Written Report Substantive Tests of Transactions and Balances
Written Report Substantive Tests of Transactions and Balances
Written Report Substantive Tests of Transactions and Balances
1
A material requisition form lists the items to be picked from inventory and used in
the production process or in the provision of a service to a customer, usually for a
specific job. The form usually has three purposes:
The form can also be used as the basis for the reordering of any inventory items that
are not currently in stock.
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If the materials are to be delivered to a specific location, there may also be space in the
header in which to identify the delivery location. Unless a service invoice is to be
prepared from this document, it usually does not include item costs or prices.
The requesting person retains a copy of the material requisition form, as does the
warehouse staff. Another copy accompanies the picked goods to their eventual
destination. If items listed on the form are not in stock, another copy may be sent to the
purchasing department for ordering purposes.
Auditors may trace the flow of material requisition forms through a company, to see if
inventory items are being appropriately used and recorded as mandated by company
materials handling procedures. If not, the auditors may conclude that they cannot rely
upon certain aspects of a company's control systems as part of their audit activities, and
so will bolster other audit activities.
A material requisition form may also be known as a purchase requisition form, though
a purchase requisition can be used for all types of purchases, not just those involved in the
production process.
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2
In job order costing system, the method of measuring and recording direct labor cost is
similar tomeasuring and recording direct materials cost.
Direct labor hours worked, direct labor rate per hour, and total amount in dollars for
each individual job or task is recorded on a document known as time ticket or employee
time ticket. A separate time ticket is prepared by each worker for every working day.
Accounting department collects all time tickets at the end of the day. These time tickets
are used to enter direct labor cost on the job cost sheet of each individual job order. An
example/sample of complete time ticket is given below:
In job order costing system, any labor charges that are not directly traceable to a
particular job are known as indirect labor cost. In example of time ticket given above
maintenance is indirect labor. Other examples of indirect labor are cleanup costs and
supervision etc. Indirect labor is not included in direct labor cost and, therefore,
becomes a part of the manufacturing overhead.
These days, many companies have replaced the manual process of recording direct
materials cost with the computerized approaches. They use a bar code technology to
enter data into a computer. This technology increases the speed and accuracy of the
whole process.
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A departmental cost of production report (CPR) shows all costs chargeable to a
department. It is not only the source for summary journal entries at the end of the
month but also a most convenient vehicle for presenting and disposing of costs
accumulated during the month. A production cost report shows:
1. Total unit costs transferred to it from a preceding department.
2. Materials, labor, and factory overhead added by the department.
3. Unit cost added by the department.
4. Total and unit costs accumulated to the end of operations in the department.
5. The cost of the beginning and ending work in process inventories.
6. Cost transferred to a succeeding department or to a finished goods storeroom.
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A bill of materials or product structure is a list of the raw materials, sub-assemblies,
intermediate assemblies, sub-components, parts and the quantities of each needed to
manufacture an end product or to finish a particular job.
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B. Analytical Procedures
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A receiving report is an important record of the goods that an entity has actually
received from a supplier because it documents what is owed to the supplier in terms of
payment for the goods received or the return of the goods, in some cases.
A receiving report is used to document the contents of a delivery to a business. The form is
filled out by the receiving staff of the business accepting the delivered goods. The following
information is typically included on a receiving report:
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Condition of the items received. This can be a negative entry, where only
damaged goods are noted.
The receiving report can be used in several ways, including the following:
Returns. If certain goods are to be returned, the receiving report documents the
reason for the return, such as damaged goods.
Payables. The receiving report can be used as evidence of receipt in the three-
way matching process. This approach is more commonly used for larger-dollar
purchases.
Accruals. The accounting staff may use receiving reports that were completed
near month-end to accrue expenses for supplier invoices that have not yet
arrived.
A master copy of each receiving report is stored in the receiving department. Copies are
sent to other departments as required by company procedures, such as the copy sent to
the payables staff to document received goods.
From a control perspective, it can be useful to uniquely number each receiving report.
The sequence of numbers can then be examined to see if any receiving reports are
missing.
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This is a blog post of Kellen, an auditor, in his blog Accountant by Day
What are inventory counts and why do you need to fly there?
For those who dont know, inventory counts are what manufacturing companies do
around the end of the year to see exactly how much inventory they have. The inventory
count must be done after production for the past year ends, and before production for
the new year begins, otherwise it becomes much more difficult to keep track of what to
count as inventory as of 12/31.
As auditors, we participate in inventory counts soon after the client has finished
counting the inventory. We only have this small window of opportunity, because in a
few days, the inventory levels will be different. We want to make sure that the inventory
records are correct as of 12/31.
The clients employees will spend a few days counting everything in the warehouse (or
warehouses.) When the clients employees count the inventory, they keep track of what
they count on count sheets. They should also put stickers or tags on each piece of
inventory to make it clear which pieces have already been counted.
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Our first inventory count test is called sheet-to-floor. For this test, we selected
inventory items from the count sheets. Then we traced these sheets to the actual
inventory on the floor, and recounted it. For inventory, auditors are most worried about
the existence assertion: Does the inventory recorded on the books really exist?
