Describe how the separation of (1) authorization of production transactions, (2) recording of these transactions and (3) physical custody of inventories can be specified amoung the production, inventory and cost accounting departments. How does the production order document provide a contol over the quantity of materials used in production? From what population of documents would an auditor sample to determine (1) whether all are authorized? (2) prodution was completed and placed in inventory or written off as scrap? and (3) finished goods inventory was actually produced and properly costed? hide problem
To specify the separation of authorization of production transactions, recording of these transactions, and physical custody of inventories among the production, inventory, and cost accounting departments, the following steps can be taken:
1. Authorization of Production Transactions:
- Establish clear policies and procedures that define the responsibility for authorizing production transactions.
- Clearly outline the roles and responsibilities of individuals involved in the authorization process.
- Implement segregation of duties by ensuring that the personnel responsible for authorizing production transactions are different from the personnel recording and processing these transactions.
- Use standardized authorization forms or documents that require appropriate approvals before production can take place.
- Regularly review and monitor the authorization process to ensure compliance.
2. Recording of Transactions:
- Assign dedicated personnel within the accounting department who are responsible for recording production transactions accurately and in a timely manner.
- Implement proper internal controls to ensure that only authorized production transactions are recorded.
- Use a robust system or software that allows for accurate and efficient recording and tracking of production transactions.
- Regularly reconcile recorded production transactions with the actual physical production activities.
3. Physical Custody of Inventories:
- Establish clear guidelines for the physical custody of inventories, including segregation of duties between production personnel and inventory custodians.
- Implement physical security measures to safeguard inventories from theft, damage, or unauthorized access.
- Conduct periodic physical counts and reconciliations of inventories to ensure accuracy.
- Document and record any movements or transfers of inventories between departments or locations.
The production order document plays a crucial role in controlling the quantity of materials used in production. It serves as a formal request or instruction from the production department to commence a specific production process. The production order document typically includes details such as the type and quantity of materials required, the steps or operations involved in production, and any special instructions or specifications.
By adhering to the information provided in the production order document, the production department ensures that the correct quantities of materials are used during the production process. This control helps prevent over or underutilization of materials, ensuring efficiency and accuracy in production.
To determine the authorization, completion, and costing of production transactions, an auditor would typically sample from the following population of documents:
1. Authorization:
- Purchase requisitions or orders for raw materials or components required for production.
- Production order documents signed or approved by authorized personnel.
- Material requisitions or issue slips showing the withdrawal of materials from inventory.
2. Production Completion and Placement in Inventory:
- Work order or production completion documents signed by production supervisors or authorized personnel.
- Material requisition or issue slips used to record the transfer of completed products to inventory.
3. Finished Goods Inventory and Costing:
- Finished goods inventory records or reports.
- Costing sheets or documents showing the allocation of costs to finished goods.
- Production cost reports or summaries.
By sampling and reviewing these documents, auditors can assess whether all production transactions were properly authorized, production was completed and accurately recorded, and finished goods inventory was produced and properly costed according to the established controls and procedures.