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Learn about the key risks in production and payroll processes, understand the production process, control tests for auditing, and substantive procedures for addressing material misstatement risks. Explore control risk assessment and general control considerations for effective risk management.
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Learning Objectives LO1 Explain the key risks of misstatement in production and payroll processes. LO2 Outline the production process: typical transactions, account balances, source documents, and controls. LO3 Give examples of control tests for auditing control over conversion of materials and labour in the production process. LO4 Give examples of the typical substantive procedures used to address the assessed risk of material misstatement in the main accounts in the production process.
Control Risk Assessment Control risk assessment governs the nature, timing, and extent of substantive audit procedures that will be applied in the audit of the account balances in the production process. • Accounts include: • inventories (raw materials, work in process, finished goods), • cost of goods sold, and • amortization (expense and accumulated). LO3
Control Risk Assessment General Control Considerations • Proper segregation of responsibilities for authorization, custody, recording and reconciliation: • Custody of inventories in hands of persons who do not authorize or account for production. • Cost accounting performed by persons who do not authorize production or have custody of production assets. LO3
Control Risk Assessment General Control Considerations • Controls should produce evidence to allow for detail control checking procedures. • Complex computer systems may be used to manage production and materials flow. • Information about the production cycle control structure often is gathered initially by completing an internal control questionnaire (ICQ). An ICQ for general controls is in Appendix 13A-1. LO3
Detail Test Controls Audit Procedures Tests of controls should address all of the control objectives. • Tests include identification of population and expression of the action to be taken. • Note dual direction of testing for completeness and validity requires selection of sample from appropriate population. • See Exhibit 13-3. LO3
Control Risk Assessment The purpose of testing controls is to determine nature, extent, and timing of substantive procedures. • Good controls – low control risk • Smaller sample sizes, earlier timing for substantive tests. • Poor controls – high control risk • Larger samples, more work at year end. LO3
