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?
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, you can establish a system of internal controls. Here's how you can achieve this separation:
1. Authorization of Production Transactions: This responsibility lies with the production department. They should have the authority to initiate and approve production orders or work orders. These orders should be reviewed and approved by authorized personnel, such as production supervisors or managers, to ensure that they meet the necessary criteria.
2. Recording of Transactions: The responsibility for recording production transactions lies with the inventory and cost accounting departments. They should maintain accurate records of all production transactions, including the quantity of materials used, labor costs, and overhead costs. These records should be properly documented and reconciled against the production orders.
3. Physical Custody of Inventories: The inventory department is responsible for the physical custody and control of inventories. They should ensure that proper controls are in place to safeguard the inventory, such as locks, access controls, and regular inventory counts.
The production order document provides control over the quantity of materials used in production through the following steps:
1. Authorization: A production order is prepared and authorized before production begins. This document specifies the quantity of materials required for the production process.
2. Material Requisition: During production, the production department issues a material requisition document to request the required materials from the inventory department. This document provides a record of the materials being used in the production process.
3. Receiving and Recording: The inventory department receives the material requisition document and verifies the quantity of materials issued. They record this information in their inventory system, ensuring that the materials used are properly accounted for.
To determine whether all production transactions are authorized, completed and placed in inventory or written off as scrap, and whether finished goods inventory was actually produced and correctly costed, an auditor would typically sample from the following population of documents:
1. Production orders or work orders: The auditor would select a sample of these documents and verify whether they have been properly authorized before production began.
2. Material requisition documents: The auditor would select a sample of these documents and ensure that they are properly recorded and match the production orders.
3. Inventory records: The auditor would review the inventory records to check if the finished goods inventory has been properly accounted for and whether any items have been written off as scrap.
4. Costing records: The auditor would examine the cost accounting records to verify the accuracy of cost calculations for the finished goods inventory.
By sampling and reviewing these documents, the auditor can ensure that all production transactions are properly authorized, completed, recorded, and costed. This helps to maintain control over the production process and ensures the integrity of the inventory and cost accounting systems.