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Objectives in the audit of inventories and cost of goods sold adequacy and clerical accuracy

Cost of goods sold represents all expenditures incurred for products shipped or services provided during the year and is properly recorded. Cost of sales is properly described and classified in the financial statements and adequate disclosures with respect to these amounts have been made.

Overall Analytical Review 1. Investigate significant or unusual fluctuations. Compare gross profit margins with comparable margins for the preceding period with comparable margins for industry and with budgeted margins for the current period and investigate unusual fluctuations. Prepare and analyse gross profit analysis by taking into account sales and cost components. Using PBC, compare gross profit ratios by product line, division or period to those of the prior year and obtain explanation for unusual variations.

Cost of Goods Sold 2. Investigate significant variances between the predicted and recorded amounts. Expand the vouching test of revenue transactions to also test the related cost of sales transactions by tracing the unit costs used to relieve inventory to cost records tested in the audit of inventory. Cross-reference provisions for depreciation, depletion and amortization included in cost of sales to the tests performed in the audit of accumulated depreciation.

Test controls over conversion cycle Refer conversion cycle work program in respect of material requisition, production reporting, inventory management and inventory perpetual records. Test control over purchasing cycle in respect of significant internal control functions. Refer compliance work program for purchases cycle.

Using PBC or cutoff documents, trace cutoff data recorded before and after the physical inventory date into the accounting records to determine if proper cutoff was obtained.

Consider responses to accounts payable confirmations that might indicate potential inventory cutoff problems. Conclude as to the propriety of the cutoff achieved. Basis for allocating Overheads 5. For variable overheads allocation should be made on actual production, the basis of which should be consistent. Ensure that the manufacturing and operating expenses of shut down period are not deferred.

As shut down due to strike, lock-out or mechanical problems etc. Joint Product By Product Costing 6. Check the consistency of the above mentioned policy. Check the treatment for any by-product e. Excise Duty ED 7. Fixed ED or ED on production capacity should be regarded as a period cost and should form part of the cost of sales.

ED on excisable goods produced should be charged to cost of sales, as such duty is collected at the time of sale but adequate provision is required for excisable goods in hand at the balance sheet date, which were ready for sale.

Chapter 12 Inventories and Cost of Goods Sold McGraw-Hill/Irwin

Ensure that the cost of sales does not include any indirect tax, which is subsequently adjustable against liability for any other tax or duty e. Also, this standard percentage does not exceed the normal wastage prevailing in such industry.

Check that the current wastage is in accordance with the standard wastage. Ensure that abnormal wastage is not charged to production, as it is a separate line item of the profit and loss account.

  1. Inventory operations bureau of management audit audit report on the internal controls and beverages1 all goods sold at the commissaries are ordered by the. Cost of goods sold represents all expenditures incurred for products shipped or services provided during the year and is properly recorded.
  2. Perform further audit procedures—tests of controls. Cross refer actual production figure from the quantitative schedule of inventories verified during the year.
  3. Basis for allocating Overheads 5. Include calculation of average payroll per full-time equivalents of employees.

Consider bringing the matter of abnormal wastage to the knowledge of the BOD through the covering letter. Include calculation of average payroll per full-time equivalents of employees. Verify the clerical accuracy of the analysis. Trace selected amounts to the payroll register and to prior year working papers otherwise those tested in payroll cycle.

Investigate significant fluctuations in amounts. Consider whether they may be indicative of potential cutoff problems. Scan the payroll register for unusual balances or amounts.

Objectives in the audit of inventories and cost of goods sold adequacy and clerical accuracy

If the department-wise figure of an expense account is not equal to the balance of the account, obtain an explanation of the nature and approximate amounts of the other categories of entries that have affected the account balance. Compute the ratios of material amounts of fringe benefits to the total compensation earned by covered employees or other data.

Compare with the comparable ratios for the preceding period and investigate significant or unusual fluctuations.

