What Difficuties are arised in process cost accounting procedures?

Certain difficulties likely to be encountered in actual practice should be mentioned before leaving the subject of process cost accounting procedures:

1. The determination of production quantities and their stages of completion present problems. Every computation is influenced by these figures.

Since the data generally come to the cost department from an operating foreman often working under circumstances that make a precise count difficult, a certain amount of doubtful counts and unreliable estimates are bound to exist. Yet, the data submitted form the basis for the determination of inventory costs.

2. Materials cost computations frequently require careful analysis. In the illustrations, materials cost is generally part of the first department's cost. In companies of certain industries, materials costs are not even entered on production reports. When raw materials prices are influenced by fluctuating market quotations, the materials cost may be recorded in a separate report designed to facilitate management decisions in relation to the fluctuating raw materials market.

3. The discussion of lost units caused by shrinkage, spoilage, or evaporation indicates that the time when the loss occurs influences the final cost calculation. Different assumptions concerning the loss would result in different costs of the unit in a department which, in turn, affects inventory costs, the cost of units transferred, and the completed unit cost.

Another consideration involves the possibility of treating cost attributable to avoidable loss as an expense of the current period.

4. Industries using process cost procedures are generally of the multiple product type. Joint processing costs must be allocated to the several or many products resulting from the processes. Weighted unit averages or other bases are used to prorate these joint costs to the several products.

If units manufactured are used as a basis for cost allocation, considerable difficulties arise in determining accurate unit costs. Additional clerical expenses are necessary if the labor-hour or machine-hour basis for charging overhead to process is used. Management must decide whether economy and low operational cost are compatible with increased information based on additional cost computations and procedures.

It should be noted that some companies use both job order and process costing procedures for various purposes in different departments. This is particularly true when a parallel or selective cost flow format is required.

Each system or method employed by a company must be based on reliable production and performance data which when combined with output, budget, or standard cost data will provide the foundation for effective cost control and analysis.

Is Disclosure in the Final Accounts is mandatory?

Disclosure in the Final Accounts : The object of audit ultimately is that the statements of account prepared from books of account which have been checked should present a true and fair picture of the financial position of the entity. This particular objective should be kept in view while checking the grouping of accounts. The auditor must see that not only items of a like nature be grouped together but also the description of each account truly reflects  the  nature  of  the  amounts  accumulated  therein.  Unless  this  is  verified,  the classification  of  income  and  expenditure  and  that  of  assets  and  liabilities  would  be misleading. 

For example if director’s fee and salaries to staff have been added together or advances to directors have been covered up by being amalgamated with book debts, the nature of these payments would be obscured. Fundamentally, care should be taken to ensure that no material fact is suppressed or stated in a manner that it may mislead any one. If it is found that owing to costing or managerial requirements, certain items of expenditure  or  receipts  have  not  been  classified  by  the  company  in  the  way  as  would meet  the  requirements  of  the  Companies  Act,  1956  the  client’s  staff  at  the  end  of  the year  should  be  required  to  re-classify  them.  

Nevertheless  such  a  re-classification  of expenditure should be checked by the assistant of the auditor to confirm that it has been correctly made and that no item requiring  re-classification has been left out. In the case of  a company, Schedule IV  to the Companies  Act,  1956  has  laid down requirements in regard to the disclosure.

Scope of the Audit of Financial Statements

The scope of an audit of financial statements will be determined by the auditor for having regard to the terms of the engagement, the requirement of relevant legislation and the pronouncements of the Institute. The terms of engagement cannot, however, restrict the scope of an audit in relation to matters which are prescribed by legislation or by the pronouncements of the Institute.

The audit should be organized to cover adequately all aspects of the enterprise as far as they are relevant to the financial statements being audited. To form an opinion on the financial statements, the auditor should be reasonably satisfied as to whether the information contained in the underlying accounting records and other source data is reliable and sufficient as the basis for the preparation of the financial statements. In forming his opinion, the auditor should also decide whether the relevant information is properly disclosed in the financial statements subject to statutory requirements, where applicable. The auditor assesses the reliability and sufficiency of the information contained in the underlying accounting records and other source data by :

(a) making a study and evaluation of accounting systems and internal controls on which he wishes to rely and testing those internal controls to determine the nature, extent and timing of other auditing procedures; and

(b) carrying out such other tests, enquiries and other verification procedures of accounting transactions and account balances as he considers appropriate in the particular circumstances The auditor determines whether the relevant information is properly disclosed in the financial statements by :

• comparing the financial statements with the underlying accounting records and other source data to see whether they properly summarize the transactions and events recorded therein; and
• considering the judgments that management has made in preparing the financial statements accordingly, the auditor assesses the selection and consistent application of accounting policies, the manner in which the information has been classified, and the adequacy of disclosure.

In forming his opinion on the financial statements, the auditor follows procedures designed to satisfy himself that the financial statements reflect a true and fair view of the financial position and operation results of the enterprise. The auditor recognizes that because of the test nature and other inherent limitations of an audit together with inherent limitations of any system of internal control, there is an unavoidable risk that some material misstatements may remain undiscovered. While in many situations the discovery of material misstatement by management may often arise during the conduct of the audit, such discovery is not the main objective of audit nor is the auditor’s programme of work specifically designed for such discovery. The audit cannot, therefore, be relied upon to ensure the discovery of all frauds or errors but where the auditor has any indication that some fraud or error may have occurred which could result in material misstatement, the auditor should extend his procedures to confirm or dispel his suspicions.

The auditor is primarily concerned with items which either individually or as a group are material in relation to the affairs of an enterprise. However, it is difficult to lay down any definite standard by which materialism can be judged. Material items are those which might influence the decisions of the user of the financial statements. It is a matter in which a decision is arrived at on the basis of the auditor’s professional experience and judgment.

The auditor is not expected to perform duties which fall outside the scope of his competence. For example, the professional skill required of an auditor does not include that of a technical expert for determining physical condition of certain assets.

Constraints on the scope of the audit of financial statements that impair the auditor’s ability to express an unqualified opinion on such financial statement should be set out in his report, and a qualified opinion or disclaimer of opinion should be expressed as appropriate.