II.

EVALUATION OF INTERNAL CONTROL OVER PRODUCTION TRANSACTIONS

A questionnaire that may be used in gathering information about prescribed controls over
manufacturing transactions is shown below:

Internal Control Questionnaire for Production Transactions

Cycle: Expenditure Class of Transactions: Production
Yes No NA Remarks
Executing
1. Are production orders prenumbered and the numerical sequence
checked for missing document?
2. Are production orders prepared by authorized persons?
3. Are bills of materials and manpower needs forms prepared by
authorized persons?
4. Are bills of materials and manpower needs forms prenumbered and the
numerical sequence checked for missing document?
5. Are issue slips prenumbered and the numerical sequence checked for
missing document?
6. Are material requisitions and job time tickets reviewed by the
production supervisor after the foreman prepares them?
7. Are the weekly materials-used reports and direct labor reviewed by the
production supervisor after preparation by the foreman?
8. Are completed production reports prepared?
9. Is a quality control report issued on finished work?
10. Do routing tickets accompany the transfer of goods?
11. Is receipt obtained from transferee when goods are transferred?

Recording
1. Are standard costs used? If so, are they reviewed and revised
periodically?
2. Does the accounting manual give instructions for proper classification of
cost accounting transactions?
3. Are summary entries for direct materials and direct labor reviewed and
approved by the cost accounting supervisor?
4. Is there verification of correct application of overhead job cost sheets?
5. Is there segregation of functions between general accounting and cost
accounting?
6. Are there periodic reconciliations of work in process and finished goods
with subsidiary records?

Custody
1. Is work in process tagged during production?
2. Are finished goods stored in locked warehouses?
3. Are perpetual finished goods records periodically compared with goods
on hand?
III. TESTS OF CONTROLS: PRODUCTION TRANSACTIONS

Controls related to production transactions are important to auditors because they affect the
assertions embodied in the financial statements. Auditors perform one or more audit procedures to test the
assertions, including the following:

General Specific

1. Existence or occurrence 1. Recorded production transactions

occurred.
2. Completeness 2. All production transactions that occurred
are recorded.
3. Valuation or allocation 3. Production transactions are recorded for
the proper amounts.
4. Presentation and disclosure 4. Production transactions are recorded to
result in presentation and disclosure in
accordance with PAS/PFRS.

DISCUSSION:
The following sections present the controls an entity should have, to ensure the propriety of each
assertion, and the tests an auditor might perform to determine the effectiveness of the controls on
production transactions.

CONTROLS TESTS OF CONTROLS

To test controls, the auditor should…
A. Existence or Occurrence
1. A material requisition should be prepared 1. Observe separation of duties and
by operating personnel and signed by a examine approval signatures.
warehouse custodian when goods are
transferred to production. Requiring
materials to be completed by two persons –
one who releases raw materials and another
who accepts responsibility for
merchandise– provides evidence that a
transaction exists. Properly completed
materials requisitions should be on file in
accounting, where an employee accounts
for their sequence.
2. Labor tickets bearing a signature indicating 2. Examine labor tickets.
that work was actually performed should
be the basis in recording labor.
B. Completeness
3. Production orders are prenumbered and
accounted for to determine that all
production is recorded.
4. Materials requisitions are prenumbered and
accounted for by an accounting clerk.
5. Time charged on labor tickets is reconciled
to employee time cards.
C. Valuation or Allocation
6. Value for transactions are based on a bill of
materials, approved ticket and rates for
labor, and predetermined overhead rates.
7. Overapplied or underapplied overhead is
reviewed periodically, and rates are
adjusted as necessary.
D. Presentation and Disclosure
8. The chart of accounts should adequately
describe the accounts to be used; and
account coding is independently checked.
3.Observe the procedure and account for a
numerical sequence of production orders.
4.Observe the procedure and account for
numerical sequence of materials
requisitions.
5.Observe if a clerk reconciles the time charged
on completed labor tickets to the total
hours for which production workers are
paid.
6. Trace the amounts to the bill of materials,
time cards and overhead rate assigned costs
may then be traced to authorized price lists
and underlying schedules.
7. Observe the signature indicating that the
overhead rate has been reviewed.
8. Examine the chart of accounts and examine
the signature of the employee performing
the procedure.