  1. Objective the internal audit department opinions and other information furnished may attest to the adequacy of may also recommend cost effective.
  2. Review the general ledger for other entries to the account.
  3. Based on the above assessments and considering the risk factors from the planning phase, determine and document the scope for selecting transactions for detailed verification. Repairs and Maintenance 14.
  4. If necessary, revise the risks of material misstatement based on the results of tests of controls. Evaluate financial statement presentation of inventories and cost of goods sold, including the adequacy of disclosure.

Inspect authorisation forms to support amounts withheld. Inspect personal files for appropriate documentation and evidence for the existence of employees. Test the calculations of net pay and the clerical accuracy of payroll register cumulative amounts. Inspect board minutes for approval of slab increments, and bonus awarded. Check deduction of Withholding tax under section 50 1 and ensure its payment to treasury within stipulated time period.

For transactions selected as above, ensure that these were: Rent, Rates and Taxes 11. Compare current period total of such expenses with the corresponding prior period amount and investigate reasons for significant fluctuations. Review all significant rent agreements and note: Based on the above assessment and considering the risk factors from the planning phase, determine and document the scope for selecting payments for verification.

For payments selected as above, ensure that these were: Communication and Utilities 12. Obtain list of telecommunication, electricity and gas connections and ensure that all bills relating thereto have been duly accounted for. Ensure that proper accrual for such expenses have been made at period end. Legal and Professional Expenses Ensure whether legal and professional expenses relates to the product cost, if so, then consider application of work program steps defined in administration and selling expenses.

Objectives in the audit of inventories and cost of goods sold adequacy and clerical accuracy

Repairs and Maintenance 14. Based on the above assessments and considering the risk factors from the planning phase, determine and document the scope for selecting transactions for detailed verification.

Review all significant service and maintenance contracts and note: Ensure that repairs and maintenance of capital nature is appropriately accounted for. Fuel and Power 15. Select a sample of fuel purchases during the period and ensure that: Compare current period consumption and expenses with the corresponding prior period figures and investigate reasons for significant fluctuations.

Analyse the relationship between fuel consumption and production and consider performing appropriate predictive tests. Review all significant insurance policies and note: Cross match the assets insured as per policy with the assets appearing in the books of the company. Fee and Subscription 17. Select a sample of such payments and ensure that these were: Ensure that lease transactions were properly authorized by reference to the minutes.

Investigate differences in excess of tolerable error. General and Other Expenses 19. If statistical sampling is used, indicate: Review the general ledger for other entries to the account. Select a sample of source documents e. Determine whether these transactions were properly recorded during the period.

Cross reference warranty expense to the analysis of accrual for warranty costs in the audit of accrued liabilities. Verify the clerical accuracy of the analysis and examine critical forms and documents. Even then consider its materiality in internal control perspective.

Cross refer actual production figure from the quantitative schedule of inventories verified during the year.

  • ED on excisable goods produced should be charged to cost of sales, as such duty is collected at the time of sale but adequate provision is required for excisable goods in hand at the balance sheet date, which were ready for sale;
  • Fuel and Power 15;
  • Cross match the assets insured as per policy with the assets appearing in the books of the company;
  • Cost of goods sold internal control objectives relate internal and external auditors and major stakeholders the quality and adequacy of the;
  • Verify the cutoff of transactions affecting cost of goods sold.

Enquire reasons for any shortfall in production and check reasonableness thereof. Assess the implication of paragraph 11 of IAS — 2 regarding allocation of fixed production overheads. Objects of the Company Ensure that the business conducted by the Company has been in accordance with the objects of the Company, as defined in the object clause of the Memorandum of Association and all the expenses are for the purposes of the business.

Audit program - cost of goods sold

Other tests as deemed necessary Management Letter Page: Supervision, review and conclusion 1. Perform Senior review and supervision. Resolve Senior review points. Resolve Partner and Manager review points. Conclude response to the audit objectives.