to issue materials to
production.
 A form that summarizes the materials
MATERIALS requisitioned by job or by process, for a period
REQUISITION such as a day/week/month.
SUMMARY Records materials used in any given period and
is the basis for assigning costs to an account.

A form that accompanies goods as they are

COST transferred through production. As additional
ACCUMULATION costs are incurred, the costs are recorded in the
REPORT report.
Records cost of raw materials placed in
production.
A prenumbered form on which time worked on jb
LABOR TICKET is recorded.
Record the specific activity of a laborer and is
the basis for assigning costs to an account.
 A form that summarizes the daily labor tickets
LABOR TICKET by job or by process.
SUMMARY Records labor used in production on any given
day.
A report that summarizes costs for cost control
COMPLETED processes and for determining the amount of
PRODUCTION cost to assign to goods remaining in the
REPORT production process.
Provides a basis for inventory valuation.
 TEST OF
CONTROLS
 OCCURRENCE
CONTROLS TEST OF
CONTROLS
01 Material requisition should
be prepared by operating
The auditor should observe
separation of duties and inspect
personnel and signed by a approval signatures.
warehouse custodian
when goods are
transferred to production.
Completed materials
requisitions should be on
file in accounting.
The auditor should inspect
02 Signed labor tickets should
be the basis in recording labor ticket
labor
 COMPLETENES
CONTROLS S TEST OF
CONTROLS
01 Production
prenumbered
orders are
and
The auditor should observe the
procedure and account for a
accounted for numerical sequence of
production orders.
Material requisitions are The auditor should observe the
02 prenumbered and procedure and account for a
accounted for by an numerical sequence of material
accounting clerk requisitions.
Time charged on labor
03 ticket is reconciled to
The auditor could observe if a
clerk reconciles the time
employee time cards charged on labor tickets to total
hours paid
 ALLOCATION
CONTROLS TEST OF
CONTROLS
01 Value for transactions are
based on a bill of
The auditor should trace the
amounts to the bill of materials,
materials, approved ticket time cards overhead rates
and rates for labor, and assigned, authorized price lists
predetermined overhead and underlying schedules.
rates
02 Overapplied
underapplied overhead is
or The auditor should inspect the
signature indicating that the
reviewed periodically, and overhead rate has been
rates are adjusted as reviewed.
necessary
 PRESENTATION AND
CONTROLS DISCLOSURE
TEST OF
CONTROLS
01 The chart of accounts
should adequately
The auditor should inspectthe
chart of accounts and examine
describe the accounts to the signature of the employee
be used, and account performing the procedure
coding is independently
checked
SUBSTANTIV
E TESTS
ASSERTIONS AUDIT PROCEDURES
For selected transactions, examine signed materials
OCCURRENCE requisitions, approved labor tickets, and allocation of
overhead

Account for sequence of production reports and

COMPLETENESS material requisitions
Reconcile time cards and labor tickets

Trace cost records to underlying documents

ALLOCATION

Check accuracy of account coding by reference to

PRESENTATION
chart of accounts
AND
DISCLOSURE
 AUDIT OF
INVENTORY
WAREHOUSIN
G
 INTRODUCTION
Warehousing or storage of such materials or
goods results in a very significant current asset
for many manufacturing, wholesale, and retail
operations. The transactions included in
warehousing are the receipt and issuance of
goods.
 OCCURRENCE
CONTROLS TEST OF
CONTROLS
01 A copy of the receiving
report signed by a
Observe separation of duties
and inspect approval signature
receiving clerk is used by on receiving report.
inventory accounting to
record receipt of goods.

02 Materials requisition is
prepared and signed by
Observe separation of duties
and inspect approval signature
appropriate operating on materials requisitions
personnel.
 COMPLETENES
CONTROLS S TEST OF
CONTROLS
01 Receiving reports and
materials requisitions are
Observe procedure and account
for a numerical sequence of
prenumbered and receiving reports to determine
accounted for by a clerk in that all have been recorded
inventory accounting
Inventory clerk signs a Observe procedure and inspect
02 copy of the receiving signatures
report after counting
goods transferred
Access to inventory is
03 limited to personnel
Observe procedures

responsible for custody.

 ALLOCATION
CONTROLS TEST OF
CONTROLS
01 Costs assign to work in
process and finished
Inquire about and observe
evidence of standards setting,
goods are set by review of standards and testing
procedures that are of standards
reviewed and periodically
evaluated. Mathematical
accuracy is tested.
 PRESENTATION AND
CONTROLS DISCLOSURE
TEST OF
CONTROLS
01 The chart of accounts
should adequately
The auditor should inspectthe
chart of accounts and examine
describe the accounts to the signature of the employee
be used, and account performing the procedure
coding is independently
checked
QUESTIONS
?
APPLICATIO
N
In a manufacturing company, which one of the following
audit procedures would give the least assurance of the
valuation of inventory at the audit date?

a) Testing the computation of standard overhead rates

b) Examining paid vendors invoices
c) Reviewing direct labor rates
d) Obtaining information of inventories pledged under loan
agreement
An auditor has accounted for a sequence of inventory tags
and is now going to trace information on a representative
number of tags to the physical inventory sheets. The
purpose of this procedure is to obtain assurance that

a) The final inventory is valued at cost

b) All inventory represented by an inventory tag is listed on
the inventory sheets
c) All inventory represented by an inventory tag is bona
fide
d) Inventory sheets do not include untagged inventory
An auditor’s test of controls over the issuance of raw
materials to production would probably include

a) Reconciling raw materials and WIP perpetual inventory

b) Inquiring of the inventory custodian about the
procedures followed when defective materials are
received from vendors
c) Observing that raw materials are stored in secure areas
and that storeroom security is supervised by a
responsible person
d) Examining materials requisitions and reperforming client
The physical count of a retailer’s inventory was higher than that
shown by the perpetual records. Which of the following could
explain the difference?

a) Inventory items had been counted, but tags placed on the items
had not been taken off items and added to the inventory
accumulation sheets
b) Credit memos for several items returned by customers had not
been recorded
c) No journal entry had been made on the retailer’s books for
several items returned to suppliers
d) An item purchased FOB Shipping Point had not arrived at the