Conversion Cycle

The conversion cycle is part of the audit transaction cycles; the cycles are a

group of operations that are repetitive in an orderly manner within an organization and the

transactions refer to businesses

Hernadez, (2009) mentions that the conversion cycle 'analyzes the steps or procedures of

All transactions that are handled in operations such as: inventories,

insurance, depreciable equipment, or in the resources that are processed, meaning that there is a

transformation of raw materials such as production cost, and others like assets

fixed.

It also defines the functions of the cycle as: 'To protect the products or items in the process.'

finished; and properly record the production cost of the products to submit the

actual production costs of the products by adequately recording all processes.

Safeguard the company's assets, as well as insurance, etc. The most used accounts

son: Inventories, Accumulated depreciations, Property, plant and equipment.” (p.17).

According to Perdomo (2017), many of the resources acquired by an entity in 'groupings'

in which they are retained, converted, processed, mounted or assembled, or used in another

shape. The functions of the conversion cycle manage groupings of resources such as

inventories, depreciable properties and equipment, existing natural resources, prepaid insurance

in advance and other non-monetary assets that are held for use in the business.

In a manufacturing, assembly, or processing business, the most important activity of the cycle of

Conversion is the production of a finished item through the use of acquired resources.

for this purpose: materials, direct labor, elements of indirect costs. The cycle of
The conversion of an entity of that class will include the movement of all related resources.

with the Inventory until the finished products are deposited in the final place of

storage within the entity. Shipments to customers would be part of the revenue cycle

of the entity.

The activities in the conversion cycles of other industries are not as extensive as in

the manufacturing industries. However, to some extent, public utility companies,

health assistance institutions, public service companies, institutions of

healthcare, real estate companies, and retailers manage inventory or others

Groupings of Resources. pp. (110-112).

According to Vielman (2009), the following are the typical functions and control objectives.

internal and the potential errors of the conversion cycle.

Typical Functions

Execution functions: Issuance of production orders, Requisition of materials

cousins, Processing of raw materials, Transfer of finished products for

storage, depreciation and amortization of assets.

Registration Functions: Inventory Transfer (in process to finished product),

Application of labor cost, Application of manufacturing overhead rate

Depreciation and amortization of fixed assets, Determination of price variations and

quality.

Protect products in process and finished, Store

adequately manufacturing records.

 Common Seats: Depreciation and amortization of deferred costs, including

properties, property withdrawal, inventory transfer, manufacturing expenses.

Vital Forms and Documents: Production order, materials requisition, slips

route, production reports, cost sheets, expense application work sheets

manufacturing, time cards (labor)

Objectives of Internal Control:

Operational Efficiency: Authorization, Segregation of Duties, Procedures of

Documentation.

Adequate and Timely Financial Information: Authorizations, Segregation of

Functions, Accounting Records and Procedures.

Inventory Custody

Potential Errors:

Inventories: Noted movements, without it; entry or exit NOT accounted for;

incorrectly annotated quantities.

Production: Incorrect interdepartmental transfers.

Work in Process: Incorrect direct labor or overhead costs, Classified expenses

incorrectly, Production completed, NOT downloaded. p. (31-34).

According to[ CITATION Mar09 4106 ]in their Topic Account Auditing 4th LADE Topic ten

Audit of the Conversion Cycle - Inventory - of the University of Caniabra reveals the

next:

Audit of the conversion cycle - Inventory-

 Elements of the area of existence

Audit Objectives

Internal Control Considerations

Audit Procedures

Information in the annual accounts

Main problems of the area

Elements of the area of existence:

Description of the areas

Goods, Raw Materials, other supplies, work in progress, Products

semi-finished products, finished products and by-products, waste and recovered materials

Group 3 PGC (General Accounting Plan)

Commercials

Raw Materials

Other supplies

Products in progress

Semi-finished products

Finished products

By-products, waste, and recovered materials

Deterioration of the value of inventories

Variation of Stocks
 Variation in stock of merchandise

Variation in the inventory of Raw Materials

Variation of Stocks of Other Supplies

Variation of Inventory

Variation of Inventories of products in progress

Variation of existence of semi-finished products

Variation of finished product stock

Variation of Stock of By-products, Waste and Recovered Materials

Audit Objectives

The balances shown in the inventory group represent products that are expected.

sell or use within the normal course of business

The products are valued at their cost or net realizable value, whichever is lower.

according to generally accepted methods and uniformly applied

There is an appropriate impairment policy for:

Slow-moving items, obsolete and damaged

Market value below cost

Long-term contracts

Internal Control Considerations

The measures of internal control are closely related to the entire process of

purchases, production and sales

In general, ensure that:

 All purchasing and production activities are authorized.

Acquisitions from third parties are received under agreed conditions.

The stocks are maintained at the established levels, appropriately.

stored, physically protected, and accounted for

The dispatch of goods is carried out based on properly documented shipments.

authorized

Internal Control Considerations

Fundamental points of inventory management system are:

Adequate segregation of functions between purchasing, receiving departments,

production and accounting.

Purchases and production orders must be supported by documents.

formally duly authorized.

