Summary
Summary AUDIT 378 Inventory & Production + Cash & Bank CYCLES
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AUDIT 378 Inventory & Production + Cash & Bank CYCLES
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Ground Principles: Risks
Controls
Tests of internal control
Learning outcomes:
Describe the nature of the different cycles including the applicable accounts and
transaction types and functions
Describe the control objectives applicable in the cycle.
Explain what could go wrong (risks or weaknesses) in the cycle including the
consequences thereof.
Make recommendations to improve weaknesses.
Design a suitable internal control system.
Formulate tests of internal control to test internal controls which you want to rely
upon.
Inventory and Production:
Transactions & functions
Control objectives & risks
Integrated with other cycles
Audit Considerations:
Part of audit Audit procedures
Obtain and record raw material, labour Purchase and payment
Salary and wages
Production process, transfer of assets and Audit of cost accounting records
costs
Sale and sending of goods, record of income Sale and receivable periodic inventory
and costs records
Physical stock take Physical observation (Quantity)
Inventory valuation (amounts) Price and collection tests
Lower of cost price and NRV (Price x quantity)
FIFO; weighted average method
ORDER
RECEIPT
STORE RM
Issue of raw materials - Planning & control of production
- Process of goods in production
PRODUCTION - Determining & calculation of
production costs
, Transfer of completed goods to FG
STORE FG
- Protection of inventory
- Control of inventory balances
SEND
Ideal Cycle (Self-study):
Order of Raw materials (part of Purchases and Acquisition cycle):
1. There must be a specific need to order materials:
- Can be in response to a client’s specific order.
- Result of a physical inventory count showing that stock levels are low.
- Computer notifies when stock levels reach re-order levels (automatic).
2. Purchase requisition for required materials (store):
- Prepared by store man.
- Authorised by head store man.
- Sent to purchasing department.
3. Purchase order completed by purchasing department:
- Prepared by purchases clerk.
- Authorised by purchasing manager.
- List of approved suppliers.
- Approved price list or policy.
Receipts of Raw Materials (part of Purchases and Acquisition cycle):
1. Material received by receiving division:
- Receiving division is separate to purchasing division.
- 2 People present when material received.
- Received goods inspected for quality, type and quantity.
- Compare received goods with purchase order; goods received note and
delivery note.
- Goods received note prepared.
- Signed deliver note returned to supplier as proof of goods received.
Update Inventory Records:
1. On receipt of new goods, inventory records must be updated to include new stock.
Storing Raw Materials:
1. Raw materials must be stored and protected until required in production:
a) Stored in separate isolated area.
b) Access to material is limited.
c) Material is stored safely.
d) Authorised documentation required for movement of material.
Production Cycle:
1. Initiate production:
a. Production must be planned.
b. Production schedules utilised.
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