However, as auditors we are also making sure that they count was done well. We
perform a second test called floor-to-sheet where we select an item of inventory out
on the warehouse floor. We count the items, and then trace them to their count sheet to
make sure that the clients counters recorded to same number that we did. This tests for
completeness: Is all the existing inventory recorded on the books?
In the case of fraud, it is much more likely that a company would overstate inventory, so
existence is the most important test. However, counters can also make mistakes, and
auditors are also checking for errors - in fact, most of the discrepancies we find as
auditors are due to errors, not fraud.
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Consignment occurs when goods are sent by their owner (the consignor) to an agent
(the consignee), who undertakes to sell the goods. The consignor continues to own the
goods until they are sold, so the goods appear as inventory in the accounting records
of the consignor, not the consignee.
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2
An invoice is a document sent to a buyer that specifies the amount and cost of products or
services that have been provided by a seller
An invoice indicates what must be paid by the buyer according to the payment terms of
the seller. Payment terms usually specify the period of time that a buyer has to send
payment to the seller for the goods and/or services that they have purchased.
An invoice provides a detailed account of the products or service and a set of other
information that can vary a bit depending on the requirements in the country the
invoice is issued and the type of product or service being sold.
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1The chart of accounts is a listing of all accounts used in the general ledger of an
organization. The chart is usually sorted in order by account number, to ease the task of
locating specific accounts.
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Example of a companys written plan for taking the physical count of their inventories
is presented on the succeeding pages.
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Example of an inventory tag
INVENTORY TAG is a tag attached to inventory items that identifies the inventory items
to aid in counting the physical inventory.
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C. Analytical Procedures
1. Compare gross profit with historical results and industry averages.
2. Compare inventory with that of budget and prior period.
3. Compare inventory turnover with that of other entities in the same
industry and that of prior periods.
4. Scan for unusual and slow-moving items.
McKesson & Robbins was a drug and chemical company in the mid-1920s
that attracted the attention of Philip Musica, an individual with an unsavory
past that included criminal acts and multiple fake names.
Under the name Frank D. Costa, Musica greeted the advent of U.S.
Prohibition in 1919 with the creation of a company that manufactured hair tonic
and other products that had high alcohol content. These products were sold to
bootleggers, which used the alcohol to produce liquor to sell to customers.
Musica purchased McKesson & Robbins in 1924 using the name F. Donald
Coster, and seeded the company with family members to help loot the company.
The fraud involved fake purchase orders, inflated inventory and skimming cash
from company sales, and occurred despite the presence of Price Waterhouse as
the company's auditors. When the scam was finally detected in 1937, the SEC
determined that $19 million in fictitious inventory was on the balance sheet of
the company. This is equal to approximately $285 million in current dollars.
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Plant Ledger: A subsidiary ledger that records detailed information on each capital
asset, including acquisition date, cost, description, location, depreciation, and
disposition.
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General Principle of Capitalization
The IRS indicates what constitutes a real property capital improvement as follows:
1
a right to keep possession of property belonging to another person until a debt owed
by that person is discharged.
2
a legal agreement by which a bank or other creditor lends money at interest in
exchange for taking title of the debtor's property, with the condition that the
conveyance of title becomes void upon the payment of the debt.
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IX. Investments
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X. Notes Payable
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Recorded notes payable 6. Read the loan agreement for terms and
represent obligations of the conditions that should be disclosed and
entity. for pledging of assets.
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References
https://www2.deloitte.com/content/dam/Deloitte/za/Documents/risk/ZA_RA_DecodingFrauds
_101115.pdf
http://www.accountingtools.com/material-requisition-form
http://www.accountingformanagement.org/measuring-and-recording-direct-labor-cost/
http://3.bp.blogspot.com/-
oU_qWl9HqTY/UMiaMYJlfYI/AAAAAAAAA5M/JP1pFeuA5Uo/s1600/Bill+of+materail+gar
ment.png
https://en.wikipedia.org/wiki/Bill_of_materials
http://www.arxisfinancial.com/images/pdfs/Inventory_Fraud.pdf
http://www.accountingtools.com/receiving-report
www.businessdictionary.com/definition/receiving-report.html
http://accountantbyday.com/2011/01/03/life-of-an-auditor-inventory-counts/
www.accountingtools.com/consignment-accounting
https://www.ventureline.com/accounting-glossary/I/inventory-tag-definition/
http://www.investopedia.com/articles/economics/12/four-unknown-massive-frauds.asp
http://www.vakilno1.com/nri/investment/remittance.html
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1. Which of the following is the least useful when performing substantive tests
on production transactions?
A. Materials Requisition Form
B. Labor tickets
C. Bill of Materials
D. Inventory Tag
B. inspect the property ledger and the insurance and tax records,
and then tour the clients facilities.
C. analyze the repair and maintenance account, and then tour the
clients facilities.
D. tour the clients facilities, and then inspect the property ledger
and the insurance and tax records.
In searching for unrecorded retirements of fixed assets, the auditor would select
items included in the property ledger and other records and then, by touring the
clients facilities, look to see if they are on hand. A fixed asset that is not on hand but
is included in the records may indicate that a retirement was not recorded.
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A. Interest expense
B. Accounts payable.
C. Accounts receivable.
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