The physical entries and exits of materials must be complemented in

pre-printed delivery notes, where the units and received products are indicated or

issued

The stocks must be properly protected, in a closed place.

conveniently secured and under the control of responsible persons

Analytical accounting systems that allow for proper allocation of

costs

Systems that allow the determination of the minimum and optimal levels of each material

Internal control considerations

 Permanent inventory record with periodic stock counts and contrast

with the accounting balances

Permanent Inventory: Every properly organized entity must have a file of

existences in which I will be collecting the entries, exits, and the inventories of each one of the

articles, in such a way that it is not necessary to resort to physical counting to know in a

determined moment the available stocks

However, having a card express a specific balance does not mean it corresponds to the

reality in that losses, thefts, losses, etc. can occur in inventory, what

which makes it necessary to verify the permanent inventory data at certain intervals with

the existing physical units in the warehouse

Adequate consideration of slow-moving and obsolete inventory items

Audit Procedures

Physical Inventory:

Auditor's attendance at the physical count conducted by the company at the end of the fiscal year

The Auditor does not count all the inventories; it is the company's task.

The Auditor observes and judges; he recounts some items to see if they match.

Cyclical and partial recounts throughout the year

The Auditor analyzes and judges whether the instructions given for these purposes were

correct
 The Auditor must take into account people who have participated in counts.

emerged differences

A sample of items from the permanent inventory records will be selected.

another from the warehouse. If significant differences arise, an inventory should be requested.

complete physical

Although the procedures for conducting the count must be established by the company.

the auditor must judge them, for which he must take into account that:

The instructions must include the date and time of the inventory's initiation, as well as

the composition of the counting teams and the tasks and responsibilities

assigned to each of them

The people responsible for carrying out the counting must be unrelated to the tasks of

storage

Before starting the counting, the warehouse must be organized and designated.

a specific area clearly identified for storing items that are not

property of the company.

The inventory must be counted twice by different counting teams.

Renumbered cards are used to record the counted amounts.

When the product, shelf, container, or any other unit of identification

there should be visible evidence that the counting has been done

The people who do the counting must put their initials on the cards.

The person in charge of supervising the count must control the numbering of

the cards, delivered to the teams and the cards that they later receive from

these at the end of the physical inventory

 Before concluding the Inventory, the person in charge of supervision must

inspect the warehouse to ensure that all units are marked

as evidence of its account

Significant differences should be investigated, if possible, before concluding.

inventory completed

Operations Cut:

The presentation of financial statements at a specific date implies a cut-off of

operations. The Auditor must ensure that the transactions have been accounted for in the

correct period.

Regardless of when the physical inventory is carried out, the latest must be monitored.

recorded warehouse movements

Immediately before starting the physical inventory, the auditor must note the

numbering and concept of the last (for example 3) movement vouchers of

merchandise (incoming and outgoing merchandise delivery notes, production reports or

any document that the company uses to record movements), obtaining

evidence that such movements have occurred

During the inventory process, the auditor must ensure that there are no

movements in the warehouse and that no goods are received or dispatched

If goods were still being received and shipped during the inventory to avoid errors.

In the counting, cautions must be established. For example: separate the receptions in

an independent space, not to recount them and consider them as purchases of the following period;
 and the day's expeditions how they will be prepared from the previous day to recount them before

that they leave the warehouse and consider the sales of the following period

Then the auditor must verify that the transactions from which he obtained

information on the day of the inventory was reflected in the permanent inventory and in the

balance closed as of the date of the count. And that the three following delivery notes, which were

in blank that day has been accounted for in the following period

Valuation of inventories

The tests to assess the inventory will consist of analyzing third-party invoices of

raw materials and stock are own manufacturing processes, material vouchers

bulletins and sheets of labor input and other costs, for the products in

course and finished.

It is common to use standard costs for inventory valuation. The Auditor must

examine the differences between standard costs and actual costs because if they are

Significant changes must be made to the valuation assigned to the final inventories.

Emphasize the provision for obsolescence, analyzing both the turnover.

of the warehouses and of each of the most important products such as their net value of

realization

Information in the annual accounts

Balance presentation

Presentation in the P&L account

Information in memory

Bases for presenting the annual accounts

 Standards for registration and valuation

Existences

Income and expenses.

Main problems in the area

The auditor must place special emphasis on obtaining evidence related to

determination of the acquisition value of the purchased inventories and the cost of

production of the processed products

The accounting and auditing of inventory are two of the most important aspects in

the determination of the economic result

It is necessary to take into account the relationship of this area with others such as: Accounts receivable and

payment obligations for traffic operations, purchase accounts, sales, and similar.

The periodization of results is related to the cutoff operations between

exercises.

Special situations affecting the inventories must be monitored, such as:

Those that originate from the imposition of interests

Existences in special situations: goods in deposit, pending of

reception or valued at a fixed value

Acquired assets by donation, exchange, donation in payment, or contributions

of capital in non-monetary

Problems related to goods of special nature, such as waste and

by-products, spare parts, in bases or packaging

Supply contracts or long-term

Futures contracts on stocks. p. (1-9)