PAYROLL AND PRODUCTION CYCLE
In the production and payroll cycle, materials, labor, and overhead are converted into finished goods and services. This lecture breaks the production and payroll cycle into two sections. Part I covers the production cycle, dealing with inventory valuation, depreciation, and cost of goods sold accounting. The audit of payrolls and labor cost accounting is in Part II. After completing this lecture, you should be able to:
1. Describe the production cycle, including typical source documents and controls.
2. Give examples of detail test of controls procedures for auditing the controls over conversion of materials and labor in a production process.
3. Describe some common errors and frauds in the accounting for production costs and related cost of goods sold, and design some audit and investigation procedures for detecting them.
4. Describe the payroll cycle, including typical source documents and controls.
5. Give examples of detail test of controls procedures for auditing the controls over payroll.
6. Describe some common errors and frauds in payroll, and design some audit and investigation procedures for detecting them.
PRODUCTION CYCLE TYPICAL ACTIVITIES
The basic production activities begin with production planning, including inventory planning and management. Production planning can range from use of a sophisticated computerized long-range plan with just-in-time (JIT) inventory management to a simple ad hoc method.
Most businesses try to estimate or forecast sales levels and seasonal timing, and they try to plan facilities and production schedules to meet customer demand. The production cycle interacts with the acquisition cycle and the payroll cycle for the acquisition of fixed assets, materials, supplies, overhead, and labor. The physical output of a production cycle is inventory (starting with raw materials, proceeding to work in process, then to finished goods). Inventory is then...