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Production & Inventory Cycle, General substantive procedures,…
Production & Inventory Cycle
Heart of each firm
Production process
Issue of raw materials & production
Customer order
Inventory Production Order (CPO)
CPO authorisation by production planning department & signature by factory manager
Inventory Job Card (IJC)
Captures all costs of the production
Goods transfer note - signed by each person responsible for part of production
Daily production reports - orders comprising WIP
Daily record of time recorded on job cards - reconciled with total hours worked by production staff
Production manager - inspects proper completion of each stage of production
Differences accounted for
Transfer of manufactured foods to finished goods inventory
General controls
Segregation of duties
Rotation of duties
Supervision & review
Management Control
Personnel take regular leave
Internal audit
Sufficient stationery control
Scrutinise all records & documents for extraordinary items
Test castings & calculations on all selected items, documents and ledger
Inventory
Safeguarding (Completeness + Existence)
Inventory safeguarded against theft & damage
Internal controls
Keep in locked storeroom
Limit access
Safeguard inventory susceptible to damage against elements: insurance
Issue of raw materials to production (Completeness + Validity)
Inventory only leaves storeroom based on proper authorised documentation
Issue notes for issuing raw materials to production
Receipt of requisition, authorised by production foreman or manager
Numerical accounting and following up on missing numbers
Signed by store man + production foreman as proof of receipt of goods
Recording (Completeness + Accuracy)
Regular inventory counts + comparison with inventory records
Follow up on differences
Adjustment to inventory records after proper management authorisation
Continuous inventory records maintained by independent personnel from safeguarding function
Write up from GRN and delivery notes / issue notes to production
Obsolete / slow-moving inventory identified timely and systematically written off according to customer policy
Key Documentation
Customer production order
Inventory Production Order
Raw materials issue slip
Customer Job Card / Inventory Job card
Job transfer / inventory movement sheet (goods received note (GRN))
Inventory master files - raw materials, WIP & finished goods
Daily production report
Completed production report
Transfer to finished goods notes
Picking slip and delivery notes
Inventory Count sheet
Inventory adjustment form
Key components of manufacturing cycle
Production process
Outputs: Finished goods services
Inputs: labour, land, machinery & raw materials
General substantive procedures
Agree opening balances to prior year closing balance
Agree total of the General Ledger to Trial Balance & Financial Statements
Governance and Control
Inspect minutes of meetings for authorisation of transactions
Test presentation & disclosure of transactions in Financial Statements
Test castings & calculations of the General Ledger, documents, recons etc
Overall review for exceptions/unusual entries in General Ledger accounts
Obtain a management representation letter
Evaluate the effectiveness of internal control and the impact on the nature, timing and extent of substantive procedures
Perform analytical procedures - comparisons with prior year balances/budgets and follow up on any major fluctuations
Evaluate the effectiveness of internal control and the impact thereof on the nature, timing and extent of substantive procedures
Obtain trial balances/schedules of significant balances and: (a) agree opening balances to previous year working papers; (b) review movements in general ledger for unusual items in manufacturing expenses, cost of sales, raw material, work in progress & finished goods & further investigate unusual entries; and (c) agree inventory master file balances to general ledger control accounts & trial balance
Perform analytical procedures such as comparing inventory balances from the current year compared to that of prior year assess the relation thereof to turnover
Financial statements assertions
Valuation: Inventory should always be stated at lower of cost/Net Realisable Value
Existence:
Inventory should physically exist at year-end
Rights & Obligations:
Firm has valid title to all inventory at year-end
Completeness:
No unrecorded inventory or undisclosed items at year-end
Cut-off:
Inventory transactions recorded in correct period
Accuracy:
Inventory determined through allocation of raw material, labour & overhead manufacturing expenses to manufactured goods
Presentation & Disclosure:
Inventory correctly classified & presented under IFRS. Appropriate disclosures made about inventory factored or pledged to secure liabilities of the firm
Substantive procedures
Raw materials: Completeness: Inspect sequence tests & exception reports of unmatched pre-numbered raw material requisitions & pre-numbered raw material issue slips
Work in progress (WIP):
Completeness: Inspect whether total cost of materials issued per the requisition notes is matched by charge to WIP
WIP: Accuracy/Validity: Recalculate the overhead allocations and enquire about the basis of allocation and it being consistent with that of the prior year + Inspect WIP account for jobs written off and the related authorisation for it
Finished Goods: Completeness: Agree GTN (in finished goods warehouse) to completed job records for goods transferred from manufacturing
Existence:
Observe operation of security checkpoints in warehouse
Cut off (For all three sections of production):
Select pre and post year-end and review (a) GRN (merchandise purchased); (b) Delivery notes (sales); (c) Completed production reports (WIP transferred to finished goods);
(d) follow through to inventory master files and general ledger to ensure recorded in the correct accounting period
Presentation and Disclosure (For all three sections of production):
(a) Inspect the financial statements to ensure that amounts are classified & disclosed correctly under IFRS; and (b) Inspect whether the financial statement notes reflect the rights and obligations of the entity with regards to assets mortgaged, pledged or leased to secure the bank overdraft or liabilities of the entity, or others
Test of controls: Completeness, Validity; Recording; Existence + Accuracy