Cost location

The management accountant’s task is to allocate the many diverse overheads onto the cost of each product manufactured. It is a major task requiring the use of many different bases allocation. The allocation of direct cost to a product can be precise. In the case of overhead allocation an element of logical guesstimate enters. There is a two-fold process, firstly to collect all overhead costs onto the product or profit centers; and secondly to load the overheads onto each product passing the center.

Reading

Read the text and answer the questions that follow it. Study new terms.

The auditing framework

When the independent auditor begins an audit assignment, he assumes that (1) the internal control system of the enterprise is appropriate and effective; (2) generally accepted accounting principles have been applied in all accounting processes underlying the financial statements; (3) the generally accepted accounting principles utilized have been applied consistently between the current and the prior periods; and (4) there is an adequate amount of informative financial disclosure in the financial statements and footnotes. Evidence gathering and its evaluation enable the auditors to reject or confirm these a priori assumptions. We are thus in a position to define auditing.

Auditing. The analytical process of gathering sufficient evidential matter on a test or sampling basis to enable a component professional to express an opinion as to whether a given set of financial statements meets established standards of financial reporting.

Now we can enumerate the major steps of the auditing process: (1) become acquainted with the firm – its environment ant its accounting, personnel, production, marketing, and other systems; (2) review and evaluate the management and the accounting control system in operation; (3) gather evidential matter on the integrity of the system; (4) gather further evidence related to the representations made in the financial statements; and (5) formulate a judgment opinion on the basis of the evidence available.

Getting acquainted

Auditing is an analytical process applied to everyday business situations. Hence it is closely related to existing business practices. Without firsthand knowledge of the nature of these practices and their larger setting, the auditor would have to rely exclusively on available financial data.

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