Describe how the separation of (1) authorization of production transactions, (2) recording of these transactions, and (3) physical custody of inventories can be specified among the production, inventory, and cost accounting departments. How does the production order document provide a control 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) production was completed and placed in inventory or written off as scrap, and (3) finished goods inventory was actually produced and properly costed?

The separation of authorization, recording, and custody can be specified through proper segregation of duties and the use of appropriate control mechanisms within the production, inventory, and cost accounting departments. Here's how it could be done:

1. Authorization of production transactions: The production department should have the responsibility to initiate and authorize production orders. These orders should be based on customer orders or forecasts from sales and operational planning. The production department should have limited access to inventory records and be restricted from making changes to such records.

2. Recording of transactions: The inventory department should be responsible for recording the receipt of raw materials, their issuance for production purposes, and the return of any unused materials. They should maintain detailed records of these activities, such as material requisition forms, and update the inventory records accordingly. The recording should be done in a timely and accurate manner to ensure proper tracking of inventory.

3. Physical custody of inventories: The custody of inventories, including raw materials, work-in-process (WIP), and finished goods, should be assigned to the inventory department. They should have appropriate storage facilities and controls in place to safeguard the inventories from damage, theft, or unauthorized use. Regular physical counts should be conducted to reconcile the recorded quantities with the actual amounts in inventory.

Now, let's discuss how the production order document controls the quantity of materials used in production. A production order document contains detailed instructions for manufacturing a specific product, including the quantity of materials needed. By following these instructions, the production department ensures that the correct amount of materials is used in the production process. The document serves as a control mechanism because any deviation from the authorized production order should be questioned and can be easily identified during the reconciliation process.

To determine the authorization, completion, and proper costing of production, an auditor would typically sample various documents from different populations:

1. To verify authorization, the auditor would sample production order documents to ensure that each one is properly authorized and supported by relevant documentation, such as sales orders or forecasts.

2. To confirm production completion and placement in inventory or write-off as scrap, the auditor would sample material requisition forms, production reports, scrap records, and inventory transfer records. These documents would provide evidence that the production process was completed, and materials were used as intended.

3. To verify the actual production and proper costing of finished goods inventory, the auditor would sample finished goods inventory records, production reports, cost allocation documents, and any related cost calculations. This would help reconcile the recorded inventory quantities and costs with the physical inventory on hand, ensuring accurate reporting.

By selecting and examining a representative sample of these documents, the auditor can assess the effectiveness of internal controls and identify any potential irregularities or discrepancies in the production, inventory, and cost accounting processes.