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(a) What are the principal audit objectives and assertions for MaxSecurity’s cost of sales? Explain.
(b) Identify the relevant substantive tests of details that would be appropriate to gather evidence about the assertions in (a) above.
(a) Costs of sales are properly supported as charges against the entity in the period. Costs applicable to future periods are carried forward as inventories (occurrence). All cost of sales relating to the current period’s revenue are included in the income statement (completeness). Cost of sales are stated in income statement at the appropriate amounts and correct period (accuracy and cut-off). Cost of sales are properly classified, described, and disclosed in the financial report, including the notes, in conformity with IFRS (classification and understandability). The principal objectives relate to occurrence, accuracy and cut-off because there is a greater risk of understatement than overstatement of cost of sales (to increase gross profit). The complex costing for MaxSecurity’s products suggest accuracy of costing of manufactured items will be at risk.
(b) The nature, timing and extent of substantive testing of cost of sales are dependent on results of control assessment and testing. The new manufacturing costing system will be tested for its ability to provide accurate costing data for cost of sales and inventory balances. The manufacturing costing system must support costing of sophisticated product designs (including likely individual specification requests by the foreign governments) and integrate with the general ledger for all stock movements. All expenses that are included in the manufacturing process will need to be substantiated (including purchases of materials and supplies, transfer of materials and supplies into the production process, labour and allocation to individual products or batch processes, machinery costs) and estimates of percentage of completion of work in process on hand at the end of the period. In addition, movements of completed items from finished goods to cost of sales during the period will be substantiated. Substantive procedures include: Trace and vouch purchases (supplier invoices etc. to entries in purchases/general ledger and entries in ledger to supporting documents). Trace and vouch labour expense (list of employees and HR records to payroll expense and payroll expense to documents and timecards); compare relationship of direct labour costs to number of employees with prior period, investigate significant fluctuations. Test mathematical accuracy of product costing.Cut-off procedures for purchases, inventory transfers, payroll. Review production data and compare relationship of overhead costs in cost of dales to direct labour, hours and/or dollars with prior years. Review relationship with respect to flow of goods, such as gross profit analysis, comparison of standard and actual costs, and review reconciliation between cost of sales and shipments Compare actual and budgeted costs by month or quarter. Investigate reasons identified by client for important variations. Investigate unexpected variations (or their absence) not identified by the client. *** put the above paragraph In a PowerPoint presentation
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